Tag Archives: Development Economics

Inflation Targeting

Inflation targeting is a somewhat new approach to the role of Central Banks. This system was implemented in Brazil when I was a senior in college. I still remember the debate on whether inflation targeting was appropriate to a developing country like Brazil and most analysts predicted it wouldn’t last long. That said, inflation targeting has been used for approximately 20 years in Brazil.

There is a book about inflation targeting written by Pierre-Richard Agénor (University of Manchester) and by Luiz Pereira da Silva (BIS). This book is titled “Integrated inflation targeting: Another perspective from the developing world”. It provides a wealth of information about recent experiences with inflation targeting in developing countries, including discussions about how it performed in light of the global financial crisis and the issues faced by policymakers. This is a very nice manuscript and I strongly recommend to those interested in learning more about inflation targeting.

Social Security Reform in Brazil

Since I was a little kid Social Security reform has been discussed in Brazil. It is fair to say that in the early 1980s a huge actuarial deficit was already in place. Since the financial side was still fine, i.e. Social Security contribution revenues were larger than the paid benefits. Additionally, the hyperinflation of this period facilitated financial adjustments. All that was needed to balance the Social Security budget was to adjust benefits by less than the actual inflation rate.

To make matters worse, several significant changes affected the Brazilian economy since the late 1980s. First, the Brazilian Constitution of 1988 changed several Social Security rules for both private sector and public sector workers. These changes, among other nefarious effects, increased substantially the benefits paid without an increase in the contributions. Moreover, the Brazilian Social Security system is a pay-as-you-go system, which makes it very vulnerable to demographic changes. In fact, the fertility rate started to decline rapidly and at the same time life expectancy in Brazil increased considerably since the 1980s. Finally, the end of hyperinflation after the implementation of the Real Plan in July 1994 prevented the use of inflation by government to curb Social Security deficits. As a result, by the end of the 1990s, Social Security had both actuarial and financial deficits.

Several mild reforms have taken place since the mid-1990s, though none of them were able to restrain the ever increasing financial deficit. A new reform is currently being discussed in the Brazilian Congress. It is not clear, at least to me, whether it will be modified (and how) or even if it will be approved by Congress. In this link you can find some of the fiscal forecasts that were used to support the current proposal to reform Social Security.

Roberto Campos and the Brazilian Constitution of 1988

Let me talk again about Roberto Campos and the Brazilian institutions. After a heterodox economic plan was implemented in February of 1986, the entire country was happy and enthusiastic. Later in the year, Brazilians voted for state governor and for a new Congress. Most important, the elected members of this new Congress were also in charge of writing a new Constitution for Brazil. Campos was elected deputado federal (a representative in the Brazilian lower chamber).

As I mentioned in a previous post, he was involved with many of the institutional changes that took place in Brazil between 1964 and 1967, including the creation of the Brazilian Central Bank. Unfortunately, his role in the drafting of the new constitution would be a much smaller one. Although many observers claim that the 1988 Constitution represented a move forward in civil and political rights, the majority of the economists believes that it severely reduced the economic freedom in Brazil by given the Brazilian federal government a central role in the country’s economy.

With a tad of melancholy, Roberto Campos produced several essays about the changes introduced by the 1988 Constitution that were made available in a book titled “A Constituição Contra o Brasil” (The Constitution against Brazil). This book is a must read for those trying to understand the (good or bad) changes introduced in the Brazilian economy after 1988. A pdf of the book (in Portuguese) is available here.

Ernesto Lozardo’s new book: Ok, Roberto. Você venceu!

Professor Ernesto Lozardo has taught economics at EAESP-FGV since 1977. I took his Money, Credit, and Banking course when I was a junior at EAESP. To make a long story short, his knowledge and passion about economics and his will to put in practice good economic policies strongly motivated me to pursue a graduate education in economics.

That said, Prof. Lozardo’s new book titled “Ok, Roberto. Você venceu!” (published by Topbooks) is about Roberto Campos. He was one of the most notable Brazilian economists of the last century, not only in terms of designing development policies but also in terms of implementing them. In fact, his policies transformed Brazil from a very poor country in the late 1940s to a middle-income country in the mid 1970s.

I strongly recommend chapters 5, 6, and 7 for those interested in learning more about the institutional reforms conducted by Campos that led to strong economic growth in Brazil in the 1970s. Several of those institutions are still present in Brazil nowadays.