Aloisio Araujo: 'Reforms are more important than opening up'

Foto: Antonio Scorza / Agência O Globo

Reproduction from the newspaper O Globo

Interview with Cássia Almeida and Luciana Rodrigues

Economist Aloisio Araujo, professor at the Brazilian School of Economics and Finance of the Getulio Vargas Foundation (FGV) and the Institute of Pure and Applied Mathematics (Impa), argues that the government should now concentrate its political capital on pension reform to rebalance public accounts, instead of wasting energy on other points of Economy Minister Paulo Guedes' liberal agenda, such as opening up the country's trade. After pension reform, the path for him should be to pursue other institutional reforms, such as tax reform, as a way to improve the business environment and stimulate investment. An advisor to Guedes, whom he met when he taught at the University of Chicago, Araujo praises the minister's political skill.

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After the pension reform, what should be the government's priority?

The mobilization of political capital is limited. I think it's right to address social security first, as it has a greater fiscal impact. But after fiscal reform, I am very much in favor of institutional reforms. Mexico achieved macroeconomic stability, but with very radical economic liberalization, with full privatization. It opened up the economy too much with NAFTA (the free trade agreement between the US, Canada, and Mexico), and growth wasn't that great. Not that I'm against trade liberalization, but when it comes to using political capital, which is scarce, tax reform is more important.

More important than trade liberalization, one of the points on the liberal agenda advocated by Minister Paulo Guedes?

The business environment in Brazil is very bad. After so much effort with the Bankruptcy Law (Aloisio Araujo was one of the authors, in 2005) , we are still at the average for Latin America. In the tax area, it's even worse than everyone else. Out of 196 countries, we are 190th (according to the World Bank's Doing Business report) . India reformed its tax system, passed a bankruptcy law, and advanced countless positions. The Brazilian tax system is a mess that hinders businesses and the entire economy. Another important reform is that of the Judiciary. To speed up processes, including those related to the Bankruptcy Law. Where there is a specialized court, the recovery process is faster, and the restoration of credit is greater.

What if the pension reform doesn't pass?

I think it will pass, even if it's watered down. The president already understands that it's important. He's been talking about it systematically. Paulo Guedes has proven to be a very good politician. I think the chances of it passing are very good. Most countries have a minimum retirement age. It's a Brazilian agenda; there are better ways to use these resources than on early retirements: building subways, investing in early childhood education. If the reform doesn't pass, the fiscal situation will deteriorate.

Reforms require a great deal of political capital.

Therefore, I think (the government) has to take advantage of its political capital to carry out the pension reform. This capital can even grow if the government succeeds in the economy. It helps to have a better fiscal situation to carry out the tax reform, because everyone is afraid that there will be an increase in the tax burden. It can do a piecemeal tax reform. First with income tax. Many countries are taxing profits and dividends. India managed to do it, folks! They are 1.6 billion, and we are 200 million.

Why do you mention India?

It was a much more complex tax system. Trucks would get stuck in a queue between states because of state taxes. It had a positive impact. India is growing faster than China, and that has to do with the reforms. Concessions (in the infrastructure sector) are also important; they can help growth. I like the privatization of sanitation, which involves well-done federal regulation. This can bring investment in the short and medium term and increase growth.