Brazil’s Paulo Guedes keeps faith in reforms despite Chile crisis

Brazil’s Paulo Guedes keeps faith in reforms despite Chile crisis

Finance minister claims backing from congress and president for ambitious economic measures

Three weeks of riots and looting in Chile against free-market policies might have tested the convictions of many a devoted economic liberal — but the faith of Paulo Guedes, Brazil’s finance minister, is undimmed.

In an interview with the Financial Times, Mr Guedes dismissed any suggestion of backing off on Brazil’s most ambitious economic reforms since the return of democracy in the 1980s. After his success in pushing through once-unimaginable cuts to generous government pensions, the Rio-born disciple of Milton Friedman last week presented his latest package of measures to slim down his country’s bloated state.

“For the last 40 years we remained a closed economy. We didn’t give a damn about integrating global value chains, increasing competitiveness, increasing productivity,” said Mr Guedes. “Now we are going to do it.”

The fresh proposals would comprehensively overhaul the government machine by freeing up more money for investment spending, triggering automatic austerity measures when fiscal limits are breached and decentralising public spending. It would wind up around a fifth of the country’s municipalities that are not financially viable and sell most of Brazil’s biggest utility, state power firm Eletrobras.

Mr Guedes estimated economies from the administrative reforms alone at R350bn ($85bn) over the next 10 years.

“The most important feature (of the new package) is fiscal responsibility,” he said, as he laid out how the automatic austerity measures would work. “You stop giving increases. There is no increase on wages, there is no promotion, you just freeze the wage bill for two years. So no fiscal crisis will last more than one year and a half in Brazil from now on.”

President Jair Bolsonaro’s conservative government lacks a majority in congress, which must approve the measures. But Mr Guedes believes that final approval of the pension reforms last month is proof that the political climate in Brasília has changed as a result of public pressure.

“I am surprised on how well things are going in the Congress now,” he said in his ministry office, which overlooks the Oscar Niemeyer-designed building that houses Brazil’s parliament. “There is no fight any more. They understand.”

He repeats fondly the chant of pro-government demonstrators this year calling for R1tn in savings on state pensions: “Um trilhão, Paulo Guedes tem razão” or “one trillion, Paulo Guedes is right”.

“The politicians looked at that and they were in panic,” the finance minister chuckled. “They said: ‘Jesus Christ, what shit this is, I have to approve a sacrifice. They are crying out for us to make a sacrifice. They are asking for a trillion’ . . . We saw that. It is amazing.”

A former day trader who co-founded Banco Pactual — which later became one of Brazil’s biggest investment banks — before running his own fund, Mr Guedes frequently resorts to the vernacular of the trading floor. “Sell that shit”, “Jesus Christ” and prices “blowing high” are among his favourites.

Now 70, Mr Guedes is seizing the chance to fulfil a life-long ambition: to unleash on his homeland the full force of the free-market economics he learnt from Friedman at the University of Chicago in the 1970s. Frustrated at the hostility to economic liberalism in Brazil after returning from the US, Mr Guedes worked in the University of Chile in the 1980s under the Pinochet dictatorship. He observed first hand the reforms of the “Chicago boys”, Chilean economists who had learned from the same guru.

“It was a wonderful transformation,” he said of their work. “The country doubled its per capita income. Thatcher, Reagan, they understood that.”

Have the violent protests that have rocked Chile not changed his view? Mr Guedes believes the root cause has been misdiagnosed. “What happened in Chile is that they did not approve their reforms democratically. So they do not even understand the reasons for their success.”

Could there be an issue with the pure free-market model? “It is amazing how people use politics to say stupid things about economics,” he retorts. “So a country grows 35 years faster than everybody else. Then they have a protest which looks much more like the yellow vests in France than anything else, and then you say: listen, the [pension system] does not work in Chile. I would say the other way around. I would say: well, maybe social democracy does not work, because they had seven presidents, social democrats, and only one liberal”.

Social democracy is a particular bête noire for Mr Guedes, who believes that it has prompted Europe, and Brazil, to give up growth in the name of reducing inequality — rather than wholeheartedly embracing capitalism and markets, as in Asia.

At a time of growing global uncertainty over the future of free-market capitalism, Mr Guedes’ faith in his economic heroes is undimmed. The name of his programme, “On the road to prosperity”, is an amalgam, he explains, of Friedrich Hayek’s treatise on market libertarianism Road to Serfdom and Ludwig Erhard’s Prosperity through Competition, which guided German’s postwar economic miracle.

The philosophical references may be lost on most Brazilians, who are struggling with one of the world’s worst distributions of income and persistently high levels of poverty. Veja, a Brazilian news weekly critical of the government, has accused Mr Guedes of “a lack of social sensibility worthy of a villain from a novel”.

Bankers in Brazil’s financial capital São Paulo remain concerned about the ultimate level of Mr Bolsonaro’s support for Mr Guedes, recalling the mercurial president’s past fondness for statist policies. “So far Bolsonaro has given full leeway to Guedes,” one said. “But is Bolsonaro a full believer in his policies? No, he’s not.”

Mr Guedes is unfazed and says he feels secure in his close relationship with the hard-right president: “He came with me and he is supporting me. I must say that honestly. The president never failed in his support. Never.”

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