03/12/2018

'We need other reforms happening in parallel,' says Aloisio Araujo.

Reproduction of the interview from the newspaper O Estado de S.Paulo

At the invitation of the future Minister of Economy, Paulo Guedes, economist Aloisio Araújo, from the Getulio Vargas Foundation (FGV), gave a presentation two weeks ago to the transition team, advocating for microeconomic reforms. At 70 years old, he was previously a visiting professor at the University of Chicago, a mecca of liberal economic thought where Guedes and some of his team earned their doctorates. According to him, the new government should leverage its political capital to, in addition to pension reform, adjust bankruptcy rules and the tax system.

Is the current situation favorable for economic reforms?
I think so. Now comes a powerful, newly elected government. It comes with a lot of room to make reforms. It's time to take advantage and implement structural reforms. I like to refer to Mexico, which greatly opened up its economy. There's a recent book by Santiago Levy (vice-president of the Inter-American Development Bank, who worked in the Mexican government from 1994 to 2000). Mexico did several things, and the effect wasn't as great as expected. It implemented macroeconomic management, keeping inflation under control, opened up the economy with NAFTA, the investment rate grew, and it has more human capital than before, but growth was small compared to Brazil's.

What lesson did Mexico teach us?

Professor Timothy Kehoe of the University of Minnesota wrote an article more than ten years ago comparing Chile to Mexico. Chile implemented some institutional reforms. It focused on bankruptcy law because of credit, as firms can grow. Levy says something similar. Mexico has a poor allocation of labor because a large part of the workforce and capital is concentrated in unproductive firms. A similar study was done in the Brazilian case.

Has Mexico failed in its microeconomic reforms?

It failed. Brazil is even further behind. My view is that you can't put all the political force at the beginning of a government into just a few of these sectors. Economic openness is important, privatization too, but the idea is also to invest in reforming certain outdated laws. Brazil's tax system is terrible.

Without tax reform, will unproductive companies survive?

This is the diagnosis for Mexico. These firms aren't being liquidated because of the bankruptcy law. There's an interaction between bankruptcy law and tax reform. There are small firms that end up not paying taxes. That creates confusion, because the tax authorities have priority in bankruptcies. The tax confusion helps these firms persist.

Does the example of Mexico highlight the fact that trade liberalization alone is not the solution?

It's important to keep in mind that we need other reforms in parallel. The opening up should be slow, gradual. Implementing the other reforms gives firms time to become more productive. In Chile, there was a rapid opening and a drop in employment, but there was a strong government that lasted a long time (the military dictatorship led by Augusto Pinochet) and, eventually, the economy recovered and became very efficient.

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