Saad-Filho Neoliberal Economic Policies in Brazil 1994-2005

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Neoliberal Economic Policies in Brazil(19942005): Cardoso, Lula and theNeed for a Democratic Alternative

MARIA DE LOURDES ROLLEMBERG MOLLO & ALFREDOSAAD-FILHO

This article offers a political economy interpretation of the continuation ofneoliberalism in Brazil under the Workers Party (PT) administration led byLus Inacio Lula da Silva from 2003 onwards. Neoliberal economic policieswere closely associated with the government of Fernando Henrique Cardoso(19942002) and they were widely perceived to have been rejected by voters inthe 2002 elections. Many observers found it surprising that the new administrationmaintained its predecessors economic programme. The government has alsorejected calls from its core supporters to change course in order to deliver sustain-able growth and distributional and welfare improvements in Brazil.

It would be unhelpful to approach these apparent paradoxes with schematiccategories such as the ideological capture or treason of the PT leadership.While the latter is analytically uninteresting, the former describes realityaccurately but fails to explain it. This article attempts to fill this gap through areview of the trajectory of neoliberalism in Brazil since 1994. It shows that, inspite of the difficulties involved in the search for alternatives to neoliberalism(due, in part, to the economic vulnerabilities imposed by neoliberalism itself),alternative policies were, and remain, feasible. However, their implementationrequires confrontations with the market and the imposition of costs on specificsocial groups, especially those that have gained most from the neoliberal

re-regulation of the economy. The governments reluctance to pursue thischange of course has had severely negative consequences for the majority ofthe population, especially the poorest social groups. These are precisely thosethat had expressed hopes that Lulas election would bring about social, politicaland economic changes in Brazil.

The political exhaustion of neoliberalism in Brazil, and the rejection ofneoliberal economic policies by the majority (including a significant part of theelite), were evident in the opinion polls long before the 2002 elections. Manycommentators and political activists claimed that the neoliberal reforms were

New Political Economy, Vol. 11, No. 1, March 2006

Maria de Lourdes R. Mollo & Alfredo Saad-Filho, c/o ASF, Department of Development Studies,School of Oriental and African Studies, University of London, Thornhaugh Street, London WC1H

0XJ, UK.

ISSN 1356-3467 print; ISSN 1469-9923 online=06=010099-25# 2006 Taylor & Francis

DOI: 10.1080=13563460500494933


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the leading causes of Brazils persistent economic underperformance, and thattheir continuation would lead to the deterioration of the countrys macroeconomic,social and welfare indicators, and the further deterioration of income and wealthdistribution.

The Cardoso administration was closely associated with the neoliberaltransition. The shortcomings of this administration and the countrys seeminglyintractable economic problems since the currency crisis of 1999 prompted adrastic decline in the governments popularity in the run-up to the 2002 elections.The administration was tainted by accusations of malpractice and corruption, andmost observers agreed that the social tensions in the country had been increasingdangerously. The neoliberal camp fractured into several factions. Five of thepresidential candidates criticised the governments track record relentlesslyduring the campaign, and the sixth Jose Serra, a well-known economist and asuccessful health minister, and the official candidate of Cardosos coalition

was ambivalent about the governments performance. All candidates purportedto offer a left-of-centre alternative to the neoliberal consensus, two of themrepresenting small parties on the far left of the political spectrum. Cardosossupporters gradually deserted him.

Lula, the founder and leader of the PT and Cardosos main adversary in theprevious two elections, acquired an early lead in the opinion polls. In the earlystages of the campaign, it seemed that his victory would lead to a decisiverupture with neoliberalism. After all, Lulas trajectory of struggle as a tradeunion leader, his unquestionable honesty, the radical image of his party and itsassociation with left-wing organisations (including Central Unica dos

Trabalhadores (CUT), a large trade union confederation, and Movimento dos Tra-balhadores Rurais Sem Terra (MST), the landless peasants movement) seemed toshow that a new political compact was bidding for power in Brazil. Hopes ran highin the PT camp and among the left. However, these hopes have been dashed. TheLula administration has been following neoliberal policies with at least as muchdetermination as its predecessor, in spite of the economic, social and politicalcosts of this strategy for the PT and its core supporters.

This article explains these policy choices, their successes and limitations in sixsections. The first briefly reviews the theoretical underpinnings of the economicpolicies associated with neoliberalism and the political economy critique of

these policies. The second examines the implementation of neoliberal policiesby the Cardoso administration, through the real stabilisation plan. The thirdreviews the new policy framework introduced by Cardoso, and continued byLula, after the currency crisis of January 1999. The fourth examines the socialand welfare implications of neoliberalism. These three sections show that,although the neoliberal reforms helped to eliminate high inflation, they alsodestabilised the public finances, increased Brazils external vulnerability and ledto the deterioration of important social and distributive indicators. Neoliberalismalso reduced Brazils economic growth rates, which compare unfavourably withthe growth rates of the previous half-century. In sum, the reforms did not fulfilthe high expectations of the Cardoso and the Lula administrations. The fifth

section explains the continuation of neoliberalism in the Lula administrationand examines its outcomes.1 The sixth summarises the article and draws the

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relevant conclusions. It also includes pointers for an alternative economic strategyfor Brazil, in order to substantiate the argument that alternatives were indeedavailable to the Lula administration. In other words, in the Brazilian case theclaim that there is no alternative to neoliberalism is incorrect.

Neoliberal economic policies in Brazil

Brazilian economic policies shifted gradually towards neoliberalism since the late1980s and with increasing determination in the wake of the real stabilisation planof 1994.2 It is well known that neoliberalism is based on the assumption thatmarket regulation is the most efficient way to coordinate economic activity,3

and the neoliberal transition required the curtailment of the wide-rangingeconomic roles of the Brazilian state.4 This included the transfer to themarkets of several functions of the state, especially the intersectoral and intertem-

poral allocation of resources (that is, the allocation of capital, labour and output,and the balance between investment and consumption) and economic management(through the elimination of strategic planning and the abolition of controls on mostintermediate and consumer goods prices). This was achieved through extensiveregulatory reforms, the closure of several government agencies and departments,the privatisation of assets worth approximately US$100 billion (18.5 per cent ofgross domestic product (GDP) in 1994) and the liberalisation of domesticfinance, foreign trade, exchange rate movements and the capital account of thebalance of payments.

Advocates of the reforms claim that market processes promote economic

efficiency and growth, gains in employment and distribution, and internationalconvergence. From this viewpoint, state intervention is justified only to tacklemarket failures, which are perceived to be exceptional and largely transitory.For example, vertical (sector-specific) industrial policies, including tax rebates,subsidies and shifts in relative prices, are frowned upon because they aredeemed to distort market outcomes.5 Horizontal (across the board) policies arepreferred because they are less discretionary and the liberalisation of trade,finance and capital flows plays an essential part in the reforms. The threat ofcompeting imports limits the prices that domestic firms can charge, and thewages that their workers can realistically demand. At the same time, financial

and capital account liberalisation curtails the states capacity to implement non-neoliberal policies (such as expansionary fiscal and monetary policies), becauseof the threat of capital outflows. It will be shown below that these neoliberalpolicies can support the elimination of high inflation, but that their economicand social cost can be very high.

Monetary policy plays a prominent role under neoliberalism. It assumes that thequantity theory of money is valid and, therefore, that money is neutral in the longrun (that is, it cannot influence the level and composition of output and employ-ment). It follows that inflation is caused by too much money chasing too fewgoods. Because the state can presumably control the supply of money (forexample, by limiting its deficits and regulating the behaviour of the commercial

banks), inflation is always due to monetary policy mismanagement. One way toimpose healthier policies is to reduce the scope for discretion in monetary

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policy. This can be done, for example, through the imposition of such policy rulesas exchange rate targeting (which increases the influence of foreign capital flowson the determination of the supply of money),6 or through inflation targeting(which uses the interest rates to control demand and inflation, regardless oftheir consequences for domestic financial stability and the balance of payments).7

These policy rules institutionalise the neoliberal priority of price stability over thegrowth of output and employment, and curtail the governments ability toimplement anti-cyclical policies.

Interest rate manipulation is normally the preferred neoliberal monetary policyinstrument, because it is supposedly non-distortionary: it is taken to affect alleconomic agents identically, and the government cannot pick winners orlosers. The manipulation of interest rates fulfils four important roles underneoliberalism: first, demand (inflation) control, which is especially important ininflation targeting systems; second, the attraction of capital flows to close the

balance of payments and achieve the target level of foreign currency reserves(these flows also signal the financial markets appreciation of the governmentpolicies); third, government financing, especially the regulation of the demandfor public securities (all else being equal, disciplined governments implementingcredible policies should be able to finance their debt at a lower cost than theirundisciplined rivals); and fourth, achieving the desired level of domesticsavings (there is, presumably, a positive relationship between interest rates andthe savings rate). It follows that the interest rates tend to be higherunder neoliber-alism than under an alternative policy regime, where similar objectives may bepursued by a broader set of instruments.8 From the neoliberal viewpoint, this is

not necessarily a disadvantage. High interest rates offer incentives to savers andincrease the availability of investment funds, which should lead to highergrowth rates in the long term. High interest rates in the poor countries alsoreflect their relative lack of capital, and the attraction of foreign savings shouldsupport higher levels of investment and global economic convergence.

Neoliberal macroeconomic policies have been criticised in an extensivepolitical economy literature. For example, post-Keynesian and Marxist politicaleconomists reject the claim that greater scope for market processes leads to econ-omic stability and promotes domestic and international equality. They emphasise,instead, the destabilising potential of market processes and the role of competition

in the creation of poverty and inequality. Drawing upon empirical studies, theyclaim that financial liberalisation and international capital mobility often increasefinancial fragility and trigger balance of payments crises.9 They also argue thatfinancialisation drains resources from production, fosters unemployment10 andreduces state capacity to stabilise the economy, especially in poor countries.11

Finally, several Marxists claim that competition concentrates and centralisescapital and leads to international divergence.12

These political economists also argue that the higher levels of uncertainty,volatility and liquidity preference in poor countries can trigger capital flight inspite of (and sometimes because of) their higher interest rates.13 Capitalaccount liberalisation facilitates these destabilising flows. Capital flight from the

periphery can also drain resources that might otherwise have supported localinvestment and balance of payments stability.14 In sum, the neoliberal reforms


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foster the expansion of the financial sector, the concentration of income within andbetween countries, and the deterioration of working conditions in several indus-tries.15

Marxists and post-Keynesians reject the neoliberal assumption that highersavings foster higher investment on two grounds. First, foreign savings oftenfinance consumption rather than investment and, therefore, replace (rather thansupplement) domestic savings.16 Second, many post-Keynesians claim that priorsavings are not required for investment. For them, successful long-term invest-ment requires a functional financial system, which can satisfy the expandingcredit needs of the economy.17 For these critics of neoliberalism, high interestrates in short-term assets (especially public securities) compel the financialinstitutions to raise their liquidity preference and behave speculatively. Thiswill reduce the supply of credit for investment and create incentives for foreignborrowing, which detracts from the development of the domestic financial system.

Finally, all political economists reject the quantity theory of money and theassumption that money is neutral. In their view, contractionary monetary policiescan have long-term negative consequences for investment, employment, wagesand growth. Their theories of inflation tend to be relatively complex, and toinclude the institutional features of the economy, distributive conflicts and thecredit mechanism. They also reject monetary policy rules in most cases. Inorder to control inflation, they prioritise the stabilisation of the balance ofpayments, fiscal and financial reforms and negotiations between the main socialactors to address the existing distributive conflicts.18

The real plan (1994 9)

The most significant achievement of the neoliberal decade was the elimination ofhigh inflation, as shown in Table 1. However, the 1994 real plan was not only ananti-inflation programme. It also included policies consolidating the neoliberaltransition. These policies, explained in the previous section, included high interestrates, financial, trade and capital account liberalisation, the privatisation or closureof state-owned productive and financial enterprises, fiscal and labour marketreforms, de-indexation, currency overvaluation and the closure of several stateagencies and departments.19

These policies were not entirely new. For example, privatisations and trade,capital account and financial liberalisation were introduced in the early 1990s,and the systematic reduction of state policy-making capacity started in the1980s. The real plan was innovative only insofar as it deployed these policiesmethodically, as part of an ambitious attempt to eliminate simultaneously twofoes of the neoliberal order high inflation and the relics of a presumablyexhausted process of import-substituting industrialisation.20

High interest rates played a key role in the elimination of high inflation and thecompletion of the transition to neoliberalism. Brazilian real interest rates rosesignificantly in 1992, when the capital account of the balance of payments was lib-eralised.21 They increased further with the real plan, peaking after the Mexican,

Asian and Russian financial crises. Although they declined significantly afterthe 1999 crisis, Brazilian interest rates have been among the highest in the


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world for at least a decade. High interest rates helped to attract large inflows offoreign capital, especially in the early and mid-1990s, leading to a significant over-valuation of the currency, the real (see Table 2 and Figure 1). This overvaluationwas deliberately pursued by the Brazilian authorities, in order to boost the impactof the liberalisation of imports.22 Currency overvaluation and import liberalisa-tion, along with fiscal reforms and de-indexation, were the functioning core ofthe real plan.

The new policy regime lifted real wages by 15 per cent in dollar terms in the

mid-1990s.

23

This wage increase, the accelerated liberalisation of imports andthe resumption of consumer credit transformed the possibilities of consumption.The country was transfixed by the appearance of previously unavailable consumergoods, at affordable prices and available on credit. Import liberalisation andinflation stabilisation ensured Cardosos presidential election in 1994 and hisre-election in 1998. Cardoso presented his government as the harbinger of mod-ernisation and the standard-bearer of the new globalised economy, and he setout to eliminate the distortions arising from import substitution. However,Cardosos policies had a severe impact on the balance of payments, local industryand employment. Imports climbed from US$27.8 billion in 1992 to US$43.1billion in 1994 and US$75.7 billion in 1998. Over the same period, the trade

balance shifted from a surplus of US$12.1 billion to a deficit of US$16.7billion, and the current account moved from a surplus of US$6.1 billion to a

TABLE 1. Brazil: macroeconomic indicators, 19902003

GDP

growth rate

(%)

Inflation rate

(%)a

Real

interest rate

(%)b

DPD

(%GDP)c

DPD interest

payments

(%GDP)d

Primary

fiscal surplus

(%GDP)

1990 24.3 1476.7 25.6 17.6 n.a. 4.6

1991 1.0 480.2 8.6 15.9 29.5 2.7

1992 20.5 1157.8 37.9 15.6 47.3 1.6

1993 4.9 2708.2 9.5 17.0 67 2.2

1994 5.9 1093.9 32.0 21.7 32.2 5.2

1995 4.2 14.8 33.5 22.7 7.5 0.3

1996 2.7 9.3 16.8 26.1 5.8 20.1

1997 3.3 7.5 16.6 29.3 5.2 21.0

1998 0.1 1.7 26.5 34.1 7.9 0.0

1999 0.8 20.0 4.7 39.4 13.2 3.2

2000 4.4 9.8 7.2 39.4 8.0 3.52001 1.3 10.4 6.5 41.6 8.8 3.6

2002 1.9 26.4 27.0 44.1 14.2 3.9

2003 0.5 7.7 15.3 44.0 7.9 4.3

2004 5.2 12.1 3.9 45.0 7.1 4.6

aGeneral Price Index, domestic availability (IGP-DI).bCalculated from monthly Selic rates and centred IGP-DI.cNet domestic public sector debt (December, excluding 1990 ( January 1991).dNominal interest payments by the municipal, state and federal governments (including socialsecurity), the central bank and the state-owned enterprises.Sources: Central Bank of Brazil (http://www.bcb.gov.br) and Ipeadata (http://www.ipeadata.gov.br).


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TABLE 2. Brazil: selected balance of payments indicators, 19902004 (US$ millio

Exports Imports

Trade

balance

Current

account FDI

Portfolio

investment

Interest

payments

1990 35,166 28,010 7156 23784 364 472 10,868

1991 34,917 28,136 6780 21407 87 3808 9493

1992 39,873 27,818 12,055 6109 1924 14,465 8278

1993 42,509 34,456 8053 2676 799 12,325 9329

1994 47,937 43,128 4809 21811 1460 50,642 8140

1995 51,435 62,384 210,949 218,384 3309 9217 10,427

1996 52,785 67,0652

14,2802

23,502 11,261 21,619 12,3891997 59,870 77,269 217,399 230,452 17,877 12,616 13,500

1998 59,037 75,722 216,685 233,416 26,002 18,125 15,321

1999 55,206 63,381 28176 225,335 26,888 3802 17,100

2000 64,584 72,444 27860 224,225 30,498 6955 17,096

2001 67,545 72,653 25109 223,215 24,715 77 17,621

2002 69,913 61,749 8164 27637 14,108 25119 15,275

2003 83,531 63,668 19,863 4177 9894 5308 15,328

2004 108,917 80,020 28,897 11,669 8695 24750 15,289

aNet interest paid on bonds and foreign and intercompany loans.bAdjusted (excluding IMF loans).

Source: Central Bank of Brazil (http://www.bcb.gov.br).


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deficit of US$33.4 billion. Between 1985 and 1998 consumer goods imports rosefrom US$376 million to US$8.2 billion, while the countrys foreign travel deficitincreased from US$441 million to US$4.1 billion.24

This structural shift in the current account created a recurring need for foreignfinance. During periods of relative abundance of foreign capital, especially themid-1990s, this was not a serious problem. Brazil easily attracted the required

capital inflows, and accumulated sizable reserves. However, these foreign directand portfolio investment inflows and loans increased substantially the countrysexternal liabilities. Consequently, the future remittances for debt service andprofit and dividend payments would also increase. Brazils reliance on fickleportfolio capital inflows to provide residual finance when loans andforeign direct investment (FDI) were insufficient increased the vulnerability ofits balance of payments. Moreover, high rates were needed in order to tapinto these sources of capital, which helped to perpetuate the misalignment ofthe real.

This was not the only vicious circle created by the real plan. The foreign capital

inflows had to be sterilised in order to limit the expansion of the monetary base.The rapidly rising domestic public debt and its spiralling cost (caused by thehigh interest rates) forced the government to maintain the high interest ratepolicy, in order to stabilise the demand for public securities.25 Finally, high inter-est rates depressed investment and growth, which limited the expansion of the taxrevenues and increased the nominal public sector deficit further. In order to financethe state budget under these circumstances, the government was forced to raise taxrates and impose new taxes. In essence, under neoliberalism the state budgetwas used to transfer income and assets averaging 8.6 per cent of GDP overten years from the taxpayers to the holders of public securities via the financialsystem.26 This exercise is wholly regressive in distributive terms, and it contri-

buted to the stagnation of the economy, the deterioration of income distributionand the shift of economic and political power towards finance.27

FIGURE 1. Brazil: real exchange rate (October 2000 100). Source: Ipeadata.


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It was difficult to reduce interest rates under this policy mix because, as wasshown above, it could become impossible to finance the federal budget and thebalance of payments. Lower interest rates could trigger capital outflows (or, lessdramatically, a reduction of the inflows below the requirements of the balanceof payments), potentially leading to a collapse of the real. Alternatively, lowerinterest rates could reduce the demand for public securities, making it harder tofinance the public deficit and, potentially, leading to the monetisation of thesesecurities. This would trigger the transfer of these funds to the dollar market,devaluating the currency, creating an inflation bubble, or both.

Although the real plan eliminated high inflation, the neoliberal reforms createda macroeconomic policy trap from which Brazil was unable to extricate itself. Thetensions generated by the vicious circles described above, and the mounting fiscaland currency costs of the stabilisation plan, eventually became unsustainable.They were the main causes of the balance of payments crisis of January 1999,28

which cost the central government approximately 5.6 per cent of GDP.29 In con-trast, the crisis was very profitable for the private financial sector. For example,several financial institutions reported profits for January that were twice as highas their previous annual profits.30

The new policy regime (1999)

The Cardoso government introduced a new macroeconomic policy regime shortlyafter the currency crisis, including a combination of inflation targeting, large fiscalsurpluses and the managed fluctuation of the real. The aim of these policies was to

preserve the low inflation regime achieved in the previous period, stabilise thedomestic public debt, reduce interest rates and the current account deficit, andstabilise the exchange rate.31 These policies and objectives have been continuedby the Lula administration.

This policy regime has been only partially successful. The devaluation of the realtriggered not only a temporary inflation bubble in 1999 (and again in 2002), but alsoa permanent increase in the rate of inflation. The governments inflation targets havenot normally been achieved without adjustments (see Table 3). Even more

TABLE 3. Brazil: inflation targets and outcomes (per cent)

1999 2000 2001 2002 2003d 2004

Target point 8.0 6.0 4.0 3.5 4.0; 8.5d 3.75; 5.5d

Tolerance banda +2.0 +2.0 +2.0 +2.0 +2.5 +2.5

IPCAb 8.9 6.0 7.7 12.5 9.3 7.6

IGP-DIc 20.0 9.8 10.4 26.4 7.7 12.1

aThe target range increased from 2.0 per cent to 2.5 per cent in July 2003.bIPCA is the price index used to assess the inflation targeting programme. It is calculated by theBrazilian Institute of Geography and Statistics (IBGE).cIGP-DI is a consumer price index traditionally used to measure the rate of inflation. It is calculated

by the independent Getulio Vargas Foundation (FGV).dTarget adjusted during the year.Source: Central Bank of Brazil (http://www.bcb.gov.br).


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seriously in the long term, the degree of indexation of the economy has beenincreasing, which reduces the efficacy of monetary policy instruments for inflationcontrol.32 For example, most privatised utility companies incorporate variations ofthe exchange rate into their pricing models, even if they produce non-tradable goodsusing domestic inputs. The government has also found it necessary to sell dollar-linked securities at times of political uncertainty or exchange rate volatility. Morethan ten years after inflation stabilisation, the Brazilian economy continues to behighly sensitive to fluctuations in the price level, and the mechanisms introducedto cope with high inflation are still being used.

The exchange rate has also shown periodic signs of instability (see Figures 1and 2), either because of fluctuations in the availability of foreign exchange orbecause of political uncertainty from the point of view of the financialmarkets. Its volatility has hindered the growth of exports and created costs forthe foreign debtors, including some of Brazils largest corporations (most

famously the Globo media conglomerate). The swings of the exchange ratehave had political implications; for example, the currency crisis of 1999 perma-nently damaged Cardosos reputation and the 2002 crisis compelled Lula toendorse neoliberal economic policies. Finally, the threat of another currencycrisis has been prominent on the list of worries of the current administration.

The limited decline of real interest rates after the currency crisis is due to threemain reasons. First, the vicious circles described in the previous section were notaddressed consistently, as discussed. Second, the inflation-targeting regimedemands higher interest rates whenever inflation exceeds the desired range,which has happened frequently. Finally, high interest rates help to stabilise the

flows of foreign capital under the floating exchange rate regime.33

These highinterest rates have made it difficult to stabilise the domestic public debt in spiteof the extraordinarily high primary fiscal surpluses achieved since 1999. Thegrowth of domestic debt is due to both the high costs of financing the outstanding

FIGURE 2. Brazil: nominal exchange rate (R$/US$). Source: Conjuntura Economica, March 2005.


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stock of securities and its partial indexation to the exchange rate. When the realloses value, as it did in 1999 and 2002, the trade and current accounts tend toimprove, but inflation, the domestic public debt and its service payments automati-cally increase. Moreover, because current policies automatically blame excessdemand for any increase in the rate of inflation (regardless of the level of capacityutilisation or the rate of unemployment), inflation stabilisation will always requirehigher interest rates and a higher fiscal surplus, perpetuating the shortcomings ofthe currency policy regime.

Manufacturing output expanded after the devaluation of the real, and substan-tial FDI inflows took place between 1998 and 2001. However, FDI has targetedprimarily manufacturing production and services for the domestic market, ratherthan much-needed exports.34 Even more worrying for the neoliberal strategy,FDI has been declining in both absolute and relative terms. The absolute fall isan international phenomenon, following the collapse of the dot.com bubble.

However, the Brazilian share of world FDI also fell, from 2.7 per cent in 2001to 2.5 per cent in 2002 and only 1.5 per cent in 2003. FDI in Brazil as a shareof emerging market investment declined from 9.6 per cent in 2001 to 8.7 percent in 2002 and only 5.3 per cent in 2003.35 This decline has been attributed tothe relatively unattractive prospects of the local market, which has been depressedby stagnant wages, high unemployment, expensive credit and inadequate infra-structure provision. Portfolio capital inflows have also declined, in spite of highinterest rates. Their volatility may substantiate the hypothesis of Calvo, Leidermanand Reinhart that these flows are determined primarily by the circumstances offinancial markets in developed countries, rather than policy choices in emerging

markets.36

In this case, the neoliberal argument that policy credibility andhigh interest rates are sufficient to attract large and dependable capital inflowsis invalid. This would also lend credence to the political economy claim thatcapital tends to leave the poor countries for trade, investment and financialreasons, leading to international divergence, rather than convergence.37 In otherwords, it is unwise for poor and middle-income countries to finance rigidcurrent account deficits with fickle capital inflows.

The economic limitations outlined above help to explain why the Braziliantrade balance reacted slowly after the currency crisis. The trade balance onlyachieved a surplus in 2001 and the current account in the following year. The

recent expansion of Brazilian exports has brought much-needed relief to thebalance of payments. However, it has been largely due to the favourable marketconditions for some of the countrys main crops and the excellent performanceof the agribusiness sector. The relatively slower growth of manufacturingoutput and processed exports has raised the spectre of the re-primarisation ofthe Brazilian economy, which would hardly be conducive to the creation ofquality employment and the improvement of social welfare. Finally, Brazilsforeign debt has expanded significantly during the neoliberal decade, from 27.3per cent of GDP in 1994 to 47.2 per cent in 2003.

The vicious circles described in the previous section were only partly addressedby the policy regime adopted after the crisis of the real. High interest rates con-

tinue to be used to attract speculative capital inflows, or to limit outflows andensure the solvency of Brazils balance of payments. Domestically, high interest


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rates are still used to control demand (inflation) and to avoid capital flight from thepublic securities to foreign currency. In spite of their pivotal role in the currentpolicy framework, high interest rates have imposed a low growth regime in thecountry, including high financial costs, generous rewards for speculativebehaviour, low incentives for productive investment and high uncertainty andvolatility.38 They may also feed cost inflation, especially in the oligopolisedsectors. The persistence of these vicious circles seems to indicate that the neoli-beral approach to the problems of the Brazilian economy may be either insufficientor wrong.

Growth, unemployment and inequality under neoliberalism

It was shown in the preceding sections that Brazil received significant foreignresource inflows after 1994, loans, FDI and portfolio investment. However,

these inflows triggered correspondingly large capital outflows in the form ofdebt service payments, profit remittances, divestment and capital flight. The netforeign resource inflows were insufficient to compensate the contraction ofpublic and private investment and the decline of the savings rate.

This was unexpected. In the early 1990s, it was claimed that financial liberal-isation, the privatisation of most state-owned banks and the internationalisationand consolidation of the financial institutions would increase the efficiency ofthe financial sector, raise the savings rate and improve the availability of fundsfor long-term investment. In reality, both savings and investment rates declined.The savings rate fell eight points since the mid-1980s, to only 20 per cent of

GDP, while the investment rate fell from an average of 22.2 per cent of GDP inthe 1980s, to 19.5 per cent in the 1990s, and 18.9 per cent in 20004. Theinflows of foreign capital may have contributed to this trend, by replacingrather than supplementing domestic savings. In this case, foreign capital mayhave financed consumption rather than investment.39 The decline of the invest-ment rate goes a long way towards explaining the falling growth rates in Brazil.Between 1994 and 2004, the average annual economic growth rate was only 2.7per cent; in contrast, between 1933 and 1980 the economy expanded, onaverage, by 6.3 per cent per annum.

Economic underperformance over long periods, high interest rates, excessively

rapid import liberalisation and the structural transformation of Brazilian industrythrough mergers and acquisitions and the flexibilisation of the workforce haveled to a significant deterioration of the labour market.40 The capacity of theeconomy to create new jobs has been declining, and national levels of unemploy-ment and underemployment have risen, even when compared to the lost decadeof the 1980s. The open unemployment rate in the six largest metropolitan areas41

increased from 4.4 per cent of the labour force in the late 1980s to 6.7 per centin the late 1990s; in Sao Paulo it rose from 6.5 per cent to 10.6 per cent. Thesetrends have continued. In the last two years of the Cardoso administration,the average rate of unemployment in the metropolitan areas was 11.5 per cent(11.7 per cent in Sao Paulo), and it has increased to 11.9 per cent (12.2 per cent

in Sao Paulo) in the first two years of the Lula administration. Sao Paulo hasbeen undergoing a clear process of deindustrialisation, with severe implications


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for employment and poverty in the area (see Figures 3 and 4). The destabilisationof the Brazilian labour market is also evident in the rapid increase of irregularemployment (empregados sem carteira) since the mid-1990s.

Unemployment and underemployment are only two of the factors contributingto the growth of poverty and marginalisation during the neoliberal period.Other influences are the low average wages in the country and the concentrationof income. Average wages have tended to decline since the late 1990s becauseof the economic slowdown and the structural transformation of the labourmarket. The wages and employment conditions of several categories of workershave deteriorated significantly, especially in the standardised (durables andnon- durables) consumer goods sector. For example, the average monthly wagein the large metropolitan areas declined from R$1,017 in the first quarter of2002 to R$957 one year later and R$912 in early 2004, with a small recoveryto R$928 in the first quarter of 2005.42 The lower middle class (earning

between two and five minimum wages) has been hit especially hard, as shownin Table 4.

Brazil is famously one of the most unequal countries in the world, and thispattern of inequality has not changed under neoliberalism. Although the Ginicoefficient declined marginally, from 0.61 to 0.59 between 1990 and 2001,43

this has only brought it back to the level of the early 1980s. There is no evidencethat there has been a break with the old patterns of inequality in the country.For example, the share of wages in the national income has been decliningsince 1999, while the share of profits has continued to grow under the PTadministration (see Table 5).

Finally, Brazil has failed to converge towards the rich core of the worldeconomy. Brazilian per capita income fell from 21.6 per cent of the developedcountry average in 1980 to 16.5 per cent in 1995 and 15.5 per cent in 2001.44

FIGURE

3. Sao Paulo metropolitan area: open and disguised unemployment (% labour force).Source: Seade/Dieese (http://www.seade.gov.br).


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Neoliberalism in the Lula administration

During the 2002 campaign, many activists and commentators on the left as well asthe right argued that Lulas election would reduce sharply the leverage of financialcapital over economic policy-making in Brazil, and that his administration wouldsuspend the payments of the countrys external debt and the governments dom-

estic public debt.These conjectures did not seem far-fetched. Early in that year, several financialinstitutions expressed their concerns by refusing to purchase federal securitiesmaturing after 31 December (the last day of Cardosos presidency). The weeklyopen market auctions became largely fruitless, as the brokers demanded ever-increasing interest rates to roll over the government debt. If these rates were notforthcoming the brokers liquidated their positions and shifted funds to the dollarmarket, devaluing the real. At the same time, their international partners down-graded Brazilian bonds and foreign debt certificates, allegedly because of theperceived lack of policy credibility in the country. The foreign banks used thesame pretext to recall their short-term loans and commercial credit lines, half ofwhich were lost in a matter of weeks. The dollar rose steadily from R$1.95 inJanuary to a peak of R$3.99 in October; domestic inflation was only 4 per centduring that period.

TABLE 4. Brazil: wage levels, in multiples of the minimum wage (% of the workforce)

,1 12 2 3 3 5 5 10 .10

March 2002 11.1 26.4 18.1 15.4 11.1 8.4

March 2005 16.7 34.0 13.3 15.9 10.0 6.1

Source: IBGE-PME (http://www.ipeadata.gov.br).

FIGURE 4. Sao Paulo metropolitan area: real wage income (main employment), 1992 (Q1 100).Source: Seade/Dieese (http://www.seade.gov.br).


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The unfolding crisis had serious political repercussions. The mainstream mediademanded that all presidential candidates (that is, Lula) must vouch for thecontinuity of Cardosos neoliberal policies in order to calm the markets. Even-tually, exhausted by their tribulations and apparently concerned for the balanceof payments, the minister of finance and the president of the central bank demanded

on television that all candidates should explain their economic policies to themarkets. Lulas leadership on the polls was shrinking rapidly, and he caved in.On 22 June, Lula issued a Letter to the Brazilian People declaring that his gov-ernment would respect contracts (in other words, service the domestic andforeign debts on schedule) and enforce the International Monetary Fund (IMF) pro-gramme agreed by the Cardoso administration. This was sufficient to calm themedia and secure Lulas leadership on the polls. This letter also gave Lula theopportunity to broaden his coalition further towards the right.

Lula would have sailed to victory with barely another glitch, but financeincreased the stakes further. It now demanded institutional guarantees of the

continuity of neoliberalism, especially an independent central bank committedto a responsible monetary policy and a new agreement with the IMF spanningwell into the new administration. This agreement was reached in record timeand signed on 4 September 2002. It states that

a combination of a worsening external environment and increaseduncertainty among investors about the future course of economicpolicies has led to a deterioration in financial market variablesin recent months. The . . . new Stand-By Arrangement with theFund . . . [is] designed to safeguard economic stability, and provide a framework for the continuity of core macroeconomicpolicies next year[under the new administration].45

The Brazilian government also agreed to submit a constitutional amendmentgranting independence to the central bank. In exchange, the IMF offered loansof US$30 billion, of which only US$6 billion would be available immediately.The rest would be available to the new government, but only if its economicpolicies conformed with IMF expectations. Lula agreed again. His blessing tothis agreement opened to the PT the doors of financial institutions and conserva-tive governments around the world.

Lula took office on 1 January 2003. His government has enforced a thoroughly

neoliberal economic policy, earning the grudging admiration of backers ofCardoso, as well as warm praise from the IMF46 and expressions of support

TABLE 5. Brazil: distribution of national income, 19992003 (per cent)

1999 2000 2001 2002 2003

Wages 45.3 45.2 44.6 43.7 42.9

Self-employed income 6.7 6.3 6.1 5.5 5.4

Profits 48.0 48.5 49.3 50.8 51.7

Source: IBGE, national accounts (http://www.ipeadata.gov.br).


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from the US government.47 The Lula administration is committed to neoliberalismat three levels. First, politically, Lula has never qualified the pledges in his Letterto the Brazilian People. Quite the contrary: he has gone out of his way to reassurethe markets on several occasions. It would be idle to speculate about whetherLula has been genuinely converted to neoliberalism or whether he simply believesthat there is no alternative. What matters is that his government has shown an evendeeper commitment to economic orthodoxy than its predecessors. Second, thegovernments economic team is drawn entirely from neoliberal circles. Financeminister Antonio Palocci was previously the PT mayor of Ribeirao Preto in SaoPaulo state, where he imposed stringent expenditure cuts and a municipal privati-sation programme that was criticised widely within the party. His closest aideshave impeccable credentials, being either trusted civil servants or well-knownmainstream economists, and the president of the central bank is a former chairmanof BankBoston. This team would be unlikely to consider non-mainstream

economic policies seriously. Third (and, in this context, unsurprisingly), thegovernment has maintained the entire policy framework developed by theprevious administration after the debacle of the real. The inflation targetingregime continues to require high interest rates, which prevents the economyfrom generating the new skilled, formal sector and highly productive jobs thatare essential to lift millions out of poverty, improve the distribution of incomeand fulfil the PTs social commitments.

The government has defended its economic policies vigorously, claiming thatthey will help to reduce inflation, stabilise the domestic debt, improve the invest-ment climate and attract foreign capital. It argues that these capital inflows will

support technological upgrading and productivity growth, and that economicstabilisation will allow the interest rates to decline gradually. The governmentscommitment to these mainstream economic policies, its promotion of investorsinterests and its reliance on the allocative efficiency of the market leaves economicpolicy hostage to the humours of the leading financial institutions as was shownin 2002. The influence of these institutions is clear in the importance achieved bythe Brazil risk indicators, especially J.P. Morgans emerging markets bond indexplus (EMBI ). This index is tracked on the daily press, and discussed widely andauthoritatively in the country. A declining index always leads to extensive self-congratulation by the authorities, while its increases invariably trigger heated

debates in the media and in Congress. In these cases, policy adjustments arealways forthcoming in order to steer the economy in the right direction.Inflation control has posed difficult challenges for the Lula government.

Although high inflation has been eliminated, it has proven difficult to achievethe governments targets, in spite of the central banks aggressive manipulationof interest rates. These difficulties seem to indicate that, although demand contrac-tion (that is, higher unemployment and lower wages) can suppress bouts of highinflation, the current Brazilian inflation is not caused by excess demand. Otherrelevant factors are the impact of high interest rates on the industrial costs, thepass-through effect of exchange rate fluctuations and the indexation of publicutility prices. In these circumstances, the devaluation of the real can have a

lasting inflationary impact first, directly, through higher imports prices and,later, through the automatic increase of utility prices regardless of the suppliers


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production costs. Finally, the imposition of higher interest rates to dampen risinginflation introduces further cost pressures into the economy. These cumulativeprocesses were especially obvious during the inflation bubbles of 1999 and20023, which were absorbed only slowly and at a high cost.48 Finally, the gov-ernment remains committed to the proposed operational independence of thecentral bank, in spite of strong resistance in Congress and in society.

The contractionary policies in the first year of the Lula administration reducedthe GDP growth rate to 0.54 per cent ( 0.9 per cent per capita) in 2003. Economicperformance improved in the following year, when GDP expanded by 5.2 per cent(3.7 per cent per capita), largely through the success of the agribusiness and exportsectors, which were stimulated by the devaluation of the real. Relief at thisoutcome was tempered by the realisation that this was the rebound after a verypoor year, that these GDP growth rates were below Brazils historical averageand that several comparable countries grew faster in 2004. This includes not

only China (9.5 per cent growth), India (6.7 per cent), Malaysia (7.1 per cent),Russia (6.8 per cent), Thailand (6.1 per cent) and Turkey (8.1 per cent), butalso other Latin American countries, among them Argentina (8.2 per cent),Chile (5.8 per cent), Uruguay (12.0 per cent) and Venezuela (18.0 per cent). InLatin America as a whole, average growth in 2004 was 5.5 per cent, which wasalso above the Brazilian performance.

Finally, the Lula administration took the initiative to increase the governmentsfiscal surplus target from 3.75 per cent of GDP (agreed with the IMF) to 4.25 percent, in order to dampen the growth of the domestic debt and facilitate thereduction of the interest rates in the wake of the 2002 crisis. This ambitious

target was achieved in 2003 and the fiscal surplus in 2004 was even higher, at4.6 per cent of GDP. In spite of these surpluses, the domestic public debt continuesto hover between 40 50 per cent of GDP. It has become obvious that the debt isfar more sensitive to the level of interest rates and the changes in the exchange ratethan to the size of the fiscal surplus. Achieving the desired surpluses has requiredsevere expenditure cuts, especially in public investment and the governmentsflagship social programmes. These cutbacks have helped to perpetuate Brazilsglaring deficiencies in infrastructure, especially the road network and the portsector, and the countrys seriously deficient public health and education sectors.They have also restricted the governments capacity to expand its programmes

of income support, food supplements (especially Fome Zero) and land reform.It is clear that Brazilian economic policy and performance hinge around thelevel of interest rates. This is the most important instrument of inflation controland, partly for this reason, interest rates are the most important reason for thechronic underperformance of the economy and the main explanatory factor forthe expansion of the domestic public debt since 1992.49 In the first four monthsof 2005 the base (Selic) rates have risen, on average, to 18.9 per cent perannum, which exceeds their average level in 2004 of 16.4 per cent. It is likelythat real interest rates in 2005 will be higher than in the recent past. Given theworsening prospects for the international economy, it seems certain that theGDP growth rate in 2005 will be lower than in 2004 (estimates point to 3.5 per

cent). By the same token, the domestic debt and its ratio to GDP will tend toincrease, which is likely to trigger another round of public expenditure cuts.


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The mainstream offers a feeble explanation for the high level of interest rates inBrazil and the large spreads charged by the countrys financial institutions.50 Itclaims that high interest rates are due to the lack of credibility of economicpolicies and the high probability of violation of contracts, either because of arbitrarygovernment decisions or because of distortions and inefficiencies in the legal system(jurisdictional uncertainty).51 These factors may be influential, but it is far from clearthat they play a leading role in the determination of the interest rates, for two reasons.First, other countries with high levels of jurisdictional uncertainty have significantlylower interest rates than Brazil, including Argentina, where the rules of the gamehave changed sharply several times during the last thirty years, China, where a power-ful Communist Party still holds dictatorial power, Malaysia, which imposed capitalcontrols arbitrarily after its currency crisis, Nigeria, where institutions remainfluid, and the political system is heavily tainted by accusations of corruption, andTurkey, where the economy has been battered by severe crises during the last gener-

ation, often requiring significant institutional adjustments. Second, the mainstreaminterpretation completely bypasses the potential influence of the concentration ofthe Brazilian banking sector on the costs and spreads charged by these institutions.52

The economic policies of the Lula administration are unlikely to dent the levelof unemployment or promote the sustained recovery of real wages. Even moreworryingly, the vulnerability of the balance of payments and the fiscal and finan-cial fragility of the economy may not permit a sustained period of rapid growth.The inability of the administration to conjure the growth extravaganza repeat-edly promised by the president during his first year in office has bred widespreadscepticism and sapped the governments popularity. The administrations indefa-

tigable pursuit of short-term credibility with the financial markets has under-mined important potential sources of growth in the economy. In particular, thegovernment has failed to promote the integrated development of the countrysmanufacturing base and to pursue an aggressive policy of export promotion inpriority manufacturing sectors (such as pharmaceuticals, electronic consumergoods, automobiles and capital goods). Economic underperformance will even-tually sap the credibility that the government has been trying to amass.

Supporters of the administration have put forward two not entirely compatiblearguments to justify the governments commitment to neoliberalism. On the onehand, the countrys economic situation does not offer any alternative. The slightest

hint of an economic policy change would trigger catastrophic capital flight; thereal would collapse, and the Brazilian economy would crash just like Argentinasdid in 20012. The most important experiment with a left-wing administration inLatin America since Allende would fail. On the other hand, it is claimed that thereis no alternative to neoliberalism, and it is futile to look for other policies. Whatdistinguishes governments in todays world is their probity, efficiency, credibilityand capacity to implement targeted and compensatory social policies, and the PTexcels in all these areas. Therefore, Lula should continue to be supported by theprogressive camp.

These arguments are untenable. Argentinas economy collapsed because ofits governments unwarranted commitment to neoliberalism. The contrast

with Allendes Chile is also misguided, because Lula has studiously avoidedconfrontation with moneyed interests either at home or abroad, except in


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multilateral trade negotiations, and has never hinted that his administration mightlead a constitutional transition to socialism. Finally, alternatives to neoliberalismare feasible, as has been shown by China, Malaysia and South Korea over longperiods of time53 and, more recently, by Argentina.54

It follows that the main reason explaining the current administrations contrac-tionary fiscal and monetary policies is political: the government wishes to signal tothe markets and to the international financial institutions its commitment to neo-liberalism. It also expects that its policy reforms will foster a more favourableinvestment climate through a stable macroeconomic environment, and throughthe provision of subsidised credit (especially via the state-owned Banco Nacionalde Desenvolvimento Economico e Social ) and labour market reforms. However,the administrations policies are unlikely to foster long-term growth. It wouldbe unwise to rely on erratic portfolio flows and FDI in disparate sectors totrigger a sustained cycle of economic growth in Brazil. The political economy lit-

erature on industrial policy has convincingly shown that, in a large middle-incomecountry, growth depends critically on the capacity of the government to foster aneconomic environment favourable to long-term investment in strategically import-ant areas through funding guarantees, indicative planning and supporting publicinvestment.55 Finally, the attempt to use fiscal and monetary policy instrumentsto satisfy the short-term interests of the financial markets may be inefficient inthe long term,56 and it may limit the capacity of the administration to deliverthe promised benefits to its core supporters the poor urban workers, the lowermiddle class and the organised rural workers. Alternatives to neoliberalismmust be considered, following the legitimate expectations of the majority. It

would be profoundly destabilising for the democratic process and the rule oflaw if the substantive decisions about the course of economic policy wereexcluded from public debate, or if it was perceived that it is impossible topursue alternatives to neoliberalism by constitutional means.

Conclusion: escaping from neoliberalism

Experience in Brazil and elsewhere shows that the neoliberal reforms do not offera consistent blueprint for a development strategy based on equality and the realis-ation of human potential. The mainstream economic strategy relies heavily on

variables that countries like Brazil influence only marginally, especially the avail-ability and cost of foreign finance. It fragments the productive base, shifts theengine of growth towards externally financed consumption and investment innon-traded goods, erodes salaries and employment levels and conditions,increases the vulnerability of the balance of payments and has been associatedwith fiscal and currency crises. In Brazil, the economic stagnation induced bythe disintegration of import substitution and the transition to neoliberalism hasbecome entrenched. The rising levels of unemployment and underemploymentand the stagnation of wages have neutralised the distributive gains initiallyachieved through the real plan. In their choice of economic policy and their deter-mination to achieve short-term financial market credibility, the administrations

led by Fernando Henrique Cardoso and Lus Inacio Lula da Silva are indistin-guishable. However, their strategy is flawed. The poor performance of the


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Brazilian economy during the neoliberal decade was due to both internal andexternal factors but, increasingly, it is the outcome of the shortcomings of theneoliberal accumulation strategy. Therefore, this strategy is hardly deserving ofcredibility.

It is important to explore the potential of alternative (democratic) economicstrategies to limit the social, economic and political damage inflicted by neoliber-alism and redress some of the profound inequalities in the Brazilian economy andsociety. This cannot be done here in detail,57 but it is useful to outline the generalfeatures of these strategies. This will illuminate the shortcomings of neoliberalismfrom another angle, and substantiate the claim that there are alternatives to thepolicies of the Brazilian government.

This article has argued that the most important macroeconomic limitations togrowth in Brazil are the fiscal, financial and balance of payments constraints.These constraints have prevented the emergence of an economic environment

conducive to growth, employment generation and social inclusion. Alternativepolicies seeking to address these constraints should depart from three principles.First, their implementation requires confronting selectively the hegemony ofneoliberalism in the economy, and curtailing the influence of the financial interestson the availability and use of foreign exchange, the allocation of resources and thesolvency of the state. Second, these policies should seek to improve the livingstandards of the majority through the expansion of investment and output inpriority sectors, the improvement of the distribution of income and wealth, andthe sustained increase in wages, employment and consumption. These outcomesmust be independent from trickle-down effects and they should be unambiguous

across a broad spectrum of measures of welfare. Third, these policies should beefficient, consistent and sustainable. Policies that are excessively costly toimplement and monitor, generate significant traps and disincentives or createmacroeconomic instability should be avoided.58

In the light of these principles, policy change in Brazil should focus on thefollowing areas. First, significant policy changes are impossible with an opencapital account of the balance of payments. An orderly (limited) closure of thecapital account might involve, for example, central bank regulations imposing asignificant increase in the risk imputed to foreign currency assets in order toraise their accounting cost to Brazilian firms, especially the banks. The central

bank will also need to restrict the flows of international capital through the dom-estic financial system, especially the CC-5 accounts (foreign currency accountsthat are frequently used for capital flight). The monetary authorities should alsoimpose costs on volatile capital, such as a quarantine following the well-knownChilean model, and increase the taxes due on dividend payments and the repatria-tion of profits. These restrictions will make it possible to reduce interest rates andthe risk of capital flight. In turn, lower interest rates will improve the budgetaryposition of the state, support domestic investment, reduce the incentives forforeign borrowing and foster the development of the domestic financial system.

Second, in order to increase the level of income and employment on a long-termbasis and satisfy the immediate economic demands of the majority, it is essential

to introduce a new industrial policy raising state capacity to direct the allocation ofresources both intersectorally and intertemporally. This should include the


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expansion of infrastructure and sectors with high employment-generating capacity(such as housing and road building and repair), and incentives for those sectorsable to generate endogenous technical progress, replace imports and consolidateexisting industries (such as the telecommunications equipment, steel andchemicals industries).59

Third, these policies will require a tax reform promoting distributive outcomes,including lower indirect taxes and correspondingly higher direct taxes. However,this tax reform will be insufficient to fund the programmes outlined above.Adequate funding will require changes in the relationship between the state andthe financial system. For example, the private financial institutions should beinduced to increase the resources allocated to strategically important sectors andthe remaining state-owned banks, Banco do Brasil and Caixa EconomicaFederal, must be protected from predatory competition. In order to release therequired resources, interest rates will have to decline, and the spreads and fees

charged by the private banks also need to fall. This may be facilitated by regulat-ory reforms (including changes in the direction of official credit flows and restric-tions on public securities trading) and the fuller use of the lending potential of thestate-owned banks. It will also be necessary to impose tighter controls on theprivatised utility companies and infrastructure providers, introduce strongerlabour laws and health and safety rules, and increase significantly the supply ofbasic public goods (especially health services, education and public security) inorder to achieve rapid improvements in social welfare. Finally, these measuresshould be supported by the rapid redistribution of unproductive land, not onlyin order to increase agricultural output and employment, but also to improve the

distribution of wealth and political power in Brazil.It is impossible to achieve these ambitious objectives within a neoliberal frame-

work in which the state signals its priorities mainly through interest rate changes,finances its policy initiatives at market prices and must compete against privateinterests in order to achieve socially desired outcomes. The policies outlinedabove and the regulatory apparatus required for their implementation will beopposed by many. It will be claimed that these rules and programmes are eitherunnecessary or unenforceable, that their outcomes will be inefficient, and thatthe attempt to change course will be counterproductive because of the loss ofgovernment policy credibility. These arguments are invalid. The concepts of

credibility and rationality have been hijacked by mainstream economics andredefined in the light of abstract market laws concocted by orthodox economics.Middle-income countries economic policies are presumed to be credible eitherif they include fiscal restraint, fixed exchange rates, monetary control through highinterest rates and sterilisation or fiscal restraint, floating exchange rates andinflation targets backed up by interest rate adjustments. However, experienceduring the last decade suggests that Brazils social and economic problems aretoo severe, and too deeply ingrained, to be resolved by spontaneous marketprocesses. Similarly, the vicious circles described in this article cannot be dis-armed by laissez-faire policies.

Obviously, no-one should underestimate the difficulties and risks associated

with the attempt to implement alternative policies in Brazil. But Brazil is arelatively large and politically important country: it should use these assets in


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order to pursue a socially desirable economic strategy. The successful implemen-tation of alternative economic policies will increase the long-term credibility ofBrazilian economic policy, and improve the countrys prospects from the pointof view of potential investors in priority sectors. This strategy will also reducethe countrys dependence on fickle international financial flows. Finally, it willopen the possibility of a cycle of democratic development, including the distri-bution of income and wealth, social inclusion and the satisfaction of the basicneeds of the majority of the population. This is what Lulas election meant tothe majority of his voters.

Notes

The authors are grateful for the generous comments of two anonymous referees. MLR Mollo acknowledges the

financial support of CNPq.

1. This article was completed in May 2005.2. Governo do Brasil, Exposicao de Motivos n. 393 do Ministro da Fazenda (Congresso Nacional, 1993).

See also Edmar Bacha, Plano Real: Uma Segunda Avaliacao, in IPEA/CEPAL (eds), O Plano Real eOutras Experiencias Internacionais de Estabilizacao (IPEA, 1997), pp. 34 62; Rudiger Dornbusch,

Brazils Incomplete Stabilization and Reform, Brookings Papers on Economic Activity, No. 1 (1997),

pp. 36794; Alfredo Saad-Filho & Eduardo Maldonado Filho, Economia Brasileira: da Heterodoxia ao

Neomonetarismo, Indicadores Economicos, Vol. 26, No. 3 (1998), pp. 87103.

3. For an overview of neoliberal economic policies, see Ben Fine, Costas Lapavitsas & Jonathan Pincus (eds),

Development Policy in the Twenty-first Century: Beyond the Post-Washington Consensus (Routledge, 2001);

Ben Fine & Colin Stoneman, Introduction: State and Development, Journal of Southern African Studies,

Vol. 22, No. 1 (1996), pp. 526; Charles Gore, The Rise and Fall of the Washington Consensus as a

Paradigm for Developing Countries, World Development, Vol. 28, No. 5 (2000), pp. 789804; Alfredo

Saad-Filho & Deborah Johnston (eds), Neoliberalism: A Critical Reader (Pluto Press, 2005).

4. See Luiz C. Bresser-Pereira, Economic Crisis and State Reform in Brazil (Lynne Rienner, 1996).

5. From this viewpoint economic fluctuations are exogenous and transitory. They are generally due to mis-

guided government intervention or irrational private (for example, herd) behaviour, resulting from market

imperfections. Crises triggered by bubbles are analysed by Roger Farmer, The Macroeconomics of Self-

Fulfilling Prophecies (MIT Press, 1993); Ronald McKinnon, Money and Capital in Economic Development

(Brookings, 1973) argues that financial repression undermines growth performance; Ronald McKinnon, The

Order of Economic Liberalisation (Johns Hopkins University Press, 1993) and Paul Krugman, What Hap-

pened to Asia? (1998), http://web.mit.edu/krugman, review the potential consequences of regulatory

failure and moral hazard for the financial markets.

6. Maria de Lourdes R. Mollo, Maria Luza F. Silva & Thomas Torrance, Money and Exchange-Rate Regimes:

Theoretical Controversies, Economia Contemporanea, Vol. 5, No. 1 (2001), pp. 547.

7. Philip Arestis & Malcolm Sawyer, Inflation Targeting: A Critical Appraisal, Greek Economic Review

(forthcoming 2006).8. Philip Arestis & Malcolm Sawyer, New Labour, New Monetarism, European Labour Forum, Vol. 20,

No. 1 (1998), pp. 721.

9. See, for example, Philip Arestis & Murray Glickman, Financial Crisis in Southeast Asia: Dispelling Illusions

the Minskyan Way, Cambridge Journal of Economics, Vol. 26, No. 2 (2002), pp. 23760, Gabriel Palma,

Three and a Half Cycles of Mania, Panic and [Asymmetric] Crash: East Asia and Latin America

Compared, Cambridge Journal of Economics, Vol. 22, No. 6 (1998), pp. 789808; Maria de Lourdes

R. Mollo & Adriana Amado, Globalizacao e Blocos Regionais: Consideracoes Teoricas e Conclusoes de

Poltica Economica, Estudos Economicos, Vol. 31, No. 1 (2001), pp. 12766.

10. See Francois Chesnais, Mondialisation Financiere et Vulnerabilite Systemique, in Francois Chesnais (ed.),

La Mondialisation Financiere: Genese, Cout et Enjeux (Syros, 1996), pp. 25195; Robert Guttman, How

Credit-Money Shapes the Economy The United States in Global System (M. E. Sharpe, 2000).

11. See Dominique Plihon, A Ascencao das Financas Especulativas, Economia e Sociedade, No. 5 (1995), pp.61 78 and Suzanne de Brunhoff, LInstabilite Monetaire Internationale, in Chesnais (ed.), La

Mondialisation Financiere, pp. 3358.


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12. See Paul Cammack, Sign of the Times: Capitalism, Competitiveness, and the New Face of Empire in

Latin America, Socialist Register 2005 (Merlin, 2005), pp. 256 70; and Mollo & Amado, Globalizacao

e Blocos Regionais.

13. See Adriana Amado, The Regional Impact of the Internationalization of the Financial System: The Case of

Mercosul, in Philip Arestis, Meghnad Desai & Sheila Dow (eds), Methodology, Microeconomics andKeynes, Vol. 2 (Routledge, 2001), pp. 35173; Sheila Dow, Money and the Economic Process (Edward

Elgar, 1993).

14. See Francois Chesnais, La Mondialisation du Capital (Syros, 1994); Mollo & Amado, Globalizacao e

Blocos Regionais.

15. See Gerard Dumenil & Dominique Levy, The Neoliberal Counter-Revolution, in Saad-Filho & Johnston,

Neoliberalism: A Critical Reader, pp. 9 19; and Pierre Salama, La Financiarisation Excluante, in

Chesnais, La Mondialisation Financiere, pp. 213 50. The deteriorating distribution of income in the

world economy is documented by Branko Milanovic, True World Income Distribution, 1988 and 1993:

First Calculation Based on Household Surveys Alone, Economic Journal, Vol. 112, No. 476 (2002),

pp. 5192.

16. See also Guillermo Calvo, The Management of Capital Flows: Domestic Policy and International

Cooperation, in G. K. Helleiner (ed.), The International Monetary and Financial System (Macmillan,

1996), pp. 67 89; Guillermo Calvo, Leonardo Leiderman & Carmen Reinhart, Inflows of Capital to

Developing Countries in the 1990s, Journal of Economic Perspectives, Vol. 10, No. 2 (1996), pp. 123

39; Martin Feldstein & Charles Horioka, Domestic Savings and International Capital Flows, Economic

Journal, Vol. 90, No. 358 (1980), pp. 31429.

17. See Victoria Chick, Finance and Investment in the Context of Development: A Post-Keynesian Perspective,

in Joseph Halevi & Jean-Marc Fontaine (eds), Restoring Demand in the World Economy (Edward Elgar,

1998), pp. 4769; Rogerio Studart, Investment Finance in Economic Development (Routledge, 1995).

18. For an analysis of Brazilian inflation along those lines, see Alfredo Saad-Filho & Maria de Lourdes R. Mollo,

Inflation and Stabilization in Brazil: A Political Economy Analysis, Review of Radical Political Economics,

Vol. 34, No. 2 (2002), pp. 10935.

19. For a review of the real plan, see Saad-Filho & Mollo, Inflation and Stabilization in Brazil. De-indexation is

the abolition of automatic price increases in response to the latest inflation index (or variations in the

exchange rate). A typical example is the determination of wages, in conditions of high inflation, by lastmonths nominal wage, marked up by the current months inflation rate. Although indexation can help to

protect real incomes, it also perpetuates past inflation (inflation inertia), making it difficult to reduce inflation

in the long term.

20. See Alfredo Saad-Filho, The Political Economy of Neoliberalism in Latin America, in Saad-Filho &

Johnston, Neoliberalism, pp. 1139.

21. See Alfredo Saad-Filho & Lecio Morais, The Costs of Neomonetarism: The Brazilian Economy in the

1990s, International Papers in Political Economy, Vol. 7, No. 3 (2000), pp. 139.

22. See Alfredo Saad-Filho & Lecio Morais, The Costs of Neomonetarism: The Brazilian Economy in the

1990s, in Philip Arestis & Malcolm Sawyer (eds), Neo-Liberal Economic Policy: Critical Essays

(Edward Elgar, 2004), pp. 15893.

23. Bacha, Plano Real: Uma Segunda Avaliacao; Dornbusch, Brazils Incomplete Stabilization and Reform.

24. CEPAL, Anuario Estadstico de Ame

rica Latina y el Caribe (ECLAC, 2003), table 293.25. Saad-Filho & Morais, The Costs of Neomonetarism.

26. Conjuntura Economica, March 2005, statistical appendix, p. XI.

27. For a similar interpretation of the neoliberal transition in the advanced economies, see Gerard Dumenil &

Dominique Levy, Capital Resurgent: Roots of the Neoliberal Revolution (Harvard University Press, 2004).

28. For a detailed account of the crisis, see Edmund Amann & Werner Baer, The Illusion of Stability: The

Brazilian Economy under Cardoso, World Development, Vol. 28, No. 10 (2000), pp. 180519; Lecio

Morais, Alfredo Saad-Filho & Walter Coelho, Financial Liberalisation, Currency Instability and Crisis in

Brazil: Another Plan Bites the Dust, Capital & Class, No. 68 (1999), pp. 914; Maria de Lourdes

R. Mollo & Maria Luza F. Silva, A Liberalizacao do Cambio no Brasil: Revisitando a Discussao dos

Pressupostos Teoricos Embutidos nas Prescricoes Cambiais Alternativas, Estudos Economicos, Vol. 29,

No. 2 (1999), pp. 189227.

29. See Saad-Filho & Morais, The Costs of Neomonetarism.

30. Bank profit rates in Brazil are usually around 11 per cent. In January 1999, the profit rate of several largebanks reached between 200 and 400 per cent. Total bank profits in 1998 were R$1.8 billion; in the month


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of January 1999, these profits reached R$3.3 billion (Folha de S. Paulo, 6 March 1999, p. 2 2). George Soros

famously declared that the devaluation of the real had only a small impact on the international financial

system because it had been widely anticipated, and because Brazil offered protection mechanisms

unavailable to investors elsewhere.

31. See Mollo & Silva, A Liberalizacao d o C ambio no Brasil; Alfredo Saad-Filho & Lecio Morais,Neomonetarist Dreams and Realities: A Review of the Brazilian Experience, in Paul Davidson (ed.), A

Post Keynesian Perspective on 21st Century Economic Problems (Edward Elgar, 2002), pp. 2955.

32. Luiz C. Bresser-Pereira, Macroeconomia do Brasil pos-1994, Analise Economica, Vol. 21, No. 40 (2003),

pp. 738.

33. Michel Aglietta, La Fin des Devises Cles: Essai sur la Monnaie Internationale (La Decouverte 1986).

34. See Mariano Laplane & Fernando Sarti, O Investimento Direto Estrangeiro no Brasil nos Anos 90:

Determinantes e Estrategias, in Daniel Chudnovsky (ed.), Investimentos Externos no Mercosul (Papirus,

1999), pp. 12579.

35. SOBEET Report, Folha de S.Paulo 5 September 2003.

36. Guillermo Calvo, Leonardo Leiderman & Carmen Reinhart, Capital Inflows and Real Exchange Rate

Appreciation in Latin America, IMF Staff Papers, Vol. 40, No. 1 (1993), pp. 10851.

37. See Palma, Three and a Half Cycles; and Anwar Shaikh, Foreign Trade and the Law of Value: Part I,

Science & Society, Vol. 43, No. 4 (1979), pp. 281302, and Foreign Trade and the Law of Value: Part

II, Science & Society, Vol. 44, No. 1 (1980), pp. 2757.

38. For a similar analysis in the case of South Korea, see Arestis & Glickman, Financial Crisis in Southeast

Asia and Ha-Joon Chang, The Triumph of the Rentiers? Challenge, Vol. 43, No. 1 (2000), pp. 10524.

39. Bresser-Pereira, Macroeconomia do Brasil pos-1994.

40. Mario Pochmann, O Trabalho sob Fogo Cruzado: Exclusao, Desemprego e Precarizacao no Final do Seculo

(Contexto, 1999).

41. Sao Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Recife and Salvador.

42. http://www.ipeadata.gov.br.43. World Bank, Inequality in Latin American and the Caribbean: Breaking with History?, 1 April 2004, p. 400,

http://www-wds.worldbank.org/default.jsp?sitewds.44. World Bank, World Development Indicators, CD Rom, 2003.

45. Brazil Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understand-ing, August 29, 2002, http://www.imf.org/external/np/loi/2002/bra/04/index.htm, paragraph 26(emphasis added).

46. In their Article IV consultation with Brazil in March 2005, the IMF executive board welcomed Brazils

impressive economic achievements over the last two years, and the remarkable track record of

performance . . . which reflected the [Brazilian] authorities continued pursuit of strong macroeconomic

policies and steady progress with structural reforms . . . [IMF] Directors [also] congratulated the authorities

for consistently achieving high primary fiscal surpluses . . . Looking ahead, the authorities reform agenda

including central bank autonomy, reform of the state-level VAT, and further measures to enhance the

business environment covers important areas. Other critical reforms would include measures to increase

budget flexibility, address the large remaining imbalances in the pensions system, promote financial inter-

mediation, and reduce labor market informality through reforms of the labor code, so as to substantially

increase flexibility in labor contracts (http://www.imf.org/external/np/sec/pn/2005/pn0541.htm#P25_355#P25_355). IMF first deputy managing director, Anne Krueger, added that the impressive trackrecord of program implementation [under the stand-by arrangement], together with the continued pursuit

of sound macroeconomic policies and steady progress with structural reforms are clearly paying

off. . . The central banks steady tightening of monetary policy in recent months has been prudent . . .

Reflecting recent developments, financial market sentiment is very positive . . . The governments agenda

for 2005 includes important tax reforms and further measures to strengthen the business environment

(http://www.imf.org/external/np/sec/pr/2005/pr0564.htm).47. See, for example, http://www.whitehouse.gov/news/releases/2003/06/20030620-3.html and http://

www.state.gov/secretary/rm/2005/43863.htm.

48. Luiz C. Bresser-Pereira, Macroeconomia Pos-Plano Real: As Relacoes Basicas, in Joao Sicsu,

Luiz Fernando de Paula & Renaut Michel (eds), Novo-Desenvolvimentismo Um Projeto Nacional de Cres-

cimento com Equidade Social (Manole, 2005), pp. 348.

49. See Saad-Filho & Morais, The Costs of Neomonetarism.


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Documents

Saad-Filho Neoliberal Economic Policies in Brazil 1994-2005