Global Crisis, Public and Private Budgets and Market Failures

By: André Elali

            The crisis created with the “corona-virus” is probably one of the most complex in the history of human evolution. Many of the crises faced by global society were sectoral, arising from economic cycles, from disputes over political, economic, religious, cultural and / or military power. The recent crisis, however, affects all aspects mentioned and many others without much predictability. There are, of course, many uncertainties and doubts. In this brief article, I intend to highlight some aspects based on legal and economic premises that I managed, even if quickly, to analyze these days.

Public and Private Budgets

The first of the remaining serious problems is the crisis in public and private budgets. The forecasts contained in public budgets reflect “concerns, needs of society and are characterized by revenue forecasts and expenditure authorizations”, in the language of Professor Marcos Rios da Nóbrega. Private budgets, on the other hand, aim at financial planning and profit, based on economic rationality. And family budgets aim to meet the goals and needs of their respective members.

Within the scope of the effects of the “corona-virus”, the breakdown of public and private planning is evident. No minimally serious State will be able to maintain budgetary forecasts and not change expenditure allocations to public health, both to prevent deaths and to prevent more harmful effects on society. No minimally serious company, in the same context, will be able to maintain the decisions and plans prior to the current crisis. Priorities have to change from the present moment. Likewise, families need to choose new priorities within their new financial realities. This will affect the consumption of certain goods and commodities, increasing their costs. It is an externality - market failure & #8211; that the state will need to control at the right time.

The word of the day, within this new reality, will be the control and / or cutting of inefficient and useless expenses (after all, efficiency and utility are economic principles that explain this movement that will occur). This will have many effects on the market, as it will force economic agents to create forced savings, whenever possible, and the leverage of companies and states (indebtedness). Through credit instruments, economic agents and states will be able to incur expenses modified by the “corona-virus”. In the long run, however, this generation of debts and eventual “pedaling” will have to be controlled with an increase in economic activity, which will be strongly affected, since it will be able to increase taxation (public revenue linked to circulation and income generation in the Marketplace).

Information Asymmetry and Economic Environment

Capital Markets and Operations

One of the main market failures - or so-called market mechanism failures - is information asymmetry. When economic agents have the same information, competition in the market tends to be more balanced and this allows for more investments and fluidity. When information is restricted to a group of people, there is an evident imbalance and this generates distortions in the economy and society. That is why it is the duty of the State to correct such failure whenever possible. The classic example of this market failure is what is called "insider trading", an illegitimate practice that generates the manipulation of information.

At the present time, due to the lack of a strong and confident global leadership, it is the total asymmetry of information between States, public agents, national and international organizations, companies and consumers. It's that status it generates a great systemic confusion: with little information or with manipulated information, agents make the wrong decisions and generate harmful effects to society and the market. There is a real chaos that does nothing to solve the crisis. The insecurity of an already insecure world is increasing. As a result of the current information asymmetry, it is evident: i) discouraging normal investment and consumption; ii) the establishment of fear as a motivation for agents' decisions; iii) lack of predictability of state actions and, consequently, private actions; iv) in the short and medium term, increased unemployment, untimely contractual and legal obligations with a growing need for State intervention that will eventually be called upon to exercise its regulatory role; v) with the interruption of economic activities, the drop in revenue and the increase in expenditure are evident conclusions.

With the economic and social environment marked by uncertainties, banking, equity and M&A (mergers and acquisitions) are paralyzed and will be postponed. The level of risk can increase considerably in some sectors. In Brazil, exchange rates have reached a level of total lack of control and this can continue over time due to the lack of flow of resources from international investors and the decrease in international reserves. At the same time, it created a maximum devaluation of Brazilian companies, which had a historic drop in national and international exchanges. Operations should only be normalized little by little with more information and greater predictability.

Supplier vs. Consumer Liability

Measures must be taken by the State to minimize the impact on small and medium-sized enterprises. The economic order, with constitutional determination, guides that such companies should be treated in a preferential way to make a less unequal system viable. The situation caused by the “corona-virus”, from what is observed, generated an escalation of contract cancellations by travel agencies, hotels, airlines. Without strong state intervention, several sectors will be highly impacted and this will generate another market failure: economic concentration. Small and medium-sized companies that do not survive the crisis will leave the market to the largest and this will generate more unemployment, less competition and less protection of consumer interests, the true legal and economic recipient of the law and the competitive economy.

Increase in Insolvency Claims and Judicial Reorganizations

The impact on companies' cash flows will generate an evident increase in insolvency and “RJ” requests (judicial recovery). Failure to comply with obligations will generate greater judicial intervention in the face of a cause foreign to normal economic relations. Legally, there is a basis for the review and postponement / adjustment of obligations, with express provision in the civil law.

Banking and Financial System

The Brazilian financial and banking market does not present, for the moment, data of concern regarding the liquidity of banks, funds and entities regulated by BACEN and CVM. Unlike the 2008 crisis, which was generated by the high degree of risk (sub-prime) and excess guarantees, the current crisis did not have an impact on the flows of financial institutions. Obviously, the banking sector will be essential for the recovery of companies and for families to have access to credit to offset the effects of the crisis and work stoppages. It will be up to the State to regulate banking practices to avoid more concentration of income and even greater inequality in the market.

Taxation

Taxation will be strongly affected since it depends on the realization of wealth in the market. The lack of liquidity will make taxpayers more punctual than normal, generating a need for proportionality (connection between means and ends) on the part of the Tax State and on the part of the Judiciary. More beneficial treatments, even if momentarily, will be important in restoring the balance of companies, as occurred with the national SIMPLES. The criminalization of business activity is now even more disproportionate compared to the current scenario. It is necessary to rethink the deferral of taxes and especially on productive activities (industry, commerce and services), either by legal norms or by judicial decisions that take into account the reality of the social system.

Measures that the Brazilian State must adopt

In summary, based on quick reflections, I understand that the Brazilian State must adopt some measures to avoid more harmful effects than those already presented: i) unify the discourse between the different federated entities and avoid internal conflicts. After all, Brazil is a Federation and must be subject to the notions of sovereignty and unity; ii) the main concern must be with public health, since the fundamental right to life is beyond other economic and moral values; iii) the interruption of economic activities has had very serious effects on everyone. It is necessary for the State to adopt the role of intervening in the promotion of business activities, generating an appropriate treatment in terms of tax, labor and obligations.

The state must control inefficient spending even more than announced. Municipalities and states that depend on participation funds should be incorporated. Funds that are earmarked for other purposes must be made more flexible for health care. Other expenses must be restructured.

In addition, State intervention should include the provision of measures to stimulate productive activities, which generate employment and income, provided the cost-benefit and efficiency relations are met. The fewer market failures, the easier the economy will resume.

The duty to suppress information asymmetry is urgent and requires control, including “fake news”, which generates more failures. The State must inform when companies and taxpayers must submit to income tax returns, information to BACEN, CVM, to other regulatory entities and how the terms of the meetings of companies and pension and investment funds are. Minimum planning should avoid last minute MPs and revocations immediately. This creates a climate of greater instability.

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André Elali

Professor at UFRN, Master, Doctor and Post-Doctor in Economic Law and Visiting Scholar at Queen Mary University of London and Max-Planck-Institüt für Steuerrecht.

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