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of the FGTS on
Brazilian output.
Leonardo Stoppa
Figures Page
1. Propensity to invest 14
2. Corporate borrowing and investment and the future output 15
3. Present investment and future output (with FGTS) 16
4. Present investment and future output (without FGTS) 16
5. Present investment and future output: Change in output due to a 17
change on interest rate
6. Corporate intertemporal production function and production 18
possibility frontier for the whole economy and its mirrored version
7. Savings and investment equilibrium 18
Tables Page
1. Propensity to invest 13
2. Marginal propensity to invest and accumulated interest rate paid 15
2. Literature review
2.1. Supporting the end
According to the neo-classicists and Austrians, any kind of centralised control
in the economy only tends to create distortions, generating even greater
problems than those of a capitalist system (HAYEK, 1945 apud Simonetti Et
al, 2010), In this sense, their followers advocate for the reduction of the state
and the end of regulations and protective laws. They argue that the Brazilian
government's attempt to protect its workers ends up raising unemployment
levels by reducing employability of the market. Since the compulsory deposit
FGTS is an additional cost to the employer, it works reducing employment in
the short term and would discourage the investment of the companies.
The anti-FGTS lobbyists also argue that the financial market offers investment
options with higher returns than the government bond (that indexes the FGTS
today), and that private agencies would defend investors' interest more than a
state bank. They argue, nothing more just than to leave the decision on the
hands of the workers, that could start from a investment on a private pension
scheme, to the investment in the stock market. In an article entitled "Why I am
against the FGTS" posted on InfoMoney, Plcido (2016) argues: "Let the
worker take care of his money or raise the worker's return. The right of the
worker to manage his money", and after, presents a calculation that has
become mantra on this debates:
"Let's count:
A) Using the FGTS, at the end of 16 years the worker would have a balance of
R$ 23,560.00 in the FGTS account;
B) Using the correction for inflation, the worker should have a balance of R$
28,637. That is, the FGTS did not correct inflation either; and
1
C) Using the average Selic rate, with a return of 80% of interest (eg if the
1
average Selic in 2015 was 13.37%, the return would be 10.7%), considered an
ultra conservative investment, the balance Final after 16 years, would be R$
51,187, or 117% above the FGTS." (Plcido, 2016)
_____________
1_SELIC: Rate for monetary policy.
In social terms, the FGTS serves as a source of support for the unemployed
worker, also serving as a macroeconomic stabilizer in the sense that it
maintains the possibility of consumption at the beginning of the
unemployment cycles, according to a study carried out by Costa (2010).
As the number of months that the FGTS withdrawals maintains the wages of
the dismissed workers is approximately 2.3 months, it is concluded that the
worker has his guaranteed income - and therefore, the consumption of the
economy is maintained part of the period of unemployment. (COSTA, 2010, p.
26)
Still in social terms, (Biancarelli and Conti, 2015) indirectly define the FGTS
as an application of Keynesianism in the Brazilian economy. Conceived with
resources focused on civil construction, the project seeks primarily to
encourage product and service supply focused on housing construction and
the development of national infrastructure. In parallel, the aim was to
encourage direct and indirect jobs in the construction industry, since at that
time Brazil had workforce available, but no stimulus had been created in order
to break the productive inertia. (CAIXA-s, s/d).
Once the disturbed market returns to equilibrium, any attempt to press for
further increases would imply a new inflationary cycle, as explained by
Howells and Santos (2015, p. 282) Higher wages agreed between workers
and firms put pressure on the prices of goods and services, stirring up
inflation. In practice, such a theory asserts that by setting wages above the
market, traders and producers would tend to raise their prices in an attempt to
regain the old profit margin, which would force a generalized rise in prices.
____________
2_Appendix-4
Another inconsistency lies in the illusion that distancing the state could result
in a change in social behaviour. Creating awareness campaigns to work
against conspicuous consumption can be even more costly. On the other
hand, leaving the decision to save or not on behalf of the worker would imply
a choice between the loss of the economic stabiliser or an increase in interest
rates. As explained by the neoclassical theory, to stimulate saving on by part
of households, the financial market will have to raise the interest offered to the
savers, (Himmelweit and Stone, 2016) so, the savings culture would be
conditioned to an offer of financial compensation greater than that offered
today, which suggests an increase in interest rates as a result of trying to
promote voluntary savings.
As a result of this lobby for lowering the state, we can note that the reality
lived in developed countries shows us that there would be only a transfer of
the responsibility of the private to the public sector regarding the costing of
social benefits. The FGTS, now financed by the private sector, is responsible
for covering an average 2.3 months of consumption of an unemployed worker
(Costa, 2010). Ceasing to exist, the economic and social stabilisation
provided by this type of fund should, under penalty of jeopardising the
financial system, be replaced by governmental measures similar to Job
Seekers Allowance complemented by benefits such as Housing Benefit.
Unlike the FGTS, which is paid by the employer, the social benefits funded by
the taxpayers would tend to suffer even more criticism from the public.
Regarding the criticism related to how the money raised by the fund is used
as well as eventual cases of corruption, it is asked firstly if it would not be
more appropriate to attack corruption instead of ending a project, since
doesnt make sense to decide to sacrifice the patient as an alternative to
Estimating the end of FGTS on Brazilian output. 9
treatment. On the investment side, the FGTS has its resources applied
directly to civil construction, but indirectly reflects in the generation of jobs. As
Keynes (1936) demonstrated, the state stimulus in infrastructure also reflects
on indirect benefits, generating results higher than the initial investment.
(Cited in Trigg, 2013)
According to a study carried out by CAIXA-g (n.d.), all these loans tend to
benefit the workers by stimulating the offer of products in the construction
industry. The direct social effects is the ease house ownership, both, by
subsidizing constructors, as by lowering the interest rate and ease access to
the credit3. Indirectly, the society has the increase on demand for jobs, direct
and indirect.
"In the basic sanitation sector, which is essential for improving the quality of life
of the population and whose investments in construction also enable the
permanent generation of millions of jobs, FGTS has been the main responsible
for much of what was done in the country" (CAIXA-s, n.d., p. 30)
__________________
3_Appendix-5
In the same manner, it would be too much to expect the ordinary worker (a
great majority of those employed by the CLT4 regime) to have sufficient
knowledge to choose among the various options that would be available in the
market. As explained by Milne (2012, p. 184) Capital markets do not just
allocate resources between savings and investment. They also allocate
savings and investments between low-risk and high-risk opportunities.
Despite its low profitability compared to other options in the market, it should
be noted that FGTS is a risk-free investment that, when assessed in the light
of the risk-return-trade-off, it is clear that for a risk-free investment and
financial speculation, the expected return is a lower yield (Milne, 2012, p.
184). The guarantee offered by the fund deposited in a public bank is not
limited to monetary correction, since in the eventual collapse of the financial
system with consecutive bankruptcy of private banks, all investors would be
left to fend for themselves. In the case of the FGTS, the worker's investment
is guaranteed by the body responsible for issuing the national currency.5
________________
4_Appendix-1
5_Appendix-7
Since this is an abstract effect analysis, the values used in the models will be
agreed in order to allow an easier viewing from the analytical point of view, in
this way, a value of 1000.00 has been chosen to be added with 80.00
referring to 8% of FGTS. Other assumptions adopted by this model are a
minimum subsistence value set at 400.00 and the voluntary investment
starting at 0.00 when the remuneration offer is 0%.
Current reality: The total salary of the worker is 1080.00, but he has direct
access to 1000.00. The worker starts investing by own decision 0.00 when the
market offers remuneration of 0%, however, by participating in a compulsory
savings scheme, the financial market receives its investment of 80.00
regardless of the interest rate offered.
Hypothetical Reality: The worker has control over 1080, of which he starts
by investing 0 when the interest rate is 0%. As he does not participate in a
compulsory savings scheme, the financial market also starts with the offer of
0,00 when it offers remuneration of 0%.
In the figure above, the blue curve represents the hypothetical reality (without
the compulsory deposit of the FGTS) and red curve represents the current
reality. By the position of the curves in relation to the 'y' axis, it can be seen
that the end of the FGTS tends to reduce the amount of money available in
the financial market as a function of the interest rate in any range agreed for
study, thus acting as a disincentive to investment, As Milne explains, An
increase in the () interest rate makes it more expensive to borrow so that
firms will end up borrowing and investing less () so there is a negative
relationship between the interest rate and investment. (2012, p. 176).
point D, the iso-profit line is tangential to the production function (MILNE, 2012,
p. 175)
To relate the function to the previous study, the data in table 2 will be used as
representative of the realities together with a production possibility frontier
with diminishing marginal return to investment, in this way, the iso-profit map
of the current reality will be drawn for an interest rate of 4.47% and the
hypothetical reality map will be drawn for an interest rate of 5.48%. It is
important to emphasize that the previous numerical model is not intended to
define the financial equilibrium of the market. To make it possible to visualize
on the graph, a magnification of 3x was used on both angles.
The next chart combines the points in the previous graphs and demonstrates
the tendency of reduction on investment when moving from the current reality
to the hypothetical reality.
The next chart shows the expectations of the households (savings) and firms
(investments). The equilibrium point is where the production possibility frontier
is tangent with the aggregate indifference map. The interest rate is
endogenous and is represented by the lines P and P, whose angles are
defined by - (1 + r) where r is the equilibrium market interest rate.
4. Conclusions
This work estimated, using economic theories learned in module DD309, the
possible effects of the end of the compulsory deposit FGTS in the Brazilian
financial equilibrium. First, a comparison was made between the theories that
support the end of the FGTS against theories that support the continuity of the
fund. The literature review was constructed in order to list the scientific
theories relating to the theme. The argument against the FGTS, mostly
stemming from works grounded on the neoclassical approach, justifies that
the relaxation of the compulsory deposit and the end of labour laws would
increase job creation. The opposite argument has shown that the FGTS is not
only a compulsory deposit but also a social reality rooted in Brazilian culture.
In addition to contributing as a macroeconomic stabiliser, the FGTS provides
a time of financial coverage to the unemployed worker, removing this
responsibility from the taxpayers.
The argument about corruption and the state's inability to adequately address
public interests is not refuted by this work, but attention is drawn to the
importance of working to evolve anti-corruption measures. Since the end of
programs such as the FGTS would mainly impact the most vulnerable
population, it was sought to focus on solutions, leaving aside demagogues
and unproductive moralism.
The last graph was an aggregate study in which the interest rate is
endogenous and dependent on the equilibrium condition. By combining the
intertemporal production possibility frontier and the aggregate indifference
map, it was possible to demonstrate that by reducing the money offered in the
financial market, the FGTS would cause a clockwise shift in the aggregate
indifference map that simultaneously modifies the expected future output and
the Interest rates.
________________
6 - The end-of-year bonus culture was absorbed by the Brazilian legal system and
transformed into an inalienable right, in this way; the Brazilian worker under the CLT is
entitled in December to an additional payment equivalent to his monthly salary. Although the
demand for typical end-of-year products increases, this benefit, being punctual, is not
significant to inflate the basic products. Like the FGTS, this benefit is criticized by the liberal
th
lobby, which asks for diluting the 13 salary in monthly instalments. If the 13th salary were
diluted in monthly payments, the greater demand on the products of the basic basket would
neutralize through inflation this wage increase, so that the 13th salary would cease to exist in
practical terms.
The FGTS is a fund formed from the compulsory deposit that the employer
must make on behalf of the employee. Slightly similar to today's growing
pension schemes in the UK, the FGTS differs in its form of collection, flexibility
and also in the conditions of withdrawal. The FGTS does not allow the parties
to choose the bank that is the recipient of the fund, as well as the amount,
which is currently set at 8% of the worker's income.
In the employment relationship, the FGTS serves as an index of the fine for
end of working contract. In the event of unjustified dismissal or a reasoned
dismissal request, the employer must deposit to the worker 40% of the total
amount accumulated during that employment contract, in addition to 10% to
be deposited in the common fund. The purpose of this legal provision is, in
addition to discouraging an avalanche of waivers in times of economic crisis,
to provide the employee with a kind of "additional unemployment insurance"7
during the period in which he seeks new employment.
_______________
7 - In Brazil there is now the unemployment insurance plan that is financed by the FAT - Fund
for Workers' Assistance - and has the number of parcels and ceiling amount limited by law, in
this sense, I use the term "Additional Unemployment Insurance" and I call attention to the fact
that, on this "additional unemployment insurance", indexed by the contractual penalty, there is
no contractual ceiling, so its macroeconomic effects are much more significant in order to
maintain, for a limited period of time, the economic activity of the unemployed.
The social perception about the need for the FGTS, as well as the work of the
press and liberal think tanks8 has increasingly given way to the federal
government to create legislative alternatives to end the FGTS. The same
country where an average of 290 children died of hunger a day (Globo, 1992)
experienced a giant economic growth and, thus, the political lobby of banks
and large companies no longer suffers significant popular repression.
At the time of this writing, the parliament had already approved ways of hiring
workers outside the CLT. Unrestricted outsourcing of workers, formerly
prohibited in Brazil, was definitely regulated allowing not only the birth of
employment agencies, but also the hiring of workers behind their own
individual companies. This method, in Brazil called "PJotization culture,
allows the employer to choose whether to hire the worker within the CLT
regime, in which the FGTS is an inalienable clause, or if the worker is required
to present himself as a service provider, excluding any protection offered by
CLT.
______________
8 - Although it is a regulated profession restricted to bachelors in Economic Sciences, the use
of the title "Economist" as well as the journalistic writing of subjects related to Economics
closed the doors to the professionals and, committed to the diffusion of liberal ideologies, the
press presents as true any theory created by Facebook Economists. For part of the Brazilian
youth, the economic methods presented by youngsters graduated by the video lessons of
Misis Institute Brazil are more credible than what say renowned economists with decades of
experience in central banks, economic policy ministries, research centres and the like. It can
be said that all the economic knowledge developed by humanity is now ridiculed in the
empirical environment by the phrase "less Marx, more Misis".
In addition to the literature review on the subject, the opinions of Ester Dweck
and Fernando Haddad were brought because they were academics with vast
experience in public administration. The interviews were conducted in the
month of closing of this work and aim was to bring a more current point of
view about the theme. The public curricula of the interviewees are show
bellow.
Ester Dweck (from her lattes-cv)
"She holds a degree in Economics from the Federal University of Rio de Janeiro
(1998) and a doctorate in Economics of Industry and Technology from the
Federal University of Rio de Janeiro (2006), with a" Sanduche Doctorate "at the
LEM of Scuola Sant'Anna, in Pisa, Italy. She is an Adjunct Professor at the
Institute of Economics at UFRJ. She has experience in economics, with
emphasis on public sector economics, growth and economic development,
working mainly on the following topics: Fiscal regime and state participation,
demand-led growth, micro-macro integration, balance of payments constraints,
analysis Of input-output and simulation models. Between June 2011 and March
2016, she worked in the Ministry of Planning, Budget and Management, in the
position of Chief of the Economic Advisory and as Secretary of Federal Budget.
And between March 2016 and May 2016, she held the position of Deputy Chief
of Analysis and Follow-up of Government Policies of the Civil House of the
Presidency of the Republic. " (CNPQ, 2017)
Dweck, E. (2017). Seminar Stand With Lula. [Online Video]. 12 May 2017.
Available from https://youtu.be/9rFDdq3I-HA. [Accessed: 26 May 2017].
GLOBO, rede _ de televiso. (2001). Jornal Nacional (2001): Fome mata 300
crianas por dia no Brasil. [Online Video]. 12 May 2017. Available
from: https://www.youtube.com/watch?v=UI3yFKVrE4I. [Accessed: 26 May
2017].
Plcido, C. 2016. Por que sou contra o FGTS? 5 motivos - e uma conta
simples - explicam isso - InfoMoney. [ONLINE] Available
at: http://www.infomoney.com.br/blogs/economia-e-politica/segunda-
opiniao/post/4618742/por-que-sou-contra-fgts-motivos-uma-conta-simples-
explicam. [Accessed 20 May 2017].
TOU, The Open University. (2014). DD102 - week 23. Introducing Hayek's
ideas. [ONLINE]. 2014. Available from: http://www.open.ac.uk [Accessed:
2014].
World Bank, the. (2005). VOLUME II: Background Documents. In: World
Bank, the Brazil Investment Climate Assessment. Finance, Private Sector and
Infrastructure Latin America and the Caribbean Region. Washington, DC:
World Bank, the. pp. 1-257. [ONLINE] Available at: https://goo.gl/6ExSAL.
[Accessed 26 May 2017].