On the Economic Experiment in Brazil

9 Aug

Cornel Ban in a forthcoming article in Review of International Political Economy:

Brazil is an important pillar of the global economy that offers a plausible alternative to neoliberalism. After a turn to a selected set of Washington Consensus policies and ideas during the Cardoso administration, during the past decade this country built an incipient policy regime that recovered the state as a focal point in development, while staying away from the more heavy-handed and exclusionary aspects of “old” developmentalism. This study set out to find whether the Consensus has been adopted with minor edits, or whether Brazil’s policy regime constitutes a different paradigm. While this country has more than an “eroded” Washington Consensus, it nevertheless did not adopt a full-blown neo-developmentalist paradigm. Instead, during the past decade, and especially since Lula’s second term, Brazilian governments crafted a hybrid paradigm in which some of the policy content of the Washington Consensus has been preserved intact, while some has been gutted and replaced with neo-developmentalist goals and policy instruments. To capture the hybridity of this policy regime that pursues growth with redistribution through “inclusionary state activism without statism” (Arbix and Martin 2010), while avoiding the wrath of transnational finance capital, I dubbed Brazil a case of liberal neo-developmentalism.

What are the constitutive elements of this policy regime? On the macroeconomic front, the goal of macroeconomic discipline emphasized by the Washington Consensus has been maintained. Commitment to this goal has been particularly steady in monetary policy, where inflation-targeting and central bank independence remain central to Brazil’s macroeconomic policy regime. By contrast, the goal of full employment that has been so central to neo-developmentalism has not been brought on a par with macroeconomic discipline. Nevertheless, since 2006 fiscal policy has been edited with a complex array of policies aimed at expanding investment and aggregate demand, an important concern in neo-developmentalist macroeconomics.

Moreover, during the economic crisis, the government used its control over federal public banks to run an off-the-books stimulus camouflaged as credit policy alongside an official stimulus package in order to help close the output gap. While signaling fiscal virtue in its official accounts, the government in Brasilia had no hesitation to use its very powerful public financial institutions to unlock the devices of the credit system blocked by the financial crisis that hit the country in 2009. In so doing, the government showed that macroeconomic stability is not the only goal and that kick-starting demand in a slump, albeit surreptitiously, is just as important. Finally, Brazil reduced its reliance on foreign savings, as if enacting the neo-developmentalist argument that “growth strategies that rely on foreign savings cause financial fragility; get governments caught up in regressive “confidence building” games; and, all too often end with a balance of payments or currency crisis” (Sao Paolo Manifesto 2010).

Brazil’s compromise between the Washington Consensus and neo-developmentalism becomes just as apparent in other policy areas as well. Thus, rather than roll back its interventions in leading sectors of the economy, the state consolidated its presence not only as a regulator, but also as owner and investor. Particularly interesting in this regard is the building of institutional and financial infrastructures able to break the bottlenecks of innovation and serve the region’s most ambitious industrial policy. In general this policy has maintained the outward orientation demanded by the Consensus, yet these interventions were not always market-following and private sector-based, a tendency that seems to be strengthened under the Rousseff administration. The imperative of deregulation has been adopted quite unevenly with regard to finance, yet not at all with regard to labor market institutions, where close labor-left party relations augur well for more inclusionary socio-economic policies. And while conditional cash transfers can be accommodated by a progressive version of the Washington Consensus, Brazil’s constant increases in the minimum wage and the use of state-owned and public-private firms to enable the expansion of welfare and employment programs better fit the commands of neo-developmentalism.

Future scholars could use these insights to undertake a comparative historical analysis of the mechanisms through which Brazil’s “old” developmentalism morphed into the liberal developmentalism after having survived the crossing of various economic deserts. This Latin American country’s previous experience with developmentalism during the first three postwar decades led to a relatively successful industrialization drive that delivered high growth, but came at the cost of enormous foreign debt, mounting inequality, recurrent fiscal and balance-of-payment crises and repressive politics. That none of these tendencies are present in its current version of neo-developmentalism is not a small feat.

So far Brazil’s liberal neo-developmentalism has been a successful policy regime, but its virtuous circles are hardly set in stone. Much of the spectacular growth has come from demand-side fiscal policies adopted during the crisis and from commodities exports. Therefore the sustainability of growth hinges on external demand. Already by the end of 2011, Brazil’s Asian-rate growth rates fell sharply, as demand in Brazil’s trading partners began to decelerate. Although they grew, investment rates remain lower than expected and outside some pockets of excellence that benefit from industrial policy, the external competitiveness of Brazil’s manufacturing is hurt by an overvalued currency. The open economy benefited Brazil’s exports but its other face is the steamrolling of some traditional sectors by Chinese competition. Despite recent progress, Brazil’s educational and physical infrastructures need massive investment to be up to par with that of competitors. Granted, the Brazilian government has good reasons to feel confident that booming foreign investment in 2010-2011 suggests that international capital buys into the liberal neo-developmentalist policy regime. That may be true for FDI, but events in Europe suggest that no policy regime is immune against the extreme volatility of transnational finance capital.

Such threats are hardly negligible. But what remains is that relatively speaking the last decade has been perhaps the Brazil’s best for the greatest number of its citizens. How long will endure the neo-developmentalist alliance bringing together the state, a sizable fraction of the domestic capitalist class, popular organizations, the informal and the rural sector workers? One may hope that the future will lead to more inclusionary growth possibilities and some of the developments recorded in this analysis point in that direction. But, tempting as it is, prediction should be resisted. As some have noted (Blyth 2006; Taleb and Blyth 2011), any political and economic status quo – and this includes Brazil’s liberal neo-developmentalism – can be visited by the “black swans” that make prediction in social science an exceedingly risky affair.


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