How the financial system drains the Brazilian economy: overview
28 February 2015
The numbers are quite clear. In Brazil, credit represents about 60% of GDP. Therefore, it is important to understand the origin and destination of this mass of resources. The different parts of the system are well known, what we have done here is to put them together so as to show how the gears work together and the paralyzing impact on the Brazilian economy. We will look at credit in commercial chains, credit cards, banks (both for personal and legal persons), the public debt, taxes and financial outflows. Much research is still to be done with this outlook, but the orders of magnitude of how the real economy is being drained by financial intermediaries becomes quite clear. Consider this as the Brazilian dimension of the global financial mess. Pikettyzinho, so to speak.
Consider the installment plans in commercial chains such as Casas Bahia. When you buy household ware on credit you will be paying a little over 100% interest. Since so many, particularly the poor recently incorporated into the economy, have to buy on credit, you will be cutting their final purchasing capacity by half. Add to this the fact that intermediaries charge an average 238% on credit card revolving credit and the more than 160% on overdraft, and we see that well over half the purchasing power of consumers is drained here to financial intermediaries, thereby sterilizing much of the economy’s stimulation on the side of demand.
The result is that the population becomes heavily indebted while purchasing very little. The installment plan presented to the consumer “fits in the pocket” according to the TV commercials, but it overloads that pocket for a long time. Thus the demand impact is jammed. Similar results are found on the investment side of the process, because if in the reproductive cycle most of the profit goes to financial intermediaries, the producer’s capacity to expand production is thwarted, with the double restriction of reduced demand and restricted self-financing: they get paid very little for their product, when facing the huge commercial chains which have become basically financial intermediaries more than providers of commercial services.
In banks, personal credit average interest rate is 103% according to ANEFAC (Associação Nacional de Executivos de Finanças, Administração e Contábeis), which is staggering. Interest for legal entities is prohibitive, in the order of 40 to 50%, and to start a business under these conditions is not feasible. There are official credit lines in public banks which operate with reasonable interest rates, but they only partially compensate for the appropriation of results by the private financial intermediaries.
The third item in the gear is the “Selic” rate, the official central bank interest rate paid to owners of the public debt. With a GDP of 5 trillion reais, one percent of GDP is 50 billion. If the primary surplus is set at 4% of the GDP, for example, this means about 200 billion reais of our taxes transferred essentially to financial groups, each year. Thus, a very significant part of the government’s capacity to finance more infrastructure and social policies is sterilized.
Furthermore, the high “Selic” discourages productive investment in companies as it is easier – zero risk, total liquidity – to profit from public debt securities, 11.75% for an inflation of 6.5% in February 2015. And for banks and other intermediaries, it is easier to profit from public debt than to promote the economy by funding productive initiatives, where you have to identify opportunities and make your project analysis homework. The large profits in financial intermediation end up by contaminating a whole set of economic agents, all sold in the name of protecting the population from the inflation monster.
It is thus understandable that we have this strange situation of a financial profit growth over 10%, while GDP growth remains stalled at around 1%, and unemployment is exceptionally low, around 6%: Brazilians are indeed working, but the results are drained by installment plans, by the bank interest rates for personal credit, by the interest rates for legal persons and by the high “Selic” rate. This is the Brazilian dimension of the global financialization. In the global financial speculation system, someone has to bring money in, and this is how it works in Brazil. And through the HSBC, Santander, City and other international banks heavily involved in Brazil, the country joins the world casino.
To close the circle, we have tax evasion. With the global crisis we have little more than some hand-slapping as regards the financial regulation system, but at least we have more information: money in tax havens is in the range of 20 trillion dollars, according to the Economist, for a world GDP of 70 trillion. Brazil participates with an estimated amount of some 520 billion dollars, about 25% of Brazilian GDP, according to the Tax Justice Network research. Which means that resources which should be reinvested in the development of the economy are not only diverted to financial games internally, but they do not even pay the required taxes. For example, we now have some data on Itaú and Bradesco in Luxembourg, while the Global Financial Integrity studies show some 100 billion reais (roughly 40 billion dollars) illegally drained from Brazil every year through misinvoicing and mispricing.
Legal or illegal transfers to tax havens represent only the external part of the drain, since the Brazilian tax system is heavily skewed, with the poor paying 32% of their income in taxes, while the rich pay an average 20%. Thus the regressive Brazilian tax system (there are no taxes on fortune and inheritance taxes are ridiculous) represents a formally legalized internal tax avoidance system, while the tax havens solution managed by the banks themselves represents the external mechanism. Join these various pieces together, and the dimension of the systemic deformation becomes quite obvious.
The attached paper organizes the key numbers, and shows how the gears of this system work fit-in to paralyze the economy and to thwart the growth impact that the enormous effort of bringing the poor into the economy had generated. The financial intermediaries adapted quickly to siphon away the new economic capacity at the bottom of the social pyramid. The numbers match. The data are known, all we have done is to put together different lines of research that usually do not communicate. In the paper below, all the numbers are referred to primary sources online. We have independent papers of analysis on each of the “gears”, which can be found at https://dowbor.org
Please have a careful look at these ten pages, it is not an “article” of opinion, but indeed a report on how the gears work together, and an example of how the financial system works in a concrete country. I have done this for different countries while in the UN. Follow the money, it was called. Consider this paper as a working tool. Most people comfortably sleep with the idea that financial mechanisms are beyond comprehension.
I hope it will be useful as a guideline, since we need many more people to understand where the economy is being deformed. No GDP can progress with so many resources drained away from the productive cycle, out of the real economy. The new Dilma government is experimenting with a “fiscal adjustment” centered on the reduction of public expenditure, which bankers love, but a broader fiscal and financial adjustment is unavoidable if we want to put our economy on its feet. The consumers, the real economy entrepreneurs, and the public administration in its capacity as provider of infrastructure and social policies, could be winners in the straightening up of a deeply skewed system.