BRASILIA – Brazil’s new Economy Minister Paulo Guedes worked in Chile 40 years ago after earning his doctorate at the University of Chicago, giving him a front-row seat to dictator Augusto Pinochet’s economic shock treatment.
Even as Pinochet’s authoritarian regime left a brutal human rights legacy — responsible for the execution of more than 3,000 leftist opponents and the torture of over 40,000 more — it drew praise from some at home and abroad for handing carte blanche to a team of economists trained by Nobel Prize-winning economist Milton Friedman.
By pursuing free market solutions such as privatizing state companies and pulling down trade barriers, the “Chicago Boys” — as they were known — laid the basis for turning a poor country into Latin America’s most successful economy by most indicators.
The young Chilean economists convinced Pinochet to open the economy and privatize state companies, although not copper miner Codelco. Price controls were abolished and imports liberalized. The financial market was deregulated, allowing for the inflow of foreign capital thanks to a currency pegged to the dollar.
Those policies were credited with jump-starting Chile’s stagnant economy, which saw high growth rates from 1977 to 1980, averaging 7.9 percent. Critics on the left said they deepened poverty and increased unemployment.
The strategy was upset by the 1979 oil crisis, which sent prices sky-high and weakened the dollar. Friedman later disowned the dollar peg, saying it had not been his idea.
Now Guedes and a team of orthodox economists he has dubbed the “Chicago Oldies” hope to emulate the Chilean economic experience on a far larger scale in the world’s eighth-largest economy.
Brazil’s new right-wing President Jair Bolsonaro, who was sworn in on Tuesday, has given Guedes free rein to apply market-oriented policies to restore growth and confidence in an economy stifled by taxes, bureaucracy and corruption.
Guedes plans to cut taxes, slash red tape, open markets and reduce the size of government by selling state companies to lower public debt. Brazil’s gross public debt stands at 77 percent of gross domestic product, staggeringly high for a developing economy.
Bolsonaro’s policies are music to the ears of the business community after years of leftist governments that, while lifting 30 million Brazilians from poverty, led to unsustainable deficits and deepened Brazil’s worst recession on record, from which it is still recovering.
Guedes, a former investment banker with no political experience, lacks experience dealing with Brazil’s fragmented Congress and will face strong popular resistance to overhauling the bloated pension system, which allows many Brazilians to retire in their 50s.
Bolsonaro has yet to build a majority in Congress to back his legislative agenda, and by eschewing the traditional horse-trading of Brazilian politics he could run up against opposition on nationally sensitive issues such as pensions and privatization.
Yet Brazil’s currency, the real, has climbed in recent weeks as many investors see the ideologically coherent team assembled by Guedes — dubbed the “dream team” by some market observers — tackling the persistently high cost of doing business in Brazil, which has deterred foreign investment.
The appointments include old hands in dealing with Congress to make up for Guedes’ lack of political exposure and career civil servants who know how the machinery of government works.
“It is a real good mix of people who share his view of things, including economists who have the same very liberal world view of the University of Chicago and old friends he trusts,” said UBS economist Tony Volpon.
Bolsonaro has adopted much of the Guedes agenda because he understands how urgently the economy requires reform, Volpon said. Brazil’s annual public-sector deficit is running at a unsustainable 7 percent of GDP.
“Investors have given Brazil a lot of time to put its house in order. With an elected government and a new economy minister who is committed to pension reform, there are no more excuses. They need to deliver,” he said.
Guedes picked fellow University of Chicago alumni to run Brazil’s biggest company, Petrobras, and some of its top state-run banks, key institutions in Latin America’s largest economy.
Economist Roberto Castello Branco took over on Thursday as the new chief executive of Petroleo Brasileiro SA, the heavily indebted state-run oil company that stood at the epicenter of Brazil’s largest corruption scandal.
Joaquim Levy, a former World Bank managing director and former finance minister, was tapped to head the country’s powerful state development bank, BNDES.
Rubem Novaes, another University of Chicago economics Ph.D., will take charge of state-owned Banco do Brasil, the largest bank in Latin America.
Castello Branco, a critic of state interference in the economy, has said he favors selling Petrobras, a view shared by Guedes but resisted by retired army generals who make up a third of the Cabinet in former army officer Bolsonaro’s nationalist conservative government.
Guedes said on Wednesday he wants to speed up the privatization program, which he sees bringing in up to 1 trillion reals ($266 billion).
Former Central Bank President Carlos Langoni, who taught Guedes economics before sending him to do a doctorate at his alma mater in Chicago, said Brazil has reached a point where it has to shed state companies — probably with the exception of Petrobras itself — to increase efficiency and fend off a budget crisis.
Langoni, who still advises his former student, said Guedes has been able to convince Bolsonaro — often resistant to such ideas during his 28-year congressional career — that privatization and deregulation are a necessity.
“I see no one better trained and equipped to implement this than the Paulo Guedes team,” he said by telephone. “They really have the know-how, the academic background, and they have all had very successful careers in private business.”
However, the challenges facing them are formidable. Brazil’s government will spend 32.6 percent of its budget in outlays on pensions, vastly outranking the ratio even in countries with much more “graying” populations like Japan and Italy.
On Friday, Bolsonaro proposed a modest increase in the minimum retirement age for men to 62 by 2022 from the current average age of 55, a proposal still likely to stir strong resistance in Congress and on the streets.
Michael Shifter, president of the Inter-American Dialogue think tank in Washington, said Guedes lacks the political experience needed to win approval for an unpopular pension reform, deregulation and sweeping privatizations.
Some experts say it would be impossible to duplicate Chile’s economic turnaround in anything but a military dictatorship, given entrenched interest groups and political resistance.
“Pinochet didn’t have to worry about dealing with a fractious Congress — none existed under his dictatorship — or with protectionist interests,” Shifter said.
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