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Pandemic or economic collapse: are these Brazil’s only choices?

. Apr 01, 2020
Pandemic or economic collapse: are these Brazil's only choices? Popular shopping mall closed for sanitization. Photo: Lúcio Bernardo Jr/Agência Brasília

Over the past few days, public debate in Brazil has been dominated by a conundrum created by the Covid-19 pandemic: should the country agree with state governors and drive its economy into recession to contain the spread, or should Brazil follow President Jair Bolsonaro and accept the casualties as inevitable side effects to save the economy. Neither side seems to be open to a middle-of-the-road solution.

The argument we explained on March 25 grew stronger after Brazil’s Central Bank presented a chart hoping to “prove” that stricter containment measures would cause the steepest economic downturn the country could face. “It is a fact that, the more public policies you do to flatten the curve of new cases, the more restrictions to job offers you create and, therefore, you deepen the economic recession,” said the Central Bank’s Economic Policy Director, Fabio Kanczuk, during a presentation of inflation perspectives.

Questioned by The Brazilian Report on how this situation applies to the Brazilian population,

and on which data or economic model it is based on, Central Bank officials limited themselves to refer us to a collection of papers called “<a href="https://voxeu.org/content/mitigating-covid-economic-crisis-act-fast-and-do-whatever-it-takes">Mitigating the Covid Economic Crisis: Act Fast and Do Whatever It Takes</a>”, published by think tank Center for Economic Policy Research (CEPR).</p> <p>Professor Pierre-Olivier Gourinchas, author of the article “Flattening the pandemic and recession curves” —&nbsp;one of the articles on which the Central Bank&#8217;s projections are based — explained to <strong>The Brazilian Report </strong>that it is actually an analysis focused on advanced economies, with “no equations and calibrations based on economic principles or historical empirical evidence.” According to the professor, since “very little data is available at this stage, the analysis is informed by the experience of previous crises, broadly defined.”</p> <div class="wp-block-image"><figure class="aligncenter"><img loading="lazy" width="1024" height="563" src="https://brazilian.report/wp-content/uploads/2020/04/bcbc-1024x563.png" alt="Central Bank uses misleading chart &quot;to illustrate&quot; a point" class="wp-image-34678" srcset="https://brazilian.report/wp-content/uploads/2020/04/bcbc-1024x563.png 1024w, https://brazilian.report/wp-content/uploads/2020/04/bcbc-300x165.png 300w, https://brazilian.report/wp-content/uploads/2020/04/bcbc-768x422.png 768w, https://brazilian.report/wp-content/uploads/2020/04/bcbc-610x335.png 610w, https://brazilian.report/wp-content/uploads/2020/04/bcbc.png 1424w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Central Bank uses misleading chart &#8220;to illustrate&#8221; a point. Red line (cases/recession without containment measures); blue line (cases/recession with containment measures)</figcaption></figure></div> <p>In his presentation, Mr. Kanczuk reckoned that scenarios are being reviewed all the time, and that the economic picture used on the report is based on data available until March 17, when the Monetary Policy Committee decided to slash benchmark interest rates to 3.75 percent. Since then, the Central Bank itself moved on with measures expected to release more than BRL 1.2 billion into the Brazilian economy, while recession is pretty much a consensus among market players.</p> <p>What is not a consensus, however, is the extent of the economic damage and, most of all, how to protect people from getting sick while avoiding massive unemployment and the hardships of a second economic downturn only four years after Brazil&#8217;s worst recession in history.&nbsp;</p> <p>Are Brazilians facing Sophie&#8217;s choice?</p> <h2>Different remedies</h2> <p>In his analysis,<strong> </strong>Professor<strong> </strong>Gourinchas expects that the appropriate health policy measures may reduce economic activity by 50 percent for one month and 25 percent for another month, which might lead to a ten percent yearly decline in GDP. However, he also points out that when it comes to “unemployment versus lost lives, there is not much to debate,” adding that a recession is likely to occur even if no containment measures were implemented.&nbsp;</p> <p>In his view, the economy needs different stimuli to fight off the impacts of the disease, namely temporary layoff assistance, financial aid to avoid bankruptcies, as well as liquidity to the financial system. While all of this should be funded, in his view, through public spending, he alerts that this could put highly indebted countries such as Italy in trouble, therefore, needing international help.</p> <p>Professor Gourinchas also told <strong>The Brazilian Report</strong> that emerging economies such as Brazil’s have limited options to fight the crisis and the best alternative would be having access to international funds, which requires “mobilization by rich countries to offer liquidity.” Without it, “sanitary measures will be expensive and difficult to maintain,” he adds.</p> <p>Besides, if the health emergency persists, developed economies could close their borders as long as it&#8217;s not addressed “which would be a disaster for international trade, which is the driving force of many emerging countries.”</p> <h2>Contrarian views</h2> <p>The study “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3561560">Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu</a>,” recently launched by economists Sergio Correa, Stephan Luck and Emil Verner, shows that public health measures do not necessarily cause a recession. In fact, they claim the opposite is true.</p> <p>By running models based on the impacts of the 1918 flu pandemic in the U.S., they have found that “cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic.”</p> <p>“Reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5 percent in the post period. Likewise, implementing non-pharmaceutical interventions (NPIs) for an additional 50 days increases manufacturing employment by 6.5 percent after the pandemic,” they wrote.</p> <p>While self-isolating measures are expected to have a deeply negative effect on the economy in the short-term, the effort may pay off in the medium term, as “the more affected areas remain depressed relative to less exposed areas from 1919 through 1923,” according to the study.</p> <p>With the obvious caveats — such as the disruptions the economy faced due to World War I — the researchers say that “anecdotal evidence suggests that our results have parallels in the Covid-19 outbreak,” quoting countries such as Taiwan and Singapore as an example of limited infection growth, alongside mitigated economic disruption due to NPI measures.</p> <h2>Speed matters</h2> <p>Professor André Luiz Marques, coordinator at Insper’s Public Policy Management Center, raises awareness to another major issue: it’s not only a matter of the amount of money necessary, but how fast it reaches the population and companies that may diminish the downturn effects of Covid-19.</p> <p>“The economy will be affected, there’s no doubt, but is it a short or long term impact? The speed of reaction will determine how long this impact will be,” he said in an interview with <strong>The Brazilian Report</strong>. “There is no point in saying that billions will be released if the process for this money to leave the federal government and reach the other end doesn&#8217;t change. States and municipalities will see this money two months from now, but they definitely don’t have two months to wait. People’s lives may be at risk waiting for this money,” he said.</p> <p>A <a href="https://economia.estadao.com.br/noticias/geral,de-cada-r-100-de-medidas-anunciadas-para-o-combate-ao-coronavirus-r-63-ainda-nao-sairam-do-papel,70003249289?utm_source=estadao:twitter&amp;utm_medium=link">study</a> by newspaper <em>Estadão</em> shows that 63.9 percent of funds announced by the federal government as of March 26 — nearly BRL 200 billion — had yet to reach taxpayers. This comes down to measures announced not yet being enacted or, in some cases, not even being submitted to Congress. Even those which have been presented to lawmakers must face a somewhat lengthy process. A bill to create an <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/27/brazil-to-pay-emergency-salary-to-informal-workers/">emergency salary</a> of BRL 600 for informal workers was only passed on March 30 — and the government still needs to figure out how to reach all of the beneficiaries, many of whom don&#8217;t even have a bank account.</p> <p>The lack of coordination between all branches of power for a swift response is, in his view, the most pressing challenge so far. And this coordination also matters when it comes to allocating resources.</p> <p>“I don’t believe in choosing between workers&#8217; lives or economic health, it cannot be disconnected. (&#8230;) The challenge is how the federal government, states and municipalities, the legislative and legal powers will sit down and come up with solutions. So far, it’s almost like every man for himself and this bill will eventually arrive. It’s already coming.”

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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