Brazil: Politics Will Test Guedes

Brazil'snewly annointed Bolsonaro administration faces difficult economic challenges.

Brazil’s new finance minister, Paulo Guedes, has a daunting task: to bring Latin America’s biggest economy back to full health following the worst recession in the country’s history. Making matters more difficult, he will have very limited time to implement urgent fiscal and structural reforms if he wants to please his boss, the just-inaugurated populist President Jair Bolsonaro, and avoid a new crisis.

Brazil’s economy is expanding. Bouncing back from a truckers’ protest that crippled key business sectors last spring, GDP grew at an annualized rate of 1.4% in the third quarter, its fastest pace in 18 months. Investment rose 1.6%, marking the first positive reading in four years. That’s a fragile recovery, worsened by 13 million unemployed workers, a staggering fiscal deficit and a massive debt-to-GDP ratio.

Guedes, who will also be in charge of planning and development, has been dubbed by the Brazilian press a “super minister.” A former pupil of Milton Friedman at the University of Chicago, he argues for smaller government and privatization.

“As a ‘Chicago Boy,’ Guedes would like to privatize everything,” says Alfredo Saad-Filho, professor of political economy at SOAS University of London. “However, his ambitions have already fallen victim to the conflicts between the president and other players close to the administration, to the extent that Bolsonaro has already intervened repeatedly to contain Guedes.” It now appears that while utility companies Petrobras and Eletrobras will be privatized, lenders like Banco do Brasil and Caixa Economica Federal will remain state-owned, Saad-Filho notes.

Another challenge is restructuring the country’s pension system. “The sooner the better,” Guedes has stated to the press. The current structure—which disproportionately benefits public servants, who can retire in their mid-50s—costs 12% of GDP.

While Guedes economic views are fairly clear, it remains to be seen where Bolsonaro and a divided and unpredictable Congress land. As some observers have already pointed out, the country’s fate is in the hands of an economist who is getting his first taste of public service—and new lawmakers who don’t know much about the economy. “A very public conflict is mounting,” says Saad-Filho, “and it started when the administration was not even in power yet.”