Category: Macroeconomics

Lula da Silva and Brazilian financialization: Learning from Dilma and the Limits of Confronting Finance

sergiomartinpaezLeave a comment

The year 2025 will be the third consecutive year in which the Brazilian economy experiences sustained growth. During the first two years of his administration, economic expansion was above 3% annually, while the outlook for 2025 is for a slowdown: 2.4%, according to IPEA, one of Brazil’s leading state economic analysis agencies.

Since June-July 2024, during the U.S. presidential election and with the possibility of Trump being re-elected, Brazil, like other emerging economies, faced devaluation pressures. This led to higher inflation due to rising exchange rates and supply shocks caused by climate issues. These issues have reduced the food supply (mainly coffee, eggs, and beans), causing prices to rise.

This macroeconomic instability scenario was reloaded by the Trump-driven trade war, particularly when the 50% tariff on purchases from Brazil was announced under a mix of arguments between commercial (trade deficit), political (preventing Bolsonaro from being judged for an attempted coup d’茅tat and US bigtech鈥檚 regulation), and geopolitical (the advance of the BRICS on a possible replacement of the dollar in commercial relationships).

What was the response in terms of economic policy? The institutionalization of the inflation target led to an increase in the SELIC interest rate from 10.75% in September 2024 to 15% in June 2025, the highest level since 2006. The orthodox argument suggests that raising interest rates reduces the money supply, curbing aggregate demand and reducing inflation. From another perspective, raising interest rates promotes carry trade, which attracts foreign capital through the capital account and allows the exchange rate to appreciate. In this way, the economy partially protects itself from speculative capital outflows and reduces the prices of imports and exports, thus decreasing the inflation.

In contrast, a sharp rise in interest rates deepens the pernicious effects of financialization: it impoverishes indebted families and concentrates income. Are there any other alternatives available? The economic toolbox offers other options. Many observers have noted a striking characteristic of Lula鈥檚 third administration: the absence of open confrontation with Brazil’s powerful financial sector. This is no coincidence. The painful lessons of Dilma Rousseff’s presidency (2011-2016) and her impeachment weigh heavily on current political calculations.

To understand this, we need to analyze the historical lesson of Rousseff’s removal, its macroeconomic causes, and how this experience has limited economic policy options.

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The Fiscal Black Holes of Mainstream Economics

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By Jacob Assa and Marc Morgan

鈥淭he purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.鈥�
鈥� Joan Robinson

Recent years have seen a proliferation of debates on the shrinking of fiscal space in both industrialized and developing countries. In the former, the discussion often takes the form of agonizing over fiscal 鈥樷��, whereas in the latter it is usually presented in the context of 鈥樷��.

In reality, the real black holes, or blind spots, are those found in neoclassical economic models underlying such debates, rather than in the real economy (Table 1). We describe three such neoclassical fiscal black holes, based on our recent paper 鈥樷��.

Table 1. Overview of fiscal black holes in the neoclassical paradigm.

Source: Authors鈥� elaboration. Shaded in black are the black holes of the neoclassical fiscal paradigm.

We show how fiscal space is not the absolute sum of taxes and borrowing, but rather relative in several ways. It depends on macroeconomic conditions, such as unemployment and inflation, countries鈥� degree of monetary sovereignty, and their level of productive capacity. Furthermore, fiscal space is relative to what governments do with it, expanding or contracting depending on the function of public spending.

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G20 Summit, Global Policy, and Internal Issues: The Economic Situation in Brazil During Lula’s Third Term

sergiomartinpaezLeave a comment

In January 2023, Luiz In谩cio “Lula” da Silva, leader of the Partido dos Trabalhadores (PT), began his third term as the president of Brazil, the largest economy in Latin America. The economic outlook is promising, with steady growth, controlled inflation, and declining unemployment rate. Despite challenges from a difficult Congress, Lula aimed to revive social and economic policies from his earlier terms (2002-2010). Simultaneously, he is pursuing an active international agenda focused on peace in the Middle East and Ukraine, environmental protection, and reforms in global governance. Brazil’s G20 presidency will conclude in November with a meeting in Rio de Janeiro that is expected to introduce new tax measures on billionaires and initiatives to boost environmental conservation. A Global Alliance Against Hunger will also be launched to tackle global issues.

This article explores the potential for necessary changes to meet Brazilian demands, concerns about the macroeconomic trajectory’s sustainability, and political tensions leading to the 2026 elections. The central argument is that Lula’s external strategy is closely tied to strengthening the internal disputes affected by neoliberal institutions. Success in this approach is vital not only for achieving structural improvements, but also for safeguarding the democratic regime, which faced threats just eight days after Lula took office.

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Agricultural production, sectoral imbalances and inflation in Albania: A Kaleckian view

mimozashabaniLeave a comment

The current remarkable surge in inflation is considered to be a nearly global phenomena (Reinhart and Lucker 2022), affecting both developed and developing nations. While there may be common drivers of inflation, such as factors associated with the Covid-19 pandemic followed by Russia鈥檚 invasion of Ukraine, there are considerable variations in the causes of it, especially with reference to developing countries, including Albania. Drawing on Kalecki鈥檚 (1976) Essays on Developing Economies, I argue that there are also domestic factors attributed to the increase in inflation that resides in the structural sectoral imbalances of the Albanian economy.  

Rising prices in Albania sparked protests across the country in March 2022. The protests highlighted the rise in food prices which increased by more than 9% compared to March in the previous year; with the price of bread being the main contributor to such increase. With Albanians spending more than 42% of their total budget on food, rising prices of 鈥榥ecessities鈥� adds more pressure to the poor households to make ends meet. Nearly a quarter of Albanians, 640,000 people, already live in poverty (Kote 2022) and soaring prices in the economy could push people further into poverty. But what is pushing food prices to soar in a country where agricultural land accounts for 24% of overall land, a good Mediterranean climate, and water resources, all of which are crucial for agricultural development? Despite these favourable conditions, the productive capacity of Albania鈥檚 agriculture sector to meet domestic demand for food and feed meets is only one third (World Bank, 2022a). 聽

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Ignorance is Bliss: Why should we study Leontief?

Thair AhmadLeave a comment

What is at stake?

Let鈥檚 start with a story. A friend asked me what my favourite genre of fiction is. I replied: microeconomics. If you get the joke, you would be laughing. Otherwise, you would be wondering why I said that. Well, that鈥檚 the truth. Take any standard economics textbook, we find ourselves in the fictional worlds of 鈥榣et鈥檚 assume there are two goods鈥� and 鈥榠f we move from point A to B鈥�. It is true and well understood that these assumptions and imaginations are meant to break down complex phenomena. However, this entry point of supply and demand curves with the endless possibilities of hypothetical scenarios is not the only way to study/introduce economics. In this regard, I put forth the relevance of studying Wassily Leontief鈥檚 work and argue that it adds pluralism to economics education at least in three aspects: 1) methodology (philosophical and mathematical approach), 2) the unit of analysis (micro to macro and in between), and 3) ideas at the margins (reading thinkers like Piero Sraffa and other classical political economists). Now we shall deal with these three themes individually.

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Capital accumulation and the trend towards normal capacity utilisation in the United States

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In this post we show that an increase in aggregate demand first generates an increase in   the use of productive equipment and then an increase in productive capacity. This suggests we do not need to worry about inflation after a fiscal or monetary stimulus to boost aggregate demand, but can rather expect higher investment in the long term along with utilisation returning to its pre-shock levels.   

A stylised fact that characterises modern economies is that part of the installed productive capacity is persistently idle. By productive capacity I mean the productive equipment (mostly fixed capital goods) in existence, together with that part of the workforce which is required to operate it. As we can see in Figure 1, in countries as diverse as Belgium, Finland or Lithuania, the effective utilisation of installed capacity often gravitates below 100%, and around 80% on average worldwide.

Figure 1. Installed capacity utilisation by country (1998Q1-2017Q4).

Source: see Appendix I.

The academic consensus is that there are large margins of idle capacity planned by entrepreneurs. The reasons why entrepreneurs plan to operate with idle capacity vary according to the school of thought considered. At the risk of making a drastic simplification, we can say that while some authors think that entrepreneurs do so in order not to lose market share in the face of changes in demand, others tend to think that there is a rate of utilisation of installed capacity that does not accelerate inflation (Non-accelerating inflation rate of capacity utilisation, NAICU).

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Review of Macroeconomics by Alex M. Thomas

mohitarora18Leave a comment

by Alex M. Thomas, Cambridge University Press, 2021.

This recently published introductory Macroeconomics textbook written by Alex M. Thomas provides a refreshingly novel approach to teaching Macroeconomics to undergraduate students. As the author points out in the Preface, this textbook offers a 鈥�problem-setting approach rather than a problem-solving one, as is the case with most economics textbooks鈥� (Page xvi, emphasis mine). The textbook has nine chapters, and the chapters have enough material to whet the appetite of a broad audience 鈥� Chapters 1,2,6 and 9 deal with the history and philosophy of Macroeconomics, Chapters 3-5 deal with the core economic theory of money and interest rates, output and employment levels and economic growth and Chapters 7 and 8 talk about the macroeconomic policy of achieving full employment and tackling inflation. In this review, I would focus on four issues 鈥� the commitment of the book towards enhancing pluralism in Macroeconomics, the importance given to studying macroeconomic theory, the idea of relating macroeconomic concepts to the context which is being studied and an explicit concern to make Macroeconomics accessible to an undergraduate audience residing in underdeveloped parts of the world.

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Internal and external constraints: economic development without currency crisis

basiloberholzerLeave a comment

Simply speaking, development macroeconomics can be summarized as the challenge of improving productivity and production capacity in poor countries. This involves the conditions that need to be fulfilled for a development process to start as well as the policy framework and instruments that support it. Heterodox approaches consider the state鈥檚 role in steering productivity growth as essential (Cardim de Carvalho, 1997). Markets may be able to exploit price signals and adjust resource allocation correspondingly. However, they guarantee neither sufficient profitability of key sectors nor the demand for the goods produced. Both the profit rate and effective demand are conditions for investment to take place (Oberholzer, 2020). It is thus up to the government to make public investment in priority sectors and to apply instruments such as taxes and subsidies in ways that simultaneously allow for economies of scale, higher productivity large-scale employment and demand. This is what is generally referred to as industrial policy (see for example Chang, 2006; Oqubay, 2018).

But this is not everything. Policymakers have to pursue such a development strategy in face of an (often permanent) shortage of foreign currency. While domestic currency can be generated via the domestic banking system including public development banks, the availability of foreign currency is limited unless a country is able to increase exports or restrict imports. Since larger export capacity and a higher degree of import substitution are long-term goals, the current account is determined by domestic and foreign economic growth. This insight has come to be known as the balance-of-payments-constrained model or Thirlwall鈥檚 law, respectively (Thirlwall, 1979, 2013): it is reasonable to assume that demand for a country鈥檚 exports grows in income in the rest of the world while imports increase with domestic economic growth because a part of increasing incomes is reliably spent on imported goods. Therefore, stability in the balance of payments requires that imports do not grow faster than foreign exchange earnings via exports allow. A limit to the growth of imports implies a limit to the country鈥檚 economic growth, hence the balance-of-payments-constrained growth rate.

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