Economist Tyler Cowen: How Brazil's Rigid Constitutional Clauses Push Up Real Interest Rates, with Analysts Estimating Over 9%
In a post on Marginal Revolution, Cowen points out that Brazil's constitution prohibits cuts to nominal public sector wages and links pensions, disability, and unemployment benefits to the minimum wage. This ratchet effect pushes mandatory spending to 90% of the federal budget, continuously creating inflationary pressure and suppressing national savings, ultimately leading to high real interest rates.
Brazil’s real interest rates are outrageously high. Some analysts estimate that Brazil’s real interest rate—calculated as the policy rate of the Central Bank of Brazil (Banco Central do Brasil) minus expected inflation for next year—exceeds 9%, which is higher than in Russia and four times that in peaceful peer economies such as Chile, the Philippines, and South Africa.
It all starts with public finances. Brazil’s 65,000-word behemoth of a constitution bars cuts to nominal public-sector wages and links pension, disability, and unemployment benefits to the minimum wage, which is adjusted annually based on recent inflation and GDP growth. This ratchet has lifted mandatory spending to 90% of the federal budget.
It also perpetuates inflationary pressure. This plus a generous welfare state in turn make Brazilians unwilling to save. At 14% of GDP, the national savings rate is 12 percentage points below the world average. If price rises have regularly eroded your bank balance in the past and the state pays for your health care, school and pension, you may as well spend all the money you make right away—especially if, like most people in unequal Brazil, you do not make much to begin with.