Maybe it's an understatement more than a warning.
Brazil's ex-Central Bank governor, Arminio Fraga, said the country needs a massive overhaul of its economic policy. And said that if he was Finance Minister he would be "acting" rather than "reacting" to the country's economic problems.
He said former Finance Minister Joaquim Levy played too much defense when what Brazil's economy really needs is for someone to play offense, and quickly.
"The sensation I have is that no one in this chaotic political culture of 30 different parties in congress wants to do anything wise, or make any sacrifice," Fraga told the Agencia Estado newswire. The full interview was published Saturday in Portuguese on Agencia's flagship daily, Estado de Sao Paulo.
Over the last five years, Brazil responded to the Great Recession in the U.S. by expanding credit, making temporary tax cuts on favorite industries like automotive, and watching inflation go from 4% to 5% to 8% to now over 10% without raising interest rates until only a couple years ago. During this period, foreign investors preferred to put their money in QE economies that had the back-stop of the Fed and European Central Bank. That took a lot of portfolio money out of Brazil at a time when China was slowing and no longer providing post-crisis stimulus to its economy. The commodity super-cycle, based on Chinese demand, evaporated over a quick three year period. And Brazil, meanwhile, was left hanging onto willy-nilly economic policies, most of them temporary, and no real reforming of its economy.
"I've never seen anything like it," he said. "From where I sit, Brazil is worse off today than it was in the early 90s."
To those who don't know what the early 90s looked like: Fernando Collar was in power and in the process of being impeached, much like Dilma Rousseff today. Inflation was high double digits. Personal income was in decline. It was the final throes of Brazil's "lost decade".
Political reform happened post-Collor and poverty was tackled under president Luiz Inacio Lula da Silva. The tragedy now is that the working class in Brazil is under threat. Unemployment is on the rise. Lower-skill labor in construction is in big trouble, with many of the largest construction firms all caught in the Petrobras Car Wash scandal. Refinery projects are on pause, taking thousands off payroll.
Fraga said that Levy's replacement at the Finance Ministry, Nelson Barbosa, is one of the architects "of all that is wrong with the Brazilian economy."
He said that Barbosa's plan to restate the unpopular CPMF financial transactions tax won't "resolve much" at the government balance sheet level.
"It's a lousy, cumulative tax that causes a lot of distortions," he said.
Fraga was picked to be Finance Minister if Dilma's challenger Aecio Neves made it to the Presidential Palace. He did not, but if the economy deteriorates over the next two years, Dilma's Workers' Party will have a hard time selling themselves as saviors, including to their low income base in the north. Then, Fraga might become Finance Minister at some point in 2019.
"I'd do a major change in the economic policies of Brazil," he said. "We need profound social security reform here, raising age requirements and removing minimum wage increases to the equation," he said. If minimum wage goes up, retirees get a raise.
"We need labor reform in this country and we need to open Brazil's economy, gradually, to the world. We have to build an entirely new economic model," Fraga said.
When asked if he is hopeful for the future given the current leadership and conditions, he said, his hope was in decline.
