Brazil’s new finance minister eyes Pinochet-style fix for economy

Brazil’s new finance minister eyes Pinochet-style fix for economy

Paulo Guedes is targeting free market reforms similar to those of ‘Chicago boys’ in 1970s Chile

For Brazil’s new finance minister Paulo Guedes, the government of far-right president-elect Jair Bolsonaro could represent a “Pinochet” moment for Latin America’s largest economy. 

Mr Bolsonaro, who won elections last Sunday, ending almost 15 years of leftwing rule, will take over a moribund economy burdened by a bloated public sector when he assumes office on January 1.

Chile’s late dictator General Augusto Pinochet came to power in Chile in 1973 after overthrowing socialist president Salvador Allende in a military coup, at a difficult time for the economy, when the country was suffering high inflation and fiscal deficits.

The Chilean dictator’s solution was a dose of Milton Friedman-style free market economics from University of Chicago-trained academics. Mr Bolsonaro is considering the same medicine in the form of Mr Guedes, who has a doctorate from Chicago and taught at the University of Chile in 1980 when Pinochet was in power.

“The Chicago boys saved Chile, fixed Chile, fixed the mess,” Mr Guedes told the Financial Times during a wide-ranging five-hour interview at his beachside office in Rio de Janeiro. 

If Mr Bolsonaro, known for his nostalgia for Brazil’s military dictatorship, represents for many voters an extreme but necessary solution to end the country’s long flirtation with the left, Mr Guedes is his counterpart in the world of economics and finance.

Under Workers’ party governments from 2002, Brazil’s public sector spent as much as a European social welfare state without the same quality of services. Interest rates are among the highest in the world, public debt is soaring, corruption is endemic and the economy is still struggling to emerge from years of recession.

For supporters of Mr Bolsonaro, the 69-year-old Mr Guedes’ uncompromisingly free market view of the world is the only answer. “Liberals know how to do it,” Mr Guedes once said.

The gruff-speaking investor from Rio de Janeiro was hitherto little known outside academic and business circles. After returning from Chile in the early 1980s, he co-founded Banco Pactual in 1983, which later became BTG Pactual, once Brazil’s biggest homegrown independent investment banks. He then joined asset-management firm JGP before running his own investment fund Bozano Investimentos.

Mr Guedes sourly recollected that on his return from Chile in the 1980s, he was “discriminated against because of my association with Chicago and Pinochet. I was attacked as a radical liberal”.

One senior Brazilian economist who knows Mr Guedes said fellow academics never respected him, seeing him as a “gambler” from the banking world. 

However, former Brazilian central bank governor Carlos Langoni, who was Mr Guedes’ professor at the Getúlio Vargas Foundation (FGV), the Brazilian academic institution and think-tank, said he was the top student of his class. “We have for the first time in many, many years someone with the right vision for Brazil,” Mr Langoni said.

Like the Pinochet plan, Mr Guedes — who first considered joining Mr Bolsonaro’s campaign only last year — has repeatedly said his priority is to end Brazil’s 7 per cent fiscal deficit through privatisations of the country’s 147 state-owned enterprises. Latin America’s largest economy wastes the equivalent of a Marshall Plan each year in servicing its huge debt, he said.

“There are no sacred cows,” he said of the privatisations. The challenge will be to convince Mr Bolsonaro, who analysts believe is a nationalist at heart and has already ruled out the full sales of important state-owned companies such as oil producer Petrobras, electricity generator Eletrobras and state lender Banco do Brasil.

Without those, warned Zeina Latif, chief economist at brokerage XP Investimentos, “talking about privatisations gets complicated”. Investors are far less interested in the smaller, less profitable companies. 

Mr Guedes’ other plans include a radical simplification of Brazil’s tax system, one of the world’s most convoluted, and reforming the country’s costly pension system, which is threatening to overwhelm the budget.

Some fear the irascible Mr Guedes is ill-suited to public life. On Sunday, pressed by an Argentine reporter about Brazil’s role in the regional trading bloc, Mercosur, he lost his temper: “You see there’s a style that matches that of the president, because we speak the truth. We’re not worried about pleasing you.”

He later apologised. But Rodrigo Constantino, an economist, who worked under him and considers him a mentor said it was “inevitable there will be some kind of heavy friction” between the minister and his boss, Mr Bolsonaro.

Oliver Stuenkel, a professor at FGV, said Mr Guedes would retain one “powerful weapon” that he could use to impose his will: the right to resign. “He knows that the minute he resigns, markets will tank big time,” he said.

The hope will be that he fares better than Pinochet’s Chicago boys. While they shrank the fiscal deficit, liberalised trade and privatised state companies, they established a fixed exchange rate that went bust after the region’s debt crisis of 1982.

A much-lauded reform to introduce a private pension system is also today facing problems, with retirees complaining that payments are too small.

But Mr Guedes’ supporters are optimistic. “This is the right timing to do things,” said Mr Langoni. “There is now a unique chance to implement this liberal shock because of the fiscal price of the public sector in Brazil.”

As for Mr Guedes himself, he referred to the slogan emblazoned on Brazil's flag, Order and Progress. “Order is meeting progress — order is Bolsonaro, progress are the liberal ideas,” he said.

Andres Schipani & Joe Leahy