Post Keynesian Economics and the Brazilian Election

[Paul Davidson <pdavidson@xxxxxxx>]

Enclosed is an email that I have just received from an
economist in Brazil. Maybe Brazil will become the testing ground for Post
Keynesian economics.

Dear Paul, 

Take a look at the newspaper article I am enclosing.
I translated it into English. It came out today in the largest newspaper
of Brasil (Folha de São Paulo). Barros is a former Cardoso's minister (he
was fired for involvement in obscure deals related to the privatization
of the telecom sector) and a top adviser to Serra, Cardoso's candidate
for presidency. Serra has been doing very badly in the polls, and there
is a strong indication that Lula may be elected in the first ballot next
Sunday (Oct 6). His campaigners have been trying to create a climate of
fear, saying that Lula will make us the next Argentina, etc. with very
limited success other than creating havoc in the financial and currency
markets. This is the most recent shot: to scare financial markets with
the idea that Lula's policies are post Keynesian and inspired by you! The
article is all very bad (and badly written which will be reflected I fear
in the translation, but I could not do miracles) but it is curious,
probably no more than that. Barros if a former professor at Unicamp, so
to some extent it is also an attack at his former employers with which he
never got along anyway. 
I sent an email to Bresser, who is also a top adivser to Serra, about
what the article means, but I don't know if he will reply since he must
be very busy with the campaign. 
All indications are that Lula is going to win so let us hope Barros'
argument, made for its scary value, ends up being right after
all! 
Best wishes



PT?s Economic Policy

Luiz Carlos Mendonça de Barros

Lula?s large advantage in the race for the presidency is provoking an
authentic earthquake in the financial markets. The best examples of this
situation of instability take place in the foreign exchange markets and
the markets for our external debt securities. The value of the real
against the dollar reached irrational levels in the last days. This
accelerated devaluation results from arbitrage operations with the
securities traded abroad, which are being sold with an enormous discount
by international banks scared by Brazil, and from speculation about a
possible external moratorium. In this period of nervousness the big
question, which mobilizes the attention of economic agents, turns out to
be speculation about the economic policy of the new administration. The
market wants to know their details and the names that will possibly
constitute president Lula?s team. In a recent interview given to O Estado
de São Paulo, the opposition candidate denied any possibility of a
transition team, expected until then by some analysts, which would
integrate some technicians connected to the current administration. Lula
reaffirmed that he will work with a thorough-bred PT?s team.
This is an important clue. PT?s administration will have an economic
policy that will reflect their view of the world and their ideas about
what is a market economy, in a country with Brazil?s features. It signals
that they will promote a 180-degree turnabout with respect to the FHC
years. During his interview to O Estado, free from the artificial
controls of [political marketing advisor, FC] Duda Mendonça, Lula clearly
expressed his ideas about the economy. For alert analysts, the
candidate?s words were revealing about the new times that are to come.
And they show that the ?sit down because the lion is tame? [a local
_expression_ meaning there is nothing to fear] policy, adopted with respect
to markets in the very same day of Lula?s interview, his likely Finance
Minster was delivering a conciliatory speech to large banks and investors
is false.
I ask your permission to digress on the relations between what is called
economic theory and the economic policy of an administration in power.
This debate is essential to understand how president Lula?s economic
policy would be designed. Economic theory represents the set of ideas and
principles about the workings of an economic system by a given group of
people or a political party. They are the so-called schools of economic
thought.
Economic science, in its beginning just a set of values connected to
human behavior, evolved a lot in the second half of the past century.
Today, it works with precise macroeconomic concepts and with
sophisticated quantitative models, which allow one to understand in a
more scientific way the workings of a modern market economy. Therefore,
the room for the existence of different schools of thought was sharply
reduced, and the divergences between economists shifted to the level we
are calling economic policy. It is not the more general concepts of
economic theory that divide discussants, but the reading of the
difficulties met in their application to an imperfect world and that
diverges seriously with respect to the pure models considered in
theory.
In the hypothesis of Lula?s victory, the change in the direction of the
economy will be radical, as I said. The school of economic thought that
will serve as the basis for the administration?s actions is different,
and its theoretical principles are opposed to those which determined the
economic policies of the last years. It can be called post-Keynesian, it
appeared in England after World War II, and it represents one of the
strands among which Keynes?s thought has split after his death. The other
strand developed in the US at the same time and became the dominant
school in that country, until the inflationary crisis of the 1960s. The
English school, that called its American colleagues ?bastard Keynesians?,
was never really tested, despite being important in the introduction to
questions like market failures as factors generating economic
instability. Its trademark is the radical reading of the systemic
instabilities inherent to market economies and the need for a continuous
and pervasive State interference to correct them. In Brazil, this radical
school of Keynesian thought is represented by the Institute of Economics
of Unicamp, at Campinas. Its most important participation was during the
Sarney administration, in the period in which the late Dilson Funaro was
the Finance Minister. They shared for two years the responsibility for
the economic policy of the first administration after redemocratization
in 1984 with the first generation of economists from the Catholic
University of Rio de Janeiro. The Cruzado Plan and the beginning of the
modernization of Brazil?s fiscal and monetary institutions are the most
important facts of this period.
Now, with PT?s victory, if it does occur, this school will be hegemonic
and the economic policy of the new government will certainly reflect its
main ideas. For those interested in knowing this possibility better, I
suggest reading a small but interesting book called Controversies in Post
Keynesian Economics, by Paul Davidson, published by Edward Elgar. I will
come back to this issue soon.

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

503 SMC

Knoxville, Tennessee 37996-0550

work phone: (865) 974-4221

fax: (865) 974-4601/  (865) 974-1686

home phone and fax (865) 692-0802

http://econ.bus.utk.edu/davidsonextra/Davidson.html