Sunday, April 11, 2021

The tragedy of interventions: from Bolsonaro to Paes

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It was April 2019. In the wake of an election campaign full of promises of “more Brazil and less Brasilia” and to free the entrepreneur from bureaucracy and excessive regulation, the Bolsonaro government sanctioned the Provisional Measure (MP) of Economic Freedom, which it tried to impose limits on the government’s own regulatory power. Just 30 days after the promulgation of the MP, the freight schedule – one of the most important prices in a market economy – completed its one-year anniversary. Despite having his economic team formally speaking out against the table, today the Bolsonaro government has become, in practice, the guardian of the absurd practice of regulating how much the entrepreneur must pay the carrier to transport his goods. Fear of the return of the truckers’ strike and its short-term consequences for economic activity in Brazil would be at the root of the decision. The same was said of the recent decision by the government, as controlling shareholder of Petrobras, to ask for the removal of its CEO for increasing the price of gasoline and diesel.

Before the recent Petrobras crisis, the disastrous intervention of the Dilma government in the electricity sector also came steeped in promises and adjectives: cost reduction in Brazil for large industrial groups, relief for consumers of electricity, which would stop suffering from “abusive increases ”.

In Rio, Eduardo Paes is aware that the breach of contract with Linha Amarela and the consequent takeover of the operation by a city hall without resources to pay any kind of compensation to the concessionaire is disastrous for the investment environment of the city and for the solvency of long term of the municipality. Usually sensible and sophisticated, the mayor knows that no one invests in a municipal concession if the mayor can decide, after playing the game and signing the contract, that an asset can be taken by force and relicated. But the pressure from users to reduce prices and to continue the “open gate benefit” apparently justified a change in direction. Last weekend, with the support of the municipal guard, the municipality of Rio began taking over the operation, in the best Bolivarian style. Enthusiastic about the precedent set by the municipality, the Legislative Assembly of Rio de Janeiro had already approved the authorization for the government to cancel another concession, the so-called Rodovia dos Lagos, operated by CCR.

The script for all these interventions is similar: a government official meets the demands of a well-defined group (truck drivers, highway users, industrial energy consumers) and, under applause, adopts measures whose cost is multiple times the benefit value, but spread over time and divided among millions of people who do not even understand that they are “paying the bill” for economic voluntarism. As in the case of market reserves, special tax regimes and subsidies, populist intervention is very difficult to combat. Those who gain from intervention always scream louder than those who lose.

The voter from Rio de Janeiro will not judge Eduardo Paes for the eventual failure of the next round of concessions, much less for the increased perception of the “Rio de Janeiro risk”. The causal link between the interventions practiced by the mayor and the disorganization of economic life in Rio is very remote and not very palatable for political debate. In this way, the voter will not blame the Bolsonaro government if the Petrobras refinery privatization program fails in light of the risks that the derivatives pricing policy continues to be marked by controlled domestic prices. The investor knows that no one buys a refinery if he thinks he will be forced to sell diesel below the import cost, but in the political debate this kind of consideration has the face of a footnote.

In the world of identity politics and responses in 140 characters or less, discussions about second-order effects, long-term costs and benefits are being relegated to an increasingly less relevant circle. And populism is getting more and more tempting.

In the public space, interventions are soon summed up to a simple and false polarization: “concessionaires versus government” or “Petrobras versus Brazil”. We don’t realize that today’s clumsy intervention leads to tomorrow’s high tariff.

As long as the public debate does not mature, governments of the left, center and right will continue to abuse naive interventionism, which appeals to a portion of the electorate in the short term but harms everyone in the long run. The recipe for populism will continue to cross party and ideological boundaries. And society will continue to blame politicians for their ills without realizing that, as always, politicians just follow the votes.

* Daniel Goldberg is managing partner of Farallon Capital in Latin America, former president of Morgan Stanley and former secretary of Economic Law at the Ministry of Justice

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