The Political Construction of Brazil: Society, Economy, and State Since Independence 9781626375697

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The Political Construction of Brazil

The Political Construction of Brazil Society, Economy, and State Since Independence

Luiz Carlos Bresser-Pereira

b o u l d e r l o n d o n

Published in the United States of America in 2017 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com

and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU

© 2017 by Lynne Rienner Publishers, Inc. All rights reserved

Names: Bresser-Pereira, Luiz Carlos, author. Title: The political construction of Brazil : society, economy, and state since independence / by Luiz Carlos Bresser-Pereira. Other titles: Construpcdao polbitica do Brasil. English Description: Boulder, Colorado : Lynne Rienner Publishers, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2016016855 | ISBN 9781626373075 (hardcover : alk. paper) Subjects: LCSH: Brazil—Economic conditions. | Brazil—Economic policy. | Brazil—Politics and government. Classification: LCC HC187 .P3921613 2016 | DDC 330.981—dc23 LC record available at https://lccn.loc.gov/2016016855

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1992.

5 4 3 2 1

Contents

List of Illustrations Acknowledgments

Introduction 1 Brazil: A History of Long Cycles and Short Political Pacts 2 Colonial Constraints: Why Brazil Was Left Behind

Part 1 The First Cycle: The State and Territorial Integration

3 For Reasons of State: Territorial Integration 4 Herding Oligarchs: Empire, Constitutionalism, and Federalism 5 The First Republic: Prerequisite to Brazil’s Capitalist Revolution

Part 2 The Second Cycle: The Nation and Development

6 Igniting Capitalism: The Profitable Revolution of 1930 7 Imperialism and Industrialization: The 1930 National-Popular Pact 8 Crisis, Coup, and Democracy: Resuming Developmentalism After 1945 9 Coffee, Cold War, and Coup (Again): The End of the National-Popular Pact 10 The Crisis of the 1960s: Inflation and the Emergence of Popular Participation v

vii ix

1 7 27 43 63

73

91

117

127

141

151

vi

Contents

11 The Military in Power: The Authoritarian-Modernizing Pact 12 The Logic of Domination: The Limits of Dependency Theory 13 Neutralizing the Dutch Disease: Exporting Manufactured Goods 14 The Military in Office: Rise and Decline in the 1970s

157 165

181 191

Part 3 The Third Cycle: Democracy and Social Justice

15 The Democratic-Popular Pact: The Bourgeoisie and the Working Class 16 The Lost Decade: Stagnation and Inertial Inflation in the 1980s 17 The Crisis of 1987: The Collapse of the Democratic-Popular Pact 18 From Elite to Social Democracy: The 1988 Constitution 19 Neoliberal Rule: Privatization and the 1991 Liberal-Dependent Pact 20 Tackling High Inflation: The Real Plan 21 Liberal Rhetoric: The Trap of Overvalued Exchange Rates and High Interest Rates 22 Lula, Dilma, and the Alienation of the Elites 23 The Pact that Never Was 24 The Quasi-Stagnation Since 1981 25 Preference for Immediate Consumption and Loss of the Idea of Nation

355

26 Brazil’s Capitalist Revolution, Democracy . . . and Then?

365

Part 4 Conclusion

List of Abbreviations References Index About the Book

207

221

229 239 255 267

285 297 321 337

375 379 399 419

Illustrations

Tables 1.1 1.2 1.3 1.4

6.1 8.1 14.1 14.2 14.3 14.4 16.1 20.1

20.2 21.1 22.1 24.1

State–Society Cycles and Political Pacts Brazilian Growth in the Long Run, 1871–2014 Strategies and Annual Growth of Per Capita GDP, 1930–2014 Differences Between Liberal Orthodoxy and New Developmentalism Ethnic Origin of São Paulo Industrial Entrepreneurs Direct Investments and Domestic Market Occupation, 2011 Industrial Cycles from 1955 to 1981 Income Distribution in 1960 and 1967 Real Average Wages in the State of São Paulo, 1965–1970 Current Account and Foreign Debt, 1971–1981 Public Savings, 1979–1988 Foreign Savings, Domestic Savings, and Investment, 1992–2004 Rates of Savings Substitution, 1993–1999 and 2000–2005 Inflation Rates and Variations in Exchange Rates, 1994–2013 Brazil’s Exports and Terms of Trade, 2002–2014 Social Indicators, 1980–2014

Figures 1.1 2.1 6.1 7.1

The Manufacturing Industry’s Share of GDP, 1947–2015 Brazil Catching Up, 1870–2014 Index of the Terms of Trade, 1901–2013 The Cyclical Tendency Toward Currency Overvaluation vii

8 11 12

22 104 137 192 194 195 197 227

281 283 292 299 340

13 37 100 124

viii

List of Illustrations

10.1 13.1 21.1 22.1 22.2 22.3 23.1 24.1 24.2 Boxes

Brazil’s Import Coefficient, 1901–2013 Share of Manufactured Goods in Exports, 1964–2014 Real Growth Rates of GDP in Brazil, 1995–2015 Industrial Production and Retail Sales, 2000–2014 Real Exchange Rates and Industrial Equilibriums, 1995–2016 Net Profits of Nonfinancial Firms, 2005–2014 Brazilians’ Opinions of President Dilma Rousseff, 2011–2015 The Gini Coefficient in Brazil, 1960–2014 Brazil’s Economic Complexity Index, 1963–2013

Brief Theory Brief Theory Brief Theory Brief Theory Brief Theory Brief Theory

1: 2: 3: 4: 5: 6:

New Developmentalism Institutions and Development Who Are the Liberals? Industrialization or “Productive Sophistication” Developmentalism, Class Coalitions, and Populism The Tendency Toward Chronic and Cyclical Overvaluation of the National Currency Brief Theory 7: The Dutch Disease and its Neutralization Brief Theory 8: Hegemony, Imperialism, and Dependency Brief Theory 9: The Policy of Growth with Foreign Indebtedness Brief Theory 10: Inertial Inflation Brief Theory 11: The Wage-Led or Export-Led Model?

153 184 287 311 315 317 324 339 345

20 59 69 87 111

121 147 176 186 200 333

Acknowledgments

The number of people to whom I am indebted is immense. There were many in this long journey. Among them are my advisers on economics and Brazilian society: Celso Furtado, Alberto Guerreiro Ramos, Hélio Jaguaribe, and Ignácio Rangel. Also, my old friends who engaged with me in long debates: Adam Przeworski, Afrânio Garcia, Antonio Angarita Silva, Ben Ross Schneider, Caio Graco Prado, Fernando Dall’Acqua, Fernando Henrique Cardoso, Fernão Bracher, Philippe Faucher, Geraldo Gardenalli, Gilda Portugal Gouvea, Gildo Marçal Brandão, Ignacy Sachs, Jorge da Cunha Lima, José Arthur Giannotti, José Marcio Rego, Le-da Maria Paulani, Lidia Goldenstein, Luciano Martins, Lourdes Sola, Márcio Moreira Alves, Maria Hermínia Tavares, Nelson Marconi, Paul Singer, Renato Janine Ribeiro, Rodrigo Bresser-Pereira, Roberto Schwarz, Sylvio Luiz BresserPereira, Vera Cepeda, and Yoshiaki Nakano. I also acknowledge my most recent friends, of whom I will mention only those who collaborated with me directly on this book: André Singer, Cícero Araújo, Claudio Gonçalves Couto, José Luís Oreiro, Lilian de Toni Furquim, Luiz Fernando de Paula, Marcus Ianoni, Paulo Gala, and Marco Capraro Brancher. I owe special thanks to Cecilia Heise, who assisted me throughout the writing. I also wholeheartedly thank my publisher of many books, Lynne Rienner, and the two excellent English editors, Greg Bates and Steve Barr. The biggest thanks, as always, go to my wife, Vera, the partner of a lifetime.

ix

Introduction

This book is my attempt at an all-encompassing analysis of Brazil that ties together society, politics, and the economy; or, in other words, the nation, the state, and the market. My objective is to narrate and discuss the building of the nation and state—the building of contemporary Brazil— since its independence in 1822. I want to answer several questions: Why did Brazil fall behind the United States? What was the main problem faced and successfully resolved during the Empire period? When was economic nationalism placed on the agenda? Why was Brazil able to industrialize starting in the 1930s? Why is dependency theory essentially a mistaken interpretation? What caused the transition to democracy in the 1980s? And, finally, why has the redistribution of income since the 1980s been relatively successful, while growth has been dismal? Is the explanation for this just economic (the deindustrialization in consequence of the dismantling of the mechanism that neutralized the Dutch disease), or should we add two cultural features that turned dominant from the 1980s: the high preference for immediate consumption and the loss of the idea of nation? In writing this book on the history of my country, I had in mind the sociological, political, and economic theories that I had learned from Karl Marx, Max Weber, and John Maynard Keynes; and in Brazil from Francisco José de Oliveira Vianna, Caio Prado Jr., Hélio Jaguaribe, Alberto Guerreiro Ramos, and Celso Furtado. I also used the theories that I have been trying to develop throughout my life, particularly the theory of the emergence of the “technobureaucracy” (the professional social class); the theory of inertial inflation; and, in the last fifteen years, the definition of “new developmentalism”—a theoretical framework for understanding the economics of growth, prices, financial stability, and the distribution of income in middle-income countries; the political economy of class coalitions or political pacts; and the developmental state. 1

2

The Political Construction of Brazil

Starting with the colonial period, I discuss the reasons for Brazil’s backwardness only in comparison with the United States. Then, in Part 1 of the book, I examine the Empire of Brazil (1822–1889), when the state was formed and the integrity of the territory was ensured. In Part 2, I seek to understand the accelerated growth between 1930 and 1980 that characterized the Brazilian capitalist revolution. In Part 3, I seek to understand the low growth rates that prevailed after 1980, when Brazil made its transition to democracy and focused on the reduction of economic inequality. I attribute the loss of dynamism in the Brazilian economy, in the first instance, to the great financial crisis of the 1980s (the foreign debt crisis); and, in the second instance, to the incapacity of the local elites to neutralize the tendency toward cyclical and chronic currency overvaluations that exists in developing countries. This tendency exists particularly in the countries that have the Dutch disease, including Brazil.1 As a consequence, the Brazilian manufacturing industry has been hobbled by a major competitive disadvantage that is causing deindustrialization and quasi-stagnation. Income per capita, which grew at the high rate of 4.1 percent a year between 1950 and 1980, has only grown 0.94 percent from 1981 to 2014; in 2015, a deep recession made the per capita growth rate negative. Another way of understanding this unsatisfactory growth rate is to consider two cultural factors that have been reinforcing each other over the last thirty years: the severe weakening of the concept of nationhood and the strong preference for immediate consumption. The relative loss of the concept of nationhood was first caused in the early 1970s by the dominance of the associated dependency theory among intellectuals, and then from 1990 by the adherence of the Brazilian economic and political elites to economic liberalism, or neoliberalism.2 During this time, we lost most of our identity as a nation, a fundamental asset for the development of every people, and an asset that has become even more strategically important in the era of globalization, when competition among nations has gained a new and bigger dimension. The preference for immediate consumption has grown stronger since the 1985 transition to democracy. It is expressed in the chronic current account deficit,3 which finances consumption rather than investment, and by the loss of the state’s capacity to finance investments in infrastructure. The loss of the concept of nationhood is reflected in the submission to the Washington Consensus and in the large current account deficit and overvalued currency. These cause foreign indebtedness, increased consumption, and cyclical balance-of-payments crises. They serve the interests of rich countries, not of Brazil. The two cultural factors reinforce each other because the chronic current account deficit is a consequence of both. They are a manifestation of exchange rate populism insofar as it is associated with consumption rather than with investment. Nevertheless, the current account deficit and the associated exchange rate populism are welcomed by

Introduction

3

orthodox (economically liberal) economists, as well as by developmentalist and Keynesian economists—the former because they legitimize foreign finance, the latter because they keep wages artificially high. Capitalism is an economic and political system in which not only firms, but also countries, compete worldwide, and where the stronger take advantage of the weaker at both the regional and global levels. Thus, it is not surprising that the policies of the rich countries in relation to the developing ones often undermine the basic political agreement that forms a nation: the agreement among the industrial entrepreneurs, the state technobureaucracy, and the workers. It is this agreement that enables the state to defend its national interests and to become an instrument of economic development. When the workers join this developmental class coalition, the state, besides being an instrument of economic growth, also becomes an instrument for reducing inequality and increasing social cohesion. The capitalist revolution—a decisive period in the history of any country—took place in Brazil from 1930 to around 1980. It first occurred in the city-states of northern Italy in the fourteenth century, with the emergence of the commercial bourgeoisie, but it only gained strength with the formation of the nation-state and industrialization in England. In terms of transformative power, only the Neolithic Revolution—the transition of man from hunter and gatherer to farmer—can be compared in importance to the capitalist revolution. This revolution occurs when a society becomes a nation, forms a sovereign state, dominates a territory, and achieves its industrial development. In Brazil, the statesman who headed the great transformation was Getúlio Vargas; the strategy he adopted was national-developmentalism; and the time during which his influence was dominant (1930–1960) is known as the “Vargas era.” In this book I analyze the political construction of Brazil. This may be surprising given that I am an economist, but first and foremost I am a social scientist for whom it is impossible to understand any country from only an economic, political, or cultural standpoint. Brazilians, like all other people, are permanently involved in the political construction of a nation, of a state, and of a market system. By the time the capitalist revolution was taking place in Britain, France, and Belgium—the first three countries to complete it—the British, French, and Belgians were involved in a political construction that would become endless, and that would be copied by others. After the first capitalist revolutions, the history of each people became a collective work through which men and women both cooperate and contend with each other in order to build their nation and their state. This is a process that goes through moments of difficulty and even of relative decadence, but in the long run we observe progress and human development. What makes the capitalist society different from the ancient empires and civilizations is that it is no longer subject to annihilation. Economic development is a historical phenom-

4

The Political Construction of Brazil

enon that begins with modernity. Capitalist development is a process of capital accumulation with the incorporation of technological progress, in which the economic surplus is necessarily invested in production—something that did not occur in previous societies. Within the framework of economic competition, which defines capitalism, business enterprises have no alternative but to keep investing and incorporating new technologies, and society must continuously reform and improve its institutions, among which the two most important are the state and the market. When a people is transformed into a nation, forms a nation-state, and industrializes, it is achieving its capitalist revolution. Usually, the state precedes the nation. A group of nationalist politicians and intellectuals provide history and meaning to the nation, which becomes effectively autonomous, and the industrial revolution materializes. The state then becomes the instrument of capital accumulation by a triumphant national bourgeoisie. But some decades later, the workers and the new middle classes gain power; then the state becomes democratic and changes into the instrument of collective action encompassing the entire society. The bourgeoisie and the new middle class— the technobureaucracy—are now the ruling classes.4 But given the struggle of the popular classes, the state in the more advanced countries first turns liberal democratic, and later on becomes social democratic. As Adam Przeworski (1985) shows in his classic analysis, social democracy—the more advanced form of economic and political organization of capitalism—was the outcome of a major compromise among the social classes. I start from this historical framework in thinking about Brazil. Its capitalist revolution was the work of a developmental class coalition that combined the Brazilian industrial bourgeoisie, the government technobureaucracy, the urban working class, and the non-exporting sectors of the old oligarchy. The opponents of this revolution were the liberal politicians and economists associated with the agricultural exporting oligarchy, the rentier capitalists, the financiers, and foreign interests. Class coalitions and political pacts are central to this book, insofar as I see the Brazilian capitalist revolution as the outcome of developmental class coalitions fighting against a liberal-dependent coalition. The liberal, or orthodox, economists had a significant role to play when it was necessary to stabilize Brazilian economy, but they were never able to promote the country’s economic development, mainly because they proved to be dominated by the colonial inferiority complex associated with the condition of dependency. In a recent work on the interpretations of Brazil, Christian Edward Cyril Lynch (2013) writes about this inferiority complex. To him, this complex was expressed in the understanding of the major interpretations of Brazil as thoughts, not as theories as they should be.5 Major interpretations are narratives based on theories that do not necessarily originate with the author, but always involve a generalization, and must make sense to the society.

Introduction

5

This is a book of historical interpretation. I include eleven “brief theories” that are not found in textbooks. They are related to the concepts and models of “new developmentalism,” a theoretical framework for understanding middle-income countries that includes developmental macroeconomics and the political economy.6 I titled this book The Political Construction of Brazil knowing that the endeavor is beyond the scope of my abilities, and knowing that I will only be able to seize and describe a piece of the huge, complex reality. A great deal of what was essential to the construction of Brazil was left aside. Among these details are the extraordinary writers and other artists, such as Antônio Gonçalves Dias and Carlos Drummond de Andrade, Antônio Francisco Lisboa (Aleijadinho) and Oscar Niemeyer, Padre José Mauricio and Heitor Villa-Lobos, Alfredo da Rocha Vianna (Pixinguinha) and Ary Barroso, Oswaldo Cruz and Cesar Lattes. Much more has been left out because I limited this book to describing and analyzing economic, political, and social development. This is a book of an academic, but it is also the book of a Brazilian who identifies with his country and with the idea of a society—one that is already capitalist and democratic, but that needs to be effectively autonomous and to banish the popular preference for immediate consumption in order to begin catching up and developing. It was originally published in Portuguese in 2014. This English edition is an updated version in which I also discuss the new economic and political crisis that broke out in 2015. In this translation, I tried to make the history of Brazil, of its institutions, and of the conflicting political ideologies as clear as possible to readers outside Brazil.

Notes

1. “Dutch disease” refers to a situation in which the currency of a country with strong commodity exports appreciates, thereby undermining the country’s industrial sector. Manufacturers receive less profit in the local currency, or the cost of exporting may even exceed revenues, so the manufacturers stop exporting. For a full discussion of the Dutch disease, see Brief Theory 7. 2. When I use the word “liberal” in the political sense, it is not an equivalent of “progressive,” as is commonly used in the United States; it refers to the defenders of civil rights and liberties. The enforcement of these rights and liberties was a victory for liberals and democrats that is today also shared by developmentalists. However, “liberal” can also be used in an economic sense, referring to a view of society that assumes only a limited role for the state, with the market as the main coordinator of the economy. (See Brief Theory 3, “Who are the Liberals?”) 3. “Current account” refers mainly to the balance of trade, which is the balance of exports versus imports of goods and services; but it also includes factor income (e.g., from interests and rents) and financial transfers (e.g., remittances). Countries finance the current account deficit by reducing international reserves, or incurring in foreign debt.

6

The Political Construction of Brazil

4. I have used the terms “technobureaucracy” and “technobureaucratic class” since the early 1970s to denote what was also called the “new middle class,” or the “professional,” “technocratic,” or “knowledge” class. 5. Christian Edward Cyril Lynch (2013, p. 734), after explaining this understanding by pointing to the fact that our major interpreters did not try to generalize, but sought to explain a national contingent reality, adds a provocative and, for me, correct explanation for employing the term “thought”: “The diffuse perception of [backwardness] of a country would be a result of the [peripheral] place occupied by it in the world.” (Emphasis in the original.) 6. For a summary of new developmentalism, see Bresser-Pereira (2010, 2015) and the website www.bresserpereira.org.br.

1 Brazil: A History of Long Cycles and Short Political Pacts

When studying a given society, we must think about it historically, meaning that we must think of it in terms of phases or stages of development through which the division of labor increases and the society becomes more complex. In precapitalist societies, the first fundamental revolution was the agricultural, or Neolithic, revolution, which enabled the transformation of tribes of hunters and gatherers into stable societies, the production of economic surpluses, and the emergence of slave-based empires. But in ancient societies there was no idea of technical progress as a permanent source of productivity growth, or the concept and practice of searching for profits to systematically reinvest in production. This happens with the second major revolution in human history, the capitalist revolution, which is completed when a people becomes a nation, achieves its national revolution, builds a modern nation-state and, subsequently, achieves its industrial revolution. Then its economic development becomes a self-sustaining reality. In these terms, the focal point of the periodization of Brazilian development should be the time of its national and industrial revolution, that is, of its capitalist revolution. However, it is reasonable to choose the nation’s independence as its initial moment, although the autonomy of the new country had been only partially guaranteed: once they were no longer subordinated to Portugal, the Brazilian elites became dependent on Britain and France. Thus, the formation of the Brazilian state happened before the nation was formed, and the Empire would be the period of the construction of this state and of its territorial integration. It is only at a later time, starting in 1930, that the Brazilian nation started asserting itself, adopting national-developmentalism, and industrializing.

7

8

The Political Construction of Brazil

Cycles and Political Pacts

In order to better understand the political and social construction of independent Brazil, we must first consider the long colonial period, which lasted from the year Portuguese colonization began (1532) until independence (1822), as well as the later cycles involving the state-society relationship in independent Brazil. I am fully aware that periodization involves simplification, which conflicts with reality in the short term. Yet, as a tradeoff, it is always clarifying when we intend to provide a general view of a given society and its history. Based on this assumption, we may think of the history of independent Brazil as having been formed by three big cycles in the relationship between the state and society, as we see in Table 1.1. Each one of these cycles emphasizes one aspect of the construction of Brazil, as is shown by their names: the State and Territorial Integration Cycle (1822–1889),1 corresponding to the Empire; the Nation and Development Cycle (1930–1980), corresponding to what I also call the “Brazilian capitalist revolution”; and the Democracy and Social Justice Cycle (1980–2014). Throughout these political cycles, Brazilians built their state and their nation, and guaranteed the integrity of their territory. At first, the state prevailed over society, which was politically organized solely as a civil society; it was the state (defined as the constitutional and legal system and the organization that guarantees it) that tried to give a national form to society. Starting with the second cycle, which included the national and industrial revolution, or the Brazilian capitalist revolution, this relationship was reversed, as civil society organized itself politically and moved toward democracy. From then on, it was increasingly the society that indicated the direction of the state. In each of these three big cycles of the state-society relationship, we can also distinguish political pacts or class coalitions that were developmental or liberal—the developmental pacts being “national,” and the liberal Table 1.1: State-Society Cycles and Political Pacts State-Society Cycles

State and Territorial Integration Cycle Nation and Development Cycle

Democracy and Social Justice Cycle

Political Pacts

1822–1889 Oligarchic Pact

1930 –1960 National-Popular Pact 1964 –1979 Authoritarian-Modernizing Pact 1980 –1987 Democratic-Popular Pact 1991–2002 Liberal-Dependent Pact 2003–2014 National-Popular Pact (failed)

Brazil: A History of Long Cycles and Short Political Pacts

9

(or “neoliberal” when we refer to economic liberalism from the 1980s on) pacts usually being dependent.2 Regarding the State and Territorial Integration Cycle, I have identified only one class coalition, under the Oligarchic Pact, which aligned the bourgeoisie (or capitalist class), the landowners, the state patrimonial bureaucracy, and foreign interests. As for the other two cycles, I divided them into two political pacts each (not counting the last, failed pact), differentiated by their elitist or populist nature and by their developmental or neoliberal nature: the 1930 National-Popular Pact, the 1964 Authoritarian-Modernizing Pact, the 1977 Democratic-Popular Pact, and the 1991 Liberal-Dependent Pact. The Nation and Development Cycle was still an authoritarian cycle. In every country, the national and industrial revolution has always been made in the context of an authoritarian regime. The 1977 Democratic-Popular Pact was developmental, but it was under this pact that the democratic transition took place. Liberal pacts or class coalitions are not necessarily democratic. The 1822 Oligarchic Pact was intended to be liberal and democratic, but was neither liberal, as it did not offer civil or political rights, nor democratic, as Brazil was not yet ready for democracy. This cannot be said of the 1991 Liberal-Dependent Pact, which was the first to fully benefefit from democracy. In this periodization, there are “empty” periods: transition periods, such as the First Republic (1889–1930), or times of crisis and political vacuum in which the prevailing class coalition was not clear, such as during 1961–1963 and 1987–1989. In this periodization, the definition of the date of the outbreak of the Brazilian national and industrial revolution as 1930 is a key issue, as it points out that a national bourgeoisie was being formed at that moment and signifies that the capitalist or bourgeois revolution was beginning in Brazil. The original developed countries all went through their bourgeois revolutions, and so did Brazil. In the 1950s, right in the middle of Brazil’s national and industrial revolution, the nationalist intellectuals at the Higher Institute of Brazilian Studies (ISEB), as well as Celso Furtado, identified the crisis of capitalism in 1929, the 1930 Revolution in Brazil, and the fiscal and exchange rate policy then carried out by the government as the beginning of this major revolution. 3 However, this revolution involved a social agreement or political pact among this bourgeoisie, the workers, and the government bureaucracy against the dependent or colonized Oligarchic Pact, which was challenged for the whole First Republic (1889–1930). This coalition, after a strong political and economic crisis, seemed to be belied by the 1964 military coup, when the dominant classes appeared united. Despite this fact, the choice of 1930 as the beginning date is currently undisputed. It was challenged by the dependency theory; as I will discuss at length throughout this book, this interpretation reflected the frustration of left-wing intellectuals with the 1964 military coup, in which the industrial bourgeoisie allied with the agricultural exporting bour-

10

The Political Construction of Brazil

geoisie. Faced with this fact, some analysts thought that it was necessary to criticize those who had identified the appearance of a national-popular class coalition in 1930 based on the participation of a relatively progressive industrial bourgeoisie, which originated not from the old oligarchy, but from immigrants. Therefore, they tried to shift this date to 1888–1891, when the abolition of slavery took place, the republic was proclaimed, and a liberal constitution was enacted. In this way, they expected to demonstrate that there had been no rupture between the old oligarchy and the new industrial bourgeoisie.4 This view is, in my opinion, a nonsolution to the question of whether a national bourgeoisie existed in Brazil. It is true that the Brazilian industrial bourgeoisie was never as independent as the bourgeoisies of the countries that had developed earlier, or even of those that developed later (as in the case of the East Asian bourgeoisies), but from 1930 on it was national enough to join the government bureaucracy and urban workers in forming a nation. In contrast, the agricultural exporting bourgeoisie, particularly the coffeegrowing bourgeoisie in 1888–1891, was oligarchic and liberal-dependent, and so unable to actively participate in a national development strategy. Interrupted Development

The great period of Brazilian economic development was 1930–1980, the Nation and Development Cycle, or Brazilian capitalist revolution. As we can see in Table 1.2, per capita income grew at an annual rate of 4 percent, making Brazil the fastest-growing country in the world in terms of the gross domestic product (GDP) at the time; in terms of per capita GDP, Brazil was second only to Japan. But from 1981 on, in the context of the Democracy and Social Justice Cycle, it experienced a huge financial crisis—the 1980s foreign debt crisis—and economic development was interrupted, while the country was beset with high inertial inflation. In 1994, this inflation was finally controlled by a heterodox stabilization plan, the “Plano Real.” Unfortunately, the expected resumption of development did not occur. This was primarily due to the thirty years of neoliberal capitalism (1979–2008). During the height of these policies, Brazil adopted liberal orthodoxy (1990–2002) as the economic strategy. From 1981 to 2014 the country’s growth rate was less than one-fourth the rate of the previous fifty years. Regardless of the change in growth rate, we would expect that, in terms of the Human Development Index (HDI), the Democracy and Social Justice Cycle would have created better results than the Nation and Development Cycle. However, this did not happen. Looking at the two quarter-century periods before and after 1984, during the first period, between 1959 and 1984, the HDI increased by 30.3 percent; but during the second period,

Brazil: A History of Long Cycles and Short Political Pacts

11

Table 1.2: Brazilian Growth in the Long Run, 1871–2014 (Annual %) Years

GDP

1871–1889 1890 –1930 1931–1980 1981–1990 1991–2014

2.4 3.6 6.6 1.7 3.0

Per Capita GDP 0.5 1.2 4.0 –0.5 1.5

Sources: Data for 1871–1900 from Angus Maddison (2003), adjusted for purchasing power parity; the data for 1901 and after are from Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br.

between 1985 and 2011, it increased by only 18.9 percent. We can see even more detail by examining the three components of the HDI: per capita income, life expectancy at birth, and the literacy rate. Although the percentages during the two periods underestimate Brazil’s social improvement because per capita income is included in the HDI, the other two variables followed the same pattern. Life expectancy at birth increased by 20.3 percent during the first period and by 19.8 percent during the second one. The literacy rate increased by 29.3 percent and then by 18.2 percent during the first and second periods, respectively. The two pacts of the Nation and Development Cycle and the first social class coalition of the Democracy and Social Justice Cycle were developmental, and thus national, and so involved a reasonable degree of state intervention in the economy. The nature of the Liberal-Dependent Pact was defined by its own title. From roughly 2006 on, a new developmental pact started to take shape. This issue, and the other issues during this period, will be discussed throughout this book. The results achieved by the different pacts and their corresponding development strategies were quite different, as we can see in Table 1.3. There was huge economic growth under the first two developmental pacts, particularly in the Authoritarian-Modernizing Pact (1965–1980), when the growth strategy was based on the exports of manufactured goods. An economic and political crisis brought to an end the Democratic-Popular Pact just after its political leaders assumed office in 1985. The Liberal-Dependent Pact, despite the stabilization of high inflation achieved in 1994, produced dismal growth rates. And the attempt to reestablish a developmental class coalition in 2003 produced initially satisfactory growth rates due to a boom in commodity prices, but collapsed ten years later. The low growth rates since 1980 highlighted the premature deindustrialization that coincided with the Democracy and Social Justice Cycle (1980–2014).

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The Political Construction of Brazil

Table 1.3: Strategies and Annual Growth of Per Capita GDP, 1930–2014

Years

1930–1960

1961–1964 1965–1980

1981–1990

1991–2005 2006–2014

Pacts

National-Popular Pact Crisis AuthoritarianModernizing Pact Crisis and DemocraticPopular Pact Liberal-Dependent Pact —

Strategies

Import substitution

Crisis and adjustment Exports of manufactured goods Financial crisis and high inflation Washington Consensus Social developmentalism

Per Capita GDP (%) 3.4

1.7

5.4

–0.5 1.1 2.2

Source: Ipeadata, Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br.

Table 1.3 serves as a reference point for the analyses throughout this book. For now, we must only stress the huge change that took place in the 1980s. This period saw a major financial crisis that the liberals claim was caused by the “exhaustion of the model of import-substitution industrialization,” or, in other words, by excessive state intervention in the economy. However, this explanation is a faulty one. This model had already been exhausted twenty years earlier, and the country was successfully implementing a strategy of exporting manufactured goods. The financial crisis was actually due to a classic cause: a balance-of-payments crisis, or foreign debt crisis, that resulted in high inertial inflation. By weakening the military regime, this crisis opened the way to a democratic transition. But the failure of the new democrats after 1985 to solve the crisis created an opportunity for a liberal and dependent class coalition, which led Brazil to submit to the neoliberal approach, or Washington Consensus. A process of premature deindustrialization and low growth followed these poor results. As we can see in Figure 1.1, which shows the proportion of manufacturing of the GDP since 1947, the share of manufacturing was already 19 percent in 1947; it increased strongly between 1947 and 1986, reaching 36 percent in the latter year; it then started to decline precipitously, and in 2015, at just 11 percent of GDP, it was lower than in 1947. As we will see, the only new historical fact that might explain this poor outcome is that, from the beginning of the 1990s, due to the trade and financial liberalization then accomplished under the aegis of economic liberalism, the government dismantled the mechanism that neutralized the Dutch disease. As a consequence, the exchange rate appreciated over the long term, and ever since then Brazilian business enterprises have faced a competitive disadvantage that precludes investment and growth.

Brazil: A History of Long Cycles and Short Political Pacts

13

In this book, I briefly analyze the State and Territorial Integration Cycle, but my focus is on the two following cycles: the Nation and Development Cycle, which was also the period of Brazil’s capitalist revolution, during which economic inequality increased; and the Democracy and Social Justice Cycle, which began in the late 1970s, when the capitalist revolution had already been completed. This was also when Brazil was already a mature democracy and was seeking to reduce economic inequality. We may assume that Brazil is still at this stage, but I believe that it would be more correct to say that this cycle ended in 2012. Since 2013, we have been experiencing a crisis of legitimacy regarding the Democracy and Social Justice Cycle—concerning its ability to diminish inequality in the context of satisfactory growth rates. And in 2015, after the reelection of Dilma Rousseff, an acute economic and political crisis occurred. Hence, we need once again to rethink Brazil. As Gildo Marçal Brandão accurately notes, when studying the lineages of Brazilian political thought, interest in the “interpreters of Brazil” has a cyclical nature, increasing during periods marked by global change. In times like these, we are forced to reorganize the spheres of our existence and to reformulate the mental frames that have schematized our knowledge. According to Brandão, the moment “we are living in is only comparable to the periods unfolded by the abolition of slavery of 1888, and by the 1930 Revolution. Everything goes as if the effort of ‘thinking the thought’ kindles when our bad formation is more evident and the nation and its intellectuals are forced to retake the traveled

Figure 1.1: The Manufacturing Industry’s Share of GDP, 1947–2015 (%)

Source: Brazilian Institute of Geography and Statistics (IBGE).

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The Political Construction of Brazil

path before embarking on a new adventure” (2007, p. 28). This book starts from this premise, but it does not intend to provide the answers for the present. Throughout the book, I discuss the challenges that were faced in the past. I hope that this discussion will be useful when, at the end of the book, I then identify the problems of the present. Facing the World

The three great cycles of the state-society relationship and the political pacts that shaped the construction of Brazil occurred as a reaction to what was happening in the capitalist world, which was gradually becoming more interconnected, moving closer to a unified system. The Portuguese discovery and colonization of Brazil occurred while the capitalist revolution was breaking out in Europe, and especially in Britain and France. This major historical change had begun in the thirteenth century in Northern Italy, and then spread throughout the world. In the past, the history of each empire or each civilization had been relatively self-contained, and was expressed in terms of its expansion, followed by its decadence and, generally, by its disappearance. But with the capitalist revolution came a decisive transformation in the history of mankind through which, first, the world became increasingly interconnected; and, second, the reinvestment of the economic surplus into production became a practice and, more than that, a necessary practice for the survival of business enterprises in a competitive environment. Before capitalism, the economic surplus was usually invested in financing military power, in building temples and palaces, and in luxury consumption. Reflecting the perspective of the commercial revolution and mercantilism, the idea of profit and the practice of its reinvestment later became generalized. With the industrial revolution and the acceleration of technical progress, reinvestment ceased to be an alternative: it became a necessity, a condition for business enterprises to remain competitive. This revolution was, therefore, so transforming that it no longer made sense to think about civilizations that flourish, decay, and disappear. Now we should think about progress or human development—about a universal civilizing process in which economic development and improvements in the standards of living, political development and democracy, social development and the formation of the welfare or social state tend to spread throughout the world, although the process is not as fast or as smooth as we would like it to be. This historical process does not happen peacefully and harmoniously. The countries that were backward when making their capitalist revolutions (since the end of the nineteenth century) were not able to do so by simply copying the technology and institutions of countries that had industrialized earlier or that had already experienced a process of productive sophistica-

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tion. On the contrary, they were, in different ways, the subjects of colonialism or imperialism. Portugal, a mercantile power, ruled throughout the whole Brazilian colonial period in the context of mercantilism, and went into decline soon after having colonized Brazil. It is impossible to understand the Brazilian colonial regime without considering this external determinant. Similarly, Brazilian independence in 1822 only made sense in relation to US independence, the Industrial Revolution in England, the French Revolution, and the Napoleonic period; the whole Empire would develop in the context of English hegemony, provided by the Industrial Revolution and the victory over Napoleon Bonaparte. Since 1889, the First Republic, in turn, can only be understood within the framework of the transference of global hegemony from Britain (or the United Kingdom) to the United States. The presidential and federative system in the 1891 Constitution was inspired by the system in the United States. The 1930 Revolution, for its part, only makes sense in the context of the later development of countries such as Germany and Japan, which adopted a developmental strategy in order to catch up, particularly given the 1929 crisis of economic liberalism and the Great Depression of the 1930s. The democratic transition of the Constitution of 1946, in turn, reflected the victory of the United States in World War II. The 1964 military coup, in turn, was a reaction to the Cuban Revolution of 1959, to the escalation of the Cold War, and to the support given by the United States to anticommunist military regimes in developing countries, be they poor or middle-income. The democratic transition of 1985 corresponded to the waning of the Cold War and to the adoption by the United States of a strategy of domination under the cover of the “promotion of democracy.” The great financial crisis of the developing countries—the 1980s foreign debt crisis—opened the way for the imposition, since the 1985 Baker Plan, of neoliberal reforms on these countries. The fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991 further increased the hegemonic power of the United States. Foreign Relations

Brazil’s international relations have reflected the great cycles and political pacts that have characterized our domestic history, while they have also responded to the continuous change taking place at the center of capitalism. Thus, here I will to a certain extent summarize this book by focusing on Brazil’s foreign relations. During the State and Territorial Integration Cycle, Brazil was dependent on Britain and France; during the First Republic (1889–1930), it was dependent on the United States. This is the reason why the great figure of the Baron of Rio Branco (1845–1912)—whose knowledge of geography, leadership, and diplomatic skills played a deci-

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The Political Construction of Brazil

sive role in the peaceful definition of Brazilian territory—was an exception, rather than the rule. For the rest, Brazilian diplomacy, as described by Hélio Jaguaribe (1962), was “ornamental” rather than an instrument of Brazilian national interests. From the 1930s on, when Brazilian diplomacy organized itself administratively and, in the context of the developmental policy of President Getúlio Vargas, played a significant role in Brazilian development, this diplomacy, conducted by a body of professional civil servants of the highest quality, had Rio Branco as its patron and as the inspirer of its commitment to national sovereignty. Celso Lafer (2001, pp. 87–88) sees the nation as an essential instrument of the construction of a nation, which requires the overcoming of “deficiencies in formation.” “Hence,” he says, “the key concept of a nationalism integrates the national space, based on economic development.” He adds that “the logic of a nationalism of ends” aims for “a controlled integration into the world economy” and for the “construction of a space of national autonomy.” Samuel Pinheiro Guimarães (2006, pp. 62–63), for his part, contrasts the “traditional” diplomatic strategy, for which “the principle of the sovereign equality among states enables Brazil to better support its interests in negotiations and in international relations,” with the “modern” diplomatic strategy, which considers globalization, the hegemony of the United States, and the gradual disappearance of nation-states as inevitable. However, this second strategy, which reflects the neoliberal and globalist hegemony of the United States in the 1990s, never prevailed in Brazil. As I will discuss throughout this book, our business and intellectual elites have always been ambivalent and often dependent, but they have also been capable of defending Brazil’s national interests. Our diplomatic elites have sometimes felt tempted by the “modern” strategy, but in the end they were capable of resisting it in favor of the traditional national strategy. Amado Luiz Cervo and Clodoaldo Bueno, in their História da Política Exterior do Brasil (1992, pp. 15–16), summarize very well this history in the introduction. For them, “by the time of Independence, the most damaging model to the national interest ever experienced was established.” The model they are referring to is Brazil’s subordination to Britain. But, from the 1840s on, domestic and foreign interests were balanced—a balance that was broken during the First Republic, characterized not by dependence on the United Kingdom, but on the United States. However, they continue, “during the Vargas administration, the conditions came together that enabled the implementation, for the first time, of a kind of functional foreign policy, no longer taking into account the interests of a social segment, but the nation’s higher interest.” This was a period in which “developmentalism and foreign policy were related.” Briefly, a nationalist and pragmatic foreign policy took shape in Brazil only from 1930 on, and it is no accident that this change was related to the

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17

transformation of the Brazilian diplomatic corps into a body of top-level public bureaucrats. The foundation of the Public Service Administrative Department (DASP) in 1937 is usually considered the first milestone of Brazil’s civil service reform—the reform that marks, from the administrative viewpoint, the country’s transition from patrimonial state to bureaucratic state; actually, it had started in 1931, during the Vargas administration, at the Ministry of Foreign Affairs (the “Itamaraty”).5 In 1938, under the command of Osvaldo Aranha, the reform was completed and the diplomatic career track was firmly established. This development, besides representing the relevance of the public function, explains why a diplomatic corps has always remained an example of bureaucratic insulation, why its staff has always been formed of professional bureaucrats, instead of outsiders interested in serving a particular government’s political objectives, as still happens today with other sectors of the Brazilian state. During the first Vargas administration (1930–1945), the fundamental emphasis of Brazilian international policy was to take advantage of the rivalry between the United States and an expansionist Germany. Both countries were very interested in having Brazil as an ally, and Brazil’s trade with Germany was just slightly smaller than that with the United States, which made the strategy of playing them off against each other easier. Its wellknown result was the support that Brazil received from the United States for the construction of its first steel factory: the Volta Redonda plant. In 1937, Vargas assumed dictatorial powers, and he renewed Brazil’s foreign debt moratorium, which had been in force since 1930. This brought him closer to Germany, although the Brazilian authoritarian regime was not as violent as that of the three Axis countries (Germany, Italy, and Japan). In 1939, when World War II began in Europe, Brazil declared neutrality. In June 1940, Vargas made a famous speech in which he predicted the end of democracy—an idea that was convenient to him. Also convenient was the political game he was playing within his own government, acting as an intermediary between the group that wanted Brazil to be associated with Germany and the one that preferred the United States as an ally. Finally, in 1942, he decided in favor of the United States, and declared war on Germany. Beside the US funding for the steel plant, two factors contributed to this decision: the collapse of trade with Germany caused by a blockade imposed by Britain and the pressure of Brazilian public opinion, which, for the most part, identified with the Allies. During the war, Brazil played a significant international role by helping solve conflicts between Peru and Uruguay, Peru and Colombia (the Leticia War), and between Bolivia and Paraguay (the Chaco War). Those actions were consistent with the policy of approximation to the United States that was gaining favor within the Brazilian government in the context of national-developmentalism, then on the rise in the region. The subsequent

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The Political Construction of Brazil

fifteen years were marked by the maintenance of this association, in which Brazil was the minor member. The ousting of Vargas in 1945 was supported by the United States, but this fact did not attract much attention because the end of his authoritarian regime was an expected consequence of the defeat in the war of right-wing dictatorships. Pan-Americanism characterized this period and was transformed into an official policy during President Juscelino Kubitschek’s administration (1956–1960). The election of Jânio Quadros as president marked a surprising shift in Brazil’s foreign policy. Although liberal and dependent forces had elected him, he began what was called the “Política Externa Independente” (Independent Foreign Policy), which, among other measures, included a decoration awarded to Che Guevara at a time when the United States opposed the Cuban Revolution and was pushing Cuba into the sphere of the Soviet Union.6 President Joao Goulart and the other military presidents—except for the first one, Humberto de Alencar Castelo Branco (1964–1967)—maintained a foreign policy that was relatively independent of the United States at the economic level, which was consistent with their national developmentalism. At the same time, however, the military allied itself with the United States in opposition to the Soviet Union and communism, as its strategy was aimed at consolidating capitalism in Brazil, and as it regarded communism as the greater threat to this objective than US imperialism. During that period, Ambassador José Augusto de Araújo Castro rose to prominence with his own brand of diplomacy, based on the “three Ds”: development, decolonization, and disarmament. This was defined in a speech at the United Nations in 1963, during the Goulart administration, and it remained influential for many years. Araújo Castro tried to make Brazilian foreign policy still more independent, though more pragmatic, and more oriented toward commercial issues; and Brazil’s trade policy became the domain of the Ministry of Foreign Affairs.7 With the return of democracy in 1985, Brazil’s foreign policy did not change much. Supported by its diplomatic corps, identified with Brazil’s national interests, it remained reasonably independent of the United States, even between 1990 and the mid-2000s, when, domestically, the political pact ceased to be developmental, instead becoming economically liberal and dependent through an uncritical acceptance of neoliberal policies. In 1992, at the height of the neoliberal hegemony, Mexico signed the North American Free Trade Agreement (NAFTA) and became dependent on the United States.8 Brazil then came under great pressure to join the Free Trade Area of the Americas (FTAA), but President Fernando Henrique Cardoso’s administration, after realizing the unacceptable limitations the treaty would impose on Brazil, refused to sign it. At the same time, Cardoso began to conduct a South American, rather than a Latin-American, foreign policy.

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At the end of the administration of President Luiz Inácio Lula da Silva, Foreign Minister Celso Amorim declared that he and President Lula had tried to carry out a “proud and active” foreign policy. With these two words, the minister gave a good definition of Brazilian foreign policy. The greatest success of Brazilian foreign policy during this administration, however, was when, in association with Turkey, it attempted to mediate the conflict between the United States and Iran. The two countries were able to make Iran accept all the US demands regarding the inspection of its atomic facilities that it had refused until then. But, as it should be expected, the United States rejected their mediation because the US aim was subordination, to include Iran within its sphere of influence—something that the Brazilian and Turkish mediation did not offer. After this effort, it became obvious to everyone that Brazil’s contribution to the main international forums was necessary. Brazil’s support for the strengthening of the Mercosul group and the creation of the Union of South American Nations (UNASUR), as well as its active solidarity (albeit limited to the poor Latin-American countries governed by nationalist and center-left parties), gave an indication of Brazil’s decision, already outlined by the previous administration, to abandon the concept of Latin America, impaired as it was by the adhesion of Mexico to NAFTA, and instead to emphasize the strengthening of South America. In its relationship with Bolivia, which required the renegotiation of unfavorable agreements, including those with Petrobras, Brazil showed the difference between being a leader, or an imperialist hegemon by accepting a substantial portion of the demands of the smaller and much poorer country. In the age of globalization, nation-states experience an essential contradiction. On the one hand, the competition among them has never been so intense. On the other, it was never so necessary for them to cooperate and coordinate their actions. The major countries are no longer threatening each other with wars, but since the markets were opened and exports started growing faster than production, economic competition between them has increased. In order to regulate this competition and solve a number of global issues—including global warming, drug cartels, epidemics, and natural catastrophes such as tsunamis—cooperation among nations is increasingly necessary. But this has not prevented the rich and imperialist countries from continuing to take advantage of their ideological hegemony to pressure the developing countries into adopting policies that do not serve their national interests. As we will see in this book, both Brazilian politicians and economists are unaware of this fact because Brazil is still unable to be a fully independent nation: it is instead a national-dependent society, a mixed-race and peripheral society whose elites experience the permanent contradiction of considering themselves white and European.

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The Political Construction of Brazil

Brief Theory 1: New Developmentalism Developmentalism can be understood, on the one hand, as an actually existing form of economic and political organization of capitalism opposed to both economic liberalism and statism; and, on the other hand, as an approach to or theory of development. As a form of organizing capitalism, mercantilism, which prepared the way for the Industrial Revolution, was the first historical form of developmentalism; Bismarckism in Germany, Fordism in the rich countries between the New Deal and the 1970s, and national-developmentalism in Brazil between 1930 and 1980 are good examples. In Brazil, national-developmentalism succeeded in promoting an industrial revolution in that country. Later on, after a major crisis and the advent of neoliberalism, there was an attempt by the Workers’ Party (PT) between 2003 and 2014 to form a developmental class coalition, but it eventually failed. As a theoretical approach, we have classical developmentalism and new developmentalism. Classical developmentalism is usually known as “development economics,” and in Latin America as “structuralist development economics.” It is the inaugural body of knowledge on economic development that originated from a group of economists associated with the United Nations, including W. Arthur Lewis, Ragnar Nurkse, Gunnar Myrdal, Raúl Prebisch, Hans Singer, Celso Furtado, and Albert Hirschman. These economists, who were mainstream from the 1940s to the 1960s, had in common the historical method, the combination of classical political economy and Keynesian macroeconomics, and the defense of some key ideas: a critical stance toward the law of comparative advantage, the identification of economic development with industrialization, the existence of a foreign constraint, and the critical role of the state in planning infrastructure investments and in planning and implementing industrial policy. New developmentalism is an heir of classical developmentalism and of post-Keynesian macroeconomics. It is a new theoretical approach and growth strategy that several economists have been developing since the early 2000s. For the time being, I am the economist most directly identified with new developmentalism, but there are already a number of others who are producing theories and conducting research using the main models of new developmentalism. Actually, a new-developmentalist school is emerging, in which we can distinguish three branches: macroeconomics, microeconomics, and political economy. In macroeconomics, we analyze the five macroeconomic prices (the profit rate, interest rate, exchange rate, wage rate, and inflation rate), asking why they tend to be out of equilibrium and what policies could put them right; in microeconomics, a branch to be developed, we make a distinction between the competitive and the noncompetitive sectors and the need for economic planning for the latter, though not for the former; and in political economy, we discuss developmental class coalitions and the developmental state. Developmental macroeconomics is the most advanced branch of new developmentalism. It is distinct from classical developmentalism and Keynesian macroeconomics in a few significant areas: (1) the fundamental variables it uses are not the public deficit and the interest rate, but the current account

Brazil: A History of Long Cycles and Short Political Pacts

deficit and the exchange rate; (2) what distinguishes developing countries from rich countries is no longer a social duality and a poorly structured market, but the fact that the former become indebted in foreign currency and are subject to balance-of-payments crises, whereas the rich countries become indebted in their own currency and are subject only to banking crises; (3) whereas in the rich countries the exchange rate is volatile around the current equilibrium, in the developing countries it is characterized by a tendency toward cyclical and chronic overvaluation; (4) due to this tendency and to the Dutch disease, the exchange rate in developing countries is often overvalued for the long term (a claim that is as exclusive to new developmentalism as it is essential for its validity); (5) given that business enterprises in developing countries consider this currency overvalued for several years as the “normal” or equilibrium exchange rate, they tend not to invest, or they invest little, so the exchange rate becomes part of the investment function, and plays a decisive role in economic development because it is like a light switch that connects or disconnects the country’s competent business enterprises from both the foreign and domestic markets; (6) the causes of this overvaluation are (a) a non-neutralized Dutch disease, and (b) three habitual (and mistaken) policies adopted by developing countries with the support of the liberal orthodoxy—a policy of growth with foreign savings, the adoption of high interest rates to attract capital and control inflation, and the use of the exchange rate as an anchor against inflation—all of which amounts to exchange rate populism; and (7) the consequences of this long-term overvaluation are low investment rates, low growth rates, and cyclic financial or balance of payment crises caused by high current account deficits (rather than by high public deficits). The East Asian example, together with my knowledge of the successful developmental policies adopted in Brazil from 1930 to 1980, served as a basis for my definition of new developmentalism—the national development strategy that I regard as necessary for Brazil to grow fast. It is a strategy that is based on three simple principles: • a strategic role for the state in macroeconomic policy making, in the coordination of the noncompetitive sector of the economy, in the social area, and in the protection of the environment, while leaving the competitive sector to the market; • long-term fiscal responsibility; and • a neutralization of the tendency toward cyclical and chronic overvaluation of the exchange rate and a maintenance of the exchange rate’s competitiveness, floating it around the industrial equilibrium, consistent with a small surplus in the current account, by keeping the interest rate low, rejecting the growth-cum-foreign-indebtedness (“savings”) policy, rejecting the exchange rate anchor policy for controlling inflation, and by neutralizing the Dutch disease.

Given this analysis, new developmentalism offers a strategy in the form of a set of policies. For clarification, the chart below compares liberal orthodoxy with new developmentalism. A brief comment on each numbered row follows the chart.

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The Political Construction of Brazil

Table 1.4: Differences between Liberal Orthodoxy and New Developmentalism Liberal Orthodoxy

New Developmentalism

Fiscal responsibility is not enough. The exchange rate tends to be overvalued and the expected profit rate depressed. Ok, but the government should not 2. A primary surplus is required. hesitate to adopt an expansive fiscal policy in the case of heightened unemployment or recession. Current account deficits are 3. Current account deficits are undesirable: they reflect excessive desirable: they represent foreign consumption, not investment. savings. 4. The Dutch disease is irrelevant. The The Dutch disease is a major problem; problem is the corruption associated countries either neutralize it or don’t industrialize. with the natural resource curse. 5. Exchange rate policy is unnecessary. Exchange rate policy is essential for neutralizing the tendency toward exchange rate overvaluation. Besides inflation, the government 6. Control of inflation is the main purpose of macroeconomic policy. should have an exchange rate target. Industrial policy is necessary, but 7. Industrial policy (incentives for it does not replace a competitive investment) is harmful. exchange rate. Human failures may be big, but they 8. Human failures are greater than market failures because politicians can be fixed. Market failures are also big, and more difficult to circumvent. are only concerned with their interests. Governments should combine focused 9. To legitimize their governments, social programs with universal social countries should adopt focused services. poverty programs. 1. A responsible fiscal policy is sufficient to guarantee macroeconomic equilibrium.

1. For liberal orthodoxy, macroeconomic equilibrium is essential but, provided that there is fiscal responsibility, the market guarantees it automatically. For new developmentalism, the market does not have this power. If the market is allowed to operate freely, there will be serious imbalances in the five basic macroeconomic prices: the exchange rate, profit rate, interest rate, wage rate, and inflation rate. The exchange rate will be overvalued, which means that the expected profit rates for industrial enterprises will be depressed; the wage rates will be artificially high; and the interest rate, which is important to the rentier capitalists, will be high. Now, in order to have economic development, the expected rate of profit must be satisfactory for industrial enterprises—enough to induce them to invest—while the interest rate must be as low as possible, without apparent prejudice to its variation as a function of interest rate policy aimed at controlling inflation.

Brazil: A History of Long Cycles and Short Political Pacts

2. For liberal orthodoxy, it is correct to have a primary surplus (i.e., a fiscal surplus excluding interest payments on the government debt) that will keep the ratio of public debt to GDP constant, at a level acceptable to the creditors. For new developmentalism, this goal is also correct, but the government should not hesitate to adopt an expansive countercyclical fiscal policy in the case of a recession— and that policy should increase investment, not public consumption. New developmentalism, therefore, rejects the creation of chronic public deficits that many people erroneously identify with Keynesian economic theory. 3. For liberal orthodoxy, a current account deficit is desirable because it enables a policy of growth with foreign savings, whereas new developmentalism understands that, in the presence of the Dutch disease, a current account surplus is desirable because it will neutralize the overvaluation caused by the disease. The Dutch disease, which I will discuss more thoroughly in Brief Theory 7, is a permanent exchange rate overvaluation and consequent competitive disadvantages caused by the export of commodities, benefiting from Ricardian rents, at a higher exchange rate (the current equilibrium) than the one needed to make the country’s enterprises using state-of-the-art technology internationally competitive (i.e., the industrial equilibrium). To neutralize the Dutch disease, it is necessary to impose an export tax or export retention on those commodities giving rise to the Dutch disease, commensurate with the severity of the disease. For instance, in a country where the industrial equilibrium is R$3.50 per dollar, and the current equilibrium R$2.80 per dollar, this tax should be R$0.70 per dollar (i.e., 20 percent on every dollar’s worth of commodities exported. When this is done, the country will necessarily have a current account surplus. In addition, the rate of substitution of foreign for domestic savings is usually high in developing countries, so foreign savings, even when they take the form of direct investment, end up being mostly transformed into consumption, and the total savings end up increasing the country’s foreign debt. 4. For liberal orthodoxy, what is required to address the “natural resource curse” (which it unduly distinguishes from the Dutch disease) is to improve morality, that is, to motivate politicians to reject rentier behavior; whereas for new developmentalism, the natural resource curse is synonymous with the Dutch disease (though morality is naturally always a problem). According to liberal orthodoxy, this curse exists in countries that are rich in natural resources and export commodities based on those resources (precisely the conditions for the Dutch disease), and this form of corruption is the “real” problem. Undoubtedly, corruption occurs mainly in the poor countries, and it is particularly high when rents from oil and mining are high. The poorer the country, the weaker are its institutions, including the most important one, the state; therefore, the greater the corruption. But it is unacceptable that economists and political scientists identified with liberal orthodoxy, when analyzing a country with abundant and cheap natural resources, note only the rent seeking and forget about or discount the Dutch disease. They overlook something that they do not understand very well or do not want to understand, as the rich countries are not interested in hearing developing countries talk about their exchange rates and the tendency toward their overvaluation. 5. For liberal orthodoxy, interest rate policy and fiscal policy are enough to achieve macroeconomic stability. For new developmentalism, an active exchange rate policy is also required. According to this view, the exchange rate in

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The Political Construction of Brazil

the short term is determined by the demand for and supply of foreign money. In the long term, however, the determination of the exchange rate depends on five policies (or non-policies): a tax on the exports of the commodities that are the sources of the Dutch disease, controls on capital inflows, a current account deficit (“foreign savings”) policy to spur growth, the adoption by the central banks of high interest rates to attract capital, and an exchange-rate-anchor policy to control inflation. Of these five policies, the last three are habitually used, but mistaken. If the export tax is adopted, if the excessive capital inflows are controlled, if the three habitual policies are rejected, and the exchange rate floats around its industrial or competitive equilibrium, the competent local business enterprises will be competitive, they will invest, and the country will grow and catch up. Yet this is not a simple task. The tendency of developing countries toward cyclical and chronic exchange-rate overvaluation represents a major obstacle to growth, though it is in the short-term interest of all, including the people, though especially of rentier capitalists, financiers, and the rich countries. In the medium term, however, it is not in the interest of the people or of sophisticated tradable business enterprises, on which economic growth depends. As for controls on capital outflows (the famous “capital flight”), new developmentalism rejects them, based on the principle that they will not be necessary. A country that neutralizes its Dutch disease and rejects the three habitual, but mistaken, policies referred to above will not be subject to financial crises. 6. For liberal orthodoxy, the inflation target is the main purpose of macroeconomic policy. According to new developmentalism, it is also necessary to have an exchange rate target, albeit an informal one, because the exchange rate is a switch that connects or disconnects state-of-the-art enterprises from the domestic and foreign markets. 7. For liberal orthodoxy, industrial policy—the definition of incentives for business enterprises or industries—is a mistake, even if rich countries usually carry out such policies themselves. In contrast, new developmentalism defends strategic industrial policies, as they are supposed to help local enterprises become competitive and sell both to the domestic and foreign markets. However, this does not mean that industrial policy has the same importance for new developmentalism that it had for classical developmentalism. The latter did not have a macroeconomic dimension, which is central for new developmentalism. And classical developmentalism relegated the problem of neutralizing the Dutch disease to the domain of industrial policy (to be handled through a combination of high import tariffs and export subsidies for manufactured goods), whereas new developmentalism sees it as a problem for exchange rate policy (to be handled through an export tax on the commodities that are the source of the Dutch disease). New developmentalism definitely does not view industrial policy as a substitute for the right macroeconomic prices. 8. For liberal orthodoxy, human failures are greater than market failures because politicians focus on making trade-offs between rent seeking and the desire to be reelected. The politicians, therefore, lack the republican spirit. For new developmentalism, human failures may occur due to a lack of knowledge or of republican spirit, but there are many politicians and senior bureaucrats who make trade-offs between their desire to be elected and the public interest. On the other hand, we know that markets left on their own do not guarantee financial stability or development, which means that the only alternative for achieving growth with stability is

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to have an active macroeconomic policy that puts the macroeconomic prices in the right place, avoids cyclic financial crises, and stimulates investment. 9. For liberal orthodoxy, poverty should be reduced through focused policies, particularly cash transfers, in order to legitimize the government. For new developmentalism, reducing poverty is not enough; it is also necessary to reduce economic inequality without reducing the industrial entrepreneurs’ profits, given that the entrepreneurs are the ones who invest and are strategic partners in any developmental class coalition. Reduction of inequality should be gradually accomplished through (1) progressive taxation; (2) a macroeconomic policy that keeps interest rates at the lowest levels possible (without prejudice to the monetary policy, for which the essential thing is the variation, not the level); and (3) an increase in public expenditure on the major social services of education, healthcare, pension plans, and social care. In other words, in the context of democracy, new developmentalism defends social or progressive policies for the reasons of justice and political legitimacy.

We must still respond to a basic question: How will the country be able to increase its savings rate through this growth strategy of domestic savings and neutralization of the Dutch disease? The answer is not, of course, to change the people’s culture. The correct macroeconomic answer is for the state to use public savings to finance government investments and, especially, for the state to adopt an exchange rate policy that neutralizes the tendency toward a cyclic and chronic overvaluation of the exchange rate, in order to keep it competitive and at the industrial equilibrium level. This type of environment would encourage business leaders to invest, so investments would be made and, as Keynes taught, the country’s savings rate would increase. The theoretical differences between new developmentalism and conventional economics are many. In Table 1.4, which is self explanatory, I just make a comparison between new-developmentalist and liberal-orthodox policies. Briefly, new developmental policies are superior to liberal-orthodox ones, provided that the country has politicians, economists, and political scientists who are reasonably competent, pragmatic, and endowed with republican spirit; and provided that a developmental class coalition is formed to guide and support the necessary policies, which are not always pleasant in the short term. In contrast, the adoption of the principles of liberal orthodoxy by developing countries may help to stabilize high inflation in the short run, but it will lead to chronic financial crises and low growth.

Notes

1. I see the First Republic (1889–1930) as a transition period between two cycles. 2. Thus, in my terminology, the post-1980 expression for classical economic liberalism is “neoliberalism.” 3. The ISEB, founded in 1955 as a division of the Ministry of Education, resulted from the transformation of an entity established under private law, the Brazilian Institute of Economics, Sociology, and Politics (IBESP). The IBESP, in turn, assembled the “Itatiaia Group,” which has met since the end of the 1950s in the town of Itatiaia to discuss Brazilian problems. The United Nations Economic

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The Political Construction of Brazil

Commission for Latin America and the Caribbean (CEPAL) began its activities in 1948, and in 1949 published a historical study that founded the Latin-American structuralist school, a branch of development economics. 4. See João Manoel Cardoso de Mello (1982) and Décio Saes (1985, p. 52). The latter is explicit, saying that “the process of formation of the bourgeois state in Brazil extended, basically, from 1888 to 1891.” 5. Itamarty Palace is the headquarters of the Ministry of Foreign Affairs. 6. In Listen, Yankee (1960), C. Wright Mills, after a long visit to Cuba, proffers the idea that Fidel Castro’s revolution was not a communist one, but rather a progressive and nationalist one, and that the US government was pushing the country towards communism. 7. As noted by Gelson Fonseca Jr. (1988, p. 260), Araújo Castro’s speech “influenced, during a long time, the official discourse itself, as demonstrated by the speech of the then president [José] Sarney at the United Nations in 1985.” 8. Canada, a participant in the same agreement, was by contrast not a dependent country, as it had attained the same level of development as the United States. Dependence occurs between countries with clearly different levels of development.

2 Colonial Constraints: Why Brazil Was Left Behind

We can see in the world today four types of countries, according to their level of economic development or whether they have implemented their capitalist revolution: the rich countries and the middle-income countries, which have already achieved their capitalist, or national and industrial, revolution; the preindustrial countries, which are currently trying to achieve it; and the poor countries. This classification is based on the assumption that the capitalist revolution is the crucial moment in the history of every people. When a nation manages to organize itself politically, builds a state, and forms a nation-state equipped with a domestic market, the conditions are ripe for its industrial revolution and, later, its sustained development. Britain’s Industrial Revolution took place in the second half of the eighteenth century, after a series of pivotal events that included the establishment by Henry VIII of the Church of England, the victory of Queen Elizabeth over the Spanish Armada in 1588, the civil wars of 1642–1651 (the first great bourgeois revolution in history), and finally, the Glorious Revolution in 1688, which transformed England into a constitutional monarchy. After the Industrial Revolution was accomplished in Britain, the example was soon followed by France, Belgium, the Netherlands and, a little later, by the United States. The ability acquired by those countries to prevail over the developing countries definitely showed what it means for a people, in terms of the increase in wealth and power, to complete its national and industrial revolution. As Celso Furtado (1961) notes in his classic formulation: developing countries were not just backward, but also underdeveloped due to the imperialism of the center and the dependency of countries on the periphery of capitalism.1 In this historical context, Brazil was one of the developing countries that did not achieve their capitalist revolutions until the twentieth century. That is why Brazil is not as rich as those countries that had achieved their 27

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capitalist revolutions in the eighteenth or nineteenth centuries. And that is why Brazil is not as poor or preindustrial as countries that have not yet completed theirs. Why did Brazil lag behind in making its capitalist revolution, especially when compared with the United States, when colonization in the United States began practically one century after colonization in Brazil? In 1776, when the United States declared its independence from Britain, it was already far more developed than Brazil, which means that Brazil had already been left behind during the colonial period. Or did this backwardness first occur in the nineteenth century, as several analysts have been arguing? In order to answer these questions, we must begin by understanding the different types of imperialism. Slaves or Settlers: Why the Type of Colonialism Matters

It is difficult for Brazilians to realize how damaging the initial mercantile colonialism was and, later on, how equally damaging industrial imperialism was. That is because the indigenous societies were so primitive that the ideology of the colonizer bringing “civilization” to the native populations seemed to have a certain plausibility. But this view was mistaken. The Europeans brought development to their colonies only when colonization was by settlement, as occurred with the United States, Canada, Australia, and New Zealand. Other areas suffered a mercantile colonization—a form of colonialism that was the cause of Brazil’s falling behind. In the case of Brazil, the climate was tropical and therefore complementary to that of Europe, which enabled the Portuguese to set up a slave-mercantile colonial system based on the cultivation of sugar cane. In colonization by settlement, the settlers wiped out or pushed out the native population, and were then left to create a society based on small farms, largely in the image of the farms in the countries they were originally from. In contrast, the slavemercantile colonial system was similar to the one in the US South. As we will see in this chapter, the colonial mercantile system was based on the plantation system, with large agrarian establishments (latifúndios) that used slave labor, were semiautonomous in terms of consumption, and did not create a diversified and educated population or open the way to the creation of a domestic market or to industrialization—very different from what happened in the north of the United States. Brazil’s falling behind took place during the three centuries of Portuguese colonization, from 1532 to 1822. In 1933, Gilberto Freyre published what may be the most beautiful book on Brazil, Casa-Grande & Senzala (The Masters and the Slaves), a historical and sociological essay on colonial society. This book is a symbol of Brazil for the quality of its research, its flawless literary style, and for its redemption of the “marginals

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of the Brazilian history: the black slave, the wife, the boy—anti-heroes facing the patriarch, the great civilizing hero.”2 It took courage for the author to praise the mixed-race nature of the Brazilian people at a time when racism was still dominant in the world; by defending racial mixture, he made a priceless contribution to defining Brazilian national identity.3 But his praise of Portuguese colonization for having built in Brazil the first tropical civilization prevented him from seeing that it was precisely during the colonial period that Brazil fell behind the United States. As Caio Prado Jr. explains in Formação do Brasil Contemporâneo (Formation of contemporary Brazil, 1942), and in a briefer and more definite way in the first three chapters of História Econômica do Brasil (Economic History of Brazil, 1945), Brazil fell behind the United States due to the differences in the types of colonization that took place in the two countries. His point was based on the distinction made by Paul Leroy-Beaulieu (1874, p. 2) between “adventurous” colonization and colonization “by settlement.” Prado reserved the expression “colonization by settlement” for what took place in the Northeast of the United States and, based on his Marxist orientation, identified the colonization in Brazil more precisely, calling it “mercantile colonization,” and thus associating it with mercantilism, the first stage of the capitalist revolution.4 And he offered an explanation for the difference between the Portuguese colonization in Brazil and the English colonization in New England based on geographical and economic grounds. Colonization by settlement took place in a region whose climate and vegetation were similar to England’s, which enabled it to be based on small family properties and implied the formation of an integrated society with a good cultural level, reproducing in America the society that existed in the metropolis—a highly developed society, according to the standards of the time. On the other hand, in Brazil, whose tropical climate was complementary to that of Europe, colonization was mercantile in nature, oriented toward producing high-value agricultural goods such as sugar, pepper, and tobacco, which were then considered spices. And, to this end, it proved to be most effective to establish a mercantile system based on large plantations and slave labor. This was different from the United States, where, according to Prado (1945), The settlers in this category [colonization by settlement] aim at building a new world, a society that will offer them guarantees that are no longer provided in the continent of origin. . . . Very different is the history of the tropical and subtropical areas of the Americas. Here . . . the natural conditions, so different from the original habitat of the colonized people, reject the settler that arrives as a simple settler. (p. 18)

Actually, the settler did not come to establish himself once and for all. As Prado (1945, p. 19) remarks, “He would come as the manager of the

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production of goods with high market value, as the owner of a profitable business; but only grudgingly as a worker.” These settlers came to make a fortune; they expected to get rich quickly in agricultural and mining production or in the slave traffic, and then return to Portugal. The vast majority of the Portuguese immigrants did not bring their families, and so mixed with the Indian and black women. And if the settlers eventually remained in Brazil, they did not create a society similar to the one they had left in Europe, but a particular slave-mercantile society. We should also add that the quality of the settlers who went to (what would later become) the United States—in particular, the level of education and technical knowledge—was superior to the quality of those who came to Brazil. Many of the latter were convicts exiled from Portugal, whereas the families that founded the United States were often fleeing religious persecution in England. Portuguese colonization, defined by the “colonial exclusive,” or exclusivo comercial (Portugal’s monopoly of Brazil’s foreign trade), was also a major obstacle to Brazil’s development because the Portuguese government worked deliberately against it. This included creating no universities in Brazil, exercising a monopoly in trade, and formally prohibiting any industrial activity. But, this arrangement ultimately provided wealth to Portugal only in the short term. The income that Portugal extracted from Brazil was eventually the cause of Portuguese decadence. Contrary to common belief, this decadence was not due to the Treaty of Methuen, which sanctioned the division of labor between Portugal and England, but to the fact that the exports of sugar cane and gold provoked the permanent overvaluation of the Portuguese currency. They gave rise, therefore, to the Dutch disease in that country. This wealth thus durably prevented the economic diversification and industrialization of Portugal. In the United States it was impossible to develop agricultural production for export, except in the South to a limited extent. However, thanks to the large domestic market generated by the influx of settlers, the United States was able to develop the production of manufactured goods that could be consumed by the growing domestic market as well as exported. Yet in Brazil, as emphasized by Ignácio Rangel (1953) and Furtado (1959), the slave plantation, a feature of mercantile colonization, was self-sufficient in terms of the workers’ consumption, and did not favor the formation of a domestic market, which is the most important prerequisite for a national and industrial revolution. Also, the large plantations were the semifeudal or patriarchal expression of mercantilism created to establish its supremacy; and, crucially, there was no idea of technical progress or of the need to increase productivity—a concept that would only appear in Europe with the Industrial Revolution. From a perspective very close to that of Prado and Furtado’s, Fernando Novais (1973) also points out the slave-mercantile nature of Brazilian col-

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onization. Mercantilism was dominant during the period of Europe’s commercial expansion, but this was also the period in which policies we would today call “developmental” led Britain and later France to achieve their major economic and social transformations: their industrial and capitalist revolutions. But, as Karl Marx taught, first it was necessary to achieve “primitive accumulation”—something that Novais mentions when he associates the mercantilism in Brazil with the slave system. The colonial system Portugal created in Brazil was a slave-mercantile system, and through it the metropolitan commercial bourgeoisie, associated with the Portuguese crown, achieved primitive accumulation. Under this system, a small landed elite in Brazil organized the production and contributed to exports. The system was based on two fundamental pillars: the exclusivo comercial and slave labor. The result was a low-production output because mercantilism still lacked the notion of productivity, and because slave labor was based on a workforce with a very low skill level. As Novais points out (1979, p. 108), “The slave structure itself blocks the possibility of technological investments; the slave, precisely for being a slave, should be kept at subhuman cultural levels, so as not to be awakened to his human condition.” Ciro Flamarion Cardoso (1980) and Jacob Gorender (1978) offer an alternative interpretation by identifying in colonial Brazil a “slave mode of production.” Despite the value of their contributions, I do not believe that they were successful. With their theory, they wanted to reduce the importance of the foreign trade and of the attempt to achieve a surplus through the construction of export-oriented slave plantations. To me, however, it is very clear that Brazil has always been a capitalist country. But it was a mercantile capitalist country for a long time, instead of an industrial one. Before the Brazilian capitalist revolution broke out in the 1930s, Brazil had been a dual society, on the one hand patriarchal and mercantile, in which the slave plantation presented a feudal heritage; and on the other hand, essentially mercantile capitalist in its relationships with other countries. The basic unit of production—the large plantation—followed the logic of mercantile profit, but domestically it was a self-sufficient unit, ruled according to patriarchal principles.5 Since the beginning of colonization, Brazil was treated by the colonizers as a commercial enterprise based on the plantation system. It was concurrently patriarchal and slave-mercantile, as the hereditary captaincies— the immense tracts of land that the Portuguese kings donated to a few nobles to begin the colonization in 1532—had been almost feudal. The theory that Brazil has never been a dual society, which became popular in the 1970s, reflected a distorted, dependent view that was eager to disqualify the 1930 Revolution and the emergence, particularly from then on, of a national bourgeoisie and of a bourgeois revolution in Brazil.6 Portugal was the first European nation to start a kind of bourgeois revolution,7 but never

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completed it. During the whole Brazilian colonial period, Portugal retained strong features of its feudal past. It was therefore natural for the Brazilian plantation to likewise preserve certain domestic characteristics of the fiefdom: self-sufficiency, absolute power of the landowner, a system of “dependents” (agregados), and the prevalence of an aristocratic ideology. But this did not prevent the large plantation from also being part of the capitalist system—of a mercantilist capitalism mixed with patrimonial, if not feudal, elements. However, we should not infer from this analysis that Brazilian colonial society had not undergone any powerful changes. The mining cycle in the eighteenth century opened the way to a substantial transformation of the structure of the Brazilian economy and society. The new wealth in Minas Gerais sparked the emergence of a middle class and of a domestic market. As emphasized by Ronaldo Marcos dos Santos (1993, p. 75), mining established the basis for the subsequent formation of the Brazilian nation-state, insofar as the economic integration produced by the mining industry engendered a nucleus of autonomous accumulation, in which traders and colonial producers were able to redirect their resources and to accumulate considerable fortunes by participating in new productive activities and stimulating these activities through their demand and credit. At the turn of the nineteenth century, the United States had already implemented its national revolution and declared its independence. Endowed with a well-structured domestic market and with a highly educated free population, the United States was preparing for its industrial revolution. Meanwhile, Brazil still had a radically backward and dual society, with a small elite enjoying the culture and products of Europe, while the mass of the people, even when free, remained illiterate and lived in a subsistence economy. When the United States declared itself independent in 1776, it already had a developed society in its New England region that was similar, and in some aspects superior, to British society. The United States, therefore, had already developed the requisite conditions, in terms of a domestic market, a working class, and an entrepreneurial middle class, along with the necessary institutions, to follow the path of the Western European countries. In contrast, Brazil arrived at its independence with an economy based on large self-sufficient plantations, without a domestic market, with a society in which the slave system was much more overarching than the slave system in the United States. Brazil therefore lacked the structural conditions that enable the establishment of institutions conducive to the formation of the nation-state and the start of economic development. In the United States, the slave system was also a major obstacle to industrial development, which started in the Northeast of the country, where the slave regime was not present, and only became established after the North defeated the South in the US Civil War and slavery was abolished.

Colonial Constraints: Why Brazil Was Left Behind

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Nationalist Explanation and Imperialism

In contrast to this explanation as to why Brazil fell behind, there is an illdefined theory by Brazilian nationalists that is, curiously, associated with some US historians who trace the falling behind to the nineteenth century. The nationalists blame British imperialism during the nineteenth and twentieth centuries for Brazil’s backwardness. One approach critiqued the law of comparative advantage in international trade, which was used by dependent intellectuals to argue that Brazil was “essentially an agricultural” country. In fact, British industrial imperialism manifested itself very clearly as early as the opening of the ports in 1808, in the Trade and Navigation Treaty of 1810, and in the Trade Agreement of 1827, with both treaties establishing preferences and privileges for Britain. But Brazil’s achievement of political independence in 1822 made it possible to neutralize such imperialism to some extent. It is true that the country did not achieve its industrial revolution in the nineteenth century, but this fact cannot be attributed to nineteenth-century industrial imperialism. Given the country’s heavy colonial heritage, it was unlikely that Brazil could have started its industrial revolution much earlier than it did, around 1930. Imperialism is always a major obstacle to a country’s development, but it is much more pernicious when it is explicit—when it reduces the dominated people to the condition of a colony—than when it expresses itself through ideological hegemony and financial submission. Latin America was subjected to colonialism from the sixteenth century by two mercantile powers, Portugal and Spain. In contrast, the Asian and African populations were not subjected to industrial imperialism until three centuries later, after the European countries and the United States had achieved their capitalist revolutions and became powerful enough to subject them to their rule. In the sixteenth and seventeenth centuries, the European countries did not have enough power to subjugate Africa and, particularly, Asia, where there were agrarian societies that were relatively developed and organized into empires. At that time, the Ottoman Empire dominated, not only the whole Middle East, but also southwestern Europe. Parts of Asia, the Chinese Empire in particular, were substantially richer than Europe. To demonstrate how damaging imperialism was to China and India, Paul Bairoch (1992) states, Around the beginning of the sixteenth century, the most important Asian civilizations had a higher level of technical and economic development than Europe. . . . China, in particular, had a far superior technology to that of Europe. (p. 153)

Regarding China, Bairoch mentions on the same page a book by Arnold Pacey (1990, p. 7) about the past thousand years of the history of technology in the world, according to which, “in all these fields, there were techniques

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The Political Construction of Brazil

in use in eleventh-century China which had no parallel in Europe until around 1700.” The Europeans’ relative lack of wealth meant that they did not have the economic or military resources to conquer Asia in the sixteenth century. This is the reason why, when the Portuguese arrived there with their caravels, in order to profit from their commercial trips, they had no alternative but to set up armed trading posts (feitorias) in, for instance, Goa and Macau, and to trade with the local empires. In the Americas, it was different. Through imperialism that we might call mercantile, the Spanish and Portuguese managed to conquer the continent because the level of development of the populations there was clearly inferior. Even the more advanced civilizations, such as the Mayan, Aztec, and Inca, did not know about gunpowder, and could thus be slaughtered by the Spanish colonizer. In Brazil, the Indians were at the stage of the primitive community, so that the Portuguese had no difficulty subjugating them. It was more difficult to enslave them, however, because the Indians never became accustomed to routine work; this fact, combined with the limited size of the Indian population, which had been largely decimated, made the colonizers resort to the African slave trade. The type of mercantile colonialism exercised by Portugal and Spain was exhausted by the time of the Napoleonic Wars and the Industrial Revolution. From then on, Western Europe and the United States, now much stronger due to this revolution, subjugated Asian and African societies to their industrial imperial rule. In addition to classical (or ancient) imperialism, whose last manifestations were the Austro-Hungarian and Ottoman Empires and the mercantilist imperial powers that Ernest Gellner (1993) calls “literate agrarian societies,” we had now an industrial imperialism headed by fully capitalist powers. This imperialism immediately assumed two forms: in Asia and in Africa, there was explicit industrial imperialism, meaning the subjection of another people to a formal status of a colony. The second form of industrial imperialism, found in Latin America from the early nineteenth century, was effected through soft power or hegemony, meaning the subordination of the local elites by the empire through persuasion and ideological hegemony, under which the local elites adopt public policies favoring the empire over their own country. The economic decadence that China and India experienced in the nineteenth century and the first half of the twentieth century is an impressive demonstration, by its didacticism, of how violent and damaging to a people formal imperialism is, and how important national autonomy—the possibility of defending national interests—is for achieving a country’s capitalist revolution, and for developing and catching up with wealthier countries.8 According to Paul Bairoch (1993, p. 88), the deindustrialization caused by colonial subordination from 1750 to 1950 can be estimated to have been between 85 percent and 95 percent in India and between 50 percent and 70 percent in China. This brutal regression between 1750 and World War II

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was a consequence of India’s being a colony during the whole period, and China a semicolony since the Second Opium War (1858), while Latin America, which was independent from the beginning of the nineteenth century, experienced some economic development during this period. Since independence, the Asian countries started developing fast. Three dynamic Asian countries—South Korea, Taiwan, and Singapore—adopted a developmental strategy based on the Japanese experience, and they were the only countries on the periphery of capitalism to successfully catch up and became rich during the twentieth century. Contemporary imperialism, since the decolonization that took place after World War II, is basically imperialism by hegemony—a soft-power imperialism based on the view that developing countries must become indebted to grow (and must “grow with foreign savings”), and must adhere to the conditions imposed by creditor countries and the International Monetary Fund (IMF) when these countries need financing to honor their interest and dividends payments. “But imperialism is something of the past,” say today’s hegemonic ideologues, who only recognize formal imperialism. This is false. Ha-Joon Chang (2002) and Erik Reinert (2007) show how politicians and economists of the rich countries continue to put pressure on the developing countries to adopt policies and conduct neoliberal reforms that those rich countries themselves did not implement when they were developing. Their books document this fact precisely and convincingly. Imperialism is alive and well today, and the more fragile and backward the country, the more violent the imperialism. To understand contemporary imperialism—imperialism by hegemony— we need to consider the common interests of the rich countries, or the imperial North. Two basic facts are important: first, they have excess capital and a great interest in occupying the domestic markets of the developing countries with their multinational corporations and with their loans; second, their workforce is costly and, therefore, uncompetitive against the workforces in the developing countries, which are able to dominate modern technology and to neutralize the tendency toward cyclic and chronic overvaluation of their exchange rates. The developed countries’ imperialism is expressed by a combination of ideological hegemony and the sheer exercise of force, ranging from the enforcement of conditions to economic sanctions. During the 1990s, at the height of its 30 years of neoliberal capitalism, the North (or the rich world) claimed to have a monopoly on liberal and democratic rationality, which it was generously transferring to the developing countries. The latter, according to the neoliberal credo, should not use the state as an instrument of their development, and should not plan investments in infrastructure or in basic material industries; they were not expected to promote their own industrialization or to manage their exchange rates (which would be impossible to do). Instead, they should keep their interest rates positive and attractive to foreign capital; open their financial

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The Political Construction of Brazil

markets; and try to grow through the accumulation of foreign savings, that is, with current account deficits and foreign currency funding. Obviously, the North insisted that the exchange rate was not an economic development issue; it did not take into account the need to neutralize the Dutch disease in order to prevent the currencies of developing countries from being chronically overvalued; it ignored the fact that capital inflows under the name of foreign savings added much to local consumption and little to investment, and eventually led an improvident country into a condition of chronic financial fragility, compelling it to enact a policy of “confidence building,” and finally to a financial crisis—a balance-of-payments crisis. The Nineteenth Century

At the beginning of the nineteenth century, Brazil was far from possessing the necessary conditions for creating its own capitalist revolution, whereas the United States had already implemented its first stage—the national revolution—and was preparing to achieve the second one, the industrial revolution. It is only from the industrial revolution on that economic development actually becomes self-sustaining. We can understand, therefore, why economic development in the nineteenth century was much faster in the United States than in Brazil. Figure 2.1 shows this very clearly: From 1870 on (there are no reliable data for before that date), the per capita income level of Brazil fell far behind that of the United States. In 1870, Brazil’s per capita income was 27 percent of that in the United States; by 1907, it had fallen to 10 percent. The increasing gap over that period was driven by the industrial revolution that the United States was experiencing. Brazil’s capitalist revolution took place much later, between 1930 and 1980. Again, as seen in Figure 2.1, during this period—or, more precisely, between 1925 and 1980—Brazil was involved in a clear catching-up process, and Brazilian per capita income rose rapidly, in 1980 reaching 31 percent of that enjoyed in the United States. Yet, since that year Brazil and many other Latin American and African countries faced a major financial crisis—the 1980s Foreign Debt Crisis—and stagnated during that decade. Afterwards, Brazil never experienced satisfactory growth rates, except for the period from 2006 to 2014, when it profited from a commodity boom. This meant more catching up, as we can see in Figure 2.1, and raised hopes that the country was resuming its economic development. But the faster growth was solely the consequence of the commodity boom. Therefore, from 2010 to 2015, Brazil was again growing at a rate below that of the United States. The decisive backwardness of Brazil in relation to the United States emerged, therefore, during the colonial period, mainly in the eighteenth century, because mercantile colonization did not establish the conditions for a capitalist revolution in Brazil, whereas colonization by settlement suc-

Colonial Constraints: Why Brazil Was Left Behind

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Figure 2.1: Brazil Catching Up, 1870–2014 (Brazil’s income per capita as a percentage of the US rate)

Sources: Angus Maddison (2003) and Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. Note: Observations are as follows: (1) constant values are adjusted for purchasing power parity; (2) United States = 100.

ceeded in doing so in the North. Nevertheless, in the context of the newinstitutionalist intellectual wave that took the social sciences by storm during the 30 neoliberal years, there were a number of analysts who insisted on placing the origins of Brazil’s underdevelopment in the nineteenth century. The new institutionalist explanation for Brazil’s being left behind originated with Douglass North (1990), and includes Stephen Haber and Herbert Klein (1997) and Nathaniel Leff (1997). Based on data collected by Angus Maddison for the Organisation for Economic Co-operation and Development (OECD)— including the fact that Brazil’s per capita income in 1820 was 50 percent of that in the United States, yet in 1900 it was 17 percent—they concluded that Brazil’s relative backwardness emerged in the nineteenth century. They came to this conclusion in their capacity as “scientists of history,” cliometricians who used economic theory and econometrics to understand history. Brazilian institutions in the nineteenth century did not sufficiently guarantee property rights and contracts, as they did in the United States. They thus repeated that the neoclassical and neoliberal new-institutionalist motto to which they referred in capital letters: “New Economic History.” If we take into consideration only the numbers, it seems that our historians are right. Indeed, during the colonial period, Brazil’s per capita income declined vis-à-vis that of the United States by a much smaller degree than it

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did during the nineteenth century. But this difference has its roots in the colonial period: during that time, the United States built the necessary conditions for its industrial revolution, while Brazil did not. The true explanation for why Brazil was left behind by the United States is that the type of colonization that occurred in Brazil—the mercantile colonial system—was based on slave labor and the plantation system that did not create the space for the education of the population, the rise of a middle class or a domestic market, the establishment of capitalist institutions guaranteeing property rights and contracts, or industrialization, while the settlers’ colonization that occurred in the United States created the ideal conditions for an industrial revolution. With regard to level of education and to the existence of effective institutions, there is no doubt that in 1820 they were much better in the United States than in Brazil, much better than the difference in per capita income suggested. This is why the United States was able to achieve its industrial revolution in the nineteenth century, and grow much more quickly than Brazil, whereas Brazil did not achieve substantial growth until the twentieth century. Recently Alexandre Rands Barros adopted the same mistaken line of thought of the cliometrists, but he distinguished the “proximate” causes of the relative economic backwardness from the “ultimate” causes, and defined the latter ones in an innovative way based on the types of colonization: “The ethnic and cultural diversity of the Brazilian population led to a low class consciousness, and, consequently, low organization to demand better access to public education of some quality” (Barros 2016, p. 7). The Legacy of Slavery

The Industrial Revolution and the French Revolution opened the way for an industrial bourgeoisie in Western Europe to establish wage labor and to guarantee civil rights in a bourgeois or liberal state. Brazil’s independence took place under the impulse of the same revolutions, but there was no transition from a literate agrarian society to a capitalist society, so the slavemercantile system of the colony remained. Consequently, the building of an independent nation-state had, in the analysis of Wilma Peres Costa (1993, p. 152), “a paradoxical effect: to reiterate the economic heteronomy that kept these [Latin-American] economies dependent on the capitalist center as a practical condition for their political sovereignty.” The slave system was, therefore, a guarantor of the stability of the empire because it kept the landowning elites connected to the state, but it was also a major obstacle to the economy’s development, insofar as it did not create, on the supply side, an educated workforce and, on the demand side, a domestic market. Both of these are basic conditions for industrialization. The slave system began to falter only in 1850, with the extinction of the slave trade; and ended even more recently, in 1888, with the abolition of

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39

slavery. This was at a time when the system had already lost all economic functionality, and had become a moral fault, indefensible for a society that intended to be liberal and modern. Since that time, Brazil began to experience capitalist economic development or, more precisely, a first attempt at such development. Although it was an independent country, during the Empire the ability of its elites to mobilize society for economic development inspired by nationalism was very limited. The colonial and slave heritage was, in this matter, a crucial issue. As István Jancsó (1993) observes, The national [project], in the sense that it emerges from the bourgeois revolution, identifying the nation’s sovereignty with a sovereign state, was a project to be invented in Latin America, insofar as it did not rest on historical antecedents that could necessarily lead to the identification of the administrative divisions of Ibero-American empires as emerging national states. (p. 3)

Brazil’s imperial elite remained an elite of landowners to which was added a small elite of senior patrimonial bureaucrats. Neither of them had any clear idea of Brazilian nationhood, given their cultural subordination to Britain and France. These elites had a colonial inferiority complex and a desire to be “European.” Associated with the mixed-race nature of the Brazilian people and with the low level of the country’s development, this desire made it difficult to define a national project, which would be necessary to overcome underdevelopment. When Brazil, from the 1930s on, at last achieved its capitalist revolution, it had to address not only the problem of economic backwardness, but also the profound inequality in Brazilian society. One cause of this inequality was the existence of a large number of poor Brazilians, the caboclos, living at the margin of the export agricultural system. But the major cause was certainly the broad and durable slave system. As Cardoso (2010) notes: Slavery left in [Brazilian society] much deeper marks than the accumulated knowledge on the subject is willing to accept. Not only was the capitalist sociability molded by the inertia of the slave order, but also the capitalist state built in Brazil’s fourth century was structured by slavery, to support it. (p. 18)

According to the author, what he calls “institutional inertia” transferred this social order from generation to generation, making it difficult to problematize slavery as a social issue relevant to the sustainability of the order. “In this sense, Getúlio Vargas represents a significant rupture with the dynamics inherited from slavery, by renewing the structure of the capitalist state to incorporate that issue into its own core” (2010, p. 27). But, as Cardoso would later argue in his book, Vargas initially limited himself to breaking this order with regard to the urban workers. He did not feel strong enough to confront the interests of the rural elites, despite being conscious of the need to incorporate the rural workers into the new order that was being built,

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The Political Construction of Brazil

as he particularly demonstrated in a speech on May 1, 1941. The abolition of slavery gave rise to a huge group of social outcasts: the free workers, usually blacks or people of mixed-race, who were victims of exploitation and discrimination. Even before abolition, in the 1850s, landowners in the state of São Paulo had clearly rejected free workers, opting instead for immigration to solve their workforce problem. They were probably right, given the difficulty of incorporating the caboclos into the capitalist labor order. However, this option led to the formation of a huge surplus of workers, which for more than a century would guarantee an unlimited supply of labor and low wages in the country. It was this population, stemming from the free workers and slaves, that gave rise to the ralé (rabble) that Jessé Souza (2003) refers to with appropriate indignation. The rural and urban sub–working class, which originated in slavery, would have enormous difficulty integrating into the capitalist society that was then being formed. Joaquim Nabuco (1883) had already foreseen this difficulty, noting: After the last slaves had been set free from the sinister power that represents to the black race the curse of the color, it will also be necessary to dismantle, through a vigorous and serious education, the slow stratification of three hundred years of captivity, that is, of superstition and ignorance. (p. 27)

The prominent Brazilian sociologist Florestan Fernandes classically developed his analysis of Brazilian inequality rooted in slavery through his research in São Paulo, presented in The Integration of Black People into Class Society (1965). In the summary of his findings, he notes: Several factors simultaneously occured to prevent the “colored people” of the capital from developing any kind of joint and conscious reaction to the social problems that tormented them. On the one hand, pauperism and social anomie led to collective disenchantment and to chronic discouragement. On the other hand, the predominance of the “white race” operated so as to maintain the archaic models of racial adjustment, with all the burdens they involved regarding the “black people,” from passiveness to a distorted perception of reality. (vol. II, p. 5)

Jessé Souza (2003) summarizes Fernandes’s view as follows:

Here Florestan addresses the key issue not only for his whole argument in the book, but also for the building of my own argument below, namely, the issue of the psychosocial organization that is a premise of capitalist activity and that requires a pre-socialization in a predetermined sense, which the former slave lacked, in any significant measure. (p. 155)

Capitalism is an essentially competitive way of organizing production, and for this competition, which is often fierce, an appropriate psychological preparation is required. In the societies that developed capitalism first, the

Colonial Constraints: Why Brazil Was Left Behind

41

preparation of the population for this process of competition took centuries, during the period of mercantile capitalism, and then accelerated in the nineteenth century to adjust the workforce to the demands of the new industrial society. Public education played an essential role in this process. The child learned the two basic methods of communication and reasoning—the national language and arithmetic—as well as a vision of history that was also a vision of civic rights, obligations or virtues, and nationalism or patriotism. In that way, the young man or woman was prepared to later follow his or her parents, sign an employment contract, and become a blue-collar worker or a white-collar employee—a part of the system. And although at a great disadvantage, they were ready to try to compete with their superiors for a place in the sun. However, none of this was possible for the poor and illiterate populations that were leaving slavery. The former slave was not prepared to sell his labor, let alone to ascend socially. It is not surprising, therefore, that capitalist Brazil became characterized by radical economic and political inequality. In other developing countries there is also a high level of social inequality, but it is usually lower than Brazil’s because it derives simply from the existence of an unlimited supply of labor, and not from the conditions for former slaves. Social exclusion and radical inequality lasted throughout the Nation and Development Cycle. The situation changed only when Brazil completed its capitalist revolution, around 1980, and the democratic transition of 1985 took place. The change intensified in the 2000s, when there were clear indications that the country had reached the Lewis Turning Point, which means that the unlimited supply of labor that classically characterizes developing countries had finally ceased to exist.9 Among these indications, the two most important ones are, first, when wages no longer increase at a rate below the increase in productivity, but at the same rate, if not above it; and, second, when the percentage of workers without formal employment contracts diminishes. As a result, the advantage of a country that achieves its industrial revolution in the context of a labor surplus and low wages disappears, a situation that leads some economists to talk about a “middle-income trap.” This is actually a problem, but the veritable trap in which Brazil was caught after consolidating its capitalist revolution was the trap of economic liberalism, which led the country, between 1990 and 1992, to undertake a hasty and ill-conceived trade and financial opening, which had as an unexpected consequence the dismantling of the mechanism embedded in the trade regime that neutralized Brazil’s Dutch disease. From then on, Brazil fell into the trap of high interest rates and an overvalued exchange rate. The relative abandonment of the social exclusion orientation that came together with the transition to democracy in 1985 is also manifested in the strengthening of movements supporting the interests of blacks in Brazil, which have gained a strength and consistency that Fernandes complained had not existed before. From the democratic transition on, the myth of racial

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The Political Construction of Brazil

democracy or of the lack of racial discrimination lost power, and the blacks began to see their rights acknowledged, to the extent of benefitting from a system of racial quotas for entry into universities. As Luiz Felipe de Alencastro (2010, p. 1) writes, “Racial quotas have benefited and still benefit tens of thousands of students in private universities in the context of ProUni (Pro University Program),10 as well as fifty-two thousand students in public universities, in several years of operation, with a great deal of benefit to the students and to the country.” All this was unimaginable in Brazil in the nineteenth century and for a good part of the twentieth century, but it became a reality with the 1988 Constitution and with the social improvements at the beginning of the twenty-first century. Notes

1. In this book I use the common expression, “developing countries,” which can include poor, preindustrial, and middle-income countries, instead of the expression “underdeveloped countries.” In doing so, I am not denying the obstacles created by industrial and hegemonic imperialism to these countries, but just suggesting that they have nonetheless been developing, albeit unsatisfactorily, achieving rates of growth insufficient for catching up. 2. See Elide Rugai Bastos (2006, p. 14). 3. Sílvio Romero (1902, p. 103) had previously praised Brazil’s racial mixture. For him, “the mixed-race individual is the physiological, ethnic and historical product of Brazil: it is the new form of our national differentiation.” Euclides da Cunha followed the same path when he offered his classic description and praise of the sertanejo (inhabitant of the backlands). 4. The two subsequent phases or moments experienced by the nations that achieved their capitalist revolution were the formation of the nation-state or national revolution, and the industrial revolution. 5. See Ignácio Rangel (1953, 1981) and Celso Furtado (1966). 6. This view, which was part of the associated dependency interpretation, can be seen, for instance, in Francisco de Oliveira (1972) and in Boris Fausto (1972). 7. I refer to D. João I, Mestre de Aviz, who, in April 1385, amidst a popular revolt and civil war, was declared the king of Portugal by the Cortes of Coimbra. The support of the rising Portuguese bourgeoisie was key to the new monarch’s achieving power. 8. Catching up is the historical process through which countries reach the level of development of the countries that had experienced their national and industrial revolutions first and are currently wealthy. 9. This became known as the “Lewis Turning Point” because Arthur Lewis (1954) was the author of the classic paper on the unlimited supply of labor that exists in developing countries. 10. Through this federal government program, scholarships were offered for the first time to private university students. Prior to this, only the public universities were supported by the government.

3 For Reasons of State: Territorial Integration

The Empire was the time of the State and Territorial Integration Cycle. When, in the 1950s, I had my “introduction to Brazil” by reading the works of the developmental or nationalist intellectuals at the Higher Institute of Brazilian Studies (ISEB), I learned that Brazilian history was divided into three periods: colonial, semicolonial (the Empire, 1822–1889, and the First Republic, 1889–1939), and the period of the national and capitalist revolution. I accepted this periodization, but have always been bothered by the idea that all the Empire’s major political players had ultimately ruled during the semicolonial period. In fact, during that time there was neither nationalism nor the idea of becoming a nation, as cultural subordination to Europe was very strong. But it is impossible to deny that there were two great political achievements in imperial Brazil: the formation of the Brazilian state (i.e., the building of the constitutional and legal system, and of the public administration that guaranteed it) and the integration of Brazil’s territory. In other words, the law of the state was extended to the country’s whole population (granting “stateness” to Brazilian society), thereby preventing political and territorial division. This is why I see the Empire the time of the State and Territorial Integration Cycle—a period dominated by an oligarchic pact uniting landowners, import and export traders, patrimonial bureaucrats, and foreign interests. But we should not be fooled: both during the Empire and the First Republic this “stateness” was only relative. D. Pedro I proclaimed the independence of Brazil in September 1822. Although there were exceptional individuals in the history of the Empire, the patriarchal and patrimonial elites who then ran this state would not immediately forge a nation. Independence was rather an agreement within the royal family, in the historic context of the subordination of Portugal to England, and not a conquest by those elites, which, during the Empire and the First Republic, would remain dependent on Britain and France, unable to formulate a project 43

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The First Cycle: State and Territorial Integration

of national development. But this did not prevent Brazil from having its heroes of independence, as stressed by José Honório Rodrigues (1975). In Rio de Janeiro, they faced the Portuguese who were part of the imperial government and the major traders, who were aligned with Portugal. Among them, we can point out the Andrada brothers (José Bonifacio, Martim Francisco, and Antônio Carlos), Joaquim Gonçalves Ledo, and José Clemente Pereira. Practically all historians emphasize the role of José Bonifacio de Andrada e Silva. Along these lines, Ana Rosa Cloclet da Silva (2006, pp. 383 and 411) wrote about the “invention of the Brazilian nation” with José Bonifacio as the key figure. In fact, Bonifacio first formed a general view of the United Kingdom of Portugal and Brazil and later, with realism and determination, outlined a national project, fighting for a “Brazilian Empire embodied in the very figure of D. Pedro I,” and for a constitutional monarchy in which “unity would be forged, from a situation attesting to the diversity.” But he was one of those exceptional individuals in the context of the mediocre Brazilian elites of the time. And his major contribution was the formation of the Brazilian state, which, as we will see, is not the same thing as a Brazilian nation. As this historian concludes, “If Brazilian integrity held, it was rather due to its own conservative meaning—expressed in the interest of the elites in perpetuating deeply rooted social, ethnic, and racial hierarchies—than due to the consolidation of a feeling of national identity.” In the nineteenth century, the “stateness” issue—the affirmation of the power of the state and of the state’s laws over the whole Brazilian territory— was the basic issue faced by the Brazilian society in the making.1 There was no national integration at the material level or at the level of values and beliefs. The difficulties of communication and transportation were immense. Revolutions seeking provincial autonomy, slave rebellions, and the appearance of jagunços, or warlords who dominated large regions, were recurrent problems.2 In 1822, the small Brazilian population (about four million people) spread across a huge territory could not be considered a nation. But the state— a patrimonial state inherited from Portugal—was already a reality. Despite all the reservations we may have about Portuguese colonization, the state that the king of Portugal, D. João I, brought with him when he arrived in Brazil with his court in 1808—with its laws, its practices, and its patrimonial bureaucracy— was a major inheritance that Portugal gave to Brazil. This bureaucratic apparatus and legal system, plus the constitution that Brazil’s political elite discussed and approved after independence (the 1824 Constitution), served as the basis for the new state. With two of its princes becoming emperors, the legitimacy of the Portuguese Crown was transferred to the government of the country during the whole Empire period. This way, the classic concept of “divine origin” of the kings’ power was reproduced in Brazil. But, as Lilia Moritz Schwarcz (1998, p. 16) observes, “In Brazil, religion and royalty are connected in a very peculiar way . . . as the monarchs reach sanctity, the saints,

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when greatly adored, reached royalty.” The figure of the emperor in Brazil— specifically, D. Pedro II—had nothing in common with the European absolute monarch who, in association with the bourgeoisie, built a nation-state. The territorial unity and relative political stability achieved owed much to the royal lineage of both emperors. Territorial integration was also due to the new elite formed by a patrimonial bureaucracy and by slave traders, associated with the old elite of landowners and slave owners. But neither the emperor, shrouded in sanctity, nor this heterogeneous and dependent elite were able to build a nation in the Brazilian tropics. I have not subdivided the Oligarchic Pact, but it could be done. In the midnineteenth century, the suppression of the slave traffic, the Land Act, and the beginning of wage labor in Brazil due to the planned immigration of European workers marked a significant change in the country’s politics and, above all, in its economy. The change in Brazil’s political center from the Northeast to Rio de Janeiro had already taken place in the mid-eighteenth century as a result of the discovery of gold in Minas Gerais, but only a century later would the country’s economic axis be transferred to São Paulo, due to the development of the coffee crop. The emergence of coffee cultivation had no significant support from the state; it resulted from the initiative of an agrarian bourgeoisie that had abandoned slave labor, and was able to profit from the opportunity presented by coffee production to evolve from mercantile and patriarchal capitalism into a capitalism in which the modern idea and practice of productivity were already present, albeit incompletely. Initial Precedence of the State

In the chronology of the state and society, the society (i.e., the nation) generally precedes the state. But this was not the case with Brazil. Regarding the early phase of its development, in the classic debate about which played the leading role in the construction of Brazil, whether the society or the state, whether the nation or the patrimonial elite that ruled the state during the imperial period, there is little doubt. Just as had occurred in Britain and France, the leading role was initially played by the state—an absolutist state, which served as the framework for mercantilism in those countries. In Brazil the state claimed to be liberal, but was instead absolutist and patrimonial.3 In the dialectical relationship between society and the nation-state, the latter prevailed during the State and Territorial Integration Cycle. Therefore, a huge patrimonial bureaucracy commanded the country politically. Together with the landowners, it built the Brazilian state, while integrating the nation-state. But we should not conclude that the patrimonial bureaucracy dominated Brazil. Raymundo Faoro’s (1975) analysis was innovative and had first-class followers, such as Maria Isaura Pereira de Queiroz (1969) and Décio Saes (1985). Its

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The First Cycle: State and Territorial Integration

greatest merit was to recognize that, with independence, the nature of power changed in Brazil because to the power of the landowners and major traders was added the power of a patrimonial bureaucracy. But the broader interpretation offered by Caio Prado Jr., Ignácio Rangel, and Celso Furtado regarding the patriarchal nature of the social and political structure of Brazil remains essential. In order to understand the modest growth of the Brazilian economy during the Empire, one must keep in mind the key fact, stressed by Rangel and Furtado, that the patriarchal and mercantile bourgeoisie were indifferent to technical progress and productivity. These interpretations are closer to the reality of pre-1930 Brazil. John D. Wirth (1977), Robert M. Levine (1978), Joseph L. Love (1980), and Love and Bert J. Barickman (1989), conducted studies on Brazilian political elites of the period between 1889 and 1937.4 For instance, Love and Barickman looked at the elites of Minas Gerais, Pernambuco, and São Paulo, and observed that the parents of 57 percent of those accounted for were landowners, as opposed to 14.3 percent whose parents were bureaucrats and 24.4 percent whose parents were lawyers.5 As for their children, two-thirds were lawyers and only a fourth were landowners. Clearly, the origins of the elites lay in the rural patriarchate, but as they received law degrees and became politicians, they were paid by the state under a patrimonial system. Two-thirds of the members of the elites had a law degree, but they sprang fundamentally from the landowner class. Although it was basically a mercantile capitalist system, elements of a patrimonial system were still present. Love and Barickman (pp. 8–9) found that those elites had strong connections outside the country. In addition, those with foreign connections tended to be the most proeminent politicians. One-fifth of the whole lived abroad for at least six months.” This elite was conservative, and became the most effective force in the construction of the Brazilian state because it knew that the state represented law and order. However, it engaged in this task with difficulty because its colonial experience had been eminently “privatist,” rather than public. That is, the appropriation of the economic surplus was done through slave labor in a setting where the supremacy of the landowner over the slave belonged to the private sphere; it was a supremacy guaranteed by the capital, by the Brazilian government, and by the landowner’s private armed forces. Here, as stressed by Wilma Peres Costa (1993 [2001], p. 153), “the formation of the state was done by maintaining and enforcing slavery, a specific form of privatism, in which the preservation of a private sphere of the exercise of violence is a premise of and a condition for its existence and preservation.” Therefore, after independence the colonial elites strongly resisted D. Pedro I’s effort to form a public armed force with the participation of foreign mercenaries, so much so that this resistance would be one of the causes of his abdication in 1831. This is why, the author adds, “the demarcation of public lands, the basis for the institution of the land tax or, as in the United States, a fundamental source of public income through its sale to individuals, was repeatedly frustrated.”

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The construction of the state during the Empire was not oriented toward the construction of a nation. Brazilian elites did not have a negative attitude toward imperialism, which usually follows the formation of a late-developing nation. They were unaware that industrial or modern imperialism was limiting the country’s development, and they were convinced that the country should not pursue industrialization. As Adrian Gurza Lavalle (2004) observes, referring to the nation-building issue, “The impossibility of admitting the existence of the nation-state as a given of the nineteenth century was a blind spot for a good part of Brazilian political and social thought.” The elites were, therefore, unable to build the nation-state as a nation, and instead built it as a state and a unified territory. In other words, the state did not rely on the nation to be established as such. When we say that during the Empire the state preceded the society, this is only true if we think in terms of a national society. If we take into account Brazilian patriarchal society, it preceded the state and established strong limits on its construction, which would only be overcome during the following cycle of the relationship between society and state, the Nation and Development Cycle. According to Adalberto Cardoso (2010, p. 86), the result was a “feeble state.” The process of building a state is the process of spreading its laws and the enforcement of those laws throughout the whole territory. As for the Brazilian state during the Empire and the First Republic, large sectors of Brazil continued to be dominated either by coronéis (plantation owners), who dominated local politics, or by jagunços (warlords). In Cardoso’s (1986 p. 86) words, this meant, using Karl Polanyi (1944) as reference, that the slave inheritance “structured the capitalist state among us, a state that, unable to extend to the private world its public regulation and unable to create mechanisms to ‘protect society,’ became itself the agent of the reproduction of hierarchies and social inequalities” The State and the Territorial Integration Cycle involved a pact that was strictly oligarchic, both under the Empire and the First Republic; in fact, the pact claimed to be liberal, but the political liberalism (which, unlike economic liberalism, is an achievement of mankind) was only rhetorical, as the civil rights of the vast majority of the population were not guaranteed.6 Economic liberalism, for its part, was not based on the domestic market; that market hardly existed. Rather, it was based on Brazil’s economic relations with the rich countries—first Britain and France, and by the end of the nineteenth century, the United States as well. The Oligarchic Pact also claimed to be national, but there was no nation to support it. The formation of a nationalist party in Pernambuco in 1842, the “Partido da Praia” (“Party of the Beach”), and its defeat during a civil war that became known as the “ Praieira Revolution,” are good illustrations of the absence of a nation. As Izabel Andrade Marson (2013) describes in a fascinating article, the Partido da Praia assumed control of the province of Pernambuco in 1845. It was a liberal party, representing the local petty bourgeoisie and the agricultural interests associated with the banguês

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The First Cycle: State and Territorial Integration

(small sugar cane mills). Whereas the local conservative party “had promoted activities aligned with the ‘free trade policy’ and with the interests of the major landowners, traders, exporters and financiers—often foreign,” the Partido da Praia enabled “a large number of citizens to have access to public affairs and jobs, measures that, in general, pleased the owners of sugar cane mills and medium-income traders, craftsmen, and small tradesmen of Pernambuco, who constituted the party’s electoral bases.” The oligarchy reacted mercilessly to the revolutionaries. This local event reflected the whole country’s political framework—its fundamentally authoritarian, anti-democratic character. As emphasized by José Murilo de Carvalho (2012c, p. 391), the electoral system of the period began relatively democratically, ensuring voting rights to roughly 10 percent of the population, but this percentage was gradually reduced, dropping to 1 percent with the 1881 electoral reform. Subsequently it rose again, but “the 10 percent participation level was only exceeded from 1945 on, sixtyfour years after the 1881 law.” Territorial Unity

Given how small the elite was, how did Brazil maintain its territorial integrity? The usual explanation for the preservation of the unity of Brazilian territory is that the figure of the emperor was important, and there was the need to ensure a gradual increase in “stateness” by submitting the whole population to the rule of law. This stands in contrast to the former Spanish colonies, which were divided into many countries. This explanation is good as far as it goes, but we need to stress two additional facts: the work performed by the politicians and the military during the Empire, and the problem of slave traffic. The conservative patrimonial political elite, representing its own interests and the interests of the landed and mercantile classes, contributed to the formation of the state and to the country’s territorial integration. But, on the one hand, it was involved in the slave traffic and in agricultural production for export; and, on the other, it was culturally dependent on Europe. These two factors made it economically liberal regardless of the affiliation of its members with the Liberal or Conservative Parties, as they supported a policy of free trade, which benefitted the elites. The patrimonial political elite had no idea of nationhood or of national and industrial revolution. Brazil thus lived out of time. At the literary level, there was a celebrated Brazilian Romantic nationalism in the nineteenth century, initially led by Gonçalves de Magalhães, which, due to the participation of D. Pedro II, became official policy. However, as Lilia Moritz Schwarcz (1998, p. 140) notes, in that literature “the subjects were national, but the culture, rather than popular, was increasingly aristocratic and oriented to simply aestheticize the local nature.” As Alfredo Bosi (2012, p. 230) observes, it was a relative nationalism: “The fusion of nation-

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alism and Romanticism is one of those half-truths that predominate in the discourse not only of Brazilian cultural history, but Latin-American as well.” Its true nature lay in writers such as Gonçalves Dias and José de Alencar, but the “half mistake” was that “Álvares de Azevedo and Junqueira Freire, quintessential Romantic poets of the so-called second generation, did not make nationalism their supreme ideal.” On the contrary, they generally opposed it, either because the manufacturing industry would be something “artificial” in Brazil or because Brazil was “an essentially agricultural country.” Another significant factor singled out to explain the preservation of Brazilian territorial unity during the Empire was the slave traffic. Luiz Felipe de Alencastro provided the classic analysis (1979, 2000, 2006) of this argument. For him, after the declaration of independence, what maintained Brazilian national unity was, perversely, the union of the interests of the landowning oligarchy with the slave traffickers who had long since established a triangular relationship among Portugal, Angola, and Brazil. The system was maintained after independence, with Portuguese traffickers being replaced by Brazilian ones. But after the Industrial Revolution, Britain no longer accepted the slave system: it wanted a market for its manufactured goods, not self-sufficient slave plantations. British pressure would be strong. It led, in 1831, to the legal suppression of the traffic, though the law soon became a dead letter. Nonetheless, with increased British pressure, the political and bureaucratic center in Rio de Janeiro became convinced of the need to suppress the traffic—which occurred in 1850, concurrent with the approval of the Land Act by the Brazilian parliament. There was an obvious agreement between the patrimonial bureaucracy and the big landowners— the two major factions of Brazil’s imperial elite. The traffic was eliminated, but, as a kind of compensation for the landowners, unused public lands were regulated, limiting the access to all kinds of squatters. At the same time, the most modern sector of the agricultural exporting oligarchy—the coffee planters, who faced a manpower shortage—was served by the beginning of a policy of incentives for European immigration. These dramatic changes finally marked the end of the colonial system. They did not mark the end of dependence on Britain, but they indicated that the Oligarchic Pact had finally achieved consistency and that Brazilian unity, under the command of a landowning oligarchy and patrimonial bureaucrats, was consolidated. Two Complementary Interpretations

Brazilian society was a strictly patriarchal, slave-based, and mercantile society until the mid-nineteenth century. Things begin to change with the expiration of a preferential business treaty with England, which prevented any industrialization; with the inflow of an ever-increasing number of European immigrants after the extinction of the slave traffic in 1850; and with the greater weight of

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a patrimonial bureaucracy within a state in the making. The expiration of the treaty enabled the Alves Branco Tariff of 1844, which had fiscal and protectionist impacts and, from both angles, strengthened the state. European immigration, for its part, resulted from a state policy sponsored by the coffee growers in the state of São Paulo. The coffee boom at the beginning of the nineteenth century in the Paraíba Valley had first led to the reinforcement of slavery. However, as noted by Emília Viotti da Costa (1966, p. 14) in her analysis of the slave system in São Paulo, “From the second half of the nineteenth century on, as coffee expanded, searching for virgin lands, and new areas were opened up, the system began to disjoint and the country moved once and for all into free labor.” The Brazilian government bureaucracy, comprising both the aristocratic patrimonial bureaucrats, who occupied the key positions in the Empire, and the socially modest rising technobureaucracy, which thrived in the army, was now a significant element in Brazilian politics. Therefore, during the mid-nineteenth century the Brazilian state began to structure itself and to show a certain ability to promote the country’s development. The newly founded and strengthened Conservative Party, together with the Liberal Party, contributed to this result. After D. Pedro II was declared to be of age, the Conservative Party, which assembled a coalition of the major rural landowners, the foreign traders, and high government employees, overpowered the Liberal Party, which advocated the decentralization of power. This assurance of the centralization of political power was important for consolidating the state. Brazil had been an independent country since 1822, but only at this moment would the country start to have a state worthy of the name—with a sovereign constitutional and legal system and with a public structure that could reasonably guarantee this system. Brazilian society was building its state in Rio de Janeiro. At this point, it was no longer just a mercantile and patriarchal society of landowners, as it had been in the colonial period, when a bureaucratic patrimonial status group was formed to manage the oligarchic state. Now, Brazil’s dominant class comprised not only an oligarchy of landowners and big traders, but also a status group of public patrimonial bureaucrats. Formerly, the prevailing view—shared by both liberal authors such as Gilberto Freyre (1933, 1951) and Nestor Duarte (1938), and by Marxist developmentalists such as Caio Prado Jr. (1945) and Ignácio Rangel (1953)—situated the political power during the Empire and the First Republic in an oligarchy of landowners that was also mercantile. The economic and political leaders of Brazil were, during the first stage, the sugar mill owners of the Northeast and the cattle breeders of the sertão (arid outback); during the second stage they were the first coffee growers of the Paraíba Valley; and, finally, the coffee growers of the western part of the state of São Paulo. Freyre (1933), who was not only the great analyst but also the great defender of the oligarchy of landowners, viewed the oligarchy as an aristocracy:

For Reasons of State: Territorial Integration

The great colonizing factor in Brazil, since the sixteenth century, is the family, not the individual nor even the state or any trading company; it is the productive unit, the capital that pioneers the land, sets up the farms, buys slaves, cattle, tools, the social force that turns political, becoming the most powerful colonial aristocracy in America. (p. 19)

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Freyre could not have been more emphatic. According to Rangel’s classic analysis, the oligarchy in the colonial period also included landowners who, internally, dominated the large plantations in a patriarchal way, while externally they already constituted a mercantile bourgeoisie. An urban mercantile bourgeoisie of importers, exporters, and slave traders appeared in the nineteenth century, and began sharing power and privileges with the rural patriarchate. Prado’s (1945) Marxist analysis follows the same path. But he emphasizes the mercantile nature of colonization, that is, the existence in Brazil of a historical form of capitalism that was not fully developed. As an indication of the limited development of the country in the mid-nineteenth century, roughly 60 percent of the tax resources of the Brazilian state came from the export and import trade, not from the domestic market. Faoro presents an interpretation that claims to be alternative to the idea of the patriarchal and mercantile nature of Brazilian society, but is actually complementary, saying that the state was patrimonial in nature, rather than patriarchal and mercantile. Sérgio Buarque de Holanda (1936, pp. 105–106) was the first one to use the concept of patrimonialism to characterize Brazilian political elites. Distinguishing the “patrimonial employee from the pure bureaucrat,” he observes that “it was not easy for those holding public positions of responsibility, formed by such an environment [patriarchal family], to understand the fundamental distinction between private and public domains.” It is this literate and conservative political elite that commanded in an authoritarian or oligarchic way. There was no democracy. Elections were a farce. The educational and social distance between the political elite and the rest of the population was huge. Faoro starts from this analysis, but gives it a wider dimension, in Os Donos do Poder (The Power Owners, 1975). Using the Weberian concept of a patrimonial bureaucracy, he argues that political power in Brazil was concentrated in an aristocratic and bureaucratic status group of legal experts, learned people, and the military, who derived their power and their revenues from the state itself. He does not deny the existence of those social actors, but reverses the reasoning, saying that the patrimonial status group running the state structure was the actual ruling class, not the landowners. For him, Brazil had reproduced the system set up in Portugal in the fourteenth century by Dom João I, the Master of Aviz, which was originally based on an aristocratic status group. Consisting of a decadent nobility that had lost its income from the land, the Brazilian status group also became increasingly bureaucratic with the inflow

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of learned people, but without losing its aristocratic nature. This status group was no longer landed because it did not derive its income from the land, but it was patrimonial because it derived its income from state property, which was partly confused with the property of each one of its members. The state collected taxes from various social classes, particularly the mercantile bourgeoisie, that were used to maintain the dominant status group and the large body of mid-level employees who were connected to it by all kinds of ties. Faoro is well aware that his theory conflicts with both the Marxist and liberal points of view, and does not hesitate to take a stand against both: “The criticism of liberal origin is paradoxically joined by the Marxist criticism. The old capitalism—equated, for the sake of school simplification, with feudalism, or with pre-capitalism—will be devoured by the industrial capitalism” (1975, pp. 734–736). Now, he argues, Brazilian historical reality demonstrated the centuries-old persistence of the patrimonial structure, proudly and inviolably resisting the progressive repetition of the capitalist experience. It adopted capitalism’s techniques, machines, enterprises, without accepting its soul, eager to transmigrate. (p. 734)

Fernando Uricoechea (1978) adopts a similar view, though more moderate: he sees the imperial administration as patrimonial or stipendiary, but stresses that the large plantation was the basic stipend that the Portuguese Crown granted to the settlers.7 The contributions of José Murilo de Carvalho (1980) and Luciano Martins (1973) follow the same path, emphasizing the role of the patrimonial bureaucracy in Brazilian society. Faoro and those who followed him offered a new vision of Brazil, not of a Brazil shaped by the colonial period, but one dating from the imperial period (1822–1889). After independence, a state was formed in Brazil that, due to its own importance and relative autonomy, resulted in the appearance of a second power group in addition to the agrarian-mercantile oligarchy: the patrimonial bureaucratic status group.8 The decisive role of the government bureaucracy at that time remains obvious from his works; that role was played by a bureaucratic and patrimonial status group of aristocratic origin, similar to the one that dominated Portugal. It was connected by family ties to the rural patriarchate in Brazil. While the landowners, the big traders, and the slave traffickers handled the economy, this status group dominated the state and politics with relative autonomy. For Faoro, there was a clear distinction between the dominant class of landowners and the ruling class of patrimonial bureaucrats, but he eventually takes this reasoning too far. Even if we could and should make a distinction between the two groups, the family ties and the relations of dependence between the political elite and the economic elite were strong. In a rural Brazil, the political power of the senior patrimonial bureaucracy depended on local elections. The poor were excluded, and the “coronel,” usually the landowner, was the decisive figure.

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The importance of this bureaucratic aristocracy during the Empire is undeniable. In his analysis of the origins of the ministers of the Empire, Carvalho points out that the vast majority of them were learned people and legal experts who could have been connected to the landowners’ families, but who were above all patrimonial bureaucrats supported by the state. At first, benefitting from their membership in status groups or from their relationships with the rural patriarchate, they studied at the University of Coimbra, and later, at the law schools of Olinda and São Paulo. With this training, they came to occupy the top positions in the Empire. According to Carvalho (1980, pp. 38–39), “what happened with the Brazilian bureaucracy partly also happened with the political elite because the latter was largely mixed up with the higher echelons of the bureaucracy.” However, the historian says, this did not mean that the imperial elite was, as Duarte (1938 [1966]) believed, “merely the representative of the rural landowners.” Nor were they, as Faoro (1975) thinks, “a solidly established status group that became, through the state, the nation’s arbiter and the owner of national sovereignty.” Maybe Carvalho makes this proviso because of the radical nature of Faoro’s position, but his historical research leans rather more towards Faoro than towards Duarte—the latter representing the Marxist and liberal conventional wisdom. Lawyers or legal experts essentially formed the Brazilian political elite, and they were usually state judges, as is peculiar to patrimonialism. In contrast, legal experts in Britain were increasingly lawyers serving the emerging bourgeoisie. The judges in Brazil presented a remarkable homogeneity provided by their law school education—a conservative homogeneity inherited from the reactionary conservatism of the University of Coimbra. On the other hand, Carvalho concludes, it is therefore clear that “the ability [of this elite] to handle conflicts between dominant groups within the constitutional rules accepted by all of them constituted the core of the imperial system’s stability.” From many angles, the work it performed, particularly during the Empire, was remarkable. But we must consider the fact that any political elite will be more culturally sophisticated than the economic elites it represents, and thus distinct from them. For a politician to be able to speak for the rural patriarchate and the big urban traders that constituted the dominant classes in Brazil, he had to be more prepared in terms of knowledge and have a different social status from those he represented. In this process, he naturally gained a certain degree of autonomy, which apparently increased as long as this political elite was deeply influenced by European culture and interests. In fact, it was a double dependence—on the economic oligarchy and on external imperial interests—that the patrimonial political elite had no alternative but to reflect, given the absence of the people or even of a civil society that could offer an alternative political base. Carvalho (1980) points out that the Empire’s patrimonial political elite lacked the power to rule on its own. Actually, what we had in the Empire was an alliance of the patrimonial status group with the mercantile bourgeoisie of

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landowners and big traders. With the prohibition of the slave traffic, the commercial bourgeoisie was transformed. At the same time, with Brazil’s increasing coffee exports, the rural oligarchy ceased to comprise mostly backward sugar cane planters, and instead became a relatively modern oligarchy comprising the coffee growers of the northern and western parts of the state of São Paulo. We had, therefore, a patrimonial and mercantile state during the Empire (1822–1889) that would extend through the First Republic (1889–1930), but the dominant class was modernizing. The power of the patrimonial status group was actually great, as Faoro stresses, but the power of the landowners remained greater. The imperial patrimonial elite stemmed above all from the landowning families, but it gradually gained autonomy through its own reproduction. What characterized this elite were its formal legal knowledge and political competence, which legitimated its power. The absolute majority of the ministers, counselors, presidents of provinces, and representatives held law degrees. We could assume that a new middle class was then emerging, a bureaucratic or professional class. However, this was not the case: it was rather a status group composed of senior politicians and patrimonial bureaucrats who were part and parcel of the oligarchy, though they did not derive their revenues from the land, but rather from the salaries they received from the state’s coffers. It was this bureaucratic, rather than a rural or capitalist group, that had the decisive role in the Empire’s ruling class—in a period still characterized by Portuguese colonization. This patrimonial bureaucratic status group cannot be identified as a technobureaucratic class because it had, due to its ties with the landed oligarchy, clear aristocratic features. In the nineteenth century, a layer of civil servants also emerged, but their positions were sinecures rather than entailing genuine work, given the patrimonial state’s role of guaranteeing them employment and survival. There is a traditional idea that one of the state’s basic functions at that time was to guarantee jobs for the poor middle class linked by family or ties of dependence to the rural landowners. According to the logic of patrimonialism, the low and the medium bureaucracy existed, not only because it was required for bureaucratic functions, but also because its members needed the jobs. As Sérgio Buarque (1936 [1969]) observes, “In Brazil only exceptionally did we have an administrative system and a body of public employees purely dedicated to objective interests and founded on those interests.” Evaldo Cabral de Mello, in his afterword to Joaquim Nabuco’s book, Um Estadista do Império (A statesman of the empire, 1997, p. 1325), points out that “the state itself could not be understood without referring to the task of absorbing, through public employment, the representatives of the slave order.” And he quotes a famous passage from the book in which Nabuco says that agriculture, besides supporting those who lent landowners money at high interest rates, “spreads the leftovers to [Brazil’s] army of public employees, who in turn support numerous dependents of all classes.” The testimonies of Tobias Barreto, Silvio Romero, and Nabuco, among others, corroborate this view.

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55

Public jobs, although they did not guarantee full stability, given the practice of “ousting” people when control of the government shifted from one party to the other, were the only jobs available for a large unemployed middle class. The political elite was recruited from this pool and from the landowner families able to pay for their sons’ university education. Public employees were part of a middle layer or middle class that was already significant.9 The gold mining cycle in the eighteenth century, as Nelson Werneck Sodré (1965 [1968], p. 69) notes, gave rise to a middle layer of society composed of all those who were not landowners, slaves, or serfs: small traders, small landowners, public employees, priests, military personnel, and craftsmen of all kinds, who were much more numerous in the city than in the countryside. Two events—the visit of the royal family to Brazil, in 1808, and the winning of independence, in 1822—were key moments in the formation of the patrimonial state in Brazil. With the growth of the state apparatus, albeit a limited one, public employees of modest social origins begin to have a political role. The senior positions of the Empire’s bureaucracy, hitherto occupied by men with aristocratic backgrounds, began to be infiltrated by external elements of lower social origins. This had already happened in the Catholic Church. When we refer to public employees, we can no longer refer to them accurately as a patrimonial status group. We may assume, however, that the administrative criteria were personal and that concern for the efficiency of the state apparatus was nonexistent. Carvalho (1980, p. 130) notes that the “unemployed middle class” referred to by Tobias Barreto and Silvio Romero, largely composed of professional people, particularly lawyers, and primarily of mixed race, felt inclined toward public employment. And he adds that it was not “everyone’s vocation, as overstated by Nabuco, but it was the vocation of urban minorities, especially of its more educated and aggressive elements.” Despite these limitations, it was the modern government bureaucracy, or technobureaucracy, that was timidly emerging, in a country where there was no easy access to government positions, particularly in the case of the navy and the judiciary, which kept its aristocratic nature. Manoel Bomfim, in his classic A América Latina (Latin America, 1905), chose “Males de Origem” [Original Woes] as the subtitle to stress that Brazil’s underdevelopment or, in his words, its “general backwardness,” was linked to the decadent nature of Portuguese colonization and to Brazil’s submission to Britain (p. 54). He says that, during the Empire and the First Republic, it was impossible to talk about a Brazilian “nation,” given the deeply dependent nature of its economic, political, and intellectual elites, and the political disorganization of its “people,” consisting of slaves, caboclos, and dependents. And there was no strong or efficient state either, as this would have also required the existence of a strong nation to guarantee its legitimacy and, therefore, its power. This lack of a nation is critical to understanding the remarkable analysis of the Brazilian state by Duarte. I defend in this chapter the argument that the

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Empire’s major achievement was the construction of the Brazilian state and its territorial integration. But the scope of this construction was limited, given the great power and the privatist nature of the agrarian and mercantile oligarchy. Duarte (1938, p. 88) carried out the first classic analysis of Brazilian state. He may have given too harsh a picture of this state’s weakness due to the rural oligarchy, but it is impossible to disagree with him. For Duarte, the semifeudal or patriarchal society that existed in the colony was largely decentralized, and could almost forgo the Portuguese state when it came to occupying the territory and organizing social life. On the one hand, given the “privatism” inherited from Portugal and, on the other hand, the lack of communications, the territorial dispersion, and the thorough political decentralization, political power “was no longer the power of the political function, but the power of the private function.” Thus, the power did not lie in the state, but in the big properties that were “absolutely independent and autonomous.” Independence did not change this picture. “The political power unfolds, however, without leaving their hands” (p. 95). On the coast, a small class of educated people appeared. “These statesmen, charged with English or French public law, repeating the language of universal democratization in such a brilliant oratory, were simply representing, without knowing it, a patriarchal society . . .” (p. 102). Consequently, despite this discourse (liberal, rather than democratic), “if the landowners as a group, when exposed to the influence of the coast, take part, at an abstract level, in the set of ideas of the other one, when they go back to their base, in their habitat, they continue to keep the traditional and organic links of their nature and character, in order to prevent the state from infiltrating this people, giving it another social meaning” (p. 106). And he concludes: The state only begins to exist beyond this [landed] order and, what is more, only acts, develops, and is circumscribed within the new circle that it opens to the state above that first circle of its direct activity. After territorially and functionally reducing it, therefore, the landed order, in turn, infiltrates it as a political class, to infuse its spirit and its nature, after imbuing it with its interests. (p. 108)

Victor Nunes Leal (1949) goes indirectly back to Duarte’s theory about the weakness and dependence of the state vis-à-vis the oligarchy of landowners with his classic book on coronelismo, the power system of the rural landlords. But there is an important difference. Although writing only eleven years later, he does not analyze the relationship between society and state in the Empire and the First Republic, but after the first administration of Getúlio Vargas and World War II. In this picture, an evolution had already taken place. The state was no longer as weak, as it had been before. Coronelismo in the quasidemocracy of the 1946 Constitution is “the result of superimposing developed forms of the representative system on an inadequate economic and political structure” (p. 20). Leal adds:

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“Coronelismo” presupposes, on the contrary, the decadence of the private power and works as a process of preservation of its residual content. We arrive, thus, at what we consider to be the central point for the conceptualization of “coronelismo”: this political system is determined by a compromise relationship between the decadent private power and the strengthened public power. (p. 252)

The Traditional Social Structure

Before 1930, Brazil was a peripheral, rural, and underdeveloped country with a simple social structure. It was a semicolonial society with almost feudal characteristics whose economy was based on farming, which was in the hands of a small group of landowners. Brazil was dominated by a small and powerful oligarchy. The landowners, who described themselves as aristocrats, were traditionally allied with the major traders dedicated to foreign trade and, after the declaration of independence, with foreign capitalism. First, they were focused on British capitalism, and later, in the twentieth century, on US capitalism as well. This oligarchy completely and easily dominated not only the country’s economy, but also its politics, as the rest of the population lacked any social groups with the awareness and political power to oppose it. In addition to this oligarchy of aristocrats, there were the popular classes, which comprised the vast majority of the population. They were basically agricultural workers. Some of them had roots in slavery; others were caboclos, descended from the first Portuguese immigrants, most of them having already undergone a process of racial mixture with blacks or Indians. They constituted a large group characterized by miserable life conditions; poverty; illiteracy; and by the low productivity of their work, carried out within a very underdeveloped subsistence economy. A third group was composed of Italian and German immigrants, as well as people from other countries, who began to arrive in Brazil in the mid-nineteenth century, many of them to work on the coffee farms. They would constitute the basis of a bourgeois middle class, as they were the main group of industrial entrepreneurs directly responsible for Brazil’s industrialization. Between the rural and commercial oligarchy and the large mass of workers was the traditional or patrimonial middle class, not very significant, but growing. It first gained a certain importance in Brazil following the declaration of independence. After the Portuguese left the country, it was necessary to organize the state and to carry out legislative, executive, and judicial functions; in short, to set up the basis of a public administration. It was this middle class, usually linked by family relations or by conditions of dependence to the upper class, that would perform those functions. The first law schools were then created to train the children of the rich families, but they would also accept members of this group. A little later, with the extinction of the slave traffic and the consequent

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prosperity brought about by coffee cultivation in the mid-nineteenth century, a class of free workers emerged. This led to the formation of an incipient domestic market and to the development of the cities on or near the coast, where trade took place. The first textile factories also appeared in the cities. In this urban environment, the middle class developed. As Sodré (1958, p. 46) observes, “The space occupied by the middle class was considerably enlarged: all kinds of urban activities, small commerce and new professions [found] a place, the army, the priests, the civil servants.” This signaled the emergence of the conditions necessary to spark a capitalist revolution. The traditional middle class, however, was growing at a faster pace than the country could sustain, given the level of economic development at the time. Originally composed mostly of distant relatives and dependents of the rich families, and biologically multiplying, this middle class was too large for the productive system to support. This is why Hélio Jaguaribe (1958) observes that it was a relatively parasitic middle class. In his words, Brazilian middle classes formed and expanded, in the context of our underdevelopment, as a by-product of the urbanization of a country that remained rural and did not offer them the opportunities to become integrated into the productive process; the inevitable marginalization led them to become parasites on the state. (p. 41)

This fact makes it easier to understand the bad quality of public services, particularly those services originating in colonial and semicolonial times, insofar as one of the state’s most important functions was to provide jobs for this parasitic middle class. The traditional patrimonial middle class became detached from the productive process, so it is clear why this class, according to Sodré (1958, p. 46), “which had largely come from the dominant class, kept throughout the years the morals, the patterns of behavior, the rules of conduct of the dominant class, and only due to the pressure of necessity would it gradually acquire its own characteristics.” Finally, the parasitic nature of the patrimonial middle class also explains its low political significance during the Empire and the First Republic. It is certainly true that, in the military movement that led to the proclamation of the Republic, the middle class played an important role, and later held power for a while. But we must consider that the army was then an autonomous source of social advancement and of affirmation of a national middle class. With the election of President Prudente de Morais (1894–1898), however, the rural aristocracy and the main foreign traders were back in power. The middle class would only be back on the political scene in the 1920s, taking part in a number of unsuccessful revolutions. This would end with the 1930 Revolution, the “lieutenants’ revolution” as it would also be called, in which the role of the middle class, represented not only by military groups, but also by civilians, would be a prominent one.

For Reasons of State: Territorial Integration

Brief Theory 2: Institutions and Development The new institutionalist explanation for Brazil’s backwardness—based on the lack of guarantees for property rights and contracts in the nineteenth century— became popular starting in the 1990s, in the context of the neoclassical and neoliberal hegemony of the thirty years of neoliberal capitalism, a period that was then at its peak. Since the previous decade, US universities and, a little later, Brazilian universities had been dominated by the economics of the “new institutionalism,” which became dominant in the 1990s. Now, everything was explained, no longer on the basis of structures and institutions, but of just institutions. And among those institutions, two figured most prominently: property rights and contracts. It would be enough to guarantee property rights and contracts for development to happen, as the market would take care of the rest. Given the fact that the new institutionalists had some reservations about neoclassical thought, which was purely hypothetico-deductive and assumed a relatively historical perspective, many young progressive Brazilian economists and political scientists hailed the new ideas. They believed that the importance of institutions to economic development had finally been acknowledged by mainstream economists, and espoused the new ideas. This was a misunderstanding by people who had not read Adam Smith, Karl Marx, Thorstein Veblen, Joseph Schumpeter, or Celso Furtado—economists who never ceased to think in institutional terms. New institutionalists like Ronald Coase, Oliver Williamson, and Douglass North “discovered” institutions in order to get rid of the historical and holistic thought that bothered them from the ideological point of view, at a time when conservative thought had become hegemonic. Their vision of institutions is very different from the one defended by me, which is old institutionalist, or, better, historical structuralist, because it is based on Marx’s thought. We structuralists consider institutions to be fundamental in predicting behavior: after all, they are built with that end in mind. To say that institutions matter is obvious; it is like saying that water matters. The institutions surrounding the state are normative and organizational. The family, like all other forms of society, would be impossible without the institutions that organize the behavior of each participant. Institutions are present in the structural levels or layers of society—in the economic layer, which includes the various types of ownership; in the political layer, which contains the state and its laws; and in the cultural layer, which includes the ideologies. It is therefore impossible for us to separate the institutions from the structure—from the three structural layers. As Marcus Ianoni commented about a draft of this book, “The new-institutionalist reductionism is the victim of voluntarism, by imagining that the choice of institutions depends simply on an act of will. In human history, an action will only be relevant and able to generate social change if it is in tune with the structural and institutional landmarks in which it exists.” Institutions and, more broadly, the change of the whole social structure, are fundamental to capitalist development. The capitalist revolution would never have occurred if the Italians had not invented the limited liability company, commercial papers (the original version of bonds), and double entry bookkeeping; and if the British and, more broadly, the philosophers of the Enlightenment had not fought for the guarantee of civil rights, that is, for the rights of property and

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of freedom. But neoliberals are mistaken when they think that the mere guarantee of property rights and contracts fuels economic development. They are two, but only two, important institutions that appear in the midst of the process of economic development. There is a strong correlation between a society’s level of economic development and of institutional development. Once a country has realized its capitalist revolution, what really guarantees high growth rates is one institution: a national development strategy, including a set of laws, public policies, goals, and informal understandings, in the context of a national agreement, that creates lucrative investment opportunities for business enterprises. Or, in the words of Rubens Ricupero (2001, p. 89), “A national project is the idea that each people and its leaders make of their future.” This was clear in the thought of the great classical economists, including Marx; in the thought of the German historical school of the second half of the nineteenth century; in the institutionalism of Veblen in the US at the beginning of the twentieth century; and in classical developmentalism. Whereas all these old institutionalisms were historical and recognized the importance of economic and political structures, new institutionalism rejected the objective correlation among the three structural layers of society, as if institutions existed in a void. New institutionalism became associated with neoclassical economics, and adopted methodological individualism and the other ideas concerning rational expectations and the rational choice schools of thought, which start from the assumption that a representative agent makes rational decisions. From these reductionist premises, which ignore the historical and dialectical nature of the social sciences, economists and political scientists in the United States explained Brazilian and, more broadly, Latin-American backwardness in a correspondingly reductionist way. Brazil lagged behind in the nineteenth century because its institutions did not protect property rights and contracts. North was the first one to state it (1990), followed by Stephen Haber (1997), and by others mentioned above; and, finally, there was a definitive text by North, William Summerhill, and Barry R. Weingast (2000) dedicated to the subject. More recently, two other new institutionalist authors, Daron Acemoglu and James A. Robinson (2012), wrote a lengthy book showing that countries fail or succeed depending on the institutions they adopt. The book acknowledges that “the first country to experience sustained economic growth was England” (p. 45), which should have lead the two authors to realize that the problem of economic development for other countries was that each one needed its own industrial revolution. But they did not come to that conclusion; instead, they believe that the whole issue is that each country should “choose” institutions suitable for promoting growth— specifically, “inclusive” institutions. In their words, “Political and economic institutions, which are ultimately the choice of society, can be inclusive and encourage economic growth. Or they can be extractive and become impediments to economic growth.” The country’s goal is not, therefore, to achieve its capitalist revolution, but to choose adequate institutions. The problem is that it is not possible or viable to define institutions regardless of the economic structure and system of values and beliefs existing in a society. My old teachers, in the 1950s, when I studied law at the University of São Paulo, criticized this kind of normative idealism. And yet, six decades later, we continue to read the same stories. The two authors are realistic enough to admit that there are other variables besides the choice of “secure property rights.” They inform us correctly that it is necessary to have “economic opportunities,” an “economic infrastructure,” and a state that is “centralized and powerful enough” (pp. 80–81). Fine, but we know

For Reasons of State: Territorial Integration

that relatively equal economic opportunities only exist when the social structure begins to be reasonably flexible, as happens with capitalism, instead of being organized in terms of castes or status groups. An economic infrastructure and a strong and efficient state only exist, as discussed before, in the context of capitalism. Therefore, how could it be that the whole issue of development is confined to the choice of inclusive versus extractive institutions? This is what is exhaustively repeated and illustrated throughout the book. Further, why call capitalist institutions “inclusive”? It is true that they are more inclusive than the previous precapitalist institutions, but they are nevertheless highly exclusive and extractive. Obviously the guarantee of property rights and contracts is important to economic development, but it is sheer neoliberalism to presume that, once they are guaranteed, the market will take care of development. Besides, property rights and contracts can only be actually guaranteed when the economy is ready to achieve or already has achieved its capitalist revolution. Precapitalist societies (either feudal, mercantilist, or patrimonial) did not guarantee property rights and contracts by definition. This condition was fulfilled in the northeast of the United States at the beginning of the nineteenth century, but definitely not in Brazilian society at that time. How could Brazil then guarantee property rights and the contracts, as the United States was able to do? It is not the institutions that make the capitalist revolution possible; instead, it is the capitalist revolution that opens the way for institutions favorable to development. Historical and structuralist thought presumes that the economic, political, and cultural structural layers of society evolve in a reasonably correlated way, and that institutions are mainly in the political layer, though they are present in all three layers. Therefore, to say that the institutions are important to the economic development, that they make a difference, is to state the obvious. After all, political activity is largely a task of defining and reforming institutions. But the institutions do not exist in a void: they are a fundamental part of an economic and political structure that changes in response to technological progress, and that is shaped by the society’s ability to organize itself politically into class-based coalitions and by its ability to modify that structure. Brazil lagged behind not because it failed to choose institutions adequate for the task in the nineteenth century, but because mercantile colonization created a slave-plantation structure that was incompatible with economic development. The causes lie in the colonial period and in the first thirty years of the Empire. The Brazilian elites in the imperial period were heirs to this type of colonization, so they were not able to enact a development policy similar to what the elites in the United States were doing at the time. Jorge Caldeira (1999, p. 7) is right when he states that, in the nineteenth century, “the formulation of the economic policy was deliberately conceived as a way of excluding the interests of most of the agents and satisfying a minority, [who were] not very interested in progress.” What he does not mention is that the country had no alternative, given its origins and formation. From approximately 1850 on, stimulated by the coffee crop and by immigration, Brazil’s economy began to grow at a rate that enabled it to start building a domestic market and prepare for industrialization. This began in São Paulo in the 1890s and gathered unstoppable momentum from 1930 on. As we saw in Figure 2.2, starting in the mid-nineteenth century, the gap between Brazil and the United States greatly increased. This happened not because Brazil grew little between 1850 and 1930, but because this was the great period of development in the United States. It was the time when the United States connected its first industrial revolu-

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tion to its second—through the revolution of electricity, the internal combustion engine, and the assembly line. And the United States became the world’s great economic power. Considering the whole period covered in Figure 2.1, we observe that Brazil was unable to reach, in the early 2000s, the per capita income that existed in the United States in 1870. Brazil’s process in catching up to the United States was, therefore, historically mediocre. It was positive only during the Nation and Development Cycle. This was a problem for the whole of Latin America—the problem of its dependence on the North, and of the huge difficulty of the elites and the people to define a national development strategy.

Notes

1. On “stateness” and the formation of the state, see Oscar Oszlak (1997, Introduction). 2. We should not mistake coronéis for warlords or jagunços. The “coronéis” were local authoritarian political chiefs, usually landowners, who obtained the rank of colonel in the National Guard—a state public police that was in charge before the army took over this function. The warlords were armed and, in certain regions (such as the Chapada Diamantina, in Bahia), were referred to as “jagunços” (Walfrido Moraes, 1963); this was also the name given to the gangs of outlaws who operated in the sertão (arid outback), and to rebels and fanatics. Given the imprecision of the term, I refer here to “jagunços, or warlords,” in order to make it clear that I am not referring to armed gangs or to fanatical rebels. 3. The exception was the United States, where the construction of the nation and the formation of the nation-state were concurrent, beginning with the country’s independence, but the nation was only definitely established with the Civil War. 4. I also made a contribution to that field with research on the ethnic and social origins of the Brazilian entrepreneur (Bresser-Pereira, 1964) and on the mobility and careers of business managers (Bresser-Pereira, 1974). 5. In order to calculate the 14.3 percent of members of the Brazilian political elite who had parents in the government bureaucracy, I used a broad criterion that included educators (3.8 percent), military officers (4.1 percent), judges (5.2 percent), and lowlevel bureaucrats (1.2 percent); see Love and Barickman (1989, p. 8). 6. The alternative to economic liberalism is developmentalism. Liberals claim that economic liberalism is a necessary condition for political liberalism—the guarantee of civil rights, which is a victory for humanity. But developmentalism is also consistent with civil rights, as the golden years of capitalism have demonstrated. It is true that the first version of developmentalism was authoritarian, but the same applies to the first version of economic liberalism. The second version of developmentalism, during the golden years of capitalism, besides being democratic, was social in that it promoted social rights. 7. As a result of this analysis, the National Guard, an institution of the landowners opposed to the central power and to the bureaucratic army, is understood as a patrimonial manifestation—a curiously anti-bureaucratic patrimonialism. 8. Faoro, however, ends his book with a chapter about “the round trip” because he believes that, in the last quarter of the twentieth century, the Brazilian state and society continued to be essentially patrimonial—which, by implication, denied history. 9. This layer, consisting of petit bourgeois and bureaucratic elements, was sufficiently small for Gilberto Freyre (1951/2003, p. 53) to affirm that “its presence in the social history of the Brazilian family [could be] almost ignored.”

4 Herding Oligarchs: Empire, Constitutionalism, and Federalism

Brazil’s territorial integration resulted partly from the work of remarkable politicians, military officers, and diplomats who fought for it: politicians such as José Bonifacio de Andrada e Silva, Bernardo de Vasconcelos, and the Viscount of Uruguay; military officers such as the Duke of Caxias; and the great diplomat, the Baron of Rio Branco. And much is due to Dom Pedro II, not only because he was emperor but also because he fought with firmness to strengthen the state, ensuring the effectiveness of the central power over a large territory dominated by oligarchies firmly in control of the provinces. We could say that the history of the Empire was the history of a landowner and patrimonial central oligarchy imposing itself on the provincial oligarchies; or that it was the history of the resistance by Conservatives against the Liberal proposal to transform Brazil into a federation, when it was not yet prepared for that. Federalism, Conservatives, and Liberals

The terms “Conservative” and “Liberal” had little connection with the corresponding terms in Europe. The Conservatives were not trying to maintain order through the preservation of traditions; nor were the Liberals trying to guarantee individual rights.1 Instead, the great parliamentary debate during the Empire was that between the concept of a unitary government, supported by the Conservative Party, against that of a federation, supported by the Liberal Party.2 The Conservatives eventually prevailed during most of the Second Empire because, at a time when a centralized government was a necessary condition for the country’s territorial integration, they rightly defended the unitary nature of the Brazilian state.3 The consolidation of the 63

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state took place between 1840 and the 1860s, under the supremacy of a new Conservative Party.4 Moreover, the Conservatives and Liberals also differed because, as noted by José Murilo de Carvalho (2012a), The Conservatives kept a literal interpretation of the constitution, (which provided for the Poder Moderador [Moderating Power]), repeating François Guizot, a French historian and influential politician: the king reigns, governs and administrates.5 The Liberals appealed to the spirit of the work of Benjamin Constant and resorted to Adolph Thiers, another French historian and politician: the king reigns, but does not govern. (p. 27)

This idea that the king reigns but does not govern was in accordance with the parliamentary, or constitutional, monarchy established in Britain by the Glorious Revolution. This was a beautiful idea, but it was not reflected in the 1824 Constitution, nor was it appropriate for Brazil’s stage of political development, in which a strong government was still needed to build a state, to maintain public order, and to guarantee the integrity of Brazilian territory— tasks that the Empire undertook. The construction of the Brazilian state can thus be conceived of as a permanent fight between centralization and federalism, as a sequence of periods of centralization and decentralization, or as a process of “systoles” and “diastoles,” in the words of General Golbery do Couto e Silva, the most important intellectual of the 1964 military regime and the author of its doctrine of national security. These two views of Brazil, which for a long time were identified with Liberal and Conservative ideas, were already present when Brazil first gained its independence. The Liberal’s federalist project was defeated in 1824 by Dom Pedro I, when he dissolved the Constituent Assembly and granted the country a constitution. The assembly was restored with the Institutional Act of 1834, but after a period of troubles, it was dissolved again in 1840. It was reinstated with the Republic and the 1891 Liberal constitution, but after the reinforcement of the power of local oligarchies and the immobilization of the state, it was abandoned in 1930 so that Getúlio Vargas could lead the Brazilian national and industrial revolution. As Simon Schwartzman (1975, p. 130) observes, “The political regime established in 1930 constituted a major centralization and concentration of political power.” Decentralization was restored with the 1946 more liberal than democratic Constitution, but it was abandoned in 1964, with the military regime.6 During this process, Brazilian Liberals, in order to defend the idea of federation, applied their outdated and misplaced Liberalism to the economy by supporting economic liberalism. It was as if they believed that history consisted of the realization of ideas. Starting from a fact (political liberalism was an achievement of mankind because it affirmed civil rights), they did not understand

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that economic liberalism works only if it is moderate (something that makes it similar, if not equal, to developmentalism) and comes after the country has already achieved its industrial revolution. Federalism is actually the best way to govern a country as large as Brazil in population and land mass, but it could only work once the political and territorial unit has been guaranteed and the national and industrial revolution has been accomplished. Miriam Dolhnikoff (2005, p. 14) is mistaken when she criticizes the prevailing tendency among Brazilian historians to view the preservation of territorial unity as an accomplishment of the political elites of Rio de Janeiro. But she is right when she states that “the federalist project, as devised by part of the Brazilian elite in the first half of the nineteenth century, did not die in 1824, or in 1840.” It ultimately won, but only with the 1988 Constitution, which strengthened the federation at a time when the country was already mature enough to be ready for it. This was the first constitution that, instead of being Liberal, was actually democratic, ensuring universal suffrage. It was also social-developmental, providing a role for the state in inducing economic development and guaranteeing social rights. The struggle between economically liberal and developmental thought— between dependent and formalist thought on one side, and nationalist and pragmatic thought on the other—pervades all of Brazilian political history. It was already present in the Empire, surrounding the issue of federalism. During the Empire, the Conservative Party, whose chief representative was Paulino José Soares de Souza, the Viscount of Uruguay, adopted the developmental approach, whereas the Liberal Party, whose most significant representative was Aureliano Cândido Tavares Bastos, adopted the liberal and cosmopolitan view. Gabriela Nunes Ferreira (1999, pp. 125–166) made a detailed comparison of the two men in order to detect, in their ideas, each man’s model of a state and “ideal of civilization.” Both started from the low level of education and civilization of the Brazilian people, both recognized Brazil’s regional diversity, and both advocated the gradual abolition of slavery. However, their interpretations of Brazil and their political proposals were different. Tavares Bastos reiterated the political and economic liberalism that prevailed in the rich world in the mid-nineteenth century. To him, “the first source of oppression and moral degeneration of a people was the government’s arbitrary power.” It was therefore necessary to “undertake the ‘moral reform’ along at least three interconnected lines of activity: immigration, emancipation, and public education.” Regarding international relations, in contrast to the nationalism of the Viscount of Uruguay, Tavares Bastos favored what we may call “cosmopolitanism”—the alternative to economic nationalism. To him, Brazil’s possibility of progress largely depended on the country’s opening to the other nations of the world. According to Walquiría G. D. Leão Rêgo (2003, p. 20), “The author’s anti-colonialism resembled

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rather an anti-Lusitanism. For a man of liberal training, colonialism does not contain in itself a radical evilness, provided that the metropolis would be an inspiration to good institutions and good political customs.” Yet the Viscount of Uruguay’s view was different. He understood that Brazil should have autonomy; despite the liberal hegemony of the time, he always thought independently. To him, the fundamental challenge faced by Brazil was how to strengthen the state and guarantee its unity. It was the challenge of coping with the “barbarity of the outback” and its rebellions. The aim was to guarantee the basic goal of any conservative order, on which depends the attainment of the other political goals of modern societies.7 Still, according to this author, “The state’s mission consisted, fundamentally, of existing—the existence of the state meaning the imposition of order on the whole Brazilian territory, submitting the local private sector to national public power and, of course, upholding the interests of the economically dominant class.” The interests of Brazil did not coincide with the interests of the major powers. Brazil’s major source of wealth was export agriculture, but this did not mean that the government should not support its manufacturing industry. And Brazil was not yet prepared for democracy. When I associated the Viscount of Uruguay with developmentalism, the reader already understood that I believe he was more identified with the project of building a nation-state than was Tavares Bastos. Besides being more realistic and pragmatic, he was more “progressive,” despite being a classic conservative. How can we explain this apparent contradiction? Wasn’t liberalism more progressive than conservatism in the nineteenth century? At the political level, liberalism was a huge improvement compared with the absolutist state. At the economic level, liberalism is usually considered an improvement over mercantilism—the first historical form of developmentalism—but this is only relatively true. At the end of the nineteenth century, Britain and France were richer than they had been at the end of the previous century, but this was due to the Industrial Revolution, which took place in the context of mercantilism rather than of economic liberalism. Political liberalism and constitutional monarchy were certainly advances for those two countries. Would they have been the same for Brazil? And would federalism, such as the type existing in the United States, have been justified in Brazil? Or would economic liberalism and federalism have been appropriate models for Brazil at that time? Brazil was ready for a constitutional monarchy after the abolition of slavery, but the proclamation of the Republic did not lead Brazil to such a political regime. Brazil was ready for federation and democracy after the Vargas and Kubitschek governments led the country through the conclusion of its industrial revolution, but this did not happen until 1985. It is always difficult to know whether an institution is mature or not— whether the apparent maturity is artificial, with little behind it, or is genuine.

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Sometimes, institutions can be ahead of the economic and political structure, and at other times the opposite happens, but there can never be a complete disconnection between a society’s economic and social foundation, its culture, and its institutions. The Empire and the Constitutional Monarchy

Just as independence had not transformed Brazil into an autonomous nation, the imperial Constitution of 1824 and the republican Constitution of 1891, both of which were liberal not democratic, did not transform Brazil into a liberal society or a constitutional monarchy, let alone a democracy. The issue of constitutional monarchy had been raised since the independence. Although the 1824 Constitution had the wisdom to establish the Moderating Power, it was a politically liberal constitution whose aim or chief principle was the British idea of the constitutional monarchy and the rule of law. The abdication of Dom Pedro I, in 1831, was basically due to his refusal to submit to the logic of constitutional monarchy. Famous for his authoritarianism and voluntarism, the emperor was nevertheless right in thinking that Brazil was not prepared for a constitutional monarchy, in which the king reigns but does not govern and the real political life takes place in the parliament. As we will discuss later on, a stable democracy is only possible after a country has realized its capitalist revolution and the appropriation of the economic surplus has ceased to depend on the direct control of the state. Britain’s constitutional monarchy was the result of a long and hard fight by the British people, its minor nobility, and by an important part of the higher nobility. It was finally achieved with the 1688 Glorious Revolution (led by the higher English nobility after Oliver Cromwell’s bourgeois revolution), which had been legitimized by John Locke, the great philosopher who founded political liberalism and took an active part in that revolution. The British experience would remain unique for a long time. Other European states would not adopt constitutional monarchy until the midnineteenth century—and, even then, only to a limited extent. So, if Europe was unprepared for constitutional monarchy at the beginning of the nineteenth century, what about Brazil? This was a country characterized by large plantations, slavery, armed landowners (jagunços), a mass of poor free men, and a small mercantile and patrimonial elite. There were no conditions here for constitutional monarchy, and the imperial period showed this to be the case. The relative political stability was only achieved because, after the troubled period of the Regency, Dom Pedro II was able to use the Moderating Power firmly, but with equanimity. Politics always involves a game of make-believe, in which the higher principles are always

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stated and repeated, while they are often disregarded. But this lack of compatibility between what is said and what is true, between rhetoric and facts, was hardly ever as great as during the Empire (and also the First Republic). Brazil was called upon to establish the most advanced political institutions then existing in the world—called upon to do so by foreigners and by Brazilians. To copy and adapt institutions on paper was not difficult. But to put them into practice, that was another story. Dom Pedro II seems to have understood this fact. Sérgio Buarque de Holanda tells us the following about him (1997, p. 16): “Nothing annoyed him so much as the accusations of personal power.” But this did not prevent him from exercising that power. “He continues to insist on his difficult gardening, trimming overhanging branches, pruning inconvenient foliage, or preventing weeds from spreading.” Dom Pedro II was forced to disguise the great power at his disposal, but he did not hesitate to use it. Having a bipartisan parliamentary system helped him. He “knew that, by defeating one of the factions, he would naturally have the other one at his side” (p. 22). This is why he changed his cabinet of ministers so many times, disregarding the elections that he knew were largely rigged or had limited meaning. Despite his care, however, “It is in the sunset of the Empire that would appear more clearly the contradictions of an alleged parliamentary system, in which the final decision belonged to the head of state, who sometimes ostensibly made it” (p. 66). And Buarque de Holanda concludes: It is partly impossible to separate the almost calm supremacy of the monarch’s will from the still persistent vestiges of the old principle according to which, by simple filiation or by royal unction, the sovereign holds a kind of sacred power. (p. 67)

But it was not the personal power of Dom Pedro II that brought about the end of the Empire, but rather his inability to solve the domestic problems of the time. Since the choice of the Conservative cabinet of ministers of 1868, the government distanced itself from the progressive elites that had emerged in the south of the country. And nothing demonstrated this trend more clearly than the way Dom Pedro II dealt with slavery. As Caio Prado Jr. points out in his remarkable 1933 essay, Evolução Política do Brasil (Political Evolution of Brazil), The Empire did nothing but stall. . . . The imperial government only joined the trend when the problem already was, nevertheless, practically solved by the private euphoria and by the impossibility of retaining the slaves who were massively abandoning the farms. . . . Abolition, finally declared in 1888, did not contribute to strengthening the shaky institutions: lost confidence can hardly be restored. (pp. 91–94)

Herding Oligarchs: Empire, Constitutionalism, and Federalism

Brief Theory 3: Who are the Liberals? This is a Brief Theory that I have written for the English version of this book, as the usual meaning of “to be a liberal” is different in the United States from its academic meaning—a distinction that does not exist in Europe or in Latin America. Besides, it is important to distinguish political from economic liberalism. In political philosophy, the founder of political liberalism was John Locke, who was writing at the end of the seventeenth century and was involved in the 1688 Glorious Revolution—the revolution that made England the first constitutional country, or the first country where the rule of law replaced the arbitrary rule of the absolute monarch. Almost ninety years later, in 1776, in the historical setting of the Industrial Revolution, Adam Smith founded economic liberalism, with his concept of “the invisible hand”: the market. Many economists view Adam Smith as the founder of economics, but this is not true; the mercantilist economists founded the field. However, Smith was a great economist and the first liberal one. The principles of political liberalism are today an achievement of humanity. The right to individual liberty is at its core, as well as the idea that all men and women should be equal before the law. The right to individual liberty is associated historically with the right to private property and, always, with the right to respect or due consideration. The idea that all men are born equal is associated with constitutionalism and the rule of law; it involves the critique of all kinds of privileges that characterized pre-liberal or precapitalist societies. Political liberalism was present in the 1788 US Constitution (although, contradictorily, along with the retention of the slave system), in the 1789 Declaration of the Rights of Man and of the Citizen of the French Revolution, and in the 1948 Universal Declaration of Human Rights of the United Nations. The reasonable assertion of civil rights is one of the two major conditions for a political regime to be democratic; the other is the guarantee of universal suffrage. According to the minimal definition of democracy that I use, a regime is democratic when it ensures civil rights and universal suffrage. Not originally included in the list of civil rights were the universal rights to vote and to run for office, which liberals in the rich countries opposed during most of the nineteenth century. The argument was simple: They feared the “tyranny of the majority.” They believed that once universal suffrage was granted, the people would vote for socialist political parties, which would expropriate wealth from the rich, including the bourgeoisie. Political liberalism remained almost unnoticed for most of the eighteenth century. It was only after economic liberalism was added to it—which happened at the turn of the nineteenth century, after the completion of the Industrial Revolution and the rise of the bourgeoisie as the dominant social class—that political liberalism also gained strength. Economic liberalism is the ideology and the form of organizing capitalism in which the coordination of the economic system is supposed to be done only by the market, the state limiting itself to defending the country against foreign enemies and guaranteeing public order. Or, to put this in a more modern context, the state should limit itself to guaranteeing property rights and contracts. The rising new dominant class, particularly interested in economic liberalism, adopted liberalism as a whole as its philosophy. And soon its ideologues came up with the idea that economic liberalism was a required condition for political liberalism—which is historically not true. Certainly, po-

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litical liberalism is inconsistent with a statist form of organizing capitalism, but it is not incompatible with a developmental or mixed form of organizing it. Social democracy is precisely the combination of political liberalism and moderate state intervention in the economy, particularly in the noncompetitive sector. It also affirms the social rights: the right to universal education and healthcare, and to the protection from the state for the old and the poor. It is a compromise between the capitalist and the socialist ideologies. During the nineteenth century, in the rich countries, two political parties generally alternated in power: the Conservative and Liberal Parties. Actually, the two types of parties were quite similar in their views and policies; both were liberal in political terms, as they defended civil rights. In economic terms, if there was a difference, conservative political parties were often less liberal (or more developmental) than liberal political parties, as liberalism, like socialism, is basically an internationalist ideology. Thus, Liberals had more difficulty than Conservatives combining economic liberalism with nationalism—the other fundamental ideology adopted by the bourgeoisie in the nineteenth and twentieth centuries to achieve capital accumulation and growth. In Europe, where there were important socialist parties, the opposition between conservative and liberal parties made way for an opposition between conservative and social democratic parties. In the United States the old conservative-versus-liberal opposition remained, in part because capitalism was so successful there, and in part because socialist movements were strongly repressed, particularly after World War I. Thus, progressive politics was associated with the Democratic Party, which played the role of the politically liberal party in opposition to the Republican Party. And so, in ordinary language, “liberals” came to be identified with progressive, social democratic politics. In Brazil we followed the European tradition on that matter—viewing a liberal as a defender of classical economic liberalism. The participation of liberals in Brazilian politics must be divided into our three cycles of the relationship between the state and society. During the State and Territorial Integration Cycle (1822–1889), Brazil duplicated the European pattern of a conservative party versus a liberal party, but it was in the context of a slave system, which had the full approval of both the Liberal and the Conservative Parties. The Brazilian Liberals understood liberalism to mean political decentralization—the transformation of Brazil into a federation. But that made no sense at a time when the priority was to ensure the integration of the territory, which was threatened by the local oligarchies. In the transitional period that was the First Republic (1889–1930), the liberals approved a new constitution for Brazil in 1891, in which they included a federal system. As a consequence, the local oligarchies recovered their power and retained it for forty years. The picture changes with the 1930 Revolution and the Nation and Development Cycle (1930–1977). At that point, the nationalists or, more precisely, the developmentalists become dominant and the liberals were in the opposition. While the developmentalists sought to industrialize Brazil, and were successful in their efforts, the liberals asserted that Brazil was an essentially agricultural country; while the developmentalists were engaged in building the nation, the liberals were permanently reasserting their dependence on the rich countries. The political party that represented the liberals was the National Democratic Union (UDN)—the liberal party associated with the old coffee and mercantilist oligarchy and with the

Herding Oligarchs: Empire, Constitutionalism, and Federalism

traditional upper middle class. In this period, the liberals defended moralism and democracy, but whenever they lost elections they opted for a coup: The UDN’s golpismo (inclination to resort to coups) turned into a kind of trademark of the party. When the liberals were successful in overthrowing a government, they immediately engaged in trade liberalization. Soon after, the country was facing economic problems, if not a financial crisis, and the liberal government had no alternative but to retreat. In all circumstances, liberals favored an alliance of the Brazilian elites with the elites of the rich countries, not with the people of Brazil. Another stage began in 1990, after the developmentalists had failed to overcome the great foreign debt crisis of the 1980s and the ensuing high inertial inflation. At that moment, the rich countries had turned neoliberal; the neoliberal ideology had become dominant everywhere, and the liberals in Brazil immediately supported the neoliberal reforms proposed by the International Monetary Fund (IMF) and the World Bank. As we will see below, these reforms resulted in a longrun competitive disadvantage for Brazilian business enterprises, insofar as they dismantled the mechanism that neutralized the Dutch disease. On the other hand, the more important economic achievement in this period—the stabilization of prices after fourteen years of high inflation—was not the outcome of liberal and neoclassical policy, but of a heterodox strategy of applying the theory of inertial inflation to address that problem. For twelve years (1990–2002), the liberals were unable to get the Brazilian economy to resume its growth. In the 2002 presidential elections, the economic liberals were defeated, and since then, a social democratic and developmental political coalition headed by the Workers’ Party (PT) has been in office. The developmentalists were able to reduce the high degree of inequality that characterized Brazilian society, but they were no more successful than the liberals in trying to rekindle the country’s economic growth. And, like the liberals, they were incapable of countering the popular preference for immediate consumption, which is associated with the non-neutralization of the Dutch disease and the corresponding, long-term overvaluation of the currency, and high current account deficits. In this book, I am critical of economic liberals because in Brazil they were never able to either promote growth or reduce inequality. Developmentalists were successful in some cases, but not in others. Given the nature of contemporary imperialism, which I call “hegemony” or “soft power imperialism,” the fundamental challenge that middle-income countries like Brazil face is adopting new-developmental and social policies that are in their own best interest, and not in the interest of the North. Among these policies is the neutralization of the Dutch disease— which implies a current account surplus, rather than a deficit—through such means as economic planning regarding the noncompetitive sector of the economy or the screening of direct investments. The rich countries and their international institutions oppose such policies, and they exert their economic and cultural hegemony to persuade the elites in developing countries that these are the wrong policies to follow. Economic liberals just do not recognize the necessity of such policies, as they have a dependent or subordinate attitude toward the rich countries. Developmentalists do recognize the necessity, and are sometimes able to adopt the policies successfully. Economic liberals in every country can almost always count on the support of the major local newspapers, which are owned by liberal families or business groups, and have their readership mainly among the traditional upper middle class, which is usually economically liberal or conservative.

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Notes

1. As Antônio Paim (1998, p. 99) points out, at the beginning of the Empire there was a rift between the radical Liberals, who opposed the Moderating Power (a fourth branch of government that coordinated the other three branches so as to stabilize the political order established by the 1824 Constitution), and the moderate Liberals, who supported it. But they were all Liberals. “The moderates would later be divided into Conservatives and Liberals.” 2. Diogo Antônio Feijó belonged to the Liberal Party and, as regent, made a major contribution to the territorial integration of Brazil. Bernardo de Vasconcelos, who was originally a Liberal, broke with Feijó and founded the Conservative Party in 1836. 3. There were two emperors of Brazil, Dom Pedro I, who ruled from 1822 to 1831, and his son, Dom Pedro II, who ruled (at first with regents) from 1831 to 1889. The “Second Empire” refers to the reign of Dom Pedro II. 4. In 1840, the Interpretation of the Additional Act was approved, revising the 1834 Additional Act and reestablishing the plan for a unitary state as conceived by José Bonifácio de Andrada e Silva and Dom Pedro I. 5. The “Poder Moderador” was the institution that gave to the Brazilian monarch the authority to act as the final power. 6. The 1946 constitution was liberal because it guaranteed the civil rights, but not fully democratic because it didn’t assure the fundamental political right: the universal suffrage; the illiterates continued not having voting rights. They would only have voting rights in a constitutional amendment previous to the 1986 general elections. 7. I understand that modern societies historically defined for themselves their major political objectives and the corresponding ideologies. First came order, which already existed in the ancient state; next, freedom, with the emergence of political liberalism; later, economic development, with the Industrial Revolution and economic nationalism; a little later, social justice, with socialism; and, finally, environmental protection, with environmentalism.

5 The First Republic: Prerequisite to Brazil’s Capitalist Revolution

The Empire was successful insofar as it built a state; ensured public order and the rule of law; and controlled the regional elites, which might have otherwise disaggregated Brazilian territory. But it failed to solve the fundamental problem of slavery, which it abolished only one year before Brazil was transformed into a republic. Brazil was the last country to abolish slavery. The campaign for abolition started at the end of the Paraguayan War, in 1870, and included such great figures as Luiz Gama, Joaquim Nabuco, José do Patrocinio, and the poet Castro Alves. Liberals supported the campaign. Although some of its leaders had been monarchists, such as Joaquim Nabuco, the campaign for abolition was largely confused with the republican campaign, which started at the same time. Both were supported by a literate, idealistic middle class influenced by the positivist ideas of Auguste Comte;1 this middle class was strengthened in Rio de Janeiro during the second half of the century by the prosperity brought by the coffee industry. The republican campaign gathered significant momentum when the Republican Party of São Paulo was founded in 1873, backed by representatives of the new agrarian bourgeoisie that, instead of slave labor, used wage-earning employees. A curious political pact was thus established between the civil and military middle classes—whose most significant representative was Benjamin Constant, the leading exponent of positivism in Brazil—and the coffee-growing bourgeoisie. It was an alliance that could not last long, as this bourgeoisie was liberal from an economic point of view, whereas positivism, with its idea of progress, was associated with economic nationalism and, therefore, with developmentalism. It is no accident that the proclamation of the Republic occurred a year and a half later. In the context of the Empire’s loss of political legitimacy, the Republic resulted from a military coup, with no popular participation, leading to a famous declaration by one republican of the time that the peo73

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ple would have “idiotically” watched what it thought was a military parade. As noted by José Murilo de Carvalho (1987 [1998], p. 9), this lack of popular participation was the “original sin of the new regime.” The proclamation of the Republic showed that there was still no “people” of Brazil, that the Brazilian state and society remained oligarchic. But it also showed that the kind of leadership exercised by Dom Pedro II had exhausted its possibilities in a country that, after having at last abolished slavery the previous year, in 1888 (far behind the other countries), was undergoing deep economic and political transformations. The emperor had not been able to keep the old northeastern oligarchy associated with Rio de Janeiro and, increasingly, São Paulo, reasonably placated, as this oligarchy resented the rising power of the new bourgeoisie emerging in São Paulo, and felt directly harmed by the end of the slave system. He thus lost legitimacy in the eyes of the social base that had supported him, but without gaining support in southern Brazil, where a bourgeois oligarchy was gaining strength, beginning in Minas Gerais. Of course, there were also more direct political causes for the proclamation of the Republic, such as the emperor’s senescence; the problem of his succession; the naive republicanism of the liberals who saw the United States as a model; and US ambitions to replace Britain as the dominant power in Brazil and, more broadly, in the Americas.2 But the determining factors were the new strength that the army had garnered since the Paraguayan War, the dissatisfaction of the military with the Empire’s course of action, and its moral criticism of what it called the Empire’s “petty politics.” Among these causes, I would stress the emergence of the military role in national policy and its determination to modernize the country. A Middle Class Government

The proclamation of the Republic, in 1889, made it possible to transfer the political power to the new bourgeoisie in southern Brazil, to the detriment of the northeastern oligarchy and of the patrimonial government bureaucracy. The pact between São Paulo and Minas Gerais or, more broadly, the “politics of the governors,” marked this shift in favor of the coffee-exporting bourgeoisie, but it only materialized at the start of the administration of President Prudente de Morais (1894–1898), and only succeeded under the administration of Manuel Ferraz de Campos Sales (1898–1902). Before that, the first two Republican governments—the brief administrations of Manuel Deodoro da Fonseca (1889–1891) and Floriano Peixoto (1891–1894), the latter a military officer influenced by positivism—were transitional governments. They were governments of the urban petty bourgeoisie insofar as the literate middle class (lawyers, engineers, journalists) and the military had

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dominated the Republican campaign. But the two military officers had considerable difficulty in governing because it was not easy to find a substitute for the pacifying role that the Moderating Power had played in this very heterogeneous society, and because both the old and the new oligarchies remained powerful, even when they were out of power. As Leôncio Basbaum (1957, p. 21) notes, “Deodoro represented this urban petty bourgeoisie, of which the army was a part, and could only find support in it. But in no country . . . can the petty bourgeoisie, a floating class with a thousand heterogeneous and antagonistic layers, hold power for a long time.” Peixoto, who ruled the country with an iron fist, understood this fact, and decided to call his government the “oligarchy of São Paulo.” By the end of his mandate, he did not hesitate to transfer it to one of its representatives, Morais. But this transition was not enough to enable the government to run smoothly. When he assumed the interim government of the country on November 15, 1889, Deodoro da Fonseca dissolved the House of Representatives. On September 15 of the following year, he called elections for a Constituent Assembly. Although, as soon as it took office, the new assembly chose him as the constitutional president of the country, this heterogeneous assembly represented the oligarchies (the old one, which was headquartered in Rio de Janeiro and in the Northeast, and the new one, which was emerging in São Paulo), rather than the middle class, in whose name Deodoro da Fonseca ruled. On the other hand, during the interim government, the imprudent management of the first republican finance minister, Ruy Barbosa, had a catastrophic impact. He implemented a radically liberal monetary reform— the decentralization to the states of the power to issue money—at a time when there was no central bank in Brazil. This policy, justified by the need to provide credit to the farmers, who now had to pay for wage labor, led to a huge increase in the money supply, and subsequently to a huge financial crisis that became known as the “Encilhamento.”3 This monetary policy was adopted at a time when Barbosa, during the interim government, was pursuing contradictory strategies that were simultaneously interventionist and industrialist. To Fernando Henrique Cardoso (1975, p. 35), “two different trends were outlined and confronted since the beginning of the Republic. To the first one, ‘industrializing’—and frequently speculative, inflationist and always in search of their interests, although essentially holding the prevailing values of progress and, to a certain point, related to positivist reformism—was opposed a second trend, more solid and conservative.” Barbosa was part of the first trend. For him, “the Republic would only be securely consolidated among us when its operation rested on industrial labor democracy” (quoted in Luz 1961, p. 106). To put it another way, “the development of the manufacturing industry is not only an economic issue to the Nation; it is, more than anything, a political issue” (quoted in Basbaum

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1957, p. 34). Barbosa was right, but his industrialism was outdated. At that moment, when industrial activity was taking its first steps in São Paulo, it was possible to encourage the manufacturing industry, but it was impossible to base a government on any industrial class. The great problem with all the revolutionaries who come to power lies in the fact that only a few realize the limits of their power and try to implement their programs through mutual concessions or compromises. During the Morais administration, a severe economic crisis was added to the political difficulties, triggered by overproduction and by the drop in coffee prices in 1895—a crisis that would take years to solve. In the name of liberalism and for the sake of maintaining the equilibrium of public finances, the federal government refused to help the coffee growers, thereby leading the governors to act. The first concrete measure, in 1902, was the prohibition by the government of the state of São Paulo against planting or replanting coffee. In 1903, when the coffee growers were mobilized, an industrialist of Italian origin, Alexandre Siciliano published a plan that included measures for the international valorization of coffee. After extensive debate, it would serve as the basis for the “Convênio de Taubaté” (“Taubaté Agreement”), signed in February 1906 in this city by the governors of São Paulo, Minas Gerais, and Rio de Janeiro. According to Edgard Carone (1972, p. 39), the Convênio was “the first state intervention in order to protect a product, the work of a class for its own benefit.” President Francisco de Paula Rodrigues Alves (1902–1906) opposed the exchange rate stabilization and the protection of the coffee industry included in the agreement. But Afonso Augusto Moreira Pena (1906–1909), already elected to replace him, accepted the plan. The policy of valorization was necessary and successful, but it highlighted the fact that governments cannot leave the economies of their countries to the mercy of markets. And, in this case, it was not the industrial entrepreneurs who benefited from the policy, but the agricultural entrepreneurs, who would later be very critical of the industrialization policies adopted by Brazilian governments from the 1930s onward. The “Politics of the Governors”

The initial decade of the First Republic was difficult, almost chaotic, because the republican state, without the legitimacy of the imperial state and without the support of the dominant classes, was a weak state. This problem would eventually be solved by the “politics of the governors.” Whereas the Empire’s Oligarchic Pact was based on the association of the old nationwide patriarchal oligarchy with the big merchants and patrimonial bureaucracy in Rio de Janeiro, the First Republic’s Oligarchic Pact, expressed in the politics of the governors, had in its core the new bourgeois

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oligarchy formed around the production and export of coffee. In both cases, the purpose was simply to guarantee political stability and civil rights, particularly the right to property. Other major political objectives common in modern societies, such as economic development and social justice, were not taken into account in a society that had not yet achieved its capitalist revolution. Renato Lessa presented a study of Brazilian politics during this era in The Republican Invention (1999). President Campos Sales was able to formulate and institute a political model or, as I would rather say, a political pact, by which he tried to guarantee the stability of the Republic. Deodoro da Fonseca and Floriano Peixoto had also sought stability, but it could not be created simply by force. Instead, there had to be a political pact endowed with legitimacy—supported by civil society, which was only first emerging in Brazil and was essentially elitist. Consequently, according to Lessa (1999), Campos Sales’s model had two distinct aspects: one concerning procedures and the other concerning substantive values. The first one comprises a group of procedures carried out to achieve stability and endow the Republic with a minimum standard of governability. They amount to the setting up of the politics of the governors and to the operation of the Commission for the Verification of Powers. The second aspect regards the values that Campos Sales attributed to his model, particularly an apolitical and administrative conception of the government, endowed with the function of protecting national interest. (p. 28, emphasis in the original)

Briefly, the model

aimed at establishing a protective layer around the federal government, isolating it from the special interests of state oligarchies. The government was presented by Campos Sales as an apolitical entity, oriented to the administration of the country, to altruism and to the public good. But the practical arrangement established in order to endow the president with such autonomy presumed free rein in the exercise of oligarchic predation and violence in the different states of the federation. (p. 14)

Regarding the procedures, the politics of the governors, or the “politics of the states,” as Campos Sales called it, innovated by trying to conciliate a weak central state with the power of local oligarchies and their representatives, the governors. Changing the Brazilian state structure from a unitary to a federal one, in accordance with the 1891 Constitution, increased the power of the governors. According to Lessa, it became clear that the simultaneous increase in the power of the executive, the legislature, and of the states of the federation, as stipulated in the Constitution, engendered more conflicts than solutions. It was an institutional system that needed reform—but a reform in practice, not just in the letter of the law: “The stability should

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derive from an arrangement between the national government and the chiefs of the states, in an attempt to define what could be called the nonconstitutional part of the political pact” (p. 139, emphasis in the original). As for the values embodied in the pact, Campos Sales proved to be a consummate ideologue. He knew that “the symbolic content existing in the substantive dimension of the model cannot be reduced to a mere rhetorical rationalization, in charge of concealing the ‘true motives’ of political action” (p. 166). Therefore, he based his argument on the assumption that federal politicians were committed to the national interest and to disinterested public administration, in which the disturbing effect of passions is neutralized. There is also a strong authoritarianism in the model. The search for the public good requires “great meetings,” and the political parties are considered unhelpful because they represent individuals whose interests are often at odds with the national interest. All we have to do is to rely on the altruism of the leaders at the federal level. By doing this kind of analysis, Campos Sales showed his opposition to the political unrest that often spread through Rio de Janeiro. And it led him to a curious contradiction: the national public interest would be defined by the central power, but the public that really counted was the one within each state. According to Campos Sales, in a phrase quoted by Renato Lessa, “it is there that one governs the Republic, above the crowds that disturb, agitated, the streets of the capital of the Union” (p. 172). It was therefore the combination of a great autonomy for the local oligarchies and the governors’ power to act according to their interests, with a shrewd ideological idealism, that responded to the demand for a legitimizing value system on the part of the oligarchic elites. In this way, the local oligarchies were placated, and the central government was able to rule with reasonable tranquility, having to respond merely to the emergence of a civil society in Rio de Janeiro. The Republic no longer relied on the Moderating Power but, as Fernando Henrique Cardoso (1975, p. 48) notes, the politics of the governors established “a system based on a leadership that, rather than personal (as in the Moderating Power), would be ‘institutional.’” The politics of the governors favored the power of the local coronéis (plantation owners). Voting continued to be based on a poll tax, and elections were as rigged as they had been under the Empire, with no guarantee of a secret ballot. But now the “coronel” had more power, given that he was responsible, as a plantation owner and a political boss, for “managing” the local elections in accordance with the governor’s wishes. It should be noted, however, that this was not yet the coronelismo (oligarchy of the rural landlords) described by Victor Nunes Leal, which existed when he wrote his book Coronelismo, Enxada e Voto (1949). At that point, the first government of Getúlio Vargas (1930–1945) had already reinforced the central government’s power, so that coronelismo, as we have already seen, involved a

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trade-off between the private power of the plantation owners, which was in decline, and the public power, which had been strengthened. Nonetheless, coronelismo continued to ensure the power of the plantation owners. The Emergence of the Military

It is impossible to understand the proclamation of the Republic without taking into account the emergence of the military as a political power, the middle class or plebeian origins of the army officers, and the classic role that the military played and still plays in national revolutions (and not only in Brazil). As Luciano Martins (1973, pp. 83–87) notes, in the last quarter of the nineteenth century, we can observe the emergence of two new middleclass groups with more social prestige: one was a group of professionals in the strict sense, comprised of engineers. The other was a group linked to the state, the military officers. “The military officer and the engineer, here considered as ideal types, are the two new players—frequently combined—that emerge from such middle sectors during the last two decades of the nineteenth century and the first ones of the twentieth century.” They will oppose the bacharel (lawyer) who, also as an ideal type, corresponded at that time to the patrimonial bureaucracy. The army officers constituted the first technobureaucratic group to be part of the Brazilian ruling class, alongside the economic oligarchy and the patrimonial bureaucracy of lawyers, which also became modern in outlook. The greater autonomy of the military will appear for the first time at the proclamation of the Republic, particularly during Peixoto’s administration (1891–1894). The attempts of the oligarchy to attract the military, however, had become successful by the end of 1894, with the election of Morais as president of the Republic. Martins notes (1973): “We must stress that, for those new players, knowledge shifts from ornamental to instrumental insofar as the military officers and the engineers transform ‘scientific’ knowledge into an instrument of social advancement and a political resource, analogous and rival to the ‘legal’ knowledge of the bacharel” (emphasis in the original). It is in the army that the development of a modern government bureaucracy in Brazil first took place. We can only talk about a professional armed force in Brazil after the Paraguayan War but, despite the presence of the military at the proclamation of the Republic, this army remained incompletely organized. The officers were divided between “scientific” and tarimbeiros, that is, between those who had a college degree and those whose backgrounds were limited to their careers in the army itself. These are significant classifications because they suggest that a bureaucracy within the state had begun to take shape. As José Murilo de Carvalho (2005, p. 17) writes, “With the exception of Rio Grande do Sul, the recruit-

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ment of officers, during the Empire and the Republic, was done predominantly within the organization itself and among lower-income groups and groups of modest social standing.” The army was the institution that offered social mobility for a technical and intellectual elite coming from the lower middle class. As Carone (1972, p. 353) observes, “The army represented in the Empire one of the few jobs and opportunities for ascent in a society where limited mobility and stagnation prevented Brazilians from achieving individual goals.” The organizational development of the army was hindered by the oligarchy, which felt more at ease with the National Guard. Since the Empire, the army’s functions had been limited to defense against foreign enemies, whereas the National Guard had the role of keeping internal order. The National Guard was an institution that served mainly the interests of the regional oligarchies, but it had characteristics that were typical of armies, that is, of permanent military organizations. As Nelson Werneck Sodré (1965 [1968], p. 127) writes, “In practice, and particularly regarding recruitment, we can observe the difference between one organization and the other, the affection shown to the National Guard, the disdain shown to the army.” The fight for the extinction of the National Guard and for compulsory recruitment as a prerogative of the army became the chief political and institutional focus of the Brazilian military during the first thirty years of the First Republic (1889–1930), until the army was successful. This victory was aided by the reforms that began in 1907–1908, when Hermes da Fonseca was minister of war, and that were intensified with the arrival of the French Mission, in 1915. These reforms finally gave the army the characteristics of a modern and professional bureaucratic organization. Also essential was the mobilization of low-ranking officers, first the “young Turks,” who took training courses in Germany, and later the lieutenants, who give rise in the 1920s to the tenentismo movement. But perhaps the most significant political development was the alliance between the army officers and the new national industrial bourgeoisie that was thriving in São Paulo. This political alliance was established by the upper bourgeoisie of São Paulo after World War I; it was composed of various political leagues, the most notable of which was the League of National Defense, which united industrial entrepreneurs and military officers in the fight for army conscription. According to Carone (1972, p. 164), the bourgeoisie of São Paulo profited “from the new campaign for conscription to once again raise the issue of patriotism, proclaimed as a class ideal, to serve as a model to rebuild the Nation. A large nationalist campaign [was] planned and the movement of the League of National Defense [followed] other bourgeois initiatives, such as the Nationalist League of São Paulo.” In 1917, poet and journalist Olavo Bilac left Rio de Janeiro for São Paulo to take an active role in the movement. The goal was to carry out a bourgeois revolution through a political alliance of industrial entrepreneurs

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and the government bureaucracy, represented by the military officers. This goal was achieved by the lieutenants’ revolution of 1922 (“the 18 of the Copacabana Fort revolt”) because, as Carone (1972, p. 181) notes, “It is only from the 1922 Uprising that we have the return of the union between civilians and the military: the ‘tenentes’ [lieutenants] and ‘tenentismo’ represent this tendency: the middle class once again unites and fights, as at the beginning of the regime, for participation and decision making.” A little later, the commander of the 1924 São Paulo Revolution, General Isidoro Dias Lopes, introduced a nationalist note into the tenentismo movement by including among its raisons d’être the fact that Brazil “is bankrupt and cannot pay the considerable interest on its considerable debt, despite the millions of ‘contos de réis’ [the currency of the time] extorted from the people over these last twenty years” (quoted in Carone, 1972, p. 365). Brazil’s foreign indebtedness began less than two months after its independence with a British company’s offer of a £400,000 loan, which would promote the mercantile colonization of Brazil.4 A century later, foreign indebtedness would be the reason for an alliance between the government bureaucracy and the bourgeoisie and the other middle layers of Brazilian society in support of nation building. The years of the oligarchic, patrimonial, mercantile, and dependent state were numbered. The announced modernization was conservative, as observed by Martins (1973, p. 96), insofar as the leadership was obviously bourgeois and the agrarian reform issue was not mentioned. The alliance of the tenentes (who were part of the military technobureaucracy) and the emerging industrial bourgeoisie was appropriate for the formation of a nation-state. ”Tenentismo”

Tenentismo—a nationalist movement led by the army’s lieutenants—was the most significant political phenomenon of the last decade of the First Republic. Virginio Santa Rosa (1933, p. 38) vigorously emphasizes the meaning of the term and of the 1930 Revolution. The tenentismo resulted from the profound dissatisfaction of urban middle classes, which included the petty bourgeoisie, professionals, private employees, and mid-level civil and military public servants. In his words, “the urban middle classes, excluded from positions of power and elective offices by the decisive action of the people of the large plantations, remained absurdly and wrongly cut off from Brazilian politicians, with no guiding influence over the country’s future.” Alexandre Barbosa Lima Sobrinho (1933), in his remarkable history of the October Revolution (i.e., the 1930 Revolution), explains that it was essentially the result of the victory of regionalism, which was, in fact, the immediate cause. However, it is only possible to understand this revolution from the viewpoint

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of the dissatisfaction of the middle classes. As Martins (1973) observes, “The crisis of the Oligarchic State was, ultimately, a crisis of the process of integration of the new layers into the political system, not into the system of production.” In other words, the 1930 Revolution marked the integration of the modern middle class into the Brazilian ruling classes. Not only the professional class, which manifested itself mainly in the army, especially the tenentes, but also in the bourgeois middle class and the industrial bourgeoisie, which did not take an active part in the revolution, but in the end greatly benefited from it. This happened because Brazil’s industrial development received a decisive boost from 1930 on, and because President Vargas, a member of the old oligarchy, had a political vision. Understanding that the country’s economic development depended on industrialization, he decided to integrate the industrial bourgeoisie into an informal, national-developmental political pact, the National-Popular Pact. Within the government bureaucracy, the military—specifically, the tenentes—played a decisive political role. Santa Rosa (1933), Francisco C. San Tiago Dantas (1949), and Sodré (1965 [1968]) explain that tenentismo was an expression of the dissatisfaction of the middle classes, or middle layers of society. José Murilo de Carvalho (1978, p. 183), for his part, rejects this idea, affirming the need to understand “tenentismo” in the context of military organization, because “sociology has exhaustively demonstrated that organizations have characteristics and a life of their own that cannot be reduced to mere reflections of external influences.” Others rejected it in a more confused way, as they had a theoretical difficulty in admitting a role for the urban middle classes in the political process. The opposition defined by Carvalho is interesting because it casts light on the phenomenon of tenentismo, characterizing it as a military movement. There is no reason, however, to choose one explanation or the other, for they are complementary. As Maria Cecilia Forjaz (1978, p. 20) observes, “The political and ideological behavior of the ‘tenentes’ can only be explained by the combination of two dimensions: their institutional situation as members of the state military apparatus and their social composition as members of the urban middle layers.” The tenentismo movement that arose from the rebellions of 1922, 1924, and 1926 was originally a political and military phenomenon. Although the tenentes rebelled against the hierarchy of the army—and there is no greater offense against a military bureaucratic organization—they were not expelled from the institution, and the sanctions they suffered were ultimately less severe than they might have been; this was because the tenentes had rebelled in the name of the army’s prestige and mission.5 Although they took part in rebellions or revolutions, they shared an essentially bourgeois ideology, similar to that held by Vargas. However, it was not an economically liberal ideology, but a positivist ideology, which, at that moment, was already clearly nationalist and developmental.

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Liberalism is the ideology par excellence of the bourgeoisie; and based on it the bourgeoisie was able to defeat the absolutist state dominated by the aristocracy. But the bourgeoisies in Europe and the United States have always been nationalist as well. It was an early form of nationalism and developmentalism—mercantilism—that enabled the bourgeoisie, in this case associated first with the absolutist king and later with the parliamentary governments, to form nation-states; it also allowed them to define their borders—the borders of their secure markets; and through it they could achieve economic success in competition with other nation-states. In Brazil, which since independence was dominated by an oligarchic liberalism, the origins of nationalism lay in the Brazilian army and in the heterodox positivism of Benjamin Constant, himself a military officer. Two intellectuals, Miguel Lemos and Teixeira Mendes, belonged to the Positivist Society of Brazil, and in 1881 transformed it into the Positivist Church of Brazil. Powerfully influenced by Auguste Comte’s ideas, they led the movement of orthodox positivism, which is depicted with precision by João Cruz Costa. They criticized liberalism, which they saw as artificial and unfeasible in Brazil, and advocated a “Republican dictatorship.” Oriented by reason and by science, it would not be confused with despotism. Benjamin Constant, who played a decisive role in the proclamation of the Republic, did not accept this orthodoxy, despite being himself a positivist. However, their ideas had a powerful influence in Brazil, in part because there was in positivism a criticism of the oligarchic liberalism that made sense to the middle class of lawyers, engineers, physicians, and professors that was strongly emerging at that time. As Cruz Costa notes (1956, p. 267), “Positivism, although opposed to the anarchic individualism, tried to replace the economists’ imperfect social science [economic liberalism] with a new science, of systematic connections—sociology—and turn it into the summit of the whole human knowledge and, at the same time, the basis of social reorganization.” This program, although full of idealism, made sense to everyone who tried to criticize the oligarchic nature of Brazilian politics, both under the Empire and in the First Republic. In this sense, Cruz Costa (1956, pp. 295–296), based on an essay by Otto Maria Carpeaux (1943), observes that “positivism, which was mostly religious and which, maybe for that reason, did not resonate very well with us, has been a kind of great myth that remains in our intellectual and political history.” Subsequently, he quotes Carpeaux, for whom positivism was “a symbol of deeper realities,” and concludes, in accordance with that great literary and social critic, that positivism “may be a symbol of the deep contradictions that exist in national destiny.” In the 1920s, when the tenentes first appeared, or in the 1930s, when Vargas abandoned the Liberals and aligned with the tenentes, Brazilian industrial development required that nationalism prevail over liberalism— and it did.

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From Mercantile to Industrial Capital

In the mid-nineteenth century, in the context of the formation of the state and of territorial integration, coffee exports finally provided the original capital that enabled Brazil to overcome the patriarchal and mercantilist nature of its society and the patrimonial and authoritarian nature of its state, and soon afterwards to accomplish its industrial revolution. The beginning of the process of modernization, through coffee cultivation and export and through the utilization of the wage labor that it required, established the preconditions for Brazil’s national and industrial revolution. But until the beginning of the twentieth century, production was guided by the logic of the patriarchal and mercantilist plantation. This logic was already being undermined by the extinction of the slave trade, which coincided with the beginning of European immigration, demanded by the most modern coffee growers in the northern part of the state of São Paulo to replace slave labor. The emergence of wage labor is a central condition for capitalism. Nevertheless, there was no significant technical progress in coffee agriculture between 1830 and 1930. Brazil was “developing” by increasing its production per inhabitant, but it did this by specializing in a more profitable commodity, coffee, not by actually increasing productivity. Mercantile capital gave the economy two crowning moments during the colonial period, but they were fleeting moments, as they were not based on productivity gains. In 1650, Brazil was at the peak of the sugar cane cycle; in 1750 came the peak of the gold cycle. But the economy slowed down during the following century. Between 1750 and 1850, the Brazilian economy was not only stagnant, it moved backward. It was only from 1850 on that coffee began to provide some “development.” But this was limited because, as Celso Furtado demonstrated, while the consumption patterns of the dominant elite became modern, this modernization did not promote the development of productive forces; that is, the systematic incorporation of technical progress into production, which is appropriate for industrial capitalism, did not occur in Brazil. From 1850 to 1930, per capita income grew as the country specialized increasingly in coffee production, but mercantile capital continued to prevail, and there was little growth in industrial capital. Brazil’s backwardness compared with the industrialized countries, which had been identified in the colonial period, did not diminish; in fact, it increased, even though the national income began to grow satisfactorily due to coffee production. This was because, during the nineteenth century, the rich countries at the time (particularly the United States) experienced a great degree of economic development while Brazil remained in a state of underdevelopment, characterized by the association of poverty with subordination to the capitalist center. After the great backwardness caused by the patriarchal mercantilism of the colonial period, Brazil, particularly São Paulo, began industrializing at

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the end of the nineteenth century. At the same time, coffee became the great agent of industrialization, insofar as it provided capital and a market for the manufacturing industry. The great obstacle to industrialization was the agrarian and mercantile oligarchy, which was unable to think of production in terms of productivity increases, and was unable to carry out Brazilian industrialization. Besides lacking the technical resources, coffee growers had economic and political objections to industrialization. They and the liberal intellectuals supporting them saw the manufacturing industry as artificial, and as inappropriate to a country with such a strong agricultural vocation. Basing their argument on the law of comparative advantage in international trade, they opposed any industrialization policy. For them, industrialization depended on state protection, including customs protection. If that were to occur, this would mean income transfers from the coffee industry to the new industrial bourgeoisie. Actually, the income to be transferred could only originate in the exporting sector of the economy. With this argument, the agrarian and mercantile oligarchy, formed by the big landowners and big traders, allied itself with imperialism in its opposition to Brazil’s industrialization. Origins of the Industrial Revolution

As we will see in the next chapter, Brazilian industrialization started in 1930, but this crucial moment in the construction of Brazil did not emerge suddenly. Although the Brazilian historical process was interrupted in 1930—when the country began to break with its agrarian, traditional, and essentially colonial bases—it is certain that this push of the Brazilian economy has clear antecedents. These can be found, first, in coffee cultivation, which developed in Brazil starting in the mid-nineteenth century. The coffee cycle presented different characteristics from those seen in the sugar and gold cycles. These cycles occurred in the middle of the colonial era, but the fundamental difference lies in the fact that, during the coffee cycle, wage labor started to be used on a large scale in place of slave labor. The big coffee growers soon find out that, in order to produce coffee, it was more economical to pay settlers to work, generally through a system of sharecropping, than to use slaves. Paid work thus appeared in Brazil on a large scale outside the urban centers. The income of laborers then enabled the formation of an incipient domestic market. It opened a gap in Brazil’s traditional semifeudal agrarian system, in which the farms were relatively self-sufficient centers with regard to the consumption of its slaves and dependents. Domestic commerce developed. The basic conditions started to appear for the establishment of a national manufacturing industry oriented to the domestic market. As in every national and industrial revolution, the

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emergence of a domestic market became an indispensable component of Brazil’s industrialization. The expansion of coffee cultivation and export, and the corresponding expansion of wage labor were, therefore, the basic causes of the emergence of this market. The massive immigration that took place in Brazil from the mid-twentieth century on was also a result of coffee cultivation, specifically, of the coffee industry’s need for paid workers. These immigrants, with their great ambition and technical knowledge—which, albeit limited, was superior to that of Brazil’s traditional population—were one of the bases for the takeoff of the economy. At the economic level, we can name some of the antecedents of Brazil’s industrial revolution: the development of the textile industry, from the midnineteenth century; the industrial boom that took place at that time, embodied in the figure of the Baron of Mauá; the establishment of a rail transportation system, albeit designed to address the needs of exporters and not the needs of national economic integration; the installation of the country’s general economic infrastructure (not only railroads, but also ports, hydroelectric power plants, and a communications system), which became possible with the prosperity brought about by the coffee industry; the failed attempt at creating a full-fledged capitalist system soon after the proclamation of the Republic, with the “Encilhamento” crisis (a major stock market bubble); and, particularly, World War I, which enabled an extraordinary pace of development of Brazil’s incipient manufacturing industry. At the turn of the twentieth century, it was time for the state to give decisive support to the Brazilian manufacturing industry, which was then beginning in São Paulo. At that moment, it was necessary to strengthen the state in order to unleash the national and industrial revolution, but this was a weak state, excessively dependent on the landowners and on an indifferent liberal political class that made it hard to achieve this task. Nevertheless, given the dynamism of the economic and political system generated by the coffee industry during the First Republic, the Brazilian manufacturing industry experienced significant development. As Steven Topik (1987, p. 185), who studied this period, notes, “Brazil went through a stage of substitution of many imported products during the First Republic, due to the official policy and to the impetus of the growing exports. . . . It favored the National Treasury, generating taxes and improving the balance of payments of Brazil.” At the political and social levels, the antecedents of the national revolution in Brazil were, among others: the emergence of a more active middle class, starting in the last three decades of the nineteenth century; the establishment of the army, especially since the Paraguayan War, as an essentially middle class organization, as opposed to the navy’s aristocratic origins; the proclamation of the Republic, which made it possible over a few short years, prior to the election of President Morais, for middle-class groups to

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replace the Brazilian agrarian and commercial aristocracy in power; and the revolutions that shook the First Republic in the 1920s, which showed the dissatisfaction that had spread through vast layers of the Brazilian population, and led to the revolution in 1930.

Brief Theory 4: Industrialization or “Productive Sophistication” Development is usually understood as the result of a combination of economic, social, and environmental development. It takes place when a country approaches the realization of the five fundamental political goals that modern and democratic societies have gradually adopted over the last three centuries, that is, since the capitalist revolution became a reality. They are: security, freedom, economic welfare, social justice, and environmental protection. Economic development is the process of capital accumulation combined with technological progress, which results in structural transformations of the economy and the society and an increase in the standard of living of the people of a nation-state. It is a historical process that takes place starting from the capitalist revolution and, particularly, the industrial revolution; and it is marked by a continuous increase in productivity, which implies a growing sophistication of the workforce employed in production. This increase in productivity may occur within any sector, but usually the greatest increase occurs when the workforce in sectors with low value-added per capita is transferred to sectors with high value-added per capita. That is because this transfer involves the mastering of more sophisticated technologies and pays higher wages. Therefore, development means industrialization or, more broadly, productive sophistication. It involves the migration of the workforce to the manufacturing industry and, more recently, to service industries involving highly sophisticated technologies. Conventional economics rejects this association between growth and industrialization, as well as policies that include incentives to produce increasingly sophisticated goods. Its followers do not think in historical or structural terms, so it does not matter to them what economic sectors a country specializes in. The market and, more specifically, the law of comparative advantage in international trade (a mere logical economic reasoning to which they attach a much greater importance than it actually has) will determine what those sectors will be or, in other words, how an economy “maximizes” the utilization of its productive resources, leaving itself to be ruled by the market. As José Gabriel Palma used to say in an irreverent but appropriate way, for those economists there is no difference between potato chips and microchips. There is a well-known distinction between growth and development, the first one meaning a mere increase in per capita income, and the second one, full and sustainable development. However, we must not discard the growth of per capita income because, when it is followed by industrialization, it spurs structural change and a reduction in poverty, even if there is an increase in economic inequality. The case of China is instructive. Between 1981 and 2010 a historically unparalleled growth of per capita income (averaging 9 percent per annum)

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reduced poverty, though economic inequality increased. Some 680 million individuals were lifted out of extreme poverty, which was reduced from 84 percent of the population in 1980 to 10 percent in 2013.* I will not repeat the entire reasoning advanced by classical developmentalism regarding this subject. Raúl Prebisch’s theory, which holds that commodityexporting countries have a structural tendency toward a deterioration in their terms of trade, demonstrates that the supposed law of comparative advantage made sense only under very specific conditions. This law assumes that the productivity gains obtained by countries are transformed into lower costs and lower prices, which benefit the domestic workers in each country, and the foreign workers who import the goods, because the domestic workers’ productivity has increased. However, this is not true for the rich and industrialized countries because their workers succeed in keeping a substantial share of the increase in productivity for themselves, incorporated into their wages. In contrast, the workers in the countries producing primary goods lack this possibility. Strictly speaking, the law of comparative advantage in international trade is mere economic reasoning, rather than a law corroborated by the historical experience of countries in their international trade relations. It tells us that even in a two-country market in which country A is more efficient in absolute terms in the production of the two sole goods produced than country B, it will pay for them to engage in trade relations if country B has a comparative advantage in the production of one of those two goods. It is an elegant reasoning, but it is neither a law nor an economic tendency that can guide an economic policy oriented to catching up. Apart from opposing Prebisch’s theory, the law of comparative advantage has a short-term perspective that ignores the changes in comparative advantages in the medium term. It is, therefore, worse than useless; it is actually detrimental to understanding the process of economic development. As Ha-Joon Chang (2002) and Erik Reinert (2007) have shown, the British used it in a pathetic attempt to persuade the Germans not to industrialize. Another criticism of this “law” results from understanding the dynamics within economic development itself. We know that this is a process of capital accumulation that incorporates technical progress, resulting in an increase in productivity and wages, and then in a rise of the population’s standard of living. If, in a given country, there is a persistent presence of those four variables—capital accumulation, technical progress, increased productivity, and improvement in the average standard of living—then the process of economic development will unfold. But why and how does productivity increase? We may answer this question by using the elements of the definition: It increases due to the combination of capital accumulation and technical progress. This is a correct answer. However, to understand productivity increases and economic development overall, we must analyze them from the angle of industrialization in a broad sense or from the angle of technological productive sophistication: productivity increases due to the transfer of labor to industries with a higher value-added per capita. This approach is not original. It has been known for centuries. It was already known as far back as 1336, when England’s King Edward III prohibited the export of raw wool. He did this because he wanted the production of wool to be complemented by the production of fabric, in order to increase the value added by English workers. According to this perspective, increases in productivity happen not only in the goods and services produced, but also in the transfer of labor

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to technologically more sophisticated goods and services, which pay higher wages and imply a higher value-added per capita. Consider the relative importance of two types of progress. Let us call tm the technical progress or the productivity increase that takes place within the production of a given set of products. Call tn the productivity increase occurring with new products. Which of those two types of technical progress is historically more important? It is the second one, the technical progress based on the transfer of labor into more sophisticated products and services, as that transfer will increase productivity more than simply improving productivity in the provision of the same goods and services. For example, suppose a country produces both simple products, such as commodities or fabrics, and complex products, such as automobiles or cell phones. It would be more difficult for this country to increase its productivity by producing the same goods than it would be by transferring labor from creating simple goods to manufacturing complex or sophisticated goods. Industrialization, or productive sophistication, is the fundamental source of a country’s productivity increase because the value-added per capita is greater in the more sophisticated sectors and, therefore, the wage rate will be higher there. Why is that? It is because the amount of work by the various kinds of employees and professionals—production engineers, marketing specialists, literature teachers—involved in the production of sophisticated goods and services is of higher value than the amount of work by unskilled workers involved in the production of simpler goods. We return, therefore, to the classical theory of value, the theory of the labor value, which is the only theory that provides a sensible explanation of wage levels. When we say that education is fundamental to development, we are saying that, by educating their citizens, countries are preparing them to do more sophisticated work that will guarantee them higher wages and will guarantee the country a higher rate of development. Education is, therefore, a necessary condition for economic development on the supply side, but for this condition to become an effective force, there has to be a demand for more skilled workers and professionals. When developmental economists argued that development is industrialization, and when we say today that development involves an industrial revolution and always promotes productive sophistication (i.e., technological, administrative, and marketing sophistication), we understand that “development” implies a transfer of labor from sectors producing simpler goods to new sectors, or to more sophisticated tasks within the same sector, thereby generating an increase in the valueadded per capita. * “Toward the End of Poverty,” The Economist, June 1, 2013, p. 11.

Notes

1. Positivism holds that authentic knowledge is based, not on theology or metaphysics, but on the scientific method, that is, on learning about natural phenomena based on empirical evidence that can be observed and measured.

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2. The United States had a “plenipotentiary” representative in Brazil who predicted as early as 1868 that in ten years Brazil would become a republic. It was General James W. Webb, mentioned by Sérgio Buarque de Holanda (1997, p. 8). 3. On Ruy Barbosa’s contradictory policy, see the brief comment by Celso Furtado at the end of O Longo Amanhecer (The Long Sunrise, 1999). 4. According to Sodré (1965 [1968], p. 66), the firm Read Irving & Cia. made this proposal as early as October 29, 1822. In 1824, Brazil took out a loan of £3 million when Manuel Jacinto Nogueira da Gama was finance minister. Martim Francisco Ribeiro de Andrada had resigned a little earlier because, among other reasons, he opposed the loan, as it cemented Brazil’s dependence on England. 5. As José Augusto Drummond (1986, p. 51) observes in his study on the tenentista movement, the tenentes “did not lose their valued bond with military institutions nor their rank of officers.”

6 Igniting Capitalism: The Profitable Revolution of 1930

The history of every people is divided into two periods: before the capitalist revolution, in which there is no technical progress or economic development, but only repeated cycles of expansion and decline of empires; and the period after the revolution, in which populations organize themselves into nations and nation-states, and economic development begins and becomes self-sustaining. Between the 1930s and 1970s, Brazil went through its second cycle of the state-society relationship—the Nation and Development Cycle— which was also the time of Brazil’s capitalist revolution, of its national and industrial revolution. This economic, social, and political revolution had existed in a nascent form since the beginning of the twentieth century, but the crisis over the economic and political organization of capitalism that would exist for nearly a century—economic liberalism—broke out with the New York stock market crash in 1929. The half century following that event opened the way to an alternative to economic liberalism: developmentalism. This event was critical for the start of Brazil’s industrialization. The Nation and Development Cycle goes from the 1930 Revolution to the “1977 April Package” [a bundle of highly authoritarian measures adopted by the military regime in that month], and corresponds to Brazil’s capitalist revolution. As Luiz Toledo Machado (1980, p. 190) says, “The great concern of the Brazilian Revolution was the establishment of a new state able to maintain national unity and the equilibrium of social forces, to rule the nation above regional oligarchies and to promote industrialization.” In 1980, when this revolution could already be considered complete, there was no longer any doubt about the capitalist nature of Brazilian society. In 1930, Brazil was prepared to carry out its nationalist revolution and found Getúlio Vargas, a politician with the stature of a statesman, who skillfully and bravely took the lead. The intellectual antecedents of the new cycle dated from the heterodox positivism of Benjamin Constant, which deeply influenced the army, and from the military 91

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government of Floriano Peixoto. They also included the first great figures of Brazilian nationalism: Sílvio Romero, Manoel Bomfim, Euclides da Cunha, Alberto Torres, Olavo Bilac, Monteiro Lobato, and Roberto Simonsen. Later, in the context of the new cycle, nationalism reached a classic moment in the works of Francisco José de Oliveira Vianna, Gilberto Freyre, Nestor Duarte, and Azevedo Amaral. It arrived at its complete definition in the ideas of the great intellectuals of the Higher Institute of Brazilian Studies (ISEB), already mentioned, and in the works of Alexandre Barbosa Lima Sobrinho and Celso Furtado.1 On the cultural level, the music of Heitor Villa-Lobos, the Modern Art Week, the powerful thinking of Mário de Andrade, and the Pau-Brasil Manifesto were some of the manifestations of this nationalism. Shifting from the society level to the state level, we must take into account a fundamental change. Different from what happened during independence and the imperial period, now society preceded the state in Brazil. Whereas on the society level nationalist ideas had already been developing since the beginning of the twentieth century, the first development-oriented political pact, the 1930 National-Popular Pact (1930–1959), would start only with the 1930 Revolution. It was an authoritarian and industrializing pact that could also be called “national” because it involved a bourgeoisie committed to industrialization, and “popular” because it also involved the popular classes. Its chief political player was Vargas. As Moniz Bandeira (2008) observes, The crisis of the 1890s exacerbated economic nationalism . . . [but] the awareness of the need for industrialization and economic development, associated with the idea of becoming a nation, began to thrive in the 1930s, and it was the strategy devised in the first government of president GetúlioVargas (1930–1945). (pp. 45–48)

Vargas understood the severity of the global crisis that had begun with the 1929 stock market crash and the paradoxical window of opportunity that was opening up for Brazil. He therefore broke the alliance he had made with the Liberals (who represented the interests of coffee and foreign trade) and joined the nationalists, in particular the tenentes, who were becoming more and more active at the political level, particularly in the tenentista movement discussed in the last chapter. National and Nationalist Revolutions

A country can begin and sustain its economic development only after achieving its national and industrial revolution. A national revolution historically implies that two middle class groups supplant the aristocratic oligarchy: the industrial bourgeoisie and the modern government bureaucracy. These two

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classes take over because they are able to give a certain rationality and efficiency to the process of production, through investment and innovation. To reach this point, however, the bourgeoisie will usually have to associate with the more “progressive” sectors of the old aristocracy and to guarantee them political leadership. The change in the dominant class coalition will be faster and more complete the more radical the political revolution. Cromwell’s revolution of 1644, the US Revolution of 1776, and Brazil’s Revolution of 1930 were less radical than the French Revolution of 1789, or the Russian Revolution of 1917. Consequently, the rise to power of middle class groups and the defeat of the aristocracy took place gradually in the first three countries, whereas it was abrupt in the latter two. Usually, the emerging social sectors associate themselves with portions of the aristocracy in decline, and we have, under the leadership of the latter, what Barrington Moore (1966) referred to as “conservative modernizations.” This is what happened in England, Germany, Japan, and, to a certain extent, also in Brazil, given that Vargas came from the landowning oligarchy. But in the end, the resulting capitalist revolution and economic development involve the transfer of political power to a middle class group consisting of industrial entrepreneurs and technobureaucrats; the latter are represented by politicians, military officers, and intellectuals, who are contradictorily nationalist and economically liberal at the same time. In all these cases, during the first stage of the industrial revolution, the role of the state will be decisive, and the state will be developmental, whereas in the second stage, the privatization of non-competitive industries will tend to happen, and we then see an alternation between developmentalism and economic liberalism. This happened even in England, where the capitalist revolution was carried out in the context of a mercantilist state, the first form of the developmental state; and it is only during the second stage that the market assumed a more effective coordination of the economy. Therefore, it is not surprising that the Russian and Chinese socialist revolutions were, in the end, just the first stage of their capitalist development. Given socialism’s unfeasibility, those revolutions first established a statist economic system, which was effective in promoting the industrial revolution in these countries; but as soon as these economies turned more diversified and complex, statism proved unable to coordinate them satisfactorily. In the case of Russia, which made the mistake of first opening politics and then the economy, the experience of liberal capitalism in the 1990s was catastrophic, as Russia suddenly had neither a market nor a state to coordinate its economy. As a consequence, a developmental political party won elections and the economy resumed its growth, while facing increasing opposition from the West. As for China, the state remained under the control of the Communist Party, while the competitive sectors of the economy were open to competition—in what proved to be a highly successful developmental form of completing its capitalist revolution.

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The countries that were late or backward in making their capitalist revolutions, such as Japan, Mexico, Turkey, Brazil, and India, had to face an additional problem in order to achieve their capitalist revolutions: the industrial imperialism of Britain, France, Belgium, the Netherlands, and, later, the United States. Consequently, apart from being national, the revolution had to be nationalist because those countries had to or have to face the modern or industrial imperialism of the countries that had previously achieved their own capitalist revolutions, become powerful and, from the second half of the nineteenth century to the first half of the twentieth century, could be explicitly imperialist, i.e., colonialist. After World War II, in view of the reaction of the colonized populations, the rich countries became imperialist through hegemony. They lost the legitimacy to exercise direct political domination, but continued to exploit the developing countries through their multinational corporations and their financial system, thanks to their ideological hegemony facilitated by the dependence of the local elites. This ideological hegemony was and is expressed by the fact that these elites are persuaded that they should open their domestic markets, first to commerce, then to the financial system and, finally, to the multinational corporations of the imperialist countries, without what I would understand to be any reasonable opening in return. In the case of commerce, exploitation takes place through an unequal exchange, that is, through the export of industrial goods and services with high value-added per capita in exchange for primary goods with low value-added per capita. In the case of finance, the exploitation is in persuading the developing countries that they face a foreign constraint and thus require foreign capital to grow—capital with a heavy burden of interest payments; as a consequence, the countries become highly indebted, and therefore dependent on the international financial system and on the international agencies (International Monetary Fund [IMF] and World Bank), which act on behalf of the creditor countries. In the case of the multinational corporations, the same arguments are used to legitimize their occupation of the domestic markets of developing countries. What is not said—and what the local elites do not realize—is that these loans and direct investments do not primarily finance investment, but consumption. Barbosa Lima Sobrinho (1981) notes that the economic nationalism of the developing countries has an “anti” element; without it economic nationalism makes no sense. The 1930 Revolution

The 1930 Revolution was a watershed event in Brazilian history. As Francisco Iglesias (1993, p. 231) states, “The attempt to ‘republicanize the Republic’ had its most significant moment in 1930. It was the most turbulent of all successions and the only one that had a really different result.” Or, in the words of

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Leda Maria Paulani (2005, p. 309), “Brazil could only stand the chance of being considered a nation from the reversion of the dynamic pole triggered by the crisis of 1929.” The national and industrial revolution that began at that point marked the end of the oligarchic state and the beginning of the nationaldevelopmental state. But this transformation was possible only because the oligarchy itself was regionally divided, and the sectors of this oligarchy that were oriented toward the domestic market allied themselves with the urban middle classes in the fight for greater political participation. According to Nelson Werneck Sodré (1962, p. 322), “When the dominant class split, the possibility appeared of restoring the alliance between sectors of that class and active groups of the middle class.” Command of the country was given to an authoritarian and nationalist politician, an heir of the positivism he had adopted in his youth, whose liberal ideas, imported from Europe, yielded to the reality of a country that had not yet achieved its national revolution, but only its mercantile revolution. Vargas headed a heterogeneous political coalition, the Liberal Alliance, with the intention of carrying out a revolution, and then gradually, without a plan but with a sense of opportunity (and great ability), to reconcile opposing factions to a shared vision of the future. He set up this new political coalition based on an alliance that included import-substitution sectors of the old oligarchy, industrial entrepreneurs, government technicians, military officers, and urban workers.2 Before 1930 there was no feudal Brazil, as imagined by the analysts of the first half of the twentieth century. But there was a patriarchal and mercantile capitalism, which, during the First Republic, was under the rule of the coffeegrowing bourgeoisie of São Paulo. During that period, however, an industrial bourgeoisie of immigrants and their descendants, with little or no capacity for political expression or activity, was emerging in São Paulo.3 Vargas would incorporate this emerging new class into his administration. At the same time, thanks to his leadership and to the favorable conditions that were developing in Brazil with the crisis of the central system in the 1930s, the modern government bureaucracy had a place amongst Brazil’s ruling classes. Consequently, between 1930 and 1960 a class coalition consisting of the industrial bourgeoisie, the modern government bureaucracy (or government technobureaucracy), the urban workers, and the non-exporting sector of the old oligarchy would promote the Brazilian national and industrial revolution. During the first fifteen years, the Vargas regime would be semi-authoritarian (1930–1937) or openly authoritarian (during the “Estado Novo” [“New State”], 1937–1945). The authoritarian period brought about abuse, but the fact is that Brazilian society was not yet mature enough for democracy. The formation of the nationstate and industrialization would not have started during that period if Vargas had not resorted to authoritarianism to neutralize the old agricultural exporting oligarchy and the foreign interests. There had been no real democracy before, and the flawed electoral regime prevented any change—certainly the kind of

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change that the Vargas authoritarian system enabled. For example, there was the introduction of the secret ballot soon after the 1930 Revolution. In Brazil, the Liberals had always insisted on identifying themselves with democracy, while accusing developmentalists of being authoritarian. But before the Brazilian capitalist revolution (1930–1980), the ideas and practices on both sides were authoritarian. The Liberals’ “democratic” discourse was only rhetorical: in fact, the liberalism at that time was oligarchic and, therefore, authoritarian; whereas the developmental thought was anti-oligarchic, but also authoritarian. It is understandable that Brazilian elites had not been democratic before achieving their capitalist revolution, that is, their national and industrial revolution. No country has ever made its capitalist revolution in the context of a democratic regime. In Europe, the first national and industrial revolutions were achieved in the context of absolutist states. In the United States, it was carried out by a republican and economically liberal aristocracy that was not really democratic; and, in the countries that achieved this revolution belatedly, such as Japan and Brazil, it took place in the context of regimes that, besides being authoritarian, were developmental and nationalist because they had to face the industrial imperialism of the countries that had already carried out their own industrial revolutions.4 However, after the capitalist revolution has been completed, surplus appropriation no longer depends on state control (through war, slavery, servitude, expropriation of peasants, state monopolies, or abusive taxation); it is now accomplished through the realization of profits in the marketplace. Now the new dominant class no longer depends on the direct control of the state to appropriate the economic surplus; instead, it does this either through profits or through surplus value, that is, the exchange of equivalent values in the marketplace. And the liberal bourgeoisie becomes the first dominant class not to impose an absolute veto on democracy. But it would be only from the turn of the twentieth century, when the bourgeoisie finally lost its fear of a “dictatorship of the majority,” that it yielded to the fight of the workers and of the republican middle classes. Only then were minimally democratic regimes installed in the rich countries. From this theoretical framework, it is understandable why Vargas’s authoritarianism was instrumental in preventing the agricultural exporting oligarchy from regaining power after the 1930 Revolution. Wanderley Guilherme dos Santos (1978, p. 93) developed the concept of “instrumental authoritarianism” to define thinkers such as Oliveira Vianna, for whom political liberalism could not exist in an oligarchic society. Santos argues, “It would be necessary to have an authoritarian political system in order to build a liberal society.”5 It is impossible to have political liberalism (the guarantee of the civil rights), let alone democracy (the guarantee of civil rights and universal suffrage) in a patriarchal society. In that kind of society, the appropriation of the economic surplus depends essentially on the direct control of the state—therefore, on political power—and not only on

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the ownership of capital, as is the case in capitalist democracies. There is no sense in analyzing statesmen like Vargas based on the criterion of authoritarian versus democratic action at a time when the country was not yet prepared for democracy, just as it would make no sense to judge Alexander the Great, Julius Caesar, Queen Elizabeth I, or Napoleon by this criterion. As Pedro Cezar Dutra Fonseca (1989, pp. 144 and 184) notes in his historical analysis of Vargas’ economic policies, the 1930 Revolution obviously did not create the industrial bourgeoisie, because “there is today a vast bibliography showing the importance of the Brazilian manufacturing industry in the First Republic.” But if its origin was oligarchic and bourgeois, its results were eminently bourgeois and capitalist: “In 1930 a new type of capitalist development began in Brazil; in general, it consisted of overcoming agrarian and commercial capitalism based on exports of primary products, towards another one whose dynamics would gradually depend on the manufacturing industry and on the domestic market.” (Italics in the original.) As Octavio Ianni notes (1971, p. 13), “What characterizes the years following the 1930 Revolution is the fact that they create the conditions for developing the bourgeois state.”6 The Beginning of Industrialization

A strategy of import-substitution industrialization gradually began to take shape in 1930, in the context of the National-Popular Pact: the economy turned inward, to the domestic market, and the economy’s degree of openness declined. This strategy had a reasonable amount of support in society, except for the old agricultural exporting oligarchy and the traditional middle class of liberal professionals and high civil servants, which served that oligarchy. It was a belated, state-led industrialization that paralleled the late industrial revolutions in central countries such as Germany, Austria, Italy, and Sweden. But there was a difference: the developing countries needed to be nationalist because they had to face the modern or industrial imperialism of those countries that had achieved their industrial revolutions first. Nevertheless, between 1930 and 1980, Brazil was successful in meeting this challenge, and reached higher growth rates. At the same time, as a populist political leader,7 Vargas looked for support (for the first time in the country’s history) from the urban masses and, consequently, managed to bring together an informal developmental pact between the classes interested in industrialization and sectors of the old oligarchy. These were the “import substitution” sectors (those not producing for export), such as the cattle breeders (of which Vargas was part) in the southern and northeastern parts of the country. It was, of course, a class coalition full of internal contradictions, which Vargas managed by resorting to a complex system of concessions and compromises. The agricultural exporting oligarchy and the foreign interests represented the opposition. It was an authoritarian regime,

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but, as noted above, that was true of the political regimes in all the other countries during the period in which they achieved their capitalist revolutions.8 Brazil’s industrial revolution began due to the combination of two primary factors: the economic opportunity for industrial investments, paradoxically provided by the Great Depression, and the 1930 Revolution. The government that took office in 1930 identified with the ideals of political and economic renovation in Brazil. However, it immediately met with fierce opposition from the coffee-growing aristocracy of São Paulo and the traditional middle classes—the liberal and dependent forces that had tried to return to power through the 1930 Revolution. The government soon adopted an industrialization policy but, as the state was unprepared to interfere in the economic sphere, this policy had no significant beneficial effects. The measures taken by the government that ultimately spurred Brazil’s economy and its industrial development were the responses to the Great Depression of the 1930s. On the government side, the purchase and burning of the stocks of coffee by the government maintained internal demand. On the market side, the strong exchange-rate depreciation, caused by a steep fall in the price of coffee, and the ensuing balance-of-payments crisis, acted as tariff protection or as a temporary neutralization of the Dutch disease for the manufacturing industry, which was soon growing fast.9 The currency appreciated again later on, and this could have negatively affected Brazilian industry by encouraging imports. But the creation of administrative obstacles to the importation of manufactured goods and the rise in tariff barriers imposed by the government continued to neutralize the Dutch disease. Many of the policies did not aim specifically at industrialization; but the mere fact that the government, issued from the 1930 Revolution, had a positive attitude towards industrialization was very significant. The 1930 Revolution marked a new era in the history of Brazil because it established the necessary political conditions for the country’s industrial revolution. The accelerated industrialization that began in the 1930s would not have been possible without the huge industrial investment opportunities caused by the global economic depression, the drop in coffee prices, and the corresponding strong devaluation of the currency. With the crisis at the center of capitalism, industrialization was made possible because, on the one hand, internal demand was relatively constant; and on the other hand, the prices of imported manufactured goods grew sharply, as the effective exchange rate of the mil-réis (the currency at the time) depreciated twice, first due to the crisis and, later, due to customs tariffs, multiple exchange rate systems, and administrative measures limiting the importation of manufactured goods.10 According to the classic analysis by Furtado (1959, pp. 218–219) of the preservation of effective demand in Brazil during the 1930s crisis, the usual mechanism for defending the economy—depreciation of the exchange rate— was not enough. With this crisis, the price of coffee on the external market

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dropped, and the currency depreciated with it: “The sudden drop in the international price of coffee and the failure of the convertibility system engendered the fall in the currency’s external value. This fall evidently brought great relief to the coffee sector of the economy.” The drop in the international price of coffee made it possible to increase exports in terms of physical volume, but it was not enough to absorb all of the coffee production. Even if the price decreased, the producers would continue to produce and harvest coffee until the cost of the harvest and subsequent processing rose higher than the price. At that point, Brazil would face economic chaos. Growers would no longer harvest coffee until the equilibrium between supply and demand had been restored. It was therefore imperative to find another solution to the problem in order to prevent the unsalable stocks from inexorably driving down the prices without a corresponding increase in the amount sold, given the low price elasticity of demand for the product. The solution was for the government to buy the surplus coffee and destroy it. To defend the coffee-growing economy, this was the only solution possible, a solution that allowed the continued harvesting of the crop. Furtado (1959, pp. 220–224) observes that “at first, it seems absurd to harvest a product to destroy it afterwards. . . . By guaranteeing minimum purchase prices, the government was actually maintaining the level of employment in the exporting economy and, indirectly, in the producing sectors connected to the domestic market.” Brazil was actually building the famous pyramids (unproductive investments) that Keynes would recommend years later. This simple preservation of relative aggregate demand was of fundamental importance for the emergence of exceptional industrial investment opportunities in the early 1930s, as it was connected to a second fact that is usually not stressed: the devaluation of the mil-réis led to a strong increase in the prices of imported manufactured goods. This devaluation of Brazilian currency was directly related to the coffee crisis, whose price per pound in the United States went from 22.5 cents in 1929 to eight cents in 1931, due to the depression. Confirming the low price elasticity of foreign demand for coffee, exports increased little: between 1921 and 1930, Brazil exported 8,371,920 tons, compared with 8,801,263 tons in the following decade. The small increase in the physical volume of exports was overwhelmed by a draconian decrease in its value. In the 1920s, Brazil’s exports reached 805.8 million gold pounds; in the following decade, they reached only 44 percent of this amount (Prado 1945, p. 297; Furtado 1959, p. 218). The result of this vertical drop in foreign purchasing power, while internal purchasing power was maintained through the policy of defending coffee prices, was an increase of approximately 50 percent in the prices of imported manufactured goods. This opportunity was seized. The idle capacity of domestic companies was rapidly put to use in March 1931, when the Vargas administration, which already included representatives of Brazilian industrialists, issued a decree prohibiting the importation of machinery bound for any industry considered to

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be in a state of overproduction. Its goal was primarily to protect Brazil’s longstanding textile industry. New investments in new sectors were also promoted. The factories usually began as workshops, and the small capital required was mostly raised from family members. The workshops soon expanded with the reinvestment of the profits. These enterprises were initially in consumer goods industries that required simple equipment (food, personal care and cleaning products, perfumes, pharmaceuticals, light metalwork, etc.), and much of that equipment could already be manufactured in Brazil. Consequently, in 1935 Brazilian industrial production was 27 percent higher than it had been in 1929, and 90 percent higher than in 1925 (Economic Commission for Latin America and the Caribbean [CEPAL] 1949, p. 206). At this crucial point in Brazil’s industrialization, the terms of trade (the prices in hard currency of the goods exported by the country compared with the prices of imported goods) dropped steeply (see Figure 6.1). Unlike what one would expect, the economy did not suffer; instead, it benefited because the decline in the terms of trade led to the devaluation of the currency. With the general decline in Brazil’s commodity exports, the Dutch disease practically disappeared for a while (as long as the prices were reduced), as commodity producers could no longer export. In the past, they had been able to export commodities at an exchange rate far higher than that required to make Brazilian industrial enterprises competitive. Figure 6.1: Index of the Terms of Trade, 1901–2013 (2006 = 100%)

Source: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. Drawn by Nelson Barbosa.

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Coffee and the Manufacturing Industry

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The 1930s crisis gave industrialization a new and decisive boost. As we have seen, this was also a crisis for the coffee export industry. Industrialization took place during this time because the coffee growers were politically defeated by the developmental class coalition that was formed in the 1930s, but this does not mean that there was an objective opposition between coffee and the manufacturing industry. The industrialization of São Paulo would never have occurred as it did were it not for the accumulation of wealth created by the coffee industry. The first attempts at industrialization had taken place in the Northeast and in Rio de Janeiro. They had failed because they lacked an economic surplus that would have allowed the formation of a domestic market and the building of an economic infrastructure—two necessary conditions for industrialization. In São Paulo, the coffee industry guaranteed these two conditions for the new manufacturing industry in the state. In the relationship between coffee and the manufacturing industry, there was a conflict at the political level, but at the economic level, coffee made the manufacturing industry viable. Warren Dean (1969), in his book, The Industrialization of São Paulo, affirms the direct causal relationship between coffee and the manufacturing industry, as the title of the first chapter, “The Coffee Trade Begets the Manufacturing Industry,” makes very clear. Carlos Manuel Peláez (1972), Annibal Villanova Villela and Wilson Suzigan (1973), Robert C. Nicol (1974), and Wilson Cano (1977) also point to this positive relationship, although the line of thought of these economic historians was different. However, some of these works, which are associated with dependency theory (both the associated-dependency and imperialist-overexploitation versions), clearly intended to criticize the theory on the struggle of nationalist intellectuals and industrial entrepreneurs against the coffee-exporting mercantile bourgeoisie. The classic analysis of this political fight had been made by Nícia Vilela Luz in her well-documented book A Luta pela Industrialização do Brasil (The Fight for the Industrialization of Brazil, 1961), based on the political actions and intellectual activity of the economic historian, entrepreneur, and politician Simonsen (1937, 1945). Luz and Simonsen’s approach was already incorporated into the original structuralist or developmental thought of CEPAL, and was at the heart of the thinking of the ISEB’s nationalist intellectuals. I have long adopted it, not only from reading those books, but from my direct experience with the economic liberalism of the rentier upper and middle classes of São Paulo. I have seen their hostility to “protectionist” industrialism and their support, even in the 1950s, for the “agricultural vocation of Brazil.” The coffee growers, and more broadly the liberal and rentier elites and middle classes, did not directly oppose industrialization. But they strongly opposed the protection of the country’s manufacturing industry, which they called “artificial,” whereas agriculture was considered a “natural” part of Brazil’s

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economy. The coffee growers realized that the protection of the manufacturing industry, besides directly damaging consumers, would ultimately have to be financed or subsidized by the coffee industry itself. This conflict was not always clear when these struggles first broke out, at the beginning of the twentieth century, with Joaquim Murtinho as the main advocate for the economic liberalism of the coffee growers and Amaro Cavalcanti and Serzedelo Corrêa as important leaders of the industrialist and developmental movement (Luz, 1961, chapter II). It did become clear in the 1940s and 1950s, when there was a debate between Simonsen and Eugênio Gudin about the coffee growers’ fight against the so-called confisco cambial (exchange rate confiscation),11 what was effectively a tax on the export of primary products by means of setting higher exchange rates for those products; during the whole national-developmental period, this was the state’s method of neutralizing the Dutch disease. It was assumed that the resources from export agriculture would then be transferred to the manufacturing industry, but this was only partially true; according to the Dutch disease model (Brief Theory 7), the export tax was effectively returned to the coffee growers in the end through the exchange rate depreciation it provoked. In his analysis of the beginning of industrialization, Furtado showed the cyclical reverse relationship between coffee and the manufacturing industry, particularly due to the movements of the exchange rate.12 When the price of the coffee went up in the international market, the value of Brazilian exports increased, a trade surplus was achieved and, consequently, the domestic currency appreciated. This strengthening of the currency meant that the exchange rate protection for the local manufacturing industry was reduced, increasing the imports of manufactured goods. But Furtado was aware that there was also a positive relationship between coffee and industry. It was obvious that the coffee-growing complex produced an economic surplus, and that the foreign income which it generated allowed the building of an energy and transportation infrastructure that was essential to industrialization, the establishment of a banking system, and the emergence of a domestic market for the manufacturing industry. In the 1970s, however, dependency theory appeared, trying to show that a national bourgeoisie had never existed in Brazil. The idea emerged that, besides the nonexistence of any economic opposition between coffee and the manufacturing industry, no political opposition had existed between the developmental coalition and the coffee-growing bourgeoisie, as the industrial entrepreneurs came from the coffee-growing families. Sérgio Silva (1973), following the line indicated by Furtado, satisfactorily solved the debate on the relationship between coffee and the manufacturing industry. He correctly recognized that industrial entrepreneurs had descended from immigrants, clearly stating that “the emerging industrial bourgeoisie finds its roots in the European immigration” (p. 91). In addition, he noticed the eminently contradictory or di-

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alectical nature of the relationship between coffee and the manufacturing industry in Brazil. He is explicit in this respect: In fact, when we examine the different aspects of the issue, we conclude that the relationships between foreign trade and coffee, on the one hand, and the infant industry, on the other hand, imply simultaneous unity and division. The unity lies in the fact that the capitalist development based on coffeegrowing expansion provokes the emergence and a certain development of the manufacturing industry; the division lies in the limits imposed on the development of the manufacturing industry by the dominant position of the coffeegrowing economy in capital accumulation. (p. 103)13

Origins of the Industrial Entrepreneurs

In discussing the relationship between the coffee and manufacturing industries, or between the exportation of primary goods and industrial goods, also, in the debate on the existence of a national bourgeoisie in Brazil, the followers of dependency theory and the liberal right tried to downplay the political conflict between the coffee growers and the industrial entrepreneurs. In this vein, they claimed that the industrial entrepreneurs of São Paulo had stemmed from families associated with coffee production and commerce, and that capital originating from coffee exports had financed investments in the infant industrial sector. They were wrong on the first claim, but right on the second. In the research I did in 1962 (Bresser-Pereira, 1964), I tried to discover the ethnic and social origins of the industrialists of São Paulo who had either founded their business enterprises or had a decisive role in their development. I also tried to ascertain the origin of the initial funding for their businesses. Regarding the latter, 78.4 percent of the respondents stated that the funds had been their own or had come from their families. These families, however, had no connection to coffee. This finding is in opposition to the argument of dependency theory. Fernando Henrique Cardoso (1963) defended a livre docência (a degree above the PhD in the University of São Paulo) dissertation that was based on research conducted among industrial entrepreneurs; he had come to the conclusion that there were no nationalist industrial entrepreneurs and, therefore, no national bourgeoisie in Brazil. Caio Prado Jr. (1966), in a passionate and resentful book written soon after the 1964 military coup, used this same thesis to condemn the Left, which had proposed an alliance between the workers and the industrial bourgeoisie. To him, the industrial entrepreneurs belonged to the same class of families that had always run the economy, finance, and politics in Brazil, whether their activities were urban or rural; to him, they would have originated in the agricultural exporting oligarchy. The basis for this finding was the fact that their emergence had taken place mainly in São Paulo, in the “four-hundred-year” paulista families,

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which were associated with coffee production. And the great historian concluded that the Brazilian Communist Party (PCB) and the nationalist intellectuals of ISEB had been wrong in defending that the industrialization of Brazil had been the outcome of an alliance of the workers and government bureaucracy with the industrial bourgeoisie, which would be a national bourgeoisie. Prado Jr. was wrong. In fact, as I demonstrated in the above-mentioned research, only 16 percent of the industrial entrepreneurs who founded or had a decisive role in developing industrial enterprises in São Paulo with more than a hundred employees came from families of Brazilian origin, and only 3.9 percent of them were from families associated with coffee production and commerce (Bresser-Pereira, 1964). In addition to the fact that the industrial entrepreneurs did not come from the old Brazilian aristocracy, but rather from immigrant families, the research showed that these were middle-class families at the time of the typical entrepreneur’s childhood or adolescence. As we can see in Table 6.1, I discovered that 49.5 percent of the industrial entrepreneurs surveyed in São Paulo were themselves immigrants, and 84 percent of them had parents or paternal grandparents who were immigrants. I had expected to find a high percentage of immigrants and their close descendants, who made up the middle class, but the figures obtained startled me: they unquestionably revealed the considerable significance of immigration for industrial development in Brazil. Regarding the countries of birth of the industrial entrepreneurs (or of their parents or grandparents), I found that those of Italian origin ranked first, with 34.8 percent; next came those of Brazilian origin, with 15.7 percent; then those of German, Austrian, or Swiss origin, with 15.2 percent; followed by those of Portuguese descent, with 11.8 percent; and, finally, those from the Middle Eastern families (Lebanese, Syrian, and Armenian, in this order), with 9.8 percent. Then there was a third step: learning where their capital came from. This research showed that it came mostly from the family of the entrepreneur. However, there is no doubt that coffee financed Brazilian infrastructure and created the domestic market that the manufacturing industry required. Table 6.1: Ethnic Origin of São Paulo Industrial Entrepreneurs Origin

Third-generation Brazilians Brazilians of more recent foreign origin: Brazilian grandchildren of immigrants Brazilian children of immigrants Immigrants Total

Source: Luiz Carlos Bresser-Pereira (1964).

Number

Percentage

23 48 101

11.3 23.5 49.5 100.0

32 172 204

15.7 84.3

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From this research I obviously did not deduce that Brazil had a national bourgeoisie equivalent to the one that existed in Western Europe or in the United States. I accepted the relatively dependent nature of our bourgeoisie, including the industrial bourgeoisie. However, it was a contradictorily or ambiguously dependent industrial bourgeoisie: at many times it was a national bourgeoisie but, when feeling threatened, as it did in 1964, it could join the mercantile and liberal bourgeoisie associated with the coffee industry and foreign trade and cease to be a national bourgeoisie. The New Professional Middle Class

At the social level, the national and industrial revolution that began in 1930 entailed basic transformations. Both colonial and imperial societies had just two social classes: the ruling class of the landowners, associated with a patrimonial bureaucratic status group; and the dominated class, composed of a large sub-working class of freed slaves and free men living in conditions of extreme misery. At the economic level, the system was internally semifeudal, as the large plantations were self-sufficient except for the consumption by the landowner’s family. Externally, it was capitalist and mercantile. Between the small ruling class and the large dominated class there was a small middle class living in the cities, fundamentally supported by public jobs, as the state functioned then mostly as a job agency and a police force under the command of the dominant oligarchy. Semicolonial Brazil was therefore politically characterized by the supremacy of a small oligarchy of landowners, exporting and importing merchants, and patrimonial bureaucrats, all of them associated with the elites of developed capitalist countries. From 1930 on, two new classes started to take shape more firmly: the industrial bourgeoisie and the urban working class. As for the bourgeoisie, the middle class greatly expanded along with industrial development. Among the workers, part of the rural sub-working class ascended to the category of urban working class, with a higher standard of living, whereas part of the old urban working class joined the traditional middle class or was already installed in it. And then began the emergence of the third class of developed capitalist societies: the new middle class, the technobureaucratic middle class, or even professional middle class. It was composed of people working in both the public and private sectors. The new professional or technobureaucratic middle class was fundamentally different from the traditional one. The traditional middle class was detached from the productive process, but the new middle class was an essential part of it. The first was formed by a status group of patrimonial civil servants and by liberal professionals, not to mention a few employees of offices and stores. The new middle class comprised a wide range of categories, including

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professional people; government bureaucrats; and a vast private technobureaucracy consisting of technicians, business administrators, advisers, clerical employees, employees of companies providing ancillary services for the manufacturing industry and commerce, salespeople, and specialized blue-collar workers; as well as representatives of a number of other professions. By the end of the 1950s, it was already possible to observe a reasonably diversified social structure in Brazil. Based on the 1950 census, I divided the Brazilian population into five classes or layers (lower, lower-middle, middle, upper-middle, and upper), and distributed the workforce among these five classes. I found that the three middle classes, (the upper-middle, consisting of professional people, representing 2 percent; the middle, consisting of military officers and mid-level employees, with functions of direction or supervision, comprising 4 percent; and the lower-middle, consisting of office and commercial employees and specialized blue-collar workers, representing 18 percent of the population) accounted for 24 percent of the population and were a clear indication that the capitalist revolution was on the way. The Modern Government Bureaucracy and the DASP

Modern state technobureaucracy, which is part of the professional class, was already appearing in the late nineteenth century, but only gained political force in the roaring 1920s. This happened when the urban middle class, of which it was a part, strongly showed their dissatisfaction with the supremacy of the coffee-growing oligarchy. The oligarchy had been profiting from the open voting system, which did not have secret ballots, allowing it to control the votes of the rural population; and it may have also been profiting from electoral fraud. This deprived the middle classes of any political space. The tenentes represented the military side of the modern state technobureaucracy that, beginning with the 1930 Revolution, took part in the newly formed political coalition, or power group. There was, however, a civilian state technobureaucracy that also began to play a decisive role, but it required the further development of the state apparatus, in order to create positions for the middle class that was being educated in graduate schools. In the 1930s, economic liberalism was abandoned and interventionism increased worldwide. In Brazil, it was not just a defense mechanism against the Depression, as it was in the United States and in Europe, but a way of promoting a national development strategy. And it left no room for economic liberalism, for laissez faire. This was the time to organize the state, to provide it with personnel and instruments in order to set up a national economic development policy. Therefore, 1930 saw the creation of the Ministry of Labor, Industry, and Commerce; 1931, the National Coffee Board and the Cocoa Institute of Bahia; 1933, the Sugar and Alcohol Institute; 1934, the Federal Board of For-

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eign Trade; 1941, the National Iron and Steel Company and the National Pine Institute; 1942, the National Service of Industrial Apprenticeship (SENAI); 1943, the Coordination of Economic Mobilization; and 1944, the Superintendence of Currency and Credit (SUMOC), which was the predecessor of the Central Bank of Brazil, created in 1964. As Octavio Ianni (1971, p. 25) observes, these newly created agencies and state-owned companies, particularly the Federal Board of Foreign Trade, which was Brazil’s first agency of economic planning, “were the first manifestations of state technostructure, which would develop considerably in the following decades.”14 These agencies required top-level bureaucratic personnel to run them, and Vargas recruited them with care. These were men of all origins, with different educational backgrounds and political ideologies, but they shared the nationalist and developmental ideas prevailing in Brazilian society at the time. Pedro Cezar Dutra Fonseca (1989, p. 162) observes that “the government interpreted, expressed and defended their ideals, which represented the country’s needs, feelings and aspirations; the country now had a historic destiny—and to meet it, it was necessary, in turn, that the revolutionary work and ideals should not be distorted.” A nation is a society that shares a common destiny, and this is fundamentally what was being conveyed to Brazilians at that time. The ideas of nation, of intervention in the market, and of planning were thus everywhere. In the private sector, among the industrial entrepreneurs, Simonsen (1937, 1945) was the great herald of planning (Cepêda, 2004); and there were many supporters in the state technobureaucracy. At that time, a remarkable government bureaucracy was forming in Brazil that would play a decisive role in the country’s economic development until 1980. After coming to power, Vargas realized that administrative deficiencies were a central cause of Brazil’s economic backwardness. To explain the revolution, he declared in a 1931 speech: “Since these problems became worse due to administrative anarchy, financial disorganization [of the state], and economic depression . . . the reaction was imperative” (quoted in Fonseca 1989, p. 160). During that period, the motto was “rationalization,” another name for state planning and intervention. Without a “good administration,” nothing was possible. From this point of view, the 1936 civil service reform was imperative, and Vargas embarked on that endeavor with the creation of the Federal Civil Service Board. Ambassador Maurício Nabuco was an early advocate of the 1936 reform, and Luiz Simões Lopes was its main political and administrative figure.15 Afterward, the 1937 Constitution took a step forward by requiring public competition for employment in the civil service and by establishing an administrative department within the Office of the President of the Republic. In the following year, this administrative department became a reality with the creation of the Administrative Department of Public Service (DASP) which became the powerful agency that executed the administrative reform.16 However, this did not mean that Vargas entertained any illusions about the possibility of

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a state organized in a fully “rational” way or of coherent public policies. This technocratic ideal, which was strong during the military period (1964–1985), did not yet exist under Vargas’s rule. As John D. Wirth (1970, p. XVI) notes, “Getúlio seemed to be very satisfied with a contingent system, a collection of ad hoc groups and personalities around the presidency.” With the “Estado Novo” (1937–1945), Brazilian authoritarianism reappeared in force, but it was now wrapped in a modernizing cloak. In order to justify its arbitrary decisionmaking, the government appealed to the fight against communism and integralism,17 movements that had recently tried to seize power. But its true logic was in the orientation, provided by Vargas and by an important part of Brazil’s nationalist elites, toward completing the national revolution, the country’s modernizing revolution, begun in 1930— specifically, providing it with an efficient state and promoting industrialization. The state would do this in spite of the insistence of the agrarian and mercantile oligarchy on the essentially “agricultural” nature of Brazil. Although the national revolution was a bourgeois revolution, the Estado Novo would emphasize the role of technology, and that of the technicians or professionals in enterprises and, particularly, in the state bureaucracy, a role that was strategically important for the desired economic development. As Maria Celina D’Araújo (2000, p. 31) observes, “The Estado Novo praised technology as opposed to politics, expressed as the dirty side of ‘private interests.’” Therefore, it represented, at the administrative level, the affirmation of the centralizing and hierarchical principles of classic bureaucracies. Beatriz Wahrlich’s 1983 book, Reforma Administrativa na Era de Vargas (Administrative Reform in the Era of Vargas), is the seminal work on the 1936 civil service reform, and it summarizes DASP’s main achievements: the establishment of competitive examination as the basis for entry into the civil service, general and uniform criteria for the classification of civil service positions, the organization and systematic improvement of the state personnel services, improved budget administration, standardization of the state’s acquisitions, and a general rationalization of methods.18 Besides all of this, DASP cooperated in the establishment of a number of regulatory agencies of the time (boards, commissions, and institutes) in economic and political areas. And the first state-owned companies were created, such as the National Alkali Company and particularly the National Iron and Steel Company of Volta Redonda, opening new areas for the growth and prestige of the government bureaucracy. DASP was the primary agent of the 1936 civil service reform. It drew inspiration from the principles of “scientific public administration,” which dominated administrative thinking in the United States at the time; and its fundamental emphasis was the creation of a staff of professional public administrators in Brazil hired through competitive examination. DASP’s job was neither easy nor straightforward. And it drew a lot of criticism, such as that of Mario Wagner Vieira da Cunha (1963, p. 92): “Its biggest

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flaw was to have tried to create a divorce, innocent or not, between the public administration and the social and economic context that it should serve. . . . The implementation of its solutions resulted from an artificially superimposed discipline on the real working conditions.” An example of this problem was the clear distinction between the career public servants, hired through competitive examination, and the extranumerários (employees not belonging to the official staff). The intention was to separate a middle class of senior civil servants from a lower class of state workers—a distinction that was increasingly problematic because it was already clear at that time that the fast economic development the country was experiencing required the hiring of many top-level administrators who were not part of the formal (admitted through public competition) state bureaucracy. This was a case of staffing up the state in a broad sense, including the state-owned companies. The creation of DASP meant a formalization of the growing political power of the government bureaucracy in Brazil. Lopes was close to Vargas, and he reported that the president was personally concerned with the reform, which made it easier to use an agency with a broader scope and set of powers than those involved in the 1995 managerial reform of the state. DASP became the president’s technical consulting agency par excellence. It was called on for opinions on a wide range of matters being discussed within the government; in this way, Vargas could use the agency’s technical arguments as justifications for his political decisions. Sometimes, the contributions of professionals were used merely to justify decisions already made, but in many other cases, Vargas would really use advice and suggestions from the technicians or public intellectuals who gathered around DASP and, more generally, around the government in order to participate in the decisionmaking. This was true not only of DASP, but also of the Geography Board, which would originate the IBGE, and the Economy and Finance Board (associated to the Finance Ministry), as well as the Ministry of Education, which was also a source of influence at that time. Along with the other government agencies created in the 1930s, they helped organize the Brazilian state, giving it administrative consistency and a national meaning to its actions. At the same time, a rigid fiscal discipline kept the government financially sound. A strong state—and an efficient one—was thus being built, a state whose senior government bureaucracy now had, for the first time, a decisive role in Brazil’s economic development. It was a state that was no longer a mere guarantor of the social order, as had been the case prior to 1930, but that was also assuming the role of a provider of social services and, even more, of an agent of economic development. It became a state whose technical and political technobureaucracy formed, together with the industrial bourgeoisie, the country’s ruling class. During the first Vargas administration, the government bureaucracy also participated significantly in the creation of the first semipublic companies, which would have a decisive role in the country’s development.

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As World War II approached, Vargas hesitated between supporting either Britain and the United States or Germany and Italy, but he realized that the former would likely be victorious and decided to ally himself with them, at a time when victory was not yet ensured. It is widely known that Vargas used this decision to obtain the necessary funding and technology for the creation of the first major national iron and steel industry—the “Companhia Siderúrgica Nacional,” in Volta Redonda. With the creation of this company, and the creation of “Companhia de Álcalis” and “Companhia do Vale do Rio Doce,” a large space was opened for the development of the government bureaucracy. The country now had two kinds of modern government technobureaucrats: the state technobureaucrats and the managers of the state-owned companies. These two groups would sometimes have their disagreements, but they would be particularly supportive of each other in their search for more power and prestige and for the success of the ongoing project of national development. The government bureaucracy as a whole became better equipped to associate itself with the industrial entrepreneurs. As Luciano Martins (1973, p. 127) observes, “On the one hand, the union between the industrial business entrepreneurs and bureaucracy’s ‘technical groups’ was within the state apparatus; and, on the other hand, the fact of being on equal terms with industrial business entrepreneurs enabled technocracy to acquire the necessary ‘freedom’ to plan capitalist development from ‘universalist’ criteria.” This agreement made it possible to establish a foundation, so that the nation, through trial and error, could gain political cohesion, diagnose the causes of its backwardness, and formulate a successful national industrialization strategy. National-Developmentalism

In Brazil, where the economic development came late (during the Empire and the First Republic), the social structure continued to be oligarchic and patriarchal, but economic liberalism was exercised in foreign relations. From 1930 on, aided by the crisis that shook up the rich world and its imperialism with regard to the South, the country became developmental—national-developmental— and the Brazilian capitalist revolution occurred in the context of the Nation and Development Cycle. Between 1930 and 1980, the average per capita income growth rate would be high: 4 percent. The expression “developmentalism” started to be widely used in Brazil in the early 1960s. In 1962, Hélio Jaguaribe (p. 206) defined developmentalism in opposition to statism or bureaucratism, and affirmed that “developmentalism is the typical ideology of the new forces that are identified with the process of the takeoff of Brazil’s economy.” In fact, despite facing a crisis at that moment (early 1960s), Brazil had been developing since 1930 under the banner of national-developmentalism. But due to the mistaken policy of growth with foreign savings, adopted

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in the second half of the 1970s by President Ernesto Geisel, the country suffered a huge financial crisis—the foreign debt crisis of the 1980s—and its development was interrupted. National-developmentalism was an ideology and a form of economic and political organization of capitalism that was an alternative to economic liberalism, which prevailed in Brazil from 1930 to 1990. It was the result of the formation of developmental class coalitions that conflicted with a liberal class coalition formed by commodity exporters, rentiers, financiers, and foreign interests.19 In the historical process of development, we always have, on one side, a developmental coalition that invests in the future, sees the state as its instrument of change, and regards industrial entrepreneurs as innovators and investors; and, on the other side, rentier capitalists, who are the bulwark of the established order and a cause of continuing backwardness. Sometimes, in the midst of a major economic and political crisis such as the one that took place in Brazil between 1961 and 1964, the coalition in government loses power. We then have a period of social regression and low growth that will only be overcome when a new developmental political pact materializes, and the country’s growth resumes.

Brief Theory 5: Developmentalism, Class Coalitions, and Populism Although capitalist development is marked by class struggle, I understand that a complementary concept, which I use extensively in this book, is to analyze it in terms of political pacts or class coalitions. Class struggle is always present in modern societies, and it is impossible to understand history without taking it into consideration. But we know that, contrary to what Karl Marx thought, this conflict is not capable of being solved. And socialism did not have—nor is it likely to have in the foreseeable future—the ability to replace capitalism. But this is not to say that progress or development cannot exist. I don’t see social classes as monolithic entities; rather, I see big subdivisions in each of the three social classes that characterize modern societies: in the capitalist class, we have the entrepreneurial (active) and the rentier (idle) capitalists; in the technobureaucratic or professional class, there are government bureaucrats, the result of the growth of the patrimonial bureaucracy, and the private technobureaucratic class, a consequence of the appearance of big corporations; and, in the working class, the urban workers, rural workers, and the employees of stores and offices. I see the dynamic of social conflicts not only in terms of the traditional class struggle, but also as the result of the political agreements or pacts made possible by the subdivisions within the social classes, and of the conflicts between the class coalitions, which determine which political pact will be dominant during each period. It is usually assumed that the fight between workers and capitalists is ideologically expressed as liberalism versus socialism, but when we think in terms of class coalitions, the fight takes place around two alternative forms of economic and political organization of capitalism: economic liberalism versus develop-

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mentalism. In developmentalism, a coalition of industrialists, public bureaucrats, progressive intellectuals, and workers defend the state’s role as a coordinator of the economic system together with the market. In economic liberalism, the rentier capitalists and financiers affirm that the state should do no more than guarantee property rights and contracts, and keep its accounts balanced; that is because they see the market as the optimal coordinator for the rest.* Based on these two forms of economic and political organization of capitalism and on the notion of class coalitions, we can see how, ever since the mercantilist period, developmentalism and economic liberalism have historically alternated. Capitalism is the first form of economic and political organization of society (or the first mode of production) in which the domestic markets and, later, global markets become institutions that play a decisive role in economic coordination within a country. But in every nation the state remains the chief political institution. Developmentalism is a form of capitalism that acknowledges the role of the market in economic coordination, but affirms that the broader coordination of a society and of the market itself lies with the state; it is a form of capitalism that views markets as wonderful institutions of economic coordination, and therefore rejects statism, but also understands that effective state intervention in the markets is necessary in order to regulate them, correct their failures, and promote socially accepted political goals. Developmentalism is the ideology in favor of a moderate, but effective intervention of the state, and a moderate economic nationalism that does not exclude international cooperation. It is the national development strategy that will guide the nation toward the realization of its goals. Within that theoretical framework, developmentalism and economic liberalism take turns in power during the development of capitalism, so the dominant class coalition changes often. In the countries that developed earliest, the first developmental coalition (the absolutist state) was very different from the second— the social democratic or Fordist coalition—which prevailed during the thirty golden years of capitalism (1949–1978) after World War II. In Brazil, the social class and political coalition that developmentalists defeated in the 1930 Revolution was not formed by rentier capitalists and financiers, but by the old commodity-exporting oligarchy, the traditional middle class, and foreign interests. In each country, the capitalist revolution always occurred in the context of a developmental system, but the bourgeoisie historically committed itself to economic liberalism, although industrial entrepreneurs usually depended on a developmental policy to prosper. In fact, economic liberalism matters more to the rentier capitalists and to the financiers who manage their wealth; and as these sectors have always relied on “organic” intellectuals to justify this preference, developmentalism was not the only system in the history of capitalism.† That is why there was an alternation between the two forms of economic and political organization. Taking Britain and France as parameters, after the first phase of developmentalism, which was the mercantilist period, we have, between the 1830s and the 1920s, the prevalence of neoliberalism, characterized by low growth rates and high financial instability. With the crash of 1929 and the Great Depression of the 1930s, economic liberalism collapsed. We then had a second phase of developmentalism, the thirty golden years of capitalism, with high growth rates, financial stability, and a reduction of inequality in the rich countries. However, after an economic crisis in the United States and in the United Kingdom in

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the 1970s, from 1980 onward, economic liberalism, now called “neoliberalism,” became prominent again; and once again it generated low growth rates and high financial instability. The second version of economic liberalism, neoliberalism, ended with the 2008 global financial crisis, and today we are living a transitional period in which there is no ideological hegemony. Economic liberalism affirms that the state should just guarantee property rights and contracts and take care of public accounts. Developmentalism adds to this an active economic policy of regulating the markets; planning the country’s noncompetitive sector, particularly infrastructure; and taking care of foreign accounts. For developmentalism, it is not enough to control the public deficit: the state should also control the current account deficit, which includes not only public indebtedness, but private indebtedness, as well. But this does not mean that no mistakes were made during the periods of developmentalist hegemony. Mistakes happened and were sometimes significant. Developmentalism implies social construction and, therefore, planning and administration. Sooner or later, mistakes and distortions will occur. Liberals insist that the mistakes are more serious than the “market failures” that result from economic coordination done exclusively by the market. But this comparison between administrative mistakes and market failures makes no sense, unless we believe that “in the beginning was the Market,” that the market is a magical mechanism of economic coordination. Actually, the market is just an institution regulated by the state, and, therefore, like the state itself, it is a socially built institution. In this sense, we should remember Hegel’s proposition that every society is able to build a state as the maximum expression of its own reason—of human reason historically objectified. All institutions, including the markets, are imperfect. But it is during the ceaseless construction of its state and other institutions that a people becomes a nation and achieves development. But we should not be fooled: developmental governments can lapse into economic populism and fail. The error always made by liberal orthodoxy, and frequently committed by developmentalism as well, is exchange rate populism: when a nation-state spends more than it collects, incurring irresponsible current account deficits. There is also the risk of fiscal populism: when the state spends more than it collects, incurring irresponsible public deficits. Exchange rate populism combined with fiscal populism define economic populism. This should not be mistaken for political populism. Getúlio Vargas showed that it is possible to be a populist at the political level without being a populist at the economic level; yet in the governments of Juscelino Kubitschek (1956–1960) and José Sarney (1985–1990) the two populisms occurred together. To be a populist in political terms means to talk directly to the people, without the intermediation of political parties. Now, this may not be the ideal form of political action, but it is usually the first way through which the masses can express themselves politically; it is, therefore, the first manifestation of democracy. To be a populist in economic terms is very different. It means that the state, or the nation-state, spends irresponsibly, and that politicians, economists, and the people will show a high preference for immediate consumption. When it is the state that spends irresponsibly, this is fiscal populism; when it is the nation-state (i.e., the country as a whole) that spends more than it collects or earns, this is exchange rate populism. Brazilian society no longer accepts fiscal populism because it is convinced that this was the cause of the high

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inflation from 1980 to 1994, but it still accepts exchange rate populism, as we have seen in Brazil’s chronic overvaluation of the currency and high current account deficits. It does so because orthodox as well as heterodox economists are often very lax with regard to current account deficits. This is a kind of populism that is not restricted to developmental governments; liberal governments also pursue it, insofar as they defend growth with foreign savings, that is, growth with current account deficits.

* At the beginning of industrialization, we had, on one side, the industrial entrepreneurs, the government bureaucracy, and the urban workers. But, on the other side, instead of the rentier capitalists and the financiers, we had the mercantile and agricultural-exporting bourgeoisie, which was always associated with foreign interests vis-à-vis Brazil’s domestic market. † The concept of “organic intellectuals” was proposed by Antonio Gramsci; it refers to the intellectuals who are at the service of the dominant class—the great majority of them.

Notes

1. The Higher Institute of Brazilian Studies (ISEB) was an agency of the Ministry of Education that existed between 1955 and 1964. The group of developmental intellectuals associated with the ISEB had been together since the early 1950s, and between 1952 and 1955 published five issues of Cadernos do Nosso Tempo. Regarding the ISEB, see Caio Navarro de Toledo, ed. (2005). 2. It was Ignácio Rangel (1980, p. 47) who coined the expression “import substitution.” He was referring to the sector of the agricultural oligarchy that took part in the 1930 Revolution. 3. The great exception was Roberto Simonsen. 4. As far as I know, all capitalist revolutions were carried out within a framework of authoritarian regimes, which in most cases did not ensure civil rights and, in all cases, did not guarantee universal suffrage. In the mid-nineteenth century, when the capitalist revolution was completed in the United States, civil or liberal rights were ensured, but not universal suffrage. Democracy only gets consolidated in a country after it completes its national and industrial revolution. For the theoretical justification for this claim, see my paper “Democracy and Capitalist Revolution” (Bresser-Pereira, 2012). 5. For a competent analysis of instrumental authoritarianism, see Ricardo Silva (2004). He has difficulty in understanding the unfeasibility of a true democracy in a country that has not yet achieved its capitalist revolution, but he offers a good analysis of the authoritarian state in Brazil. 6. This quotation shows well how Ianni resisted the prevailing dependency theory, even though he was an illustrious member of the “sociology school of São Paulo.” 7. It should be noted that political populism (the direct relationship between the charismatic political leader and the people without the intermediation of political parties and their corresponding ideologies) has no derogatory meaning for me when it happens at the beginning of a people’s political development. Under those conditions, political

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populism is the first manner in which the people are called to participate in politics, and politics ceases to be merely oligarchic. 8. Contrary to popular belief, the United States was no exception. It only reached universal suffrage long after it had carried out, in the first half of the nineteenth century, its industrial revolution and, thus, completed its capitalist revolution. 9. The permanent neutralization of the Dutch disease is only achieved by imposing an export tax or retention on the commodities that are the source of the disease. 10. The exchange rate is “effective” when, instead of using the US dollar as a reference, we use a basket of foreign currencies. It is also effective when we take into account tariffs, subsidies, or multiple-exchange-rate regimes. “Real exchange rate” refers to the exchange rate when it is simply adjusted for inflation. 11. Eugênio Gudin was against economic planning, and regarded the Brazilian manufacturing industry as “artificial”; in the 1950s and 1960s, he was the leader in Brazil of the reaction against the ideas of CEPAL. Roberto Simonsen, in the name of the entrepreneurs, defended the national manufacturing industry and state intervention in the economy. On this dispute, see João Paulo de Almeida Magalhães (1961), Lourdes Sola (1982 [1998]), Ricardo Bielschowsky (1988), and Maria Rita Loureiro (1992). The original texts of the debate were republished in Eugênio Gudin and Roberto Simonsen (1977). 12. Wilson Suzigan called this analysis the “theory of adverse shock” (1986, pp. 23–28). 13. A similar dialectical analysis was done by Liana Maria Aureliano (1981). To her, “the coffee-growing accumulation is made under mercantile capital and, in its contradictory movement, it encourages the emergence of the big manufacturing industry” (pp. 10–11). Later on, she points out the importance of the 1930 Revolution: “The political crisis of the 1920s culminated in the 1930 Revolution: the coffee-growing bourgeoisie was definitely displaced from its position of control over the state apparatus” (p. 98). In the same vein, Sônia Draibe (1985), despite insisting on the positive relationship between the coffee and manufacturing industries, and despite identifying with the criticism of “CEPAL’s political economy,” acknowledges the conflict between the coffee and manufacturing industries, saying that “regarding its project of industrialization, the industrial bourgeoisie would face the opposition of the sectors associated with coffee” (p. 37). Her analysis of Brazilian industrialization, significantly, begins in 1930. 14. Ianni uses the term “technostructure” in the same way that I use “technobureaucracy,” that is, to identify the professional middle class (civil and military, private, and public) that was emerging, in this case, at the state level. 15. Maurício Nabuco became the pioneer of bureaucratic and civil service reform in Brazil by establishing the principle of merit at the Ministry of Foreign Affairs in the late 1920s. Luiz Simões Lopes was, however, the reform’s most important public figure. According to Francisco Gaetani (2005, p. 99), “Lopes [was] the main entrepreneur of public policies in the period 1934–1937, although Nabuco played an important role in starting the process of the definition of the reform, and Vargas was the political entrepreneur during the whole time.” Lopes would continue his task of rationalizing the state apparatus by creating the Getúlio Vargas Foundation in 1944, which, with the Brazilian School of Public and Business Administration, would become the country’s most important center of studies in public administration. In 1954, he created the São Paulo School of Business Administration and, in the 1960s, founded its public administration program. Also relevant concerning this reform is the contribution of Lawrence S. Graham (1968). 16. DASP was created by the Decree Law 579 of July 30, 1938. It was basically a central agency for personnel, budget, organization, and methods. It absorbed the Federal Civil Service Council, created by Law No. 284, of October 28, 1936, which

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was the first reform that established a meritocratic career structure for the Brazilian government bureaucracy. 17. Integralism was a radical right-wing political current inspired by fascism that gained support among Brazilian intellectuals in the 1930s; in 1937 it was involved in a failed coup that created the political conditions for Vargas’s authoritarian Estado Novo. 18. Beatriz Wahrlich (1915–1994) was one of the founders of the Brazilian School of Public and Business Administration (EBAPE), at the Getúlio Vargas Foundation, and of the study of administrative reform in Brazil. For the quality of her studies, her research, and her teaching, she deserves the title of intellectual patron of public administration in Brazil (Wahrlich, 1970, 1983, 1984). She studied Vargas’s 1937 civil service reform in depth, and was the chief theorist of Roberto Campos and Hélio Beltrão’s 1967 developmental administrative reform (defined in Decree Law 200 of February 25, 1967)—a reform that anticipated the 1995 managerial reform of the state. 19. I define “capitalist rents” as interest, real state rents, and the dividends earned by rentier capitalists; in neoliberal or rent-seeking capitalism, they are associated with the “financiers,” that is, the professionals who manage the wealth of the former, receiving, in exchange, commissions and high bonuses. Although there are similarities, capitalist rents should not be mistaken for Ricardian rents or land rents, which, in rentiers’ capitalism, are a part of the broader concept of capitalist rents.

7 Imperialism and Industrialization: The 1930 National-Popular Pact

During the 1930–1960 period, Brazilian politicians and intellectuals were divided between nationalism or developmentalism versus economic liberalism and its associated expressions, cosmopolitanism and cultural dependency. Regarding the applications of these ideas to Brazil, nationalism and developmentalism originated in the works of intellectuals such as Sílvio Romero, Alberto Torres, Francisco José de Oliveira Vianna, Gilberto Freyre, Anísio Teixeira, and Azevedo Amaral. In the 1950s, these ideas materialized into the economic thought of Raúl Prebisch and Celso Furtado, at the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), and of intellectuals at the Higher Institute of Brazilian Studies (ISEB); and in the political thought of Alberto Guerreiro Ramos, Hélio Jaguaribe, Ignácio Rangel, Álvaro Vieira Pinto, and Nelson Werneck Sodré. In addition, there was the significant intellectual figure of Roberto Simonsen, who was also a businessman and leader of associations representing the interests of industrialists. CEPAL spoke euphemistically about imperialism and dependence in terms of the “center” and “periphery,” criticized liberal economics, supplied the justification for industrialization, and proposed economic planning. The ISEB conducted historical analyses of Brazil’s national revolution and developmental class coalition, and critiqued the idealism of the Brazilian elites and the mimetic and alienated nature of Brazilian culture. Liberalism and cosmopolitanism have a long history in Brazil, of which Tobias Barreto and Ruy Barbosa were a part, as was Eugênio Gudin, the greatest representative of both currents of thought during the 1950s. Nationalism, that in Brazil was always economic, never ethnic, as well as developmentalism (economic nationalism plus moderate state intervention) marked Getúlio Vargas’s National-Popular Pact and the national-bourgeois interpretation of Brazil, whereas liberalism and cosmopolitanism corresponded to the 117

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economic liberal interpretation—the notion of Brazil’s agrarian vocation— which had prevailed until 1930. Before 1930, nationalism was confused with nativism or with patriotism, instead of being associated with developmentalism. It is only from the 1950s on, when Brazil’s industrialization was no longer a project, but a reality, and when industrial entrepreneurs became strong enough to support an ideology that would touch the whole country, that economic nationalism became aligned with developmentalism. That was the point when industrial entrepreneurs started to criticize cosmopolitanism, or the dependent outlook of local elites, and the imperialism of the rich or developed countries. The key developmental idea was that Brazil, which until 1930 had been a semicolonial country dominated by a local aristocracy that was submissively allied with international capitalism, was then ready to become an independent country, a true nation. Thanks to industrialization, Brazilian nationalist elites, both intellectual and entrepreneurial, were able to criticize the recommendations and pressures that came from the North or that were locally expressed by the liberal and cosmopolitan elites—ideas that actually favored the rich countries, not Brazil. Developmentalism is the ideology of economic development; it is a national development strategy or, more broadly, the alternative to economic liberalism. It is historically distinct from nationalism because nationalism can be ethnic and violent, whereas developmentalism is absolutely not ethnic in nature: it is just economic nationalism. National-developmentalism appeared in Brazil in the 1950s as an ideology of industrialization, whereas liberalism retained its agricultural orientation. Developmentalism criticized the modern industrial imperialism of Britain, France, and the United States. This imperialism did not end with the post-World War II decolonization. It remained alive and strong through the exercise of its ideological and economic hegemony—through a whole series of recommendations and pressures aimed at the developing countries, supported by international financial agencies. Its goal was to occupy Brazil’s domestic market with its exports of industrial goods that had high value-added per capita. This is why developmentalists accurately affirmed that imperialism was anti-industrialization, and criticized multinational corporations for their minimal contributions toward the improvement of the country’s technological capacity. When multinational corporations began to make investments in Brazil, given the closure of Brazil’s domestic market to imports of manufactured goods, the developmentalists suspended this criticism, not realizing that the exploitation remained insofar as the multinationals’ direct investments eventually contributed to an increase in consumption, not in the country’s productive capacity, and insofar as the capital inflows caused the national currency to appreciate, thereby sapping the motivation of businesses to invest. Cosmopolitanism argued against this project of nationhood, as it continues to do today; and it denied or ignored all the assumptions of develop-

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mentalism, beginning with the view that Brazil had been a semicolonial country. At that time, cosmopolitanism was typically on the defensive, and did not organize its ideas very well. Liberal cosmopolitanism, marked by a colonial inferiority complex (the belief that the rich countries, their intellectuals, their politicians, and their capitalists knew what was best for Brazil) started from an attitude of disbelief regarding the potential of Brazilians. It also maintained, despite Gilberto Freyre’s classic criticism, that the climatic and racial characteristics of the country did not enable the development of a great civilization. Colonial ideologues rejected the existence of imperialism and proposed that Brazil become associated with the rich countries, ignoring the fact that any association between unequals is subordination. There was only one issue regarding which their ideas were more coherent: the defense of foreign capital. Their major argument was that an influx of “foreign savings” was “necessary” for Brazil’s economic development. At the time, the nationalists did not have the arguments they have today to refute this claim. In fact, what is really necessary is just the knowhow of those enterprises, not their capital.1 Socioeconomic Groups and Politics

After this brief analysis of the ideological struggles that marked the national revolution in Brazil, it is not hard to identify which socioeconomic groups were behind them. Developmentalism and nationalism were clearly the political expression of the new emerging social groups. However, as the Brazilian nationalist revolution placed a strong emphasis on the process of industrialization, these ideologies were, above all, representative of the interests of the emerging class of industrial entrepreneurs. Their support for developmentalism resulted naturally from the support they received from the developmental state, whose chief policy seemed to be import duties, but actually comprised more than that. It also included in different moments the adoption of multiple exchange rates and (from 1967 to 1989, subsidies to the exports of manufactured goods. All this amounted to a “disguised” export tax that coffee planters termed “exchange rate confiscation”), which the state used to neutralize the Dutch disease, and thereby ensure a competitive “effective” exchange rate (i.e., the rate based on calculations that consider tariffs, subsidies, and multiple-exchange-rate regimes as determining the exchange rate). The measures to neutralize the Dutch disease and to protect the infant industrial sector recommended by nationalism were achieved by a developmental state that, through its investments in state-owned companies, created demand for industrial entrepreneurs. The defense of the three ideologies opposed to developmentalism (agriculturalism, cosmopolitanism, and liberalism) was, naturally, conducted by the traditional middle class and, more particularly, by the rural aristocracy

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and the commercial elites involved in foreign trade, whose interests were threatened by the industrial development. The development of the industrial sector in Brazil challenged the calm supremacy that the rural aristocracy and commercial elites had been exercising over the country since independence. This prevailing order was in full accordance with the interests of the industrialized countries, and was justified by the tenets of economic liberalism. The rich countries were interested in having Brazil remain a complementary agricultural economy. The same goal was shared by the old Brazilian dominant class, which saw industrialization as a threat to its dominant position. It is true that industrialization would benefit agriculture, and from that vantage point one could argue that it would serve—rather than go against—the interests of the agricultural sector. It is not so simple, however. The producers of agricultural goods for domestic consumption would benefit, but the old dominant class in Brazil was entirely devoted to producing goods for export, and their foreign markets would not increase significantly with industrialization. The reason why those markets would not expand is that the main goal of Brazilian industrial development was to replace imports with domestically produced manufactured goods. On the other hand, Brazil’s old aristocracy, which suffered a rude political blow with the 1930 Revolution, had clearly realized that industrial development would only happen in the country if placed under government protection. This aristocracy assumed that any kind of government protection would immediately imply a transfer of income from export agriculture to the manufacturing industry, and this view offers a further explanation for their opposition. This transfer did happen through exchange rate confiscation.2 Actually, it turned out to be much smaller than feared because what the commodity exporters lost was offset by what they received through exchange rate depreciation. Therefore, the main parties engaged in the political struggles from 1930 to President Juscelino Kubitschek’s administration (1956–1961) were, on one side, the industrial entrepreneurial class and the state technicians or professionals, and on the other side, the old dominant class consisting of major landowners and traders involved in foreign commerce. This was thus a fight between the two groups within the elite, with the new bourgeoisie, the new capitalist class of industrial entrepreneurs, whose origins might be found in the various echelons of the middle class, pitted against the old agrarian and commercial oligarchy—including the “four-hundred-year” coffee-growing families of São Paulo and the sugar mill owners in the Northeast, which were included in Brazil’s so-called rural aristocracy, and which exported commodities, on which the developmental state imposed the disguised tax. We should then ask what was the role of the other socioeconomic groups in the political debate? More particularly, what was the role of the left-wing groups? In those years, the really significant left-wing organization was the Brazilian Communist Party (PCB), which had embarked on a revolutionary or putschist adventure in 1936, but still relied on the large

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participation of Brazilian intellectuals. For about twenty years it hesitated between the idea of revolution and cooperation with the national bourgeoisie. But, as Daniel Aarão Reis Filho observes, after the 1954 coup, which overthrew Vargas, “the PCB would gradually become a strict advocate of the prevailing Constitution” and of the “valorization of political democracy.” At its 1958 convention, held when the ISEB’s intellectuals had already conceived of a national-developmental alliance with the national bourgeoisie, the PCB also supported such an alternative by signing the “Declaration of March 1958.” Concurrently, in the other parties, particularly in the Brazilian Labor Party (PTB), left-wing and nationalist groups emerged, and the Nationalist Parliamentary Front was formed in Congress. The control of a great number of student and union organizations was transferred to the Left. Finally, in the 1950s there emerged a Left with a significant political presence, but its goal was not socialist revolution. Rather, it sought a combination of national-developmentalism with the affirmation of social rights by the state. Left-wing nationalism was more radical than the nationalism of industrial entrepreneurs. Some left-wing groups went so far as to deny the usefulness of any and all foreign investment in the country. But the differences, at least between the industrial entrepreneurs and the more representative left-wing individuals, were not significant. More important than the difference of ideology was the similarity of viewpoints in the common fight against cosmopolitanism, agriculturalism, and economic liberalism. Therefore, it is not surprising that the left-wing nationalist intellectuals of the “Itatiaia group,” which published the journal Cadernos de Nosso Tempo (Workbooks of Our Time) from 1953 to 1956 and later gathered at the ISEB, would become great analysts of Brazil and theorists of the Brazilian industrial bourgeoisie.3 It is also not surprising that the PTB, which was, in one way or another, the political manifestation of the Left, would join with the Social Democratic Party (PSD), in which the interests of a good part of Brazil’s industrial bourgeoisie were represented, as well as those of many other sectors of society.

Brief Theory 6: The Tendency Toward Chronic and Cyclical Overvaluation of the National Currency Since 2006, a group of Keynesian and developmental economists have been devising a new version of developmentalism, as well as macroeconomic principles to be associated with it. This new developmentalism states that (1) the two key macroeconomic variables are the exchange rate and the current account deficit or surplus; (2) economic development basically depends on investments, and investments depend on the existence of lucrative investment opportunities; (3) the lack of such opportunities derives more from bottlenecks on the supply side

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(lack of savings, education, infrastructure, etc.) than from insufficient demand or the lack of access to demand; (4) and that the lack of access of technologically competent business enterprises to both domestic and foreign markets results from an exchange rate that is overvalued over the long term (due to the tendency toward cyclic and chronic currency overvaluation), which disconnects the competent business enterprises from their markets. The tendency toward cyclic and chronic overvaluation of the currency shows that it is not enough for macroeconomists to criticize Say’s law, as Keynes did in the first chapter of The General Theory of Employment, Interest and Money (1936), or to show that, contrary to what is said by conventional theory, supply does not create its own demand. It is also necessary to criticize the lack of access to demand, both external and domestic, caused by a chronically overvalued currency. Brazil’s tendency toward a cyclic and chronic overvaluation of the national currency was a manifestation of the Dutch disease; it resulted from the developmental coalition’s Dutch disease and from the adoption of three “habitual policies” of developing countries, supported by liberal orthodoxy, that generate excessive capital inflows: the growth with foreign savings and consequent indebtedness to foreign creditors policy; using the exchange rate as a monetary anchor for controlling inflation; and setting a high interest rate, a policy justified either by the objective of “attracting capital” or by the central bank’s “need” to conduct monetary policy not around a core exchange rate of 1 percent, but, for instance, around a core exchange rate of 5 percent. New developmentalism, and the developmental macroeconomics underpinning it, may be considered a second version of structuralist theory or of the school of economic development that, between the 1940s and the 1960s, was conceived of by a group of development pioneers. This theory, which combined elements from the classical or political economy and from the Keynesian schools of economics, went through a crisis in the 1970s. But it started to be revived in the early 2000s. Now, whether because many countries are in a more advanced stage of development, or because the global capitalism of the early twenty-first century is different from the capitalism of the 1950s, it provides a necessary new vision of the kind of economy that developmental macroeconomics seeks to support. This became clear from the early 2000s, after a succession of financial crises followed by a large increase in economic inequality had revealed the failure of the liberal proposals for developing countries. These proposals did not promote stability, growth, or a more equitable distribution of income. On the contrary, the liberal policies (trade and financial liberalization, privatization, reduction of the size of the state, precariousness of labor, etc.) only benefited a restricted minority. The 2008 global financial crisis made the failure of the second version of economic liberalism, neoliberalism, obvious to the rich countries. A group of new theories and policies then appeared, and these constituted the new developmentalism and the associated developmental macroeconomics.* Although economic development also depends on factors on the supply side (e.g., education, technical and scientific progress, investments in infrastructure, and good institutions), new developmentalism states that the bottleneck lies on the demand side, and affects not only demand itself, but also access to development through a competitive exchange rate or an equilibrium exchange rate. Economic development depends on a high rate of investment, which does not depend on high previous savings, but on the existence of lucrative investment

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opportunities for the business enterprises using state-of-the-art technology. This, in turn, depends on the existence of domestic and foreign demand, as well as access to both, which only a long-term competitive exchange rate can ensure. The primary condition for investment is not the existence of prior savings, as orthodox (i.e., neoclassical) economists argue. Instead, assuming the availability of credit to industrial entrepreneurs, the essential condition is the existence of lucrative investment opportunities for them—opportunities that offer a satisfying difference between the expected profit rate and the real interest rate. It is necessary to have internal demand and, therefore, wages (whose increase is the ultimate justification of economic development) that rise in proportion to productivity growth. To facilitate this, capitalist income, such as interests and rents, should be as low as possible, because their economic and political justification is limited and because the greater they are, the smaller will be business profits and workers’ wages—money for people who actually produce. And, finally, the exchange rate must be competitive, at the industrial equilibrium level. In the process of economic development, the exchange rate actually plays the role of a light switch: when the rate is in equilibrium, the domestic companies that use cutting-edge technology have access to the whole global market; when it is overvalued, they lose this access, whereas foreign business enterprises, whose efficiency may be even lower, start to export to the country and, consequently, to capture its domestic market. But developing countries face a fundamental problem: the tendency toward cyclical and chronic overvaluation of the currency. This tendency leads the country into repeated balance-of-payments crises. The identification of this tendency is something new in economics literature.† It results from two factors that appreciate the currency: the Dutch disease (which affects most developing countries) and excessive capital inflows, justified by the mistaken idea that the structural foreign constraint faced by the developing countries should be overcome by resorting to “foreign savings.” The existence of this tendency means that, apart from varying cyclically, the exchange rates of developing countries are often chronically overvalued. And because this overvaluation usually lasts through at least the medium term, exchange rates are now the focus of development economics, which formerly never paid much attention to them, as their volatility was considered to be short-term and thus a concern only for monetary theory. Consequently, development macroeconomics criticizes both neoclassical or orthodox theory, which declares that a currency floats gently around its exchange rate in such a way as to eventually balance the country’s current account, and Keynesian macroeconomics, which states that a currency floats in a volatile way around this same equilibrium, though still eventually balancing the country’s current account. Development macroeconomics affirms that, in the developing countries, the exchange rate is not eventually regulated by the market, as it undergoes cyclical balance-of-payments crises. The cycle, as we can see in Figure 7.1, begins with a balance-of-payments crisis, which occurs when foreign creditors suddenly suspend the rollover of foreign debt in foreign currency, resulting in a strong devaluation of the local currency. Later, after the inevitable adjustment that the country is forced to make, the exchange rate once again gradually appreciates. This appreciation is actually caused by a non-neutralized Dutch disease, which pulls down (appreciates) the currency to the current account equilibrium. Then the policies

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habitually adopted by developing countries (growth with foreign savings, high interest rates to attract capital and control inflation, and the exchange rate as an anchor against inflation) result in capital inflows, which pull down (in Figure 7.1), i.e., reduces (in relation to the dollar) the value of the local currency below the current account equilibrium (in the domain of the current account deficits), thus appreciating the local currency. These policies are recommended by the rich countries and irresponsibly accepted by the local governments. As a result, because of an inflow of more loans, total foreign debt rises again, and the creditors begin to gradually lose confidence and to suspend the renewal of their loans. And, a little later, the herd instinct kicks in: the foreign creditors lose confidence and refuse to roll over the developing country’s debt. A new balance-of-payments crisis arises, leading to the abrupt devaluation of the domestic currency all over again. As shown in Figure 7.1, according to the Dutch disease model, we have the two equilibrium rates: the industrial equilibrium and the current account equilibrium. And we have the effective exchange rate, which goes through a cycle of overvaluation and crisis. The two theoretical alternatives to this tendency are a soft and well-behaved fluctuation, assumed by orthodox theory, or a volatile fluctuation, assumed by the Keynesians. Even if we cannot, in practice, separate the effects of the two factors—the Dutch disease and the capital inflows—we can simplify our description of them by noting that the Dutch disease pulls the local currency’s value up to the current account equilibrium (because it is compatible with the intertemporal equilibrium of the exchange rate at the current equilibrium level), and that the excessive and unnecessary capital inflows that result take the country into the domain of current account deficits and foreign indebtedness. On the other hand, we may consider the fact that this indebtedness goes through three stages during this Figure 7.1: The Cyclical Tendency Toward Currency Overvaluation

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whole process: there is the substitution of foreign savings for domestic savings, when the country is already very indebted; then the “foreign financial fragility,” which, for a long time, the structuralists believed was a “structural condition” of development; and, finally, a new balance-of-payments crisis. The cyclic nature of the currency overvaluation became evident during President Fernando Henrique Cardoso’s administration (1995–2002). After the “Plano Real,” the currency strongly appreciated due to two policies: the pursuit of growth with foreign savings and the use of the exchange rate as an anchor to keep the residual inflation left over from the plan under control. The Dutch disease was not neutralized. The results included growing current account deficits, an increase in the foreign debt and, by the end of the government’s first term, in 1998, the loss of the creditors’ confidence. This created the suspension of the foreign debt rollover and the onset of a crisis, in January 1999; at that time, there was a classic devaluation of the domestic currency and the demand for support from the International Monetary Fund (IMF). But would not a floating exchange rate prevent this appreciation and prevent the crisis? It could prevent it, but this hardly ever occurs because capital inflows are speculative and imply a bubble of foreign indebtedness. When making their financial investments, foreign speculators fulfill their own prophecy that the exchange rate will continue to appreciate, and they irrationally continue to make their investments. Then, all of a sudden, they lose confidence. When that happens, they suspend not only any new investments, but also the rollover or refinancing of the existing debt, and the crisis breaks out at last. This is what we saw in the second financial crisis of the Cardoso administration, in 2002, which took place during the implementation of the floating exchange rate policy. Summing up, the Dutch disease and the three aforementioned habitual policies appreciate inexorably the developing countries’ currencies, creating a major competitive disadvantage for local businesses, and thus an obstacle to investment and growth. If the developing countries neutralized the Dutch disease, as a country like Norway does, and rejected these habitual policies, they would grow much faster.

* I first defined this tendency in Globalization and Competition (2009). † Some of the new developmentalist economists gathered in São Paulo, in April 2010, and defined the “Ten Theses of New Developmentalism,” which were then subjected to a broad discussion, and were originally supported by eighty development economists all over the world. The ten theses are listed at: http://www.tenthesesonnewdevelopmentalism.org.

Notes

1. We will see this issue more clearly when we discuss “growth with foreign savings,” which, in the 1990s, became a neoliberal mantra for the developing world. 2. “Exchange rate confiscation” was a term that referred to the process by which, under a system of multiple exchange rates, or with a combination of high import tariffs and export subsidies, the government gave the exporters of primary goods a more appreciated exchange rate than the rate assured to imports and, in cer-

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tain cases, to the exports of manufactured goods. It was, therefore, a disguised tax on commodity exports that, by shifting the supply curve of those commodities to the left in relation to the exchange rate (not in relation to the international price of the commodity, here assumed to be constant), neutralized the Dutch disease to a degree equivalent to the value of the alternative export tax (a simpler but politically more difficult way of neutralizing the Dutch disease). 3. This fact was particularly obvious regarding one of the most important representatives of the group, Hélio Jaguaribe. On this subject, see Simon Schwartzman (1963). This group disintegrated by the end of the 1950s (perhaps a reflection of the structural transformations to which we will refer below), and the ISEB would fall into the hands of more radical groups, leading to its closure by the military coup of 1964.

8 Crisis, Coup, and Democracy: Resuming Developmentalism After 1945

By aligning himself with the United States during World War II, Getúlio Vargas would be winning in the short run, but he knew that the fate of the “Estado Novo” was sealed. The dictatorial regime had violated rights, worsening an authoritarian climate that had always existed in Brazil. But by the end of the fifteen years of his first government, Brazil had changed. Its industrial and national revolution was in full swing. The interim government that resulted from Vargas’s overthrow in 1945, presided over by José Linhares, immediately shifted to a liberal orientation. With the democracy created through the 1946 Constitution, and as if it were an essential part of it, economic liberalism became hegemonic and drove trade liberalization. Immediately after, the administration of Eurico Gaspar Dutra (1946–1951), elected with the support of Vargas, initially maintained the policy of liberalization. But soon the large foreign exchange reserves that had been built up during the war were exhausted, and in 1947 the country faced a currency or balance-of-payments crisis. The crisis was inevitable, given the—then unknown—tendency in the developing countries toward a cyclical overvaluation of their exchange rates. This is a tendency that is always confirmed when international trade and capital movements are left free, and a developing country accumulates a debt that is repayable only in reserve currencies. The exchange rate crisis forced the government, in 1947, to go back to import controls and, in 1948, to try to establish the first public investment plan in Brazil: the Salte Plan. The return to import controls can be better understood in light of the political situation. The 1945 transition had not created any major social conflicts; instead, it was the result of a near consensus among the middle classes and the elites excited by the victory of the democratic countries in the war. And it did not engender any substantial changes in the political coalition that had been prevailing in Brazil since 1930. So, from 1948 on, it was not surprising that, given the failure of eco127

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nomic liberalism, the government’s economic policy once again aligned with the preference of the developmental class coalition—including the industrial bourgeoisie, the government bureaucracy, and the workers—for an economic development strategy based on import substitution. However, the new policy lacked ideological legitimacy because some major intellectuals, such as Francisco José de Oliveira Vianna and Azevedo Amaral, had been compromised by the support they had given to the Estado Novo. Political legitimacy would appear in the 1950s, provided by the group of intellectuals associated with the Higher Institute of Brazilian Studies (ISEB), which would be known from 1955 on as the “ISEB group.” In Latin America, they were associated with the ideas of the United Nations Economic Commission for Latin America and the Caribbean (CEPAL). Validating the economic strategy of protecting the nation’s manufacturing industry took a great deal of effort. This included criticism by Raúl Prebisch and Celso Furtado of the law of comparative advantage in international trade. It included Keynesian thought, and considered the successful developmental experiences of the central countries that had been backward, but were eventually successful in making their capitalist revolutions. The developmental experiences of protecting manufacturing occurred in countries like Germany and, particularly, Japan. On the other hand, at the political level, the ideas of the ISEB’s great intellectuals—Alberto Guerreiro Ramos, Ignácio Rangel, Álvaro Vieira Pinto, and Hélio Jaguaribe—were essential for legitimizing import-substitution industrialization. They would be the ones who, with more energy and consistency, would identify and defend the political pact conceived by Vargas and the corresponding national development strategy: nationaldevelopmentalism. They showed that until 1930 Brazil had been a semicolony, dominated by an agrarian and mercantile oligarchy allied with imperialism, and that in 1930 Brazil’s national and industrial revolution had begun, based on a political coalition formed by the industrial bourgeoisie, the government bureaucracy, the workers, and the import-substitution oligarchy. In 1946 a semi-democracy was established in Brazil; it was not yet a full democracy because those who were illiterate had no right to vote. In 1947, the Brazilian Communist Party (PCB) was declared illegal and the mandates of its elected representatives were revoked. However, despite the campaign of the Liberals, who had been successful in 1945, the two parties created by Vargas, the Social Democratic Party (PSD) and the Brazilian Labor Party (PTB), soon became dominant. And Vargas, then in the Senate, criticized economic liberalism. The Second Vargas Administration

In 1950, a large majority elected Vargas president of the Republic. Over the following four years, until he was the victim of a coup and committed sui-

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cide in 1954, Vargas’s national-developmentalism would always be conducted by him and by the economic staff of the Office of the President, led by two senior public bureaucrats: Rômulo de Almeida and Jesus Soares Pereira. This staff managed to restore the basis of national development with the creation of new state-owned companies that would be in charge of the development of the country’s economic infrastructure, Petrobras and Eletrobras the most important among them. But there was also a group of more liberal technicians, mainly involved in international cooperation— including Ary Torres, Roberto Campos, Lucas Lopes, and Glycon de Paiva— that gathered around the Brazil-United States Mixed Committee. Their work, however, under Vargas’s command, complemented the task of the other group. A contributing factor behind this cooperation was the fact that the work and debates took place within an intellectual framework that deemed economic planning for development to be legitimate: the context of structuralist development economics, or classical developmentalism. The new state-owned companies and the state’s decision to invest in economic infrastructure represented a victory for the nationalist segment of the government’s economic bureaucracy. Its development plans materialized, and created professional positions that were sources of power and prestige. Its major victory was the creation of the National Bank of Economic and Social Development (BNDES) in 1952, at the suggestion of the finance minister at the time, Horacio Lafer, an industrialist from São Paulo.1 The idea was first studied in 1942, by the Cooke Committee, sent by Franklin D. Roosevelt at Vargas’s request to promote industrial development. Corwin D. Edwards, a member of this committee, in which a few Brazilian industrialists and former lieutenant João Alberto Lins de Barros took part, proposed the creation of an investment bank; and the government seriously considered the proposal. That same year, Vargas charged the Administrative Department of Public Service (DASP) with forming a group to examine the possibility of establishing an investment bank; and among the group members were Alberto, Luiz Simões Lopes, and the banker Gastão Vidigal. The industrialists received the idea with enthusiasm. Roberto Simonsen became an active supporter. At that time, however, it was evident that the government bureaucracy and, more broadly, the country’s technical and industrial elites, were divided on the issue between two sides: the nationalists and the liberals, whose main spokespeople were Simonsen (who was also a businessman) and the economist Eugênio Gudin, respectively. The debate that took place between the two sides—the nationalists defending industrialization backed up by an active planning policy, and the liberals asserting Brazil’s basically agrarian vocation and rejecting state intervention—is today part of the country’s economic history. In the 1940s, the Bank of Brazil was in charge of financing production and, with the creation of the bank’s foreign trade division, Carteira de Exportação e Importação (CEXIM), it also started to finance and regulate Brazil’s foreign trade.

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However, the Bank of Brazil still lacked an appropriate agency for financing industrial investments. This would happen only in 1952, with establishment of the Brazilian National Development Bank (BNDS). Before that, in 1948, a commission from the United States, the Abink Commission, was sent to Brazil to help the country industrialize—with a policy that the United States itself would soon abandon: industrial policy. The Brazilian committee that worked as a counterpart to the US one was headed by Otavio Gouvea de Bulhões, and approved a project. In 1951 this industrial policy took shape within the Brazil-United States Mixed Committee, which had been created to discuss and formulate a development plan for the country and for its international financing. Observe that the dominant views in the United States at that time were neither liberal nor neoliberal; developmental ideas were still dominant internationally. Thus, the Mixed Committee suggested that the state be in charge of infrastructure (energy, transportation, communications), whereas the private and foreign sectors would be in charge of mining (then the main strategic interest of the United States regarding Brazil). The Brazilian state would guarantee US companies access to its market. There was, of course, a conflict between the two groups of government technobureaucrats, particularly because the nationalist group wanted a state monopoly of oil, which was rejected by the liberals. Nevertheless, the two groups were equally oriented toward economic planning and toward establishing a state-based transportation and energy infrastructure. The policy of the Mixed Committee outlined what would become the Plano de Metas (Targets Plan) of Juscelino Kubitschek. In order to obtain US financing, which was also part of the agreement, the government had to provide matching funds. The Brazilian finance minister solved this problem by creating an additional income tax, of 15 percent. It was then necessary to designate an agency to carry out the five-year plan just then being drawn up with the new financial resources. This was the opportunity for the creation of the BNDES—an agency insulated from political pressure that would take charge of economic planning and of funding the necessary investments in infrastructure and industrialization. The BNDES is an institution that even today plays a decisive role in the country’s economic development. Besides contributing to economic development, and despite all the setbacks undergone by the Brazilian bureaucracy, the BNDES would be one of the bases of the Brazilian government’s autonomy and power. In 1953 the Vargas administration faced an exchange rate crisis, or a balance-of-payments crisis, in spite of the control it maintained on imports. However, given that in 1951 there was the prospect of a third world war, the government decided to liberalize imports, fearful that the country would again face problems with supplies of basic imported inputs for its development once the war started. This mistaken forecast (which led to the loosening of import controls), the fact that the government continued to see Brazil’s current account deficits as natural, and the corresponding foreign

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financing all fed the tendency toward acyclic and chronic overvaluation of the exchange rate, and made a new exchange rate crisis inevitable. As Pedro Paulo Zahluth Bastos (2012) notes, It was a structural exchange rate crisis, with negative effects on the general strategy of the Vargas administration. It did not just mean the failure of the strategy of foreign financing of the development program: in the short term, it threatened the continuity of economic growth. (p. 450)

In view of the crisis, the government acted vigorously: it approved the Free Market Act and, in October 1953, issued Superintendence of Currency and Credit (SUMOC) Directive No. 70 under which it depreciated the currency and created a public auction for the purchase of foreign currency for imports, in which the goods were divided into five categories according to their degree of priority for development or for basic consumption. Through this system of multiple exchange rates, established by Osvaldo Aranha, who had replaced Horacio Lafer at the Ministry of Finance, Brazil set up for the first time a clear mechanism for the neutralization of the Dutch disease. Obviously, this was not clear to the economic policy makers, but they should have guessed something about its implications. The exchange rate crisis, however, had weakened the Vargas administration and made way once again for the liberal moralism of Brazil’s National Democratic Union (UDN) and of a radical leader who appeared at this time, Carlos Lacerda. Unjustly accused of corruption, Vargas was the victim of a coup on August 24, 1954, led by the liberal opposition. He committed suicide, leaving an impressive suicide letter, the carta-testamento (testament letter). Below are three excerpts: Again, the forces and interests against the people get organized and again fall over me. They do not accuse me, but insult; they do not fight me, but slander, and do not give me the right of defence. . . . After decades of domination and plunder of economic groups and international finance, I became head of a revolution and won. . . . Hatred, infamies, slander did not sweep away my spirit. I have given you my life. Now I offer you my death. I feel no fear. Serenely I take the first step towards eternity and leave life to enter history.

He had headed a great second government (1950–1954) and confirmed his key role in the major transformation in Brazil that any country must face in order to develop—a national and industrial, or capitalist, revolution. Vargas was Brazil’s twentieth-century statesman. He was authoritarian when Brazil had not yet carried out its capitalist revolution, and therefore its society was not mature enough to have a minimally solid democracy. Thanks to the revolution he headed, the dominant class ceased to depend on the direct control of the state for seizing the economic surplus—a condition that was intrinsically inconsistent with democracy; now it could get it in the

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form of profits earned in the marketplace. In Brazil, that made it possible to have a democracy worthy of the name. Kubitschek and the Consolidation of the Manufacturing Industry

As noted above, the political coup that overthrew Vargas occurred in 1954. Then, in 1955, there was an attempt at a liberal-conservative coup that aimed to suspend the presidential elections. This was neutralized by a countercoup conducted by General Henrique Teixeira Lott. Following these events, Juscelino Kubitschek was elected president with the support of the same political forces that had supported Vargas’s national-developmental project. At this point, Brazil faced three major threats to its development. First, there was the problem of inflation: the annual rate averaged 11 percent from 1939 to 1953, but reached 26.2 percent in 1954.2 Second, there were Brazil’s terms of trade, which had reached a high point in 1954, only to decline in the following years because of a decrease in the international price of coffee; from 1954 to 1960, there was a 25 percent reduction in Brazil’s terms of trade.3 Finally, national economic development was threatened by a crisis involving Brazil’s economic infrastructure: Despite the efforts of the second Vargas administration to initiate economic planning, investments in infrastructure did not follow the accelerated pace of development, and thus proved to be the economy’s real bottlenecks. As a result, and particularly due to the small coffee crop in 1956, the growth rate of the actual gross domestic product (GDP) fell to 1.9 percent that year, making the per capita income growth negative.4 The Kubitschek administration (1956–1961) would be associated with industrial entrepreneurs. As stated by Luiz Alberto Moniz Bandeira (1962, p. 35), “Juscelino Kubitschek actually represented the first government of the industrial bourgeoisie which, in the period 1955–1960, occupied the first level of the dominant classes.” Economically, the basic structural transformation was the increase in the proportion of manufacturing industries of the GDP, which rose from 22.6 percent in 1955 to 27.5 percent in 1960.5 The automotive industry was introduced in Brazil during that period. Starting practically from zero in 1955, Brazil was already producing 133,078 vehicles in 1960, with over 90 percent composed of local content. This accelerated industrialization resulted from the government’s economic policy during that period, more specifically the Targets Plan. Before the 1930 Revolution, Brazilian governments had always represented the local agrarian and commercial oligarchy, which led to governmental attitudes towards industrialization that ranged from indifference to open hostility. The 1930 Revolution changed all that. Particularly during Vargas’s second term, there was a serious attempt to plan for the promotion of Brazilian

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industrial development. Previously, starting in 1937, through DASP, the government had executed a significant civil service, or bureaucratic, reform. Due to these previous efforts to strengthen the state, under the Kubitschek administration the Brazilian state proved a reasonably effective instrument for the country’s development. At last, Brazil had a developmental state. Three facts explain the positive actions of the Kubitschek administration. First, the same political forces that had been in power since 1930 had elected it. And those forces, although often contradictory, could be defined as generally nationalist or developmental in outlook. Second, there was Kubitschek’s personality. History is not the work of political or military leaders, but of leaders with strong personalities who leave their mark on history. This is what happened in Kubitschek’s case. With an uncommon ability to sense an opportunity, he was able to recognize the historical moment the country was going through, and he gave his government two guidelines: forced industrialization, at full steam; and optimism, implying a reliance on the potential of both the country and its people. His industrialist ideology and the extraordinary support he gave to Brazilian industrialization often seemed to happen despite the industrial entrepreneurs, rather than because of them; his unlimited optimism was a head-on denial of the colonial inferiority complex, particularly as it related to Anglo-Saxon peoples, which was then widespread in Brazil. Finally, the new president surrounded himself with a competent team of technicians, particularly economists, who had begun to appear in Brazil at the end of World War II, around the Getúlio Vargas Foundation (FGV), SUMOC, the Bank of Brazil, and the Ministry of Finance. This team of technicians, many of them educated abroad and influenced by CEPAL’s economic thought, constituted a new force in Brazil. In the second half of the 1950s, this group of economists was ready to take increasing control of the national economy and to plan its development. Besides their technical capability, they now had at their disposal a functional system of national accounting, which was essential for planning; the system had been in development by the national income team at the FGV since 1947. President Kubitschek, who was elected in 1955, realized the potential of this group and charged it with the task of formulating the Plano de Metas; he later gave the group a number of responsibilities in key sectors of the economy. It should be noted that this group, which was undoubtedly not homogeneous, and had serious differences among its members, was characterized above all by its technical competence and its mastery of a complex field such as economics. This was a classic bureaucratic group comprising staff from the government civil service and state-owned enterprises. As such, they remained in power regardless of changes in administrations or ideological guidelines. Under the political orientation of the president of the Republic, whom they counseled, the members of this group, rather than merely defining economic policy, became a factor in the country’s development.

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The transitional government that came to power after Vargas’s suicide in 1954—a liberal and dependent government whose finance minister was an illustrious orthodox economist, Eugênio Gudin—encouraged the inflow of direct foreign capital, through SUMOC’s Directive No. 113, which went too far, even discriminating against domestic companies in favor of foreign ones. In addition, it provided big customs, fiscal, credit, and exchange-rate incentives for the establishment in Brazil of automotive, shipbuilding, and heavy mechanical industries—which are usually dominated by multinational corporations. The Kubitschek administration continued this policy, and the investments in the automotive industry became paradigmatic of the “benefits” of growth with foreign savings.6 I will present my critique of the soft power imperialism in Brief Theory 8, and of growth by means of foreign indebtedness (“savings”) in Brief Theory 9. For now, I will just say that, considering the models of the Dutch disease and of the high rate of substitution of foreign for domestic savings, one can conclude that, although capital is scarce, most developing countries do not need foreign capital to grow, as only a zero or a surplus current account would be consistent with a competitive exchange rate. A current account deficit (foreign savings) always implies an overvalued currency. The Direct Investments Issue

One of the causes usually invoked for industrial development in the 1950s was the new situation represented by the flow of foreign capital into the Brazilian manufacturing industry. Before World War II, investments in industry were limited to assembling imported components. At that time, in view of the closure of Brazilian imports demanded by the import-substitution industrialization model, foreign companies, which started to be called “multinational corporations,” changed their strategy and decided to occupy Brazil’s domestic market. This situation led many analysts, including Hélio Jaguaribe (1958) and Fernando Henrique Cardoso and Enzo Faletto (1969), to believe that the imperial powers were no longer hindering Brazil’s industrialization, but rather cooperating with it. For a while I believed this, too, but today I no longer have the same opinion because what the multinational corporations ultimately did was to occupy the Brazilian domestic market, replacing Brazilian companies that could do the same work, rather than making investments that Brazilian businessmen would be financially unable or would lack the technical knowledge to make. At that time, Brazilian nationalists, headed by great figures such as Alexandre Barbosa Lima Sobrinho, Rômulo de Almeida, and Jesus Soares Pereira, were fighting hard against the unrestricted flow of foreign capital into Brazil. They argued that direct investments of foreign capital hardly constitute an essential condition for a country’s industrial development, let

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alone a basic cause of it. On the contrary, direct foreign investments may become a cause of underdevelopment if they are directed into mining, commerce, agriculture, or public services. Even if it is directed into the manufacturing sector, argued these critics during the 1950s, foreign investment may be harmful to the country in view of the burden represented by the future remittances of profits and royalties. But those arguments did not help, whether because it seemed to be a matter of “common sense” that direct investments promoted economic development, or because the ideological hegemony of the rich world prevailed. Personally, I was confused about this issue when, in the 1970s, I saw that the countries that received more direct investments were the rich countries. If they received so many investments, how could a country in need of capital such as Brazil reject them or, more precisely, impose conditions on them—for instance, that they should actually transfer technology, that they should be associated with domestic capital, or that they should help boost exports? However, in the 2000s, two arguments showed me the mistake I had made. First of all, it is important to distinguish between national accounts and economics. In accounting terms, the total savings of a country are the sum of domestic and foreign savings (which are equal to the current account deficit); in economic terms, this is not necessarily so. What usually occurs is that the direct investments, which finance part of the current account deficit, do not end up financing investment but consumption, insofar as capital inflows appreciate the national currency and discourage domestic investment. What is today well demonstrated is that there is a high rate of substitution of foreign for domestic savings, and that domestic savings displace national savings. When the country decides to adopt a growth with foreign savings policy, it is implicitly deciding to grow with a more appreciated exchange rate than the one that would prevail if the current account were in equilibrium. Therefore, first, the country is deciding to discourage investments by domestic companies, insofar as they lose the ability to export and, what is more serious, to compete with the imports in the domestic market. Second, the exchange rate appreciation artificially increases the wages and, given a high marginal propensity to consume, increases consumption. In the first case, domestic savings are indirectly reduced, according to the Keynesian argument that investment determines the level of savings; in the second one, it is directly reduced, given the workers’ high marginal propensity to consume. The second new argument against direct foreign investments is in response to a table drawn up by an agency of the United Nations in Geneva specializing in monitoring direct investments,7 and distributed every year to newspapers in a press release, that lists the ten countries with the most direct investments during the previous year. It is true that the topmost recipients of those investments are the rich countries, headed by the United States (and currently also China), but this is absolutely not an argument in their favor. If the direct investments are oriented to the domestic market, as is usually the

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case, and not to exports, they are a cession of the country’s domestic market similar to the cession every country makes when it imports goods and services. But, in the case of exports, the country always requires as reciprocity the cession of the other country’s domestic market (or the multilateral cessions of markets), whereas in the case of direct investment there is no such reciprocity. The argument presented by multinational corporations is that they provide capital (but we have already seen that developing countries do not need it, as it appreciates their currencies and reduces domestic savings), or that they provide technology (which would have been a good argument if they really did transfer technology). These arguments apart, we still have the table. If two columns were added to the bigger spreadsheet from which the table is drawn, one showing the direct investments made by the countries and the other showing the balances, we would have a completely different picture. We would find, as I show in Table 8.1 regarding direct investments made between 2001 and 2010, that in 2011 the countries that mostly occupy the domestic markets of the other countries are the rich ones, headed by the United States, whereas those that allow their domestic markets to be occupied by the others are the developing countries, headed by Brazil. Those two arguments make it clear for me how the rich countries, supportive of each other, today exploit the developing countries and impair their development: not by exchanging, via international trade, goods with high value-added per capita for goods with low value-added per capita, but by occupying the domestic markets of those countries through loans and direct investments, but without offering access to their own domestic markets in return. This occupation through direct investments implies remittances of profits, which are paid for with the revenues from the export of commodities that have low value-added per capita. It is a type of financing for which the middle-income countries have no need. They would develop much more if they did not incur chronic current account deficits and the resulting permanent foreign indebtedness, if they kept their markets balanced (or in surplus, if they take into account the Dutch disease, which we will discuss later). But this alternative is not in the best interest of the rich countries, which are today rentseeking countries, given that they occupy the domestic markets of the developing countries without due reciprocity. As observed by Leda Maria Paulani (2013, p. 254), “Rent-seeking is the defining feature of capitalism’s present stage, and positions such as the Brazilian one help boost it. Therefore, we can consider the repeated absorption of foreign savings that Brazil has demonstrated for two decades as a more contemporary kind of dependence—since it is in tune with financialization—more sophisticated and more perverse.” In the last twenty years, Brazil’s own direct investments abroad increased substantially, and we started to occupy the markets of the rich countries and of many Latin-American countries. We are, however, very far from compensating for the occupation of the Brazilian domestic market.

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Table 8.1: Direct Investments and Domestic Market Occupation, 2011 (in $ millions) Greatest Surpluses

Country

United States Japan Switzerland United Kingdom France Italy Norway Austria South Korea Sweden

Surplus

169,719 116,111 69,808 53,137 49,201 18,151 16,430 16,323 15,694 14,760

Greatest Deficits

Country

Brazil China Singapore Australia Belgium India Ireland Turkey Saudi Arabia Indonesia

Deficit

–67,689 –58,868 –38,776 –21,318 –18,436 –16,802 –15,250 –13,412 –12,958 –11,135

Source: United Nations Conference on Trade and Development (UNCTAD). The surpluses indicate the countries that occupy other countries' domestic markets; the deficits, the countries whose domestic markets are the most occupied.

The Consolidation of the Government Bureaucracy

In the context of the 1930 National-Popular Pact, a modern government bureaucracy appeared that would play a strategic role in the formulation and establishment of the national development strategy. We have already seen how this happened during the first Vargas administration, with the creation of a series of government agencies and, finally, with the implementation, in 1937, of the civil service reform, including the creation of DASP. In the 1950s, during the second Vargas administration, there was the creation of the BNDES, the Central Bank of Brazil, Petrobras, and some other agencies oriented toward economic coordination; and we would see the consolidation of the strategy of forming a large government bureaucracy, which adopted the principle of bureaucratic insulation—the protection of some key public agencies from clientelism and pork barrel politics. Whereas government agencies, particularly those belonging to the social ministries, were partitioned among the parties that supported the government, and the agencies related to infrastructure were spared to a degree, the agencies for economic coordination were completely insulated from clientelism. This was a demand from the government bureaucracy, but it was also a decision made by the politicians themselves, who recognized the strategic nature of economic coordination agencies and the risk to themselves of subjecting those agencies to clientelism.

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Between the end of World War II and the outbreak of the 1980s foreign debt crisis, the bureaucracies at the Bank of Brazil, the BNDES, and the state-owned companies were developing rapidly. But their efforts to define merit and to implement merit-based hiring and promotion were sidetracked. According to Lawrence S. Graham (1968, p. 6), who studied the 1945–1960 period of civil service reform, the technobureaucracy had a formalism that was incompatible with the political infrastructure existing in the country after the 1945 democratic transition. As he put it, “The attempt to reform Brazilian federal public administration through the use of an American style of public administration policies led to the construction of an administrative system characterized by a high degree of formalism, in which there was a high degree of divergence between the rules and the reality,” and between the civil service reform demand for entrance examinations and what effectively happened at the federal, state, and municipal levels. The bureaucratic regime supported by Oliveira Vianna did not escape Graham’s classic criticism of Brazil’s legal system: the law remained artificial and unenforceable. When Vargas returned to power, he tried to restore the civil service reform by sending to Congress, in 1953, a global project of administrative reform, but he was unable to obtain approval; and Kubitschek, who would later make the same attempt, was no more successful. Nevertheless, as Celso Lafer (1970) states, Brazilian public administration was progressing: it was estimated that, in 1952, the percentage of public servants chosen on merit reached 9 percent, up from 4 percent in 1943.8 However, the great development of Brazil’s government bureaucracy was also being achieved at state-owned companies; at organizations (which were mainly state-owned then), such as the FGV, created in 1944 by Vargas; and at government agencies such as the BNDES. In 1956, Kubitschek decided to implement the ambitious Plano de Metas (Target Plan), which would complete the industrial revolution started by Vargas, particularly in the automotive industry. This again raised the question of which sector of the government technobureaucracy should be chiefly involved—the statutory or the “parallel” one. Although the president tried the statutory path, which required public entrance examinations, in the end it was the parallel path that proved to be faster and more flexible. A large number of agencies were then created. One of them, the Automotive Industry Executive Group (GEIA), led by Lúcio Martins Meira, employed non-statutory but competent staff, hired according to merit-based criteria. This was the managerial government technobureaucracy that was emerging at a time when the Weberian bureaucracy sought by the 1937 administrative reform had hardly materialized. As observed by Celso Lafer (1970, p. 85), “Kubitschek’s direct assistants for the implementation of the Programa de Metas (Targets Program) were all top-level technicians, experienced not only in the previous planning attempts but also in important political positions.” Among them, apart from Meira,

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we can point to Lucas Lopes, Campos, and later Furtado, who were involved in the creation of the Northeast Development Agency (SUDENE). The choice of a parallel technobureaucracy, which anticipated the logic of the Decree Law 200 of 1967 and of the 1995 managerial reform of the state, was essential to the success of the plan. National-developmentalism was victorious. The Brazil of 1960 was a different country compared with what it had been in 1930. Its economic development had been extraordinary: a sophisticated and integrated industrial infrastructure had been set up, so one could say that Brazil’s industrial revolution was complete. The nation had gained cohesion, autonomy, and identity; its state, as an organization, was more structured and professionalized, and as a legal and constitutional system, was legitimized by an incipient democracy, so its national revolution was thus also complete. When the two revolutions are completed, they constitute a capitalist revolution: Brazil was no longer a mercantile and patriarchal society, but a capitalist industrial society in which capital accumulation and the incorporation of technical progress were now an essential part of the economy. This was a different world from the patrimonial one described by Raymundo Faoro (1975). He claims that, because the Vargas governments “froze” the society and state in the form they acquired during those periods, Brazil under Vargas was still an expression of the patrimonial state. Faoro is clear in this respect: From D. João I to Getúlio Vargas, over a six-century journey, a political and social structure resisted all changes . . . the centuries-old persistence of the patrimonial structure, proudly and inviolably resisting the progressive repetition of the capitalist experience. (pp. 733–736)

Now, by insisting on this idea, Faoro ignores the fundamental difference between patrimonialism and the rational-legal bureaucracy, an idea that Max Weber forcefully stressed. Faoro does not take into account the essentially traditional nature of the patrimonial state, as opposed to the modern, rational-legal nature of industrial capitalism and modern technobureaucracy. This was a mistake that Sérgio Buarque de Holanda (1969, p. 106) did not make, even though he was writing much earlier. As he put it, “Patrimonial functionalism may, with the progressive division of functions and with rationalization, acquire bureaucratic features. But, in its essence, the more characterized the two types are, the more patrimonial functionalism differs from the bureaucratic one.” In the 1970s and early 1980s, a number of intellectuals discussed the Brazilian state, its weakness, the limited representativeness of the political parties, clientelism or patrimonialism, and associated phenomena, and they concluded that the government bureaucracy should be more professional-

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ized. The most renowned among them were Luciano Martins (1973), Simon Schwartzman (1975), Maria do Carmo Campello de Souza (1976), Edson de Oliveira Nunes (1984), and Ben Ross Schneider (1991). When they saw the key problem of Brazilian politics as the state’s weakness, an aspect of its patrimonial nature, they were heirs to the classic analyses of Nestor Duarte, Victor Nunes Leal, and Faoro. Their analyses were usually brilliant, but only Martins and Schneider clearly realized that the state was undergoing a full process of modernization, and that clientelism, undoubtedly existing and problematic, would not prevent a parallel technobureaucracy from acting as a powerful modernizing element. The same was noticed by Campos who, in 1967, tried to increase the flexibility of Brazil’s public administration and expand this parallel technobureaucracy with a pioneering administrative reform (set out in the Decree Law 200) that was a powerful instrument for strengthening the state, and was the first step towards the 1995 managerial reform of the state apparatus. Notes

1. The BNDES was founded in 1952 as the Brazilian National Development Bank (BNDE); the significant addition of the “S” to the name indicates that it is also a “social” bank. The “S” was added in 1982, soon after the beginning of the Democracy and Social Justice Cycle. The institution essentially remained, however, a huge development bank. 2. These figures represent the cost of living in Rio de Janeiro from December to December. Source: the Brazilian Institute of Economics (IBRE) of Getúlio Vargas Foundation (FGV). 3. The terms of trade are calculated by the division of the average prices of the goods and services that a country exports by the average prices of its imports. 4. These figures are from the IBRE. 5. These figures are also from the IBRE. 6. The first political crisis in ISEB’s group of nationalist intellectuals was due to the fact that Jaguaribe (1958) supported the belief that investments by multinational corporations would be beneficial. This belief was the foundation of basic argument of the associated dependency interpretation, which supported an association with the rich countries. 7. It is the Division on Investment and Enterprise of the United Nations Conference on Trade and Development (UNCTAD), a United Nations agency that publishes the World Investment Report annually. It is worth observing that the economically liberal ideological orientation of this agency opposes the developmentalist orientation of the UNCTAD as a whole, which is demonstrated in the excellent annual report, the World Development Report, to which first-rate economists such as Jan Kregel and Heiner Flassback have contributed. 8. In his classic work on Kubitschek’s Target Program, Celso Lafer (2002) included a chapter on Brazilian public administration that evaluates its ability to consolidate such a comprehensive government plan.

9 Coffee, Cold War, and Coup (Again): The End of the National-Popular Pact

During the 1950s, six new historical facts—a couple of them associated with the worsening Cold War—would cause structural changes in Brazilian politics by opening the way to a political crisis at the beginning of the 1960s, and by making the 1930 National-Popular Pact obsolete. The first and most important new fact was the 1959 Cuban Revolution. This revolution was originally just a nationalist revolution but, given the refusal of the United States to permit the nationalization of some US business enterprises, it eventually became a socialist revolution. C. Wright Mills was in Cuba for three months just after the revolution and, in his dramatic book Listen, Yankee (1960), predicted that this would happen if the United States didn’t change its policy. The prediction was fulfilled and, as a result, the whole Latin-American Left entertained the hope that socialist revolutions would be possible in their countries as well. Brazil was no exception. The Left, which had so far been irrelevant or had associated with the industrial bourgeoisie and the government bureaucracy, tried to gain autonomy and to define its own project, which involved a certain radicalization on its part and alarmism on the Right. The second fact, linked to the first one, relates to the armed forces and was due to the Cold War, which dominated foreign policy in the 1950s. This was the growing influence of army officers who were trained at the National War School. They were more prepared and more organized than their colleagues in the armed forces, so they developed an “ideology of national security,” as well as a military strategy based on the assumption of the unavoidability of a third world war. They concluded that, in this war, Brazil should join the bloc led by the United States. This vision weakened the nationalism that had always characterized the army in particular, and undermined the national developmentalism, of which the military had been a mainstay. 141

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The third new fact was the consolidation of Brazilian industrialization. During the Kubitschek administration, the country experienced extraordinary industrial development, completing its accelerated transformation, started in the 1930s, into an industrial economy. During those years, Brazil developed its consumer goods industries and laid the foundation for its basic materials industries, with the construction of the Volta Redonda steel plant, for instance. But, as we saw in Chapter 8, it was during the Kubitschek administration that the automotive industry, the industrial equipment industry, and the naval equipment industry were definitively established in Brazil. At the same time, the basic materials industries experienced a further boost from such developments as the establishment of the petrochemical industry and the building of new iron and steel plants. In other words, that period saw not the takeoff, but rather the consolidation of Brazilian industrial development. The most direct consequence of this change was the victory of the ideology of industrialism and its subsequent loss of importance as long as the process of industrialization was successful. After all the big industrial investments of the 1950s, especially in the last five years of the decade, when the automotive industry was established, there was no sense in debating whether or not Brazil might become an industrial country, or whether or not Brazil had an “agrarian vocation.” By that time, it already was an industrial country. Reality had contradicted the old theories, according to which Brazil could not industrialize and our natural and ethnic characteristics would not allow us to create powerful manufacturing industries similar to those in the developed countries. On the other hand, from a theoretical standpoint, it was increasingly clear that economic development would not be possible without industrialization, and that even agriculture could only reach high levels of productivity if the country industrialized. Economists, sociologists, and almost all other social scientists interested in national development were forced to arrive at the same conclusion. These three facts, particularly the third (the consolidation of Brazilian industrial development), made agriculturalism anachronistic. Industrialism had won the battle and was no longer merely the ideology of one socioeconomic group or other, or of the Left or the Right. It had become a widely accepted idea throughout the country. The fourth new fact was the crisis of coffee overproduction, which took place in the second half of the 1950s and resulted in the drop in its price internationally and in the loss of the value and effectiveness of exchange rate confiscation—the government’s mechanism for neutralizing the Dutch disease. The drop in the coffee prices also led to another shock to the power structure of the old rural aristocracy, which since 1930 had been experiencing a series of economic and political setbacks. With the depreciation of the national currency that followed, the big landowners had less reason to fight industrialization and, specifically, to contest exchange rate confiscation,

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which coffee planters deemed to be a “disguised” export tax. For them, the mechanism that neutralized the Dutch disease, which involved a relatively appreciated exchange rate for the exports of commodities, represented a transfer of income to the manufacturing industries, a transfer they saw as confiscation. In fact, insofar as the basic exchange rate depreciated due to this disguised tax, a good part of what the coffee growers thought they had paid was actually returned to them. This was not easy for them to understand, but this problem diminished in importance during the second part of the 1950s with the fall of coffee’s international prices. The groups related to the coffee industry would continue to protest against the “confiscation,” but they did so without the same energy, without the same emphasis. On the other hand, the coffee crisis reduced the power of the big landowners, while the power of the industrial entrepreneurs increased. But the reasons for any conflict between them diminished: there was no more reason to fight, as the other sectors of the bourgeoisie accepted the leadership of the industrial bourgeoisie. By becoming dominant, the industrial entrepreneurs no longer needed industrialism or developmentalism to defend their interests, so they were free to shift towards a more economically liberal position. Another consequence of the consolidation of Brazil’s industrial development and of the coffee crisis was that nationalism began to fade from the Brazilian political landscape. The decline of nationalism intensified with Congress’s approval of the Tariff Act of 1958. This is the fifth new fact that lead to structural changes in Brazilian politics. Before the Tariff Act, the protection of the manufacturing industry was done through administrative instruments, such as the system of import licenses and exchange rate measures. The latter included the exchange rate auctions established in Brazil under Directive 70 of the Superintendence of Currency and Credit (SUMOC). These protective measures were unstable, and could be revoked at any time by a mere administrative act. They were, therefore, under constant attack by those opposing protection for the manufacturing industry. With the approval of the Tariff Act, however, nationalism had won a great victory. The protection of national industry ceased to be occasional, provisional, or unstable. Now a law, not merely an administrative act, ensured Brazilian industrial development. However, when this victory was won, and the industrial entrepreneurs became secure in their positions, their nationalism no longer had any reason for being, at least not nationalism as they understood it. The sixth new fact was the increased power of trade unionism during the 1950s. The first strike was of maritime personnel and occurred in 1953. It is also in the 1950s that interunion agreements first appeared in Brazil. The first was “Trade Union Unity,” which was received with great apprehension by the bourgeoisie because the institutional framework prohibited this kind of trade union federation. Many others appeared later. Thus, trade unions were organizing and abandoning the protection of the government,

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which had regulated them in the 1930s. Peleguismo, or the co-optation of union leaders by the government, lost its significance;1 and more authentic leaders, although still representing only a small portion of the blue-collar workers, assumed control of trade union organizations, both regulated and not regulated by law. The 1964 Military Coup

These six new historical facts were decisive in causing the collapse of Vargas’s national-developmental coalition—which had united industrial entrepreneurs, urban workers, and the non-exporting sectors of the old oligarchy—and in provoking the political crisis of 1961–1964, and, finally, the military coup. Of these new facts, the Cuban Revolution was the most important because it promoted the radicalization of the Left and the alarmism of the Right. But all these facts helped undermine the reasons for the alliance of the industrial entrepreneurs with the workers, and increased the reasons for an alliance between the developmental and liberal sectors. The industrial bourgeoisie was successful, but fearful of the emergence of the people as a political agent, it joined its ancient opponents. These were the rural exporting oligarchy, those involved in high-value trade, and the foreign companies. In so doing, the industrial bourgeoisie confused itself with them, resembling the last chapter of George Orwell’s Animal Farm, where it was hard to distinguish between the pigs and the men. The old political alliance between the industrial entrepreneurs and the Left—the national-popular class coalition—was broken. Part of the Left, in turn, refused to serve as an auxiliary political force for the industrial bourgeoisie, and they became radicalized. The moderate nationalist Left, represented by President João Goulart, was alone, without support from any side. It relied only on the mass of workers, who had no political weight. The breakup of the 1930 National-Popular Pact soon became inevitable. The moderate Left and the progressive industrial entrepreneurs were well aware that, though the national revolution was not over, the political radicalization that Brazil was undergoing after the resignation of President Jânio Quadros in 1961, and the strong rejection of the vice-president, João Goular, by the right and the military, was leading the country to crisis. Nevertherless, the moderate Left coming to power with João Goulart, felt the need to reform the economic and political structures with a view to accelerating growth, and achieving a better distribution of income became politically more important. The term “basic reforms” summarized the proposed reforms, particularly agrarian reform (the great forgotten part of Brazil’s industrial revolution), urban reform, tax reform, banking reform, and the limitation on remittances of the profits of multinational corpora-

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tions. Reformism had emerged in force after the presidential elections of 1960. The fundamental idea was that Brazil’s legal structures, which regulated the country’s economic, social, and political relations, were archaic, corresponding for the most part to the semicolonial phase of Brazil’s history. According to reformism, these structures, especially the ones regulating rural property (it must be noted that the old rural aristocracy remained the Left’s main target), represented the institutionalization of privilege and backwardness, obstructing the country’s economic and political progress. It was necessary, therefore, to reform these structures and to eliminate the privileges, but this did not require a revolution. The reforms would be made peacefully, within the framework of democracy. Yet liberal-conservatives denied the need for reforms as passionately as social reformists demanded them. The liberals thought that Brazil needed a stronger educational system (although, when in power, they had done nothing to achieve that) and more administrative morality. It was a repetition of the ideology of the jeunesse dorée, liberal-conservative and moralistic, that was brilliantly criticized by Alberto Guerreiro Ramos (1955). Economic development would result from market forces, but social justice would occur naturally, through a few timely legislative measures. In the 1950s, the ideological fight between reformists and conservatives was relatively moderate. From the resignation of President Quadros and the attempted military coup to prevent Goulart’s investiture, the political situation began to deteriorate quickly. The military would only accept the investiture of Goulart as president if the political regime were changed to a parliamentary one. But at the beginning of 1963, after a referendum in which the parliamentary system was strongly rejected, Goulart was confirmed as president under a presidential regime once again, and he proposed some basic reforms. Then began a process of strong political radicalization. The room for dialogue and compromise, through which the socioeconomic groups would solve the conflicts by making mutual concessions, was rapidly reduced. Many of the reformists had become revolutionaries, discouraged about the possibility of transforming society by peaceful means. And many of the conservative liberals became reactionaries, if not putschists, determined to yield to nothing; they followed the logic that any concession would be a defeat and an invitation for the Left to demand more. These liberals, who, before the convention of the National Democratic Union (UDN) in Curitiba, at the beginning of 1963, accepted agrarian reform by constitutional amendment, now would no longer accept it. On the other hand, the reformists, who used to agree with moderate agrarian reform, now found only a more radical reform to be acceptable. The left-wing groups, despite their relative weakness in the Brazilian political scene (ideological politics was just beginning), gained autonomy and strength. The more extreme leftists, based on their relative increase in

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power—with the victories of left-wing groups in trade union elections; and the growing support among students, army sergeants, and the rural workers of the peasant leagues—began to believe that they had acquired great political power in Brazil. The liberal Right, in turn, saw that, for the first time in the history of Brazil, left-wing groups with certain political positions were taking part in power, and that some of them aimed at attaining greater power. Previously, the fight for power was waged among subgroups within the dominant class itself. At most, we had struggles between the rising middle class and the old rural aristocracy. But now there were left-wing groups, and their aim was socialism. Alarmism, therefore, became the great instrument of radicalization at the service of the most extreme leaders on the Right. It would also serve the left-wing radicals, but less efficiently. The way the Right used alarmism to achieve radicalization was simple. At first, statements of an apparently defeatist nature were spread, such as, “The communist revolution is near,” “Within a year we will have a communist revolution in Brazil,” and “Let us enjoy the last moments of bourgeois comfort.” The last phrase was said as a joke, but its effect was the same as the other phrases: they alarmed people and terrified them. These phrases had no foundation in reality. Communism never gained a major presence in Brazilian politics, and the left-wing noncommunist forces were still too weak to mount an armed revolution in the country. But those phrases, by positing the emergence of the Left as an autonomous political force, resonated with people and started to be repeated. The alarmists on the Right concluded that, if the communist revolution was near, they must unite to resist, must yield to nothing, and must turn all their forces against the communists; in other words, they must radicalize. As a result, many people who had never been radicalized, who had conservative but not immobilist tendencies, suddenly became right-wing radicals, unaware that they were the victims of political manipulation by right-wing radical leaders, who benefited greatly from their ideological shift. This was the way Brazil headed to the coup. The military began to conspire. It was soon informed of the support of the United States, through its ambassador to Brazil. Recently declassified White House documents indicate that President John F. Kennedy, also worried about a communist coup in Brazil, considered an armed intervention. It was not necessary. Two weeks before the military coup, the “March of the Family with God and Freedom,” in São Paulo, indicated that the bourgeoisie as a whole would support any measure taken against the communists. On April 1, 1964, a military coup brought an end to the brief democracy of the 1946 Constitution.2 Fifty years later, Marcelo Ridenti (2014) summarized it as a chapter in the country’s “conservative modernization.” Indeed, Brazil’s capitalist revolution was made without major ruptures. The 1930 Revolution, the 1964 military coup, and the democratic transition of 1985 were ruptures, but moderate ones, always aimed at guaranteeing order and capitalist development.

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Brief Theory 7: The Dutch Disease and Its Neutralization Brazilian industrialization, both in its first phase of import substitution and in its second phase of exporting manufactured goods, was only possible because Brazil neutralized its Dutch disease. How could this have happened when development policy makers did not know about the Dutch disease or the natural-resources curse? In fact, they did not have a clear idea of the Dutch disease because the first model that defined it was devised by W. Max Corden and J. Peter Neary (1982), based on the formation of two sectors in the economy and deindustrialization, and the second model was mine (2008b), which stressed the origin of the Dutch disease in Ricardian rents resulting from the abundance of natural resources, and highlighted the existence of two equilibrium exchange rates, the current equilibrium and the industrial equilibrium. The Dutch disease and the policies intuitively adopted by Brazilian developmental economists to neutralize it are fundamental to understanding Brazilian industrialization between 1930 and 1980.* But the absence after 1980 of an exchange rate policy to neutralize the Dutch disease is essential to understanding the deindustrialization, followed by low growth rates, that took place from then on. A country has the Dutch disease when it has two equilibrium exchange rates: the current equilibrium exchange rate, which balances intertemporally the country’s current account, and the industrial equilibrium exchange rate, which is the necessary exchange rate for companies in the tradable sector using cutting-edge technology to be competitive. These two equilibriums are considered in terms of the value of the foreign currency, not in terms of price. They are defined based on the required exchange rate for companies producing commodities (the current equilibrium), and the other tradable goods, mainly manufacturing goods (the industrial equilibrium) to be competitive.† The nominal exchange rate, or market price exchange rate, floats around the lower equilibrium (i.e., with the current equilibrium), thereby making life very difficult if not impossible for the country’s manufacturing companies. The difference between the two equilibriums is caused by the “Ricardian rents” obtained through the country’s abundant and cheap natural resources. The production and export of the commodities giving rise to the Dutch disease are economically viable at a substantially higher exchange rate than the one needed by the country’s competent manufacturing companies to have access to foreign markets and even to the domestic market. The term “Dutch disease” was coined after the Netherlands discovered natural gas in the 1960s. The Dutch guilder appreciated, and the government realized that this “blessing” of an abundant resource was actually a curse because it caused the currency to appreciate. This, in turn, was killing the country’s very modern manufacturing industry. This is why the phenomenon is also called the “natural resources curse.” In Brazil’s case, it is a curse because, when the exchange rate appreciates, industrial enterprises begin to receive fewer Brazilian réis per dollar’s worth of goods exported. The costs of the exports exceed the revenues in the local currency, and industrial enterprises cease to export; soon after, the country starts importing the goods that the exporters used to provide to the domestic market, so these companies are also denied access to the domestic market. Deindustrialization becomes inevitable. The difference between the industrial equilibrium and the current equilibrium indicates the severity of the Dutch disease. In countries where the Ricar-

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dian rents are high, the severity of the disease is high, and the investments in other tradable industries will be nonviable, unless the country neutralizes the disease through an adequate exchange rate policy; in countries where the Ricardian rents are not so high, the difference between the two equilibrium rates is relatively small, and the most efficient manufacturing companies, which benefit from some tariff protection, may survive in the domestic market, but will hardly be able to export. The first case is typical of countries such as Venezuela and Saudi Arabia; the second one, of countries such as Brazil, which opened up its trade and financial sector in 1990–1991 and ceased to manage its exchange rate from then on. Brazil then started to deindustrialize prematurely and its growth slowed down, but the policy changes did not destroy Brazil’s whole manufacturing industry. The neutralization of the Dutch disease can be accomplished by imposing a variable tax on the exports of the commodity or commodities giving rise to it. This tax must be equal to the difference, in domestic currency, between the two equilibrium exchange rates. This tax increases the cost of the foreign currency (and therefore increases the value of the foreign currency), making the current equilibrium equal to the industrial equilibrium, thus neutralizing the Dutch disease. In other words, this tax shifts the supply curve with regard to the exchange rate (not with regard to international prices, which are assumed to be constant) upward to the industrial level, since now the producers of the commodity will only be willing to produce the amount that demand would absorb if the exchange rate were correspondingly depreciated. It must be noted that the tax does not affect the international price(s) of the commodity or commodities; it only affects the supply by the domestic producers in relation to the exchange rate. If, for instance, at a certain international price for soybeans, producers are exporting one hundred bushels at the rate of R$2.80 per dollar, and the government judges that the industrial equilibrium exchange rate is R$3.50 per dollar, the imposition of a R$0.70 tax per exported dollar will neutralize the Dutch disease, because, with the tax, the soybean producers will only be willing to continue producing and exporting the same amount if the exchange rate shifts towards this level. The tax must be flexible, changing according to the variations in the international price of the commodity. If the severity of the Dutch disease is not high, as is the case in Brazil, the international price of the commodity may fall so much that its export becomes “expensive.” In this case, the government, in addition to eliminating the tax, should grant the commodity producers a temporary subsidy. It is the producers and exporters of the commodity who pay the tax but, in the end, they are not encumbered because the amount paid via the tax is received back in terms of exchange rate devaluation. Therefore, there is no economic reason for the exporters to oppose the tax.

* Celso Furtado, in a report he wrote in 1957 on Venezuela for the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), which was only published in 2008, described the problem in practical terms. † When I developed my original model of the Dutch disease (2008b), I had only a vague idea of what the value of the exchange rate was. I came to the theory of the value of the exchange rate later, in “The Value of the Exchange Rate and the Dutch Disease” (2013).

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1. The trade union leaders who came from the trade union system organized by Getúlio Vargas were derisively called pelegos, and the system as a whole, in which the state remained the dominant force, was called peleguismo. 2. There was a similar march in Rio de Janeiro, but that occurred just after the military coup.

10 The Crisis of the 1960s: Inflation and the Emergence of Popular Participation

The political crisis that started with the resignation of Jânio Quadros, in 1961, was followed by serious financial and economic crises. Since the end of World War II, the country had been dominated by a feeling of optimism that, by the late 1950s, had become euphoria. Brazil was not just “the country of the future,” it was becoming the future. From 1961 on, however, the situation changed. Brazil was gradually entering a situation of crisis in which the emerging difficulties overwhelmed the available solutions. The crisis manifested itself initially as a financial crisis—a balanceof-payments crisis—in the form of a currency depreciation in 1961. In its economic aspect, the crisis was easily discernible. The rate of growth of per capita income, which had been around 3 percent until 1961, became negative in 1964, amounting to a 6.1 percent reduction. For the first time in the country’s history, there was a serious problem of industrial unemployment. There had always been disguised unemployment and underemployment in Brazil, with people working in the fields and even in the cities in marginal services for which the work’s marginal productivity was zero. This is, by the way, a general problem in underdeveloped countries. But Brazil had never had, on a significant scale, such a high incidence of open unemployment of people who had previously been integrated into the country’s industrial economy. This began in 1965. According to estimates obtained after careful research by the Federation of Industries of the State of São Paulo (FIESP), by June 1965 unemployment in the City of São Paulo was over 13 percent of the industrial workforce.1 The primary causes of the economic crisis were the inflationary nature of the policies of the Kubitschek administration (1955–1960), the political insecurity during the Goulart administration (1961–1964), and the exhaustion of the strategy of import-substitution industrialization—three factors 151

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that lead to a decrease in investment opportunities. Between 1959 and 1966, the gross capital formation rate dropped from 15.9 percent of gross domestic product (GDP) to 12.8 percent, clearly reflecting the decrease in lucrative investment opportunities.2 The expense of the construction of Brasília, inaugurated in 1960, unbalanced the public budget and caused inflation. The attempt to control inflation through exchange rate appreciation provoked a balance-of-payments crisis. Inflation initially appeared as a demand-pull inflation, but soon became cost-push inflation. The deeper cause of the crisis, however, was the exhaustion of the strategy of importsubstitution industrialization, which, contrary to what is usually understood, was not applied in the 1980s, but in the early 1960s. Exhaustion of Import Substitution

The exhaustion of the strategy of import-substitution industrialization was the structural cause of the crisis. Brazil’s industrial development, from its beginnings to the end of the 1950s, had been based on import substitution. The new industrial enterprises began their activities with an already captive market: the one that had been opened by the importation of similar manufactured goods, which was now no longer possible due to the raising of tariff and/or exchange rate barriers. A typical local enterprise tried to expand its share of the domestic market, seeking out sectors that had never been reached by imported products, only after the enterprise had been established as a supplier to its traditional market sectors. However, this economic development strategy, based on a reduction of the import coefficient, was actually temporary. In the early 1960s, amidst the economic crisis of the time, the possibilities of import substitution had become exhausted, as Maria da Conceição Tavares (1963) and Celso Furtado (1964) stated once the phenomenon started to be observed. This exhaustion was expressed by the fact that the variable that defines this growth strategy—the drop in the import coefficient—ceased to occur. As we can see in Figure 10.1, the import coefficient, which had been over 50 percent of the GDP in 1912, and in 1930 represented 17 percent of GDP, fell to 5 percent of GDP by 1966. And this was its lowest point. Consequently, when the country did not mobilize itself to export manufactured goods, the rate of private investment in relation to the GDP dropped from 11.2 percent in 1959 to 7.8 percent in 1966. A few years earlier, it was still relatively easy to start a new industrial enterprise in Brazil. It was possible to take any manufactured good that was being imported, acquire the technological know-how, copy it or pay royalties, obtain the seed capital and funding, and open the business. In the early

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Figure 10.1: Brazil’s Import Coefficient, 1901–2013 (% of GDP at 2005 prices)

Source: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br., with the author's calculations.

1960s, however, the situation changed. Brazil continued to import a wide range of goods. Therefore, theoretically, the process of import substitution was still viable. An examination of Brazil’s import portfolio, however, shows that the goods that continued to be imported could hardly have been produced economically in Brazil; or—and this was the major problem—to do so would require big investments. Not even the major domestic industrial entrepreneurs were in a position to make such investments. The time had come for Brazil to start considering the export of manufactured goods. With the decline in investments and the economic slowdown, real wages fell, making the problem of lack of demand worse for manufacturers. The decrease in wages started in 1958, before the crisis appeared. Per capita GDP continued to grow, but real wages fell. This resulted in a less favorable income distribution for the consumer class, while production, and particularly production capacity, increased. Between 1958 and 1966, the real minimum wage dropped by 38 percent. This drop was concentrated in the period from 1961 to 1962, when the real minimum wage fell by 37.4 percent as a result of high inflation and the currency depreciation of 1961. From this moment on, the pace of economic development started to slow down.

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Cost-Push Inflation

In order to understand the low-growth period of 1960–1967, we need to consider an additional variable: the acceleration of inflation during the Kubitschek administration, which the Goulart administration was unable to control. The first military government, under Humberto de Alencar Castelo Branco (1964–1967), did manage to control it. But the successful price stabilization that then took place had not taken into account the cost component of inflation. The inflation rate, which had remained between 10 percent and 20 percent since the end of World War II, grew during the Kubitschek administration due to an expansion of public expenditure. From 1961 on, it assumed the characteristics of open inflation while the economy was hit by a crisis and demand declined. How to explain this fact? The fierce debate between structuralists and monetarists concerning the causes of this inflation no longer made sense. When the inflation rate was around 20 percent, it was still possible to look for its origins in foreign trade (i.e., causing a depreciation of the national currency due to the chronic tendency toward an imbalance in the current accounts, or supply bottlenecks such as an insufficient production of agricultural goods for domestic consumption). Or it could have had a monetary explanation, although the emissions were endogenous: they were a consequence rather than a cause of inflation. But, in view of the stagflation (inflation with recession) that occurred, it was necessary to look for another explanation. The first person to realize that the inflation Brazil was experiencing had ceased to be either structural or demand-pull inflation, but was instead cost-push inflation, was Ignácio Rangel, in A Inflação Brasileira (The Brazilian Inflation, 1963). This book is still one of the most important works written in Brazil on inflation. The remarkable imagination of its author, and his acute sense of observation, allowed him to open up new perspectives in the analysis of the inflationary phenomenon in the country. Rangel states (1963, pp. 56–57) that cost-push inflation does not simply originate in the monopoly power of business enterprises—in the fact that Brazil’s economy is characterized by oligopolies and cartels. It is also a mechanism that the economic system resorts to in order to defend itself against the crisis of insufficient demand. In the medium term, “once the areas institutionally prepared for absorbing new investments are saturated, and before new areas are prepared . . . the profitability of new investments begins to decline,” and so do the investments themselves or, in his words, “immobilizations.” This establishes “a tendency to economic depression, which will go from potential to effective if we let capital accumulation actually decline. The rise in the inflation rate is one of the ways in which the economy resists this tendency, upholding the system’s rate of immobilization.” Inflation, therefore, “is a defense mechanism of the economy against the tendency toward a decrease in the rate of immobilization.”

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Eventually the new military regime was successful in controlling inflation from 1965 to 1967, but this result would have been less costly in terms of a recession and a fall in wages if Ignácio Rangel’s analysis had been taken into account. The Emergence of the People

The new authoritarian regime always tried to assume a democratic appearance. Congress operated during practically the whole time. There was an opposition party. Brazilians guilty of subversion or of armed struggle were regularly given trials, though the trials took place in the military justice system. Torture and murders were carefully hidden. Why did they do this? Because they knew that there was no longer room in Brazil for a clearly authoritarian regime, as had been the case with the Estado Novo. A pure and simple dictatorship would not be supported by the Brazilian elites, let alone by its people. Starting in the 1950s, there was a very clear increase in popular political participation. One of the moments when this was dramatically revealed was the big protest demonstration against the coup d’état that overthrew Getúlio Vargas in 1954. The people, who had been ignored in the Proclamation of the Republic, strictly speaking because the Brazilian people as such did not exist, began to take shape. In 1961 Alberto Guerreiro Ramos (1961, p. 42) proved to be optimistic about the Brazilian people: “The most important political fact of Brazilian life nowadays is the existence of the people . . . as an eminent protagonist in the political process.” During the entire previous history of Brazil, we could not talk about the existence of a “people,” that is, of a considerable part of the Brazilian population that would participate in the country’s political process. Since independence, political control had been in the hands of a small dominant class of landowners and of a patrimonial bureaucracy, which did not constitute a civil society. In the late nineteenth century, with the development of an incipient domestic market and, after the Paraguayan War, with the growing importance of the army, the middle class began to appear as a political force. This middle class and, particularly, the military, acceded to power with the proclamation of the Republic and remained there, under the governments of Manuel Deodoro da Fonseca and Floriano Peixoto. However, with the election of Prudente de Morais as president in 1891, the power returned to the old agricultural exporting oligarchy. There it would remain until the 1930 Revolution. The rest of the population—the rural workers, blue-collar workers, and the lower middle class—were still excluded from the political process, as they had been during the Empire. Only the uppermiddle class started to be heard, but it did not yet constitute the basis of a civil society worthy of the name.

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This situation began to change with the 1930 Revolution and Vargas’s populist politics. He tried, for the first time in the country’s history, to integrate the people into political life. Another step was the “democracy” of the 1946 Constitution.3 The growing importance of the industrial blue-collar workers as a socioeconomic group and the spread of the means of mass communications (particularly radio), among other factors, spurred a growing public interest in the country’s political destiny. The popular leaders, especially those in the postwar period, seized on this newfound interest to win elections. We must observe, however, that this populism, despite its demagogic nature, represented progress in relation to the politics of patronage, a system in which the coronéis manipulated the elections. Now, to be elected, it was necessary to persuade the voters. In the 1960 elections, as had already happened to a lesser degree in the two previous presidential elections, there was a clear manifestation of popular will. At least in the elections for executive positions and, particularly, for the presidency, there was a devoted participation of the people in the political process. This increased popular participation led Ramos to welcome the emergence of the Brazilian people in 1961. Despite this, José Honorio Rodrigues (1965, pp. 13–14) was more correct when, four years later, in the context of the 1964 military coup, he declared that “two-thirds of Brazilians are marginalized, live on the periphery of power, and have nothing to do with it.” Brazil was in the midst of economic and political change, but power remained firmly in the hands of the oligarchy. This explained the basic institutional stability behind the apparent political instability: “No matter what happens, abdications, resignations, abolitions, formal changes in the regime, succession crises, Brazilian stability is a rock.” In fact, the Brazilian people would only show their full strength in the context of the 1977 Democratic-Popular Pact, during the trade union demonstrations of 1978 and 1979 in the municipalities near São Paulo (Santo André, São Bernardo do Campo, Diadema, and São Caetano do Sul), and particularly during the “Diretas Já” (“Direct Elections Now”) campaign. Notes

1. The data, published in the newspaper O Estado de S. Paulo on February 1, 1966, came from the Department of Documentation, Statistics and Record of the Federation of Industries of the State of São Paulo. 2. See Werner Baer and Andrea Maneschi (1969, p. 74). 3. The quotation marks around “democracy” refer to the fact that illiterates still could not vote. This would not happen until the 1988 Constitution. This was also a limited democracy because the Brazilian Communist Party was declared illegal, and the mandates of its representatives in the Brazilian House of Representatives were revoked.

11 The Military in Power: The Authoritarian-Modernizing Pact

The 1964 military coup stemmed from an economic and political crisis that, at first, worsened the economic crisis. Due to the necessary adjustments made, the country went into a recession. In the end, however, the resulting stability allowed the achievement of a number of competent reforms, including the nationalization of a significant number of public service companies. This gave rise to high growth rates between 1968 and 1973. The government’s legitimacy, in turn, was high at the beginning, as the haute bourgeoisie and the traditional middle class heartily supported the military. Yet, in 1974, this legitimacy started to shatter, with the military regime gradually losing the support of those classes, while the working class and the Left continued to oppose it, as became clear in that year’s Senate elections. A new political pact was formed in 1964, which I call the “AuthoritarianModernizing Pact.” It emphasized development and modernization, just like the National-Popular Pact under President Getúlio Vargas, but it excluded the workers and the Left. To understand it, we must first make a distinction between the first military government, that of President Humberto de Alencar Castelo Branco (1964–1967), and the others, starting with the administration of President Artur da Costa e Silva (1967–1969). The Castelo Branco Administration

The Castelo Branco administration was a government of technobureaucratic military officers who shared their powers with the civilian government bureaucracy, particularly in the economic sphere. Economists and engineers occupied all the key economic positions, except for the presidency of the Bank of Brazil. They were in the Ministry of Finance and the Planning Ministry, and they held the presidency of the Central Bank and the presi157

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dency of the Brazilian National Development Bank (BNDS). There were economists and technicians who left their consulting positions to work in the administration, thus becoming technobureaucrats. And there were engineers in the ministries concerned with infrastructure. Under this administration, the bourgeoisie was present only insofar as it had created the political conditions for the military coup, and insofar as the government served its general interests. Industrial entrepreneurs, however, did not share any of the power, nor did the politicians. The members of the former National Democratic Union (UDN), who were presumably the greatest beneficiaries of the military coup, were instruments rather than controllers of the government. The trade unions were absent. The demands of the old Brazilian oligarchy were also left unmet: the 1966 policy on the coffee industry proved to be harsh towards the coffee growers. The Castelo Branco administration was solidly authoritarian, while mixing developmentalism with economic liberalism. This changed under the subsequent military governments, starting with the Costa e Silva administration, when the political participation of the elites widened, particularly that of the industrial entrepreneurs. Now we again had a developmental class coalition and a national development strategy, but it was a conservative political pact rather than a relatively progressive one, such as Vargas’s (principally during his second administration). The Castelo Branco administration was economically liberal and philosophically idealistic. It was idealistic because it believed more in ideas than in reality, and because it believed that it would be necessary first to change the people’s mind-set, then the structures. It believed that what was important was not creating effective economic conditions for social change, but to “convert” Brazilian society to capitalism. This idealistic nature of the Castelo Branco administration can be illustrated by the revealing phrase of one of its representatives. Talking about the economic crisis of the first half of 1963, this anonymous representative said to me: The economic situation is really difficult, but there is a trade-off. The most important thing now is to change the mentality of the industrialists, to make them concerned with costs, with increasing productivity. The time when they should only produce to sell and have a lot of profits is over. Now, they must either change their mentality and effectively compete in the market, or they will not survive.

This was an outlook similar to that of the jeunesse dorée, the liberal-conservatives who opposed Vargas’s developmentalism, and whom Guerreiro Ramos (1955) criticized. To the Castelo Branco administration, economic development could only be achieved through intitutional reforms. Few governments were so legislatively prolific. Many of the laws were good, technically well-conceived. That was the case of those concerning the creation of the Central Bank, the creation of the national system of popular habitation, tax reform, the creation of the National Board of Foreign Trade (CONCEX),

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the nationalization of electric power and telephonic companies, and the law on real estate rents. Many aspects of the laws were debatable, but they resulted from the work of intelligent and capable technicians. At the economic level, the government adopted liberal rhetoric and relatively liberal policies. It believed in the forces of the market and pursued the goal of monetary stability as a top priority, sacrificing development in the name of the fight against inflation. It was relatively anti-industrialization. For instance, in the fight against inflation, it did not hesitate to punish the manufacturing industry by restricting credit to a greater extent than it did with agriculture. Politically, the Castelo Branco administration was conservative, as it aimed to preserve the status quo; it was moralistic, as it viewed the honesty of politicians as the solution to Brazil’s problems; and it was so violently anticommunist that it verged on paranoia. At the international level, it was a colonialist government that left the country dependent on the United States in the context of the Cold War. It was colonialist because it believed that the development of Brazil would only take place with support from abroad, believing that there were no conditions for autonomous development. The 1965–1966 recession resulted from the stabilization policy of the Castelo Branco administration. The Government Program of Economic Action (PAEG) for 1964–1966 declared that its first goal was “to speed up the pace of the country’s economic development,” and that its second goal was “to progressively contain the inflationary process during 1964 and 1965, in order to achieve a reasonable equilibrium of prices starting in 1966.” But it actually gave top priority to fighting inflation. This did not mean that the government failed between 1964 and 1966. During the three years of the Castelo Branco administration, with Roberto Campos at the Planning Ministry and Otavio Gouvea de Bulhões at the Finance Ministry, Brazil’s public finances were organized; and inflation, which had reached 94 percent in 1962, dropped to 25 percent by 1967.1 In addition, important developmental reforms were adopted: tax reform, including the creation of a value added tax; banking reform; the introduction of adjustments of financial assets for inflation; and the creation of the Central Bank of Brazil. Telephone and power companies were nationalized and put under government control, allowing those sectors to see huge growth in the following years, self-financed through service fees. With the end of President Castelo Branco’s mandate and the coming to power of Costa e Silva, Brazil underwent a deep transformation. The regime became more authoritarian with the enactment in December 1968 of Institutional Act No. 5, which enabled such actions as the closure of Congress and of all the legislative assemblies of the Brazilian states for almost a year; the suspension of all constitutional guarantees, eventually resulting in the institutionalization of torture by the political police; censorship of music, films, theater, and television; censorship of the press and of other

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means of mass communications; the prohibition of political meetings not authorized by the police; and the suspension of habeas corpus for political crimes. More people became disenfranchised, particularly university professors with a history of active left-wing militancy. The most idealistic and radical on the Left were outraged, joined the armed struggle, and were violently repressed between 1969 and 1971. Authoritarianism was manifested in the systematic disrespect for civil rights, disrespect that had the approval of the legislative and judicial branches of the government. Torture became a routine form of investigation. In view of this violence, the Catholic Church, which had initially supported the military coup, changed its position and began to defend human rights. A few bishops distinguished themselves in this regard, such as Dom Paulo Evaristo Arns, Dom Ivo Lorscheiter, and Dom José Maria Pires. This change in the Church reflected a greater change in the Latin-American Church resulting from the Second Vatican Council, during 1962–1965, and from the historical meeting of the Latin American bishops in Medellín, Colombia, in November 1968. The Church advocated for a “preferential option for the poor,” and became an instrument of democratization. The return of the Church to conservatism would not take place for another ten years, with the election of John Paul II as pope in 1978, and with the repression of liberation theology, which had resulted from the Second Vatican Council and the Church’s ensuing shift to the left in the 1960s. At the economic level, the government again became developmental under Costa e Silva’s military regime. It also relied on the participation of industrial entrepreneurs, who had been excluded from governmental decisionmaking processes under the previous administration. Import substitution was restored, but with a view to protecting the capital goods and basic inputs industries. Industrialization was no longer geared only to import substitution, and it no longer implied a reduction in the import coefficient. Rather, it was reoriented successfully toward the export of manufactured goods, as a new mechanism for the neutralization of the Dutch disease was implemented— one based on high import tariffs and large export subsidies for manufactured goods. Income, however, continued to be concentrated in the middle and upper classes, while the workers remained excluded from the political pact. The Strength and Weakness of the “Modernizing Tripod Model”

The 1964 Authoritarian-Modernizing Pact was also a nationalist and developmental pact, insofar as it gave clear preference to Brazilian companies and delegated to the state the role of strategic agent of economic development. But the pact was closely tied to the interests of financial capitalism and of the multinational corporations installed in Brazil. This is why it was also called the “modernizing tripod model,” the three legs being the bour-

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geoisie, the technobureaucracy, and foreign interests. In 1964, Brazil already had a powerful industrial bourgeoisie that was responsible for the development of an integrated industrial infrastructure. On the other hand, industrial multinational corporations had already been solidly installed since the 1950s, and bank capital, which served as a bridge between mercantile and the industrial capital, was modernizing and becoming integrated into the accumulation process.2 But this bourgeois dominant class was not able to control the accumulation process through the classical mechanisms of the capital market. Brazil’s incipient capital market was not able to lead the industrialization of the country. The professional middle class in the public sector, both civilian and military, thus emerged in 1964 as the rationalizing and organizing force that, allied with the bourgeoisie, proposed to consolidate capitalism in Brazil.3 The strength of the Authoritarian-Modernizing Pact lay in its developmentalism, and in the fact that the military had allied itself with national capital. Its weakness lay in the total exclusion of the workers, broad sectors of the professional middle class, and of the petty bourgeoisie.4 And, as would become obvious from 1977 on, this weakness also came from the fact that the bourgeoisie, although benefiting from the military regime, was excluded from much of the decisionmaking: it was a controlled bourgeoisie. There was, therefore, a lack of compatibility between the social formation, which was primarily capitalist, and the nature of the political regime, which was primarily bureaucratic. The defeat of the Brazilian Renewal Alliance (ARENA), the party that supported the military regime and was the formal expression of the Authoritarian-Modernizing Pact, in the 1974 Senate elections marked the beginning of the military regime’s crisis of legitimacy—a crisis that would gain a new dimension with the “April Package” of 1977, as we will see in Chapter 12. Industrializing Technobureaucracy

Although it relied on the active participation of the industrial bourgeoisie, Costa e Silva’s military regime was enjoying a period of supremacy over the civil and military technobureaucracy. This new professional middle class, like the traditional one (whose origins preceded the industrial revolution), was conservative and prudent, always concerned about its security. In contrast to the traditional middle class, however, it was integrated into the productive process, making it pragmatic and developmental. This new middle class also depended on economic development, as it was itself an outcome of that development, and its power and prestige increased directly with industrialization. This led to the appearance of the large private and public bureaucratic organizations in which members of the new middle class—the professional managers and specialists—progressively assumed power.

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Accordingly, as the ascending professional middle class became politically dominant, one could imagine a country governed primarily by technobureaucrats and military officers from this new class, characterized by their great, even urgent, desire to promote the country’s economic development. (The desire would be urgent because in this development lay the whole source of their prestige and power.) It was therefore possible to predict that Brazilian military officers would be freed from the dominance of colonialist and authoritarian ideas, and that the technobureaucrats of the new professional middle class would develop an economic theory and policies more adapted to the real needs of Brazil’s development. In order to gain political representation, which is essential for any national development project, those military officers and civilian technobureaucrats would have to allow other groups to participate in the administration, particularly the industrial entrepreneurs. The dialogue with the Left could start again, and trade unions could once again be authorized. However, this kind of government would soon realize that Brazil’s economic development could only be carried out on nationalist terms, in support of the national interest, with growing state intervention. Only in this way was it possible to defeat the structural vicious circle of underdevelopment. Insofar as their interests were not profoundly tied to the liberal capitalist system, the technobureaucrats and military officers from the new middle class would not have any difficulty adopting the statist policies that would be necessary. This kind of government by technobureaucrats and military officers of the new professional middle class is typically characterized by ideological pragmatism. For them, what really matters is their power, which depends on technological and industrial development. Since know-how—a strategic factor of production, replacing land and capital—is what legitimizes technocratic power, this legitimacy could only be confirmed if the government manages the economy efficiently and generates development. If a greater nationalization was necessary to guarantee this development, it would naturally be adopted. The Developmentalism of the Military

After the death of President Costa e Silva, at the end of 1969, another military officer took his place: General Emílio Garrastazu Médici, who was chosen by a board of military officers. The most radical sectors of the Left, disoriented and hopeless, responded to the dictatorship with armed struggle. And the police reacted with violence, particularly with torture. The government’s higher echelons made attempts to eliminate the use of torture, but they did not intensify their efforts, given the resistance of the military and the police. And the Left’s armed struggle, despite repeated defeats that revealed its lack of support among the population, continued to be active, although it was increasingly weakened. The youth, the intellectuals, and the

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political leaders remained silent. The democratic dialogue was strictly closed. The dictatorial military regime, which had been disguised until December 1968, became overt from then on. We were living under the command of Institutional Act No. 5. The victory of the government’s party in the parliamentary elections of 1970 showed that the military regime had been able to build, until that moment, a favorable image among the masses. The victory of Brazil in the 1970 soccer World Cup also helped the party win the elections. The government thus faced no opposition from the masses, let alone from the elites, whose authoritarian nature had often been reaffirmed. Brazilian economic liberalism, although trying to identify itself with democracy, had always been intrinsically authoritarian. The liberal tradition in Brazil, contrary to what had occurred in the United States or in Britain, never involved the majority of its population. Liberalism had always been an imported ideology, associated with the oligarchic authoritarianism to which it was historically allied. On the other hand, nationalists and developmentalists were equally authoritarian. They were concerned with the realization of the national revolution, and saw none of the conditions required for a democracy in Brazil. They assumed that, if the authoritarian regime contributed to furthering the national and industrial revolution, this revolution would then create the conditions for a democracy. They did not deceive themselves, unlike the liberals, who posed as democratic not to promote the country’s development or its capitalist revolution, but to make the Oligarchic Pact appear as if it were also both liberal and democratic. In the 1930s, the early years of Brazil’s capitalist revolution, there were no conditions that would have enabled a real and consolidated democracy in the country. During the almost democratic period between 1945 and 1964,5 the priority of the working class, the industrial entrepreneurs, and the nationalist and left-wing intellectuals was not to defend democracy. They were more concerned with defining a national-developmental ideology that could guarantee the country’s industrialization and development. The military regime was deeply authoritarian, but it revived the idea of a national project of development that had been originally conceived by Vargas. The Castelo Branco administration had been marked by its fight against subversion and by macroeconomic adjustments. After the Costa e Silva (1968–1969) administration, which was a transitional period, the government’s message under the Garrastazu Médici administration (1969–1974) lost its negative quality and acquired an increasingly affirmative tone. A developmental nationalism emerged that was centered on the military, which was traditionally nationalist, and on the industrial entrepreneurs, who now received the decisive support of the administration. The developmentalism of the 1964 Authoritarian-Modernizing Pact appeared in the form of an emphasis on the flag, on Brazil’s national anthem, and on the moral and civics classes that all schools at all levels were supposed to offer. The government’s discourse

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showed that the intention was to subordinate everything to the construction of an economically huge and powerful country. This developmentalism was also expressed in Brazil’s foreign policy, whose most notable representative during the military period was Antonio Francisco Azeredo da Silveira, minister of foreign affairs in President Ernesto Geisel’s administration (1974–1979). It was clearly manifested in the Trans-Amazonian Highway project, whose chief purpose was to guarantee national sovereignty. The highway was designed to integrate the national territory—a role that the establishment of Brasília as the nation’s capital and the construction of the Belém–Brasília Highway had played during President Juscelino Kubitschek’s administration. The military regime was therefore characterized by a nationalist ideology and a national developmental project. After the Castelo Branco administration, the military discovered its nationalist and developmental vocation. However, this was a moderate nationalism, particularly because it did not take a restrictive approach to foreign capital—the approach demanded by Alexandre Barbosa Lima Sobrinho, the great intellectual, nationalist, and democratic public figure of that time. Under the influence of a technocratic leadership, the military governments adopted a pragmatic attitude, one without any radical ideology. The strategy of the technobureaucratic civil and military class in power was based on an alliance with national and international capitalism. In this alliance, civil and military officers were no longer a subordinate element, as they had been during the State and Territorial Integration Cycle, under the Empire. Rather, they were an active element that tried to achieve, through this alliance, a higher growth rate for the country. National developmentalism remained the most appropriate ideological basis for this class coalition, but, as we have already seen, unlike that of Vargas, this coalition excluded the workers. Notes

1. Getúlio Vargas Foundation IGP/DI (General Price Index). 2. In Brazil, a bank’s capital is not considered financial capital, as it usually is elsewhere, because we understand that financial capital is a fusion of the banks’ capital with industrial capital, with the latter dominated by the former. This has never happened in Brazil. 3. In Brazil, we understand “technobureaucratic capitalism” as primarily a capitalist social formation, which is increasingly technobureaucratic in every industrialized capitalist country. 4. We previously did a critical analysis of this modernizing tripod alliance in the early 1970s, together with other critics of the military regime. It is significant, however, that its supporters, such as Roberto Campos and Mário Henrique Simonsen, did not hesitate to speak explicitly of the tripod, as they recognized its importance to the maintenance of the regime. 5. I say “almost democratic” because universal suffrage was not yet guaranteed: the illiterates had no right to vote.

12 The Logic of Domination: The Limits of Dependency Theory

The Marxist reaction to the rise of the authoritarian regimes in Latin America was “dependency theory,” which claimed that national developmentalists were wrong—that the bourgeoisie in any country at the periphery of capitalism was intrinsically dependent, so it could never become a national bourgeoisie, as had happened in the capitalist revolutions of the rich countries. This view originated in the socialists’ classic critique of nationalism, which says that it conceals capitalism’s class contradictions, and in the socialists’ pessimistic view of elites. Dependency theory appeared in 1965, soon after the Brazilian military coup, with the circulation throughout Latin America of an unpublished paper by Andre Gunder Frank, “The Development of Underdevelopment,” which was published the following year. In this paper, he criticized the view, then prevailing among the nationalists and the Left, that the developing countries had dual societies—a semifeudal (or traditional) society and a mercantile society—which in Brazil were being overcome by a class coalition uniting a national bourgeoisie with the people and the state bureaucracy. To justify Frank’s rejection of dualism, which was dominant at the time, supporters of dependency theory affirmed that peripheral societies were not dual, and that in Brazil the classic conflict between the new industrial bourgeoisie and the old agricultural exporting oligarchy associated with foreign interests did not exist. Instead—although this was contrary to the historical evidence—dependency theory held that the industrial entrepreneurs stemmed from the old oligarchy and, therefore, unlike Europe and the United States, Brazil had no national bourgeoisie able to lead an industrial and capitalist revolution, nor could the country ever develop one. In this way, dependency theory also criticized those on the Left who adhered to the national-bourgeois interpretation (including the Communist Party since 1958), which argued that, first, it was necessary to realize the capitalist revolution, and later on, the socialist one. 165

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As we saw in Chapter 6, the basis for this interpretation (the social identification of the industrial bourgeoisie with the agricultural exporting oligarchy) makes no sense in relation to Brazil because the vast majority of the industrial entrepreneurs came from families that had immigrated between the mid-nineteenth century and the first two decades of the twentieth century. Actually, dependency theory was a resentful reaction of the Latin-American Left to the military coups that occurred in the region in the 1960s (1964 in Brazil, 1967 in Argentina, 1968 in Uruguay), and a way of identifying the internal “guilty parties” of the political defeats represented by such coups: the intellectual groups that supported the nationalist and developmental fight for autonomy and for the industrialization that was taking place with the participation of the national bourgeoisie. In order to support their argument, the supporters of dependency theory refuted the view that Brazilian society had a dual nature before the 1930 Revolution. In the case of Brazil, dependency theory was not only an immediate reaction to the military coups during the 1960s, but also to the “economic miracle” that occurred in that country between 1968 and 1973. The huge state investments in infrastructure, the combination of private and state resources involved in heavy industry, and the emergence of a capital goods industry in Brazil during the 1970s were the underlying causes of a new political pact, the Authoritarian-Modernizing Pact, which I discussed in the previous chapter. As with every bourgeois revolution, Brazil’s national revolution, which President Getúlio Vargas had begun and the military continued to support, was not originally a democratic one, but instead a nationalist and developmental one. Nevertheless, it created the necessary conditions for the future consolidation of democracy, that is, of a system in which the alternation of the parties in power was viewed as normal. However, dependency theory criticized the developmental regimes because they were authoritarian and exclusionary. On those two issues, the critique was correct. But it was mistaken in advising that the idea of an autonomous development of a nation be thrown out, along with authoritarianism and the exclusionary nature of those regimes, as if eliminating the nation were necessary for achieving democracy and reducing inequality. In the intellectual history of Latin America, few topics have been treated with more confusion and imprecision than dependency theory. First, because it is not really a theory, as it is not expressed as a systematic set of ideas. Instead, it is or was a sociological and political interpretation of Latin America that became dominant in the 1970s, displacing the nationalbourgeois interpretation, which had prevailed in the intellectual domain up to that point. Second, it was problematic because, contrary to what many people thought, it did not constitute a criticism of imperialism. The word “dependency,” when applied to the periphery of capitalism, is the counterpart of the word “imperialism,” when applied to the center. Thus, most peo-

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ple understood dependency theory to involve a strong critique of the imperial North and of the local dependent elites. Actually, the specific dependency theory that prevailed—associated dependency theory—dismissed the critique of imperialism that the national-bourgeois interpretation had made; it denied that the imperialism of the rich countries represented an obstacle to the development of an already formally independent country such as Brazil. Only the imperialist overexploitation dependency interpretation accentuated the imperialist nature of the center–periphery relationship, as its name suggests. The problem with this interpretation lies elsewhere: in its utopian nature, and in its view that a socialist revolution would be viable in Brazil, and, more broadly, in the developing world as a whole. The Two Canonical Versions

The key assumption of the two central versions of dependency theory— overexploitation and associated dependency—is that there is no national bourgeoisie in any country on the periphery of capitalism (i.e., no bourgeoisie identified with national interests). There is only a dependent bourgeoisie. Based on this assumption, the imperialist overexploitation interpretation— whose founder was Frank (1966, 1969) and whose main representative in Latin America was Ruy Mauro Marini (1969, 1973)—radically denied the possibility of a national bourgeoisie taking shape and leading or participating in a national and capitalist revolution, as happened in the eighteenth or nineteenth centuries in the countries that are currently rich. Alternatively, Fernando Henrique Cardoso and Enzo Faletto (1969) developed the associated dependency interpretation, according to which the local elites were dependent, but economic development remained possible through the association of the country with the hegemonic powers, whose multinational corporations were “proving” in the postwar period to be necessary for such development insofar as they brought foreign investments into the country. There were two canonical versions of dependency theory: the imperialist overexploitation dependency and associated dependency interpretations. They both opposed the national-bourgeois interpretation, dominant in the 1950s, which criticized imperialism and the dependency of the local elites, but not the whole bourgeoisie. Its criticism was aimed at the agrarian and the mercantilist bourgeoisie, while it was optimistic regarding the autonomy of the industrial bourgeoisie. A third version of dependency theory— the national-dependent interpretation, with which I am identified—was nearer the national-bourgeois interpretation; it was as critical of imperialism as the national-bourgeois interpretation, and recognized the dependent nature of the Brazilian elites, but only in part. It relativized the industrialists’ dependency, qualifying it as ambiguous or contradictory, based on the view

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that they could act as a national or a dependent elite, depending on the circumstances.1 The two canonical interpretations of dependency theory were originally Marxist, whereas the new national-dependent interpretation uses Marx’s ideas but cannot be considered Marxist. Let me begin with an analysis of the imperialist overexploitation dependency interpretation, whose main supporters were Frank, Marini, and Theotonio dos Santos. They adopted a line of reasoning that was consistent and logical, but unrealistic. Starting from the premise that the existence of a national bourgeoisie in Latin America was impossible, this reasoning leads to the conclusion that the workers would have no choice but to support a socialist revolution. This interpretation was close to the nationaldependent one because it attributed a major role to imperialism, but it proposed a socialist revolution, which was deemed impossible by the intellectuals associated with the national-dependent interpretation, such as Celso Furtado and myself. To Frank, Latin America had always been capitalist, but this capitalism was mercantilist, so it was wrong to say that Brazil had been experiencing a national-bourgeois revolution since the 1930s. European colonization had been mercantile because it promoted a growth model in the region based on the export of primary products and because it blocked technological progress. In this way, capitalism and imperialism would be the basic causes of underdevelopment, so much so that the less-developed areas of the continent were those that had the highest mercantile exporting performance. In the same vein, Marini (1969) developed the interpretation of overexploitation or, according to the form he adopted, the theory of sub-imperialism and overexploitation of labor. He recognized that during a certain period the bourgeoisie and working class had interests in common, which “led the petite bourgeoisie to become the avant-garde of reformism and of the policy of class collaboration,” but “the 1964 military coup delivered a deadly blow to the reformist trend” (1969, p. 151). The national-bourgeois interpretation, therefore, would be identified with the reformism that Marini admitted had been valid only during a limited time. In his view, reformism was failing because Brazil’s development was based on the overexploitation of workers, defined by the fact that the workers received wages that were lower than what was necessary for their subsistence, and by the fact that they faced increased working hours and workloads. Exploitation was a normal characteristic of capitalist economies, and was intensified in the dependent, or peripheral, countries, where it was transformed into overexploitation insofar as the workers became subject not only to the local dependent bourgeoisie, but also to the imperial center. Dos Santos argued accordingly: the title of his 1973 book, Socialism or Fascism: The New Character of Dependency and the Latin-American Dilemma, already reveals his view that the only alternatives for Brazil and for Latin America

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as a whole were socialism or fascism (the latter identified with the regimes emanating from military coups). The associated dependency interpretation’s founding text was the book by Cardoso and Faletto, Dependency and Development in Latin America, published in Chile in 1969. Given the dialectical reasoning that Cardoso and Faletto used, this book is not always clear. For a long time, I did not clearly see the distinction between this version of dependency theory and the national-dependent alternative, which had always made more sense to me insofar as it preserved the idea of a national bourgeoisie, but considered this bourgeoisie to be ambivalent and contradictory—sometimes associated with the nation, but at other times subordinated to the elites of the rich countries. Cardoso (1977, p. 14) argues that the essential characteristic of dependency theory is not the study of imperialism, but the analysis of the social classes in the dependent capitalist state: “What was significant was the “movement,” the class struggles, the redefinitions of interest, the political alliances that maintained the structures while at the same time opening the possibility of their transformation.” It is not surprising, therefore, that this theory had so much impact in the 1970s in the United States, where left-wing intellectuals saw in it something new and attractive insofar as it criticized capitalism, but did not hold their country’s imperialism responsible for an important aspect of the difficulties that Latin-American countries faced in developing. The associated dependency interpretation originated in the “school of sociology of São Paulo,” which had Marxist roots, although most of its advocates abandoned Marxism after the democratic transition of 1985 and became liberal-conservatives.2 It can be summarized—with all the implicit risks—in a simple idea: as Latin-American countries lack a national bourgeoisie, they have no alternative but to associate with the dominant system and profit from the opportunities it offers for their development. According to the followers of the associated dependency interpretation, a necessary condition for economic growth in developing countries was the inflow of foreign savings provided by the multinational corporations, insofar as Latin-American countries are supposed to lack sufficient resources to finance their own development. They made this claim, which has been extremely agreeable to rich countries, but it has been a major cause of Brazil’s dismal growth rates from 1980 until today. The associated dependency interpretation was influenced by the fact that multinational corporations had started participating in the industrialization of Brazil in the 1950s, which apparently refuted the nationalist or national-bourgeois interpretation that affirmed that imperialism was against the industrialization of developing countries. But the supporters of the associated dependency interpretation didn’t realize that the multinational corporations were simply capturing the domestic markets that had been closed to their exports. And they

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ignored several other facts: (1) that capital is generated at home, and the growth between 1930 and 1960 had been financed by domestic savings; (2) that capital inflows have little effect on economic growth because they appreciate the national currency and discourage investment, causing foreign savings to replace, rather than add to, domestic savings; in other words, foreign savings end up by causing, first, increased consumption (given the high rate of substitution of foreign for domestic savings), second, international financial fragility and, finally, a balance-of-payments crisis; and (3) that countries with the Dutch disease will tend to have current account surpluses, not deficits, if they duly neutralize this competitive disadvantage. In their defense I must admit that the new developmental models that account for all these points were unknown at that time. As I note in Brief Theory 1, a group of economists developed them in the last fifteen years. Using their skills as sociological and political analysts, Cardoso and Faletto showed how the social classes both fought each other and intermixed in the struggle for power, in the context of a dependency relationship. But they went too far when they stated that the existence of nationalist elites was impossible. Such an assumption was soon disproved, first, during the Authoritarian-Modernizing Pact, under which the industrial bourgeoisie was authoritarian, but also nationalist, and, second, when we saw Brazil’s industrial bourgeoisie act as a national and democratic bourgeoisie under the 1977 Democratic-Popular Pact and during the Diretas Já campaign. The most recent manifestation of dependency theory is the concept of “passive revolution,” originated by Luiz Werneck Vianna (1997, pp. 47–51). It reaffirms the classic assumption regarding the political and social history of Brazil, according to which this history was not characterized by ruptures, but rather by a continuous conciliation among the country’s elites. This assumption has an element of truth, but conceals the conflicts and ruptures that actually did happen. According to Werneck Vianna, “the bourgeois revolution followed its ‘passive’ form, obeying the slow movement of the transition from the landed and slave order to a competitive social order.” And the 1930 Revolution does not escape this logic: national-developmentalism started from “the belief that backwardness and underdevelopment could be defeated with molecular developments deriving from the expansion of the modern.” From this criticism of developmentalism, which ultimately repeats the dependency theorists’ criticism in so many words, Werneck Vianna regrets that, through its Declaration of March 1958, the Brazilian Communist Party (PCB) joined the bourgeoisnational project. And he concludes, “The alliance between the Left and the landowner elites around a state and a national-developmental project implied validating the recycling of the supremacy of the traditional elites.” Thus, in terms of political domination, Brazil at the end of the twentieth century mirrored Brazil in colonial times.

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In any discussion on dependency theory, Florestan Fernandes deserves a separate analysis. As founder and head of the “school of sociology of São Paulo” in the 1960s–1980s, and as a left-wing intellectual who, together with his colleagues and followers, was dismissed from teaching by the military regime in 1969, he adopted a critical attitude regarding the Brazilian bourgeoisie. Already in his maturity, he turned more definitely toward the left and became a revolutionary socialist.3 Hence, he could be considered a supporter of the imperialist overexploitation dependency theory. To Fernandes, the bourgeoisie would be aligned in principle with a national and democratic revolution, as he states in his book A Revolução Burguesa no Brasil (The Bourgeois Revolution in Brazil, 1975).4 In a previous essay (1973, p. 35), he declares, “Classes and class relations lack structural dimensions and social dynamisms that are essential for the balanced integration, stability and transformation of the social order inherent in class society.” With this in mind, and considering “how tangled and bewildered the beginning of the Bourgeois Revolution in a colonial, peripheral or dependent economy was” (1975, p. 89), Fernandes had doubts about the role of Brazilian industrial bourgeoisie—doubts that combined with his indignation at the military regime. After all, as he saw it, the bourgeois revolution was frustrated in Brazil, as the bourgeoisie was not able to carry out a national and democratic revolution. On the contrary, caught up in the context of global capitalism that went from competitive capitalism to monopolistic capitalism, Brazil’s bourgeoisie was unable to maintain its independence and move towards democracy. Instead, it became a dependent and autocratic bourgeoisie. According to Fernandes (1975, p. 293), the autocratic essence of bourgeois domination, which is functional for the hegemonic and central capitalist nations, is manifested in the fact that “dependent and underdeveloped capitalism is a savage and difficult capitalism, whose viability is often decided by political means and in the political domain.” We know today that this notion of an autocratic essence of the bourgeoisie is not true. This became clear from 1977 on, when Brazil’s industrial bourgeoisie reacted against President Ernesto Geisel’s April Package (a draconic set of authoritarian measures that included a temporary recess of Congress and amendments to the Constitution by decree). As we will see in Chapter 15, this bourgeoisie proved at that point to be national and democratic by starting to break its agreement with the military technobureaucracy in order to take part in the Diretas Já campaign and in the broad 1977 Democratic-Popular Pact, which would preside over the democratic transition in the following years. However, Fernandes’s reasoning is rich and complex, and cannot be understood simply as an imperialist overexploitation interpretation. He rejects the assumption of the intrinsic dependency of peripheral

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bourgeoisies: “Contrary to the usual cliché, under dependent and underdeveloped capitalism the bourgeoisies are not mere ‘buying bourgeoisies’ (typical of colonial and neocolonial situations, specifically). They have strong economic, social, and political power, with a national basis and scope” (1975, p. 296). In the chronicles of the “school of sociology of São Paulo,” his debate with Alberto Guerreiro Ramos is well known, but this was a methodological debate, not a substantive one. As Maria Arminda do Nascimento Arruda (2009) observes, The dialogue of the “paulistas” [sociologists from USP] with the developmental agenda was different from the ISEB’s point of view. First, the issue of the national development and of the Nation’s autonomy was marginal to the analyses, and it is interesting to compare both variants of the subject’s interpretation. (p. 320)

At this level, Fernandes’s analysis of Brazil is very often similar to that of the Higher Institute of Brazilian Studies (ISEB) and to Celso Furtado’s. For instance, instead of attributing a secondary role to the immigrants in industrialization, as dependency theory did, Fernandes (1975) chose to be consistent with his idea of the continuity of agrarian and industrial elites. He viewed the immigrant “as a privileged economic agent in the early stages of the concentration of industrial capital, and the hero of industrialization” (p. 133). Similarly, instead of criticizing the dualism, or the “dualistic reason” of Brazilian society (something that was important, from the rhetorical viewpoint, for dependency theory because it allowed its followers to reject the proper origin of Brazilian industrial bourgeoisie, and to declare that there never was a division of the bourgeoisie between a mercantile/patriarchal bourgeoisie and an industrial bourgeoisie),5 Fernandes does a fascinating analysis of the “double articulation” of Brazil’s capitalist economy. In line with the dependency theory and the school of sociology of São Paulo, he situates the beginning of the bourgeois revolution in the last decade of the nineteenth century, rather than in the 1930s, as I do. This was a way of disavowing the 1930 Revolution and the leadership of Getúlio Vargas in Brazil’s industrialization. However, in his 1973 book Capitalismo Dependente e Classes Sociais na América Latina, Fernandes looks at the period of 1890–1930 and identifies, a competitive capitalist economy, doubly articulated: internally, through the articulation of the archaic sector with the modern or urban-commercial sector (at that time slowly becoming an urban-industrial sector); and externally, through the articulation of the agricultural-exporting economic complex with the central capitalist economies. Therefore, the very conditions of capitalist development introduced systematic or occasional inhibitions, which undermined, reduced or annulled its dynamic potential. (p. 141)

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At this point, Fernandes abandoned dependency theory and was thinking along the lines of the national-bourgeois interpretation. But he did not identify with this interpretation because he was indignant at the association between the industrial bourgeoisie and the military, and because his concept of the national bourgeoisie was too rigorous. To Fernandes, and to all the representatives of the imperialist overexploitation and associated dependency interpretations, a bourgeoisie could only be considered national if it were conscious of the revolution it was conducting and if it had “a strong democratic and nationalist orientation” (p. 215). But this requirement, which was also Cardoso’s, makes no sense when applied to the industrial entrepreneurs. This consciousness of revolution did not exist in the rich countries, where the capitalist revolution was undeniable. And why should it have? After all, business entrepreneurs are not intellectuals who develop theories to explain political behavior; they are practical men who form their vision of the world and of their country according to their interests. This is all the more reason for the nonexistence of this consciousness in Brazil, whose bourgeoisie embodies and always embodied the national-dependent ambivalence. Fernandes is right when he affirms that what determined industrialization “was not the ‘revolutionary will’ of Brazilian bourgeoisie . . . but the degree of relative advancement and potential of the capitalist economy in Brazil” (p. 215). However, he wanted and expected more from the Brazilian bourgeoisie, and was frustrated when he saw that it supported the 1964 military coup. This is what we see, for instance, in his statement that Brazil was “a nation that seemed to prepare itself and head for the Bourgeois Revolution in great style—that is, following the French model of national and democratic revolution” (p. 216). But, suddenly, the process was interrupted when “the dominant sectors of the upper and middle classes assembled around a self-defensive counter-revolution” (p. 217). Instead of nationalism and democracy, what we saw was an alliance of the bourgeoisie with international financial capitalism, the repression of the working class, and “the transformation of the state into an exclusive instrument of bourgeois power” (p. 217). Throughout the book, Fernandes views the Brazilian crisis of the 1960s as having been caused by the transition from a competitive capitalism to a monopolistic one. It was then that “the bourgeoisie lost its ‘historical opportunity’ because, ultimately, it was out of its reach to neutralize the unequal rhythms of capitalism” (p. 260). Instead, the bourgeoisie joined the military and international financial capitalism in an authoritarian military coup that “provided the Brazilian bourgeoisie with the opportunity to take a giant leap” (p. 265). But Fernandes does not then engage in a simplistic vision of bourgeois authoritarianism. The autocratic position assumed by the bourgeoisie from 1964 on may be in contradiction to the economic foundations of bourgeois domination. But “this polarization is historical, not structural-functional. In other words, it is not intrinsic to the

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bourgeois domination and it is very likely that other bourgeois forces (internal or external) will displace, if this transitional stage is overcome ‘in order,’ the oligarchic elements that are behind this polarization” (p. 275). In other words, Fernandes argues that the 1964 authoritarian regime was transitory, that it was a moment of consolidation of Brazilian capitalism that would not prevent the subsequent democratic transition, as the bourgeoisie is not always authoritarian. In fact, the capitalist class was not intrinsically authoritarian, as the precapitalist oligarchies had been, nor was it intrinsically democratic: democracy is an achievement of the people and of the republican middle classes. The bourgeoisie does not disallow democracy, as its wealth and ability to make profits do not depend on the direct control of the state; this is in contrast to what happened under the old modes of production in which the dominant class just vetoed democracy. But the bourgeoisie continues to fear democracy because it remains a minority. Thus, provided that democracy is “limited,” that the capitalist class continues to control the media and finance political campaigns (rather than accepting the public funding for electoral campaigns), and that it always keeps its power of veto over investments, the bourgeoisie tends to prefer a democratic regime to an authoritarian one, as became apparent in Brazil starting from the 1977 Democratic-Popular Pact. In 1973, Fernandes was writing before a major change: the rise of a new class coalition that included the industrial bourgeoisie, the 1977 DemocraticPopular Pact, which would lead Brazil to democracy. But he already realized that the contradictions of Brazilian capitalism could be solved under democracy. And he knew that, for this to happen in the context of a bourgeois revolution, it would be necessary to have, on the one hand, a “break” in the capitalist class, with the “monolithic nature” of bourgeois power disappearing, making way for “bourgeois nationalism” or for a “revolution within the procapitalist order, anti-privatization and anti-imperialism”; and, on the other hand, “the eruption of Brazilian people,” something that had already happened in the 1920s, and now occurred again, insofar as “the people changes its historical and structural setting, and the working class acquires a new economic, social and political weight within Brazilian society” (1975, pp. 279 and 287). At that moment, this remarkable sociologist was far from both the imperialist overexploitation and associated dependency interpretations, but not very far from the national-dependent interpretation. The National-Dependent Interpretation

The third version of dependency theory is the national-dependent interpretation. It is an alternative to both the associated dependency interpretation, on the right, and to the imperialist overexploitation interpretation, on the left. This is my own view of dependency, which I have been discussing under that name

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in papers since 2005 (Bresser-Pereira 2011), but which had already been present in Furtado’s works since 1966 and in mine since 1970. The papers I am referring to constitute a revision of my “Six Interpretations on the Brazilian Social Formation” (1982), in which four of the interpretations I identified were post-1964. These were the authoritarian-modernizing interpretation, the imperialist overexploitation interpretation of dependency theory, the resentful functional-capitalist interpretation (in which I placed most of the members of the “school of sociology of São Paulo,” except for Cardoso), and the new dependency interpretation. Regarding this last one, the remarkable intellectual Cardoso was on my side. In a 2005 article I linked Cardoso with his peers, and I replaced the term “functional-capitalist interpretation” with “associated dependency theory.” I also replaced “new dependency theory” with “nationaldependent interpretation.” The term “new dependency” referred to the model in which income is concentrated in the middle and upper classes, a feature that characterized the military regime. The national-dependent interpretation pervades this whole book.6 It is close to the national-bourgeois interpretation, which prevailed before 1964, insofar as it acknowledges the negative role of modern imperialism and the possibility of a national bourgeoisie. It is distinct from it, however, insofar as it believes that the Vargas-led developmental class coalition uniting the industrial entrepreneurs with the workers was dismantled by new historical facts that emerged during the 1950s and the crisis of the early 1960s: the great progress of industrialization that rendered meaningless the interpretation of the “agrarian vocation”; the ingress of multinational manufacturing companies into Brazil, which apparently implied a rejection of the nationalist theory of the rich countries’ opposition to the periphery’s industrialization; the exacerbation of social demands; and, above all, the 1959 Cuban Revolution, which united the industrial and rentier bourgeoisies against the left and the workers. The intellectuals who shared the national-dependent interpretation understood that the political and economic crisis of the 1960s was caused by these new historical facts, which at that time made the class coalition of the industrial bourgeoisie and the workers impractical. However, for the nationaldependent interpretation, these facts did not justify a rejection of the critique of imperialism, as they did for the associated dependency interpretation; and these facts did not justify the proposal of a socialist revolution in the short term, as they did for the imperialist overexploitation interpretation. As for imperialism, I have never accepted the assumption of the associated dependency interpretation that the entrance of multinational corporations into Brazil’s manufacturing industry invalidated the thesis of imperialism. The occupation of the domestic markets of the developing countries merely changed: it became less imposing and more grounded on pressure and persuasion, and the multinationals partially displaced rich countries’ exports and finance in the process of occupying the domestic markets of developing countries so as to guarantee increased capital accumulation and

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profit realization. Furtado, who has always been clear about this, says that, in view of the stagnation of Brazil’s economy that began in 1980: In a country still in the making, such as Brazil, the predominance of the logic of the transnational companies in the organization of economic activities had led almost necessarily to interregional tensions, to the exacerbation of corporate rivalries and to the formation of pockets of misery, everything pointing to the impossibility of establishing a national project for the country. (1992, p. 35)

The national-dependent interpretation recognizes the dependent nature of Latin-American elites, and this is why it may be considered as part of dependency theory. But insofar as it treats this dependency as relative and contradictory, it differentiates itself from the other two interpretations. It recognizes that local elites tend to be indifferent and cosmopolitan, making it hard to define a national development strategy. But it emphasizes the contradiction between the interests of the rich countries and those of middle-income countries such as Brazil, stating that the industrial bourgeoisie is aware of this fact, though only vaguely. The expression “national-dependent,” which I use to identify this interpretation of dependency theory, is a deliberate oxymoron: its two terms joined by a hyphen are in opposition to each other. During Brazil’s capitalist revolution, the capitalist class in Latin America was divided between its mercantile/financial side, which lived on Ricardian rents obtained from commodity exports and was associated with the rich countries, and its industrial side. Nowadays, the industrial bourgeoisie, although weakened by the purchase of many of its business enterprises by the multinational corporations, continues to represent the developmental side, while the rentseeking and financial capitalism associated with foreign interests represents the economically liberal side. The nationalism of the industrial bourgeoisie is based on concrete interests: the dimensions of Brazil’s domestic market and the fact that it will be more capable of conquering this market and foreign ones if it relies on the support of a state.

Brief Theory 8: Hegemony Imperialism and Dependency The logic of capitalism is the logic of competition. And it is also the logic of the strongest exploiting or trying to take advantage of the weakest. This applies to the relationship between business enterprises and is also true for the relationship between nation-states. Imperialism is an unavoidable consequence of domination. And it is not just a consequence of domination by the rich countries, today led by the United States, whose costly workforces make them relatively supportive of each other; it is also an outcome of the domination by middle-income countries, such as Brazil, of the poorer countries in their vicinities.

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Historically, modern industrial imperialism either reduced other, “uncivilized” peoples to the condition of colonies (this was the Asian and the African experience in the nineteenth century and in the first half of the twentieth century), or reduced them to the condition of semicolonies, as it happened in Latin America, where the elites in the nineteenth century were fully dependent on foreign economic philosophies and political culture. Second, after World War II, when all countries became formally independent, imperialism could only be pursued through hegemony or soft power. That is, it must persuade the local elites with arguments; money; and several forms of pressure that arise from a disguised threat of formal sanctions, if not war. We then had three cases of hegemonic imperialism on three continents: Latin America, whose countries had already been formally independent since the early nineteenth century, and where some countries had achieved some real political and economic independence and were able to adopt national development strategies for achieving industrialization or productive sophistication, but which remained relatively dependent in cultural terms; Africa, where countries had become formally independent, but remained highly dependent culturally and politically; and Asia, where many countries had achieved full cultural and political independence, adopted developmental strategies, and sustained high rates of growth. When a country is unable to be truly independent, when its elites are dependent— which is usually associated with the espousal of economic liberalism—the result is the adoption of economic policies that do not serve the interests of national development, but instead those of the dominant countries, such as full trade and financial liberalization, growth with foreign savings (i.e., with current account deficits and foreign indebtedness), and privatization and denationalization of monopolist public services. The rich countries’ logic of domination is clear, although few are aware of it. They are interested in occupying the markets of developing countries and achieving higher rates of profit than they can achieve in their home countries, whether by exporting goods with higher value-added per capita than those they import; providing funding that will overvalue the dominated country’s exchange rate and finance domestic consumption, rather than investment; or by occupying the domestic market through direct investments by their multinational corporations, which also usually involve a high rate of substitution of foreign for domestic savings. Besides, while direct investment flows between rich countries balance each other, investment flows into developing countries do not because local multinational corporations would be required for this kind of trade-off. The North is interested in trade and financial opening, chronic current account deficits, and in long-term overvalued exchange rates in the developing countries, all of which become major obstacles to industrialization or a cause of deindustrialization in the developing countries, as has been happening in Brazil since 1991. Within this framework of economic interests, the concept of cyclical and chronic overvaluation of the currencies in developing countries is ignored or rejected by the economists of the rich countries. The Dutch disease, which is a major problem, cannot be denied in the case of the oil-exporting countries, but even there it is underestimated, while the whole problem is attributed to the corruption of political leaders. In Brazil, where the overvaluation caused by the Dutch disease is less serious, it is fiercely denied. Finally, the assumption of the foreign constraint is happily accepted by those economists, and “solved” through the advice that the developing countries resort to foreign savings, that is, to current account deficits

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and indebtedness in foreign currencies. It thus creates the “foreign constraint ‘solved’ by foreign indebtedness” complex, which often becomes a major obstacle to development. Based on this argument, Brazil accepts the unrestricted inflow of capital into the country, although foreign savings augment domestic savings only to a limited extent; instead, they mainly add to consumption.* Part of this process of hegemonic imperialism is to persuade the developing countries that their key economic problem is the shortage of capital and of dollars to invest. Liberal economists and some developmental economists associate such shortages with the “foreign constraint”—the fact that the income elasticity of demand in the rich countries for primary goods is less than 1, while the income elasticity of demand for industrial goods is more than 1. And they “solve” the problem with the proposal of growth with foreign indebtedness. In this way, liberal orthodoxy made Brazilian society believe in the absurd but seemingly true idea that economic development is the outcome of a competition among developing countries to attract direct investments. In consequence, developing countries must make every concession to multinational corporations in order to obtain their capital; must permanently practice confidence building to guarantee their credit and credibility with foreign creditors; and must adopt the recommendations coming from the North through the World Bank and the International Monetary Fund (IMF), many of which go against good economic theory and their national interests. In fact, by opening their domestic markets to those corporations without reciprocity—without having their own multinationals that could invest abroad—developing countries are effectively offering their domestic markets to the multinationals for free. These one-way capital inflows only appreciate the developing country’s exchange rate and promote the substitution of foreign for domestic savings. This does not mean that developing countries should be against direct investments by multinational corporations. After all, they are interested in the corporations’ technology and in the new foreign markets that they open. But experience has shown that developing countries seldom gain either one or the other. What we have in most developing countries is a national alienation expressed in the indiscriminate opening to foreign capital, which has its greater and pathetic expression in the opening of the country to direct investments in monopolistic public services such as electric power, landline telephone services, and the operation of roadways, which can be a source of forced savings but is instead transformed into secure rents for rich countries.† The North makes recommendations and exerts pressure on the developing countries to adopt policies and institutions that they themselves did not adopt when they were in a corresponding stage of development—something that Ha-Joon Chang (2002, 2008) and Erik Reinert (2007) demonstrated conclusively in their research. The IMF’s imposition on Argentina of a complete privatization of the social security system is an example. No rich country has privatized its basic social security system, for the simple reason that a basic income must be ensured for all senior citizens, and only the state can manage that. Another example is the foreign ownership of retail banks: none of the big rich countries allowed this to occur when they were engaged in the industrial and capitalist revolution. Another example of the deleterious export of ideology is the condemnation of industrial policies in the name of free trade: the rich countries vehemently criticize these policies, whereas most of them carry out these policies domestically without hesitation. The condemnation, however, is effective in keeping many of the peripheral countries

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paralyzed. Another example of this alienation of the Brazilian elites is their acceptance of the neoliberal thesis according to which the great problem of Brazil’s economy lies in the state technobureaucracy, and not in the mistaken economic policies that have been adopted as a result of economic populism and dependency economics. The final and worst case of alienation is the belief held by the Brazilian elites that current-account deficits are welcome because they would increase investment insofar as they are financed by foreign direct investments. This is a major mistake; it is one of the causes of the long-term overvaluation of the exchange rate and of low growth rates. Only in special cases, when the country is already growing fast, does the growth cum foreign savings policy contribute to the increase of investment intead of the increase of consumption. These are the ways through which, on the one hand, the North’s industrial, or modern, imperialism (a combination of ideological hegemony or soft power, pressure, and economic requirements) manifests itself and, on the other hand, the dependency and alienation of Brazilian elites are expressed. The dependence or independence of the elites of developing countries can be better understood if we take into account two possible types of class coalitions: the national coalition and the dependent coalition. When there is a national coalition, it means that, despite the class conflicts, there is a basic national alliance between the country’s rich and poor; when there is a dependent coalition, it means that the local elites have chosen to associate, in a subordinate way, with the rich countries’ elites, rather than with the people in their own country. Alienation is not just an attribute of the economic and political elites, but also of the intellectual elites. In order to see this, it is enough to watch the annual meetings or conferences of economists and other social scientists. Only foreign social scientists are invited to the major conferences. Another example is Brazil’s official system of evaluation of scientific works—Qualis—in which, in the fields of economics, management, and political science, there are practically no Brazilian journals classified in the first two categories. More broadly, this alienation and dependency are expressed in the adoption of theories and policies from abroad that do not apply to Brazil’s reality, but are legitimized by the “superiority” of the foreign culture and by the greater “impact factor” of the articles published in its academic journals.

* Foreign savings equals, by definition, the current account deficit, which is supported by capital inflows, foreign financing, and direct investment. † In the 1990s, aware that this opportunity existed in most of Latin America, the Spanish government did not hesitate to subsidize its business enterprises so that they could capture these secure rents.

Notes

1. In his comprehensive survey on dependency, Gabriel Palma (1978) also identifies three interpretations, and rightly places two of the founders of the structuralist development theory, associated with the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), Celso Furtado and Osvaldo Sunkel, with the third one.

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2. Florestan Fernandes, the founder and head of the “school of sociology of São Paulo,” as well as Octavio Ianni and Roberto Schwarz, did not adopt the associated dependency interpretation. Originally, Fernandes was not a Marxist, but he became a Marxist in the 1960s. There is more on his interpretation of Brazil later on in this chapter. 3. Fernandes was a founder of the Workers’ Party (PT) and was elected a member of the federal Chamber of Deputies when this party still thought it was a revolutionary socialist party or, at least, a non-reformist one. 4. This was, by the way, the definition that Fernandes used in his classic A Revolução Burguesa no Brasil (The Bourgeois Revolution in Brazil). To him, the bourgeoisie “is defined, given its economic, social and political roles, as if it were the equivalent of a revolutionary, democratic and nationalist bourgeoisie. It even attributes to itself the grand French model of the national and democratic Bourgeois Revolution” (1975, pp. 215–216). 5. “Economia brasileira: crítica à razão Dualista” (“Brazilian economy: a criticism of the dualistic reason”), by Francisco de Oliveira (1972), was, after Cardoso and Faletto’s essay (1969), the most influential text of dependency theory. His criticism of the national-bourgeois interpretation was focused on a critique of the duality existing in Furtado’s work. 6. See also Furtado (1966) and Bresser-Pereira (1970).

13 Neutralizing the Dutch Disease: Exporting Manufactured Goods

The first stage of Brazil’s industrial revolution, between 1930 and 1960, was characterized by import substitution: growth followed by a reduction in the import coefficient (the value of imports as a percentage of the gross domestic product [GDP]). Economically, the transformations achieved were remarkable. A domestic market was formed, and import substitution proved to be so effective that by 1960 there were practically no manufactured consumer goods imported by Brazil that were not also produced in the country. In addition, Brazil’s economic dependence decreased, including the national income’s dependence on the exportation of coffee and other commodities. Brazil had become an industrial economy. Between 1961 and 1964, the country went through a period of economic and political crisis, while between 1964 and 1967, already under military rule, there was a period of reform and economic adjustment. The year 1967 saw the beginning of a decisive economic recovery and a shift from simple import substitution to a manufactured-goods-exporting model. From 1968 to 1973, GDP grew at an average annual rate of 10 percent. It was Brazil’s “economic miracle,” which ended in 1974, one year after the first major increase in the price of oil. These high growth rates were possible because the economic stabilization policies, the institutional reforms, and the nationalizations effected by Roberto Campos, as minister of planning, and Otávio Gouveia de Bulhões, as finance minister, were successful; and then because, under the new General Costa e Silva administration, now with Antônio Delfim Netto as finance minister, four policies sped up the growth process. These were: (1) a change in the government’s development strategy from one based on import substitution to one based on the export of manufactured goods; (2) the definition of the remaining inflation as a cost-push phenomenon (in which firms with monopolist power are able to increase prices independently of demand), thereby justifying the implemen181

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tation of a more expansive macroeconomic policy; (3) a guarantee of the maintenance of aggregate demand by aligning the production of luxury goods, particularly vehicles, with the income concentration in the middle and upper classes; and (4) the adoption of a new system for neutralizing the Dutch disease that ensured a competitive exchange rate that would be compatible with the export of manufactured goods. Theoretically, the neutralization of the Dutch disease is always done through an export tax. But this fact was not clear to the Brazilian economists of the second half of the twentieth century, who had only an intuition of the problem and resolved it either by using multiple exchange rates or high import tariffs for consumer goods along with export subsidies for manufactured goods. Between 1930 and 1960, this “disguised tax,” referred to as the confisco cambial (exchange rate confiscation), had been levied through a system of multiple exchange rates. From 1967 on, it was levied through a system of import duties and export subsidies, which included a disguised tax on the commodities giving rise to the Dutch disease. If we consider that, in the 1970s and 1980s, the average import tariff on manufactured goods was 45 percent (and that the export subsidies for manufactured goods also averaged 45 percent), this meant that the exporters of commodities were effectively paying a 45 percent tax on their total goods exported (amounting to about 30 percent of the post-tax prices of their total goods). This system increased the costs to the commodity exporters, shifting their supply curve to the left in relation to the exchange rate. Now, they would only continue to export the same amount if the actual exchange rate depreciated accordingly. Thus, the tax devalued the national currency for the producers and exporters of manufactured goods. The interesting point is that, in the end, the tax cost nothing to the producers and exporters of commodities because what they paid in taxes they got back in the form of depreciation. The Dutch disease was thus once again neutralized and allowed the country to dramatically extend its exports beyond commodities: in 1965, the exports of manufactured goods amounted to 6 percent of total exports; by 1985, it had risen to 60 percent. The Manufactured Goods Exporting Model

As Maria da Conceição Tavares notes in her classic essay, “Height and Decline of the Process of Import Substitution in Brazil” (“Auge e declínio do processo de substituição de importações no Brasil,” 1963), the importsubstitution industrialization strategy was already exhausted by the early 1960s. We have already seen that, since the beginning of the twentieth century, and particularly since 1930, the import coefficient had decreased. It had been at 28 percent of GDP in 1930, but had fallen to 6 percent by 1966.

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From then on, the import coefficient increased slightly until 1975, thanks to the increased exports of manufactured goods, which opened room for the increase of imports, particularly industrial inputs; then it fell again, and resumed growth only in the mid-1990s. Having relied on commodity exports, the country had reached the limit of its project of autarchic industrialization in 1966. Brazil could no longer base its industrialization on a strategy oriented to the domestic market, which would necessarily imply a reduction in the import coefficient. To insist on that strategy would have caused low productivity and losses in economies of scale that would not have been economically sustainable. Brazilian economic development would have to depend thereafter on the export of manufactured goods. And this is what happened. From 1967 on, Brazil began to adopt a firm policy of support for the export of manufactured goods and, as we can see in Figure 13.1, the share of manufactured goods in total exports increased dramatically— from 6 percent in 1965 to 62 percent in the peak year, 1990—not by chance the year in which Brazil dismantled the mechanism that neutralized its Dutch disease (see Chapter 19, “The Great Mistake” section). In 1967 the import-substitution industrialization strategy was over, and the manufacturedgoods-exporting strategy began. Instead of just neutralizing the Dutch disease in relation to the domestic market with import tariffs, the government decided to neutralize it also on the export side, with export subsidies. Brazil, alongside South Korea, Taiwan, Hong Kong, Singapore, and Mexico, had become one of the NICs: “Newly Industrialized Countries.”1 It must be noted that the protection of the domestic manufacturing industry was not abandoned (particularly the capital goods industry and the basic materials industries, such as petrochemicals, which continued to be a governmental priority and the subject of import substitution), but the essential goal was to export manufactured goods. Import duties did not represent just a policy of protection of infant industries, they also implied the neutralization of the Dutch disease on the import side. Now it was necessary to do the same on the export side: it was necessary to “subsidize” the export of manufactured goods—which was done. And I put “subsidize” in quotation marks because, actually, although it was in the form of a subsidy, it was not an incentive for inefficient business enterprises to export, but rather a way of guaranteeing Brazilian enterprises an effective exchange rate that would make them internationally competitive. Brazil’s development strategy was therefore no longer an importsubstitution strategy, but a manufactured-goods-export strategy. The economy’s import coefficient had ceased to decline, and had once again started to grow. Moreover, the domestic market expanded again but, as had already happened during the period of the import substitution strategy, this growth was followed by an increase in economic inequality. Therefore, a new development strategy was taking shape that, besides stimulating the

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Figure 13.1: Share of Manufactured Goods in Exports, 1964–2014

Source: Government of the Federal Republic of Brazil, Ministry of Development, Industry and Foreign Trade.

exports of manufactured goods, deeply concentrated the national income in the middle and upper classes. In a 1977 book, I called this strategy the “industrialized underdevelopment model” because it maintained the dual nature (and, therefore, underdeveloped feature) of Brazil’s economy and society: a capitalist elite and two middle layers (the capitalist middle class and the technobureaucratic middle class). Under the aegis of the 1964 Authoritarian-Modernizing Pact, the new economic strategy—defined by the military, by Delfim Netto, and by João Paulo dos Reis Velloso—was still oriented toward import substitution in the areas of heavy industry and capital goods, but was already deeply oriented toward the export of manufactured consumer goods. There were two basic catalysts for the high growth rate that began in 1967. On the one hand, the new macroeconomic policy no longer viewed inflation as essentially a demand problem; it instead adopted the theory of Ignácio Rangel, which diagnosed it as a cost-push phenomenon. On the other hand, there was a process of income concentration in the middle and upper classes, which spurred the demand for luxury goods, especially vehicles. So while the workers were now excluded from the political pact and duly marginalized, the middle class, both bourgeois and professional/technobureaucratic, benefitted from it.

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The new government, under the command of General Artur da Costa e Silva (1967–1969), surprised everybody with a developmental macroeconomic policy. The new finance minister, Delfim Netto, working from the perspective that he had learned from Ignácio Rangel, defined the inflation in Brazil at that time as cost-push inflation.2 He declared that in 1967 Brazilian inflation had shifted from a stage of predominant expansion of demand, with high levels of productive capacity utilization, to a stage of predominant expansion of costs, with pronounced levels of idle capacity. Inflation continued despite the demand slowdown, due to the influence of several factors, including the autonomous rise of certain costs, the rise in the interest rate, the increase in the average cost resulting from fewer sales, and the influence of expectations.3 The economic policy initiated by Delfim Netto proved to have a positive effect. After defining inflation mostly as cost-push, and only secondarily as demand-pull, the government was not afraid to take measures, albeit limited, to stimulate demand. The wage policy was accordingly revised so as to offset the losses suffered by wage earners due to an underestimation of the residual inflation. Moreover, credit policy became more flexible, government investments remained high, and incentives to boost demand made it possible for business enterprises to increase their production and for employment levels to be restored. The economy thus entered a virtuous cycle of prosperity in which increased demand stimulated production, and production, in turn, stimulated demand. Companies’ profits increased, so they no longer needed to raise their prices to make up for rising costs. The government, consistent with its definition of inflation, tightened the administrative controls over industrial prices more and more. When there is cost-push inflation, prices are being determined in monopolistic terms, so there is no sense in trying to fight inflation with severe constraints on demand. Demand needs to be liberated demand while exercising a strict control on the costs and prices in the monopolistic sectors. This policy was adopted through the creation of the Interministerial Price Commission, which controlled costs and prices in the 350 largest Brazilian industries, specifically, the economy’s oligopolistic sector; in addition, the governmental deficit was contained within narrow limits, and banking credit was controlled. The result was that, as Brazil entered a period of relative prosperity, inflation, which had been reduced between 1965 and 1966 due to required adjustments, continued to fall over the following years due to the new prosperity. As for the reduction in the governmental deficit and in the issuance of paper money, this was possible thanks to the fiscal adjustments that took place during the administration of President Humberto de Alencar Castelo Branco (1964–1967). This government, despite having failed to make a distinction

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between cost-push and demand-pull inflation (to the detriment of Brazilian development), had the merit of facilitating the task of containing the government deficit. The two main factors that allowed this containment, however, were new taxes and prosperity (the latter helping to boost tax receipts). However, we need to stress that the deficit, rather than being a cause of inflation, was a consequence of it. Insofar as the government was able to reduce the inflationary (cost) rate through incentives for demand and through price controls, it became easier to control the cash deficit and the paper money issues, thereby preventing the inflationary spiral from gaining strength. Another positive aspect of the economic situation under the Costa e Silva administration, aside from the reduction of the inflation rate, was the increase in exports. They were high in 1967, reaching a record of $2 billion in 1969. This was in addition to the favorable international economic climate. Another factor that positively influenced the exports, particularly those of manufactured goods, was the establishment by the finance minister in 1967 of a flexible exchange rate that was adjusted for inflation. This policy of mini-devaluations, or a crawling peg exchange-rate regime, limited speculation and provided greater security to the exporters, who did not risk their exports becoming suddenly expensive just because the government decided to use the exchange rate as an anchor for controlling inflation.

Brief Theory 9: The Policy of Growth with Foreign Indebtedness (“Savings”) The three policies that cause the tendency toward cyclic and chronic currency overvaluation in the developing countries are: the non-neutralization of the Dutch disease, along with the capital inflows associated with high interest rates; growth with foreign indebtedness (“savings”); and the use of the exchange rate as an anchor for controlling inflation. Thus, in addition to an objective competitive disadvantage (the Dutch disease), it is the widespread beliefs underlying the three policies that are responsible for the long-term appreciation of these countries’ currencies, which is probably the most important obstacle that developing countries face when trying to grow and catch up. The existence in the developing countries of a foreign constraint (i.e., a lack of hard foreign currency), caused primarily by the fact that the income elasticity of demand for imports is greater than 1, led first the structuralist economists and later the Keynesians to defend this misguided policy of foreign indebtedness which, obviously, is in the best interest of the rich countries, of their rentier capitalists, of the financiers, and of the orthodox economists who work for them. To explain an obvious fact—the dollar shortage that developing countries usually face when trying to finance investments—the two-gap model says that a foreign constraint will result from the above-mentioned income elasticity of demand for

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imports, and from an income elasticity of foreign demand for their commodity exports that is lower than 1. In fact, this dollar shortage is mostly caused by the chronically overvalued currencies of those developing countries that did not adequately manage their exchange rates. However, as this tendency toward the cyclic and chronic overvaluation of developing countries’ currencies was unknown, structuralists and Keynesians concluded that this was a “structural limitation on development” that should be countered through foreign indebtedness— an indebtedness that should be high, and whose sole limitation should be the risk of a balance-of-payments crisis. This was a heterodox theory that liberal orthodoxy happily accepted. Thirlwall’s Law (named after Anthony Thirlwall, a postKeynesian economist) correctly states that, once the strategy of import-substitution industrialization, through which the economy’s import coefficient declines, has been discarded, exports should grow at the same rate as the GDP. This law was based on the same elasticities as those specified above, and was erroneously interpreted by many as a “Keynesian” justification for foreign indebtedness. Developmental macroeconomics rejects this theory with the argument that developing countries generally have a high rate of substitution of foreign for domestic savings. It does not reject the concept of foreign constraint, but wishes this restriction to be solved by depreciating the currency to the industrial equilibrium level, and not by resorting to foreign indebtedness. More than that, if a country suffers from the Dutch disease, the neutralization of the disease will involve a current account surplus, which will have to be maintained so that the exchange rate does not deny to the country’s competent industrial enterprises access to domestic and foreign markets. There is always the hope that foreign savings are added to domestic savings, rather than replacing them, but this happens only when the economy is growing fast and the economic agents’ marginal propensity to consume declines. Usually, the rate of substitution of foreign for domestic savings tends to be high. On the other hand, when a country facing the Dutch disease, this is showing a current account surplus this is an indication that it is at least partially neutralizing it, because eliminating the competitive disadvantage represented by such disease implies, necessarily, a current surplus, which will have to be proportional to its severity. In any case, current account deficits, increased foreign indebtedness, and an overvalued currency, besides discouraging investment in the manufacturing industry, will represent a high cost for the country: if the rate of substitution is 50 percent, an investment yielding 15 percent for the multinational corporation that invests in Brazil will cost the country 30 percent, with the rest dissolved into short-term consumption. The mechanism that causes the substitution of foreign for domestic savings is simple. Capital inflows cause a substitution of foreign for domestic savings when they give rise to the appreciation of the local currency. Consequently, if we think about the supply side or the income side, there is a change in the income distribution: wages increase artificially, consumption also increases artificially (given the existence of a high marginal propensity to consume among the workers), domestic savings drop, and foreign savings replace domestic savings rather than adding to them. On the demand side, the national currency appreciation encourages investments for a brief period, since imported equipment becomes cheaper and internal demand increases due to the short-term increase in wages caused by the appreciation of the national currency. But soon after

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such appreaciation makes the manufacturing industry of the country not competitive, industrialists cease to invest, and the developing country ceases to profit from the great advantage it has: to export manufactured goods profiting its relatively low labor costs. When the domestic currency appreciates, the country’s efficient companies are disconnected from the global demand; consequently, their lucrative exportoriented investment opportunities drop, and so does domestic savings. In addition, imported goods start to flood the domestic market, and domestic companies start to lose market shares within the country. The result, due to both the first and second reasons, is little or no increase in the country’s rate of investment and total savings. Instead, consumption and foreign debt increase. Only in exceptional circumstances, when the country is already growing fast and the marginal propensity to consume is declining, will growth based on a foreign savings policy be beneficial to the country. But most of the time, even when it comes to direct investments involving the formation of fixed capital, there is a substitution of foreign savings for domestic savings.* This criticism of the policy of growth based on foreign indebtedness (“savings”) may seem strange, but all scientific knowledge implies the criticism of common sense. Before Copernicus, it was “obvious” that the Earth was flat; before Darwin, it was “obvious” that the man had been created by God in His image and likeness; before Keynes, it was obvious that, in order to increase investment, it was necessary to first increase savings. Until recently, it was obvious that efficient companies will always have access to markets because the exchange rate would only stray from the equilibrium in the short term. Until now, it also seemed “obvious” that foreign savings would be added to domestic savings, rather than replacing them. But, besides the two economic arguments that I have just presented, there is empirical evidence sustaining this criticism. And it shows that capital is generated at home. A country rarely grows based on foreign savings and, when it does, it is not for long. This perception is confirmed by the fact that the fast-growing Asian countries are growing with foreign dissaving—that is, current account surpluses in the Asian countries and an increase in their reserves. Because they cause an overvaluation of a developing country’s currency, excessive capital inflows (resulting from the use of the exchange rate to control inflation and from the growth with foreign savings policy) are a form of exchange rate populism. In this case, it is not the state that irresponsibly spends more than it collects (which implies fiscal populism), but the nation-state that does so. That is to say, it is the state plus the private sector that overspends. Given a high marginal propensity to save, the result of an exchange rate appreciation is an artificial increase in wages and in consumption and a reduction in investment. Economic populism—the policy of irresponsibly spending more than what is collected—may, therefore, become fiscal populism when the state irresponsibly spends more than it collects and incurs a public deficit; it may also become exchange rate populism, when the country or the nation-state irresponsibly spends more than it collects and incurs current account deficits.† The theory of the twin deficits, which holds true even when the exchange rate is reasonably balanced, results from the similarity—and interrelationships—between the two deficits and the two types of populism. When economists, both orthodox and heterodox, insistently recommend that Brazil try to grow with foreign

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savings, they are actually promoting exchange rate populism, and they are defending consumption to the detriment of investment. The orthodox economists do so because they believe that growth with foreign indebtedness will be good for the country. In fact, it will be good for the creditors. The heterodox economists defend consumption at the expense of investment because they think that, in this way, they are redistributing income. The rejection of foreign financing does not mean that a well-developed national financial system should not be considered fundamental to development. Brazil has a sophisticated financial system that, as noted by Fernando José Cardim de Carvalho (2005), is dysfunctional because it does not finance investment enough. Nevertheless, “it has a very high capacity for adaptation, especially if it can rely on adequate institutions of regulation and financial supervision to direct the transition and to guarantee the permanent enforcement of best practices” (p. 20). We can now affirm that Brazil has such institutions. In addition to the National Bank of Economic and Social Development (BNDES), the major national private banks are able to finance investment, provided that they cease to be mere financial backers of public debt at very high interest rates, and instead contribute to the increase in savings. And we must stress that their funding is domestic, it is granted in domestic currency to business enterprises that are investing. Consequently, it does not appreciate the country’s currency, as happens when a foreign loan is made in hard foreign currency; nor does it imply, therefore, a high rate of substitution of foreign for domestic savings. * In Brazil, between 1994 and 1999, the rate of substitution of foreign for domestic savings was 100 percent, despite the fact that 60 percent of the current account deficit during that period was financed by direct investments. † The adverb “irresponsibly” is important here because there is such a thing as a legitimate or responsible public deficit, that is, one that is carried out in the context of a countercyclical policy. There may also be a current account deficit that is responsible, when the country does not have the Dutch disease to be neutralized, and when it is growing very fast, given the high profit expectations of the entrepreneurs. In this case, the marginal propensity to consume will decrease and the rate of substitution of foreign for domestic savings will also decrease.

Notes

1. As Bela Balassa (1981, p. 12) observes in his analysis of the NICs, “A development strategy oriented to the outside should not be understood as a strategy that favors exports to the detriment of import substitution. Its characteristic was rather to provide equal incentives for production oriented to the foreign and the domestic markets.” 2. A few years earlier, in 1963, when I was pursuing my PhD with Delfim Netto, in a weekly seminar he organized we read and discussed the newly released classic book by Rangel, A Inflação Brasileira (The Brazilian Inflation). 3. This information is from a 1967 document from the Ministry of Planning and Economic Coordination.

14 The Military in Office: Rise and Decline in the 1970s

The expansion that started in 1967 reached its apex in 1973. During this “economic miracle,” the gross domestic product (GDP) grew at an average annual rate of 11.3 percent, and the manufacturing industry at an average annual rate of 12.7 percent (Table 14.1). Thanks to increased savings, provided by the abundant profits of the new state-owned companies, whose prices had been corrected during the previous period of adjustment (1964–1967), and to the good financial situation of the Brazilian government, which was manifested in high public savings,1 private and state investments were also high: 15.7 percent and 9.5 percent, respectively, of GDP. This meant that in 1967 the total rate of investment reached 25.2 percent of GDP. In 1974, a process of economic slowdown began, culminating in the 1981 recession. In contrast to the 11.3 percent growth rate between 1967 and 1973, average GDP growth per annum declined to 5.4 percent between 1974 and 1981. Industrial production growth suffered a sharper drop: the growth rate averaged 12.7 percent per annum between 1967 and 1973, but fell to 5.4 percent between 1974 and 1981.2 Brazil was witnessing a second cycle of industrial expansion in the context of the export model, which still had an element of import substitution, but was based on the exportation of manufactured goods. Since the 1950s, Brazil’s economy achieved enough industrial density to be the scene of classical economic cycles. The existence of a complete consumer goods industry, as well as capital goods and basic inputs industries, enabled the economic cycles of capital over-accumulation and underaccumulation to become endogenous, linked to the internal dynamics of the Brazilian capitalist system. Economic cycles in Brazil no longer merely reflected the cycles of the central economies, reproduced there through the increase or decrease in the prices of exported products (particularly coffee) and in the value of Brazil’s exports; it was no longer, therefore, an exogenous 191

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primary-exporting cycle. Instead, it had become the result of the internal dynamics of Brazil’s capitalist system. At the same time, however, the internal economic cycle continued to reflect the cyclic movements of international capitalism, with which Brazilian economy is naturally and increasingly connected. Table 14.1 presents the evolution of Brazil’s industrial cycles from 1955 to 1981. But a fundamental problem regarding the crisis starting in 1974 was it was not clear whether the crisis was actually a cyclic phenomenon. Although there is no doubt regarding the importance of exogenous factors in the explanation of the economic cycles, the cycles are mainly caused by over-accumulation during the expansion phase, followed by a drastic reduction in investments during the deceleration phase. Generally, the financial cycle is added onto the economic cycle. Financial cycles are a result of speculative actions of financial agents, which, in the developing countries, are themselves the result of the cyclic and chronic tendency toward exchange rate overvaluation. In this cycle, the exchange rate appreciates as the country becomes indebted in foreign currency, but only up to the moment when the foreign creditors lose confidence and suspend the renewal of credits; then the country goes bankrupt. The balance-of-payments crisis happened only in 1981, but there had been a shift in the economic cycle in 1974. The first oil shock, in 1973, played a role in this shift, but there was no external crisis. On the contrary, from then on the government decided to “grow with foreign savings,” which would lead to a deadly financial crisis in 1981. Income Concentration in the Middle and Upper Classes

We can only understand the 1968–1973 “economic miracle” and, more generally, the high rate of economic development achieved until 1980 by taking into account the concentration of income in the middle and upper classes during that period. A key characteristic of the economic developTable 14.1: Industrial Cycles from 1955 to 1981 (% annual GDP growth rates) Period

1955–1962 1963–1967 1968–1973 1974–1981

Source: IBGE.

GDP 7.1 3.2 11.3 5.4

Industry 9.8 2.6 12.7 5.4

Agriculture 4.5 4.2 4.6 4.9

Services 6.8 3.7 9.8 6.6

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ment that took place under the military regime was the alignment between income concentration and the demand for luxury goods that the Brazilian manufacturing industry had begun to produce in the previous decade, especially vehicles. In principle, as it is mostly wage levels that determine consumption, it is necessary that their increase be proportional to the rate of productivity in order to sustain demand. This did not happen at that time: in the 1960s, wages grew substantially less than productivity, and there was strong income concentration. But capitalism always found ways of circumventing this restriction. In the initial phase of development, the classic solution is a planned policy for the production of capital goods and intermediate goods that create cross demands. An export policy may, for some time, achieve the same result. A third approach is to replace the wage increase with a credit increase, as we saw in the United States in the period that preceded the global financial crisis of 2008. In Brazil, during the 1970s, in order to conciliate growth with wages that were rising less than productivity, the solution was to include the middle class as a beneficiary of economic development. In 1966, in view of the decreasing capital productivity resulting from intensive investments that reduced the country’s capital-to-output ratio, and given the low wage growth, Celso Furtado predicted, in Underdevelopment and Stagnation in Latin America (1966), that Brazil and, more broadly, Latin America, would be headed for stagnation. He was mistaken. Soon after, the “economic miracle” began. How can we explain this? In 1970, on a suggestion made by Antônio Barros de Castro in a conference in São Paulo, I published the article “Concentration of income and the economy’s recuperation” (1970), which offered an explanation of the discrepancy. Aside from the fact that the Brazilian economy was turning to the export of manufactured goods, the explanation is that there was an income concentration in the middle classes, which created the required market for the automotive industry. At the same time, Maria da Conceição Tavares and José Serra (1971) offered a similar explanation and was widely read. As shown in Table 14.2, from my 1970 article, economic inequality had increased substantially in the selected cities of the Northeast between the beginning and the end of the decade. On the other hand, led by the economic growth, the average wage was strongly increasing (Table 14.3), whereas the minimum wage was increasing only slowly. The initial hypothesis was thus confirmed: accelerated economic growth was taking place through a concentration of income in the middle class and upper classes. The minimum wage is an indication, albeit an imperfect one, of the remuneration of the poorer layers of the population. According to data from the Ministry of Labor, in São Paulo, the richest city of Brazil, roughly 30 percent of the employees received the minimum wage. Yet the average wage is influenced by the minimum wage and by the high

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Table 14.2: Income Distribution in 1960 and 1967 (% of the national income in the first and fifth quintiles) Cities

Recife

Salvador

Fortaleza

João Pessoa

São Luís

Dates

October 1960 March 1967 July 1962 August 1967 April 1962 July 1965 November 1964 July 1967 September 1963 February 1967

1st Quintile 10.3 3.2 5.6 3.8 8.0 5.3 5.6 2.8 5.6 4.6

5th Quintile 47.1 56.4 50.5 51.0 48.8 49.0 50.8 54.1 43.9 52.4

Source: Banco do Nordeste do Brasil (BNB), Departamento de Estudos Econômicos do Nordeste, Distribuição e Níveis da Renda Familiar no Nordeste Urbano (Distribution and Levels of Family Income in the Urban Northeast) (Fortaleza: BNB, 1969), p. 22.

wages paid to specialized blue-collar workers, teachers, technicians, clerical personnel, engineers, technical staff, and those fulfilling the bureaucratic functions typical of the middle class (from the lower-middle class to the upper-middle class). If the average wage was increasing while the minimum wage was decreasing, this was obviously due to a redistribution of income toward those receiving the higher wages. The Technobureaucratic-Capitalist Model

In the 1970s, I also called the developmental model, which is based on the exports of manufactured goods, the “industrialized underdevelopment model,” in order to stress the fact that it is characterized by income concentration in the middle and upper classes. In this way, Brazil kept a dual society, divided between those included in and those excluded from capitalist development. It was a society that guaranteed the demand for luxury goods through a process of income concentration that included the professional middle class and the bourgeois middle class—the holders of college degrees and businessmen employed by small and medium-sized companies. The industrialized underdevelopment model and the 1964 AuthoritarianModernizing Pact represent a whole that, on the level of abstraction at which I am working, requires an integrated analysis. We might also talk about “state capitalism,” but this would remove the model’s specificity. In

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Table 14.3: Real Average Wages in the State of São Paulo, 1965–1970 (Brazilian cruzeiros) Year

1965 1967 1968 1969 1970

Average Wage 405.7 466.0 400.7 471.0 534.1

Source: Brazilian Institute of Geography and Statistics (IBGE). The figures are from March of each year, except for 1970, for which the figure is from February.

fact, between 1964 and 1984, Brazil had a technobureaucratic-capitalist society in which the political power was under the command of the technobureaucratic government, and those who benefited from it were mostly the industrial entrepreneurs. But the multinational corporations and the international banks also greatly benefited from it, the latter insofar as the country adopted the policy of growth with foreign savings, a policy that resulted in the great foreign debt crisis of the 1980s. The manufactured goods exporting model adopted from 1967 onward resulted from the 1964 Authoritarian-Modernizing Pact, which encompassed the civil and military public technobureaucracy and the industrial bourgeoisie. In the context of this class coalition, the state directly controlled a substantial portion of the national economy through state-owned companies. It planned the large investments in infrastructure and in the basic materials industries. It determined, in addition to fiscal and monetary policy, the country’s exchange rate and wage policies, thereby controlling the chief macroeconomic prices. And it promoted an industrial policy that was confused with the macroeconomic policy. The confusion centered on the system of import duties and export subsidies, which was the equivalent of controlling the exchange rate and the neutralization of the Dutch disease. The state and the capitalist enterprises complemented each other. The big government oversaw electric power, transportation, steel, oil, and communications, and generated demand for capital goods. The industries producing capital goods, like the rest of the manufacturing sector, was in private hands, and its strategic component was the automotive industry. In a few industries, especially petrochemicals, the triple alliance among the public technobureaucracy, the industrial entrepreneurs, and the multinational corporations was expressed in a formal way. This was the subject of a PhD dissertation and the corresponding book by Peter Evans (1979), one of America’s most brilliant sociologists.

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Foreign Indebtedness

After the first oil shock, in 1973, produced huge trade imbalances in the oilexporting countries, greater access by Brazil and the other Latin-American countries to foreign credit was made possible by increased international liquidity, due to an increase in eurodollars available for foreign loans. In Brazil, the government’s mistaken strategy was to raise the gross foreign debt as much as possible, maintaining high international reserves as a guarantee. It expected, in this way, to prevent a financial crisis. But starting in 1981, Brazil suffered a greater financial crisis: the great foreign debt crisis of the 1980s. As a consequence of the 1974 global cyclic shift and of the policy of getting into debt to fuel growth, capital inflows appreciated the currency and led to an explosive growth of foreign indebtedness. The policy of pursuing growth with foreign savings (a criticism of which is presented in Brief Theory 6) successively led the country to an increase in consumption, rather than in investment; to international financial fragility; and, finally, to a balance-of-payments crisis. Until the early 1970s, including the period of the “economic miracle,” Brazil had grown fast without depending too much on foreign savings. However, when it resorted irresponsibly to foreign savings (Table 14.4), the growth rate did not increase. In fact, it fell—from an average of 11.3 percent annually in 1968–1973 to 5.4 percent during 1974–1981, while foreign debt during 1974–1981 more than doubled. But this table does not tell the whole story, as it was from 1982 on that the Brazilian economy sank into complete stagnation as a consequence of the financial crisis—the balance-of-payments crisis—created by the foreign debt crisis of the 1980s. The indebtedness was intended to finance deficits in the current account, which were supposed to increase the rate of capital accumulation. However, although consumer goods were not directly imported, those deficits also led to rising levels of consumption, insofar as they appreciated the domestic currency and generated an artificial increase in wages. By the end of 1973, when the price of oil quadrupled, it would have been a natural decision to change the policy of current account deficits and foreign indebtedness. This is not what happened. The euphoria of the “economic miracle” contaminated Brazil’s economic policy. By 1974, the miracle had already ended, and the world was facing the consequences of the 1973 oil shock. But when General Ernesto Geisel took office as president, he proclaimed Brazil an “island of prosperity,” and grandly formulated the Second National Development Plan (Plano Nacional de Desenvolvimento II, PND II). This plan promoted the development of infrastructure (supported by the state), the basic inputs industries (supported by the state and by the major corporations, including foreign ones in the case of petrochemicals), and the capital goods industries (supported by national bourgeoisie). To finance this plan, the government

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Table 14.4: Current Account and Foreign Debt, 1971–1981 (Selected years, $ million) Year

1971 1973 1976 1978 1981

Source: Central Bank of Brazil.

Current Account –1,898 –2,936 6,784 –13,407 –9,113

Foreign Debt 7,947 13,962 30,970 50,143 71,878

turned to foreign investors, and the state-owned companies became indebted in dollars, while the government restrained prices to control inflation. This unacceptable price restraint would cause the crisis for those stateowned companies over the following decades. There was no problem of clientelism in these companies, which benefited from the policy of bureaucratic insulation. On the contrary, they had been financing their own major investments since 1964. This was particularly true of Eletrobras and Telebras. Nevertheless, due to the price restraint, they became vulnerable and were mostly privatized. In 1977, foreign indebtedness reached such a high level that it started to snowball. That same year, Brazil’s terms of trade began to deteriorate dramatically, and they became even worse in 1979, after the second oil shock. The price index of Brazilian exports compared with imports dropped from 112.7 to 65.1 between 1977 and 1981. Whereas Brazil became irresponsibly indebted, in 1979 the US Treasury Department, in view of the stagflation (a form of inertial inflation) that was occurring in the US economy, decided to dramatically raise interest rates. Consequently, the international interest rates increased explosively. In accordance with the debt agreements, the payments of interest and the amortization of Brazil’s foreign debt (not the total amount of the debt) were indexed to an international interest rate (usually the LIBOR). So, the value of those payments increased. On the other hand, in the face of the continuous growth of Brazil’s foreign debt, from 1980 on, and definitely from 1981 on, the creditors’ banks ceased to roll over Brazilian debt. Consequently, the country went bankrupt once again, as it had in 1930. This caused the most serious financial crisis in Brazil’s history. The country was no longer facing a mere liquidity crisis, but a solvency crisis that would have tragic consequences for the Brazilian economy, not only in terms of growth—the 1980s would be a decade of complete stagnation—but also in terms of high inertial inflation, which would haunt the country until 1994.

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The Mistakes of 1979–1980

At the beginning of 1979, the economy was already showing clear signs of crisis. Inflation was dangerously accelerating to 77 percent; foreign indebtedness was becoming worrisome in view of the second oil shock and the rise in international interest rates. The public deficit, which had already reached 5.3 percent of the GDP in 1978, increased to 8.1 percent in 1979. Finally, in order to address the rising inflation, the government allowed Brazil’s currency at the time, the “cruzeiro,” to appreciate, while the prices charged by the state-owned companies were restrained. The state-owned companies, which had been financing themselves since 1964—thereby enabling a great expansion of energy and communications services—were now in deficit and forced to become indebted in foreign currency. This signaled the premature end of the great effort to build Brazil’s economy, which had begun in 1930; the Nation and Development Cycle was now coming to an end. During the shift from the Geisel administration to that of President João Baptista Figueiredo, Mário Henrique Simonsen left the Ministry of Finance (which he had headed since 1974) to become head of the Ministry of Planning. In order to face the crisis caused by the second oil shock and by the increase in international interest payments, Simonsen undertook to (1) speed up the mini-devaluations, (2) reduce state expenses and subsidies, (3) unify fiscal and monetary budgets, and (4) cool down the economy to reduce imports and curb the inflation rate. In view of this grim prospect, the businessmen supported Antônio Delfim Netto, who between 1967 and 1973 had very competently commanded Brazil’s economy. Their support for Delfim Netto finally led Simonsen to resign. Delfim Netto became head of the Ministry of Planning in August 1979, with full powers, intending to reenact the 1967 success. To this end, he formulated an expansionist strategy on the assumption that Brazil’s inflation was mainly cost-push. If the economy expanded while the government administratively controlled prices, business enterprises would be led to reduce their profit margins (profits on sales), thus lowering inflationary pressures; but their profit rate (profits on capital) would be maintained because their sales would be increasing. The situation in 1979, however, was different. In 1967 the state budget was balanced and the country’s foreign debt was low, but by 1979 Brazil was in the opposite position. In 1967 Brazil was exiting from a cyclic crisis naturally, whereas in 1979 it was going deeper into a cyclic crisis. In 1967 the workers’ unions were neutralized, which made wage cutbacks easier, whereas in 1979 there were major trade union demonstrations, starting in São Bernardo do Campo. In fact, the only common point between the two phases was the cost component of inflation. It is not surprising, therefore, that the new policy did not have the expected outcome.

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During the second half of 1979, the state-owned companies made several price adjustments (called “corrective inflation”) that put a strong upward pressure on prices. In December 1979, in view of the overvaluation of the cruzeiro, a 30 percent maxi-devaluation was implemented, causing serious losses to the state-owned companies. Due to the strong inertial or indexed component of the Brazilian economy, this had a strong inflationary effect, therefore annulling itself. The government then made its most serious mistake: it prefixed the mini-devaluations of the exchange rate at levels below the expected inflation rate. By doing this, it intended to reduce the inflationary expectations of business enterprises, thereby reducing the rate of increase in their prices. The government thus adopted a policy of inflation control based on the agents’ expectations, ignoring the distributive conflict or the need for equilibrium in the relative prices.3 This policy was based on the neoclassical assumption of “rational expectations,” which had then become dominant at US universities—that is, the assumption that economic agents form their expectations in a rational way, from their intuitive knowledge of “good” economic theory. So Brazil adopted a policy similar to the one that had been implemented a little earlier in Argentina by José Alfredo Martinez de Hoz, minister of economy, with catastrophic results, and to the one adopted in Chile at roughly the same time, with equally catastrophic results, insofar as the economic agents ignored the “exchange rate orientation” that was offered. Instead, prices continued to increase inertially, as the agents sought to maintain their incomes. Consequently, Chile’s domestic currency strongly appreciated, provoking a strong increase in the current account deficit and in the foreign debt, leading to the balance-of-payments crisis.4 Of course, this liberal policy did not work in Brazil, either. While inflation rose to almost 120 percent, the monetary and exchange rate adjustments were below 60 percent. This did violence to the law of value, which also applies to the exchange rate,5 and the distortional effects were immediate. With the exchange rate appreciation, the real interest rate rose, the black market in dollars reappeared, and actual wages and the domestic consumption increased in the short term (whereas the disincentive to invest did not provoke the economy’s deceleration). Therefore, given the international context, which demanded economic adjustments, Brazil’s economy went into a state of euphoria: the GDP grew by nothing less than 8 percent, imports grew disproportionately, the trade deficit rose to $3.4 billion; and foreign indebtedness, which had amounted to $50.1 billion in 1978, rose to $71.9 billion in 1981 (Table14.4). Naturally, the cruzeiro revalued, cancelling the 1979 maxi-devaluation, of which only its negative effect remained: the strong acceleration of inflation to roughly 100 percent annually, which began a period of high inertial inflation that would only end in 1994, with the “Plano Real” (“Real Plan”).6

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Historians of great financial crises created by foreign debt usually point to Mexico’s bankruptcy, in 1982, as the start. But Brazil’s crisis had already begun in the second half of 1980. The government’s mistaken economic policy led international bankers to interrupt the rollover of Brazilian debts. After a series of fruitless trips abroad, and given the growing pressure by international bankers for a more austere economic policy, in November 1980 Finance Minister Delfim Netto drastically changed the economic policy, competently making the necessary adjustments. Brazil, now partially monitored by the International Monetary Fund (IMF), began a regime of fiscal adjustments and interest rate hikes, thus preparing for a new attempt to depreciate the cruzeiro, which would happen at the beginning of 1983. There was no alternative for the Brazilian government. The only thing that did not make sense was the strong cutoff that was then implemented with regard to the investments of state-owned companies. This was based on the IMF’s accounting policy of considering as part of the public deficit variations in the financing needs of state-owned companies (without, of course, including in the same category any deficits of private companies). But the orthodox policy proposed by the IMF was not entirely followed because the wage law of 1979 and the subsidies to exports and agriculture were not eliminated. The violent monetary contraction and the dramatic increase in the interest rates paralyzed investments; in 1981, the deceleration turned into a recession. For the first time since 1930, the GDP growth rate was negative. Industrial employment levels fell by 10.3 percent, and industrial production suffered a decrease of 9.9 percent. In return, inflation dropped, but only moderately, decreasing from 110 percent in 1980 to 95.1 percent in 1981. The fundamental purpose of the recessionary policy was not to reduce inflation, but to equilibrate the trade balance and to placate the international financial system.7 This result was only attained in February 1983, when Delfim Netto decided to effect an exchange rate devaluation that turned out to be successful—and that returned Brazil to its developmental policy after having, since November 1980, been correcting the monetarist mistake of 1979. But this devaluation unleashed a high inertial inflation. Moreover, the foreign debt crisis was not solved, and it would not be solved for another decade.

Brief Theory 10: Inertial Inflation Between 1980 and 1994, Brazil’s economy experienced a period of high inertial inflation, during which inflation was no longer measured in annual terms but in monthly terms, usually ranging between 10 percent and 30 percent per month. This inflation puzzled orthodox and monetarist economists, as well as structuralist and Keynesian economists. I remember quite well Affonso Celso Pastore—one

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of the country’s best orthodox economists—saying to me at the end of 1984, when he was president of the Central Bank of Brazil and I was the president of the Bank of the State of São Paulo, “Bresser, I don’t understand what is happening. I have already done everything to curb inflation and it doesn’t fall!” My answer was prompt: “It doesn’t fall because it is an inertial inflation.” If Pastore had read the two articles I had written with Yoshiaki Nakano on the subject a year before (I then offered him a copy of the two papers), he would have understood better what was happening and what had to be done to put an end to this form of inflation, which was not yet known at that time except by a few economists.* In fact, we—structuralist or classical developmental economists—had a new theory to explain inflation in Brazil. That was the theory of “inertial inflation,” an inflation that was independent of demand-pull inflation. Mário Henrique Simonsen (1970) and Felipe Pazos (1972) were the originators of the idea, but it only gained a systematic character in the early 1980s, when the theory not only solved an important puzzle, but also suggested that the solution to the problem, while difficult, was not as costly as assumed by the orthodox economic theory.† My fellow student Nakano and I played an active role in the development of these new ideas. My original ideas about inflation came from Ignácio Rangel, especially from his ideas on cost-push and managed inflation. These ideas were revolutionary. They explained how recession and inflation could coexist, as had happened as early as 1963, when A Inflação Brasileira (The Brazilian Inflation) was published. Rangel discovered a specific characteristic of high inflation that conventional economics, whether monetarist or Keynesian, did not explain. In addition, he took a decisive step in the understanding of the relationship between inflation and currency by developing the structuralist idea that the money supply is endogenous and passive. It was not the increase in the quantity of money that explained inflation, but the increase of inflation caused by other factors (mainly monopoly power and the need to reduce cyclic crises), which induced the increase in the money supply, making it endogenous. A few years later, reading a review of ideas on endogenous money (Merkin, 1982), I observed that no economist from the central countries had written as firmly or as clearly on the subject prior to Rangel, although several of them, including Knut Wicksell, John Maynard Keynes, Joseph Schumpeter, and Joan Robinson, had suggested the idea. During the 1960s and the 1970s, I adopted this vision of inflation. I added to it the idea, then already known, that distributive conflict played an essential role in the inflationary process. However, during the 1970s, after the oil crisis, a new major problem emerged in the developed economies: stagflation. The central economies saw their inflation rates increase even as they entered or remained in recession. The same phenomenon that Rangel had studied and explained ten years before, by examining the Brazilian economy, was now replicated at the international level. In the central countries, stagflation had the perverse consequence of undermining Keynesian theories of inflation, which were replaced by monetarist theories based on the expectations of economic agents—expectations that had been transformed into a magical instrument that provided an answer to all the problems the economists could not solve. Neither the conventional and monetarist theories nor Rangel’s theory explained stagflation or the stability of inflation at certain levels. This was a universal phenomenon, although it was particularly visible in Brazil’s economy. During practically the whole of the 1970s, for instance, inflation in Brazil remained relatively stabilized, around 40 percent annually. In 1979, the inflation

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rate rose and remained stable at around 100 percent per annum. Why the stability, and why the acceleration? Monetarist theories were clearly unsatisfactory and Keynesian theories had lost their explanatory power with stagflation. Structuralism provided only a limited explanation, as the bottlenecks in the supply of agricultural goods proved to be less important than they at first seemed. And Rangel’s ideas, although clarifying, did not solve the issue. In 1980, after watching inflation leap from 50 percent to 100 percent annually and later stabilizing at the latter level, in a process that was clearly independent of demand, I had an intuition. The fact that managed inflation or costpush inflation tended to spread in modern economies characterized by an oligopolistic or technobureaucratic capitalism, in which the state played a fundamental economic role, was not an adequate explanation for the phenomenon. There was an additional, basic problem: the difference in timing among companies between the increases in their costs and the automatic translation of those higher costs into higher prices happened regardless of demand. As I wrote the following year, in 1981: “The increases in costs and in prices do not all take place at the same time in all the corporations. They alternate between one corporation and another. This lack of coordination is a decisive factor. Let us take three corporations, A, B and C, in the system. If these three corporations rigorously and alternately apply the policy of fixed margin over the costs, the inflation rate, once started and established in a certain level, will become permanent. The combination of fixed margins over costs, with alternating price increases, does not necessarily lead to an increase in the inflation rate, but rather to the maintenance of a determined level of inflation” (Bresser-Pereira, 1981, p. 40). I think that this was the first formulation of the theory of inflationary inertia in Brazil. I cannot say that this obvious idea occurred to me in a fully independent way: In the structuralist theory of inflation of Juan Noyola Vazquez (1956) and Osvaldo Sunkel (1958), there was already an idea of the process of the initial increase in prices. Moreover, Simonsen (1970), in a pioneer study on inflation, had written about “inflationary feedback.” Neither the structuralists nor Simonsen, however, had used the idea of delayed increases in prices based on the distributive conflict, that is, on the fight of economic agents to keep their incomes, in order to explain the stagflation of the central economies and of the Brazilian economy. In Simonsen’s eclectic model, feedback was just a factor, combined with the monetary and demand factors.** However, I only arrived at a broader understanding of inflation from the works that I subsequently wrote with Nakano. His first article on the subject, in 1982, showed why Brazilian inflation at that time was not demand-pull inflation, and how there was a compatibility between recession and inflation. In the following year we coauthored a theoretical article on inflation, “The Theory of Inertial or Autonomous Inflation” (Bresser-Pereira and Nakano, 1983). With this article, we finally had a systematic and formal exposition of the theory of inertial inflation. At that time, economists at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), particularly Francisco L. Lopes, André Lara Resende, Pérsio Arida, Edmar Bacha, and Eduardo Modiano, were also developing their ideas on the subject, but they had not yet written a systematic paper on inertial or autonomous inflation.†† Once this new type of inflation was explained, a new policy to control it was an implicit consequence. Our second basic paper on the theory of inertial inflation, “Administrative Policy: Gradualism or Shock” (Bresser-Pereira and Nakano, 1984a), dealt with this problem. It was clear to us that the conventional

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stabilization policies did not apply in this case. It did not make sense to restrict demand when the economy was already in recession. It made even less sense to control the money supply, as it was endogenous. The attempt to administratively control oligopoly prices, although apparently more reasonable, actually did not made sense either, not only due to the difficulties inherent in price controls, but because when the inflation is high and inertial, business enterprises need to regularly increase their prices, at least every month. Thus, controlling the price adjustments of each oligopolistic business enterprise made no sense. To index prices made no sense, either, as this would freeze the relative prices. Finally, while living with inflation, as the structuralists intended in the 1950s, when inflation was around 20 percent per annum, made sense, it no longer made sense to live with inflation once it hit 5 percent, 10 percent, 20 percent, and 30 percent per month. That is, when inflation becomes fully inertial, it becomes intolerable. Brazil did not face hyperinflation, a situation in which the economy becomes fully dollarized and the prices increase daily, if not hourly. When this happens, a monetary reform using a nominal anchor—in principle, the exchange rate, which is fixed and pegged to the US dollar—will ensure stabilization, provided it is followed by a fiscal adjustment and other reforms in order to make monetary policy independent. It is enough for the government to have international reserves in hard currency or the support of a foreign power that could guarantee these reserves, and to be able to eliminate the public deficit after the shock. Fiscal adjustments are essential, as hyperinflation is always the consequence of a deep fiscal crisis in which the state no longer has credit and has therefore lost the ability to finance some of its deficit in a noninflationary way. In 1983, Brazil was confronted with, not hyperinflation, but high inertial inflation—an intermediate situation between a small, moderate inflation, typical of developed countries, in which inertia is a secondary factor, and hyperinflation. Brazil faced a typically high inertial inflation, and there was no alternative but to control it administratively, that is, through the neutralization of its inertial component. When inflation is inertial, fiscal and monetary policies do not work, because it is autonomous in relation to demand. If we want to control it through an exchange rate anchor, we should first let hyperinflation dollarize the economy. But no one was willing to take that risk. Thus the question was how to control high inertial inflation administratively, without resorting to controls on a case-by-case basis—a price fixing system. There are two alternatives: either a system of prefixing to gradually reduce the exchange rate, which would be based on fiscal and monetary policies and would cause the economic agents to change their expectations regarding future inflation, thus encouraging firms to increase their prices accordingly; or an immediate general freeze of all prices and wages, combined with a table defined in law eliminating from companies’ payable accounts in the day of the freeze the expected rate of inflation. In this way, the inertial component of inflation would be neutralized insofar as the price freeze didn’t distort relative prices and thus the companies’ profits. The first alternative is the monetarist one, which had disastrous effects in Argentina and Chile; the second was the one that our 1984 paper proposed (1984a). We called this approach to inertial inflation the “heroic solution.” The article was published in the Brazilian Journal of Political Economy in July 1984. A month later, Francisco Lopes (1984a) published a small and brave article proposing the same price freeze, which he called “heterodox shock,” and his article had far more political repercussions than did ours.

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In that year, 1984, the theory of inertial inflation finally matured. Nakano and I had written the two articles that made clear the diagnosis of and therapy for Brazil’s inflation. Resende (1984) published that September, in the Gazeta Mercantil, and article titled, “A moeda indexada: uma proposta para eliminar a inflação inercial” (“Indexed Currency: a Proposal to Eliminate Inertial Inflation”), in which he developed a system for neutralizing inflationary inertia that would be adopted ten years later, as part of the Plano Real. He was the one who proposed a monetary reform in which two currencies would coexist for some time, thus making it possible for the economic agents to redefine their contracts in the new currency, the “real.” In November, Arida and Resenda (1984) presented at a seminar in Washington, organized by the British economist John Williamson, their first structured article on inertial inflation, which was erroneously taken by many for the founding paper on the subject. Actually, by that time, the two original papers on inertial inflation by Nakano and me, referred to above, had already been published. After that, the theory of inertial inflation became part of mainstream theory, present in macroeconomics textbooks, although it definitely contradicted neoclassical monetarism, which the textbooks did not reject.

* I was referring to “The Theory of Inertial or Autonomous Inflation” (1983) and to “Administrative Policy: Gradualism or Shock” (1984a), the two basic articles on inflationary inertia that I had written with Yoshiaki Nakano. † For the history of the discovery and systematization of inertial inflation, see Bresser-Pereira (2010). ** No idea is really new in this world. Many years later I discovered that, in 1972, Felipe Pazos had published a book in the United States, Chronic Inflation, which presented many of the ideas on inertial inflation. In the early 1980s, however, the ideas I used, first in my classes at the Getúlio Vargas Foundation and then in my 1981 article already referred to, “Inflation in Oligopolistic and Technobureaucratic Capitalism,” seemed to me an extraordinary, illuminating discovery, although still budding. Sometimes in my life I have felt excited by an idea. That was one of those moments. After all, I was starting to decipher the mysteries of stagflation and high inflation. †† Francisco L. Lopes (1984b) wrote the first systematic work on inertial inflation produced at the Pontifical Catholic University of Rio de Janeiro (PUCRio). He had a theoretical conflict with two of his colleagues at PUC-Rio, Resende and Arida, because he favored a price freeze. At the end of 1984, Lopes reached an agreement with his colleagues and presented a wonderful article on inertial inflation at a conference that December of the Brazilian Association of Graduate Programs in Economics (ANPEC).

Notes

1. As we will see later, in Table 16.1, public savings reached 9.5 percent of GDP in 1973. 2. I am grateful to Geraldo José Gardenalli for his collaboration in the analysis of the data, and for his criticisms and suggestions.

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3. Relative prices are in equilibrium in an economy when the profit rates are reasonably close, and when, as a result, the fundamental law of the markets, the tendency toward the equalization of profit rates, is taking place. 4. The classic work on these mistaken stabilization strategies is by Carlos F. Diaz-Alejandro (1981). 5. The value of the exchange rate or of the foreign money corresponds to the costs plus a satisfactory profit margin of the representative national enterprise that participates from the foreign trade of the country and assures the equilibrium of its current account. See Bresser-Pereira, Marconi, and Oreiro (2014). 6. The “Plano Real” was implemented in 1994 to stabilize the Brazilian economy, which had shrunk during three of the previous six years and had been afflicted with the highest inflation rates in the world, never dipping below 100 percent since 1982. The plan involved, among other steps, neutralizing inertial inflation with the help of a temporary unit indexed to the dollar, using the exchange rate as an anchor to control inflation, balancing the government budget, and introducing a new currency, the “real.” 7. In fact, as Luiz Antônio de Oliveira Lima (1982, p. 151) observes, “The fight against inflation is not a priority of the current (1981) governmental economic program, being just a smokescreen to justify a process of reduction in the economic activity that enables an improvement, albeit temporary and precarious, in our foreign accounts.”

15 The Democratic-Popular Pact: The Bourgeoisie and the Working Class

The democratic transition in Brazil started in 1977, when the bourgeoisie—particularly the industrial bourgeoisie—began to break with the Authoritarian-Modernizing Pact, which it had been associated with since 1964, and gradually allied itself with the popular forces. The democratic transition, therefore, did not result from the victory of the soft-line over the hardline military officers in the armed forces. This was an incorrect assumption that prevailed among the intellectuals who, in the early 1980s, participated in a research project on democratic transitions headed by Guillermo O’Donnell, Philippe C. Schmitter, and Laurence Whitehead (1986). In reality, it was a movement that took place at the level of civil society.1 Around 1976, the dominant bourgeois class realized that the menace of communism had disappeared. Democracy was not its ideal political regime, but historical experience had shown that it did not present the dreaded risk of a “dictatorship of the majority” that economically liberal ideologues had always feared. The bourgeois class became convinced that democracy was safer and could potentially guarantee it the power to shake off its military protection and associate itself with the democratic forces. Thus began the 1977 Democratic-Popular Pact, which would lead to the Diretas Já campaign in 1984, and to the democratic transition at the end of that year. In 1974, at the beginning of his administration, President Ernesto Geisel tried to start the transition to democracy by taking the initiative and attempting a political “detente,” but it did not last long: frustrated by the National Congress’s rejection of his proposed reform of the judiciary, he issued a set of authoritarian institutional decrees in April 1977, which became known as the “April Package.” From 1977 on, the government resumed the process of democratic transition, now called the “opening” (abertura). But given its slow pace, Brazilian civil society, which had been taking shape since the beginning of the capitalist revolution, realized that this opening 207

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was actually a way of postponing the transition, so it exerted more pressure for democracy. It was the bourgeoisie’s reaction to the April Package that actually started the democratic transition. The 1977 Democratic-Popular Pact then began to crystallize—for the first time a pact without the government’s participation, but which gradually prevailed in society. It was also the first political pact under which the popular classes actually had some power. Soon it became clear that the new political pact, or class coalition, had two goals: democracy and the reduction of inequality. This second goal was the price the workers demanded from the bourgeoisie. The bourgeoisie accepted it because the whole criticism being made of the military regime since 1970 focused not only on its authoritarianism, but also on the tendency of its economic policies to concentrate income in the middle and upper classes. And the bourgeoisie accepted the price because the workers’ demands were moderate. There was no idea of expropriation. And even their demands regarding a more progressive tax system were small, so the democratic political leaders gradually realized that the policy of inequality reduction would be limited to substantially increasing state expenditures in the social area: basic education, healthcare, social security, and social services. This meant that a system of progressive taxation would not be adopted, but there would be an attempt to set up a social state in Brazil. This was something that would be accomplished by the democratic governments, which, in the twenty years following the democratic transition, more than doubled governmental expenses in the social area, not only in absolute terms, but as a percentage of the gross domestic product (GDP).2 The democratic transition that started in 1977 was characterized by the dialectics between the “opening” process headed by the government and the process of democratization demanded by civil society—a democratization, not a re-democratization, because the 1946 regime had only been a half democracy, insofar as it barred illiterates from voting. These two political processes—opening and democratization—were not radically contradictory, but they involved different goals. The democratic transition embodied the civil society’s fight for civil rights, for political rights (democracy), and for social rights; the opening was the strategy adopted by the military regime to neutralize society’s demands, yielding here and there to be able to postpone the transition to democracy. Advances and Setbacks of the “Opening”: 1974–1978

Brazil’s democratic transition was a sui generis process. The political scientists who study Latin America have been trying to establish relationships and analogies involving the democratic transitions that took place in countries such as Portugal, Spain, Greece, and Brazil, but the Brazilian transition had

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little in common with the transitions in the other countries. The Brazilian case had many unique elements, beginning with the fact that the transition in Brazil was far slower than those in the other countries. In the cases of Portugal and Greece, the transitions involved a rupture in the constitutional order. As for Spain, the process occurred in a planned way. But, in these three cases, the transitions were completed relatively quickly, whereas in Brazil it took more than eight years. The Brazilian opening, while it was a real process of transition to democracy, also corresponded to a survival strategy of the authoritarian military regime. Through “opening” and closing phases, the military regime always tried to make the process of democratic transition appear to be a gift from the armed forces. Many analysts were taken in by this thesis, starting with the distinction, more rhetorical than real, between the hard-line and softerline military officers. The leader of the softer faction was Ernesto Geisel, the president who implemented the April Package with great violence. Playing on the bourgeoisie’s conservatism, the softer faction always warned that the opening should be “slow and gradual” in order to avoid regression (i.e., the hard-liners retaking power). However, the curious fact was that, in this game between hard-liners and softer officers, it was not always possible to see clearly who was playing on each team because the bureaucratic unity of the army, although there may have been some fissures, remained strong. Actually, this internal rivalry was a fiction created by the regime itself and backed by hasty analysts, rather than being a reality. The softer officers used the hard-liners systematically to frighten civil society and to postpone the inevitable end of the authoritarian regime. In the municipal elections of November 1976, the opposition party, the Brazilian Democratic Movement (MDB), which had seen a surprising number of its senatorial candidates elected only two years before, achieved another great electoral advance. The authoritarian response was not long in coming. It was the April Package, implemented because the National Congress had refused to approve a reform of the judiciary, as mentioned above. The government shut down the National Congress for fourteen days and issued a series of amendments to the 1969 Constitution that the military imposed on the country. They were meant to guarantee the Brazilian Renewal Alliance (ARENA) a majority in Congress after the general elections of 1978. The chief authoritarian measures were: the creation of the “bionic” senators (indirectly elected), a limitation on the number of representatives from São Paulo, and the creation of eight representatives for each one of the former territories that had been transformed into states. Through these three mechanisms ARENA was guaranteed control of Congress. After the implementation of the April Package, civil society protests increased. The bourgeoisie, which had been speaking against nationalization since 1975, began to speak directly in favor of democracy. The Brazilian

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Bar Association, the journalists, intellectuals, students, and sectors of the Catholic Church created multiple manifestos demanding the reestablishment of the rule of law. In the 1978 elections, the MDB won in the Senate and almost achieved a majority in the Chamber of Deputies. Given its loss of political legitimacy, the government had no alternative but to accept democratization, even while always trying to postpone it. The end of media censorship, during 1977–1978, was the first material sign of the democratic transition. And finally, in June 1978, President Geisel announced the “schedule for the opening” as a way of influencing the elections and the members of the Electoral College, who would choose the new president of the Republic. According to this schedule, his government would end (as it actually did) with the transfer of powers to the successor he had chosen, General João Baptista Figueiredo, and with the extinction of the Institutional Act No. 5 (which gave dictatorial powers to the president, including the ability to revoke mandates, censor the media, and shut down Congress). The 1977 Democratic-Popular Pact

The acceleration of the democratic transition, culminating in the elimination of Institutional Act No. 5, resulted from the 1977 Democratic-Popular Pact. This class coalition was popular because it included the participation of the workers and the poor. Through this tacit, informal pact, civil society set aside the class struggle and achieved a basic unity that enabled the country’s democratic transition. It was not an agreement between political parties, nor did it involve a revolutionary strategy for seizing power. Instead, it was a broad class coalition that would become dominant or, in the words of Antonio Gramsci, a historic block. The 1977 Democratic-Popular Pact and the Diretas Já campaign were based on four basic principles: (1) the democratic transition, which appealed to all classes; (2) the preservation of capitalism, which interested the bourgeoisie; (3) the reduction in economic inequality, which interested the workers and the Left; and (4) the resumption of developmentalism, which appealed to everybody. The democratic transition not only interested the vast majority, but now also became an achievement of this majority. It interested the workers, the intellectuals, and the middle classes—the entrepreneurial, the rent seeking, and the wage-earning (technobureaucratic) middle classes. And it now coincided with the interests of the bourgeoisie at almost all of its levels (lower, middle, and even the upper bourgeoisie) and in almost all of its sectors, except for the speculative mercantile bourgeoisie. This last group, consisting of the old agrarianmercantile bourgeoisie and of the new upper bourgeoisie directly depend-

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ent on the purchases and subsidies from the state, remained authoritarian, along with the civil and military lower technobureaucracy, which was in power and contained minority sectors of all classes. Those were the social sectors that continued to support the party in power: first ARENA, and then the Democratic Social Party (PDS).3 The principle of not opposing capitalism was almost an automatic part of the 1977 Democratic-Popular Pact. It was only for a moment in the history of Brazil, in the period just before 1964, that the Left believed it could rise to power. However, in 1977, it was still immature and thus wrong to think so; given the evident bourgeois ideological hegemony, it was clear to the Left that capitalism would remain in Brazil at least in the medium term. Therefore, the natural choice was to leave the revolution for a later time and to give absolute priority to the democratic transition. The principle of the reduction of inequality prevailed upon the bourgeoisie, given the evidence of the huge concentration of income within the country. Not only had income been highly concentrated since 1960, as statistical studies made clear, but also the degree of economic inequality, when compared with that of the other capitalist countries, proved to be one of the highest in the world.4 In view of the Left’s denunciations of the growing inequality since the early 1970s, the vast majority of the bourgeoisie had accepted the idea that it was necessary to do something about it, especially through a minimum wage policy and a substantial increase in the public expenditure in education and healthcare, in order to gradually reduce income inequality. The absence of such policies, particularly a progressive tax system, is the main cause of the current inequality in the country. This holds true even though there are other important causes, such as the varied levels of education and the imposition of very low taxes on inheritances. In the most developed European countries, a progressive tax system, particularly for the income tax, reduces the rate of inequality by 30 percent. In Brazil this reduction is only 6 percent.5 Finally, the 1977 Democratic-Popular Pact was a developmental pact. Nationalism was again the ideology that defined Brazilian society in the context of the fight for democracy, as demonstrated by the 1988 Constitution— the greatest result of this pact. But, as we will see below, this democratic, popular, social, and national pact lasted only ten years. The national bourgeoisie (which did not exist, according to the dependency theory) joined the popular and democratic forces in the fight for democracy and for the reduction of economic and political inequalities. But the democratic government that took office in 1985 failed to stabilize the economy due to the populist economic policies that it then adopted. Besides demoralizing the 1977 pact, it also discredited the nationalist and developmental ideas, which had become confused with populism.

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The Collapse of a Class Alliance

With the repeal of the Institutional Act No. 5, on December 31, 1978, the country took a major step towards the democratic transition. This was a clear achievement of civil society, now strengthened by the gradual support of the bourgeoisie. Since the 1977 April Package, the business entrepreneurs—particularly in the industrial sector—had been starting to distance themselves from the authoritarian regime and to opt for the country’s democratization. Whereas the other sectors of society—the left-wing intellectuals, the workers, the students, the Church, the salaried middle class, and the petty bourgeoisie of professionals—had long since been demanding democratization, the position of the bourgeoisie in favor of the restoration of the rule of law was the new and decisive fact. The “schedule for the opening,” in June 1978, ultimately involved an “exchange” between the government and civil society. Pressed by the civil society, the government agreed to terminate Institutional Act No. 5, but in return required the guarantee of the election, by the Electoral College, of João Baptista Figueiredo to the presidency. This was in effect a demand for the preservation of the same system of power for at least another six years. However, the bourgeoisie’s adherence to the idea of democratization made the democratic transition unavoidable for the government. One of many signs of this was the “Manifesto of the Eight,” formally called the “First Document of the Entrepreneurs,” issued on June 26, 1978, in which major Brazilian business entrepreneurs declared their support for democratization.6 This change in the position of the bourgeoisie opened the way for the students, the lawyers, the workers, and the Church to demonstrate more strongly in favor of a democratic transition, for which they had been fighting for so long. It was a movement that met with less repression than before. As I remarked in my book published in 1978, The Collapse of a Class Alliance, what took place in 1977 was the rupture of the alliance between the industrial bourgeoisie and the military technobureaucracy. I tried to predict and systematically analyze the process of democratic transition after that rupture. As long as a breakup of the authoritarian political pact of 1964 was actually happening (if only partially), it was possible to predict the inevitability of the country’s democratic transition and to analyze its causes. The central idea was that democratization had become inevitable, but this was not merely due to the strategy effected by the military regime to regain legitimacy, nor was it the natural tendency of a capitalist regime such as Brazil’s to liberalize. Nor was it just the product of popular struggles for democracy. 7 Although each of these explanations had a certain basis in reality, the most general and direct explanation lay in the breakup of the alliance between the (mostly industrial) bourgeoisie and the state technobureaucracy. The 1977 Democratic-Popular Pact was then created

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within the civil society, leading to the country’s democratization. And the breakup of the 1964 Authoritarian-Modernizing Pact was the outcome, insofar as the stability of this alliance of the military technobureaucracy with the (mostly industrial) bourgeoisie depended on the strength of the authoritarian regime. The popular struggles for democracy carried out by workers, students, intellectuals, and basic ecclesial communities of the Catholic Church were significant, but the underlying factor that mattered most was the conversion of the bourgeoisie to the idea of democratization.8 The democratic transition was not a survival strategy for the military regime, as most political scientists claimed, nor was it solely the consequence of the popular struggles for democracy, as others have argued. The theory of the democratic transition that I summarize here, devised while the process of democratic transition was going on, has some points in common with these two interpretations, but emphasizes the breakup of the alliance between the industrial entrepreneurs and the military technobureaucracy; the appearance of a project of political hegemony of the bourgeoisie; and the establishment of a new political pact that I named “Democratic-Popular,” which would be firmly in place as of 1977. These facts gave rise to a progressive loss of legitimacy of the military regime, and they explain the democratic transition. The dynamics of that transition, which occurred between 1977 and 1985, were characterized by a permanent dialectic between the civil society’s demands for a deepening of the democratization and the military government’s strategy of controlling and postponing the “opening.”9 The Conservative Reflex of the Bourgeoisie: 1979

Given the change in the position of Brazilian civil society and, particularly, of its entrepreneurial sector, which was gradually turning to democracy, the opposition believed that, backed by society’s democratic pressures, it would eventually win the support of some of the deputies and senators of ARENA, and thus be able to elect its candidate for president, General Euler Bentes Monteiro, in the indirect elections. But the government counterattacked: it devised the “schedule for the opening” and threatened a new clampdown if the schedule was defeated. Whether because of this governmental strategy, or because the MDB candidate was a military officer who was unable to divide the military (instead, rather uniting it) or to engage with the bourgeoisie, this crisis was averted. And the Electoral College obediently elected General Euclides Figueiredo president. The Right then began to reconstitute itself in Brazil, having been weakened by the process of democratic transition. The bourgeoisie restored its alliance with the state technobureaucracy, though on weaker and more transitory terms, and this alliance was now personified by the new president.10

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To the bourgeoisie, the election of General Figueiredo meant that, for at least another six years, political power would be lodged with the same civil and military technobureaucracy that had possessed it since 1964. Given the bourgeoisie’s dependence on the state, it was convenient to politically reconstitute its alliance with the governing technobureaucracy. At this point, the Federation of Industries of the State of São Paulo (FIESP) was the most important representative body of the bourgeoisie in Brazil, and the FIESP leadership elected in 1980 had great expectations of independence from this same government. However, its executive board was suddenly aligned with the government. This was a demonstration of the bourgeoisie’s conservative and authoritarian reflex. The government, for its part, made every possible attempt to please the haute bourgeoisie. The appointment of Antônio Delfim Netto to the Ministry of Planning, in August 1979, was an example. Other demonstrations of the government’s intention to please the bourgeoisie included the persistence of big orders from state-owned companies to the capital goods manufacturing sector and a broad range of subsidies supporting capital accumulation. This was especially clear in the context of unprecedented inflation and the state budget deficit’s reaching unprecedented levels. In 1981, when a recession became unavoidable given the government’s economic policy mistakes, it was the industrial bourgeoisie that suffered the most, whereas the financial bourgeoisie widely benefitted from it. Even among the industrial bourgeoisie, the monopolistic sectors, controlled by multinational capital and by the local bourgeoisie, succeeded in increasing their profit margins during the recession and, ultimately, in achieving rewarding profits. Their financial statements published during the first semester of 1982 showed this to be the case. At this point, the president multiplied his trips abroad. He invited a curious entourage of businessmen to visit Brazil. The formal justification for the invitation was the possibility of establishing commercial contacts. For the government, it was actually a form of public relations; for the business entrepreneurs, it was a way of honoring and demonstrating their formal submission to the president. The huge demonstrations and trade union strikes that took place in 1978, 1979, and 1980, especially in São Paulo’s ABC region, under the leadership of Luiz Inácio Lula da Silva, also contributed to the partial realignment of the bourgeoisie with the government. These strikes, although conducted without any violence, surprised and scared the bourgeoisie. Up to that point, the bourgeoisie had been saying that it was willing to conduct direct negotiations with the workers and to accept their strikes, but when the workers showed great determination, it became frightened and eventually relied on the government to suppress the strikes. Given this conservative reflex of the bourgeoisie, the government felt strong enough to autocratically dissolve the opposition party, the MDB,

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when it would have been more democratic to simply allow the creation of new parties. The opposition was then divided among the Party of the Brazilian Democratic Movement (PMDB), which was the successor of the old MDB; the Workers’ Party (PT), composed of union members from São Paulo’s ABC region and headed by Lula; and the progressive Catholic movements. ARENA split, giving rise to two political parties: the Social Democratic Party (PDS) and the Liberal Front Party (PFL). The latter, by voting with the opposition in the 1984 Electoral College, enabled the election of Tancredo Neves, thereby completing the democratic transition. The Democratic Labor Party (PDT) would become the party of Leonel Brizola; it had a labor or social democratic project, and was strong only in the states of Rio de Janeiro and Rio Grande do Sul. The PDT had similarities with the Brazilian Socialist Party (PSB), originally lead by Miguel Arraes. The PSB was particularly strong in the state of Pernambuco, but throughout the years would increase its share of power in the rest of the country. With the reorganization of the political system during the transition to democracy, the PT became the most important new political phenomenon, having originated in an alliance between trade union leaders and representatives of the basic ecclesial communities of the Catholic Church. And it was a party of the technobureaucratic middle class.11 The Brazilian Social Democratic Party (PSDB), a political party created in 1988 as the result of a splitting up of the PMDB, represents mainly the upper-middle class. The PMDB was both technobureaucratic and bourgeois, and during the Cardoso administration it leaned to the right, becoming an economically liberal and politically conservative party that replaced the PFL, which had been transformed into the Democratic Party (DEM), and the PDS, which later became the Brazilian Progressive Party (PPB). This was a pathetic effort to create a popular party. At first, the PT would be a party oriented toward socialism and democracy, supported by most of the left-wing intellectuals. But when it came to power in 2003, it did what all the left-wing parties that rose to power are forced to do: it became social democratic and faced the challenge of governing capitalism better than the capitalists. Other parties, such as the Brazilian Labor Party (PTB), the Liberal Party (PL), and the Party of the Republic (PR), would become pure “parties of affairs,” intended only to promote the personal interests of their members, and always existing as part of the dominant party coalition, independently of who the president was and irrespective of which party was elected. This kind of party would later multiply after the democratic transition. On April 30, 1981, a terrorist attack took place at the Riocentro Exhibition & Convention Center, in Rio de Janeiro, carried out by members of the army against a left-wing demonstration related to May 1, Labor Day in Brazil. The army, however, rallied around those responsible for the attack, and the president was powerless to identify and punish the guilty parties.

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This was an indication that a process of closure was nearing, confirmed soon after by the dismissal of General Golbery do Couto e Silva from the Office of the Chief of Staff for the Presidency. This partial closure, supported by the conservative reflex of the bourgeoisie in 1978–1980 and by the Riocentro episode in 1981, would be confirmed by the “electoral package of November 1981.” It was decided that, under this package, the votes would all be attributed to each party, with all coalitions being forbidden. This electoral monstrosity was designed to formally divide the opposition by allowing the voters to support candidates from only one party—whether in elections for city council members and mayors, or for deputies, senators, and state governors. The new closure was a clear demonstration that the abertura sponsored by the soft-line military officers had merely been a delaying tactic. In June 1982, predicting its defeat in that year’s elections, despite all the electoral measures taken before the previous election, the government, repeating what it had done in the 1977 April Package that triggered the democratic transition, decided to (1) “freeze” the constitution granted in 1969 by a military junta, stating that it could only be modified by a two-thirds congressional majority, and (2) define a new composition of the Electoral College that was supposed to elect the new president in January 1985, ensuring greater weight to the small states (which the PDS expected to control), in this way seriously distorting the representative principle. This once again seriously jeopardized the efforts of various movements to restore democracy. The Diretas Já Campaign

The electoral defeat foreseen by the military regime was confirmed in October 1982, with the election of several opposition governors, including André Franco Montoro, in São Paulo, and Neves, in Minas Gerais. Under this new leadership, the process of democratic transition became unstoppable. The industrial entrepreneurs and, more broadly, the bourgeoisie as a whole, which had retreated in 1978–1980, were back on the political scene after the Riocentro episode. The breakup of their alliance with the military technobureaucracy thus became final. The democratic transition, however, would first gain impetus at the beginning of 1984, when the constitutional amendment proposed by Congressman Dante de Oliveira establishing direct elections for the presidency of the Republic suddenly became the great cause of the democratic opposition. The decisive event, which lead the people to take to the streets from that day on, was a great demonstration in São Paulo on January 25, the date the city was founded. Governor André Franco Montoro, showing remarkable political leadership, decided to organize the rally and, to the astonish-

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ment of the vast majority of the politicians, more than one hundred thousand people showed up. This rally morphed into the “Diretas Já” [direct elections now] campaign, marked by large popular demonstrations in every city of the country. The two governors, Franco Montoro and Neves, who established a political alliance reproducing the classic São Paulo–Minas Gerais alliance, and Congressman Ulysses Guimarães, president of the PMDB, headed the movement. The new political pact gained strength from the economic crisis that had started in 1980. The Diretas Já campaign sought to institute direct elections for the presidency of the Republic, and popular participation in the campaign, as well as that of the middle classes, proved decisive. The popular demonstrations affected the politicians, and several members of the government’s party accepted the idea of direct elections. Nevertheless, the governmental majority was reaffirmed by Congress rejecting the required constitutional amendment approved by two-thirds of its members. But the whole society was still focused on the restoration of democracy. Thus, the PMDB launched Neves as a candidate for the presidency, and, as mentioned above, the PFL also supported him. Congressman José Sarney was chosen by the PFL to be the vice presidential candidate on Neves’s ticket, and so a victory in the 1984 Electoral College was guaranteed, and, with their election, the democratic transition was completed. Briefly, the democratic transition resulted from a broad political pact that united practically all the modern sectors of civil society. Industrial entrepreneurs, the cultivated middle classes, and the organized workers were the chief players. Only the mercantile and financial bourgeoisie and the civil and military technobureaucracies, which had been more involved with the authoritarian regime, were excluded from the pact. This exclusion, however, was only relative, as the new regime proved to be open, even vulnerable, to members of the excluded sectors. Now, given the high degree of opportunism prevailing in these sectors of the society, which are characterized by their dependency on the state, there was a massive realignment. All of a sudden, democracy became unanimous. As the industrial bourgeoisie played a decisive role in the formation of the 1977 Democratic-Popular Pact, the conciliatory nature of the democratic transition became inevitable. Given this fact, Francisco C. Weffort (1984, p. 87) suggests that we had in Brazil a “conservative transition.” This would be accurate if we consider that the alternative to conservatism is socialist revolution. The military intended to create a conservative transition through the abertura—a process over which they would have had full control. Yet, the demand for genuine democratization by the civil society prevailed. It did not question capitalism, but wanted it to be a social and national capitalism. Three years after the democratic transition, the 1988 Constitution would reflect this reformist and progressive option.

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There was, however, a conservative element in the democratic transition, which was accentuated by a political agreement that guaranteed the victory of the opposition in the Electoral College—an agreement between the developmental and progressive PMDB and the economically liberal and politically conservative PFL, which was deeply committed to the military regime (this party had actually emerged from a split-up of the PDS, ARENA’s successor). Given the force of the political demonstrations and the conversion of the bourgeoisie to the cause of democracy, the PFL voted for Neves in the Electoral College, but the cost of this agreement to the democratic cause was huge. It meant not only accepting a vice presidential candidate from this group (Sarney), but also making official an alignment with large sectors of the authoritarian mercantile bourgeoisie, which thus evaded the fate of the defeated and remained in power. The Bourgeoisie’s Project of Political Hegemony

It was not only the negative causes of the military regime’s loss of legitimacy that led broad sectors of the bourgeoisie to break their alliance with the state technobureaucracy in 1977 and to support the fight for democratization. We must also consider that, at the time, the bourgeoisie devised a project for its own political hegemony, a project that could only be carried out in the context of a democratic regime. Now, the bourgeoisie, mainly the industrial bourgeoisie, wanted to break free from military protection so that it could assume command of the nation. To the bourgeoisie, it was not enough to be the economically dominant class; it also wanted to be politically dominant. But, as we will see, the industrial bourgeoisie was too optimistic. After the transition to democracy, the rentier capitalists, financiers, and entrepreneurs in the agro-business sector were the ones who gained wealth and power, not the industrial entrepreneurs. This project, although naive on the part of the industrial entrepreneurs, as it intended to establish a linear relationship between economic domination and political domination, did have some basis in reality. Capital accumulation had been carried out in Brazil at an accelerated pace ever since the 1930s. Consequently, there was in the country a vast entrepreneurial or active bourgeoisie, composed of small, medium, and big industrialists, farmers, traders, and service providers of all kinds, who were increasingly replacing the old landowning and mercantile bourgeoisie. Alongside it, there was also an emergent upper class and a traditional middle-class rentier bourgeoisie living on interest income, rents, and dividends. And this entire bourgeoisie was now the holder of the classical capitalist ideology: economic and political liberalism, individualism, defense of “private enterprise” as the only economic system compatible with democracy, and a celebration of business entrepreneurship and profits.

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Besides asserting the political values inherent in its own class more openly, Brazil’s bourgeoisie was able to finally exercise an ideological hegemony over society. That is, it managed to impose those ideas on the other classes, including the professional middle class, which previously had its own ideology founded on technical rationality, planning, and economic development. But, despite the importance of those ideas in modern societies, and the diffusion in Brazil of all kinds of socialist values (Christian, Marxist, social democratic, etc.), there was no doubt about the overarching supremacy of bourgeois values. A symptom of this fact was the transformation of the most renowned business entrepreneurs into the new “heroes” of Brazilian society, fighting with government leaders, politicians of the opposition, and artists for media attention. This ideological hegemony of the bourgeoisie—maintained by the bourgeoisie’s control of the newspapers, radio, and television, and of the school system at all levels—not only ensured that the bourgeoisie could play the democratic game of rotation in power at no great risk, but made it possible for it to devise a project of both ideological and political hegemony. Therefore, because it was no longer afraid of communism and because it had a hegemonic project, the national bourgeoisie became part of the 1977 Democratic-Popular Pact (and the Diretas Já campaign)—a pact that came to power in 1985. But as we shall see in Chapter 17, this pact was short-lived because, with the failure of the Cruzado Plan, it would collapse as early as 1987. Notes

1. See O’Donnell, Schmitter, and Whitehead, eds. (1986). The Brazilian political scientists who took part in this research project, Bolívar Lamounier, Luciano Martins, and Fernando Henrique Cardoso, transformed the Brazilian democractic transition into a problem internal to the military: the victory of the softliners over the hardliners. Instead, in two books (Bresser-Pereira, 1978, 1985) and in an essay, “The dialectic of redemocratization and abertura” (Bresser-Pereira, 1984), I defended the thesis that the transition was a demand of the people that received decisive support of the bourgeoisie from 1977 on. In this chapter, I summarize this interpretation. 2. Attention was diverted away from the goal of a progressive tax system because the reform of the tax on the circulation of goods (a state tax), which was actually necessary to prevent a fiscal war among the states of the federation, was defined as “the great tax reform” to be carried out. But a progressive tax system was equally necessary. 3. The PDS would then become the Brazilian Progressive Party (PPB); it is now the Progressive Party (PP). 4. A study published by the World Bank in 1980 comparing the share of the national income of the top 10 percent of families based on wealth in thirty-two capitalist countries showed that Brazil had the greatest rate of concentration (50.6 percent) and Sweden the lowest (21.3 percent). Aside from the developed countries, LatinAmerican, Asian, and African countries were also on the list.

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5. These estimates are by Fernando Rugitsky (2014). 6. Fernando C. Prestes Motta (1979) provided an analysis of this document. The last chapter of his book is a competent analysis of the “opening” and of the entrepreneurs’ role in this process. 7. The regime’s strategy of abertura, meant to regain its political legitimacy, was defended, for instance, by Roberto Campos (1979). On the other side, the analysts directly involved in popular struggles claimed that democratic transition was the consequence of such struggles, but didn’t systematize their thought. Although this latter interpretation is insufficient, we must highlight the fact, following Göran Therborn (1977), that the rise of the existing democracies depended decisively on popular struggles. 8. We must stress the fact that the central capitalist countries would never have attained the levels of democracy that they did if they had depended solely on the will of the bourgeoisie; in those countries, popular struggles were essential to the attainment of democracy. 9. I developed this theory in two books, O Colapso de uma Aliança de Classes (The Collapse of a Class Alliance, 1978) and Pactos Políticos (Political Pacts, 1985). 10. Cardoso (1979) realized this fact and called it, very appropriately, a “conservative frond.” 11. See Leôncio Martins Rodrigues (1990).

16 The Lost Decade: Stagnation and Inertial Inflation in the 1980s

In 1980, after fifty years of extraordinary development, a severe financial crisis halted that development and pushed Brazil’s economy into a near-stagnation that has lasted to this day. Nevertheless, this will not prevent significant political and social development over the next thirty years. The Nation and Development Cycle (1930–1979), during which Brazil’s capitalist revolution was completed, had recently come to an end in 1979, and the Democracy and Social Justice Cycle (1980–2014) had begun. Awareness of the depth of the financial crisis in 1980 did not emerge immediately. This is because exports were restored by 1985, thanks to a successful exchange rate devaluation two years before. The solid growth of the gross domestic product (GDP) and the democratic transition left everyone optimistic. The book A Economia Brasileira em Marcha Forçada (Brazilian Economy on a Forced March), by Antônio Barros de Castro and Francisco Eduardo Pires de Souza (1985), reinforced this optimism. This book, which exerted a large influence in Brazil, states that the big investments of the Second National Development Plan (PND II) in infrastructure and in the basic inputs and capital goods industries were finally bearing fruit. Unfortunately, the two economists were wrong because they underestimated the dimension of the macroeconomic imbalance caused by the financial crisis involving foreign debt, which had forced Brazil to bail out business enterprises and banks, and, consequently, to plunge into a serious fiscal crisis. In fact, the satisfactory growth in 1984 resulted from the 1983 exchange rate depreciation; and the growth in 1985 and 1986 resulted from the expansive fiscal policy irresponsibly carried out by the new democratic government. I became fully aware of the severity of the crisis in 1987, when I was finance minister. I took over the ministry soon after the collapse of the Cruzado Plan and the foreign debt moratorium decided on by my predecessor, Dílson Funaro.1 I immediately tried to give Brazilians a clearer idea of the 221

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financial crisis (an exchange rate, or balance-of-payments, crisis) and of the fiscal crisis that the country had plunged into. Perhaps I contributed to making Brazilians aware of the seriousness of the situation. I then instituted an emergency plan to control the high inertial inflation, called the “Bresser Plan.” I defined fiscal adjustment as a priority and tried to find a general solution for restructuring the debt of highly indebted countries.2 In December of that year, realizing that I had no support from President José Sarney for making the necessary fiscal adjustment, and that the economy was heading toward lack of control and hyperinflation, I resigned.3 During my last week at the ministry, I remember giving a lecture in São Paulo in which I dramatically warned of the seriousness of the macroeconomic crisis. Two years later, when Sarney handed over the government to President Fernando Collor de Mello, Brazil’s high inertial inflation had become hyperinflation: in February 1990, the monthly inflation rate hit 82 percent—far more than the minimum 50 percent monthly increase of prices conventionally considered necessary to qualify as hyperinflation. My diagnosis appeared in my 1990 article, “The Perverse Logic of Stagnation: Debt, Deficit and Inflation in Brazil.” In 1992, Celso Furtado, also writing perceptively on these events, published a book with a suggestive title, Brazil: The Interrupted Construction. Financial Crisis and Stagnation

The stagnation of per capita income in the 1980s basically resulted from the great exchange rate crisis, or balance-of-payments crisis, which at the time was referred to as the “foreign debt crisis.” The crisis started with a radical change in US economic policy under President Ronald Reagan and the president of the Federal Reserve, Paul Volcker. In the 1970s, the United States had experienced a period of economic crisis characterized by a decline in profit rates, a decrease in growth, constant devaluations of the dollar, and by an increase in inflation—in other words, by stagflation. The United States also experienced a major decline of its hegemony, caused by this economic crisis and by its defeat in the Vietnam War. In view of the crisis in the United States, Volcker adopted a policy that surprised everyone, yet was successful in ending inflation. He instituted strong monetary tightening that brutally raised interest rates, appreciated the dollar, and led the country into a huge current account deficit—a deficit in dollars. However, this deficit was in the country’s own currency, so it did not cause the risks and problems that current account deficits cause in the developing countries. Concurrently, the US Treasury Department implemented a policy of fiscal expansion, and deeply increased the public deficit. This way, as Maria da Conceição Tavares observes,

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Reagan decided to do something unprecedented, which is a bastard upsidedown Keynesian policy, combined with a hard monetary policy. To redistribute the income to the richest, to increase fiscal deficit and to raise the interest rate is an explosive policy. Nevertheless, its result was America’s recovery. . . . Briefly, since 1979, from this attitude of Volcker, confirmed by Reagan’s policy, the United States declared that the dollar was the sovereign currency, the international standard, and that the dollar’s hegemony would be restored. With this, they plunged the world economy into a recession that lasted three years. (1985 pp. 40–41)

The crisis lasted three years in the rich countries. However, for the developing countries, highly indebted in foreign currency, the US economic policy caused a very important financial crisis that kept some of them stagnant for ten years. In a rich country that has a reserve currency and becomes indebted in its own currency, financial crises are usually banking crises; in the developing countries, which become indebted in a foreign currency and so cannot issue currency to cover their debts, the financial crisis is in principle currency or balance-of-payments, crisis. For Brazil, this terrible crisis derived from the fact that it believed in the policy of growth with foreign savings, recommended by financial markets and orthodox economists and accepted by structuralist economists as the best way to solve the problem of the foreign constraint, instead of trying to adjust the exchange rate to the proper level. But given the absolute neoliberal ideological hegemony in the 1990s, the financial nature of the crisis was minimized and more importance was attached to the economic crisis, which was attributed to the “excessive state intervention in the economy,” specifically to the import-substitution industrialization strategy. This was the understanding despite the fact that Brazil had already been successfully engaged, since 1967, in an industrialization strategy based on the export of manufactured goods. The Financial Crisis of the 1980s, which by its severity deserves to be written in capital letters, began in 1979, when the US government, in view of the stagflation and the second oil shock, decided to brutally increase the interest rate on treasury bonds. I have already discussed this fact in Chapter 14, as well as the mistakes we made then, specifically the reproduction of the monetarist and liberal mistakes that José Alfredo Martinez de Hoz had made in Argentina. In 1981, when the international financial system suspended the rollover of Brazilian foreign debt, and the crisis erupted at full strength, Brazil had two choices: to declare a full default or to declare a “virtual default” (not aggressive) of the principal and continue to repay the interest and dividends while negotiating with the International Monetary Fund (IMF) and other chief creditors. Brazil chose the second and signed a letter of intent with the IMF in January 1983, committing to a trade surplus of $6 billion, a 50 percent cut in the public sector deficit, and a 90 percent annual inflation

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rate. According to the IMF’s estimates, this process of adjustment would represent a negative GDP growth rate of 3.5 percent for that year. In February 1983, the Brazilian government decided to do a muchrequired 30 percent maxi-devaluation of the currency, which caused indignation across the country, as usually happens in such cases. The surprise and indignation came from the fact that the government had been for years following a fixed exchange-rate regime with a crawling peg (daily minidevaluations). But the maxi-devaluation was a necessary measure, resulting from the agreement with the IMF, and a courageous measure, which in the end proved to be successful in producing big trade surpluses.4 In April, it was evident that the trade surplus of $6 billion would be achieved thanks to this depreciation and to the strong recession, which reduced imports. But the target for the public deficit proved unreachable; and, worse, the maxidevaluation and other measures of “corrective inflation” raised the level of inflation from 100 percent at the beginning of 1983 to approximately 180 percent in 1984. It was the high inertial inflation that was gaining strength—an inflation resulting from the formal and informal indexation of the economy that the economists at the government and the ones at the IMF didn’t know about, as the theory of inertial inflation was just then being developed by a group of Brazilian economists in São Paulo and Rio de Janeiro, including me (see Brief Theory 10). This was an inflation that could not be explained by monetarist, Keynesian, or structuralist theories, but only by the theory of inertial inflation; because this type of inflation derived from the formal and informal indexation of prices, it went up easily, while it was rigid downwards. At the beginning of 1983, given the suspension of the Brazilian debt rollover since 1981, the dollar shortage was dramatic. Consequently, and since there had been no agreement on a moratorium on the payment of interest, a new agreement with the IMF became necessary, and that meant new austerity measures. The fact that the recession was already violent, unemployment and bankruptcies were growing, imports were falling, and the target of a $6 billion trade surplus was being attained did not impress the IMF, which did not understand that such policies had no power to curb inertial inflation. Several measures were put into practice in June and July of 1983. The most relevant of them was to cut actual wages—a policy that had not been adopted since 1974. The government decided to index wages at 80 percent of the National Consumer Price Index (INPC) over the next two years. This measure represented a cut of roughly 30 percent in actual wages during this period. The adjustment measures—mainly the exchange rate depreciation—were effective in balancing the external accounts, but failed to stabilize prices. Instead, they deepened the political crisis of the military regime and strengthened the democratic opposition, which could increasingly count on the support of the industrialists.

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The crisis faced by the economy in the 1980s was the most serious in the history of Brazil’s capitalist development. In fact, except for small fluctuations, the country’s economy had never ceased to grow since the nineteenth century, since around the 1840s, when the unequal commercial agreement with England, made at the time Brazil won its independence, had ended; and when the development of coffee cultivation made it possible to overcome the low-growth scenario that had prevailed since the middle of the eighteenth century due to the exhaustion of the gold cycle. Brazil had experienced a hundred and fifty years of extraordinary growth. According to a study by Angus Maddison (1988), Brazil’s GDP growth rates between 1870 and 1980 were the highest among a select number of countries, including the United States, Japan, and the Soviet Union. Since 1981, however, Brazil’s economy went into a long period of stagnation that lasted an entire decade: per capita income, which had grown by 52.7 percent over the eight previous years (1973–1980), slipped into total stagnation in the 1980s. Yet, as we will see later on in this book, after the debt crisis and the high inertial inflation were solved, at the beginning of the 1990s, the country’s growth resumed, but very slowly, qualifying as a quasi-stagnation. This dramatic reduction in the growth rate was directly related to the drop in the country’s rate of investment, which had been around 23–25 percent in the second half of the 1970s, but then started falling in 1983, reaching 18 percent of GDP in 1985.5 Brazil was confronted with a structural crisis, whose basic symptoms were the stagnation of per capita income and a drastic reduction in the country’s ability to save and invest. The fact that the transfers received by the country had become positive, which meant that Brazil was starting to pay its foreign debt, influenced this reduction in savings and investment. We must, however, introduce the third symptom of Brazilian economic crisis in the 1980s: the inflation rate. In the 1970s, growth had been possible with an average annual inflation rate of 32.6 percent—a moderate rate. But in 1980, inflation rose to nearly 100 percent; in 1983 it reached 200 percent, and, finally, after the Cruzado episode, it rose to almost 400 percent in 1987. In 1988, it was close to 1,000 percent. During the last month of the Sarney administration, February 1990, inflation reached 72 percent per month, qualifying as hyperinflation.6 At this level of inflation, it was impossible to think about economic growth. And it was no longer the reduction in the output-to-capital ratio or the deterioration of the terms of trade that prevented economic development. What prevented it was economic disorganization produced by the high inflation. This happened despite the formal and informal indexation that intended to neutralize the disintegrating effects of inflation, but that was ultimately the cause of the inertial aspect of the inflation. Consequently, after the failure of the Cruzado Plan, there were three major fundamental symptoms of the huge crisis faced by Brazil:

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an unprecedented stagnation of per capita income, a reduction by approximately 6 percent of the rate of investment, and inflation rates exceeding 10 percent per month. Negative Public Savings

The exhaustion of the strategy of import-substitution industrialization was not the cause of Brazil’s economic crisis in the 1980s. Liberal economists believed that it was the cause, and repeated their diagnosis endlessly, but the main cause of the economic stagnation in the 1980s was the pursuit of growth in the 1970s with a foreign savings policy. This policy played this role because it directly gave rise to the huge foreign debt crisis of the 1980s and, indirectly, to the high inertial inflation and to the state’s fiscal crisis. This was something similar to what was happening in the other LatinAmerican countries, as José Maria Fanelli, Roberto Frenkel, and Guillermo Rozenwurcel (1992) suggest, The Latin-American crisis does not originate in the weakness of the import substitution strategy, but rather in the dynamics of the adjustment to the external shocks that took place in the early 1980s . . . in the foreign and fiscal imbalances produced by the foreign debt crisis, which, after ten years of adjustment, were not yet solved. (p.1)

The policy of incurring current account deficits (foreign savings) resulted in an increase in the foreign debt and an appreciation of the currency. The increase in the debt was ultimately transformed into a balance-of-payments crisis and a banking crisis. After the banks and dollar-indebted business enterprises were bailed out by the state, the fiscal crisis broke out. On the other hand, the depreciations that became necessary implied an acceleration of inflation—an acceleration that was permanent, rather than temporary, because the prices were indexed and the inflation was inertial. Consequently, as usually occurs in financial crises, it was the state that was ultimately thrown off balance, enabling the liberals to declare that “the state is no longer the solution, but rather the problem.” The military regime tried to circumvent the fiscal crisis starting in 1981, and to circumvent the exchange rate overvaluation with the 1983 depreciation, but it did not understand inertial characteristics, and was therefore unable to control inertial inflation. From 1985 on, the populism of the democratic government led the country again into an exchange rate and fiscal crisis and to a worsening of the inflationary crisis. There are two ways to measure in flow terms the resulting fiscal crisis: the operational public deficit and the ability of the public sector to save. The first one includes the state-owned companies and corresponds to the

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annual increase in the indebtedness of the state or to the financial needs of the public sector as a whole. Besides measuring the state’s financial imbalance, it is also an indication of excess demand; but, as Brazil’s public deficit already had a substantial financial component, and as it happened while the private sector was reducing its investments, the ongoing public deficit was compatible with a clear lack of global demand. Public saving is the difference between the state’s current revenues and expenditures. This measure is related to the public deficit, but is concerned with the financing of public investments. Public savings were around 5 percent of GDP toward the end of the 1970s, then reduced to 3.8 percent in 1979, and then turned into negative savings of 1.8 percent of GDP in 1988 (Table 16.1). This meant that, in the 1970s, the public sector was able to collect forced savings and to invest them—that is, to play the state’s role par excellence in the development process. But in the 1980s, after having assumed the debt in dollars of companies during the huge financial crisis of that time, it began to generate negative savings. Since the state could no longer rely on its own savings to finance its investments, the public deficit now financed them, and did so precariously, thereby reducing the ability of Brazil’s economy to invest and save. If the state’s accounts are balanced, public savings can finance public investments. This is a fundamental concept of public accountancy, as important as the concept of a public deficit; and it is more important than the concept of a primary surplus, which was so favored by the IMF in the 1980s because it is equal to the public deficit minus the interest paid by the public sector. Since the IMF is closely associated with the international financial system, which, whenever possible, wants interest to be forgotten, but wants its credits to be honored, the primary surplus became the most employed fiscal concept. If it is positive, it means that there will be resources to repay at least some of the interest. The public deficit itself, which Table 16.1: Public Savings, 1979–1988 (Odd years, % of GDP) Year

1979 1981 1983 1985 1987 1988

Tax Burden 24.3 24.6 24.7 22.0 22.6 22.1

Public Savings 3.8 2.3 0.6 0.3 –1.2 –1.9

Sources: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. (regarding the tax burden); Central Bank of Brazil (regarding public savings).

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indicates the value of the state’s indebtedness, is left in the background. What should be said of public savings, which indicate the amount of resources the public sector has to invest? It is ignored, based on the neverexplicit premise that the state does not need to invest, or that it should invest little, although a negative public savings is the primary indicator of a fiscal crisis. It is generally the private sector that invests. However, now the state also needs to invest, and needs savings to finance its investments. When public savings become negative, the state incurs a fiscal crisis. The priority of economic policy at that point is to rebuild the state’s savings, so that the state will once again be able to finance its necessary investments. Negative public savings and the corresponding public deficit gave rise to a growing imbalance of the state’s stock: the public debt. In the early 1970s, the public debt became fundamentally external, but at the end of this decade, when international banks started reducing foreign debt rollovers (1979–1980), eventually suspending them altogether (1982), the public internal debt began to grow explosively. As the private sector was paying its foreign obligations in cruzeiros, the government took on the debt in dollars and, with the resources obtained, financed its own deficit. Notes

1. Formally known as the “Economic Stabilization Plan,” the Cruzado Plan involved a change of currency from the “cruzeiro” to the “cruzado,” with 1,000 cruzeiros equivalent to one cruzado. The plan also included freezing all prices, fixing the exchange rate at 13.88 cruzados to the US dollar, removing indexing for many contracts, and assigning a fixed value to Brazilian federal treasury notes. 2. In my capacity as finance minister, between May and December 1987, I diagnosed the crisis and presented the guidelines for its solution in the Plan of Macroeconomic Control (1987), I devised and introduced the Bresser Plan, and I developed a proposal regarding foreign debt restructuring for all indebted countries based on the securitization of their debts at a discount—a proposal that was rejected by then US Secretary of the Treasury James Baker, but adopted eighteen months later by Secretary Nicholas Brady. On my overall experience as finance minister, see BresserPereira (1992), and on my role in the debt crisis, see Bresser-Pereira (1999). 3. I must, however, acknowledge that President Sarney always gave me support regarding the financial crisis involving the foreign debt. 4. Note that this maxi-devaluation became necessary because of the mistaken 1979 policy of changing inflation expectations with a predetermined devaluation below the inflation rate—the neoliberal/monetarist policy that had been disastrous in Argentina and Chile. 5. Source: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. 6. There is a convention among economists that an inflation rate of more than 50 percent a month is hyperinflation.

17 The Crisis of 1987: The Collapse of the Democratic-Popular Pact

At the beginning of 1986, the government launched the Cruzado Plan. This would become the major lost opportunity for the new democracy and for the developmental economists who had been so critical of the relative orthodoxy of the preceding period, 1981–1984. The plan was well designed because it was based on the most important contribution of LatinAmerican economists to economic theory, the theory of inertial inflation (Brief Theory 10), but it failed grossly. One of the immediate causes of its failure was the fact that the imbalance in relative prices, which is inherent in inertial inflation, was not sufficiently corrected by the conversion table, which should have neutralized inertial inflation by reducing the price increases that the suppliers of goods and services added to neutralize the real effects of future inflation. Another cause was the government’s inability to contain aggregate demand, insofar as it did not reduce the public deficit or adopt a rigid monetary policy. The wage increase implemented on the day of the plan was also a contributing factor. But the biggest cause of the plan’s failure was an appreciation of the currency, due to the increase in real wages above productivity. This resulted in a high current account deficit, the increase of a foreign debt that was already high. Given these facts, foreign creditors lost confidence once again; foreign debt rollover was interrupted; the balance-of-payments financial crisis erupted; and inertial inflation returned in full strength, reaching 15 percent in March 1987. In the 1980s, the foreign debt was the foundation of Brazil’s economic crisis, and it continued to be so until 1993. Stagnation in the 1980s was explained by the reduction in the rate of public investment and by the acceleration of inflation, which either disorganized investments or made them more inefficient. There was then a reduction in the output-to-capital ratio, that is, in the productivity of investments, which cannot simply be explained by the relative increase in the prices of the capital goods, which normally 229

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occurs in this situation. The structural financial imbalance of the public sector, manifested in negative public savings and in the connected foreign current-account deficit, in turn caused the reduction in investments and the increase in inflation. The foreign savings problem, however, was gradually being solved, partly due to the big surpluses in real transactions that had resulted from Brazil’s recession, and to the 10 percent real depreciation that I had implemented in May 1987, which relatively reduced the foreign debt. Meanwhile, the Brazilian proposal to solve the foreign debt crisis by means of a discount through securitization of the credit of the commercial banks—that is, of the transformation of that credit, in the financial market, into new securities with a lower value—was inelegantly rejected by the US secretary of the treasury James Baker, in September 1987. A year and a half later, the following secretary of the treasury, Nicholas Brady, integrated my suggestion into the so-called Brady Plan.1 After many missteps, including a courageous but poorly thought-out stance of the Collor administration regarding the foreign debt, Brazil’s new president, Itamar Franco, finally signed the Brady Plan in order to reschedule the foreign debt with a discount of nearly 15 percent. It was not a great discount, given the bad example provided by Mexico, which two years before had accepted a negligible discount when negotiating a major debt agreement with the United States. Nevertheless, added to the positive effect of the surpluses that Brazil was achieving in its external accounts, it represented a solution to Brazil’s foreign debt. The Collapse of the Democratic-Popular Pact

The 1977 Democratic-Popular Pact, which presided over the country’s transition to democracy, went through a crisis at the beginning of 1987. The decisive fact was the complete failure of the Cruzado Plan to stabilize prices and to establish the basis for overcoming the huge financial crisis of the 1980s. The double crisis of foreign debt and high inflation had been instrumental in hastening the end of the authoritarian regime. But now it became the cause of the crisis of the democratic pact. The society had enthusiastically supported the stabilization plan, which involved a price freeze, but felt betrayed when the plan failed at the beginning of 1987 and inflation returned in force. The new political crisis showed once again the gap between the mass citizenry, which had the right to vote but could not effectively participate in political life, and the elite, which had become unable to define a political pact and a national project for Brazil. The 1977 Democratic-Popular Pact and the Diretas Já campaign implied a script that the 1988 Constitution formalized—a democratic, social, and national agreement. But its national

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aspect was under fire from progressive intellectuals who had accepted the associated dependency interpretation; and the whole agreement was criticized by neoliberals, whose ideology had become dominant in the North during the 1980s. The political crisis was expressed, in the short term, by the loss of political legitimacy of President José Sarney’s administration—that is, by the loss of the support of civil society. More broadly, it meant that, for the first time since 1930, the industrial bourgeoisie was excluded from the political pact. It was a bourgeoisie that, despite its ambiguities and contradictions, had been a national bourgeoisie and, in that capacity, had taken part in Brazil’s national revolution. It was excluded because, after a new period of crisis and power vacuum (1987–1990), similar to that experienced during 1961–1964, the new political pact would be neoliberal and antiindustrialization: it would be the 1991 Liberal-Dependent Pact. Apparently, the death of Tancredo Neves just when he should have assumed the presidency of the Republic was not just a personal tragedy, but also a historical fatality that cost Brazil dearly. History is not made by personalities, but in the short term, there is no doubt that the positive or negative weight of certain political leaders can be decisive. The assumption of the presidency by José Sarney was the determining factor in the return to power of the most archaic and parasitic sectors of Brazilian capitalism. We could adopt an alternative view that is structurally more pessimistic: that the “New Republic”—the name given by Sarney to the new democratic regime—was doomed to failure, regardless of its political leadership. Florestan Fernandes (1985), for instance, had no doubt about this fate. We have already seen that the transition had a significant conservative element insofar as it relied on the participation of the industrial bourgeoisie, but we should not forget that the 1988 Constitution was a product of this transition, and progressive and national ideas were strongly represented in it. The commitment to democracy and to the affirmation of social rights, and a substantial increase in public expenditure on education, public healthcare, and on systems of cash transfers to ensure a minimum income to poor households resulted from this constitution, as had the great decentralization of resources from the federal and state levels to the municipalities. Consequently, in the years that followed the democratic transition, Brazil advanced substantially at the political and social levels. The most impressive advance was the implementation of the Unified Health System (SUS), a universal healthcare system. Brazilian democracy became sounder, civil society had more scope for action, and the country’s social indicators improved substantially. To Fernandes, however, failure was inevitable. He was convinced, since writing his book A Revolução Burguesa no Brasil (The Bourgeois Revolution in Brazil, 1975), that, given its dependent nature, Brazil’s bour-

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geoisie would be unable to or would have much difficulty in conducting a national and democratic revolution similar to the one conducted by the bourgeoisies of the central countries. But his pessimism proved to be incorrect. Although the contradictory, national-dependent nature of Brazil’s bourgeoisie limits its economic and political leadership capabilities, and although the bourgeoisie often proves to be politically confused and always conservative, it seems to me a mistake to deny its economic and political leadership capabilities due to the lack of an adequate vision of national problems. The project of the bourgeoisie may not be clear, and it certainly does not identify itself with the project that each one of us has for the country, but it exists. The research and analysis of Eli Diniz (1978) and Renato Raul Boschi (1979) on the subject are conclusive. And the very experience of Brazil’s national development essentially resulted from an alliance between the bourgeoisie and the technicians from 1930 until at least the 1970s. The bourgeoisie has certainly revealed its conservatism at times, as well as its inability to properly solve the problem of the concentration of income, and its lack of determination to cope with the absolute misery in which a considerable part of the Brazilian population still lives. But we must not confuse this conservatism, which, incidentally, also characterizes the bourgeoisies of the developed countries, with the lack of political leadership required to promote national development. The Cruzado Plan

At the beginning of his administration, President Sarney tried to be faithful to the 1977 Democratic-Popular Pact, which, by a fluke, had led him to power. His behavior in 1985 was characterized by an attempt to develop a discourse and modern and progressive policies. The ministers chosen by Neves were maintained and, when Sarney needed to make changes, those changes had a progressive orientation. At the Ministry of Finance, for instance, Dílson Funaro, a paulista business entrepreneur, replaced Francisco Dornelles, an orthodox public servant. And a rather heterogeneous team of economists from the State University of Campinas (Unicamp), the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), and the University of São Paulo (USP) assumed command of Brazil’s economic policymaking at the Ministry of Finance; the Central Bank of Brazil; and the Ministry of Planning, Budget and Management. The social area was formally defined by the government as a priority. At the Ministry of Social Insurance and the Ministry of Health, Brazil’s public health physicians began a revolution in the healthcare system with the establishment of Healthcare Integrated Actions, which, with approval under the 1988 Constitution, would later give rise to the SUS. The strong protection given to the information

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technology industry, which had begun under the military regime, was strengthened further, but soon proved unable to ensure the modernization of the country. The foreign debt became the subject of a sovereign policy that ended, in February 1987, with an aggressive foreign-debt moratorium. The process of privatization of state-owned companies also began, but only to a limited extent. The trajectory of Brazil’s economy toward an increasing integration into the international capitalist system was reaffirmed, although with ambivalence. Direct elections for the presidency of the Republic were restored, the National Security Law was softened, and the Constituent Assembly was convened. As early as the first year of the New Republic, however, conflicts within the democratic pact became evident. The workers’ demands were clearly beyond the economic system’s capacity in the short term. Real wage increases or wage adjustments for inflation were being demanded that were well above the increase in productivity. The partial acceptance of these demands resulted in an increase in consumption and in the acceleration of an already high inflation rate. The willingness of modern and progressive industrial entrepreneurs to pay more taxes to finance the increased social expenditure, which was implicit in the social pact, was clearly inadequate. They reaffirmed the idea of a pact, but they intended to limit it just to wage issues—a proposal that was not acceptable to the workers. In the wage domain, these entrepreneurs ended up adopting a curiously populist attitude: they offered little resistance to wage demands. But they immediately passed the real increases on to the consumer, thereby accelerating inflation. Populism was the chief response of both the federal and state governments to social demands, which increased with the democratic transition.2 A hike in the wages of civil servants and of the employees and managers of state-owned companies was the most evident result of this phenomenon. Another result was an increase in the expenditures on public works and services. Consequently, the public deficit increased and the state’s ability to save decreased; the latter had already been seriously reduced by the need to repay the interest on an excessively large public foreign debt, which was then (in 1985) being made worse by the explosive increase in the internal public debt caused by the growing public deficit. On February 28, 1986, however, a new policy—the Cruzado Plan— changed the country’s economic and political situation. Given that inflation was growing relentlessly, the government finally followed the recommendation of the group of economists who had developed the theory of inertial inflation. It promoted the option of a “heterodox shock” (i.e., a general price freeze). The plan corresponded to the correct diagnosis of the nature of Brazil’s inflation—basically inertial at that point—and succeeded in drastically reducing inflation. Consequently, it immediately had the full support of the whole nation. For a few months, both the government and

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society lived in a state of grace. The government’s popularity ratings reached unimagined levels. The president and the finance minister were treated as demigods when they appeared in public. Apparently, the New Republic had done what was expected of it. The economic crisis and the political crisis were forgotten. However, mistakes made in the Cruzado Plan’s formulation led to a complete failure by the end of 1986. These included the unrealistic ideas of “zero inflation” and the 8 percent real increase in wages on the day of the price freeze; a series of missteps in the plan’s management, particularly the inability to control the aggregate demand that, based on consumption, was growing explosively; and the inability to correct the imbalances in the relative prices. Many share the responsibility for this failure, but there is no doubt that President Sarney’s lack of action was decisive. Fascinated by the plan’s success, he prohibited the softening of the price freeze over the following months, thereby preventing any correction in the relative prices. He also limited as much as possible the fiscal measures proposed by the two ministers in the economic area, and particularly proposals by the Central Bank team that was charged with controlling aggregate demand. The aftereffects of the failure of the Cruzado Plan were dreadful: the economists who had developed the theory of inertial inflation and proposed the “heterodox shock” were absurdly challenged, starting with the adherents of neoliberalism, which was progressing worldwide; the economic and financial crisis returned in the first half of 1987 with a virulence that was unprecedented in the country’s history; and the political crisis, this time ignited by the government’s loss of popularity and legitimacy with the civil society, reappeared in full strength. Amidst the Turmoil of the Crisis

I took over the Ministry of Finance in April 29, 1987, amidst the deep crisis triggered by the failure of the Cruzado Plan. At that moment, however, there was still some confidence in the government’s policies. An indication of this was the fact that the president of the Party of the Brazilian Democratic Movement (PMDB)—the great leader of the democratic transition, Congressman Ulysses Guimarães—still wanted to associate his party’s name with the government’s economic policy, and he presented four names as replacements for the resigning finance minister, including mine. At that time, people still believed in the possibility of maintaining the DemocraticPopular Pact, which had given rise to the New Republic, and whose basis had always been the PMDB. Seven and a half months later, however, when I submitted my resignation, Guimarães decided that he would not present any more names to the Ministry of Finance. This was the definitive sign

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that the 1977 Democratic-Popular Pact was broken, that it no longer existed. It was also a sign of the deep worsening of the political crisis. Brazil’s default in February 1987, two months before my arrival at the Ministry of Finance, was unavoidable given the impossibility of the country’s renewing its debts abroad. And it was an act of courage by Funaro, who was then finance minister. When I replaced him, I kept the default, as I was trying to find a general solution to the huge foreign debt crisis of the 1980s. And I did find one: the securitization of the foreign debt with a discount, which, as previously mentioned, was incorporated eighteen months later into the Brady Plan.3 Briefly, in my new position, (1) I implemented the emergency measures included in the stabilization plan that was called the “Bresser Plan,” which aimed to circumvent the extremely acute economic and financial crisis that was generating a number of debt restructuration crises, bankruptcies, a real wage reduction, increase in unemployment, acceleration of inflation, and an instability in the balance of payments never seen before; (2) I devised a medium-term plan for the country, the Macroeconomic Control Plan; (3) I reformulated Brazil’s policy with regard to the foreign debt; and (4) I proposed a tax reform and a set of measures to reduce the public deficit. The rejection by the president of this last item was the direct cause of my resignation. The president’s difficulty in accepting a fiscal adjustment was related to a new event. On May 18, seventeen days after I had taken over the finance ministry, the political crisis that would last until the end of the Sarney administration had clearly taken hold. That day, President Sarney appeared on television and, against the general expectation that he would remain president for a total of four years, he declared that he would remain for five. The speech contradicted the commitments made by Sarney and Neves. As they had not been elected directly, but by the Electoral College, the understanding was that they would remain in office for just four years— just time enough to approve the new constitution. By making this decision, the president lost the support of the democratic and progressive sectors that had so far stood behind him. The split-up of the PMDB began, and would give rise, a year later, in 1988, to the Brazilian Social Democratic Party (PSDB), under the leadership of Mário Covas, André Franco Montoro, and Fernando Henrique Cardoso. From then on, the president felt personally committed to staying on for the extended period. For this reason, he began to focus solely on his objective of remaining in office for five years. This represented an understanding and a pushing to the limit of Machiavelli’s principle that the first duty of the prince is to maintain his own power. In order to achieve that goal, President Sarney gradually defined his strategy and political tactics. After the most progressive or left-wing sectors of the PMDB withdrew from the government, his idea was to divide the PMDB and form a great right-wing party in a coalition with the Liberal

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Front Party (PFL) and part of the Social Democratic Party (PDS)—two parties that originated under the authoritarian regime, as had Sarney himself. In this way, the whole bourgeoisie would be unified around the president. However, Sarney was unable to form the new party, let alone unite the business community behind him. But at the end of 1987, a right-wing political group was created within the Constituent Assembly called the “Centrão” [Big Center] to oppose the ideas of the Left prevailing in the Systematization Committee and to provide parliamentary support to the president. The democratic transition had been conservative since the beginning, and had involved a certain continuity in relation to the military regime. But this was a limited continuity, insofar as democratization had been an effective achievement of the democratic and modern sectors, which were both progressive and conservative. It had been the result of an alliance between the center-left and center-right political forces to establish a democratic and modern capitalism in Brazil. However, after the crisis of the Cruzado Plan, and particularly after the end of 1987, the archaic and populist aspects of the government were accentuated. In addition to the social democratic centerleft abandoning the government, the liberal right abandoned it as well. And thus, when a political elite that was incompatible with the country’s real economic and political forces was reelected, the Sarney administration lost its legitimacy. Day by day, the support that it had enjoyed at all levels of civil society decreased. The political crisis was taking shape. The economic crisis, in turn, was worsening as well. Demonstrating its incompetence and resorting to confidence-building at any price, the government suspended the foreign debt moratorium in 1988 without having reached a reasonable settlement that should have included the necessary restructuring of deadlines and an agreement on the amount to be paid, which would have made the payment compatible with the resumption of development. Soon afterwards, however, the country was back to the moratorium—a “white moratorium” resulting from the impossibility of meeting Brazil’s international obligations. In addition, the new finance minister made two failed attempts at stabilization: the orthodox “Plano Feijão com Arroz” (Rice and Beans Plan) and the heterodox “Plano Verão” (Summer Plan), while the state stumbled along without any fiscal discipline. Consequently, the Sarney administration’s last full year, 1989, was a time of artificial economic euphoria and accelerated inflation; in the government’s last month (March 1990), inflation hit 72 percent; Brazil was in hyperinflation. In this discouraging political situation, however, there were two positive factors. First, the consolidation of Brazil’s democracy was confirmed. Despite the severity of the crisis, the liberal-conservative, or neoliberal, sector eventually made no suggestion of a new military coup in Brazil. Second, in 1988 the Constitutional Congress finished its process of institutionalizing democracy in Brazil. The absence of the conditions for a coup

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derived from two circumstances: the fact that the military had no alternative project for the country and the lack of support for this kind of action from the country’s ruling classes, which did not feel that their power was threatened by the economic and political crisis. However, despite all the criticisms that were later made of the work of the Constitutional Congress, despite the conservatism of some measures and the corporatism of others, there is no doubt that the 1988 Constitution represented a major political advance. It resulted from a great democratic political agreement in which the real forces of the nation took part, and in a reasonably representative way. With the 1988 Constitution, Brazil’s democracy, which had already been consolidated at the political level (insofar as it reflected the fact that the country’s capitalist revolution was completed), was now also consolidated at the institutional level. Since then, the defeated political party did not immediately challenge the election results, as happens in unconsolidated democracies. Briefly then, the 1977 Democratic-Popular Pact, which presided over the democratic transition, disintegrated at the beginning of 1987, when the failure of the Cruzado Plan showed that the democratic and developmental class coalition in power did not have a realistic appraisal of the huge economic crisis the country faced or a real proposal for the modernization for Brazil. This broad class coalition had been successful in its chief goal—to restore democracy in Brazil—but it failed to stabilize the economy, ignite the resumption of development, and to promote a more equitable distribution of income. It failed because the crisis left by the authoritarian regime was huge—a financial crisis of foreign debt—and also because this political coalition eventually became populist at the economic level. Notes

1. For an account of my actions at the Ministry of Finance, see Bresser-Pereira (1992), “Contra a corrente: a experiência no Ministério da Fazenda” (“Against the Current: the Experience in the Ministry of Finance”). 2. It must be noted here that I am talking about “economic populism,” which refers to the practice of governments irresponsibly spending more than they collect. It may also include “fiscal populism,” when that irresponsible spending results in a state deficit (i.e., when it is a public deficit), or “exchange rate populism,” when it is the nation-state that spends irresponsibly, resulting in a current account deficit. Another problem is populism in political terms—when some politicians communicate directly with the people without the intermediation of political parties. 3. On my role in the solution of the foreign debt crisis, see Bresser-Pereira (1999), “A Turning Point in the Debt Crisis.”

18 From Elite to Social Democracy: The 1988 Constitution

The democratic transition achieved in 1985 was a great victory for Brazilian civil society. It was the result of a falling-out, beginning in 1977, within the alliance between the industrial bourgeoisie and the military regime, which had been in place since 1964; and it was characterized by the great popular mobilization that was seen in the Diretas Já campaign and in the formation of the 1977 Democratic-Popular Pact. What was the kind of democracy that resulted from all this? What was its quality? Was it already a consolidated democracy? And, in terms of the stages of democratization, was it just a democracy of elites, or maybe a public-opinion democracy, in which the people already had some voice, or a civil society democracy in which civil society has ceased to be just a bourgeois civil society? Did it turn out to be merely a liberal democracy, or was it already a social democracy? These questions have no simple answers, but two political statements help us understand the issue. On the day of the Brazilian presidential runoff election of 2002, President Fernando Henrique Cardoso affirmed that “democracy is consolidated in Brazil,” while candidate Luiz Inácio Lula da Silva assured people, “I want to be remembered in history as the president who had most dialogued with businessmen, trade union members, and with all the political forces.” When he made this claim, at the end of 2002, the already virtually elected candidate confirmed and completed the words of Cardoso, the president who was finishing his term: a consolidated democracy is a democracy in which argumentation and compromise predominate. I suggest, however, that the 2002 elections meant more than the consolidation of democracy in Brazil: they signaled that Brazil was making the transition from a democracy of elites to a social democracy, in which the universal social services of education, healthcare, and social security are reasonably ensured; and to a pubic opinion democracy, in which the voters have some power. 239

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The democracy of 1946 was not yet a consolidated democracy. It occurred during Brazil’s capitalist revolution and, strictly speaking, it was not really a democracy at all because it refused the right to vote to those who could not read and write. The nature of Brazilian democracy that reappeared in 1985, after the Diretas Já campaign, was different: it was born strong, as a conquest of the people with the support of the entrepreneurial class. Brazil had already concluded its capitalist revolution, so economic surplus appropriation had ceased to be carried out mostly through the direct control of the state (as had been the case in precapitalist societies). Now it took place through the market, in the form of profits for the business enterprises and high wages and bonuses for the professional and technobureaucratic middle classes. Consequently, Brazilian society remained very unequal, but there was one crucial change: the ruling classes did not need the state’s power to appropriate the economic surplus. An authoritarian regime was no longer required for the survival of the ruling classes, which realized at that point, albeit grudgingly, that their interests would be better secured under a democratic regime. As to the people, it never had any doubt about its support for democracy. The democrats thus won with the backing of the people and some of the bourgeoisie (the industrial entrepreneurs), but not from the economic liberals, who sided with them only at the very end of the transition to democracy. From that moment on, there was no one to oppose democracy in Brazil, and so democracy consolidated. The probability of a new political coup since then has dropped to nearly zero.1 Although won by the people, the first form of democracy in a country’s history is always a democracy of elites. In the early stages of democratization, the regime can be considered democratic because the two minimum requirements for democracy (guaranteed civil rights and universal suffrage) are present, but the people are silent. Then, the democratization of civil society—the reduction of power inequalities among its members— takes its first steps. At this stage, the rule of law, the freedoms of thought and of association, and free and competitive elections for the chief positions of government are already in force. But the politicians listen to the voters only at election time; once elected, they start to govern according to their convictions and interests. Brazil’s 1946 democracy was a typical democracy of elites. When Fernando Henrique Cardoso assumed the presidency of the Republic in January 1995, Brazil already had a consolidated democracy. Nevertheless, he will be remembered as a good president because he presided over the transition from a democracy of elites to a popular democracy. It was obvious for him that a government leader has to face two restrictions. He has to be directed both by the “economic restriction,” which imposes strict limits on his policies, and by the “democratic restriction,” which forces him to always take the people into account. I remem-

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ber a phrase that he said to me at the end of 1998, when his popularity had fallen due to the balance-of-payments crisis the country had plunged into: “With those rates, my power is decreasing.” It was in this context that he made his bravest and best decision at the economic level: he devalued the real. Cardoso governed while always being attentive to what society was telling him. The degree of the success of his initiatives, however, largely depended on the clarity that society itself had on the issue. And this clarity depended on the complexity of the problem, the degree of public debate that took place, and on the degree of consensus achieved. Society was telling him, with one voice, that education and healthcare were fundamental things, that it was necessary to face the problem of poverty, and that agrarian reform was necessary—and this is why he invested a considerable part of his efforts in those directions. This story shows something about the quality of the leader, but, more importantly, it reveals the rising strength of Brazil’s democracy. Another part of society was telling him that market-oriented or neoliberal reforms were necessary, and he tried to implement them. But as the content of the reforms was not sufficiently discussed, and a national consensus had not been formed on the subject, some of the reforms were decided by the government’s top echelons in a context of neoliberal hegemony. These included reforms that allowed the privatization of the monopolistic or quasi-monopolistic state-owned public service enterprises. Regarding the reforms of the social security system and of the tax system, there was consensus that they were required, but the desired design of these reforms was different for each member of the government. Given that high inflation had been controlled and that resources were limited, there was also a relative consensus among the orthodox government economists and the financial sector that a new cycle of high growth was at hand, but this view was intrinsically mistaken. The country was experiencing a deep current account deficit and increased foreign indebtedness that was financing consumption, not investment. Nevertheless, during Cardoso’s administration there was a consistent practice of democratic governance: respect for the law and for public opinion, adherence to ethical principles, and the pursuit of dialogue and negotiation. There was always someone advising him to take more aggressive executive actions, but the president resisted. As a sociologist and a genuine democrat, he would rather listen to everybody and look among conflicting ideas for a vector that best represented the perspective of society. If we exclude the currency stabilization that he initiated, but which actually took place under Itamar Franco’s administration (1992–1995), Cardoso did not achieve the economic outcomes everyone expected, but he did contribute to the improvement of Brazilian democracy. Lula acted likewise. His government was marked by dialogue, negotiation, and compromise—skills he exhibited throughout his life, ever since he

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assumed the leadership of the metalworkers of São Paulo’s ABC region in the 1970s. In the advanced democracies, such as the ones in Europe, compromise and argumentation are the two golden rules, and these are the rules that Lula and Cardoso followed. But Lula had a great advantage compared with the leaders of the more conservative parties. He did not have to resort to populism to have the people’s support because, to a large extent, the people knew that his government’s decisions would be the best that could be made for the poor. However, this did not eliminate the challenge facing all democratic politicians: convincing the majority of voters that one’s path was the right one. And Cardoso’s administration could not avoid being tainted by exchange rate populism—the long-term appreciation of the national currency to control inflation and artificially increase revenues. Lula did not govern alone. His government left plenty of room for negotiation and argumentation. The rich or the conservatives were worried about the fact that, for the first time, a clearly left-wing candidate had become president of the Republic. But, as proof that democracy was consolidated in Brazil, there was no attempt to question his mandate, something that invariably occurs in unconsolidated democracies. In modern democracies, nobody governs alone. In democracies based on popular mandate, to govern is not an individual action, but a collective process involving the whole society. It is a permanent process of achieving consensus and, when that is not possible, compromise. During his campaign, Lula made insistent statements along those lines because he had learned this truth in practice, insofar as he had lived through and taken an active part in the democratic transition and in the 18 years of democracy that preceded his administration (1985–2002). In government, he remained faithful to this commitment. The government, in a public opinion democracy, is already a government of many. Not only the president, not only the ministers and the congressmen and senators, not only the higher courts, not only the governors, and not only the senior civil servants participate in the government, but also everyone who expresses aspirations and opinions is a part of civil society. To express this fact, a new word appeared, “governance,” which means this collective and impersonal process that a democratic nation politically follows. A country’s governance is the result of the ideas and interests, of the pressures and counterpressures occurring within civil society, and at the federal level it is the result of the dynamics of the state apparatus and of the leadership of the politicians occupying the key positions. To the president of the Republic falls the responsibility of leadership of this complex process of government. But we must not overestimate this role. In a presidential regime such as Brazil’s, the president holds the greatest amount of power, but this power is smaller than we think. His greatest power lies in appointing and dismissing his auxiliaries—his ministers and

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second-tier officials. Apart from that, he has no alternative but to carefully guide the state’s ship towards the destination to which he had committed himself during the election campaign. This destination is clear—it is the destination of employment for all and of social justice. But in order to achieve those two objectives, there are many paths and many economic and political constraints that, if not taken into account, will lead to a flawed management of the economic and political system. How to define the paths and the constraints? How to make the right choices? In his government, Lula gave clear precedence to the poor, and managed to reduce inequality in the country thanks to an international situation that was very favorable to him, namely, the huge increase in the prices of the commodities exported by Brazil (mainly soy beans, iron ore, and oil). When there is no crisis, when the problems are more or less resolved, the citizens of modern democracies tend to walk away from everyday politics. Analysts have interpreted this apathy as a sign that democracy is in crisis in that country. Maybe they are right. But apathy is not what I see in Brazil’s democracy. In a country where democracy is alive, the citizens do not make themselves heard only at election time. This is an elitist or Schumpeterian notion of democracy, which Brazil has overcome. It has not yet reached the stage of participatory democracy, but it has progressed in that direction, and is already a democracy of popular involvement, as we can see by the many mechanisms of citizen participation (e.g., popular committees at the local level and national conferences on a variety of themes) based on the provisions in the 1988 Constitution on participation. And many criticize Brazil’s democracy. After all, we never have the democracy we want. Milton Lahuerta (2003, pp. 247 and 256), writing at the end of the Cardoso administration, offered a pessimistic analysis of Brazil’s democracy. For him, at that moment, “Brazil lives under the aegis of the failure of public institutions and of the dissolution of the political players and identities.” But he did recognize the participatory nature of this democracy: “the main virtue of the 1988 Constitution is the fact that it results from an unusual popular participation in the country’s history and it is expressed by a group of demands that reveal the contrasts and contradictions that appeared as a consequence of the military dictatorship.” Evaluations of Brazil’s democracy are always problematic, and opinions vary greatly. Wanderley Guilherme dos Santos (2006, p. 14) divided its evaluators into three categories: “According to some of them, it has reached its splendor now, at the beginning of the twenty-first century; according to another school, it is under threat; and, finally, according to others, it was definitely demystified.” But Brazilian democracy is probably not fully depicted by any one of these categories, because none of them makes sense alone. It was definitely never a mystery; it is not under threat; and it is far from having reached perfection.

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The Quality of Brazilian Democracy

After this introduction, we can discuss the quality of Brazilian democracy. Social critics such as Francisco de Oliveira consider it to be bad. The fact is that, since the beginning of the twentieth century, it was the object of too many hopes and some disappointments. What can be stated for certain is that civil rights were not a new thing in Brazil, but universal suffrage was—it was guaranteed for the first time in the 1988 Constitution. Thus, Brazil now fulfills the minimum requirements of a democracy. With, on the one hand, the guarantee of freedom of speech, of association, and of the press, and, on the other hand, the extension of suffrage to illiterate people, Brazil has become a nation of citizens. But it has remained a society characterized by huge economic, gender, and racial inequality. How should one evaluate Brazilian democracy given the inequality at the economic and social levels and the formal equality at the political level? Is the democracy that resulted from the democratic transition of 1985 and the 1988 Constitution of reasonably good quality, or is it still a democracy of elites? What is, after all, Brazil’s actual level of political development? To answer this question, we need to consider the level of economic development and correlate it with that of political development. My assumption is that these two forms of development correspond to two structural levels or layers of society, which, in principle, move in an interconnected way. Evidently, this correlation is never perfect. On the contrary, when Marx (1859) explained it in his celebrated preface to his A Contribution to the Critique of Political Economy, he stressed the dialectical nature of this relationship and the fact that, in the first half of the nineteenth century in Europe, the level of economic development was more advanced than the level of institutional and political development, thereby leaving space for political revolutions. As for Brazil today, the opposite holds true. The institutional and political structure—democracy—is more advanced than the economic structure, and pulls the latter forward as the state endeavors to reduce inequality. Wanderley Guilherme dos Santos (2007, pp. 14, 29, and 31), discussing Brazilian democracy, states that “the assumption, shared by many, that it is up to democracy to dilute economic inequalities, is, nevertheless, invalid.” I think he is being too pessimistic. He himself remarks that democracy is alive and well in Brazil because the civil society is organized: “The number of groups of citizens that have organized to pursue benefits is growing,” as “the Brazilian process contradicts the direction of the history of rich democracies, regarding both electoral participation and the mobilization and creation of basic social capital.” Actually, I see in Brazil a democracy as old as the US one, which in the 1960s had reached a good level of quality. But while US society has become decadent insofar as it has lost cohesion, in Brazil I see the opposite.

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My optimism regarding Brazilian democracy should not, however, be confused with a satisfaction with the results achieved thus far. Civil rights are basically guaranteed, but that is mostly for the rich and the middle class. Respect is a fundamental civil right, but the poorest, the women, the blacks, and those of mixed race continue to be disrespected. Brazilians already feel that they are citizens, and they have abandoned the pathetic humility of noncitizens, of subjects. But the authoritarian heritage is still strong. Brazilians have also become aware of their political and social rights; they have demanded the guarantee of political rights through different forms of democratic participation, and the guarantee of social rights through the expansion and improvement of the social services provided by the state. But the profound economic inequality of Brazilian society is still a major obstacle to the implementation, not only of social rights, but also of civil rights. As the notable sociologist José de Souza Martins states throughout the whole of his written work, there is a strong disrespect for women, yet also a strong willingness to resort to lynching when individual women are disrespected. In a recent article on this subject, Martins (2014) said: “In a country in which there is pseudo-citizenship, something that is more said than done, the country has not yet given women the whole protection to which they are entitled. The archaic values of the traditional society protect them, in their own way, in the culture of vengeance and final punishment.” The quality of democracy is associated with the form and degree of legitimacy of the state. The judiciary is a bureaucratic power by nature. It advanced with the 2003 constitutional amendment that created the National Board of Justice, which has binding power on administrative and ethical problems. The detailed nature of the 1988 Constitution led to the judicialization of justice, that is, the delegation to the judiciary of the power to decide on a large number of issues, on which it acquired in practical terms the power to legislate. The Achilles’ heel of Brazilian democracy is the legislative branch. First, it suffers from all the limitations of a representative democracy. Brazil chose a proportional electoral system, which works well in small countries, such as those in Scandinavia, but presents serious problems in large countries. The voter is distant from the candidates for Brazil’s Chamber of Deputies, and usually does not know anything about them when he votes. After the election, the constituent’s ability to make the official accountable, that is, to follow what he is doing in Congress, is very limited. Besides, as candidates of the same party compete with each other for the vote, the force of the political parties declines. Finally, the proportional electoral system, by not granting a majority in the Chamber of Deputies to the winning political party (something that is usually done in the alternative system of plurality vote by electoral district), forces the president to pursue what Sérgio Abranches (1988) called the “presidentialism of coalitions.” Perhaps this system would not raise problems if all of

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the political parties were “serious” parties—that is, parties with a reasonably clear program or ideology. Such parties exist in Brazil; we already have a great party that began as revolutionary and became social democratic and developmental, the Workers’ Party (PT), as well as another great economically liberal and politically conservative party, which originally tried to be social democratic, the Brazilian Social Democratic Party (PSDB), in addition to a few small parties with clear ideological positions. But there are a great number of “parties of affairs,” parties without a real program, whose members in Congress pursue only their own interests of power and enrichment. Therefore, to create a governing majority, the government is forced to obtain the support of these parties in exchange for cabinet positions and, mostly, for approvals of legislative amendments that are in their own interest. The government must therefore often make compromises that are beyond what is reasonable. Politics is the art of compromise, but Brazil’s electoral system forces the president into compromises that are excessive, and that are often demoralizing. On the other hand, the proportional electoral system is more democratic insofar as it makes room for the minorities, and is thus more representative than the system based on electoral districts, which is what prevails in the rich and large countries. The intermediate solution—the mixed system used in Germany since the postwar period—is the best solution. Half of the congressmen would be elected by proportional vote, based on a list defined by the political party, and the other half would be elected by majority vote in the electoral districts. This mixed electoral system is not a magical solution, but it represents one of the two fundamental items of political reform in Brazil (the other being exclusive public financing of electoral campaigns). In the meantime, we observe a legislature disconnected from the people in which politicians with a questionable past continue to occupy important positions in the management of the Chamber of Deputies and its specialized committees. The press profits from this situation, making a number of accusations, some well-founded, some not, but it has only a limited impact on congressional life. As summed up by Congressman Chico Alencar (2013), of the Socialism and Freedom Party (PSOL), in view of this situation, the population itself experiences a contradiction: it knows of the importance of politics and respects the politicians but, at the same time, despises actual politics and, consequently, undervalues its own vote. And this left-wing congressman adds: Instead of parties, with their purposes—often deceitful—we have the contractor caucus, the banking caucus, the sectarian religious caucus, the agribusiness caucus, the ball caucus, the firearms caucus. . . . Democracy of the corporations. In the internal management of public funds, the mathematics is addition and multiplication, not division or subtraction. The constitutional principles of morality and fairness are of little value. (2013, p. A3)

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The congressman’s criticism of the party system in Brazil is too strong, as were the initially strong criticisms by political scientists such as Bolivar Lamounier and Rachel Meneguello (1986), Scott Mainwaring (1993), and Olavo Brasil de Lima Jr. (1997), who argued that there was no ideological basis for Brazilian parties. This view, however, lost its validity with the research conducted by Argelina Cheibub Figueiredo and Fernando Limongi (1995, 1999), which showed a strong programmatic consistency in the big Brazilian parties of that time: the Liberal Front Party (PFL), the Social Democratic Party (PDS), and the Brazilian Labor Party (PTB) on the right; the PSDB and the Party of the Brazilian Democratic Movement (PMDB) in the center; and the Workers’ Party (PT) and the Democratic Workers Party (PDT) on the left. Leôncio Martins Rodrigues (2002, pp. 110–111), in turn, showed that these ideological positions were related to the parties’ professional origins, and that they were similar to those we can find in other countries. In his words, “The data related to the social and occupational composition, to the patrimonial dimension, to the levels of education and to the college formation of the caucuses show that the six Brazilian parties are distinguished not only by ideology (the most visible side of the parties’ lives), but also by the social sectors they represent.” In this way, “ideological politics,” which sociologist Alberto Guerreiro Ramos demanded in the 1950s, already exists today in Brazil. The establishment of the young Brazilian democracy was followed by an extraordinary increase in the number of Brazilian voters: in 1945, the citizens possessing the right to vote represented just 16 percent of Brazil’s adult population (over 18 years); by 2010, that figure reached 70.6 percent, totaling 135 million voters. Brazil has become a mass democracy in which the voters have something to say, though less in the proportional elections to the chambers of deputies than in the majority elections for the three levels of the federal government and the Senate. In the proportional elections to the state and federal chambers of deputies, it is impossible to clearly see the options for the voters, given the great number of candidates and their distance from the electorate. The proportional system is, in principle, more democratic, opening the way for all ideological currents, but in majority elections, particularly in the presidential elections, the “weight of the people” has been felt very clearly. In 1989, the bulk of the poor voters supported Fernando Collor de Mello because they were indignant at the failure of the Cruzado Plan; in 1994 and again in 1998, they voted for Fernando Henrique Cardoso, in return for his having stabilized the high rate of inflation; in 2002 and 2006, they voted for Lula, and in 2010 for Dilma Rousseff, because the PT candidates were able to show a commitment to the poor that one could not see in the other candidates. This mass democracy obviously worries the politically conservative and economically liberal forces, which are trying to maintain their politi-

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cal hegemony in several ways. Their great trump card is the fact that socialism has ceased to be a medium-term alternative to capitalism; their strategy is to identify capitalism with economic liberalism, and convince people that there is also no alternative to the latter, although developmentalism is obviously an alternative. Their primary instruments for the exercise of this hegemony are the funding of electoral campaigns, the control of the mass media (press and television), and the systematic demoralization of the political class, which is made easier by the existence of many unethical politicians. Their fundamental challenge is to neutralize the decisions of the politicians that are made in the name of the people who elect them. Although the discourse of those forces is always democratic, they have in them a “hatred of democracy” that Jacques Rancière (2005) clearly identified. By rejecting public campaign financing laws, the conservative and economically liberal forces can “buy” politicians, making them dependent on those forces. Once these politicians are elected, the media tries to demoralize them whenever possible—a task that is not difficult because, in fact, a good percentage of the politicians are corrupt: rather than making trade-offs between the desire to be elected and the public interest, they make trade-offs between the desire to be elected and the interests of the rentier; this is corruption by capturing the state. There are also, however, a significant number of politicians committed to the public interest—politicians who make the first type of trade-off. It is this kind of behavior, in addition to the political participation of a people that knows that politics could benefit it, that ensures the reasonable quality of Brazilian democracy. However, democracy in Brazil faces a curious contradiction that comes from the workers: democracy was fundamentally their achievement, but in the opinion polls, they show little support for it. That is probably because all the hopes they placed in it were not realized. And these hopes could never have been. Democracy is just a type of political regime or state; it is the form that the major institutions in capitalist societies assume when those societies accept civil rights and universal suffrage. The fulfillment of those two conditions—universal suffrage and a guarantee of civil rights—does not mean that democracy is consolidated, let alone that the country is well governed; and even less does it mean that, in this country, the demands of the workers and the poor are reasonably met. Democracy is conditioned by the capitalist system itself—by the differences in wealth and power that are inherent in it. We may also think of democracy as an ideology, but in this case a basic contradiction emerges: in principle, democracy is the ideology of political equality, which allows the poor and the workers to defend their rights. This is the case of Brazil and of many other countries that have already completed their capitalist revolution by making their industrial revolution, where democracy has thus been consolidated. But there are perverse interpretations of the purpose of democracy. Since the 1980s, the United

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States has adopted a “civilizing” foreign policy of spreading democracy all over the world, and using it to promote “regime change,” that is, the overthrow of nationalist governments in developing countries that are authoritarian (like Syria’s) or not (like Venezuela’s), but that have in common a resistance to US domination—that oppose the occupation of their domestic markets by the rich countries’ exports, finance, and multinationals. The 1988 Constitution

I have already made several references to the 1988 Constitution. Given its great significance for the construction of Brazil, I will dedicate this section to it. It was the fifth Brazilian constitution worthy of the name. The first one, the 1824 Constitution, was economically liberal and politically authoritarian, established the Moderating Power, and only managed to remain in force when it was corrected by the liberal Addition Act of 1834 and by the conservative and centralizing Interpretation of the Addition Act, which was passed in 1840. The second constitution was the 1891 Constitution. This was liberal and oligarchic, establishing presidentialism in Brazil and prematurely decentralizing the Brazilian state for the benefit of the state oligarchies. The third one was the 1934 Constitution, which reflected the corporatism of the time expressed in the idea of class representation. It was short-lived. The fourth one, the 1946 Constitution, was liberal and democratic. The fifth was the 1988 Constitution, which was democratic, social, and developmental. The democratic transition involved the formation of a National Constitutional Congress with original powers. Although legal experts disputed among themselves after the democratic transition, some of them affirming the validity of this original power, others denying it, the fact is that this power was exercised. At the same time, a democratic transition was taking place in Argentina, but there the new government limited itself to restoring the previous constitution. Given this fact, Cícero Araújo (2011, p. 336) asked, “But why, after all, did the Brazilian transition have a Constitutional Congress and the Argentine transition did not?” The answer to this question lies, in my opinion, not in legal issues, but in the fact that in Brazil the transition, albeit conservative, was a true revolution because it implied a change in the nature of the new class coalition. Whereas the 1964 Authoritarian-Modernizing Pact united the military technobureaucracy and the bourgeoisie, the new coalition of the 1977 Democratic-Popular Pact was much more comprehensive, uniting nearly all the classes around democracy and the idea of a Constituent Assembly. The fact that the transition was conservative limited the amount of change that could happen, but at the same time it provided more legitimacy to the progressive and national constitution that would emerge in 1988.

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The 1977 Democratic-Popular Pact was eminently democratic, and so was the constitution that stemmed from it. Essentially, because it guaranteed illiterates the right to vote, which the 1946 Constitution had denied, it guaranteed universal suffrage, which is one of the two minimum requirements for a political regime to be considered democratic (the other being the guarantee of civil rights.) Brazil became, at last, a democratic country. But the members of the Constitutional Congress did not limit themselves to a minimal conception of democracy; they wanted the Brazilian state to also be a social state. So, in addition to guaranteeing civil and political rights, they included in the constitution a large number of social rights, the most important of which was the universal right to healthcare. And at the strictly democratic level, they tried to give more powers to the citizens through mechanisms of direct or participatory democracy: in the 1988 Constitution there are twelve items related to the ideals of solidarity and participatory democracy. The “Citizen Constitution,” as its chief political sponsor, Congressman Ulysses Guimarães, christened the 1988 Constitution, was Brazil’s first democratic constitution. It was democratic in its content and democratic due to the political legitimacy of the members of the Constitutional Congress. As Paulo Bonavides and Antonio Paes de Andrade (1989, p. 485) note, “Never in Brazil had a constitution reflected so well the real forces of power, to which Lassale referred in the second half of the last century, as this singular text of 245 fat articles, followed by 70 no less voluminous others containing temporary constitutional provisions.” Besides extending the number of fundamental rights, the 1988 Constitution was innovative in that it made those rights immediately enforceable: citizens could now demand their enforcement based only on the constitutional text. The way the Constitution was discussed and approved was particularly democratic. The members of the Constitutional Congress did not start from a document already drawn up by experts, but organized themselves into committees that focused on the various subjects that a constitution should cover; so the constitutional text was approved from the bottom up. This made it possible for the final document to actually cover all the important issues of the law in a democratic way. On the other hand, this method of working loaded the Constitution with items that made it possible for pressure groups to safeguard their interests. The members of the Constitutional Congress, who had been elected in 1986, discussed the 1988 Constitution in the context of a popular, democratic, and developmental political pact, something that had not been done before. However, by the time the Constitution was approved, on October 5, 1988, this pact had already broken down due to the failure of the Cruzado Plan; and the politicians who had led the democratic transition were held responsible. Maybe this is why, though the members of the Constitutional Congress celebrated the approval of the new Constitution, the Brazilian

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elites reacted negatively. The failure of developmentalism led to a strong turn towards neoliberalism by those elites. This ideology was already dominant in the rich countries beginning in 1980, and it was a dependent economic liberalism that obviously did not welcome such a democratic and national constitution. The first criticism pointed to the “punctiliousness” of the new constitution, that is, the excessive number of articles and items. The second one concerned its social nature, claiming that it would be “impossible” for a middle-income country such as Brazil to guarantee so many rights to its citizens, that any attempt to guarantee them would make the country “ungovernable.” The third criticism concerned its nationalist nature, expressed by the preference that the state purchase from domestic companies, and by the prohibition on privatizing basic public services. Given the developmental nature of the 1988 Constitution, the economically liberal government of Fernando Henrique Cardoso supported those liberal criticisms. It authorized the privatization of monopolistic public utility companies and eliminated the purchasing preference given to domestic companies. It also removed the excessively bureaucratic nature of the 1988 Constitution by reducing the stability of the positions of the civil servants—a task in which I, as head of the Ministry of the Federal Administration and State Reform (MARE), was personally involved. This was the essential part of what was changed in the Constitution, through numerous amendments approved since 1988. By March 1988, seventy constitutional amendments had already been approved. The great number of constitutional provisions and amendments led Claudio Gonçalves Couto and Rogério Bastos Arantes (2006) to conduct some clarifying research about the 1988 Constitution. They wondered why this constitution had proven to be so unstable, subject to constant amendments. To answer this question, they distinguished three dimensions in the democratic process: the polity dimension, which concerns the basic parameters of the regime, the politics dimension, which refers to the rules of the political game, and the policy dimension, regarding the results of this game in terms of public policies. Using this framework, they developed a careful classification of the provisions of the 1988 Constitution, and found that it was the immoderate use of public policy provisions that led to this constitution’s being so punctilious and subject to frequent amendments. And they concluded that 30.5 percent of the amendments could be considered as policy and 69.5 percent as polity in nature. The analysis is innovative and clarifying, but naturally it presents problems. What are the basic parameters of a constitution that would be “relatively neutral” from an ideological viewpoint, and so classifiable as belonging to the polity dimension? Would it be only civil rights, as the economic liberals would want, or also political rights, as the democrats would want,

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or also social rights, as the social democrats would want? Why include the right to property in the polity dimension and the right to healthcare in the policy dimension? And, if we admit that the second one belongs to the polity dimension, why include the civil rights in a good constitution but exclude social rights? In fact, there is no reason to exclude the policy parameters if they are considered by the members of the Constitutional Congress as fundamental to the social construction of the country. On the other hand, the fact that the 1988 Constitution is punctilious does not make it unique. Modern constitutions are usually much longer than the classical and condensed US Constitution. Modern societies are more complex, and thus demand much more regulation than that required by the societies of the eighteenth century. And the fact that the 1988 Constitution is frequently amended says nothing or very little about it. When one decides to make a long constitution that includes the polity and policy dimensions, we know that it will have to be amended relatively frequently. And it is therefore necessary that the institutional roadblocks to amending such a constitution not be insurmountable. I know that liberals present the US Constitution as the ideal constitution. It is only so because it went through more than two centuries with few amendments. But is that because it is a condensed constitution, or because it proved to be very difficult to amend, whereas US society did not cease to develop economically since independence? The second alternative makes more sense. The US Constitution, which cannot be amended by the legislative branch unless the amendment is ratified by a three-quarters majority of the states, is mainly changed through interpretations by the Supreme Court. Is it a constitution that has contributed more to the political and social development of the United States than the 1988 Constitution has contributed to the political and social development of Brazil? I do not believe so. The 1989 Presidential Elections

After the failure of the Cruzado Plan and the election of President Collor de Mello (1987–1989), Brazil experienced a period with a power vacuum similar to the one in 1961–1964. The 1977 Democratic-Popular Pact collapsed in 1987 as a direct consequence of the failure of the Cruzado Plan. The significance of this failure was not simply economic; it was also, perhaps above all, political. The best and most tragic proof of this was the 1989 presidential elections. All the great leaders of the democratic transition— Guimarães, Mário Covas, Leonel Brizola, and Lula—were defeated, receiving votes practically inversely proportional to their participation in the 1977 Democratic-Popular Pact; Guimarães, who had headed the democratic transition and the development of the pact, received only 3 percent of the vote.

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And an arriviste politician, so far unknown, Collor de Mello was elected to the presidency. This was not an indication of the political immaturity of the Brazilian people, as some assumed, but it was a demonstration of the Brazilian people’s indignation at the inability of their leaders to stabilize the country’s long-term high inflation, which caused insecurity and suffering for everybody. In early 1990, the country was suffering from hyperinflation. That February, inflation had reached 82 percent, and it threatened to rise to 100 percent in March, the month President Collor de Mello was due to take office. Notes

1. The theory behind the claim made in this paragraph—that democracy becomes consolidated when the democratic transition happens after or together with the industrial and capitalist revolution—is developed in the article “Democracy and Capitalist Revolution” (Bresser-Pereira, 2012).

19 Neoliberal Rule: Privatization and the 1991 Liberal-Dependent Pact

Since the 1970s, the economic dominance of the rich countries has been challenged, first by the Asian “tigers,” later by Latin-American countries such as Brazil and Mexico, and finally by the big Asian countries, China and India. But these new rivals suffered serious setbacks due to the huge foreign debt crisis of the 1980s, which hit Latin America and Africa, and to the collapse of the Soviet Union in 1991. These gave economic dominance back to central capitalism, particularly to the United States. After the thirty golden years of capitalism (1948–1979), the spread of neoliberal ideology, which gave the imperial North and its hegemonic-style imperialism a new and apparently convincing discourse, also contributed to this economic dominance. Globalization—the opening of world markets—which the new ideological hegemony supported, and the collapse of communism have also contributed to that ascent. In fact, the great beneficiary of globalization was China, which, with its developmental strategy based on a competitive exchange rate and low wages, began to export its manufactured goods worldwide; and, between 1980 and 2010, it experienced the most extraordinary growth of all time: an average annual growth rate of 10 percent, which multiplied its gross domestic product (GDP) by seventeen, while Brazil and the rich countries just doubled theirs over the same period. The Liberal-Dependent Pact, which became dominant in Brazil in 1991 after the the failure of President Fernando Collor de Mello and his finance minister, Zelia Cardoso, can only be understood in the context of the great transformation undergone by world capitalism during the 1990s. In the postwar period, we had the thirty golden years of capitalism—a period of great economic growth, financial stability, development of social rights and, surprisingly, a reduction of inequality in the rich countries. In the 1970s, however, this period of capitalism waned for a number of reasons: the growth rate fell in the United States, and the United States faced some255

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thing new, stagflation (high inflation combined with stagnation); the workers’ movements for higher wages reduced profit rates; social movements demanding rights, starting with the student revolution of 1968, scared the conservatives; and the newly industrialized countries (NICs) began to export manufactured goods to the rich countries. The capitalist class (including the rentier capitalists, who live on interest, rents, and dividends) associated with the professional financiers eventually triumphed with the elections of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States. In the context of globalization, a rentier, or neoliberal, capitalism then took shape. This meant the replacement of the thirty golden years of capitalism with the thirty neoliberal years, characterized by economic financialization—the explosion of fictitious capital for rentier capitalists and of financiers who managed their wealth and received high commissions and bonuses in return. This was a regressive stage of capitalist development that would have severe problems thirty years later, during the global financial crisis of 2008.1 As Luiz Gonzaga Belluzzo (2000) notes, there was then established a “new world order,” which is not a spontaneous phenomenon. On the contrary, it is the result of the unrestrained power of the United States: the rules of widespread commodification and of universal competition, presented as natural forces, actually reflect the prevalence of the interests of the dominant country over the rest of the world. (p. 50)

Neoliberalism arrived late in Brazil and ended quickly. The 1991 LiberalDependent Pact prevailed in Brazil between approximately 1991 and 2005. It was born out of the collapse of the Cruzado Plan and the resulting power vacuum that existed between 1987 and 1990. For the capitalist elite, particularly the industrial entrepreneurs, the fundamental political options were always whether it should align itself with the workers and the professional middle classes to form a developmental and social-democratic class coalition, or align with the elites of the rich countries and form an economically liberal and dependent class coalition. In the first case, the local elites must accept higher taxes and higher state expenditures on education, healthcare, and other social services; but as a trade-off, assuming the policymakers are reasonably competent, the capitalist elite should be able to count on a competitive exchange rate, which would ensure access to the domestic and international markets by the competent business enterprises. In the second case, the local elites pay less taxes and have greater approval from the elites in the rich countries, pleased by their submission, but the country ceases to be a real nation, unable to have a strategy of national development, and its growth prospects will be mediocre, not enough to catch up to the developed nations. In the case of a big country like Brazil, which has a sizable domestic market, to opt for an alliance with the Northern elites would have only

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made some sense to the productive capitalist class during the Cold War, when there was a real fear of communism. But, even during that period, the choice of the industrial entrepreneurs and the military was developmental or defined by economic nationalism. During the 1990s, however, in the context of the Liberal-Dependent Pact, an alliance with the Northern elites began to make sense to most of the business community, and not only to the rentier capitalists (and the financiers who receive commissions from them). Paradoxically, this subordination did not make sense to the industrial business entrepreneurs or even to the financial sector, particularly the big retail banks that depended on the growth of the domestic market. But the neoliberal ideological hegemony that prevailed at that time encouraged the Brazilian bourgeoisie to be part of the world global elites. This is why Brazilian entrepreneurs exhibited constant ambivalence and contradictions, which may be defined by an oxymoron: national-dependency. Sometimes they were nationalist and developmental, but at other times they yielded to the ideological hegemony of the rich countries. From the 1980s Crisis to the Washington Consensus

In order to understand the neoliberal domination that was established in Brazil at the end of 1991, we must go back to the great foreign debt crisis of the 1980s, which severely debilitated the Brazilian state and the populist economic policies that had prevailed in Brazil since José Sarney had taken office as president in 1985. We must also consider the new neoliberal hegemony that was established in the North with the elections of Margaret Thatcher in Britain in 1979 and of Ronald Reagan in the United States in 1980. The foreign debt crisis resulted from the growth with foreign savings policy, an approach adopted by President Ernesto Geisel (1974–1979), which led to the debt crisis, and soon to a fiscal crisis, insofar as the state took on the private debt, as classically happens in financial crises. The cost of the 1983 depreciation, for instance, fell almost completely on the state and the state-owned business enterprises. On the other hand, the Central Bank of Brazil had no dollars to provide to companies that needed to repay their debts in hard currency. However, since the companies had some (albeit insufficient) resources in local currency, they transferred their debt to the state and paid it with the funds they had in cruzeiros. With these funds, the state financed its own public deficit. The foreign debt was thus nationalized, and the foreign debt crisis became a fiscal crisis. I offered a systematic criticism of the Washington Consensus as early as December 1990, in a lecture at the XVIII National Economics Meeting of the Brazilian Association of Graduate Programs in Economics (ANPEC).2 The Washington Consensus emerged from the crisis of the Keynesian Con-

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sensus and the corresponding crisis of development economics, or classical developmentalism, which had been conceived in the 1940s and 1950s.3 This perspective was influenced by the appearance of a new neoliberal right, and by its affirmation as a dominant tendency, based on the contributions of the Austrian school (Friedrich Hayek, Ludwig von Mises), monetarists (Milton Friedman and Edmund Phelps), of new classics related to the rational expectations (Robert E. Lucas Jr. and Thomas J. Sargent), and of the public choice school (James M. Buchanan, Gordon Tullock, and William A. Niskanen). These theoretical views, tempered with a certain degree of pragmatism typical of economists working in the great international bureaucracies, were shared by the US Treasury Department and, consequently, by the International Monetary Fund (IMF) and the World Bank, multilateral agencies that, in practice, are subordinated to the Treasury. According to the Washington Consensus, there were two basic causes of the Latin-American crisis: (1) the state’s excessive growth, manifested in protectionism (the strategy of import-substitution industrialization), excessive regulation, and numerous state-owned companies, many of which were inefficient; and (2) economic populism, defined by the inability to control the public deficit and to keep the wage demands of both the private and public sectors under control. Consequently, the existence of exchange rate populism, which resulted in irresponsible current account deficits, was forgotten. Based on this evaluation, in the short term the reforms should fight economic populism and achieve fiscal balance and stabilization. The medium-term, or structural, recipe would be to adopt a market-oriented growth strategy, that is to say, a strategy based on reducing the size of the state, liberalizing international trade, and promoting exports. According to John Williamson (1990c), the Washington Consensus comprised ten reforms. The first five reforms could be summarized into one: promoting the economy’s stabilization through fiscal adjustment. The five remaining reforms are different ways of affirming the idea that the state should be strongly reduced. This list of reforms is, therefore, consistent with the incorrect diagnosis that the Latin-American crisis stemmed from fiscal indiscipline (economic populism) and statism (nationalist protectionism). The Washington Consensus said nothing about the mistake of trying to grow with foreign debt. In addition, the analysis had no historical perspective, as is typical of neoclassical and neoliberal thought. It thus ignored the particularly important role of the state in the early stages of economic development, and in the stage of the capitalist revolution that Brazil had completed in the 1970s. The Washington Consensus obviously suggested or accepted the neoclassical and liberal absurdity that it is enough to stabilize the economy through fiscal adjustment, to liberalize it, privatize it, deregulate it, and to guarantee good institutions (understood as those that guarantee property and contracts) for a country to grow satisfactorily and steadily.

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When President Collor de Mello took office on March 15, 1990, Brazil was suffering from hyperinflation. He and his finance minister, Zélia Cardoso de Mello, immediately decided on a frontal and dramatic attack on the problem. The Collor Plan was an orthodox stabilization policy that involved draconian fiscal and monetary measures, including the capture of private savings by the state, a drastic fiscal adjustment, and a price freeze. According to the orthodox vision, this plan would necessarily put an end to high inflation, which had been transformed into a hyperinflation over the previous months. It had become hyperinflation because it surpassed 50 percent per month, reaching 82 percent in February 1990. But the authors of the plan made a big mistake: they did not include the conversion table of the business enterprises’ accounts payable. This table was essential because, without it, the enterprises that bought on credit and sold for cash in the shorter term would have great losses on the day of the freeze because the suppliers would have accounted for future inflation in their prices, whereas the opposite would happen to the enterprises that bought for cash and sold on credit. Those that sold on credit would have adjusted their prices according to the predicted inflation for the following days or month. If the prices were frozen without annulling the adjustments for predicted inflation (this is what the conversion table could have done), the imbalances in the relative prices would be huge. Some firms would experience high losses, and they would have to increase their prices, no matter what, just to survive. This is what happened with the Collor Plan. Given the hardship caused when business enterprises were prevented on the first day of the price freeze from maintaining their profit margins, those businesses that had lost money due to the plan (about half of the total) increased their prices again. Also, the practice of indexation was restored, and the plan failed. At the end of the year, inflation was 20 percent per month. In May, when the monthly inflation rate was still around 4 percent per month and Brazilians were sure that inflation had been controlled, although in a Draconian way, Yoshiaki Nakano and I wrote a paper, “Hyperinflation and Stabilization in Brazil: The First Collor Plan,” which argued that the plan had unfortunately failed due to the lack of a conversion table for accounts payable. We presented it in June 1990 at the International PostKeynesian Conference in Knoxville, Tennessee. In July of that year, we discussed the paper with economists at the Brazil desks of the IMF and the World Bank, in Washington, DC. They disagreed, as they were certain that, given the monetary and fiscal adjustments, the plan would be successful. Their mistake was that they knew nothing about inertial inflation. The Collor administration is widely identified with the submission of Brazil to the Washington Consensus or, more generally, to liberal orthodoxy.

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But there was no such submission on the part of Collor’s first economic team, led by Cardoso de Mello, Ibrahim Eris, and Antônio Kandir. This was a “heroic” period because, in addition to creating a brave stabilization plan (that was nevertheless mistaken because it lacked a mechanism for neutralizing inertial inflation), the team attempted to negotiate the Brazilian foreign debt in a sovereign manner.4 The Great Mistakes

It was only after a liberal economic team replaced the developmental one that this subordination materialized. Over the following years, liberal economists would dominate Brazil’s economic policy. During the period of fast growth of the Brazilian economy, between 1930 and 1980, the liberals and, later on, the neoliberals were deprived of political power; they only took power during brief periods, in 1945, 1954, and in 1960, usually in response to economic crises and military coups, with the support of liberal politicians. In 1991, with the background of the 1987 collapse of the Cruzado Plan, which had been managed by populist economists, Brazil surrendered to the North, while the Brazilian elites abandoned developmentalism and embraced economic liberalism, a semicolonial condition that presidents Lula and Dilma Rousseff tried to reverse, but without success. From 1991 on, in the context of the Liberal-Dependent Pact and of a quasi-stagnant economy, the country returned to the semicolonial condition that it had been in before 1930. Collor attempted to attack inflation by adopting a program of neoliberal reforms, and made two great and lasting mistakes by engaging in trade and financial liberalization. Brazil was not ready for financial liberalization, which is a permanent source of financial instability. It did seem ready for trade liberalization, as its manufacturing industry was no longer an infant industry. But trade liberalization eventually proved to be a long-term mistake because it unwittingly dismantled the mechanism that had been neutralizing the Dutch disease. I call this mechanism, which had been embedded in the Brazilian commercial system, the “Delfim Netto mechanism for neutralizing the Dutch disease.” The previous mechanisms that Brazil had been using since the 1930s were based on multiple-exchangerate regimes that included an appreciated rate for commodity exports, resulting in a disguised tax that the indignant exporters called confisco cambial. The Delfim mechanism involved a disguised export tax as well, but it also included high import tariffs and export subsidies for manufactured goods. As I already observed in the Brief Theory 7, regarding the Dutch disease, an export tax on the commodities that create the disease is the correct instrument for neutralizing it. This tax must be equivalent to the

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seriousness of the disease, that is, to the relative difference between the industrial and current equilibriums. If, for instance, the industrial equilibrium were R$3.10 per US dollar and the current equilibrium R$2.50 per dollar, and the only product that was creating the disease was soybeans, a tax of R$0.60 on each dollar’s worth of exported soybeans would neutralize the Dutch disease. Here’s how this worked. The Delfim Netto mechanism, which I summarized in Chapter 13, was based on an average tariff of 45 percent on all imported manufactured goods and an average subsidy of 45 percent on the exports of manufactured goods. This meant that the Brazilian currency was 45 percent more depreciated for imports as well as exporters of manufactured goods; or, viewing it from a different perspective, it meant that commodity exporters were in effect paying a 45 percent tax on the sales prices of their goods (amounting to about 30 percent of the post-tax prices). Another example also shows how the mechanism worked: Suppose the nominal exchange rate in a given year in the 1970s or 1980s was twenty cruzeiros per dollar. For the importers and exporters of manufactured goods, that exchange rate would have actually amounted to twenty-nine cruzeiros, as those extra nine cruzeiros represented the 45 percent tax that the commodity producers paid on the twenty cruzeiros. So the commodity export tax was 9 cruzeiros per 20 cruzeiros worth of goods exported. However, the 45 percent tax on the commodity prices was actually too much. My research and experience indicate that the Dutch disease in Brazil could have been neutralized with a tax of around 20 percent. A small current account surplus is a good indication that a country with a moderate Dutch disease, as is the case with Brazil, is neutralizing it. When exports of manufactured goods were high and the country had a small current account surplus, the exchange rate fluctuated around the industrial equilibrium. But such periods were rare. Most of the time, the real exchange rate was around 16 percent appreciated,5 which meant that, taking the price after tax, a commodity export tax of 20 percent would have neutralized the disease and kept the exchange rate floating around the competitive equilibrium—the industrial equilibrium. Given that the Collor administration reduced the import tariff from 45 to 12 percent and eliminated the manufacturing subsidy, the real (the post-1994 currency) has been overvalued by an average of about 20 percent since then, varying between 15 percent and 25 percent, according to the commodity prices. I concluded that since 1991 Brazilian manufacturing enterprises have faced a competitive disadvantage of around 20 percent relative to their counterparts in other countries who are exporting to third countries (again, varying from 15 percent to 25 percent, depending on the prices of the commodities). This disadvantage disappeared only when a balance-of-payments crisis sharply depreciated the currency, as happened in 1999 and 2002. But, given

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the tendency toward cyclical and chronic overvaluation of the exchange rate in the developing countries, the currency soon appreciated again. In relation to the domestic market, this disadvantage was smaller because it is necessary to deduct the import tariffs. If we take the average tariff today (12 percent), the disadvantage in the domestic market is around 8 percent. The lack of a conversion table for neutralizing inertial inflation during the time of the Collor Plan was the other mistake, in this case a short-term one: its immediate consequence was the failure of the stabilization plan and four more years of high inflation. As mentioned above, the dismantling of the mechanism that had neutralized the Dutch disease between 1967 and 1990 was the long-term mistake, because its evil consequence—the creation of a major competitive disadvantage for all Brazilian exporting business enterprises, except those producing commodities—remains today. And that’s after twenty-five years! This is one of the critical factors that explain the ongoing deindustrialization of the country and the unsatisfactory growth rates, which have been continuously low except during commodity booms (as was the case during 2004–2010). Unable to count on adequate profits, business enterprises do not invest, or they invest only minimally; also, private savings are low and the growth rate is quasi-stagnant. The other major factor causing quasi-stagnation in Brazil, which is ongoing, had its beginnings ten years earlier, at the beginning of the 1980s. I refer to the fall in public savings. In the 1970s, they were around 2 percent of GDP; since the 1980s, they have been negative by about 2 percent of GDP. We know that in the national accounting system total investments are the sum of private savings (domestic and foreign) and public savings. Public investments and public savings have fallen by around 4 percent since the 1970s. How much did private investments fall over the same period due to the competitive disadvantage? I would say it was by about 4 percent, given that total savings and investment fell from around 25 percent to 17 percent. These two factors causing quasi-stagnation are associated with a high preference for immediate consumption, which characterizes the Brazilian society—a preference that results in an overvalued currency in the long-term and in the preference for public social expenditures over public savings and public investments. That Brazil has been quasi-stagnant since 1980, except during the short commodity boom in the 2000s, is far from clear to most economists there; they prefer to read the international press, which insists that Brazil is growing fast, just a little less than China or India, which is not true. When they acknowledge the problem, they explain it with vague references to the insufficiency of savings, or with old explanations like poor institutions, poor infrastructure, and poor education. But these problems existed in Brazil between 1930 and 1980, when the economy was growing by about 4 percent a year. Since 1980, after these problems had faded, Brazil’s

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growth slowed to less than 1 percent a year. Among these explanations, the insufficiency of savings alone makes sense, but only if we relate it to two new factors behind Brazil’s sluggish growth rates: the fall of public savings and the lasting overvaluation of the exchange rate caused by the fact that the Dutch disease has ceased to be neutralized. Since the 1970s, the tax burden has increased from around 20 percent of GDP to around 34 percent. This means that public savings did not fall because of a lack of capacity of the state to extract taxes from the people; rather, they fell due to the decisions of politicians, under pressure from the voters, to spend more in the social area. If, additionally, we consider the absurd interest rate the Brazilian state pays on its debt, and the long-term overvaluation of the exchange rate, we can see that all these problems are associated with one other problem: the high preference of Brazilians for immediate consumption. The Subordination to the North

In the 1990s, after the collapse of the Soviet Union, the United States became fully hegemonic, while Brazil’s national revolution was interrupted and Brazilians lost their sense of being a nation. The new subordination to the North, beginning under Collor’s administration, was turned into a reality with the choice of Moreira as finance minister. With him came to power the Department of Economics of the Pontifical Catholic University of Rio de Janeiro (PUC-Rio)—a group of economists who were heterodox only regarding the theory of inertial inflation, and who, for the rest, conducted an orthodox and neoliberal policy from 1991 to 2010, particularly at the Central Bank.6 The stabilization plan of December 1991, which was supported by the IMF, marked the submission of Brazil to the Washington Consensus. And, as expected, it failed. According to the agreement, as the government increased the interest rate to stratospheric levels, it lost control over its exchange rate, which it had maintained since 1930, due to the opening of the capital account. This was one of the basic conditions imposed by the IMF for its participation in the orthodox stabilization plan. The monthly inflation rate in December 1991 was 20 percent. Relying on the fiscal adjustment already achieved, the letter of intent approved by the IMF predicted that, thanks to the increase in the interest rate, inflation would obediently decrease by a little less than 2 percentage points per month, so that a year later it would be at 2 percent per annum. This reflected a conventional monetarist vision of Brazilian inflation. This did not turn out to be the case. In December 1992, the monthly inflation rate was still 20 percent. Despite the huge fiscal adjustment of 1990, two years later there was a public deficit once again, due to the huge increase in the basic interest rate paid by the government, which hit

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more than 30 percent per annum in real terms. Meanwhile, the economy plunged into recession. In the end, this was the only “result” of the agreement with the IMF, besides an increase in foreign indebtedness. The inflation rate that was supposed to be reduced remained constant at around 20 percent per month. Through the 1991 agreement with the IMF, the country adhered strictly to the theses of the Washington Consensus, opened its economy to capital inflows, lost control over its exchange rate, and promised to make the liberal reforms that, until recently, had been considered unthinkable in Brazil. Since it was also conservative, the 1991 Liberal-Dependent Pact had the participation of industrial entrepreneurs from the start. But soon these entrepreneurs realized the incompatibility between liberal orthodoxy and economic development, and, as their interests were directly related to economic growth, they looked for an alternative. The liberal class coalition was composed of rentier capitalists; the stockholders of the big utility companies, which operate as monopolies or near-monopolies; representatives of agribusiness; and executives from the financial sector, whose power has increased extraordinarily in the last fifty years, as macroeconomic policy has become critical in all countries. In Brazil’s case, where there is chronic macroeconomic instability, that power has increased even more. In modern societies, those who are familiar with the techniques of financial management have more political power. The increased power of the financial organizations derives from their classic quasi-public role of creating money and from their knowledge of macroeconomic policy—a knowledge that became strategic in modern times. They accumulate such knowledge because they need to hire a large number of macroeconomists in order to manage their own treasuries and the wealth of their clients. Given its dependency or globalism, this liberal-dependent coalition relied on the distant, but effective support of the governments and elites of the rich countries, and on the active participation of the multinational corporations installed in Brazil. Whereas the rentier capitalists, the financial sector, and the utility companies are particularly interested in maintaining high interest rates and high monopolistic prices, the rich countries and the multinational corporations are interested in the appreciated exchange rate, which reduces the country’s competitiveness and increases the value, in hard foreign currency, of the remittances of profits, dividends, and royalties to foreign headquarters. The association, in a position of inferiority, of nationals with foreigners is not surprising, since the co-optation of local elites has always been a strategy of empire. It is based on the force of the prevailing ideology and on common economic interests. As Paulo Nogueira Batista Jr. (2008, p. 32) notes, “Hegemonic nations operate so as to benefit those who cooperate with their projects of power.”

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In this new neoliberal context, the nationalist business entrepreneurs became a silent minority, whereas the rentier capitalists, interested in obtaining high interest rates, and the financial sector that works for them, profited from the country’s macroeconomic instability to guarantee the maintenance of high interest rates, an overvalued currency, and a strong foreign dependency. But more serious than the political retreat of the industrial bourgeoisie was the alienation of Brazil’s intellectuals. Large sectors of its left-wing intellectual elite, resentful since the 1964 military coup, rejected from then on any alliance with the industrial entrepreneurs on the assumption that “it would be impossible to exist as a national bourgeoisie in dependent countries,” but that this would not be important as long as Brazil’s economic development was ensured by the investments of multinational corporations.7 By adopting this assumption, the Left jeopardized the very concept of the nation. A nation only exists when, despite the class conflicts, there is a basic solidarity among its citizens regarding competition with other nations. In the past, this solidarity was essential for winning wars. Today, it is necessary for growing and competing in the global arena. Whereas the elites of the rich countries, beginning with the United States, have been quite aware of this fact (or were until the 1970s) and are nationalist, Brazil’s economic, political, and intellectual elites have ignored this simple truth. They just want to integrate into the global system, without questioning whether they would be doing so in an autonomous or in a subordinated manner. In the early 1990s they submitted to the North.8 Notes 1. Financialization was originally analyzed by François Chesnais (1994, 1998). In Brazil, the pioneer work was carried out by Luciano Coutinho and Luiz Gonzaga Belluzzo (1998). 2. See Bresser-Pereira (1991), “A crise da América Latina: Consenso de Washington ou crise fiscal?” (“The Latin-American Crisis: Washington Consensus or Fiscal Crisis?”). 3. On this crisis of Keynesian macroeconomics and structuralist development economics, see John R. Hicks (1974), Albert O. Hirschman (1981), and Michael Bleaney (1985). 4. See Bresser-Pereira (1991), Os Tempos Heroicos de Collor e Zélia (The Heroic Times of Collor and Zélia). 5. I am assuming that the 30 percent over the total price that characterized the Delfim mechanism represented a bigger depreciation than the one ordinarily required to make the manufacturing industry competitive. 6. The finance minister was Moreira; the president of the Central Bank was Francisco Gros, and one of its directors was Armínio Fraga, who would become president of the institution in 1999.

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7. More coherent, though utopian, were the supporters of the radical dependency theory, based on the imperialist overexploitation theory. They also assumed the “impossibility” of a national bourgeoisie, but they opted for the socialist revolution, which they expected to be accomplished at that moment. 8. During capitalism’s thirty neoliberal years, once the profits of multinational corporations were no longer achieved mainly in their own domestic markets, the nationalism of the rich countries’ elites also began to suffer. Instead of coalitions including the people and the elite, which, despite the class conflicts, defined nations, we started to see in each central country the search for transnational coalitions, especially agreements with the economic elites of other countries. The great crisis of those countries since 2008 is related to this fact, but this is not the place to discuss it.

20 Tackling High Inflation: The Real Plan

The period of the 1991 Liberal-Dependent Pact was one of Brazil’s submission to the North, only interrupted by the brief administration of President Itamar Franco (1993–1994). It was a neoliberal and cosmopolitan pact that reflected the new US hegemony after the fall of the Berlin Wall and the collapse of the Soviet Union. And it was characterized by privatization, including that of monopolistic or quasi-monopolistic public services, and by the opening of all markets, including the market of Brazil’s big retail banks. But it was also during this period that Brazil’s high inertial inflation was finally brought under control, through the Real Plan, of 1994. This fact gave rise to much confusion, because its success was attributed to the Washington Consensus. But that was incorrect. The Real Plan was a strategy for neutralizing inflationary inertia that was strictly heterodox; it had nothing to do with the stabilization policies sponsored by the International Monetary Fund (IMF). Nevertheless, the neoliberal cause was strengthened because those directly responsible for the Real Plan became identified with this ideology later on. This is why Marcus Ianoni (2013) mistakenly saw in the Real Plan the “neoliberal reconstruction of state power,” which had been shaken by the great financial crisis of the 1980s and by the failure of the Cruzado Plan. The Real Plan did indeed contribute to the reconstruction of state power, but it was a heterodox, not an orthodox, stabilization plan. The two and a half years of President Fernando Collor de Mello’s administration, which ended with his impeachment for corruption in August 1992, were years of orthodox fiscal and monetary adjustments on a huge scale, combined with trade and financial liberalization. If the trade liberalization had been just a way of ending a protectionist policy, the bankruptcy of many business enterprises would have been a reasonable price to pay for that adjustment. But we know today that trade liberalization was disastrous 267

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for Brazil because it dismantled the mechanism for neutralizing the Dutch disease, creating a major competitive disadvantage for Brazilian business enterprises. As to the financial opening, this was also detrimental: from the start of the opening onward, the country was no longer in a condition to neutralize the tendency toward cyclical and chronic overvaluation of the currency. That tendency had always existed in Brazil, due to the Dutch disease and to the excessive foreign capital inflows caused by the mistaken policy of growth using foreign savings.1 By entering into an agreement with the IMF and opening the country’s capital account, Brazil gave up its monetary autonomy and, more broadly, its hard-won political autonomy. This change took place at the end of 1991, after President Collor changed his middle-of-the-road administration to a politically conservative and economically liberal one. This was the beginning of the Liberal-Dependent Pact. One year later, with Collor’s impeachment, after a popular campaign that was reminiscent of the Diretas Já campaign, Vice President Itamar Franco, a developmental politician from Minas Gerais who was firmly oriented toward the public interest, became president. He tried to restore the country’s national autonomy, but the high inflation rate that he inherited from President Collor’s administration was already 20 percent per month, decisively reducing his leeway. At the end of 1993, Brazil’s economy was still suffering from a deep macroeconomic imbalance. The associated instability, which had started in 1979, was characterized by high inflation, high interest rates, and widespread unemployment. Only the balance of payments was in equilibrium, thanks to the exchange rate depreciation of 1983, sustained during the following ten years by the crawling peg system, which had been adopted in 1964. The high trade surpluses achieved during that period, and the debt negotiation that resulted in the Brady Plan, seemed to indicate that the foreign debt problem was being solved. President Franco made controlling inflation the top priority of his administration. As a result, this extraordinary public figure changed his finance minister four times in two years. Only the appointment of Fernando Henrique Cardoso restored the hope of controlling inflation, when this member of the group of economists who had developed the theory of inertial inflation returned to the government, and the Real Plan began to be outlined based on the theory of inertial inflation.2 The Real Plan

The Real Plan was based on the theory of inertial inflation, which I described in Chapter 15. This theory, despite having been discussed since the early 1980s, and despite being simple—after all, it explained inflation by the formal and informal indexation of the economy—was still unknown

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to most of the economists who studied the Brazilian economy during that period. The failure of successive stabilization plans—there were twelve of them between 1980 and 1993—was basically due to this unawareness. The stabilization plans of Antônio Delfim Netto in the early 1980s, the “Plano Feijão com Arroz” (Rice and Beans Plan), the three plans of the Collor administration—all of them ignored inflationary inertia. In the case of the Collor Plan, the fundamental cause of its failure was not having neutralized inflationary inertia. The Cruzado, Bresser, and Verão (Summer) Plans acknowledged the inertial nature of inflation in Brazil and correctly neutralized it through a table of corrections for the accounts payable of business enterprises, but they were defeated by the populism of President José Sarney’s administration (1985–1990), which prevented them from being implemented with the necessary fiscal adjustments. Of the twelve stabilization plans, roughly five included a price freeze; some of them were heterodox, most of them were orthodox. All of them failed.3 By the time Cardoso took over at the Ministry of Finance, a new price freeze had become politically unfeasible. The previous experiences, some of which were negative, such as the Cruzado Plan (due to its utter failure) and the Collor Plan (due to the confiscation of savings), had traumatized society and the financial market. If a price freeze under those conditions was not viable, and if the government was not willing to wait for hyperinflation to eliminate the gaps in price increases and thus neutralize inertial inflation, and since it was not willing to dollarize the economy (as a few irresponsible economists and the IMF proposed), there was no alternative but to neutralize inflationary inertia through an indexed currency or through an indexed currency that could follow the dollar. Pérsio Arida and André Lara Resende (1984) originally proposed that policy. It was an attempt at the otenização of the economy: stabilization through the transformation of all prices into an “indexed money” (the OTN) based on National Treasury Bonds, which is indexed to the dollar, followed some months later by a monetary reform introducing a new money. Two years later, when those two economists took part in the 1986 Cruzado Plan, they understood that a stabilization plan with prices temporarily indexed to the dollar money would be hard to explain and hard to get adopted, so they opted for a price freeze. When I was developing the Bresser Plan with my team, a similar idea to the “otenização” was discussed with Francisco L. Lopes and Yoshiaki Nakano, but we reached the same conclusion. The Bresser Plan failed because it was an emergency plan set up in a moment of such deep imbalance in the relative prices, in which a simple conversion table could not satisfactorily neutralize the inertial component of the high inflation, and because I did not manage to convince the government to make the necessary fiscal adjustment. After this, my team and I considered applying the idea of an indexed currency to a second plan, which was adopted at the beginning of 1988.4 Because of a lack of political support

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for the necessary adjustments, I decided to resign before that plan could be implemented.5 My conclusion that it was impossible to control high inertial inflation under the Sarney administration was confirmed over the subsequent two years. As mentioned above, in the last full month of that government (February 1990), the monthly inflation rate had reached 82 percent. In the first fifteen days of the following month (still under the Sarney administration) it was headed for 100 percent. We were not in high inertial inflation anymore, but in hyperinflation. In June of 1993, when the inflation rate was above 20 percent per month and the Franco administration was paralyzed by this high inflation, Cardoso became finance minister. There was new hope, given the political support he received and the fact that he summoned the excellent team of economists that had developed inertial inflation theory. As the first positive result of the existence of a new and competent economic team, the irrational attitude against new heterodox plans lost power; this attitude had dominated the country after the failure of the Collor Plan. It was clear that the new team would soon adopt some kind of shock therapy, and that it would probably combine orthodox and heterodox economic policies. It was also clear that the major component of the high and persistent inflation in Brazil was inertia, so the shock should be able to neutralize this inertia. The conventional explanation relating inflation to the budget deficits, although valid in the case of low inflation rates, had proved to be recurrently incorrect for Brazil, particularly in the previous years. The budget deficit was zero in 1990 and 1991, but inflation remained high. Another conventional wisdom had also proved to be mistaken: the one that attributes inflation to an increase in the money supply. Even the monetarist (neoclassical) economists now recognized the passive or endogenous nature of the money supply when inflation is inertial.6 The Real Plan, which terminated Brazil’s high inflation on July 1, 1994, had started to be developed in October 1993. The price freeze strategy was politically exhausted. Therefore, when the Cruzado team was brought back to the government, the Real Plan that it devised was intended to neutralize the high inertial inflation through a monetary reform that would immediately reduce inflation. The original idea was to have two coexisting currencies, as had happened in Bulgaria in the 1920s: the old currency, for which the inflation rate would be high, and a new indexed currency. This dual system would allow economic agents to convert their contracts, voluntarily and according to the market, from the old currency, in which the contracts included the expectation of inflation, into the new currency. Given that the new currency was pegged to the dollar, after the conversion the contracts were no longer required to include the inflationary expectation. This way, on the day that the monetary reform would replace the old currency with the new (July 1, 1994), the inflationary pressures—resulting from the imbal-

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ances in the relative prices, which changed in a lagging and unsynchronized but necessary way—would be neutralized. The relative prices in the new currency would already be balanced. There would be no gaps between their rates of increase because during the three months of double currencies they would have been increasing every day, according to the variations in the exchange rate. The economic team of the Real Plan, instead of issuing a second currency, established a daily currency index that was equivalent to a currency, the Unit of Real Value (URV), which reflected the present inflation because it was tied to the exchange rate. Actually, it was not a currency at all, as the payments would continue to be made in the old currency, the cruzeiro. But, since it was a currency index, the contracts, including the sales on credit and the wages, could be voluntarily converted to it in the four months during which the URV existed, rendering the use of the conversion table or tablita unnecessary on the day of the monetary reform, when the old currency became extinct. The Real Plan was divided into four stages. In the first stage, between December 1993 and February 1994, a fiscal adjustment was carried out, based on cuts in public expenditure, including the social expenditure whose constitutional percentage in relation to the total expenditure was partially suspended, and on an increase in taxes, which led to a balanced budget for 1994. Congress, after some initial opposition, approved the fiscal adjustment that the economic team had defined as a prerequisite to the introduction of the second stage of the program. The second stage of the plan, between March 1 and June 30, consisted of neutralizing the inflationary inertia through the mechanism of the URV. All the prices, including wages, long-term contracts, rents, and financial investments, now had two prices—the nominal price in cruzeiros and the price in URVs—as this unit of value was corrected daily by mini-devaluations of the exchange rate made according to the current inflation rate. Only the wages were necessarily converted to the new index according to their average value in the prior months, and there was no resistance to the government’s decision. Because the contracts were converted into URVs, the prices in URVs remained stable, whereas the prices in cruzeiros changed every day—as happens under hyperinflation and full dollarization. As predicted, the market ensured that the conversion of cruzeiros into URVs was made according to the average real value of the contracts, rather than through their peak nominal values (as was done with the contracts in cruzeiros). Through this mechanism, economic agents were able to achieve, in those four months, a reasonable equilibrium of the relative prices, which no longer had the gaps that are normal with inertial inflation. The Real Plan thus neutralized the inflationary inertia that had resulted from the lagging indexation of prices and, therefore, from continuous but frustrating attempts to balance the relative prices.

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The third stage of the plan was the announced shock theory (i.e., monetary reform), which on July 1 transformed the URV into the new currency, replacing the cruzeiro altogether. The inflation rate, which had reached 45 percent per month, was immediately reduced almost to zero. The fourth stage, between July 1 and December 31, saw the plan’s consolidation. In principle, it should have included an additional fiscal adjustment, but fear of failure led the government to pursue further (and unnecessary) trade liberalization and, particularly, to promote a brutal increase in the interest rate, which caused a strong exchange rate appreciation. This was immediately used as an exchange rate anchor against inflation. Consequently, in the following days, the new currency, which should have been tied to the dollar in a one-to-one ratio, strongly appreciated. The Central Bank then profited from the pressure for the sale of dollars and purchase of Brazilian reais (reals), which immediately took place, to consolidate the currency’s stabilization. In addition to the original mechanism for neutralizing inertia, the URV, the government adopted an old mechanism for controlling inflation, the exchange rate anchor, which many economists (who have never understood the theory of inertial inflation) regard nowadays as the fundamental component of price stabilization. This is not true, but of course it did help to control inflation, and it would not have been a mistaken policy if this mechanism had not been eternized and then misused. In the following years, the use and abuse of this anchor, always in the name of the Real Plan, would have disastrous consequences for Brazil’s economy. While the Central Bank maintained the policy of mini-devaluations, the perverse combination of a high interest rate and an appreciated exchange rate would keep the economy quasi-stagnant, jeopardizing investments. Meanwhile, domestic and foreign debt increased explosively, impelled by the interest rate. The fluctuation of the real would only take place later, in January 1999, amidst a balance-of-payments crisis caused by this overvaluation, which those responsible for economic policy did not have the courage to correct when it appeared. The Cardoso Administration

When Cardoso became president in January 1995, inflation was already under control, and there were great hopes. These were mostly confirmed when the new government expanded and rationalized its expenditures on social services, made advances in the area of human rights, began the 1995 Managerial Reform of the State, implemented the Social Security Reform, increased the prestige of Brazil abroad through a balanced diplomacy, and always acted according to high ethical standards. But the Cardoso administration did not succeed in resuming economic growth because it never

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faced up to the problem of the highly appreciated exchange rate, which it inherited from the Real Plan. There is no worse inheritance for a government than an appreciated currency left by the previous administration. The rate has to be brought back to equilibrium, but this is always a highly unpopular policy because it temporarily increases inflation and temporarily reduces the real revenues of the entire population. But if the government does not face the problem, the country’s competitiveness will drop; opportunities for lucrative investments will decline; exports will drop; imports will rise; and the country will not only face stunted growth, it will also be subject to a balance-of-payments crisis. This is what happened during the Cardoso administration. Dilma Rousseff also started her administration with a highly appreciated currency that, as we will see, was the main cause of low growth under her watch. It did not lead the country to a crisis only because she managed to depreciate the real (although insufficiently), and because the country’s international reserves were large. Cardoso clearly realized that, in view of the global economy, Brazil could not even think about acting like an independent agency, shutting itself down, and going back to the model of industrialization through import-substitution. But he made a mistake by not rejecting the dominant neoliberal and globalist ideology, according to which integration into the world economy should not be a competitive integration, but rather a subordinate integration, aligned with the interests of the multinational corporations and their home governments. The adoption of a strategy of growth with foreign savings, which involved exchange rate populism and only served the interests of rich countries, and the amendment to the Constitution opening the public services to control by foreign capital are two examples of what I am describing. Since the beginning, the Cardoso administration managed to obtain a substantial parliamentary majority, insofar as it had the support of the most important right-wing and neoliberal party at the time, the Liberal Front Party (PFL); of a social democratic party, the Socialist Popular Party (PPS), heir to the old Brazilian Communist Party; of the always undefined Party of the Brazilian Democratic Movement (PMDB); and of the usual “parties of affairs.” With regard to the last, in the context of the presidentialism of coalitions prevailing in Brazil, presidents have no alternative but to include such parties in their congressional coalitions and to offer them government positions in exchange for their support.7 This majority empowered the government to initiate a substantial agenda of reforms—though one that right from the beginning proved to be neoliberal and dependent. It was neoliberal because it implied the privatization of state-owned enterprises that constituted natural monopolies, such as those in energy production and distribution, toll roads, and landline telephone services. And it was dependent because it withdrew the exclusive right that domestic companies had to provide public services, which is stipulated in

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the Constitution. And, lastly, it allowed, not only the privatization, but also the denationalization (i.e., sales to foreigners) of monopolistic public services and large retail banks. As Brasílio Sallum Jr. (2000, p. 25) noted, the Cardoso administration tried to build a hegemonic center-right block based on two key ideas: economically liberal reforms justified by the need to stabilize prices and an explicit project to terminate the Vargas era. In fact, there was only one fundamental idea, the same idea that had been hegemonic in the North since 1980, and that had prevailed in Brazil since 1991: the neoliberal project of reducing the role of the state and of decreasing the autonomy of the nation-state in the context of globalization (a form of capitalism gone global), which the United States deemed favorable to its hegemony. The Vargas era was the time of Brazil’s national and industrial revolution. It was the time, according to Sallum, when “the state became the organizing nucleus of Brazilian society and the lever to build the country’s industrial capitalism—a developmental state” (p. 25). And he adds: “The Cardoso candidacy was the culmination of a long process of construction of a new hegemonic block opposed to the Vargas Era [industrialization]” (p. 55). Nationalist revolutions, not only in Brazil but also in many other developing countries, mostly in Asia, had proved to be a challenge to US domination. When the United States was involved in the Cold War and in the exhausting Vietnam War during the 1960s and 1970s, it had been unable to face this second challenge. After the Soviet Union collapsed and the United States became the only imperial power, its hegemonic project, now endowed with the ideology of neoliberal market fundamentalism, became a priority, as the United States worked to assert itself over the whole world. The Cardoso administration was a victim of this situation, of this unique and fleeting moment of full neoliberal hegemony, and surrendered to it. The Cardoso administration was also unsuccessful at the economic level because it was unable to restore Brazil’s competitive exchange rate; the currency had significantly appreciated in the six months following the Real Plan. A government will only be successful with regard to the economy if it manages to keep its exchange rate floating around a competitive level at or near the industrial equilibrium, as this is the only way business enterprises will feel encouraged to invest. The economic prospects that were opening up to the country seemed to be the best possible. Through the Real Plan, which Cardoso had overseen as finance minister, prices had been stabilized; and many people—including me, while I was his minister of federal administration and state reform (1995–1998) and minister of science and technology (1999)—thought this meant that the country had finally achieved macroeconomic stability, after fifteen years of high inflation. We believed that Brazil was therefore ready to resume its economic growth.8 After all, it was expected that a candidate from a modern political party that was believed to be social democratic, as its name indicated—the Brazilian

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Social Democratic Party (PSDB)—could ensure that the country sustained balanced economic and political development without falling into the hands of the old populism, or into the hands of the new neoliberalism that came from the North. Between those two ends of the spectrum, the new government emerged as a force for hope. However, it did not work out that way. The government was not social democratic or center-left, and it did not adopt a modern developmental, non-populist policy. Instead, it opposed developmentalism and the national option. Sallum noted that there was a “liberal-developmental” current in the Cardoso administration, but it did not prevail. In his words (p. 35), “Liberal fundamentalism remained as the axis of economic policy.” This was made easier by the confusion that engulfed the Brazilian entrepreneurial class, which was also under the influence of the new neoliberal hegemony. Therefore, although the government withdrew its preferential treatment for domestic business enterprises, the industrial entrepreneurs, with rare exceptions, remained silent or even lent their support. The Cardoso administration gave full priority to the policy of consolidating price stabilization, ignoring the need to reestablish an exchange rate equilibrium. Consequently, not only did this policy fail to spark the resumption of growth, the economy eventually plunged, in 1998, into a huge balance-ofpayments crisis. Since its earliest days, in January 1995, the government submitted to the principles of the Washington Consensus, then prevailing throughout the world. For this reason, it dramatically raised interest rates, with the intention of using exchange rate overvaluation as an anchor against inflation. As a result of this policy, the overvalued currency boosted the consumption of imported goods, discouraged private investment, and prevented Brazil’s foreign accounts from balancing. The high interest rate, apart from attracting foreign capital, appreciating the national currency, and acting as a disincentive to investment, perversely prevented the country from achieving fiscal balance, given the weight of interest payments in the state’s expenditure. The exchange rate did not return to the industrial equilibrium level (at which it had been during almost all of 1930–1990) for a number of reasons. First, since the trade and financial opening carried out by the Collor administration, the country had ceased to neutralize the Dutch disease, as it was no longer imposing a disguised tax on the exports of commodities that had given rise to the Dutch disease—the so-called exchange rate confiscation. Consequently, the lack of an export tax (the correct way of neutralizing the Dutch disease) shifted the exchange rate from the industrial equilibrium to the current equilibrium. Second, from 1995 on, the government’s policy of using the exchange rate as an anchor to control inflation and its policy of growth with foreign savings (which jointly represented exchange rate populism), led the country to a current account deficit, the

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substitution of foreign for domestic savings and, eventually, to the 1998 balance-of-payments crisis. As a result, the process of deindustrialization, which was already happening in the 1980s due to the great foreign debt crisis of that decade and to high inertial inflation, was reinforced insofar as the exchange rate became chronically overvalued. And it was therefore overvalued over the long term. Productivity did increase during that period, but this was not due to Cardoso’s reforms; rather, as David Kupfer (2005, p. 132) observes, the higher productivity was due “to a strong increase in the propensity to import, mainly inputs and intermediate goods, and to the discontinuation of the production of certain goods with greater technological sophistication.” Over the eight years of the Cardoso administration, the average gross domestic product (GDP) growth rate was only 2.1 percent, which meant an annual per capita income growth rate of around 1.0 percent. The country thus remained almost stagnant. During its first four years, the Cardoso administration faced an overvalued exchange rate, huge current account deficits reaching 4 percent of GDP, and high interest rates. That period ended amidst a severe balance-of-payments crisis. This crisis, whose immediate cause was the suspension of the rollover of Brazil’s foreign debt by the foreign creditors, both public and private, was clearly related to the country’s high rate of indebtedness. At the end of 1998, the ratio of foreign debt to exports more than quadrupled. Immediately after his reelection, in January 1999, in the middle of a major financial crisis, the president finally let the exchange rate float. The real depreciated by roughly 30 percent in real terms, and the country seemed to be headed again toward a macroeconomic equilibrium and, possibly, to a resumption of development. Despite the fact that the balance-of-payments crisis of 1998 and the resulting exchange rate depreciation were directly related to the policy of growth with foreign indebtedness (or foreign savings) and to the policy of using the exchange rate as an anchor to control inflation, the economic authorities soon forgot the scare that the crisis had caused. So, the government retained those same economic policies, which, combined with the maintenance of high interest rates and the non-neutralization of the Dutch disease, led once again to an appreciation of the currency. As a result, the ratio of foreign debt to exports remained at a level above four times what it had been before. Given this high rate of foreign indebtedness, the stagnant economy, and, in the second half of 2002, the new political threat represented by the probable election of the Workers’ Party (PT) candidate, Luiz Inácio Lula da Silva, it was not surprising that the country once again faced a second balance-of-payments crisis at the end of the year. The IMF’s prompt help prevented the worst, but, at the same time, it confirmed a usually forgotten truth: international creditors and the IMF itself are only concerned with and only talk about public deficits and inter-

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nal debt. But when a financial crisis occurs in a developing country, it always occurs on the foreign side, and it is always a balance-of-payments crisis. The crisis breaks out after a bubble of foreign credit to the country is formed, and then is “solved” by foreign savings. When the current account deficit and the foreign debt become too high, and thus too risky from the standpoint of the international creditors, a crisis erupts. But it is never the debtor country that declares a default. It is the international financial agents who suspend the debt rollover and, if there is no intervention by the IMF, the agent of last resort, default becomes unavoidable. The second balance-of-payments crisis the country underwent during the Cardoso administration reflected the perverse macroeconomic “equation” that was then adopted (high basic interest rate–appreciated exchange rate) with the support of Washington and New York, that is, with the support of the US government and the international financial system. The high interest rate prevented private investment and caused an increase in the public deficit. All of the government’s efforts to reduce public expenditure had little effect on the public deficit, due to the weight of the interest rate, but they eventually caused an increase in the tax burden and a reduction in public investments. In the 1990s, the tax burden increased by about eight percent, reaching a level incompatible with the stage of the country’s development. But at least half of this increase was applied to the payment of interest on the debt. Meanwhile, the rate of public investment dropped by roughly one percentage point, to around 2 percent. That was a huge drop: during the entire period of the country’s vigorous development, until 1980, this rate averaged 5–6 percent.9 Thus the economic and financial results achieved by the Cardoso administration were not good. (That does not include the Real Plan. Although it was Cardoso’s work, it was work he had done under the Franco administration.) But we cannot deduce from this performance that the government had failed overall. Major advances took place in the social area and in the area of human rights. Social expenditure increased and the poor were able to rely on broader social coverage. Actually, the process of reducing inequality started during the Cardoso administration, but the Lula administration boosted the process with its minimum wage policy and the increase in the number of beneficiaries of the “Bolsa Família” (“Family Allowance”). The ethical standards of the government had never been so high. Democracy was respected and reaffirmed. Cardoso’s great prestige among the Brazilian people is an indication of this fact.10 The voters behaved in an apparently paradoxical way, praising their president but criticizing the high unemployment rates that characterized his administration, and thus refusing to vote for the candidate that represented the continuity of such an administration. This behavior is only apparently paradoxical, however, because Cardoso impeccably embodied the presidency during those years. In a dif-

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ficult international setting, he showed dedication to the public interest and a great ability to compromise. This is the reason why Brazilians respect and admire their former president. The main criticism that his administration repeatedly received from the opposition—that he was not devoted to social problems—proved to be false. This government was social democratic in the social area, as it increased the tax burden and expenditures in the social domain. For instance, when Portugal and Spain became democratic and were governed by social democratic parties led by Mário Soares and Felipe González, respectively, the tax burdens required to finance their increases in social expenditure grew significantly (Maravall, 1993). In the eight years of the Cardoso administration (1995–2002), the tax burden grew from 27.9 percent to 33.4 percent of GDP, and part of these additional funds were spent on social programs in the fields of education, healthcare, minimum incomes, social care, agrarian reform, and assistance to small rural producers; the rest was spent to cover the growing interest payments. We should recognize that, although the country’s social structure was still essentially unfair at the end of Cardoso’s administration, there was significant progress in this area. Infant mortality dropped from 48 to 30 per 1,000 live births. The illiteracy rate dropped from 19 percent in 1991 to 13 percent in 2000. The national system of student evaluations that was installed during that time—comprising the National High School Exam (ENEM), also called “Provão,” and the National Exam for the Assessment of Student Performance (ENADE)—remains as a landmark of national education. I think that the Management Reform of 1995, in which I took part, will be considered a landmark of Brazilian public administration. At the political level, the president proved to be a democrat respectful of human rights, forbearing, and always willing to discuss and compromise. And in the ethical domain, he was an example for the whole country. His wife, Ruth Cardoso, was always with him, but she shined in her own right: her contributions to the regulation and development of the third (i.e., nonprofit) sector, whether service organizations or social accountability organizations, were invaluable. The Second Washington Consensus

The most general cause of the unsatisfactory performance of Brazil’s economy after the Real Plan was the exchange rate overvaluation supported by two policies: the pursuit of growth with foreign savings and the use of a high exchange rate as an anchor against inflation. The latter has largely been employed since 1999, when the policy of currency mini-devaluations (or “crawling peg,” which had guaranteed the equilibrium of the exchange rate since 1964) was replaced by the inflation-targeting policy. “Foreign savings” is one of the euphemisms of economic theory for a current account deficit.

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Growth through the use of foreign savings means that the country will try to accelerate its growth by adding foreign savings to domestic savings, thereby increasing the country’s rate of investment (given that domestic savings plus foreign savings equals total investment). It is a policy based on the mistaken assumption that the foreign constraint should be overcome by foreign indebtedness, rather than by the adoption of an appropriate exchange rate and an increase in exports. Once the Brazilian government made this decision, a country that had a current account deficit near zero in 1994 began to experience increasingly larger current account deficits, which were financed by loans and direct investments. The result, however, was not an increase in the rate of investment and growth, but an artificial increase in actual wages and consumption. This happened because the capital inflows appreciated the domestic currency and thus reduced the investment opportunities focused on the export of manufactured goods. On the other hand, the interest rate was kept at a very high level “to fight inflation.” In fact, there was no reasonable explanation for the Cardoso administration’s requirement that real interest rates in Brazil remain above 12 percent per annum, while other countries with similar levels of development had interest rates that were one-fifth to one-quarter as high. This high interest rate was also meant “to attract capital,” although this capital, instead of being added to domestic capital, ended up replacing it; and it financed consumption, rather than production. Actually, besides dampening the rate of investment, this interest rate policy increased income transfers to rentier capitalists, increased public expenditure, and irresponsibly augmented the public debt. This perverse macroeconomic model based on a high interest rate and an appreciated exchange rate led to an increase in financial instability and to low growth. But the system had the support of the rich countries, which were profiting from it. The high interest rate benefited Brazilian and foreign rentier capitalists. The appreciated exchange rate benefited the foreign exporters to Brazil; indirectly, it also benefited Brazilian rentier capitalists, insofar as it was through exchange rate appreciation that inflation was kept low and the real interest rate (the remuneration of the rentier capitalists) was kept high. In the meantime, the high interest paid by the state was around 6 percent of GDP, which resulted in an increase in the tax burden and in a reduction in public investments. The two most general causes of Brazil’s poor economic performance in the 1990s were the new government’s uncritical acceptance of trade liberalization, which dismantled the mechanism that neutralized the Dutch disease, and what I call the “Second Washington Consensus”—financial liberalization. This was the financial dimension that complemented the first consensus, which, as noted above, focused on fiscal discipline and reductions in government spending. It was at this moment that Washington defined trade liberalization, financial opening, and growth with foreign sav-

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ings as the cornerstone policies for the developing countries. The second consensus had devastating effects on those countries, including Brazil. In addition to saying that developing countries should adjust their economies and open them commercially—something that would have been reasonable for middle-income countries if there were a replacement for the mechanism that neutralized the Dutch disease, which is imbedded in the foreign trade system—the consensus said that they should also open their international financial accounts or, in other words, that they should suspend all the controls they traditionally maintained over their exchange rates. Moreover, it stated that developing countries should grow with foreign savings, that is, by having current account deficits financed by foreign indebtedness or direct investments. Brazil was back to the 1970s with regard to foreign indebtedness, but instead of the disastrous “development cum debt” of that decade, we would now have “development cum foreign savings,” as if there were any difference between the two. Concerning the policy of growth with foreign savings, the criticisms that I have been offering since 2001, particularly that the theory involves a high rate of substitution of foreign for domestic savings, is in Brief Theory 6 (in Chapter 7). On the subject of financial opening and capital flows, a wide-ranging debate was sparked among economists of developed countries—some of them critics of liberalization, others enthusiasts. The latter started from the neoclassical assumption that liberalization is always beneficial, and affirmed that financial liberalization is as necessary to development as trade liberalization, and must occur at the same time. However, Dani Rodrik (1998, p. 61) demonstrated there was no evidence that countries without capital controls grow faster. Luiz Fernando de Paula (2011, p. 108) conducted an econometric study showing that, in Brazil’s economy, “there is no evidence that the financial liberalization [of 1992] had generated positive effects in a set of economic variables (inflation and economic growth). On the contrary, empirical evidence shows that, besides having had an adverse effect on the GDP, the financial integration of Brazil generated destabilizing effects from the macroeconomic point of view, attested by its impact on the increase in the inflation rate and on the appreciation of the exchange rate.” Financial liberalization ultimately means the loss of a country’s ability to properly manage its exchange rate. Now, given the central assumption that I have been discussing in developmental macroeconomics—the historical tendency toward a cyclic and chronic overvaluation of the exchange rate in developing countries—it is catastrophic for a country to lose its ability to carry out an exchange rate policy in order to remain competitive. Nevertheless, the most serious mistake of the Second Washington Consensus lies in its promise: “We will finance your development with foreign savings, possibly with direct investment.” There lies the trap that led most

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of the already highly indebted developing countries in the late 1980s to grow anemically in the 1990s. There lies the origin of the balance-of-payments crises, whose limit case was Argentina. There lies the main explanation for Brazil having suffered two balance-of-payments crises: one in 1998, at the end of first four years of the Cardoso administration; and the other in 2002, at the end of his second term. Savings without Investments: 1994–1999

The critique of the growth with foreign savings policy was developed in view of what happened to Brazil’s economy after the Real Plan. As we can see in Table 20.1, the current account deficit (foreign savings received by a country) increased firmly in Brazil between 1993 and 1999: we had a surplus in 1992 and another one in 1999, and the foreign savings received by Brazil hit 4.73 percent of GDP. Nevertheless, the rate of investment did not increase; if we take those same two years as a reference, it actually dropped slightly: from 19.28 percent in 1993 to 18.90 percent in 1999. The current account deficits of the Cardoso administration were financed in two ways: loans and direct investments. The increase in direct investments was extraordinary. As Cardoso himself remarked in his Christmas message of 2001, until 1994 the country had received at most $2 billion a year in foreign investments; after the Real Plan, the country began to receive, on average, $2 billion a month. In fact, there was a huge increase in direct foreign invest-

Table 20.1: Foreign Savings, Domestic Savings, and Investment, 1992–2004 (% of GDP) Year

1992 1994 1996 1998 1999 2000 2002 2004

Foreign Savingsa –1.58 0.33 2.80 3.96 4.73 3.76 1.51 –1.76

Domestic Savings 20.00 20.42 14.99 14.42 14.17 14.25 16.47 19.43

Investmentb 18.42 20.75 17.79 18.38 18.90 18.01 17.98 17.67

Sources: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br; Brazilian Institute of Geography and Statistics (IBGE), www.ibge.gov.br. Notes: a. Foreign savings = current account deficit. b. Investment = the gross formation of fixed capital.

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ments during his administration.11 Nevertheless, as we can observe in Tables 20.1 and 20.2, the economy’s rate of total investment did not grow during this period. The increase went to the net income sent abroad and to consumption. Moreover, between 1994 and 1999, while the current account deficit increased, Brazil had a high rate of substitution of foreign for domestic savings; between 1999 and 2005, when this deficit dropped and became a surplus, there was a reverse substitution of domestic for foreign savings. Between 1994 and 1999, in the context of the growth with foreign savings policy, there was a strong increase in the current account deficit, or in foreign indebtedness, while the rate of investment remained practically constant. There was then, as predicted by the model that criticizes foreign savings, a substitution of foreign for domestic savings. After the devaluation of the real in 1999, the reverse process began. To the strong exchange rate depreciation was added a favorable foreign shock that doubled the country’s exports within a few years, so the current account deficit of 4.73 percent of the GDP in 1999 became a 1.65 percent surplus in 2005. Brazil thus had an external adjustment of 6.4 percent of GDP. In Table 20.2 we observe that, in much the same way that investments did not grow in the previous period, when foreign savings were rising, during the period when foreign savings were declining, investments did not fall. Actually, if we compare the average rate of investment in 2004–2005 with that in 1999–2000, there was a 3.7 percent increase, indicating a substitution of domestic for foreign savings during the second period. This was due to the fact that, as predicted by the model, exchange rate depreciation caused wages to drop, but consumption dropped as well, resulting in higher domestic savings. On the demand side, the devaluation caused the reappearance of lucrative export-oriented investment opportunities that, when financed, further increased domestic savings by the same amount. This reverse process of substitution was fueled by a fiscal adjustment beginning in 1999; by a rise in commodity exports; and by an improvement in the terms of trade from 2003 on, which produced current account surpluses (as well as welcomed public dis-savings). If this model is correct, then we should have had, during the first period, a high rate of substitution of foreign for domestic savings and, in the second period, an equally high or even higher rate of substitution of domestic for foreign savings. Table 20.2 summarizes the measurements of the two rates of substitution. In order to calculate the rate of substitution of foreign for domestic savings, I chose the period in which foreign savings were clearly ascending (1993–1999) and, to measure the reverse process of substitution of domestic for foreign savings, I chose the period in which foreign savings were clearly declining (2000–2005). As Table 20.2 shows, the rates of substitutions in both periods were very high. The rate of substitution of foreign for domestic savings between

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Table 20.2: Rates of Savings Substitution, 1993–1999 and 2000–2005 (% of GDP) Period

1993 1993–1999 2000 –2005

Investment Rate I=S=Si+Sx 20.3 17.2 17.1

∆ Foreign Savings ∆Sx(t)-∆Sx(t-1)

∆ Domestic Savings ∆Si(t)-∆Si(t-1)

Rate of Substitution ∆Si /∆Sx

2.8 –4.8

–5.9 4.7

211% 97%

Source: Ipeadata, Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. Expanded upon by the author. Note: The figures correspond to three-year averages, each centered on the middle year; 1993 is the baseline.

1993 and 1999 was impressive: 211 percent. This high rate derived from the fact that investments dropped, despite the 2.8 percent increase in foreign savings, because wages grew strongly with the Real Plan and consumption also increased, causing a strong reduction in domestic savings over the same period: by 5.9 percent of GDP. The reverse process of substitution, this time of domestic for foreign savings, which took place between 2000 and 2005, might seem surprising, but it is equally predicted by the model. In fact, the rate was 97 percent of GDP because investment remained practically the same, and the 4.8 percent decrease in foreign savings was almost fully offset by the increase in domestic savings of 4.7 percent of the GDP, insofar as wages fell. But it is not just the reduction in actual wages that explains the substitution of domestic for foreign savings in this second period; we must also consider the government’s fiscal adjustment that began in 1999,12 and the increase in exports from 2002 on. The latter is explained not only by a more favorable exchange rate, but particularly by an improvement in the prices of the goods exported by Brazil; these exports grew by 30 percent between 2002 and 2005.13 During the first period, the rate of substitution above 200 percent was exceptional. Other researchers, although without a theory to explain the phenomenon, have measured the shift in domestic savings caused by foreign savings in several countries and periods, and most of the results were around 50 percent.14 Notes

1. I develop the Dutch disease model and critique the policy of growth with foreign savings in Developing Brazil: Overcoming the Failure of the Washington Consensus (2009), which analyzes the 1994–2006 period; and in Globalization and

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Competition (2009), in which I present a theoretical treatment of developmental macroeconomics that I had been working on since 2001 and discuss the national development strategy that is an alternative to the Washington Consensus: new developmentalism. 2. The group I am referring to also included three economists who played important roles in the formulation and implementation of the Real Plan—Edmar Bacha, André Lara Resende, and Pérsio Arida. They were originally defined as “new structuralists,” given the plan’s heterodox nature; but after the plan, during the Cardoso administration, they proved to be neoclassical and orthodox economists, along with Gustavo Franco, who had a significant role in the consolidation of the plan. 3. For an evaluation of those twelve plans, see Bresser-Pereira (1996, chap.14). 4. Regarding the second plan, see Francisco L. Lopes (2004). 5. Because I was unable to obtain the necessary support from President Sarney, I resigned in December 1987. 6. See, for instance, Affonso Celso Pastore (1994). 7. “Parties of affairs” are parties that have no ideology or program, but instead exist only to promote the power and personal enrichment of their leaders. The proportional electoral system enables them to form caucuses and sell their votes to presidents in exchange for cabinet and subcabinet positions and budget amendments benefiting the congressman’s constituency. 8. Although both the government and the press thought that the Real Plan encompassed the whole economic policy of the Cardoso administration, this is an incorrect perception. The Real Plan—which neutralized inertia and put an end to high inflation in Brazil—was announced in December 1993. It began with the provisional measure that, on April 1, 1994, introduced the URV (the mechanism to neutralize inertia), and was completed with the monetary reform of July 1, 1994. On January 1, 1995, the economic management of Pedro Malan began, the results of which I analyze in this work. 9. The tax burden, in turn, was around 23 percent of the GDP. 10. According to Datafolha (a survey institute), the evaluations of the Cardoso administration in September 2002 were excellent or good for 26 percent, medium for 39 percent, and bad or very bad for 32 percent of the respondents. 11. In 2001, direct investments were higher than the current account deficit, which meant that the country was able to repay some of its financial debt. 12. Whereas between 1995 and 1998 the primary surplus was around 0 percent, during 1999–2002, it hovered around 3.5 percent and, during the following fouryear period, around 4.5 percent of GDP. 13. Source: Foundation Center for the Study of Foreign Trade (FUNCEX). 14. In Paulo Gala (2006) there is a summary of that research.

21 Liberal Rhetoric: The Trap of Overvalued Exchange Rates and High Interest Rates

Between 1980 and 1994, the fundamental problems faced by the Brazilian economy were the foreign financial debt crisis, high inertial inflation, and the unbalanced public accounts. Since the early 1990s, when the first and second problems were solved, the fiscal problem remained, but then two other problems appeared, resulting from the price stabilization of 1994 and the orthodox policies adopted since then: high interest rates and a chronically overvalued exchange rate. The price stabilization and orthodox policies adopted by the government constitute the macroeconomic trap that has prevented Brazil from growing fast and catching up. Both are associated with the growth with foreign savings policy, and the three problems together have prevented investments in production and have caused the process of financialization, which renders the returns on financial investments greater than the profit rate provided by such investments. As Bibiana Medialdea (2013, p. 443) remarks, the growth with foreign savings policy is at the origin of the financialization of the Brazilian economy: “Insofar as the financial intermediaries channeled a large portion of the resources into the financial sphere, fewer resources were made available for productive investments.” Regarding the three macroeconomic problems—the fiscal imbalance, the high interest rate, and the overvalued exchange rate—the first one was solved starting in 1999, when the government established a primary surplus target and began to achieve it. The problem of the high real interest rates was never fully solved, however. In the 2000s some progress was made, and the interest rate dropped from around 9 percent in real terms to around 3 percent in 2012. But in 2013 it began to rise again, due to a small increase in inflation and the pressure of financial markets against a government that had been weakened by the country’s growing trade deficit. As to the exchange rate, there were no improvements at all, but instead a strong deterioration. The exchange rate (which affects the competitiveness of industrial enterprises 285

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in Brazil) should be around R$3.00 per dollar, but it has been fluctuating around R$2.40. Why did Brazil have success with one problem, some progress with another, and practically none with the third? I could try to answer this question by starting from the economic liberalism or developmentalism of the presidents and their economic teams, but before doing that, we need to think in terms of the way Brazilian society regards those three problems, which are not easy to tackle because they involve the interests of consumers, businessmen, and rentier capitalists. Government leaders only feel empowered to try to solve any one of these problems when there is a reasonable consensus in civil society or the nation about the need to solve them, and about how to do it. The problem of fiscal irresponsibility was addressed with reasonable success from 1999 on because Brazilian society was convinced that it had been one of the causes of the high inflation between 1980 and 1994. The reduction of real interest rates started in 2001 because it was then that the criticism of Brazil’s exorbitant interest rates, which had prevailed since 1994, grew in consistency and intensity. By then, it had become clear that these high rates could not be explained by Brazil’s risk or by the need to fight inflation; the cause was simply the desire of financiers and rentier capitalists to keep them high. Brazilian society was persuaded of this. Yet nothing was done with regard to the third problem: the cyclic and chronically appreciated exchange rate (i.e., overvalued Brazilian currency). Despite the fact that the criticism of currency overvaluation had acquired a sound theoretical basis in 2002, and that economists had begun to study it more assiduously, progress was modest. This was essentially because, in the short term, any correction would have involved costs in terms of a temporary increase in inflation, a temporary reduction in actual wages, and the bankruptcy of business enterprises that were excessively indebted in foreign currency. There is also the fact that people have difficulty understanding how damaging an overvalued currency can be to a country’s economy. In addition, both orthodox and heterodox economists reveal a strong preference for immediate consumption (which I will discuss in chapter 23). They are not aware that this chronic and cyclic overvaluation acts as a light switch that disconnects the competent business enterprises from the market, both foreign and domestic, thus discouraging investment and savings, and preventing the accelerated growth that Brazil needs to catch up. The Mistaken Macroeconomic Tripod

In 1994, after the Real Plan stabilized the high inflation that had dominated Brazil’s economy since 1980, everybody thought that from then on the econ-

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omy would once again grow fast. But during the following years, GDP growth was frustratingly sluggish, as we can see in Figure 21.1; and as early as 1998, the country plunged into another financial crisis. As a result, the government abandoned its exchange rate policy of mini-devaluations (crawling peg), which had guaranteed the stability and the competitiveness of the Brazilian currency, the real, from 1964 to 1994, and adopted the floating exchange rate system. At the same time, it proposed an inflation-targeting program and initiated a more rigorous fiscal policy based on a primary surplus target, as noted above. The government called this set of three new measures—the floating exchange rate, inflation-targeting policy, and primary surplus—all adopted at the height of the crisis, “the macroeconomic tripod.” And with the enthusiastic support of our international competitors, the tripod became synonymous with a responsible and competent macroeconomic policy. Of the three policies in the “tripod,” I have serious objections to only one of them: the floating exchange rate. This policy implies that the government should leave the exchange rate fully free, on the theory that the market always decides better than government leaders. Besides, it would prove impossible to manage the floating-exchange-rate policy alongside the interest-rate and fiscal policies. The primary surplus is necessary in principle because it is a sign of fiscal responsibility. However, it would

Figure 21.1: Real Growth Rates of GDP in Brazil, 1995–2015

Source: Brazilian Institute of Geography and Statistics (IBGE). Note: The figure for 2015 is estimated.

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suffice just to not forget that fiscal policy should always be countercyclical. As for the inflation-targeting policy, I have no objections, provided that the inflation target is not the only one taken into account, that the government also defines an exchange rate target (albeit an informal one) and, of course, a growth target. The government would have to make trade-offs among these three targets. In practice, the tripod is part of the liberal rhetoric and a way of justifying the interests and objectives of the liberal-dependent coalition: high real interest rates, based on a policy of using high rates to attract capital; and a low inflation rate, guaranteed by those nominal interest rates and by the use of the exchange rate as an anchor for controlling inflation. This truly orthodox macroeconomic tripod is thus based on a high primary surplus, high interest rates, and an overvalued exchange rate (i.e., an overvalued currency). The two parameters for reaching high real interest rates, which favor the interest of rentiers and financiers, are a nominal interest rate as high as possible and an inflation rate as low as possible. There is little doubt that the country should have a primary surplus or, more precisely, that it should be fiscally responsible. But it should also be responsible in exchange rate terms. It is unacceptable for a developing country to renounce its exchange rate policy, as the North demands, and let the exchange rate float freely, when we know that in developing countries there is a tendency toward a cyclic and chronic overvaluation of the currency. And it is equally unacceptable for the inflation-targeting policy to dominate the two other objectives that any good macroeconomic policy should have: a competitive exchange rate and reasonably full employment. It is fine to have an inflation target, provided that those responsible for this economic policy also have an exchange rate target and a growth target, and that they are prepared to make the difficult compromises among the three of them. This macroeconomic tripod is usually justified by a well-known economic syllogism, the “Mundell-Fleming trilemma,” also called “the impossible trinity.” This states that it is impossible to have at the same time an interest rate policy, capital mobility, and a fixed exchange-rate regime (exchange rate policy). To arrive at this conclusion, and thus propose abandoning the exchange rate policy, the trilemma starts from two assumptions: that having an interest rate policy is essential and that capital mobility is a given, and we cannot even think about capital controls. Therefore, it concludes, the government should waive the exchange rate policy (which the trilemma calls the “fixed exchange-rate policy”) and engage in a regime of pure fluctuation of the exchange rate, with no governmental intervention. However, there is no reason to consider full capital mobility as a part of the natural order of things. The direct cause of the bad performance of Brazilian economy after the Real Plan was the combination of high interest rates and the chronic over-

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valuation of the exchange rate. This was a perverse combination associated with the hasty and ill-conceived opening of trade and financials in 1990–1992, and it destroyed the mechanism for neutralizing the Dutch disease that had been functioning in Brazil since 1967. Moreover, as part of the application of the macroeconomic tripod, in 1999 the government abandoned the system of mini-devaluations of the exchange rate (“crawling peg”), thereby leaving it to the whim of the market. At that time, Brazil was already a middle-income country, and literature began to appear in the 2000s mentioning the “middle-income trap,” which normally results from the exhaustion of the unlimited labor supply (the Lewis Turning Point) and from the country’s need to invest more in science and technology because it can no longer merely copy technologies. Those two points are real problems for Brazil’s economy; but as for science and technology, Brazil’s competent research community has been leading a national system of innovation that has not been fully effective only because low profit expectations and high interest rates have discouraged private investment. In fact, the trap in which Brazil has languished since overcoming high inertial inflation in 1994 is that of a chronically overvalued exchange rate and very high basic interest rates that first materialized in 1990–1992, when Brazil finally accepted the Washington Consensus and neoliberal reforms. The currency has remained overvalued since then, except for the balance-of-payments crises of 1998 and 2002 and the financial crisis of 2014–2015, when it underwent drastic depreciations. The currency remained overvalued because the Dutch disease ceased to be neutralized after 1990, as a consequence of trade liberalization combined with the opening of the capital account. The latter caused the country to lose its control over the exchange rate; and the policy of using the exchange rate as an anchor to control inflation, as well as the growth with foreign savings policy, ended up flooding the country with dollars and appreciating the currency. But this appreciation was also due to the abusive increase in the interest rate that was implemented after the Real Plan. Instead of realizing, as it should have done, that the Real Plan had been successfully completed at the end of 1994, the government decided to “maintain” it, based on the view that inflation remained the main problem for Brazil’s economy. This gave the liberal economists a justification for promoting high real interest rates which the developmental economists would later enthusiastically support, beginning with the Lula administration. As for the overvalued exchange rate, economic liberals and, later, developmentalists realized that it could be very conveniently used as an anchor against inflation. But they also realized, particularly the developmentalists, that the policy of using the prices of state-owned companies as an additional anchor against inflation was a very attractive option. Now, there is nothing more perverse or populist in an economy than to use the

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exchange rate and the prices of the goods and services of state-owned companies to fight inflation. Inflation Targeting Policy

In January 1999, after a severe balance-of-payments crisis had been unleashed in the fourth quarter of the previous year, President Fernando Henrique Cardoso, who had just been reelected, went against the advice of his finance minister and decided to let the exchange rate float.1 Six months later, he decided to abandon the system of mini-devaluations that had done so much good for the country, and to adopt an inflation-targeting policy.2 The decision to let the exchange rate float was made in order to depreciate the currency, and it proved to be a wise one: the exchange rate depreciated by roughly 30 percent in actual terms over the following days. After a necessary rise in the interest rate, the Central Bank of Brazil systematically reduced it. But in 2001, Argentina’s huge exchange rate crisis (after the Argentine peso had been maintained at parity with the US dollar for ten years) led to a strong devaluation of the Brazilian real. The Central Bank, in the name of the government’s inflationtargeting policy, which had been mistakenly initiated in July 1999, was once again forced to raise the basic interest rate, taking it, in actual terms, to one of the world’s highest levels. Once again the Central Bank broke the golden rule of competent monetary policy the world over: to set the lowest possible interest rate consistent with macroeconomic equilibrium. As the interest rate is the only instrument that orthodox economists recognize as valid for monetary authorities, there is always a “good reason” to raise it. Sometimes the aim is to attract short-term capital; in these cases, interest rates are raised to prevent the economy from overheating and the current account deficit from increasing too much. At other times, the aim is to control inflation, even when it is not demand-pull inflation. But in all the cases, the aim is to benefit the rentier capitalists and financiers. In 2001, the main reason put forward for raising the interest rate was to meet the inflation target. The inflation-targeting policy that the government had started in 1999 was mistakenly identified with the success of the exchange rate fluctuation of January of that year. Thanks to the bad memories left by the high inertial inflation of 1980–1994, inflation control became a kind of taboo subject that no one felt authorized to discuss. During my time in the government, I always expressed my disagreement with the economic policies that were being adopted. Three years after leaving the government, I wrote a document with Yoshiaki Nakano that immediately had great repercussions: “A Strategy of Development with Stability” (BresserPereira and Nakano 2002).3 Upon its adoption of an inflation-targeting policy, the government tried to replace the exchange rate anchor with a mone-

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tary anchor.4 The subordinate, colonialist premise was that Brazil would be unable to control inflation without some kind of “anchor.” But the exchange rate anchor continued to be used as the anchor against inflation, and it was employed to help achieve the inflation target. In 1999, Brazil was not ready for an inflation-targeting policy because such a policy only makes sense when one starts from a situation of macroeconomic equilibrium and seeks only to prevent the loss of that equilibrium. This was not the case in Brazil. The inflation-targeting policy was devised in the rich countries to manage a certain regime of monetary policy, not to change it. Since the trade and financial opening of 1990–1992, Brazil was caught in a trap of high interest rates and overvalued exchange rates, and it needed to modify its monetary policy regime through a concerted strategy aimed at lowering the basic interest rate and depreciating the currency to a competitive level. Both the high interest rate and exchange rate were signs of a perverse monetary policy regime that an inflation-targeting policy could not solve. Besides this, the de-indexation carried out by the Real Plan had not been complete. The contracts for public concessions, corresponding to roughly 30 percent of the Brazilian economy, continued to be indexed according to specific price indexes. It is this indexation that explains why inflation does not fall much when Brazil’s economy cools down. Before the government adopts an inflation-targeting policy, Congress should pass a law forbidding it from entering into any new contract with an indexation clause. As Elio Gaspari (2013) observes, “The indexation of anything whatsoever is to society what cocaine is to the human body.” Of course, this does not mean that the government should not take inflation into account in the periodic revisions of a contract, but the adjustments should not be attached to an index, and they should consider other variables, particularly increases in productivity. However, when the government decided to adopt an inflation-targeting policy, in 1999, the interest rate was still abnormally high. As a result of this policy, the country was caught in the trap of high interest rates and an overvalued exchange rate that it already had, with the addition of an inflation rate that was relatively rigid downwards. It was clearly necessary to first solve the twin problems of the very high interest rate and the overvalued exchange rate, and only afterwards consolidate the macroeconomic stabilization through an inflation-targeting policy. The inflation-targeting policy operates by means of a reaction function to the ongoing inflation rate and to the output gap. When the exchange rate is introduced into this reaction function, as good practice advises, especially for the developing countries, in which the exchange rate has a tendency toward cyclic and chronic overvaluation, we need to know the distance between the current exchange rate and the industrial equilibrium exchange rate, which is a central part of developmental macroeconomics. If

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the distance is large because of a Dutch disease that has not been neutralized, the introduction of an inflation-targeting policy should be postponed until this neutralization is achieved. The decrease in inflation that has taken place since 1995 (Table 21.1) could have been larger if the government had not made the mistake of maintaining some indexations in the Real Plan, particularly those of the privatized public services. Thanks to the neutralization of inertial inflation achieved by the Real Plan in 1994 and to the exchange rate appreciation that followed, the inflation rate dropped dramatically over the first four years after the plan. During that whole period, it varied essentially due to the exchange rate, with the interest rate playing a secondary role. With the exchange rate fluctuation and the devaluation of 1999, inflation rose, although far less than feared. With the devaluation of 2002, inflation rose again, but not by much; and over the following years it fell as the currency appreciated. However, in 2012, despite an exchange rate appreciation, the inflation rate did not fall, probably because of the labor shortage caused by the exhaustion of the labor supply, which happened in the 2000s, thereby making it possible to increase wages above productivity. In the context of inflationary inertia and recession, the policy of fighting inflation with a high basic interest rate is inefficient and irrational. The sensitivity of inflation to the interest rate is low when inflation is inertial, so the cost in terms of unemployment and lack of growth will not be countered by the minimal reduction in inflation that this kind of policy provides. Table 21.1: Inflation Rates and Variations in Exchange Rates, 1994–2013 (%) Year

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2013

Inflation (IPCA price index) 916.43 9.56 1.65 5.97 12.35 7.60 3.14 5.90 5.91 5.84 5.91

∆ Nominal ΔExchange Rate 1,887.71 9.53 7.66 0.85 24.28 –4.95 –10.64 –5.82 –11.88 16.69 10.39

Source: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br.

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The movements of inflation both upward and downward since the Real Plan can be better explained by the devaluation or appreciation of the exchange rate than by the higher or lower interest rates. The decrease in inflation that took place since mid-2003, under the first Lula administration, was due less to recession and more to currency appreciation and to the fact that the inflationary bubble caused by the 2002 depreciation had deflated. If the alternative is not to increase the basic interest rate, but rather to bring it firmly down to the level of the countries with risk ratings identical to Brazil’s, how can the problem of the existing inflation be faced? The most obvious solution, apart from stricter fiscal adjustments, would be to initiate a decisive process of de-indexation of all kinds of contracts, particularly those for public concessions. And it is necessary to include wages in this de-indexation. They are not formally indexed, but their informal indexation is an inheritance from the period of high inflation. High Interest Rates

For a long time, it was said that the interest rate in Brazil was kept high in order to offset Brazil’s high risk. But this claim makes no sense. As long as Brazil’s risk is part of the long-term interest rate, it amounts to saying that the interest rate is high because it is high. Besides, this claim does not make a clear distinction between the basic interest rate, which is the rate paid by the Central Bank to the government to roll over its short-term debt, and the market interest rate. The “Brazil risk” is part of the country’s market interest rate: it is the difference between the average interest rate paid by Brazilian business enterprises abroad for their loans in dollars and the rate of US Treasury bonds. However, the measure of the risk that international lenders believe they incur by lending to Brazil is not this difference, but an independent measure of the very interest rate that measures this risk. It is the average of the country’s “risk ratings” determined by rating agencies such as Moody’s and Standard & Poor’s. What drew our attention, then, was that, in contrast to the widespread belief that has prevailed so far, there is no correlation between this ranking and the basic interest rates adopted by the countries. Brazil’s basic interest rate in 2001 was roughly three times higher than the market rate. However, there was a second issue. The extremely high basic interest rate of the Central Bank pushed the market interest rate upwards. The basic interest rate is essentially exogenous to the economic system, being defined with a reasonable degree of discretion by the Central Bank. But the market interest rate is endogenous: it results from the supply and demand for loans. The orthodox idea that both rates are strictly correlated due to the arbitrage carried out by financial markets is false. The public debt rollover presents

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practically no risk to the lenders who have no alternative but to lend. Or rather, their only alternative is to stash the money—to literally put it in the bank or, metaphorically, under the mattress. Consequently, the Central Bank has full autonomy when it comes to determining this rate. The market rate is naturally endogenous, but it does not reflect just Brazil’s risk rating: it also reflects the high basic interest rate. And creditors will assume that if Brazilians themselves establish such a high basic interest rate, it must be because it is very risky to lend to Brazil. But it is not due to Brazil’s risk that the level of the market interest rate (i.e., the level around which the interest rate should fluctuate according to the monetary policy) is very high, but to the fact that a rate at that level is in the best interest of rentier capitalists and of the rentier middle class. Besides, a high interest rate has been the norm in Brazil since 1964 when, with the creation of the Housing Financial System, those with savings accounts were guaranteed a real interest rate of 6 percent annually. In addition, the economic authorities who were aligned with the financial system tended to allocate too many functions to the interest rate, using it to try to: (1) reduce investments and the aggregate demand when they are overheated, so as to prevent wage pressures and the acceleration of inflation; (2) limit exchange rate devaluations to prevent cost-push inflation; (3) attract foreign capital to close the balance-of-payments deficit; (4) persuade domestic investors to buy securities, to finance the public deficit; and (5) reduce the trade deficit through the control of internal demand. Of these multiple functions, one or more of them will be pointing to a high interest rate. In fact, all of them can be justified by the need to control the inflation rate. In its meetings, the Monetary Policy Board (COPOM) always declares that the only function of the interest rate is to control the inflation target. There is no reason to doubt it, but we must be aware that COPOM and the Central Bank are not immune to the pressures of the market, and that they make their decisions independently regarding the level of the interest rate. They also respond to a broader logic of current macroeconomic policies and to the self-fulfilling expectations of the financial market. A sole instrument is unable to simultaneously accomplish all five objectives. Besides, those objectives are contradictory. A rise in the interest rate may enable the government to achieve one objective, but definitely not the others, and the macroeconomic imbalances will be deepened. For instance, if the Central Bank raises the interest rate to attract foreign capital, it may help to close the balance-of-payments deficit and control inflation, but it will simultaneously be appreciating the exchange rate, which will lead to a trade deficit and, in the long term, to a balance-of-payments problem all over again. This may force a harsh depreciation, generating inflationary impacts and financial crises. Given the multiplicity of purposes, Brazil’s real interest rates since 1991 have been the highest in the world.

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The last argument of the orthodox supporters of high interest rates is the need to control inflation. But why did the Central Bank require an interest rate of 11 percent to control inflation in 2002, when in other countries it was around 1–2 percent in actual terms? In fact, Brazil’s great difficulty in escaping the trap of high interest rates and of overvalued exchange rates lies in the fact that the Brazilians were made hostages to inflation. This was an excellent situation for the dominant coalition of rentier capitalists and financiers. To them, inflation is Evil itself, even when it is low, because it might keep interest rates negative, and then their wealth ceases to grow. Or worse, their wealth is slowly “eaten up” by inflation. After the 2008 global financial crisis, the rich countries were confronted with enormous rentier wealth combined with the excessive debts of households and business enterprises. One of their solutions to the problem has been to maintain a slightly higher inflation rate and negative interest rates. But Brazil has not experienced negative interest rates for a long time. A country can only follow a model with an inflation target to the letter when it is living in normal times, when it is not caught in a trap of high interest rates and an overvalued currency, from which it must escape. But an escape from such a perverse equilibrium would necessitate an exchange rate devaluation, which would accelerate inflation temporarily. In this case, the inflation-targeting policy would makes some sense, but only if it is understood in a flexible way; if the monetary authorities have other objectives as well, particularly those of economic growth and an exchange rate fluctuating around the industrial equilibrium; and if they do not adopt the orthodox liberal practice of transforming the inflation target into an absolute priority, causing the real interest rates to remain high.

Notes

1. Surprisingly, however, only the president of the Central Bank lost his position, whereas Pedro Malan, the finance minister, was kept on even though he had been contradicted by President Cardoso. The new president of the Central Bank, Francisco L. Lopes, who had supported the fluctuation of the exchange rate as a member of the economic team, remained in office only a few days more. Without the minister’s support, and given the natural difficulties that followed the exchange rate fluctuation, Lopes was replaced by Armínio Fraga, who remained in office until the end of the Cardoso administration. All the economists mentioned here were originally either students or faculty members at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio). 2. José Serra, Paulo Renato de Souza, and I took part in this internal struggle. Of the three of us, only Serra was a member of the economic team, as planning minister during the first fifteen months of the administration. Pérsio Arida resigned to be candidate in the municipality of São Paulo. Souza, as education minister, and I, as minister of federal administration and state reform, were excluded from the eco-

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nomic team. However, I argued many times with the president over the need to devaluate the real or let it float. I had earlier formalized my position in a letter, in November 1996. 3. The paper’s impact on the press was documented in a special dossier, in http://bit.ly/1QHvdCE. The document was published in the Revista de Economia Política, along with four other papers that discussed the possibility of multiple equilibriums of the interest rate. 4. See Olivier Blanchard (2005).

22 Lula, Dilma, and the Alienation of the Elites

In October 2002, on his fourth attempt, Luis Inácio Lula da Silva was finally elected president of the Republic. The Workers Party (PT), which he had founded in 1980 with other trade union leaders, progressive Catholics, politicians, and left-wing intellectuals, rose to power. Lula was a popular leader who had demonstrated poise and great leadership ability during the big strikes in the automobile industry in São Paulo’s “ABC” municipalities in 1978 and 1979.1 Lula would have been elected as early as 1989, were it not for the collapse of the Cruzado Plan, and in 1994 and 1998, were it not for the Real Plan’s success in controlling the high inertial inflation that had existed from 1980 to 1994. The election of a left-wing candidate for the first time in the country’s history demonstrated that capitalism and democracy had been consolidated in Brazil, insofar as the bourgeoisie and right-wing political parties never thought of resorting to a coup to remedy the problem of a left-wing president. Brazil was no longer the country of an agricultural exporting oligarchy that had never seen defeat, or the country of authoritarian economic liberals who, when defeated, immediately thought of overthrowing the elected government. For the newly elected government, limits were similarly respected: once in power, the left-wing coalition never challenged the logic of private ownership and profit, instead confining itself to trying to reduce inequality. But this does not mean that the Brazilian Right easily accepted the election of left-wing politicians. Lula knew that politics is the art of compromise, of mutual concessions that are required to achieve a majority. Moreover, he knew that it is possible to be elected without the support of the bourgeoisie, but impossible to govern without it. This is why, in a famous document from his 2002 electoral campaign, “Letter to the Brazilian People,” he changed the tone and the content of his propositions and, immediately after the election, showed that he knew that it 297

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was impossible to govern capitalism without the involvement of the capitalists; and so he approached them. What is more, following Getúlio Vargas, he was determined to make compromises in his effort to build a new national and popular pact. Lula has never ceased to be a left-wing politician, and this fact was an obstacle to the formation of a new developmental class coalition. It was certainly possible to ensure satisfactory profits for the manufacturing industries in exchange for increased wages for the workers, but such a compromise was not an easy task. For some time, he was successful. The rejection by the Brazilian industrial bourgeoisie did not become clear until the next administration, that of Dilma Rousseff. Once elected, Lula declared that the previous administration had left a “cursed heritage,” but he actually had a blessed heritage: an incredibly depreciated currency, which enabled him to appreciate it in the following years, thereby keeping inflation under control while he raised the minimum wage and made the country grow. When an administration begins with a strongly depreciated currency, this makes life much easier. The crisis of 2002 was not solved by the new administration, but by the crisis itself, which corrected the exchange rate overvaluation that had been one of its causes. The Lula Administration

The Lula administration (2002–2010) puzzled the conservative elites; frustrated the radical Left, which abandoned the PT and created the Socialism and Freedom Party (PSOL);2 pleased the reformist Left, which saw this government as returning to the idea of a nation held by the center-left developmentalists; dazzled the povão, the huge mass of poor workers that guaranteed Lula’s reelection in 2006; conserved the support of the main labor unions and of popular movements such as the Landless Workers Movement (MST); and achieved a level of popularity by the end of his second term that had never been seen before in Brazil. During the first two years, Lula promoted a greater fiscal adjustment than was actually necessary because, in his way, he earned the trust of the bourgeoisie and of the high technobureaucracy. Moreover, he was advised by an opportunistic finance minister and by a president of the Central Bank who was committed to the international financial system and who controlled inflation through a perverse appreciation of the exchange rate.3 With these advisors, Lula did everything the liberal-dependent coalition had asked for, and certainly more than he should have: he raised the interest rate and deepened the fiscal adjustment, despite the fact that the real interest rate was already high and an adjustment had already been underway since 1999. The recession of 2003 was a result of this policy.

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From the fourth year on, however, when Lula was relying on Dilma Rousseff, his chief of staff, Guido Mantega, the minister of finance, and Luciano Coutinho, the president of the National Bank of Economic and Social Development (BNDES), perhaps the more accurate characterization of his administration was “social-developmental,” insofar as it allocated a major role to the state in the promotion of growth and in the reduction of economic inequality. But the policies Lula actually adopted were far from the ones proposed by new developmentalism (Brief Theory 1).4 At the same time, the investment and growth rates accelerated. This was thanks, on the one hand, to an increase in the prices of the commodities exported by Brazil, an improvement in the terms of trade, and an astonishing increase in the value (though not a quantum one) of Brazilian exports (Table 22.1)—all the result of a commodities boom. It was also thanks, on the other hand, to a policy of income redistribution based on a large rise of the minimum wage in actual terms: 52 percent. At the end of Lula’s eight years in power, the gross domestic product (GDP) growth rate had doubled compared with that under the previous administration, but it was not high enough to justify the optimism of the rich countries regarding the “huge growth of Brazil” as one of the four members of the BRICs.5 In fact, this growth was a “reward” from the international establishment for the good treatment that its business enterprises were receiving and for the continuous appreciation of the real, which served the interests of both speculators and foreign exporters to the country. One moment of national euphoria, during the Lula administration, was the discovery of great oil reserves in the pre-salt layer of the Campos Basin. A little earlier, in 2005, I had written a small article on the Dutch disease, or the “natural resources curse,” and the deindustrialization that it caused. This article, already mentioned above, gave rise to an intense debate about Table 22.1: Brazil’s Exports and Terms of Trade, 2002–2014 Year

2002 2004 2006 2008 2010 2012 2014

Exports ($ billion) 60.4 96.6 137 197.9 201.9 242.6 224.6

Terms of Tradea 94.7 94.2 100.0 105.9 119.7 121.5 115.0

Source: Ipeadata, the economic and financial database of the Institute for Applied Economic Research (IPEA), www.ipeadata.gov.br. Note: a. In the trade index, 2000 = 100.

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the Dutch disease and the deindustrialization that resulted from its nonneutralization since the trade and financial liberalization of 1990–1992. Despite all evidence to the contrary, the government denied that Brazil had the Dutch disease. But soon after, with the discovery of big oil reserves in the pre-salt layer, the government recognized that the production of oil would give rise to the disease and decided to modify the oil industry’s regulatory framework in order to neutralize it. This framework now had two regimes that the government could choose from, depending on the risks to the business enterprises of the plots subject to competitive bidding. The sharing regime was adopted for the pre-salt layer, based on the argument that it would allow a more effective neutralization of the Dutch disease. But later on, I realized that this new regulatory framework did not include as a key component any export tax, without which it would be impossible to prevent the currency overvaluation caused by the disease. A sovereign fund was created to place the resources deriving from the exploitation of the presalt layer, and this gave rise to a great political debate on how to distribute those funds. Regarding the neutralization of the Dutch disease, it was mistakenly understood that the sovereign fund would perform this task, so not a word was said about the required export tax.6 The Lula administration emphasized income redistribution. His administration was strongly progressive in that it aimed to transform the state into a social state, but it hesitated on the developmental side. The main redistributive measure was a huge rise in the real minimum wage, by 52 percent, as mentioned earlier, over the eight years of Lula’s administration. The increased share of social expenditure in the GDP also contributed to the reduction of inequality, but this increase had already been taking place since 1985, in the context of the 1977 Democratic-Popular Pact. In 1987, the failure of the Cruzado Plan led to the collapse of this great political pact, but the agreement to increase social expenditure to reduce economic inequality survived, and was carried out by all the democratic governments, except the administration of President Fernando Collor de Mello. Between 1985 and 2010, social expenditure almost doubled its share of GDP, from roughly 13.3 percent in 1985 to 22.8 percent in 2009.7 In addition to the rise in the real minimum wage and the increase in the state’s social expenditures, the expansion of the Bolsa Família also contributed to the reduction of social inequality. Millions of poor Brazilians ascended to the C Class (a concept from election polls and marketing), and were mistakenly identified as belonging to a “new middle class.”8 Actually, they were (and still are) workers who were leaving the condition of subproletarians to take part in mass consumption.9 As Jessé Souza (2010, p. 45), who studied Brazilian workers and used the word batalhadores (wage workers) to refer to this C Class, notes, to brand this great social group as “middle class” conceals the “significant contradictions and ambivalences in the lives of those Brazilian

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workers and expresses the notion of a financial capitalism that is ‘good’ and without blemish.” His criticism is pertinent, but the change in the curves of participation of the C Class and of the D and E Classes since 2003 is significant.10 Marcelo Neri (2011, p. 27), the main researcher to identify this fact, has observed that between 1995 and 2003 the proportions of those classes in the population remained stable at around 36 percent (C Class) and 54 percent (D and E Classes), but starting in 2004 the trajectory changed completely, and by 2011 the relationship was reversed: the C Class represented 55 percent of the population, whereas the D and E Classes had dropped to 33 percent. There is no doubt that a period of mass consumption, which the group of economists associated with the PT, under the leadership of Ricardo Bielschowsky, proposed in their government plan drawn up for the 2002 elections, was achieved during the Lula administration. But this growth model proved to be ephemeral: The large domestic market that had materialized during the Lula administration was captured by imports, and thus only deepened the deindustrialization that occurred during Dilma Rousseff’s administration. A good growth model should not be supported only by exports or only by consumption; instead, it should keep these two variables balanced, while keeping the exchange rate competitive. The numbers related to the reduction of inequality and to the improvement in the living standards of the working class since the democratic transition, particularly during the Lula administration, were remarkable. Inequality had already been decreasing due to the increase in spending on education, healthcare, and on targeted social care programs. But there was a clear acceleration during the Lula administration due to the rise in the minimum wage and the increase in cash transfers, mainly the Bolsa Família. According to the National Household Sample Survey (PNAD), the population living in extreme poverty fell from 25.5 percent of the population in 1990 to 3.5 percent in 2012—an achievement that led the United Nations report on the Millenium Development Goals Report 2015 to point out that it had an important effect on their achievement.11 The per capita household income increased by 40.7 percent between 2003 and 2011, which was 13 percent higher than the increase in per capita GDP (27.7 percent) during the same period. The Gini coefficient, which was around 0.60 in the second half of the 1990s, decreased to 0.58 by 2003, to 0.54 by 2009, and to 0.49 by 2015.12 The share of wages of the GDP, which had increased with the Real Plan, later declined, but has been growing again since 2004. This confirmed the consumption-oriented growth model, which characterized PT governments, enabled broad social inclusion. But they turned out to be untenable, as was proven by the low growth rates under the Rousseff administration (2011–2016).13 The social developmentalism of the Lula administration was far from the normative proposals of new developmentalism. The exchange rate appreciation during Lula’s eight years in office was enormous: in nominal

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terms the price of the US dollar fell from R$3.95 in December 2002 to R$1.65 in December 2010. It was a classic case of exchange rate populism. Based on the currency values as of December 31, 2015, the dollar dropped from R$7.20 on December 31, 2002, to R$2.20 on December 31, 2010, when the competitive or industrial equilibrium was around R$3.50 per dollar. This appreciation was the factor that, added to the rise in the real minimum wage and in the other wages, explains the growth of the C Class and of Lula’s huge popularity at the end of his administration. But, as we will see, it also explains why the growth rate during the Rousseff administration’s first four years was so small. The causes of this exchange rate appreciation were (1) the failure to neutralize the Dutch disease; (2) the increase in its severity (caused by the increase in commodity prices); (3) the mistaken policy of growth with foreign savings; (4) the policy of fighting inflation through an exchange rate anchor; and (5) the policy of high interest rates conducted by the Central Bank, based on the argument that it was required for controlling inflation and attracting foreign capital. Again, this appreciation was due to exchange rate populism, but it ended up hindering the export of manufactured goods, which fell sharply, and worsening the process of deindustrialization. The appreciation did not cause a crisis in the manufacturing industry right away because the sector was compensated with a growth of the domestic market. Brazil was, therefore, in “the best of all possible worlds”: inflation was kept under control, workers’ wages increased while economic inequality decreased, the interest earned by the rentier capitalists and financiers was kept at a slightly lower level than during the previous administration, the profits of the business enterprises oriented to the domestic market were high, and the profits of the industrial enterprises were maintained (thanks to domestic market growth). But, with the exchange rate overvaluation, the increase in the domestic market turned out to be only a temporary benefit for Brazilian companies. The disastrous effects of this huge exchange rate appreciation were felt during the Rousseff administration. As it turned out, the whole increase in the domestic market was ultimately captured by the imports. The capture did not happen during the Lula administration because the importers of manufactured goods usually need three years to organize themselves, and this delayed their impact on the market. Today, it is evident that this macroeconomic equation was untenable. In fact, it was the usual perverse exchange rate populism that both economically liberal and developmental governments often adopt. The macroeconomic policy was a responsible one in that the public deficit was kept under control and a primary surplus was maintained, but the highly appreciated exchange rate and the large current account deficits from 2008 on were classic examples of exchange rate populism, conducted by an orthodox president of the Central Bank who made the argument that deficits were “foreign savings,” and were thus supposed to increase the investment rate.14

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With the increases in the prices of commodities and the corresponding increases in exports, the high current account deficits of the previous administration became a current account surplus in 2005. But soon afterwards, in 2007, due to the maintenance of exchange rate appreciation, the current account went into deficit again. The prospect of an exchange rate crisis was still distant, as this same increase in exports, added to a policy of purchasing reserves in exchange for a domestic public debt, allowed the government to reduce the net foreign debt and to even make it negative by the end of 2010. Consequently, the increase in international reserves provided more security to the economic agents and to the government. But this was only a relative security because it was due less to the accumulation of current account surpluses than to the exchange of foreign debt for domestic debt. In addition, this policy, which caused the domestic public debt to continue growing, was and still is expensive for public finances; it represents a huge financial cost for the state because the interest rate on Brazilian reserves abroad is substantially lower than the Central Bank’s basic interest rate (SELIC), which is the same interest rate the US Treasury pays on its bonds. The state managed to reduce the interest paid by lowering the basic interest rate, but increased it again through its policy of reserves. We must recognize that this policy derived less from a desire to increase reserves so as to be more secure, and more from the need to buy foreign currency to prevent the overvaluation of the real. The Lula administration strove to gain support not only from the industrial entrepreneurs, but also from the international economic and financial system. Hence, as soon as it became clear that the new government would not threaten the interests of the investors and of multinational corporations, Lula began to receive praise from Washington and New York. The North engaged in its classic process of co-opting the economic and political elites of developing countries, with which it tries to become associated, repeating the strategy of every empire: associating with the local and dependent or subordinate elites. As they were competing with Brazil, the rich countries were naturally satisfied because their interests would be served insofar as the Brazilian government followed their recommendations: 1. the interest rate should be high, so as to remunerate their speculative capital; current account deficits should be viewed as “normal” for developing countries, as these deficits would supposedly have been caused by “increased” investment financed by direct investments and loans; 2. capital inflows and outflows should be free, so that the rich countries would be able to lend developing countries capital at high interest rates;

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3. foreign loans and the investments of multinational companies should be considered necessary for financing investments within the developing countries, despite the fact that they usually finance consumption, not investment; and 4. after a financial crisis, the exchange rate should gradually appreciate because this would enable foreign speculators to profit, not only from the high interest, but also from the appreciation of the national currency (this practice is called “carry trade”).

As Leda Paulani (2013) observes, “The joint result of those movements could not have been different: The Brazilian economy drowned in dollars and the domestic currency was in permanent state of overvaluation. From the productive viewpoint, this means deindustrialization and re-primarization of the country’s export portfolio.” Unsurprisingly, confirming the general truth that the more a leader of a middle-income country is praised by Washington and New York, the more favorable his policy will be to his rich competitors, and the more damaging to his own country, Lula also began to receive universal praise, whereas the exchange rate continued to appreciate.15 Lulism

When Lula was elected president, at the end of 2002, I imagined that perhaps a new popular and national political pact was being formed, but the first two years of the government did not confirm this prognosis. I knew that the new president would have to compromise with the dominant capitalist and technobureaucratic classes. This had happened with all the socialist parties that rose to power through elections, and it could not fail to happen with the PT. But, contrary to the views of sharp analysts such as Tales Ab’Sáber (2011, pp. 12 and 19), it did not mean that Lula’s concessions to capitalism would be so great as to transform him into a representative of the upper bourgeoisie, including its financial sector. Nor did it mean that, given his “clear desire for articulating extremes, besides including the very poor classes in his political project . . . Lula also fully co-optd the extremely rich.” But these words from a major banker at the time of Lula’s reelection, which Ab’Sáber quotes to support his view, are deceptive. The fact that this banker believed that it made no difference whether the elected [president] was Lula or his conservative opponent from the Brazilian Social Democratic Party (PSDB) did not mean that the richer bourgeoisie supported Lula, let alone the PT. It just meant that the dominant class had lost its “fear of Lula,” which it had felt before his first election. Lula was a political leader, competent and successful, and so he bet that he could achieve a reasonable consensus of Brazilian society. But, for him,

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it was essential to be associated with the most progressive sectors of the bourgeoisie, specifically, with the industrial entrepreneurs, who had been marginalized under the previous administration. For a while, during the first two years of his administration, Lula’s submission to orthodox and liberal macroeconomic thinking seemed to disallow this interpretation, but this was a strategic retreat of a political leader who knew that politics is the art of compromise. Since the beginning of his administration, Lula tried to head a new national and popular pact. To this end, he created a formal agency—the Board of Economic and Social Development of the Presidency of the Republic—to which he appointed a representative number of industrial entrepreneurs, trade union leaders, association leaders, public bureaucrats, and intellectuals. This gave his government a multi-class nature. However, this pact only began to take shape during the third year of Lula’s administration, when he was already surrounded by a number of nationalist and left-wing ministers and advisers. This was no easy task, given the complexity and the heterogeneity of Brazilian society, and given the dependency of the Brazilian elites. But over the next several years, under Lula, and later, under Dilma Rousseff, progress was made towards a new national and popular pact. Instead of talking about the “end of the Vargas era” (a motto of the 1991 Liberal-Dependent Pact), one started to talk about a renewed Vargas era, in which the state would once again play an active role in promoting the economy, the national economic strategy would become developmental, and a great understanding among the country’s progressive social sectors would be deliberately pursued. Lula became stronger when, during the “Mensalão” scandal, he did not go on the defensive, but instead pursued popular support.16 To this end, he adopted a whole series of concrete measures for the benefit of the very poor and, instead of hiding in the Planalto Palace, frightened by the scandal, he worked with determination to win over the public, using his popular rhetoric as a weapon. The result of this strategy was the emergence of the “Lulism,” which André Singer (2009, 2012) analyzed with great acuteness. The mass of voters in the three previous presidential elections, in which Lula had been defeated, had voted for conservative candidates. Then, during his first election victory, voters were divided between Lula and the conservative candidate. But finally, during his reelection, the voters massively supported him. To the ideological and political leadership that Lula had shown during the major strikes in São Paulo’s ABC region in 1978 and 1979, and during his time as the head of the PT, was now added his populist and charismatic leadership. He began to talk directly to the masses, without the intermediation of any ideology or political party. Singer was mistaken only when he stated that the large sub-working class that was economically and socially ascending was “conservative.” In successive presidential elections, it has turned out to

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be neither conservative nor progressive; it has simply understood for whom it should vote. It expects from the government the provision of security and broad social services, and it had voted for Collor because it had become frustrated with the politicians who had led the democratic transition when they failed to control high inflation through the Cruzado Plan. It had voted for Fernando Henrique Cardoso because he had guaranteed price stabilization. And it began to vote, now with more enthusiasm, for Lula and later for his successor, because Lula objectively met its demands and knew how to talk to it as no one else did, not even Getúlio Vargas. In attempting to understand the political significance of the Lula administration, it is a mistake to declare, as did the left-wing critic Francisco de Oliveira (2010, p. 27), that this administration did not represent any significant political change, that it was an episode of “topsy-turvy hegemony.” In his words, “Consent becomes its reverse: it is no longer the dominated who agree to their own exploitation; it is the dominant—the capitalists and the capital, to be explicit—that agree to be politically led by the dominated, provided that the ‘moral direction’ does not question the form of capitalist exploitation.” This theory may make sense for those who believe that socialism is a concrete and real alternative to capitalism here and now. But if this theory is not true, if there is no room today for democratic socialism, the exercise of politics, when it is not mere criticism, but political construction, should include thinking about a better form of capitalism, one that is less unfair and more efficient. To understand this point, the distinction made by Carlos Nelson Coutinho (2010) between big and small politics, in a book that reproduced the papers presented at a seminar on Antonio Gramsci’s theory of hegemony, is an important one. What is big politics? Is it simply the opposition between capitalism and socialism or, more reasonably, the opposition between neoliberalism and social developmentalism? Big politics is that which presents true alternatives to the voter. If socialism is not in the realm of the possible, the historical alternative within capitalism, in terms of economic and political organization, lies between economic liberalism and developmentalism; in terms of political organization, it lies between liberal democracy and social or social democratic democracy. Both developmentalism and social democracy presuppose a class coalition. But, whereas developmentalism can be both conservative and social, social democracy is, by definition, progressive. In practice, social democracies often yield too much to economic liberalism and fail to achieve growth with income redistribution, but in theory social democracy is committed to the workers and the poor. In its initial phase—the phase of the formation of the nation-state and of the industrial revolution—developmentalism is just economic, but later, thanks to the struggles of the workers and the poor, it also tends to be democratic and social.

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The Lula administration and Dilma Rousseff’s first term both represented an effort to build a developmental political pact that united the industrial entrepreneurs with the working class and the public technobureaucracy; but, unhappily, the effort failed. The essential elements of developmentalism were present under those two governments—moderate intervention in the economy in the form of investments in noncompetitive sectors, support for national champions by the BNDES, and a strategic industrial policy. In a country where inequality is so strong, however, a developmentalism that seeks to be social is also a necessity, and the reduction of inequality should be a priority even for the elites. The financial and rentier elites rejected this type of developmentalism, which was no surprise. But social developmentalism could have won the support of the industrial entrepreneurs, and a new national and popular political pact could have been achieved, if the government had been competent in its macroeconomic policy; if it had kept the five macroeconomic prices (the profit rate, interest rate, exchange rate, wage rate, and inflation rate) right or balanced, as new developmentalism proposes; if it had neutralized the tendency toward cyclical and chronic currency overvaluations and especially the Dutch disease; and if it had ensured satisfactory profits for the manufacturing industry. Instead, the PT administration placed all its hopes in an industrial policy that could not deliver what was asked of it, and which was no substitute for the right macroeconomic policies. After ten years of responsible fiscal policy, in 2013 and particularly in 2014, the government lost control of public finances, not because it was trying to get the votes of workers or consumers, but because it was implementing very expensive industrial policies that benefited the industrial entrepreneurs, but could not make them invest as much as expected. Take, for instance, the BNDES Investment Sustaining Program (PSI), which made loans to industrial firms between 2009 and 2014 totaling R$362.3 billion, and charged interest rates below the rate of inflation. These loans were effective in encouraging investments, but not enough to compensate for the overvalued currency and the high interest rates, which discouraged potential investors. After every election in which left-wing candidates are the winners, the political and economic elites in capitalist countries try to co-opt them. In Brazil, they were not able to co-opt the PT administrations. During the Lula years, the economically liberal Right remained silent. But it was revived during the Rousseff administration, supported by the unsatisfactory growth of the country. And during the harsh reaction to the Mensalão scandal, in 2012, the elites became full of moral indignation. Vladimir Safatle (2013), when assessing the first ten years of PT government, recognizes that “the Lula administration saw itself as a booster of the reconstruction of the national business community in its desire for globalization.” But obviously, he adds, this government did not imply a transformation of capitalist society:

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“In the political domain, ‘lulism’ was based, on the one hand, on the transformation of great and abnormal alliances into the unique possible condition of ‘governability,’ withdrawing from the portfolio of political debates any and all structural change in the ways of managing power.” But to form a developmental pact, the will of the leader is not sufficient. We must take into account the role of the workers, of the public technobureaucracy, and of the industrial entrepreneurs. Their roles in developmental pacts are strategic ones. They formed the dominant group in Brazil during the whole Nation and Development Cycle (1930–1980), and played a decisive role in the democratic transition—under the 1977 DemocraticPopular Pact. But with the breakdown of the Cruzado Plan, headed by an industrial entrepreneur, Dílson Funaro, and with the failure of the developmental strategy based on “industrial policy,” the industrial entrepreneurs became disoriented and disorganized. They realized that the strategy of import-substitution industrialization was exhausted and that the alternative liberal orthodoxy was not acceptable. But they did not know where to direct their political action. For some time, they remained stunned. Organizations such as the Federation of Industries of the State of São Paulo (FIESP) and the National Confederation of Industry (CNI) were suddenly speechless. So, when the neoliberal wave blew into Brazil at full strength, in 1990, the industrial entrepreneurs had no arguments against it. They opposed trade liberalization, which was apparently required for making the manufacturing industry more competitive, but trade liberalization was a mistake, as the high import duties and export subsidies for manufactured goods were not just protectionism, but also a mechanism for neutralizing the Dutch disease. The 1990 trade liberalization thus instituted a major competitive disadvantage for the Brazilian manufacturing industry, and was the main cause of the deindustrialization that followed. As to the financial opening, in December 1991, it represented an even greater threat because it implied the loss of control over the exchange rate, yet it was not perceived as such by industry. In May 1989 the thirty major Brazilian industrial enterprises founded the Institute of Studies for Industrial Development (IEDI) to defend the country’s manufacturing industry. However, lacking advice from competent macroeconomists and political scientists, they did not know that the fundamental threat lay in the macroeconomic domain and, particularly, in the exchange rate.17 Instead, they insisted that the government define an industrial policy, as had happened in the 1970s. They did not realize that the industrial policy of that time had mixed certain elements of industrial policy, properly speaking, with macroeconomic policy. As discussed earlier, the system of import duties and export subsidies implied an exchange-rate macroeconomic policy, insofar as it included a disguised tax that neutralized the national currency overvaluation caused by the Dutch disease.

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The 2008 Global Financial Crisis

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During the Lula administration’s sixth year, the 2008 global financial crisis broke out, and it was a major crisis of neoliberal capitalism, similar to the crisis triggered in 1929. It was a crisis of a rentier and financialized capitalism and of the neoclassical economics that legitimated it. The crisis resulted from the deregulation of financial markets and from the frantic speculation that led to the formation of asset bubbles in real estate property, credit, and investments. And, after the current period of transition and reorganization, it may well lead to a new way of thinking about and organizing capitalism. The crisis originated at the core of rentier capitalism, the United States, confirming the paradox observed by José Luís Fiori (2004, p. 15), when he identified “the absolutely unexplainable paradox from the standpoint of all the existing theories on world leadership or hegemony: the discovery that the system’s main crises were caused by its own power, which should be its great pacifying and stabilizing asset.” In view of the crisis, the Lula administration, at the level of the Ministry of Finance and the BNDES, tried to implement a countercyclical policy. But this only went halfway because, during the eight years of this administration, the Central Bank was dominated by orthodox economists who had typically come from the financial market or who had earned their PhDs abroad. From the moment Guido Mantega took over the Ministry of Finance, he fought firmly against the orthodox policies of the Central Bank and the continuous appreciation of the real, but the monetary policy remained beyond his power, so Brazil had a consistently orthodox policy that was contrary to the country’s interest. The most pathetic moment of this orthodoxy took place during the 2008 global financial crisis, which mainly hit the business enterprises that had become indebted in dollars, particularly those that had entered into risky derivatives contracts. In this crisis situation, when practically all the other countries have decided to immediately reduce their interest rates, the Central Bank of Brazil, which had been increasing its rate since February 2008, continued to increase it even when the signs of crisis were already evident, until January 2009. This choice contributed to the stagnation of Brazil’s GDP growth in 2009 and to a sharp drop in its industrial production.18 Counterbalancing such monetary policy, the Ministry of Finance conducted a countercyclical fiscal policy, reducing taxes and increasing the public expenditure. To this end, it reduced the taxes of low-income sectors, broadened the scope of the Bolsa Família, reduced the tax burden on the automotive industry, launched the great program of subsidized popular housing called “My Home, My Life,” and reduced the primary surplus target. In addition to these actions, despite the lack of cooperation from the Central Bank, the Ministry of Finance managed to affect the monetary sys-

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tem by promoting the capitalization of the BNDES in the amount of R$100 billion,19 by increasing the funds for financing exports, and by determining the increase in loans from the official banks.20 Guido Mantega’s moment of glory occurred in 2009, when he had the courage to start controlling capital inflows by imposing the Tax on Financial Operations (IOF), which amounted to 2 percent of those inflows. This was something that liberal orthodoxy affirmed to be the greatest crime against the “sacred” free circulation of capital. It was a modest measure (expanded and improved later), but it was enough at the time to limit exchange rate appreciation. Nevertheless, the Ministry of Finance was unable to stop the continuous appreciation of the real over the eight years of the Lula administration. The Central Bank’s policy of controlling inflation with an overvalued exchange rate that led the country to increasing current account deficits had a brief hiatus during the 2008 crisis, when the real and practically all other currencies were devalued in relation to the dollar; but soon after that, this orthodox exchange rate populism continued inexorably to appreciate the real, counting on the support of vulgar Keynesian economists, who offered the faster growth of GDP during the Lula administration compared with that during the Cardoso administration as “proof” of the advantages of a wage-led strategy. Actually, the relatively high growth rates during the Lula administration were only made possible by the 2000s boom in commodity prices, which rose some 160 percent between 2002 and 2008. Compared with the prices of commodities, the prices of exported manufactured goods grew by just 53 percent during the same period. This situation enabled the Brazilian economy to finance an increase in imports without generating a significant imbalance in the current accounts. And in the short term, the industrial enterprises got something in return: an expanded domestic market. Most industrial enterprises were no longer able to export, but the domestic market was booming. Not long after, during the Rousseff administration, the continuation of this model would prove to be unfeasible because the overvalued exchange rate had led the domestic market to be quickly captured by imports. As mentioned above, the handover of the domestic market to other countries did not take place during the Lula administration only because the importers of manufactured goods need three years, on average, to get organized and begin importing. Within a few years’ time, the manufacturing industry’s trade surplus became a growing deficit, while the proportion of consumption captured by imports increased. Whereas industrial production was practically at the same level as before the 2008 global financial crisis, the volume of retail sales was 25.3 percent higher, using the same basis of comparison. The growth rate remained high for a brief period, due to the

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continuous increase in the minimum wage. But the country deindustrialized, and the new jobs created by this domestic market were now being filled in the countries that exported manufactured goods to Brazil. The discrepancy between the trends in domestic production and domestic consumption of manufactured goods can be seen in Figure 22.1, which compares the physical production of the manufacturing industry with the retail sales. At first, the two rates were growing in a well-behaved and somewhat parallel form; that is, they were practically equal. But from 2008 on, there has been a marked divergence of the two variables: physical production has stagnated, while retail sales continued to grow normally—now fueled by imports. During the Lula administration, the appreciation of the exchange rate was enormous. In 2016 reais, Lula received from the previous FHC administration a highy overvalued currency of R$6.00 per dollar and eight years later delivered to his successor, president Dilma Rousseff, an exchange rate of R$2.20 per dollar, when, at the beginning of 2003, the industrial or competitive equilibrium was R$3.50 per dollar (at December 2015 prices).21 A policy like that, which relied on exchange rate overvaluation to control inflation, while promoting higher wages and the maintenance of household income above GDP growth, would not prove sustainable. This indicated a

Figure 22.1: Industrial Production and Retail Sales, 2000–2014 (R$ billion)

Source: Brazilian Institute of Geography and Statistics (IBGE): monthly industrial surveys on physical production and trade.

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reduction in the expected profit rate, and helps explain the fall of the investment and the growth rates under the following administration. Studies have since shown that household income was growing more than per capita GDP.22 This wage-led strategy was definitely not sustainable in an open economy such as Brazil’s. But at the microeconomic level, there was progress. The BNDES, reinforced by a huge injection of capital, strongly increased investment financing while implementing an industrial policy aimed at strengthening major national groups. The Ministry of Development, Industry and Trade began to define and actively pursue a strategic industrial policy. The state-owned enterprises again received preference when it came to government purchases. And, what is more important, with the Growth Acceleration Program (PAC) the country finally, once again, had planning in the area in which it was actually necessary: infrastructure and the basic materials industries. These are sectors that the market was totally unable to coordinate efficiently. As João Paulo dos Reis Velloso (2010, p. 22) notes, “The real importance of the PAC is the acknowledgement, for the first time in thirty years, that, contrary to neoliberal theory, the mere action of the forces of the market is not enough to promote the GDP’s accelerated growth.” This was in contrast to the disaster that had been taking place in this area since the Collor administration: the dismantlement of the federal government’s entire engineering and planning structure, based on the argument that the private sector would take care of the problem. At last, this mistake was now beginning to be corrected. And the demand for engineers—the most important professionals in any process of economic development— which had dropped to pathetic lows, began to rise again. Another great leap forward took place in the field of foreign policy, headed by External Relations Minister Celso Amorim, who had already occupied the same position in Itamar Franco’s administration. The domestic decisions that developing countries need to make are related to their ability to reject any dependence on the rich countries, headed by the United States. The Lula administration carried out a nationalist foreign policy that was cooperative with other countries. Following the tendency of the Cardoso administration, which had resisted US pressure to join the Free Trade Area of the Americas (FTAA), Lula managed to reject the agreement without antagonizing the United States: When he set out a number of principles of national autonomy whose acceptance was a condition for Brazil’s entry into the FTAA, the United States ended the talks. There was also evolution in the domain of cultural policy, which was initially under the guidance of one of the major names in Brazilian popular music, Gilberto Gil. In the domains of social policy and human rights, the Lula administration acted competently, but without any great innovation compared with the previous administration.

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As for public administration, specifically in relation to the 1995 Managerial Reform of the State, progress at the federal level was murky due to the PT’s initial hostility, while it continued to advance at state and municipal levels. Managerial reform is the second type of administrative reform that occurs in the history of every modern state. The first type, which took place in the nineteenth century in the rich countries and began in 1936 in Brazil, was bureaucratic reform, which makes the public administration of a liberal state professional and effective. The second type, managerial reform, started in the United Kingdom in the 1980s, and has been spreading to the other rich countries. It is a reform that makes the major social services of the social state efficient. Among the developing countries, Brazil was the first to initiate this reform, in 1995. The PT opposed the 1995 Management Reform, mistakenly arguing that it would be neoliberal and detrimental to civil servants. So, during the first years of the Lula administration, this reform was paralyzed at the federal level. But because it continued to take place with the strong support of society in the states and the major cities, and because the vast majority of the civil servants, consultants, and teachers supported it (as I used to say, the 1995 Management Reform won the hearts and minds of Brazil’s senior civil servants), the federal government eventually accepted it, and gradually enforced it. But it did so in a timid way, showing that the Brazilian Left was dependent on the second-level civil servants, who generally did not support the reform. They did not support it because it made their own jobs less necessary by reserving for statutory civil servants only the functions of formulating and managing public policies and controlling the state resources, while transferring to social organizations (non-state-owned organizations financed by the state, and having management contracts with the state) the free, or almost free, social and scientific services that society decides the state should provide. Despite these reservations, under the second Lula administration there were no longer any major objections to the reform, so it continued to progress, albeit slowly. However, it progressed vigorously in the states and major cities, particularly through the creation of social organizations. The Dilma Rousseff Administration

There is nothing better for a new government than to receive a heavily depreciated currency due to a balance-of-payments crisis. At that point, inflation and unemployment are high, but thanks to the depreciated exchange rate, Brazilian manufacturers will recover their competitiveness and will invest, the economy will recover, and inflation will fall. Crucially, this recovery will be attributed to the new government, though the adjustments that caused it had actually occurred previously, a result of the crisis. This is what happened in 2003, during the transition from Cardoso to Lula.

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Conversely, there is nothing worse for a new government than to receive from its predecessor a strongly overvalued currency. This is what happened in 2011, during the transition from Lula to Rousseff. As we have already seen, on January 1, 2011, she received from Lula an exchange rate of R$2.20 per dollar, when the competitive or industrial equilibrium was R$3.50 per dollar.23 Rousseff began her administration hoping to ride on the continuity of the Lula government, which had achieved satisfactory growth rates combined with a relatively large reduction in economic inequality. Indeed, during the eight years of the Lula administration, between 2003 and 2010, the GDP growth rate doubled compared with that under the previous government, leading optimistic analysts to conclude that Brazil had “resumed development.” If this had been true, it would have meant that my 2007 book, Developing Brazil, in which I claimed that the Brazilian economy had been quasi-stagnant since the Real Plan, would have been wrong. It would have also meant that one needed only to keep the Brazilian economy oriented to the domestic market, or “wage-led,” as Lula had done, for growth to be ensured independently of the exchange rate and interest rate. Unfortunately, this optimism made little sense, and the positive evaluation of the Lula administration that this optimism revealed was later qualified. Lula had not taken the country out of the macroeconomic trap of high interest rates and an overvalued currency—the two joint causes of low growth since 1990. In fact, the five years (2004–2008) of satisfactory growth were explained not by competent policies, but by the commodities boom. Thus, Lula left a terrible legacy of currency overvaluation, which made President Rousseff’s mission an impossible one: to achieve a 59 percent depreciation of the real to make the Brazilian manufacturing industry competitive again—a depreciation that she had no political support for carrying out, given its twin short-term consequences: a reduction (albeit moderate) of all incomes, including real wages, and a rise of inflation in a country that had been hostage to inflation since the painfully high rates of 1981–1994. Figure 22.2 helps to understand the “impossible mission” that Dilma Rousseff inherited from Lula. It compares the real exchange rates with the industrial or competitive equilibrium curve from 1989 to 2014. We see that President Rousseff inherited the government when the exchange rate of the US dollar against the Brazilian real had reached its lowest or most overvalued point. We also see that the industrial equilibrium fell between 1988 and 2003 because, during this period, the average wage grew less than productivity, or, in other words, because the unit labor cost fell in Brazil in relation to the unit labor cost in the United States. From 2003 to 2011, the industrial equilibrium remained relatively stable. Thereafter, up to 2014, it has been rising sharply, as increases in the unit labor cost in Brazil outpaced those in the United States, or, in other words, as wages divided by

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productivity were increasing faster than the same variables in the United States. On the other hand, as the prices of the main commodities exported by Brazil remained high until 2014 (which meant that the current equilibrium remained constant)24, the Dutch disease turned increasingly severe, insofar as its severity depends on the distance between the industrial and the current equilibrium. In Figure 22.2 we have the indexes of the industrial equilibrium and the real exchange rate from 1995. We see that the real exchange rate, which appreciated from 1995 to 1997, depreciated sharply in the financial crisis of 1998, crossed the industrial equilibrium, reappreciated timidly and again depreciated in the 2002–2003 financial crisis, remaining from 1999 to 2004 above the industrial equilibrium. But it does not stop in that year, and in the next years up to the second quarter of 2014, it remained substantially overvalued—below the industrial equilibrium. This one, on its turn, that fell between 1995 and 2003, began to increase from this year one, reflecting the increase of real wages and the low growth of productivity, or, in other words, the rise of comparative unit labor cost of Brazil in comparison with the

Figure 22.2: Real Exchange Rates and Industrial Equilibriums, 1995–2016 (Brazilian real to the US dollar, December 2015 prices)

Source: Center for New Developmentalism/EESP-FGV. Note: In these two indexes, 1995 is basis 100.

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United States. In the whole period we saw the confirmation of the tendency toward a cyclical and chronic overvaluation of the currency—the central tendency of the new developmental theory, which I originally formulated in 2008, when this cycle that I am describing was taking shape.25 The tendency toward cyclical and chronic overvaluation of the national currencies of developing countries is a core concept of new developmental theory, and it explains what happened during the two PT governments. When the exchange rate fell well below the industrial equilibrium, this was Lula’s heaven: the exchange rate was appreciating, but from a low point (R$6.00 per dollar), and commodity prices were exploding. But then there was Dilma Rousseff’s hell: the currency reached its trough during her first year in office (R$2.20 per dollar). In October 2011 she decided to reduce the interest rate, which in a few months went down to 2 percent a year in real terms one year later. It was a bold move—a strong attack to the rentier capitalists and the financiers, who, in Brazil, feel entitled to a basic interest rate of at least 6 percent a year—which caused the depreciation of the real. But a small depreciation—the real went just to R$2.60 per dollar, much less than was required to make the exchange rate competitive again and to encourage industrial investment, which was also being constrained by huge inflows of imported manufactured goods. As a consequence of the continued overvaluation of the exchange rate and of the importation of manufactured goods, growth of GDP in 2012 was just 1 percent. But this devaluation was enough to cause a modest increase in inflation in 2012. These facts, plus the political instability of the presidency and the growing dissatisfaction of rentiers and financiers, gave opportunity to a backlash. The liberal-conservative economists recovered their voice (they had been silent during the Lula administration, overcome by its success) and led an attack not only against the reduction of the interest rate and the increase of inflation, but also against three other mistakes made by the government: the “creative accounting” that disguised the deterioration of the fiscal accounts, the freeze of the price of oil, and the reduction of the prices of energy aimed to control inflation. Finally, the international financial markets also manifested their unhappiness with what was happening, which was expressed in the fall of confidence rates. In April 2013 the Central Bank again began to increase the interest rate. It was a major political defeat for the president. The government was thus again steeped in a trap comprising a high interest rate and an appreciated currency, a situation that had been prevailing in Brazil since 1990. The president had tried to overcome it with determination, but failed. In the second half of 2012, government economists overestimated the outcome of the fall of interest rates, and claimed that, given it and the depreciation of the real, the “macroeconomic matrix had

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been corrected.” By this they meant that Brazil’s macroeconomic problems had been fixed and the economy was ready to grow. They were deceiving themselves. The five macroeconomic prices were still out of kilter because (1) the exchange rate was still far below (more appreciated than) the industrial equilibrium even after the 2011 depreciation, and the business profit rate was falling drastically from the previous year (Figure 22.3); (2) as a result, the expected profit rate was very low, if not negative, causing the investment rate to fall accordingly; (3) the wage rate continued to grow faster than productivity due to the government’s minimum wage policy, the relative scarcity of labor associated with Brazil’s declining population in the 1990s, and the increase of the demand for domestic laborers; and (4) the inflation rate, which had been below 6 percent, began to rise dangerously due to the depreciation. Of the five macroeconomic prices, only the interest rate had been set at the right level. In 2013, the Rousseff administration’s political defeat vis-à-vis the financial establishment became clear, as the manufacturing industry, predictably, did not respond to the fall in interest rates or to the currency depreciation. The industrial entrepreneurs, with no profits, and uneasy with the agressivity of the government toward the financial system had definitely lost confidence in the government. This defeat meant the acceptance

Figure 22.3: Net Profits of Nonfinancial Firms, 2005–2014 (% of GDP)

Source: Carlos Antônio Rocca (2014).

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of the Central Bank’s hiking of the interest rate, and checked any further depreciation of the real. Meanwhile, wages continued to increase above the productivity rate insofar as, on the one hand, demographic changes (the declining of the fertility rate and aging population) ended the unlimited supply of labor, and, on the other, domestic service absorbed the supply of unskilled labor. Thus, the comparative index of unit labor costs continued to increase, signifying that real wages in Brazil were growing more than those in competitor countries, or that productivity was growing less, or both. This meant that Brazil’s economic competitiveness continued to decline, and so the industrial equilibrium exchange rate continued to rise or require a greater depreciation. In this situation, to maintain a balanced current account, the currency would have to depreciate further. Notes

1. The automotive industry in Brazil originally developed in four locations in the Greater São Paulo area: the ABC municipalities (Santo André, São Bernardo do Campo, and São Caetano do Sul) and the nearby town of Diadema. 2. The PSOL was founded by socialist activists of the Workers’ Party who were discontent with the policies of the Lula administration. 3. I refer to Antonio Palocci and Henrique Meirelles, respectively. 4. The expression “social-developmentalism” was adopted by one of the chief leaders of the PT, Senator Aloízio Mercadante, in his PhD dissertation at the State University of Campinas (Unicamp 2010), to characterize the Lula administration. There was also an attempt by some economists to define social-developmentalism as a theoretical alternative to new developmentalism, but this makes little sense, given the nonexistence of any new social-developmentalist theory. 5. The BRICs were supposed to grow and catch up to the rich countries, but this was true with regard to China and India, not to Brazil and Russia. 6. A sovereign fund is one of the ingredients of the neutralization of the Dutch disease, but the key ingredient is an export tax, or retention tax, on the commodities that originated the disease. 7. The data is from the Institute for Applied Economic Research (IPEA), updated by Milko Matijascic (2011, p. 173). The increases in state social expenditure went from 0.23 percent to 1.09 percent of GDP for social care, 2.25 percent to 3.67 percent for public healthcare, 2.61 percent to 4.22 percent for education and culture, and 5.71 percent to 7.30 percent for social security and welfare. 8. The C Class is one of the classes or layers that marketing and political surveys use; it belongs to a structure of five layers: A, B, C, D and E. In Brazil, the C class is usually defined as households with monthly incomes between $600 and $1,400. It is often referred to as the “new middle class,” but this term is not related to the sociological concept of a new middle class.  9. Marcelo Neri (2011, p. 18) is very clear about it: “‘New middle class’ was the nickname we gave to the C Class many years ago. To label people as C Class sounded derogatory, worse than A or B Class, for instance. . . . New middle class provides the positive and prospective meaning of someone who has achieved—and continues to achieve—the dream of ascending in life.”

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10. Classes here—C, D, E—are not social classes but horizontal strata defined by acquisitive power. They are used in marketing and in public opinion research. 11. Worldwide, the fall of the extreme poverty rate in this period went from 47 percent to 14 percent. 12. Source: Ipeadata, the economic and financial database of the IPEA (2010). 13. The share of wages in the GDP, which had reached 35 percent in 1995, soon after the Real Plan, and had fallen to 31 percent by 2004, rose again to 35 percent by 2009. Household consumption, which represented 60.3 percent of the GDP in 2001, was already 62.5 percent in 2013. See the relevant data from the Brazilian Institute of Geography and Statistics (IBGE); as well as João Sicsú’s estimates in Teoria e Debate (88), p. 14, May 2010, based on the national account figures from the IBGE. 14. I am referring to Henrique Meirelles, who was president of the Central Bank of Brazil during the eight years of the Lula administration. 15. In the 1990s, the two leaders of middle-income countries who received the most praise from Washington and New York were Carlos Menem, of Argentina, and Boris Yeltsin, of Russia, both of whom led their countries into brutal crises. 16. This scandal broke in 2005, when a congressman publicly accused the PT of having used public funds since 2003 to make secret payments of the equivalent of $10,000 a month each to its political allies. “Mensalão” roughly means “big monthly stipend.” The trials related to the accusations began in mid-2012, and by the end of the year twenty-five of the forty defendants had been found guilty of crimes including bribery, money laundering, misuse of public funds, and conspiracy. 17. I remember warning the other members of the FIESP about this issue in the early 1990s, when I took part in the meetings of the FIESP’s Higher Economic Council. I said then: “You are resisting trade liberalization, which is inevitable. It only needs to be better managed. You are not realizing that the main risk lies in the exchange rate, which will probably appreciate with the end of high inflation.” In 2001, I was invited to dine with the IEDI’s leaders. The first thing its president, Paulo Cunha, said to me was to recall my words on the exchange rate; now he realized where the problem was to be found. 18. As José Luis Oreiro and Eliane Araújo (2012) conclude from their competent counterintuitive theoretical and econometric analysis, “The reduction in the interest rate at the October meeting might have reduced the impact of the global economic crisis on Brazilian industrial production.” 19. The volume of loans made by the BNDES under the presidency of Luciano Coutinho rose from R$150 billion in mid-2006 to R$280 billion at the end of 2009. 20. As a result, between October 2008 and December 2009, while the credit offered by private Brazilian banks increased by 24 percent, and that offered by foreign banks in the country only by 1 percent, the credit offered by the public banks grew by 75 percent (source: Central Bank of Brazil). 21. The “industrial equilibrium” exchange rate is the exchange rate that makes competitive the manufacturing business enterprises that utilize technology in the world state of the art. The nominal exchange rates were, on December 1, 2003, R$3.95 per US dollar, and, on December 31, 2010, R$1.65 per dollar. 22. According to an IPEA study, per capita household income between 2003 and 2010 increased by 40.7 percent, whereas the per capita GDP advanced by 27.7 percent. In 2012, when the GDP grew by only 0.9 percent and per capita household income remained steady, total wages increased by 5.2 percent. 23. Eight years later, in June 2015, the industrial equilibrium had risen to R$3.80 per dollar at December 2011 prices, due to the increase in wages above the

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increase in productivity, and, as a consequence, to the rise of Brazil’s comparative unit labor cost index. 24. The current equilibrium exchange rate is the exchange rate that balances intertemporally the current account of the country. 25. I formulated originally the theory of the cyclical and chronic tendency of the exchange rate in developing countries in the French and the Brazilian editions of Globalization and Competition (2010), which were published one year before the English edition.

23 The Pact that Never Was

On the political side, the year 2013 marked the definitive failure of the developmental class coalition that the PT tried to construct based on the election of Lula in 2002 and his eight-year tenure in office. The economic and political crisis that broke up in 2015 signaled the end of the Democracy and Social Justice Cycle that had began around 1980. During her administration, President Rousseff proved to be a determined, ethical, and public-spirited woman. But she was powerless to undo the exchange rate appreciation she inherited from the previous government, which made the manufacturing industry unprofitable. This meant that she was unable to keep the developmental class coalition alive, as the industrialists were supposed to play a key role in it. Besides, in a system based on the “presidentialism of coalitions,” which requires the government to build a political coalition in order to obtain a majority in Congress, Rousseff was confronted with noncooperative members of the governmental coalition in the Chamber of Deputies, despite having offered positions in the administration to the coalition parties—positions, however, that as Mello and Pereira (2015) remarked, did not correspond to the electoral achievement of the political parties, particularly the biggest one, the PMDB We observed her public spirit in many ways: in her dismissal of corrupt ministers; her reduction of the basic interest rate and of bank spreads; her firm stand in support of human rights; and her support for governmental transparency, which included publishing the salaries of public servants. But her determination was not enough to reignite sustained economic growth, which in 1981 had been stopped by that decade’s financial foreign debt crisis coupled with high inertial inflation. After these two problems had been overcome in the early 1990s, the currency, which had been overvalued in the long term (except during the 1998–1999 and 2002 financial crises), together with high basic interest rates, left the country stuck in quasi-stagnation. 321

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President Rousseff did not, however, demonstrate any great political skill. Luiz Werneck Vianna (2012) states, “More than just being a manager, Dilma assumed management, the first executive role of Brazilian capitalism, conceived as a national project to be implemented in an authoritarian way by the executive branch and its sophisticated technocracy.” In fact, the president revealed a rigidity that was incompatible with the spirit of compromise that her office required. Her original goal was to lead a national project with the support of society, and at the beginning of her administration, she adopted a strong ethical stance that is usually associated with the traditional middle class, not with the rich. We know that capitalism as a form of economic and political organization of society is inherently corrupt. Personal gain in the form of money is its most ingrained logic. The president understood that, and was firm in firing corrupt ministers. On the one hand, during her second year in office she continued with her left-wing political beliefs, and would not let her government be co-opted by the Right, so the conservative elites were deeply unsatisfied. On the other hand, there were low growth rates; the disillusionment around the manipulation of public accounts by the Treasury; and the political crisis associated with the verdicts in the Mensalão case in 2012, seven years after the scandal had broken out. This created an opening for a political crisis that would emerge the following year, in the form of mass demonstrations in June 2013. Toward the end of his administration, Lula was able to count on a reasonable amount of support from the industrial entrepreneurs, who were meant to play a key role in the proposed developmental political pact. During her first few years in office, Rousseff fired several ministers involved in corruption, and enjoyed a high level of popularity. Yet, by the end of 2012, before her overall popularity fell, she had already lost the support of the industrial entrepreneurs. The central cause was the fact that her administration had been unable to ensure a reasonable profit margin for the manufacturing industry. The overvaluation of the exchange rate from 2007 on, which we noted in Figure 22.2, made Brazilian companies uncompetitive, causing them to lose out to foreign competitors—first in the foreign markets, then in the domestic market. This was at a time when their rate of profit and the profit-to-GDP ratio were falling drastically. As we saw in Figure 22.3, the net profit-to-GDP ratio of the nonfinancial companies, which had been around 5 percent between 2005 and 2010, fell dramatically from 2010 on, sinking to 1.4 percent in 2014. The industrial bourgeoisie, tired of low profits and sometimes outright losses, repeated what it had done during the 1960s crisis: it joined with the rentier capitalists, including the rentier middle class, the agribusiness sector, and the financiers. Although economic liberalism is not in the blood of the industrialists, a developmental project without profits was not making sense to them. A class coalition must meet the interests of all parties. The political pact pro-

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posed by the PT satisfied workers with full employment, wage increases, and better healthcare and education, but left the manufacturing industry starved of profits. The key cause of the Rousseff administration’s poor economic results was the highly overvalued real that she had inherited from the Lula administration and its orthodox central banker, Henrique Meirelles. Rousseff did not have the power to carry out the required depreciation of the real that would have avoided such failure. She did not have the support of the selfanointed “social developmentalists” or of the liberal economists;1 nor did she have the support of the working class, the rentier middle class, or the financiers—though each group opposed her for different reasons. Even the industrial entrepreneurs were not united on the matter: some of them had lost their competitive edge in the manufacturing industry due to the overvalued exchange rate, and were forced to become just assemblers of imported parts (the maquila industry); others were indebted in dollars, and so were opposed to devaluing the currency. But they did not censure the fiscal policy, which was under control; and they were unable to criticize the exchange rate overvaluation or the current account deficits, of which they approved. Instead, they accused the president of being “interventionist” and developed an absurd explanation for the poor results: the industrial enterprises were not investing because they were “confused” by the various incentives associated with the government’s industrial policy. This was economic nonsense, devoid of meaning. Industrial entrepreneurs stopped investing for a more straightforward reason: they could not achieve a minimally satisfactory profit rate. In 2013 the Brazilian bourgeoisie, again united, adopted a fiercely negative view of Rousseff and the PT. Brazil was again living in a “political void,” similar to the one the country had experienced in 1961–1964, when the National-Popular Pact collapsed and was succeeded by the AuthoritarianModernizing Pact; and to the one in 1987–1990, when the DemocraticPopular Pact failed and was succeeded by the Liberal-Dependent Pact. The failure of this class coalition was made clear by the large mass demonstrations of June 2013, when thousands of young people took to the streets. They were first led by a small left-wing group that demanded the cancellation of a hike in urban bus fares, but soon expressed the overall dissatisfaction of the traditional middle class with the public services of education, healthcare, and social security, for which it paid taxes but did not use (opting instead for the corresponding private services). These demonstrations showed that democracy in Brazil could be something quite concrete—that society’s dissatisfaction with the government and politicians could express itself not only in elections, but also in the streets. Some interpreters, such as Marcos Nobre (2013) and Renato Janine Ribeiro (2014), understood that the demonstrations marked a new phase in the history of Brazilian democracy.

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They were probably right. The demonstrations revealed society’s strong mistrust of politicians, but not of democracy. As Ribeiro notes, they included a strong demand to improve the quality of public education and healthcare, so as to make them attractive to the middle class—a concern that had been at the core of the 1995 Managerial Reform of the State, which I had led during its first four years (and which continues to be carried out, mainly at the state and municipal levels). Claudio Gonçalves Couto (2014), analyzing the absurd demands of the smaller but frequent demonstrations that followed the demonstrations of June 2013, argued that they were related to the recent emergence of the C Class as consumers—an emergence that the traditional middle class had difficulty accepting. For him, this emergence was the source of “a double resentment: first, a resentment from those above (mostly from those not so above) who lost class distinctions based on consumption; second, a resentment from those below (mostly from those not so below) who, after ascending through consumption, began to also aim for the recognition that the marks of class distinction could supposedly provide (mostly international brands), but who have the door of distinguished society slammed in their faces.” The immediate consequence of the June 2013 demonstrations was a big drop in the president’s approval ratings, which went from around 65 percent “good” or “great” responses in 2012 to less than a fifth of that in early 2015 (Figure 23.1).2 The major political shift occurred within the traditional middle class. From 1977 on, this class had been associated with the workers and the poor, Figure 23.1: Brazilians’ Opinions of President Dilma Rousseff, 2011–2015 (%)

Source: Datafolha, Instituto de Pesquisas.

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or with the batalhadores (hard-working people) studied by Jessé Souza (2010). But since the failure of the Cruzado Plan in 1987, and especially since the scandals in which politicians from all the political parties were involved, this social class, which is largely a rentier middle class (as part of its revenues originated from interest, rents, and dividends), felt abandoned by the Rousseff administration, and so moved to the right.3 Thus, in 2013, its opposition to the government gained strength and a liberal moralism suddenly reappeared that recalled the putschist moralism of the pre-1964 economically liberal party, the National Democratic Union (UDN). This time, however, in contrast to the 1950s, the liberals were confronted with a consolidated democracy.4 The political and ideological radicalization of the traditional middle class manifested itself pathetically in its reaction against the “More Doctors” program—under which the Rousseff government placed foreign doctors in the poorest regions of the country and on the outskirts of the large cities, where the Brazilian doctors, who were in short supply, refused to work. Thanks to a constitutional provision that guarantees the universal right to healthcare, the Brazilian government, through the Unified Health System (SUS), established public health posts across the country, but failed to staff them with enough doctors—many have no doctor. Given this shortage, Rousseff decided to hire foreign doctors through general recruitment and through an agreement with the Pan American Health Organization and the government of Cuba. The initial response against the More Doctors program was merely a corporate reaction from Brazil’s medical profession. But this highly relevant public policy (there is nothing more terrible for someone than being sick and having no doctor to assist her) soon evoked a political reaction— one of indignation—from the wealthy and moderately wealthy, for whom the doctor shortage was not a problem. This was a sign that a new and aggressive Right was emerging. The Recession

In 2013 it was not clear to anybody that the Brazilian economy was already heading to an economic crisis, but the states revenues stopped growing. Instead of facing the new problem, Rousseff, unhappy with the poor economic performance of her administration, then tried a last-ditch, disastrous policy to boost the economy, which was heading toward a recession. She tried to compensate for the appreciated exchange rate and high real wages with an aggressive industrial policy. To stimulate investment, her policy promoted the exemption from charges associated with labor contracts in various industrial sectors, and it reduced the excise tax. This

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policy was extremely incompetent: it was not really an industrial policy, insofar as the benefits were extended to almost all industrial sectors; it was highly costly, causing a brutal fall in state revenues; and it ignored the fact that industrial policies are not undertaken to compensate for mistaken macroeconomic prices, but to strategically promote specific enterprises and industries. Industrial policy was effective in promoting economic development in Brazil in the 1970s, as it was many times in the East Asian countries, because the essential condition for its success—the equilibrium of the five macroeconomic prices—was guaranteed. This was not the case in Brazil in 2013 and 2014. Adopting an industrial policy without a competitive exchange rate is a recipe for failure. Adopting a reduction of taxes at a time that the state revenue was already falling was the perfect recipe for a fiscal crisis of the state coupled with a major economic crisis of the whole country. On the other hand, beginning in 2013, reflecting the fall of the international financial market’s confidence in Brazil, the appreciation of the real was reversed. After almost eight years in which the exchange rate had floated around R$2.60 per dollar against a competitive exchange rate that was going up from R$3.50 to R$3.80 per dollar, the relative decline of the capital inflows pressed, finally, the exchange rate toward depreciation. To avoid the inflationary consequences, the Central Bank actively intervened, selling dollars in the futures market (swaps) to keep inflation below the target. The devaluation’s causes were (1) a major fall in 2014 of the prices of the commodities exported by Brazil; (2) an increase of the real basic interest rate (SELIC) by the Central Bank to 7 percent a year;5 (3) a loss of confidence in the government, expressed in a relative decline of capital inflows despite the rise in the interest rate; and (4) an expected (and finally confirmed at the end of the year) increase of the interest rate in the United States, which caused the depreciation of all currencies not pegged to the dollar, including the real. The competitiveness of a country depends, first, on the quality of the technology it uses or its productivity; second, on the changes in the country’s comparative unit labor cost index, which compares its unit labor cost (wages divided by productivity) with those of competing countries; and, third, on the exchange rate, which, if the country’s productivity growth slows down, must depreciate to keep the economy competitive and the current account balanced. During the Rousseff administration, as in the Lula administration before it, technical competitiveness dropped because Brazilian companies did not meet the conditions necessary for investing and so modernizing their plants, and the comparative unit labor cost index increased because real wages rose faster than the growth in productivity. Currency depreciation should theoretically make up for this loss of technical and economic competitiveness, and keep the country’s current account

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balanced, while the people’s incomes would fall. However, as currency depreciation did not occur up to 2014, the country’s consumption level remained high and the current account deficit continued to grow. Rousseff’s administration was marked by major policy errors. Three were especially important. First, Rousseff overestimated the changes in macroeconomic prices (or in the “macroeconomic matrix”) achieved by the government during its first two years. She thus assumed that the country was ready to grow again when it was not, given that the recent devaluation had been insufficient to make the manufacturing industry competitive. Second, in the context of rising inflation, she resorted to price controls in the oil and electrical power industries. Third, when growth did not resume, she decided in favor of a major reduction in the taxes paid by the industrial enterprises, but the results were dismal: in one year, this policy transformed a reasonably satisfactory primary surplus in 2013 (1.7 percent of GDP) into a primary deficit of 0.6 percent and a nominal defict of 6.7 percent of GDP in 2014. This fiscal error, plus the 2015 recession, led liberal or orthodox economists to say that the fundamental cause of the recession was fiscal—that the social 1988 Constitution had led the country into a “structural fiscal unbalance” and that “the constitution does not fit in Brazil’s GDP.” This was false. From 1999 to 2012, Brazil presented satisfactory primary surpluses and kept the public debt under control—which disqualifies the “structural” argument; the tax burden, which represented 33.3 percent of GDP in 2006, had fallen to 32.4 percent in 2014. The fiscal imbalance only appeared clearly in 2014, with the equivocated fiscal policy then adopted, which was not a result of a populist policy (it benefited the manufacturing industry, not the voters), but of a mistaken concept of what an industrial policy should be and from a mistaken evaluation of its powers. From the second half of 2013, the market reflected the need for depreciation, but now the government and the Central Bank were no longer interested in letting the exchange rate depreciate because of inflation and the fact that elections were coming at the end of the following year. In less than two years, the Central Bank sold (actually, swapped) $100 billion of its reserves to avoid depreciation. As a result, the current account deficit continued to increase, and, what was worse, the crisis of the manufacturing industry and deindustrialization intensified. In 2014 the prices of Brazil’s export commodities—particularly iron ore, oil, and soybeans—fell precipitously at the same time that the international financial system (including the US Federal Reserve) began to perceive the financial fragility of Brazil’s economy, and accordingly reduced the supply of foreign currency to Brazil. In 2013, Brazil was heading toward a major recession and a political crisis: that year, the state’s revenues began to fall and the popular demonstrations in June caused a major drop in President Rousseff’s

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approval ratings, but both the economic and political crises broke out only in 2015, after the reelection of the president in October 2014. The economic crisis was a surprise. In January 2015, the banks and consulting firms that are covered in the Central Bank of Brazil bulletin, Focus, predicted a GDP growth rate of only 0.5 percent, but what actually happened in this year was a 3.8 percent GDP decline, and in 2016, GDP is expected to fall by around 3.5 percent—what will total a 7.4 percent fall. For 2017 the consulting firms predict a modest recovery. In September 2016, at the time of this writing, unemployment, which had been only 4.3 percent of the labor force in 2014, rose to 11 percent. Inflation, which had been around 6 percent, went up to 10 percent a year, and now is back to 7.5 percent. Public revenues fell dramatically (from August 2015 to August 2016 they fell 9 percent), while the Central Bank raised the interest rate, and, so the Treaury’s payments to rentier capitalists. Consequently, the nominal fiscal deficit rose to 9 percent of GDP in 2015 and to 9.6 percent from August 2015 to August 2016, characterizing a fiscal crisis. Brazil faced the worst recession in its history in 2015–2016, and yet mainstream economists in these two years only talked about one thing—the present fiscal crisis—as though that was the cause of this recession. In fact, the fiscal crisis was much more a consequence than a cause. It was not just misguided fiscal policy of 2013 and 2014, marked by tax exemptions, that caused the current economic and financial crisis. The tax revenue fell and the public deficit exploded mainly due to the recession. The real causes of the current recession were (1) the sharp drop in the price of commodities exported by Brazil in the second half of 2014; (2) the large overvaluation of the exchange rate since 2007 that led industrial companies to suffer a fall in the rate profit of 16.5 percent in 2010 to 4.3 percent in 2014; (3) keeping the real rate of Selic interest in real terms revolving around an absurd 9 percent per year during this period; (4) the large corporate debt (the financial side of the economic crisis) associated with falling profits; (5) the 2013–2014 fiscal mistakes, added to the decline in profits and led to (6) the loss of confidence in government, (7) to a mistaken fiscal adjustment policy in 2015, when the country was already in a recession, and finally—as a result of all this—to (8) the financial fragility of companies and their need to reduce their debts, that led to (9) the stoppage of investments and the major 2015–2016 recession. Thus, before the recession, the sector that was unbalanced was not the public sector, but the private sector—what led Felipe Rezende (2016) that this was a Minskyan financial crisis. Considering the financial balances of the three sectors of an economy, the private sector balance, the public sector balance, and the foreign sector balance, when the private sector balance gets into deficit (which began in 2007 and reached 2.9 percent of GDP in 2013) it is characterized as a Ponzi scheme, or a Mynkian crisis. A study by CEMEC (2016) confirmed this analysis: in 2015/16 half of

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the Brazilian business enterprises did not generate cash to cover their financial obligations. We must certainly face the fiscal crisis, but it will only be overcome with the return of growth. Summing up, the most important cause of the great recession was the high overvaluation exchange in the long period from 2007 to the first half of 2014, the fall of commodity prices in 2014, and the financial crisis that involved the private sector. It was the long-term overvaluation of the exchange rate that reduced the profit rate and led Brazilian business enterprises to borrow, and, eventually, reach insolvency. Nevertheless, the liberal orthodoxy only speaks on the fiscal crisis, and insists that it is “structural,” instead of asking the government to create special lines of credit to help the businesses enterprises to get out of the Ponzi situation and to help the Brazilian economy get out of the recession; instead of asking the Central Bank to reduce the interest rate, while making the exchange rate float around R$3.90 per dollar, to make the manufacturing industry competitive; and instead of resuming public investment, limiting fisal adjustment to current expenditures. The Impeachment

Then there was the political crisis, and it was a major one. Despite the growing and emotional opposition of the traditional middle class and of the rich, President Rousseff was reelected in October 2014, albeit by a narrow margin. She was re-elected against strong opposition from the entire bourgeoisie, thanks to the support that she had from the poor and from most of the Northeast. Thus, she was elected, but lacked “political legitimacy,” as she could not count on the support of braod civil society. Immediately after the economic and political crises broke out, each crisis started reinforcing the other. On the political front, the economically liberal opposition was back to its classic, or UDN, golpismo, and immediately sponsored a proposal of impeachment, with the support of a conservative and corrupt president of the Chamber of Deputies, Eduardo Cunha, who had recently been elected and was a member of the opposition; he was also a moralist from the traditional middle class. At the same time, a second major scandal, this one involving Petrobras, broke out into the open, the result of the “Lava Jato” [“car wash”] Operation, an investigation conducted by the Federal Police, the Public Ministry,6 and the Judiciary. This was a case of the state showing a republican capacity to defend the public patrimony, which business enterprises, lobbyists, and politicians had been trying to capture.7 André Singer (2015, p. 35) called this highly effective group of judges, public prosecutors, and federal policemen the “Justice Party,” as it adopted methods similar to those of the “Mani Pulite” [“clean hands”] Operation in the 1990s,

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which revamped the whole Italian political system. The Brazilian operation encouraged “prized delation” (information from defendants in exchange for a reduction in their sentences),8 and in less than one year Lava Jato sent 96 people to prison. It is still prosecuting and sending to jail a large number of people, including leading business figures, a major banker, politicians, and lobbyists, while recovering huge sums of money for the treasury. This investigation has caused indignation among the threatened politicians, who expected the president and her justice minister to intervene and stop the proceedings—something that both refused to do, with good reason. Suddenly, between December 2014 and January 2015, the Brazilians learned that their country was falling into the worst recession in memory. Rousseff was also surprised and, at this point, made a major political mistake. During the electoral campaign, she had assured the voters she would not adopt orthodox policies, but then, in December 2014, she decided to change the economic policy and adopt a strong fiscal adjustment. In addition to doing that, she chose a liberal-orthodox economist, Joaquim Levy, as minister of finance, and offered no explanation. This was a big political mistake; it created the opportunity for a classical austerity policy, a procyclical fiscal adjustment adopted in the middle of a deep recession, which aggravated it substantially. With the choice of an orthodox finance minister and with a fiscal adjustment, Rousseff expected to recover the confidence of the business class. She didn’t. It would have been understandable that she changed the policy when in January 2015 the recession became clear. She could not adopt a countercyclical policy because her expansionary policy in 2014 had broken the state finances, and because the capitalist class, without which it is impossible to govern a capitalist society, required the adjustment. She should have made it clear that in October, during the campaign, she and all the other economists, either in the opposition or in the government, were not aware that the country was heading into a major recession coupled with a fiscal crisis. But she didn’t say a word about that. In this moment her popularity suffered a second a major fall, plummeting to an 8 percent approval rating in early 2015 (Figure 23.1). The conditions for a major political crisis were set. Coupled with the economic crisis, 2015 and 2016 were years of deep political crisis, which ended up, in August 2016, with the impeachment of President Rousseff. The Lava Jato Operation was the center of it, as it was at the heart of the economic crisis, having created an enormous sense of insecurity among politicians and businessmen associated with the construction industry. A second ingredient of the political crisis was the political inability of the president and the fall of her approval ratings. The political opposition immediately accused the president of “electoral larceny” and asked for the impeachment, although no crime could be attributed to her.

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On March 15, 2015, a large demonstration against the Rousseff government, against the politicians, and against the poor quality of public services again took place in Brazil. According to Datafolha, 220,000 people gathered on Paulista Avenue, a major thoroughfare in São Paulo. That was a huge turnout. In this dismal political situation, the liberal-conservative opposition did not hesitate to associate itself with Cunha, president of the Chamber of Deputies, who was deeply involved in the Lava Jato scandal, and had the power to initiate the process of impeachment against the president. The Left, which was in a bind because of the direct involvement of the PT in the scandal, reacted indignantly at the initiation of the impeachment process, arguing correctly that it was an attempt at a parliamentary coup. For that reason, and probably because it became increasingly evident that the president had no involvement in any corruption, the mass demonstrations, which initially favored impeachment, lost supporters and petered out. In December 2015, my evaluation was that Congress would most likely reject Rousseff’s impeachment—and that this rejection would confirm my view that Brazil is now a consolidated democracy. I was mistaken. In the beginning of 2016, the vice-president of the Republic, Michel Temer, also president of PMDB, and his associate Wellington Moreira Franco, realized that the impeachment was an opportunity for them and, although not being neoliberal, asked liberal-orthodox proponents to write a plan for PMDB that included all the neoliberal reforms aiming to dismantle the welfare state that was being built since the 1988 Constitution. The strategy worked. The PMDB got the support of the three liberal-conservative parties, the PSDB, the DEM, and the PPS (the former Communist Party), and the process of impeachment was successful. Although the impeachment followed all the formal legal requirements, it was a classic parliamentary coup. Brazilian law requires that the president to be impeached must have committed a crime, and she didn’t commit any crime. The small irregularities in the execution of the budget definitely did not constitute a crime. All the members of the Congress knew that. The impeachment had other reasons: the opportunity seized by the economic elites of ouster from the government a political party, the PT, that made a lot of compromises, but that she never was able to fully coopt. The economic and political crisis that began to take shape with the 2013 June demonstrations and with the reunification of Brazil’s economic elites (productive as well as rentier, industrial as well as agricultural and financial) against the PT and the Rousseff administration represented more than just a government crisis, or even the demise of the developmental pact proposed by the PT. It represented the end of the Democracy and Social Justice Cycle (1977–2014), which had been successful in achieving democracy and in reducing economic inequality, but had failed to promote eco-

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nomic growth. In fact, after the strong growth of per capita income achieved between 1950 and 1980 (averaging 4.1 percent a year), the next few decades saw a growth rate of around 1 percent—a quasi-stagnation for a middle-income country that was supposed to be catching up with the economic powers. Cícero Araújo (2015, pp. 30–31), in an article with the suggestive title, “Defeated in Victory,” argues that Brazil was actually going through a regime change, a crisis that is leading to new patterns of statesociety relations—a “shift of the deeper layers of our democratic regime” towards a new political phase that would be “substantially more conservative.” I agree with this interpretation. For the past several years, I have been saying that the Democracy and Social Justice Cycle was showing signs of exhaustion, and I have been wondering what will succeed it. If we consider the 2008 global financial crisis, which represented a major failure of the liberal or orthodox ideologues, we could conclude that such a crisis would open the door to a progressive new cycle. But this was not the case in Brazil. The state-society cycle that began in 1980 and ended in 2014 was a progressive cycle that included the short-lived 1991–2002 Liberal-Dependent Pact. The 2015 economic and political crisis was a crisis of a left-wing political party in office that was unable to make its strong ideological commitment consistent with economic development. This was because it fell for fiscal and, especially, exchange-rate populism, which resulted in large current account deficits, and in profit rates for the manufacturing enterprises that were too low to encourage them to invest. Given the shift to the Right and to economic liberalism, what are the chances that a conservative or economically liberal class coalition can be successful in resuming economic growth and catching up? In my view, they are small. With the failure of the social and developmental pact that Lula and Rousseff tried to construct, naked class struggle and conflict will prevail over class cooperation. This is not the socialist struggle of the workers against the capitalists, but the neoliberal fight of the rich against the workers. Liberal-orthodox economists are hoping that the likely outcome of this struggle—a constitutional amendment freezing in real terms state expenditures aimed at dismantling the social state and making labor contracts more flexible—will reduce the cost of labor and thereby help recover Brazil’s competitiveness. They are wrong. Some advances may be achieved in this area, mainly a reform of the social security system by establishing a minimum age for retirement,9 but the fundamental cause of low profits in the manufacturing industry is the persistent failure to neutralize the tendency toward cyclical and chronic overvaluations of the exchange rate, which has existed since 1990. The heterodox economists in office between 2003 and 2015 failed to redress this failure because they lacked sufficient power, technical competence, or both. But when in office liberal or orthodox economists were also unable to redress this failure because, in addition to the

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possible lack of power and competence, they ignored or rejected the idea that countries incurring current account deficits tend to have an overvalued currency. This means that these economists are, in practical terms, condemning their countries to exchange rate populism and quasi-stagnation in the name of orthodoxy. In fact, I never was so pessimistic in relation to the economic prospects of Brazil, given, on one hand, a neoliberal government originated from a parliamentary coup, which ignores the major competitive disadvantage that the manufacturing industry suffers due to the high interest rates and the long-term overvalued currency trap, and, on the other hand, the high preference for immediate consumption and the loss of the idea of nation that characterizes Brazil today. Brazilian society, which was so cohesive in the 1980s, in the framework of the 1977 Democratic-Popular Pact, will be an increasingly divided society in economic and political terms, and recovery will be difficult, if not impossible.

Brief Theory 11: The Wage-Led or Export-Led Model? Among classical developmental economists there is an old belief that Brazil should follow a strategy oriented to the domestic market, one that would seek to create a system of mass consumption. From the 1940s to the 1960s, they were critical of the devaluations of the national currency, which they viewed as an orthodox approach that only served the interests of the local commodity exporters. They were skeptical of exchange rate devaluations, which would economically benefit and politically strengthen the commodity exporters, who opposed industrialization and would prefer to promote economic growth by increasing import tariffs (Bresser-Pereira and Rugitsky, 2016). In the 1950s, Raul Prebisch (1963) derived the import substitution model from the concept of the foreign constraint (the two income-elasticities), but in the 1960s he changed his mind, and instead advocated an export-led strategy that would be more moderate.* In 1979, Anthony P. Thirlwall formalized the concept of the foreign constraint, showing clearly that the growth of exports sets a limit the growth rate of GDP. This confirmed the superiority of the export-led strategy.† The fact that the only countries that were successful in catching up in the twentieth century—the East Asian countries—adopted export-led strategies also confirmed this view. A major change took place in 1967, when Brazil’s government complemented high import tariffs with high subsidies for the exporters of manufactured goods. In doing so, the developmental government was not adopting an appreciated exchange rate (as many supposed), but was instead creating a competitive exchange rate within the framework of its industrial policy. In other words, the industrial policy included the developmental macroeconomics policy of neutralizing the Dutch disease and keeping the exchange rate competitive through the use of a disguised commodity-export tax that the commodity exporters called

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“exchange rate confiscation.” This export-led strategy was highly successful. The share of manufactured goods as a total proportion of exports rose from 6 percent in 1965 to 62 percent in 1990. Today it is impossible to replicate this system of high import duties and high export subsidies due to Brazil’s agreements with the World Trade Organization (WTO). Therefore, when we accept a chronically overvalued exchange rate, we are putting up with deindustrialization and low growth rates, we are renouncing competitive integration into the international system, and we are handing over our domestic market to third parties. This is what we have seen in Brazil since 1990. For a few years, in the 2000s, the manufacturing industry benefited from the boom in commodities and the redistribution of income achieved by the Workers’ Party (PT). But when the exchange rate appreciated (in 2007), and stayed high for approximately three years, it gave enough time for the importers of manufactured goods to organize their imports. Once that organizing was done, Brazil’s domestic market was captured by foreign exporters. New developmentalism maintains that a non-neutralized Dutch disease and, more broadly, a non-neutralized tendency toward cyclical and chronic overvaluations of the exchange rate will produce a long-term overvalued exchange rate. New developmentalism offers a theoretical explanation for the problem, and it can demonstrate how such long-term overvaluation has a direct negative impact on the investment rate, insofar as it blocks the access of businesses in middleincome countries to the foreign markets and even to their own domestic markets. From this, new developmentalism concludes that a policy aimed at keeping the exchange rate competitive is essential for growth. If such a policy is able to counter the tendency toward overvalutation by neutralizing the Dutch disease, and the government rejects the three habitual policies that appreciate the national currency (growth through foreign savings, high interest rates to attract capital and control inflation, and the exchange rate used as an anchor against inflation), exports of manufactured goods will grow fast, and we can say that this growth strategy is export-led. Some classical developmental economists were led back to the export-led versus wage-led controversy—specifically, the question of whether growth strategy should be oriented toward exporting manufactured goods or toward increasing wages and supplying the domestic market. Such discussions had gained a theoretical status in the 1990s due to the publication of papers by three distinguished economists: Robert A. Blecker (1998) and Amit Bhaduri and Stephen Marglin (1990), who showed their preference for a wage-led strategy. Besides being effective in promoting growth, they reasoned, it would be consistent with the reduction of inequality. They were wrong. My argument is that a wage-led strategy would only be consistent with a closed economy that adopts the import-substitution model; or, in other words, a wage-led strategy would work if the country sets up a huge import-tariffs system. Instead, if we acknowledge that middle-income countries must get integrated into the world economy in a competitive way (not in the subordinated way defended by economic liberals), an export-led strategy is the right strategy. In the late 1960s, developmental economists were already acknowledging the advantages of an export-led strategy. The domestic market is the greatest asset that a country’s economy can have; its magnitude is defined by its GDP:

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the sum of wages, profits, and capital income. It was in order to take advantage of this market in the 1950s that Brazilian developmentalists defended the strategy of industrialization by import-substitution. But, when those same economists realized in the late 1960s that this model of industrialization had been exhausted, they subscribed to the successful process of increasing the exports of manufactured goods. This expanded the domestic market and raised wages by accelerating the country’s growth. Brazilian success in exporting manufactured goods coincided with the changes that were taking place in capitalism as it went global. In this new context, economies are more open than in the past. Now, competing on an equal footing for markets for manufactured goods and exporting more technologically sophisticated goods have both become prerequisites for development. There is no sense, therefore, in thinking about turning the economy inward and going back to import substitution. In fact, when a country considers its growth rate to be satisfactory, the development strategy should not be export-led or wage-led, but instead should be a balance between the two: exports should grow at the same rate as GDP growth, so that the economy’s degree of openness remains constant, and wages should keep pace with increases in productivity. This way, industrial enterprises will have lucrative investment opportunities, while the domestic market will flourish. But when the level of growth is unsatisfactory, as has been the case in Brazil since 1980, and when low growth is caused mainly by an appreciated exchange rate and by a high interest rate, it will be necessary to depreciate the currency until it reaches the industrial equilibrium. For some time, the country will experience a transitional period from a long-term overvalued to a long-term competitive exchange rate, and from a lower to a higher rate of sustained growth. During that period, which will be brief, wages will grow more slowly and the rate of productivity growth and exports will grow more than the GDP, reflecting not an export-led strategy, but a required macroeconomic adjustment. * See Luiz Carlos Bresser-Pereira and Fernando Rugitsky (2015). † See Raúl Prebisch (1963) and Anthony P. Thirlwall (1979).

Notes

1. The “social developmentalists” I am referring to include Ricardo Carneiro and his group of economists at Unicamp. 2. Similar drops in popularity were also experienced by the state governors. 3. They generally switched to the Progressive Party (PP), the successor to the Social Democratic Party (PDS), which had succeeded the Brazilian Renewal Alliance (ARENA), the conservative political party that had supported the military regime between 1964 and 1984. 4. A sign of the old putschist moralism and of its lack of legitimacy in a consolidated democracy such as Brazil’s was the call for a March of the Family with God for Freedom in São Paulo on March 22, 2014, which tried to replicate the marches of the same name held in March 1964 in Rio de Janeiro and São Paulo. As expected, the demonstration failed: the turnout was only 700 people. In the marches of 1964, some one hundred thousand took part.

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5. The nominal interest rate was 14.25 percent, and the predicted inflation rate for 2016 was 7.25 percent. 6. The Public Ministry is a government institution unique to Brazil. It is similar to an attorney general’s office, but consists of independent prosecutors who handle cases of broad public interest at the federal and state levels, especially cases involving wrongdoing. 7. I defined the “republican state” elsewhere (Bresser-Pereira, 2004) as a state that is able to defend itself (and, thus, the public patrimony) from rent-seeking attempts to capture it. 8. Brazilian law encourages informants to implicate people by reducing the penalties for the informants who effectively contribute to an investigation. 9. In Brazil, people retire after a certain number of years of work, not at a particular age, a practice that allows some to retire very early.

24 The Quasi-Stagnation Since 1981

We can now review the Democracy and Social Justice Cycle (1977–2014). It began with the reaction of the business entrepreneurs to the 1977 April Package, achieved power with the democratic transition of 1985, and was marked by substantial progress in the social domain. Economic growth slowed down dramatically, and the country went into a process of premature deindustrialization. Social development materialized in the great and successful fight for the democratic transition, headed by the 1977 Democratic-Popular Pact and the Diretas Já campaign, and culminating in the approval of the 1988 Constitution and the achievement by Brazil of the second minimal condition for democracy: universal suffrage.1 The new Constitution also decisively affirmed social rights, creating the basis for a huge increase in spending on social services (which almost doubled as a percentage of gross domestic product [GDP], from 13 percent in 1985 to 23 percent in 2014) and the establishment of a universal healthcare system: the Unified Health System (SUS). It also created a broad system of cash transfers that practically eliminated misery in a country with a per capita income amounting to a fourth or a third of those in the rich countries. Yet the growth rate during this period was dismal. As noted before, GDP per capita growth between 1981 and 2014 was 1.3 percent a year, in contrast to 4.1 percent a year for the period from 1950 to 1980. In this chapter, I will first present the social advances of Brazil; second, I will then resume a discussion of my views on the economic causes of the country’s quasi-stagnation; and third, I will address the three broad cultural causes for this quasi-stagnation: the high preference for immediate consumption that we see in Brazil, the loss of any sense of nationhood, and the alienation of the Brazilian elites.

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A Short History of Social Progress

The problem of inequality proved to be the fundamental problem of Brazilian society in the 1970s, and it remains so to this day. Since the democratic transition of 1985, there have been significant advances toward ameliorating this inequality, and the Workers’ Party (PT) governments have given this issue clear priority. Inequality, inherited from the Brazilian slave system that ended so late (1888), defined in its time a society formed by a small elite and a huge mass of the poor and slaves, between which there was a small middle class of professionals and small merchants. This social structure started to change during the Nation and Development Cycle (1930–1977). During the military regime, the space that the popular classes were beginning to occupy was closed, the rising professional middle class and the businessmen were privileged, and higher education became a priority. Unfortunately, basic education was left on the back burner, and the concentration of income in Brazil hit new highs. However, this situation began to change once again with the democratic transition of 1985. Democracy was unable to overcome the economic regime of low growth that has persisted since 1980. But it was able to address with relative success the problems of inequality and poverty. A significant indicator of this fact is the changes in the Gini coefficient. In this measure, the higher the number, the greater the inequality. After reaching its peak in the early 1990s, inequality in Brazil began to fall significantly while the country was still in the period of high inertial inflation, as we can see in Figure 24.1. The height of inertial inflation occurred in 1989, when it was becoming hyperinflation, and the Gini coefficient hit 0.636; from then on it fell consistently, as the country moved towards greater equality, reaching 0.490 in 2015. The improvement in the coefficient since 1989 is associated with the end of high inflation, first through the Collor Plan (1990) and later through the Real Plan, which put an end to high inflation in 1994. It is also associated with the redistributive policies under the administrations of Luiz Inácio Lula da Silva and Dilma Rousseff, particularly the increase of the minimum wage, which rose 70 percent in real terms between 2003 and 2014 (Lopez-Calva and Rocha 2012). As to the share of wages in the total revenue (total remuneration of the factors of production), it decreased until 2004, when it amounted to 45.8 percent of total revenue, and subsequently began to increase in response to the wage policy, surpassing 50 percent in the 2010s (Bastos 2012, p. 27). Actually, to understand the increase in the standard of living and the reduction in inequality during this period, we have to consider the expansion of the Bolsa Família and the building of a social state in Brazil. Since the democratic transition, Brazilian society has been complying with what had been agreed upon in the 1977 Democratic-Popular Pact and the Diretas Já campaign: to reduce inequality by increasing public expendi-

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Figure 24.1: The Gini Coefficient in Brazil, 1960–2014

Sources: The data for 1960, 1970, and 1980 are from: Velloso, João Paulo dos Reis, ed. (1991). A Questão Social no Brasil [The Social Issue in Brazil]. São Paulo: Nobel. The data from 1976 to 1979 are from: Ramos, Lauro (1993). A Distribuição de Rendimentos no Brasil 1976/85 [The Distribution of Income in Brazil 1976/85]. Rio de Janeiro: Institute for Applied Economic Research (IPEA); the information was drawn by the author from the National Household Sample Survey (PNAD). The data from 1981 to 2009 were collected from IPEA's website; regarding those years for which no data were available (1991, 1994, and 2000), data from the following year were used. Note: Observation: second-degree polynomial tendency.

ture in the social domain. This expenditure, which amounted to 12 percent in 1985, today amounts to nearly 24 percent of the GDP. The tax burden was also increased to finance the interest payments on the public debt resulting from extortionate interest rates. But the main increase in taxes was due to the need to finance education, healthcare, and the deficit of the social security system. Consequently, during a historical period when the world was dominated by neoliberal hegemony, Brazil managed to build a social state. In the 2000s, the satisfactory growth rates boosted the social indicators, which continued to improve up to 2014, further aided by a strong reduction in the birth rate in the 1980s. Although the growth rates fell in the 2010s, full employment was ensured up to 2014, while the formalization of labor contracts increased. Only in 2015, when a major economic and political crisis broke out, did unemployment increase, rising from 4.3 percent of the labor force in December 2014 to 9 percent in December 2015.

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Brazil is being transformed by its social policies, particularly the SUS, which I view as the greatest achievement of Brazil’s democracy, and by the fact that, for the first time in the country’s history, basic education is given priority by the Brazilian elites. The quality of education remains understandably poor, due to the relative illiteracy of the parents and the low quality and low pay of the teachers, but every year the quality is improving in comparison with other countries. The substantial increase in social expenditures was the outcome of the great social agreement—the 1977 Democratic-Popular Pact—that existed during the democratic transition. This pact was the result of pressure from the voters, families, particularly women, and from nongovernmental organizations for more and better services in education and healthcare. The targeted cash transfers, particularly the Bolsa Família, were also very successful programs. In this area, the country owes a special debt to Senator Eduardo Matarazzo Suplicy, who has led a long and tireless fight for the establishment of a basic income system.2 In the context of a consolidated democracy, Brazil has been successful in the social domain, under the guidance of the federal government. The implementation of reforms, however, has been decentralized to the states and the cities. Table 24.1 shows the extraordinary progress Brazil has made since 1980 with regard to the Human Development Index (HDI) indicators for life expectancy, infant mortality, the rate of illiteracy, and GDP per capita. Elementary and high school education now reaches 97 percent of Brazilian children. Even if the quality of elementary and middle school education in Brazil still leaves much to be desired, affected as it is by the very poor family background of the students, it is improving. According to the report 2000–2015 Education for All Report (2015, p. 84), published by the United Nations Educational, Scientific and Cultural Organization (UNESCO), “In Brazil, the percentage of repeaters declined from 24 percent to 9 percent in 2011.” Table 24.1: Social Indicators, 1980–2014 Item

Human Development Index Life expectancy (years) Infant mortality (1-year-olds, %) Illiteracy rate (%) Per capita GDPa (PPP, 2005 US dollars)b Per capita GDPa (PPP, 2012 US dollars)b

1980

0.55 62.5 69.1 25.9 7,310 —

2014

0.74 74.9 14.9 8.4 10,200 15,412

Sources: United Nations Development Programme (UNDP); Brazilian Institute of

Geography and Statistics (IBGE). a GDP = gross domestic product. b PPP = purchasing power parity.

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The conservative critique states that Brazilian social expenditure has been concentrated purely on relief activities. In fact, there was a significant increase in social care expenditure in Brazil, mostly with the adoption of mechanisms supporting the minimum wage, which are now concentrated in the Bolsa Família. However, the cash-transfer programs that were included and expanded under the Bolsa Família program managed to eliminate or substantially reduce extreme poverty.3 A large number of studies show a big drop in the poverty rates and some improvement in the distribution of income since 1996.4 That year, Brazil’s Gini index was 0.599. Since then, it has been decreasing consistently; as noted above, it reached 0.490 in 2015.5 For another measure of inequality, we can look at the spread between the earnings of the rich and the poor. Taking 1996 as the baseline once again (because this was the year of top income concentration), the earnings of the richest 20 percent of households that year were 29.3 times higher than the earnings of the bottom 20 percent. By 2004, this ratio had dropped to 21.9 times.6 However, these data are not entirely reliable because of a shift in what was considered income. Of the total amount of income measured by the National Household Sample Survey (PNAD) in 2004, the most recent year for which official information is available, 76 percent of the national income derived from labor income.7 Or, according to the Brazilian Institute of Geography and Statistics (IBGE), labor income (of wage earners and self-employed individuals) in 2010 represented 40.1 percent of the country’s total national income. On the other hand, we know that since the 1990s the amount received by the rentier capitalists as interest on the public debt increased extraordinarily: in the early 1990s, this amount represented around 2 percent of GDP; in 2005, it reached 8.3 percent of GDP; in 2012, it had fallen back to just under 6 percent of GDP; and in 2015, after a new round of interest rate increases by the Central Bank and the fall of GDP, the rate was back to 8 percent. For this reason, I am persuaded that the rentier capitalists and financiers have a seigniorage of around 6 percent of GDP;8 they believe that the minimal real interest rate is 6 percent a year and that they have the “right” to 6 percent of GDP in the form of interest paid by the state. Despite the general reduction in inequality in Brazil, which can be observed by decile or by the Gini coefficient, the rentier capitalists, or the top 2 percent, have become even wealthier. How could the rich get richer while income inequality is decreasing? When middle-class income declines in relation to that of the poor, the usual rates of income distribution point to a reduction of economic inequality, even if the income of the rich people has greatly increased. What has been happening since 1999 is a decline in the incomes of the middle class—with consequences during the political crisis that began in 2015. Between 2001 and 2005, the income of someone who was receiving more than R$1,050 a month dropped by 46 percent in real terms (i.e., adjusted for inflation),

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compared with what was paid to those who were just being hired.9 Perhaps the simplest summation of the distribution of income during this period is that, whereas the income of both the entrepreneurial and professional middle classes fell relative to the incomes of the rich, the very rich (who are mostly identified with the rentier capitalists and who represent the top 2 percent of the population) benefited from the increase in interest rates. The relatively skilled working class (the C Class of marketing and public opinion surveys, which is being called the “new middle class”) also benefited, and had access to mass consumption. Consequently, due to the drop in the income of the proper middle class, the normal indicators used to gauge the distribution of income have been favorable. However, in this instance there was a redistribution of income, but it was favorable to the poor and to the very rich, and harmful to the middle class. A substantial increase in the rate of formal employment took place until 2014, reflecting the exhaustion of the unlimited supply of labor that had depressed wages and facilitated the informal hiring of personnel by business enterprises, and resulting in a corresponding reduction in unemployment. This reduction in the labor supply, which enabled the country to finally reach the Lewis Turning Point (the moment when the supply of labor becomes exhausted), is related to a strong decline in the birthrate since the 1980s. The rate was 3 percent in the 1960s; today it is about 1 percent. During the 2000s, the unemployment rate dropped substantially while the growth rate was increasing: in 2005, the unemployment rate was 9.5 percent of the labor force; in 2012, it was below 5 percent.10 These two trends, and the increase in formal labor’s share of total labor, contributed to the reduction in inequality that took place in Brazil. However, the major recession that began in 2015 has altered this nice picture dramatically: income fell by around 7.4 percent in 2015–2016, and the unemployment rate at October 2016 had reached 11 percent—these two facts indicate that part of the gains that the poor had claimed from the 1980s were beginning to be lost, and that inequality was again increasing The social improvements were significant, but the 2015 crisis showed that they could be reversed. As the problem of economic growth has reemerged, social challenges remain a key issue. Inequality is still considerable and, in this democracy, workers’ demands for bigger and better social expenditures are very strong. This is why the new developmentalism is also, and necessarily, a new social developmentalism. The challenge is to attain and sustain high growth rates while decreasing inequality. Conservative critics say that this is impossible.11 In the short term, that would be true if the country’s problem were how to increase the investment rate, and if this depended on depreciating the exchange rate to take it to the industrial equilibrium level. A devaluation of the real, dropping it to nearly R$3.00 per US dollar (at January 2014 prices), would imply a small reduction in

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wages in the short term. Therefore, wages would no longer grow with the increase in productivity, as is generally the case in healthy capitalist economies. However, this reduction would be widely compensated for in the medium term by an increase in the growth rate and by an increase in wages due to higher productivity. The Quasi-Stagnation Since 1981

During the Lula administration, it became clear that the country was undergoing premature deindustrialization. I think that I was the first to warn of this fact when, in 2005, in a small article in the newspaper Folha de S. Paulo, “The Natural Resources Curse,” I presented the basis for what would be my Dutch disease model (Brief Theory 7). I warned that, with the trade and financial opening of 1990–1992, the country had ceased to neutralize the persistent currency overvaluation that defines the Dutch disease, the exchange rate had appreciated over the long term, and a process of deindustrialization had begun (Bresser-Pereira 2005). My assertion had a theoretical foundation, not an empirical one. It was based on a theory I was then developing which said that, due to the non-neutralization of the Dutch disease and to the three mistaken habitual economic policies (growth with foreign savings, the use of the exchange rate as an anchor to fight inflation, and a high interest rate), the exchange rate tended to be cyclically and chronically overvalued. And it rested on the fact that, with the trade and financial opening, this tendency had ceased to be duly neutralized. The theory was confirmed over the following years in empirical terms, while an intense debate ensued that is still taking place, despite the evidence of the data and the strong theoretical explanation for them. A country suffering from the Dutch disease necessarily has an overvalued currency. Brazil had only recently industrialized, and it achieved an impressive growth rate between 1930 and 1980 because it had neutralized its Dutch disease or, in other words, because it had neutralized the chronic overvaluation of the currency that characterizes all developing countries that did not manage their exchange rates. A country that creates a financial opening and liberalizes its trade, as Brazil did in the early 1990s, no longer has powerful instruments for controlling its exchange rate because it no longer controls the capital inflow. In the case of Brazil, this was particularly true because the government ceased to impose a tax on commodity exports—the so-called exchange rate confiscation—which, in different ways, had been neutralizing the Dutch disease since the 1930s and had paved the way for the Brazilian national and industrial revolution. Thus, deindustrialization became inevitable, as the appreciated exchange rate took away the competitiveness of the competent domestic enterprises that had been exporting

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until then; in addition, the strong currency left the domestic market vulnerable to imported goods that competed directly with products the country was able to efficiently produce. Brazil’s premature deindustrialization started in the 1980s due to the huge foreign debt crisis of that decade. But its trade and financial opening in the early 1990s, and the resulting currency overvaluation, made it durable. Since then, Brazil has been at the mercy of its tendency toward cyclical and chronic currency overvaluation, so the exchange rate has remained appreciated over the long term. The result was a loss of competitiveness by the Brazilian manufacturing industry, a drastic reduction in the exports of manufactured goods, and an increase in the imports of manufactured goods from competing foreign firms—all of which led to a serious and premature process of deindustrialization.12 Evidence that we were right, however, was accumulating. As we observed in Figure 1.1 (back in Chapter 1), the percentage of the GDP taken up by the manufacturing industry increased sharply, from 20 percent in 1947 to 36 percent in 1984, but it has since dropped in two stages, eventually reaching 11 percent in 2015. The share of industrial employment in total employment also fell: from 27.0 percent in 1986 to 17.9 percent in 2009; the trade balance for manufactured goods, which had been a $29.8 billion surplus in 2006, became a huge deficit of $48.7 billion by 2011. This was “compensated” for by an improvement in the balance of commodity exports—which have a value-added amount per capita that is much smaller than the amount for exports of manufactured goods. Whereas China impressively became the world’s factory through its technological development, Brazil became the world’s farm, and we can hardly point to any technological development. As Pierre Salama (2012, p. 242) observes, “The increase in the manufacture of increasingly sophisticated products is a fact in China, which does not happen in Brazil, except for a few sectors.” Consequently, taking 1991 as a baseline of 100, the productivity of Brazil’s manufacturing industry in 2011 had fallen to just 49, well below the levels of other emerging countries.13 This rate was only favorable when Brazil’s manufacturing industry was compared with those of the rich countries, which have been deindustrializing for some time. Consequently, Brazil’s index of economic complexity—an interesting index of structural change developed by Ricardo Hausmann et al. (2014)—increased sharply from the 1960s (when the index began to be calculated) to the 1990s, but it showed a decreasing complexity from the 1990s on (See Figure 24.2). The cause of this obvious process of premature deindustrialization was the overvaluation of the real. At the beginning of 2014, the exchange rate was around R$2.40 per dollar, whereas my appraisal was that the industrial equilibrium exchange rate in Brazil at that time must have been around R$3.30 per dollar, or, at December 2015 prices, R$3.80 per dollar. But it is

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Figure 24.2: Brazil’s Economic Complexity Index, 1963–2013

Source: The Observatory of Economic Complexity.

possible that this rate should have been slightly higher. According to a competent econometric study carried out by André Nassif, Carmen Feijó, and Eliane Araújo (2011), the “optimal” level, that is, the industrial or competitive equilibrium level of the exchange rate, was R$2.84 per dollar in 2011, which amounted to R$3.28 at 2014 prices. The numbers can be debated, but the work confirms that exchange rate overvaluation in Brazil has been considerable. Nelson Marconi (2013), in turn, estimated the industrial equilibrium exchange rate in 2012 at R$2.75 per dollar (R$3.02 at January 2014 prices). Finally, José Luis Oreiro, Flavio A. C. Basilio, and Gustavo J. G. Souza (2013) estimated this rate for the end of 2013 to have been R$3.30 per dollar. We therefore have three very close estimates of what rate would constitute the industrial equilibrium. With the accumulation of so much evidence, it was finally necessary to recognize the problem of deindustrialization. However, for neoliberal orthodoxy the exchange rate is still not to blame. Its many economists and journalists always prefer to put it aside, to avoid discussing it. They know this is a macroeconomic price whose valorization is a perverse means of meeting the inflation target and of increasing the gains of rentier capitalists and financiers. So they prefer not to consider it. These people are not interested in the profits of productive investment, but rather in rents in the form of real interest. They search, then, for other reasons to explain deindustrialization, and state that it is the “lack of savings.” They ignore the fact that insufficient savings is caused by insufficient investment. Or, they then say the reason is the “Brazil cost,” that is, the insufficient infrastructure; extremely high taxes;

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excessive burden of the payroll, along with labor rights; and the lack of technological skills. And they ignore the fact that all countries search to address these problems, regardless of their ideological orientations. The new developmentalism is distinct from the liberal orthodoxy with regard to the problem of infrastructure. The delay in investment in this area between the 1980s and mid-2000s was due to two beliefs prized by liberal orthodoxy and the policies they give rise to. First, that there is no difference between public expenditure on consumption and on investment, so both types of expenditure should be counted as identical in the estimate of the primary surplus to be attained. Second, they insist that there is no difference between producing roads and hydroelectric power plants and producing shirts or vehicles, and that, therefore, the market is equally competent in allocating funds to both types of industry. It was these two beliefs that, in the 1990s, led to the dismantling of the engineering sectors of the federal administration (in the ministries that take care of energy, mining, transportation, and communications); to the unemployment of engineers; and, in turn, to a sharp decrease in the number of young people interested in attending engineering school. Only recently, after the government began to plan investments in infrastructure and in the basic materials industries through the Growth Acceleration Program (PAC), and after the National Bank of Economic and Social Development (BNDES) increased financing to those sectors, were engineering programs once again sought after. Even so, a fundamental problem in the development of those sectors has still been the dismantling of some government departments and private engineering companies due to the lack of engineers. In the 2010s, while the deindustrialization was advancing and the growth rates were clearly unsatisfactory, the economy continued to have full employment. This was a puzzle that needs to be explained, so here is one explanation: The currency appreciation that has taken place has increased wages and consumption artificially, and boosted the demand for domestic services. It thus spurred a transfer of labor from the manufacturing industry to domestic service; that is, workers were being perversely transferred from a sector in which the value-added per capita is high to a sector in which the value-added per capita is low. This is perverse because we know that an increase in productivity results from the transfer of labor from industries that are less sophisticated in technological terms, and which pay low wages, to sectors with higher technological sophistication, which add a higher per capita value to production and pay higher wages. It is this process that will boost overall productivity, not an increase in the production of the same good or services. Economic development is a process of structural change because it implies this transfer—to higher productive sophistication, or industrialization. During the last cycle of overvaluation, between 2007 and 2014, Brazil’s manufacturing industry was even worse than an unprotected industry; it was

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a negatively protected industry, due to this long-term (seven-year) exchange rate overvaluation. Counterbalancing this was tariff protection averaging 12 percent, but this was far from high enough to counteract the effect of the exchange rate overvaluation. Nevertheless, liberal economists and foreign countries often blame Brazil for being too “closed” or too “protectionist.” They are wrong. Brazilian business enterprises, except for commodity exporters and the non-tradable service and construction industries, suffer a competitive disadvantage of some 20 percent in relation to their foreign competitors because the mechanism that neutralized the Dutch disease, through a system of high import duties and export subsidies for manufactured goods, was dismantled in the early 1990s as part of the process of trade liberalization. The currency became overvalued in the long term by 15 percent to 25 percent, depending on the prices of the goods exported, only to become sharply depreciated during balance-of-payment financial crises. Thus, Brazilian enterprises producing tradable goods and services faced a major competitive disadvantage that has been consistent since the early 1990s. The industrial policies and controls on capital inflows that the government implemented during the Lula and Rousseff administrations were far from enough to offset the overvalued currency. The huge depreciation that the market eventually forced on Brazil in 2014–2015, after a long delay, considering the floating exchange rate regime, solved the problem and made competent or potentially competent tradable-goods businesses competitive again. It is this external adjustment, more than the fiscal adjustment now underway, that will help Brazil overcome the present recession. But in the long-term the exchange rate will again follow the tendency toward cyclical and chronic overvaluation, and the Brazilian economy will remain quasi-stagnant. Insufficient Savings?

Throughout this book I have been arguing that Brazil has been quasi-stagnant since 1990 due to the overvaluation of the currency in the long term, and that this has represented a major obstacle to investment and growth insofar as this overvaluation blocks access to demand—both foreign and domestic. The classical economists taught that the investment rate depends on the expected profit rate and the interest rate. John Maynard Keynes agreed, but he added that the expected profit rate depended on demand, which, contrary to what the classical and neoclassical economists affirmed, was not automatically ensured. New developmentalism accepted this, but argued that investment also depends on the exchange rate because, when it is or may be overvalued in the long term, domestic firms do not have access to demand.

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In this analysis, the investment rate does not depend on previous savings. Following Joseph Schumpeter and Keynes, what is fundamental to investment and growth are (1) innovation, effective demand, or both; plus (2) the existence of a financial system that supplies credit. Neoclassical economists are unhappy with this conclusion, arguing that we ignore the role of previous savings. Indeed, it is quite clear that private investment does not depend on previous savings. As Keynes showed, the process is the other way around. Investments determine the increases in income, and savings are a residuum. But this is a short-term analysis. In the long term, we have to consider that the state is also able to accumulate savings—public savings—to partially finance public investments. And, again, in the long term, cultural differences in relation to savings make a difference, as we see clearly in the fast-growing Asian countries. In fact, the level of savings in Brazil is low. But for it to be increased, it is useless to appeal to the economic agents to save more. What we have to do is to adopt Keynesian logic, according to which it is investment that determines savings. So, in order to increase savings, the country must implement three measures: First, the state should set up lucrative investment opportunities—something that will essentially depend on a reasonably low interest rate and on a competitive exchange rate (at the industrial equilibrium level)—that would connect the competent domestic companies with foreign and domestic markets. Second, the state must achieve positive public savings, rather than just a primary surplus. And, third, the state must create pension funds and other institutional mechanisms that mandate compulsory contributions. Now, despite the progress carried out during the first two years of the Rousseff administration, the power of rentier capitalism in Brazil has so far prevented the real interest rate from dropping to acceptable levels. And the power of the commodity exporters has prevented the imposition of a variable tax on their exports, which would have allowed the exchange rate to approach the industrial equilibrium level. But another factor has been the government’s fear, whether of higher inflation or of reduced wages. This fear has existed despite the fact that these would have both been temporary and limited phenomena, resulting from the devaluation necessary to neutralize the Dutch disease and to adjust the exchange rate to the industrial equilibrium. Regarding the use of public savings to finance public investments, this is an issue that remains off the country’s agenda because, since 1999, Brazil has accepted and complied with the target of a primary surplus equal to the real interest rate on the public debt minus the GDP growth rate. This target allows the ratio of public debt to GDP to remain constant. More broadly, and together with a policy of increasing the government’s reserves through an increase in the internal public debt, it enables the public debt to become, as Miguel Bruno (2010, p. 83) emphasizes, “the main

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axis of the rentier/patrimonial accumulation in the period 1991–2008.” Through it, liquidity is ensured for the Brazilian financial system and financialization is made possible, that is, the multiplication of financial gains through the use of financial “innovations,” particularly of derivatives. China’s Challenge

In the 2000s, China emerged as a great world economic power. Once the richest and most important empire of antiquity, it kept this title until the seventeenth century. But, as it kept its society organized in bureaucratic and mercantile terms, over the following century the countries that achieved their capitalist revolutions earliest, such as Britain and France, soon outperformed it. In the nineteenth century, these countries became strong enough to impose their imperial will on China, to divide it between them, and to lead the Middle Kingdom into profound decline. However, with the national liberation achieved in 1949, China began its economic development and, later on, started catching up. Mao Zedong believed that he was achieving a socialist revolution. In fact, he was heading the first phase of China’s capitalist revolution—the phase of the construction of the state, of the establishment of a system of universal public education and of heavy industrialization. From 1980 on, Deng Xiaoping conducted the second part of this revolution. This was characterized by: (1) the privatization of the competitive sectors that became coordinated by the market, while the state kept control over the economy’s noncompetitive sectors, including the major banks; and (2) the adoption of a consistently low interest rate and of a competitive exchange rate located at the industrial equilibrium level. This enabled exports of manufactured goods with a growing degree of technological sophistication to soar, and allowed the country to grow at an average per capita rate of 9 percent between 1980 and 2012. In order to make the exchange rate competitive, China effected, in the 1980s and 1990s, two big devaluations that managed to neutralize the permanent overvaluation of the country’s currency caused by an extended Dutch disease.14 The countries that are victims of this disease, apart from having cheap labor, display a very large difference between the wages of factory engineers and those of blue-collar workers. As a result of these two economic strategies—keeping state control of the monopolistic sector and keeping the exchange rate competitive—China experienced the most extraordinary economic development of all time. The Chinese example, like those of South Korea and Taiwan, together with my knowledge of the successful developmental policies adopted in Brazil, particularly the way the Dutch disease was neutralized (something that South Korea and Taiwan were spared), served as a basis for my definition of the new developmentalism—the national devel-

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opment strategy that I regard as necessary for Brazil to grow fast. It is an economic strategy that is based on three simple principles:

• assign a strategic role to the state in macroeconomic policymaking, particularly exchange rate policy, aiming at keeping the exchange rate competitive, floating around the industrial equilibrium and consistent with a small surplus in the current account, by keeping the interest rate low, by rejecting the growth-cum-foreign indebtedness (“savings”) policy, by rejecting the exchange-rate anchor policy to control inflation, and by neutralizing the Dutch disease; • coordinate the noncompetitive sector of the economy, while leaving the competitive sector to the market; • show long-term fiscal responsibility, resorting to expansionary fiscal policies only countercyclically, and exchange rate responsibility, not incurring chronic current account deficits.

It was this kind of policy, combined with cheap labor, that gave China the huge competitive advantage that enabled it to experience, between 1980 and 2010, an average annual per capita growth rate of 9 percent—something never before achieved by any country. China’s growth favored Brazil because it caused the increase in the prices of commodities that proved essential for Brazil’s growth at relatively satisfactory rates between 2005 and 2008. But it also represented a major threat, as China was the country that profited from Brazil’s overvaluation through its exports to Brazil, a situation that continues to benefit China today. In view of this fact, the late Antônio Barros de Castro (2008, p. 99)—one of the main representatives of Brazilian structuralist and developmental economic thought—published an article on the quasi-stagnation of the Brazilian economy in a Sino-centric world market, in which he predicted that Brazil would return to vigorous growth if it knew how to mimic certain aspects of Chinese development. He naturally opposed Brazil’s returning to being a merely primary-exporting country, as was happening with the other LatinAmerican states. Instead, he insisted that Brazil’s development strategy should be fully reviewed, and incorporate the “new technologies, which enable the economic and environmentally friendly use of raw materials that can be obtained on a large scale.” Three years later, Castro (2011, p. 146) returned to the subject. Brazil would not be able to compete with China in manufacturing, he wrote, except for some sectors in which Brazil would have an advantage, which were the industrial sectors associated with the production of commodities, such as equipment for oil or ethanol exploitation. In his words, “I do not propose to return to the agrarian world. The agrarian world is an opportunity for you, for instance, to build a manufacturing industry related to the pre-salt, to new materials, to special steel. It is

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to apply the existing knowledge to develop new and original things. The chemistry of ethanol allows us to develop green plastic; we guarantee the evolution of the product.”15 I do not agree with this old friend and remarkable economist. Brazil is a very large country, with a domestic market big enough to produce industrial goods efficiently in many sectors. Certainly, it will be more efficient in some sectors than in others, but Brazil can be efficient in sectors beyond those involved in the export of commodities. For instance, Embraer, the aerospace conglomerate, has no such connection. The country must not limit itself to industrial sectors that the government assumes to be currently efficient; the market is supposed to do that job. In modern economies, planning is necessary only for heavy industry and infrastructure—the sectors that the market is not able to coordinate. Brazil’s industrial entrepreneurs, technicians, and engineers aiming to build competitive business enterprises will identify the sectors in which Brazil will be able to compete using the world’s latest technologies. The men and women who will be doing the innovating will be making these decisions. And no one can predict, not even economists like me or my friend Castro, who these people will be or in which sectors they will be successful. The government must guarantee the general conditions necessary for investment. Industrial hubs and local productive arrangements, which benefit from externalities, should receive special attention. Obviously, it is advisable to have a strategic industrial policy to help enterprises take advantage of the opportunities offered by the market. But the rest must be left to the entrepreneurs and to the market, which not only need internal financing, but also macroeconomically correct prices—and particularly a favorable exchange rate; if the rate is allowed to float freely, as I have mentioned, the currency will usually end up being chronically overvalued. The Attack on the Public Technobureaucracy

As in every modern society, in Brazil the technobureaucratic or professional class is strong. It is strong in the private sector, due to the presence of managers and consultants of enterprises and to technicians in general. But it is especially strong in the state, as the upper layer of this class is to be found at the heart of the state apparatus; and from there it works with elected politicians to formulate public policies. In neoliberal thought and the liberal orthodoxy, the state technobureaucracy is the great enemy, a kind of angel of evil or a weed that hinders Brazil’s development. It could not have been otherwise, as their ideas originated in the rich countries and in the neoliberal and globalist hegemony that stemmed from those countries between 1979 and 2008. In order to exercise their domination, in order to continue to extract the

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economic surplus from the developing countries through trade, loans, and direct investments, the rich countries need to maintain docile elites in the governments of the developing countries. Nothing is more strategic for the rich countries than to divide and conquer. Nothing is more important in their relationship with the middle-income countries than to undermine the basic political agreement that forms a nation: that among the active business entrepreneurs, the state technobureaucracy, and the workers. It is this agreement that enables the state to defend its national interests and to become an instrument of economic development; it allows not only the country’s industrial policy, but also the country’s whole macroeconomic policy to be conceived in terms of support for the national enterprise. When the workers join in this agreement, as is typical in democracies, the state, in addition to being an instrument of economic growth, becomes an instrument for reducing inequalities and increasing social cohesion. The discourse promoting a decrease in the size of the state, criticizing the technobureaucracy, and defending limitations on workers’ demands was also applied internally by the elites of the rich countries; it was the discourse of the thirty years of neoliberal capitalism, which, for those countries, had perverse consequences culminating in the global financial crisis of 2008. Nonetheless, the developing countries were the favorite target of neoliberalism. Exercising their imperial role, the ideologues of the North, the World Bank, and the International Monetary Fund (IMF) have used the developing countries as “laboratories” for their liberal reforms. In this way, they transformed their neoliberal rhetoric into concrete experiences and undermined the national agreements between the local entrepreneurial elites and the state bureaucracies. In Asia, this strategy was not very successful, but in Latin America, whose elites insist on considering themselves to be part of the North, neoliberalism was able to forestall economic development through the 1990s. This situation began to change in the 2000s, when nationalist and left-wing candidates repeatedly won elections to office. During the 1990s, the dominant political coalition of rentier capitalists, financiers, and foreign interests was the main beneficiary of the state policies. The institutions essential for this coalition—the 1991 Liberal-Dependent Pact—were the universities and the Central Bank of Brazil. It was essential to capture academia because it is a key apparatus for ideological domination, and because we live in what can be called “technobureaucratic capitalism” or “knowledge capitalism,” in which domination through capital has lost its relative weight compared with domination through knowledge and ideological hegemony. The essential strategy of domination has led the most brilliant young Brazilians to study in PhD programs at foreign universities. While it is advisable to send technicians and students of the natural sciences to study in PhD programs abroad, sending our most brilliant young persons to stay four to five years studying economics abroad at the PhD level has

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been the method par excellence through which teaching and research in this area become alienated from Brazil’s interests. This practice also facilitated the capture of the Central Bank by the financial institutions and rentier capitalists. The high interest rates prevailing in Brazil that resulted from the Real Plan (1994) can only be explained by this capture—by rent-seeking. There are other causes, particularly fiscal imbalance, but it has become clear that this imbalance alone, which is mostly due to the interest rate itself, is not enough to explain the high levels of this rate. Analysis of the behavior of monetary authorities during the period under the 1991 Liberal-Dependent Pact has shown that the Central Bank and the Ministry of Finance did not view the high basic interest rates as a problem, and that they adhered to the concepts of liberal orthodoxy. The Central Bank of Brazil ignored the objective of keeping interest rates as low as possible, as is the practice established by the law of the Federal Reserve System in the United States. Nobody ever talked about the need for the whole government, and particularly the Central Bank of Brazil, to define a strategy to reduce the short-term real interest rate to acceptable levels. As for the currency, which was devalued only during the two financial crises under the Cardoso administration, the monetary authorities showed no concern about making it competitive. In fact, in the context of the Liberal-Dependent Pact, Brazil did not have a Central Bank that acted in the interests of the nation. Summing up, during the Democracy and Social Justice Cycle (1980– 2014), the Brazilian economy suffered an unsatisfactory performance. In the 1980s, Brazil experienced a huge and lengthy financial crisis, the 1980s’ Foreign Debt Crisis, as well as high inertial inflation. Then, early in the 1990s, the country submitted to the neoliberal consensus, and engaged in the trade and financial liberalization that led the government to lose control over the exchange rate—control that it had exerted throughout most of the previous cycle—the Nation and Development Cycle. The exchange rate was allowed to float freely, and Brazil experienced repeated balance-of-payment crises: in 1998, in 2002, and to some extent in 2014—partially because the rolling over of foreign debt was not fully suspended. Such crises and the low growth rates from 1980 were the result of the liberal dismantling of the mechanism that neutralized the Dutch disease and, more broadly, the tendency toward cyclical and chronic overvaluations of the exchange rate. In consequence, the local business enterprises were at a major competitive disadvantage, and thus invested less; and the country went through a long period of premature deindustrialization and quasi-stagnation. In the introduction to this chapter, I noted that there have been, not just economic causes, but also cultural causes for Brazil’s quasi-stagnation since 1980. These are (1) the preference for immediate consumption, and (2) the loss of the idea of nation by the Brazilian elites. We turn to these problems now.

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Notes

1. The first minimal condition is the guarantee of civil rights or the rule of law. 2. See Eduardo Cesar Marques (1997); Eduardo Matarazzo Suplicy (2002); Ricardo Paes de Barros et al. (2006); and Sergei Suarez Dillon Soares (2006), among others. The latter two works, when examining in depth the problem of the recent evolution of economic inequality in Brazil, evaluate the Bolsa Família program; they describe its limits, but also stress its positive effect on the distribution of income. 3. The Bolsa Família program benefited more than 13 million households in 2012, three times more than all the previous programs combined, yet its cost amounted to just 0.05 percent of GDP. 4. These data originated from research coordinated by Marcelo Neri, head of the Center for Social Policies, Getúlio Vargas Foundation, and by Ricardo Paes de Barros, from the Institute for Applied Economic Research (IPEA), with the help of the 2005 National Household Sample Survey (PNAD). According to Nanak Kakwani, Neri, and Hyun H. Son (2006), from 1995 to 2004, while per capita income decreased at a rate of 0.63 percent per annum, the income growth rate for the poor was positive, at 0.73 percent per annum. 5. Sources: IPEA; prepared by the Department of Planning and Strategic Investments, Ministry of Planning, for the Multi-Year Action Plan (PPA) 2012–2015. 6. The results were based on PNAD and Brazilian Institute of Geography and Statistics (IBGE). All the other indices for economic inequality, such as the Gini and Theil, show the same tendency. 7. Samir Cury Barros and Gabriel Ulyssea (2007) did a careful analysis of the problem of underestimation of the incomes of the poor, and noted the underestimations that take place with regard to the poorest decile. However, after corrections are made for all the deciles, the general underestimation of the level of economic inequality is small. 8. Here “seigniorage” is understood to mean the power of the rentier capitalists in Brazil to obtain a share of GDP in the form of interest without a good justification for it. 9. Source: The General Register of Employed and Unemployed Individuals (CAGED), Ministry of Labor and Employment. The data were compiled by Mendonça de Barros Associates. 10. Source: PNAD; prepared by the Department of Planning and Strategic Investments, Ministry of Planning, for the PPA 2012–2015. 11. For instance, see the article by Mansueto Almeida, Marcos de Barros Lisboa, and Samuel Pessoa (2015). 12. “Premature” because all countries deindustrialize after a certain level of development, but Brazil began its deindustrialization well before it had achieved that level. 13. Source: IBGE; estimates by Geraldo Mellone. 14. The extended concept of the Dutch disease includes countries that do not export commodities but do export unsophisticated manufactured goods. If, in such a country, the difference between the salary of a plant engineer and that of a worker is substantially bigger than in the rich countries, the unsophisticated goods will define the current equilibrium and the more sophisticated industries will face a competitive disadvantage (Bresser-Pereira 2008b). 15. In the 2000s, Brazil found huge oil reserves on its coast, but relatively far from the surface, in the pre-salt layer.

25 Preference for Immediate Consumption and Loss of the Idea of Nation

One way of interpreting “lulism”—the huge popularity that Lula commanded for several years—is to say that it resulted from a long-lasting credit and consumption bubble that characterized the last six years of the Lula administration (2005–2010).1 As a result of a December 2003 law that made it legal to lend against the paycheck of the consumer (in the United States, the so-called payday loans), there was a large increase in consumer credit.2 Before that, in the context of democracy, we had other consumption bubbles: one very briefly in 1986 (during the Cruzado Plan) and one that lasted a little longer during the years immediately after the Real Plan (i.e., 1995–1998). The market is by definition unable to control financial and consumer bubbles (this is why they are called “bubbles”). In the Brazilian case, they took place in association with fiscal and exchange rate populism, which are endemic in most developing countries independent of whether the politicians and economists in office are liberal-orthodox or vulgar Keynesians. The exceptions are the East Asian countries and India. In the case of Brazil, the high preference for immediate consumption to the detriment of savings and investment is not an exclusivity of the people; it is shared by most economic policymakers, independent of being orthodox or heterodox, right or left. We discussed the two types of populism—fiscal and exchange rate populism—in Brief Theory 5. Fiscal populism is to incur chronic and irresponsible fiscal deficits; exchange rate populism is to incur chronic and still more irresponsible current account deficits. Obviously, orthodox policymakers do not accept this criticism, but their preference for immediate consumption is objectively revealed by the fact that they consider it “natural” for a country to have chronic current account deficits, to be financed by loans or by direct investments. Thus they ignore, first, the fact that the Dutch disease is only neutralized when a country reaches a current account surplus; and, second, that there is usually a high rate of substitution of for355

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eign savings for domestic savings. This substitution process converts direct investments and foreign loans into consumption rather than investment. But are my arguments here based on a classical theory that Keynes himself criticized? Not really. I am not saying that it is necessary to save first and invest later. I am saying that, first, it is necessary to have lucrative investment opportunities, which will stimulate and increase the private investment and, as a result, increase savings. To this end, it is essential to adopt a whole set of policies, including a variable tax on commodity exports, to ensure that the market exchange rate revolves around its optimal value: the industrial equilibrium exchange rate. Second, in addition to private savings, it is necessary to increase public savings (revenue minus consumption by the state), so that they correspond to one-fifth to one-fourth of the country’s total investment. In addition to being financed by public savings, public investments can be financed by public deficits, but the latter should be limited so that, in the medium term, the ratio of public debt to GDP remains constant.3 In Brazil, between 1930 and 1980, the successive governments were able to limit the popular preference for immediate consumption because they were all, to various degrees, authoritarian. During the period of democratic transition (1977–1984), imposing this limitation became more difficult. It has been even harder since the popular classes achieved democracy. The price of the freedom achieved was, apparently, a lower rate of development. The huge financial crisis of the 1980s explained the stagnation during that decade. Brazil’s low growth thereafter is essentially explained by the fall in public savings around 1980 and the persistence, since 1991, of cyclical and chronic overvaluation of the currency. The Brazilian economy has been subjected to policies that mix the logic of liberal orthodoxy with the logic of vulgar Keynesianism to a greater or lesser extent. These two views, with regard to the key issue of exchange rate overvaluation, are mutually reinforcing. It is perfectly natural for developing countries to have a high propensity for consumption. However, what is surprising is that the economists, including those who oppose the government, reveal in their policies what I call a “preference for immediate consumption determined by economic policy.” The great challenge faced by politicians and economists is to circumvent this preference. But, instead of doing so, both liberal orthodoxy and vulgar Keynesianism encourage it: liberal orthodoxy, with its proposal of financial liberalization and growth based on foreign savings or, in other words, with its support for chronic current account deficits; vulgar Keynesianism, with its support, not only for current account deficits, but also for chronic public deficits. The orthodox economists appear to be critical of populism because they preach fiscal responsibility. Despite this, they quite often hold views concerning the exchange rate that are irresponsible. As for the vulgar Keynesians, they are comfortable with the two deficits. Both groups are afraid of any increase in inflation or any drop in actual wages

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that would accompany currency depreciation. But they forget that those two costs must be paid in order to have accelerated economic growth later on, growth that will lead to higher wages and lower inflation, undoing the damage initially caused by the depreciation. The Loss of the Idea of Nation

Capitalism is an economic and political system in which (1) not only businesses, but also nation-states or countries compete fiercely; and (2) the stronger countries do not hesitate to act in an imperialist manner, and in so doing to “occupy” the domestic markets of the less-developed countries through unequal trade, finance using their foreign money, and their multinational corporations. As we saw in Chapter 2, this imperialism is softpower imperialism. The idea is to persuade the developing countries that they “need” the capital of the rich countries, although the countries that have the faster growth rates are the ones that have current account surpluses most of the time. The goal is to show that “capital-rich countries are supposed to transfer their capital to capital-poor countries,” an intuitive phrase that I used to argue was as true as the claim that the earth is flat. Brazil was only able to achieve very high rates of growth and to complete its national and industrial revolution between 1930 and 1980 because Brazilians had a national project—industrialization—and their politicians and economists were supposed to pragmatically adopt all the policies that would lead to this objective. In this way, they were able to neutralize the Dutch disease, although they didn’t have a clear idea of the problem. Since 1990, Brazil has no longer had either a national project or an idea of itself as a nation. Classical developmentalism and Keynesianism have been excluded from the main universities; economic liberalism, which has worked as an ideological instrument of domination, is back; and the local intellectual, business, and political elites are again submissive to the North. How can we explain this? As sustaining a nation is a daily challenge, how can a country abandon its idea of a common destiny or of a common project when we know that this is a necessary condition for human development? Internally, the causes of this change were, first, the rejection of the exclusionary nationalism that characterized the military regime. At that time, democrats associated nationalism with social exclusion and authoritarianism. Second, in the 1970s we have the hegemony, in the intellectual sphere, of associated dependency theory, which, besides being critical of authoritarianism, had a Marxist origin at a time when Marxism was very strong in Latin America. Third, the shift away from nationalism is associated with the severity of the great financial crisis that was the 1980s foreign debt crisis, and the failure of Brazil’s progressive developmental economists to face it and to control inflation between 1985

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and 1987. Externally, it is explained by the North’s new neoliberal ideological hegemony, endowed with more radical arguments against nationalism and developmentalism at the periphery of capitalism than the previous Keynesian consensus had offered. Between 1968 and 1973, in the context of a nationalist and repressive military regime, Brazil experienced an “economic miracle” during which growth rates averaged 10 percent. The reaction of progressive intellectuals was to see in the policy of the military regime confirmation that it was impossible for a bourgeoisie identified with the nation—a national bourgeoisie— to exist in Brazil. Dependency theory was on the rise. According to the “associated dependency” interpretation of this theory, the “inevitable” lack of a national bourgeoisie did not prevent economic development, as that would now be ensured by multinational corporations. Thus, they abandoned the national-developmental and anti-imperialist interpretations associated with the Higher Institute of Brazilian Studies (ISEB), the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), and of the Brazilian Communist Party (PCB)—and, in practical terms, surrendered to the North. Instead of realizing that dependency made the national bourgeoisie ambivalent and contradictory (sometimes national, sometimes dependent), and that it was legitimate to make a political pact with that class, they preferred a purist interpretation that took the socialists back to the sources of their thought, based on internationalism and on class struggle. But finally, in the 1990s, many of those who in the 1970s had adopted the associated dependency interpretation and had rejected nationalism, abandoned the socialism they had shared in their youth. The neoliberal and globalist ideology was expressed in the belief that neoclassical economists, with their mathematical models and superior rationality, knew best. Therefore, the adherents of this ideology accepted the idea, defended by those gentlemen, that the coordination of economic activities by the market was superior to coordination by the state. Markets are very often excellent mechanisms for coordination and can allocate funds relatively well. But they are intrinsically unstable, are subject to recurring bubbles in asset prices, and are blind to justice and to morals. And they lack any preference for the national interest. This is why they must be firmly regulated by the state. The 1991 Liberal-Dependent Pact, prevailing at a time of widespread neoliberal hegemony, shared with neoclassical orthodoxy the belief in self-regulated markets, a belief that would eventually cause gigantic losses in the rich countries themselves, as we have been seeing since the start of the 2008 global financial crisis. In 1991, after the collapse of the Soviet Union, the United States became fully hegemonic, while Brazil’s national revolution was interrupted and Brazil lost its concept of a nation. A year later, when President Fernando Collor de Mello chose a new, economically liberal team of ministers, the

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Liberal-Dependent Pact became the prevailing class coalition in Brazil, and the Brazilian national revolution—the formation of the Brazilian nationstate with the transfer of the centers of decisionmaking into the country— was interrupted. At this point, the country reverted to the semi-colonial condition that had characterized the period between 1822 and 1930. Now, the nation was weakened because there was no agreement among the classes, and because it lacked the characteristic that Otto Bauer (1996) defined as fundamental: “the consciousness of a common destiny.” Therefore, Brazil no longer had a national development strategy or a strategy for competing internationally. Growth became impaired, if not jeopardized. The reaction of developing countries to this ideological and financial hegemony varied widely. Whereas Asian countries were somewhat influenced by the new ideas,4 the Latin-American countries completely surrendered to them. Regarding Brazil, a country with a strong cultural identity, this submission may seem surprising. It is less surprising, however, if we understand that a strong cultural identity does not necessarily mean a clear national political identity, or even self-esteem. The case of Mexico, which has always had a strong cultural identity and a strong national sentiment, is significant in this regard. Since it joined the North American Free Trade Agreement (NAFTA), Mexico has lost its independence and its sense of nationhood, even as it has preserved its cultural identity. Brazil’s cultural identity is expressed in its common language, in the mixed race, in the integrated immigrants, in the wonderful feather art of the Indians, in the great baroque art, in our wonderful popular and classical music, in our food, in the carnival, in our tropical exuberance and our joy. All this makes the Brazilians conscious of who they are and proud of themselves. By comparison, in economically more developed countries such as Canada, for instance, this cultural identity is more frail. As a trade-off, however, this country has a clear sense of being a nation with a strong national political identity. No Canadian doubts that it is the government’s duty to defend national work, capital, and knowledge. Yet we Brazilians are divided, our self-esteem is poor; we suffer from the “street dog complex,” or our feeling of national inferiority; and we have lost the concept of our national interest. Brazil shows that a country can have a strong cultural identity but a weak national political identity. Canada shows that a country can have a weak cultural identity but a strong national identity. Or, a country can have a combination of the two, a strong cultural with a strong national identity, such as the United States or China. Cultural identity is entrenched in society, whereas national identity is political, related to the ability of a country’s elites and its people to have a concept of nation and of the national interest. Between cultural identity and national political identity is the concept of self-esteem. Brazilians are proud of their cultural peculiarities, but their self-esteem is low. This becomes explicit when the cultural identity is con-

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ceived of as exotic, as the rich countries do regard us; and thus Brazilians accept the depreciation associated with cultural difference. In this way, we go back to the colonial inferiority complex already referred to by Francisco José de Oliveira Vianna (1920, 1923). And we go back to the situation in which Brazilian culture, when it was not popular in nature, was something transplanted, mimicked, and uncritically copied from elsewhere, as already stressed by Alberto Guerreiro Ramos (1955, 1960) and Roland Corbisier (1955) at the ISEB, in the 1950s. And we Brazilians return to the condition in which our ideas become “out of place,” as Roberto Schwarz (1973) observed so astutely. National identity is related to nationalism, but cannot be mistaken for it. It is also a cultural phenomenon, as it depends on the nation’s success in turning into reality the objectives of economic and political development— in guaranteeing higher degrees of well-being, freedom, and justice. A nation is “a soul, a spiritual principle” and is “an everyday referendum,” as Ernest Renan (1882) stated in the nineteenth century. National identity implies a politically organized society working toward national autonomy and economic development. It is, through nationalism, the always-unfinished collective construction of the nation-state based on a vision of national identity. If the nation is actually being built, its people’s self-esteem will be high. Brazilians’ self-esteem has been low for a long time. Brazil had a national project between 1930 and 1980 because Brazilians could then, despite their divisions, establish a great political agreement combining industrial entrepreneurs and the public technobureaucracy. Once conflicts are acknowledged, the existence of a basic solidarity among the classes is a prerequisite for the existence of a nation. This agreement was stronger between 1930 and 1960 because it also included the urban workers. The military regime (1964–1984) represented a regression from this agreement, insofar as it excluded the workers from the political pact and accentuated social conflict. It was also a regression because it led a large portion of the Brazilian Left to develop the idea of an intrinsic dependency on the North that, by denying the possibility of a Brazilian national entrepreneurial class, denied the very idea of a nation. But dependent colonialism took hold of Brazil and prevented development only when the crisis of the 1980s breached Brazilian defenses. The globalist discourse after the foreign debt crisis, according to which the developing countries no longer had enough resources and had to compete to obtain foreign savings, invaded the country and alienated the entrepreneurial, governmental, and intellectual elites. In order to obtain the “necessary” investments and funding, Brazilians needed to gain “credibility”—and therefore had to comply with all the recommendations coming from the North—particularly with a macroeconomic policy that was contrary to Brazil’s national interests. Consequently, despite all the adjustments and all the reforms that were implemented, the country stagnated.

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Given the low growth rates that prevailed between 1980 and 2014, the lack of prospects, and the emigration to rich countries, Brazilians’ selfesteem, which was already low, went into free fall. The negative cultural identity—the Brazil of the novel Macunaíma and of jeitinho brasileiro (the Brazilian way of doing things)—once again prevailed over the more affirmative cultural identity, embodied in the Brazilian character of Emília,5 the angry but optimistic Brazil of the poets Antônio Gonçalves Dias and Antônio de Castro Alves, in the work of novelist José Bento Renato Monteiro Lobato, and in that of anthropologist Darcy Ribeiro. After the mid-2000s, however, when its economic development was accelerating, the country adopted a nationalist policy both internally and externally, received greater international attention, and once again raised its self-esteem. But with the major political and economic crisis of 2015, which marked the end of the Democracy and Social Justice Cycle, such advances are now seriously threatened. The Alienation of the Brazilian Elites

Another way of discussing the loss of the idea of nationhood is to look to the alienation of the Brazilian elites—the business as well as the intellectual elites. They have lost a sense of a shared stake in the interests of the nation, and Brazil has been subjugated by a renewed neoliberal hegemony emanating from the rich countries. During its first thirteen years in office (2003–2015), the Workers’ Party (PT) could count on a reasonable amount of support from the intellectuals for its redistributive initiatives, but not for any developmental strategy. My impression is that globalization had penetrated the mindset of intellectuals more than that of the industrial entrepreneurs. The intellectual clout of universities in the United States is an explanation for that. Brazilian intellectuals, especially the economists, have capitulated to the thought and values championed by the Anglo-Saxon neoclassical mainstream. Foreign guests dominate their annual conferences. In the context of the public system of evaluating graduate programs in economics overseen by the Ministry of Education, the academic community lauds Brazilian researchers for their articles published in foreign academic journals far more than when articles are published in Brazilian journals.6 In this way, the standards of academic excellence and the research agenda of young Brazilian economists are defined abroad. In contrast, the industrial entrepreneurs became interested for a time in forming a developmental pact. But they eventually abandoned the project because the government was unable to ensure them satisfactory rates of profit. The industrialists formed the dominant group in Brazil during the whole national-developmental period, and had a decisive role in the democratic transition—in the 1977 Democratic-Popular Pact. Yet, with the collapse

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of Plan Cruzado, under the leadership of one of those same industrialists— Dílson Funaro—and the failure of the associated developmental strategy, the industrial entrepreneurs were perplexed and confused. After nearly sixty years of a reasonably solid political hegemony (1930–1987), they realized that they had lost power. But, given the force of neoliberal ideology, “scientifically” justified by neoclassical economics, they did not have any alternative ideological framework to work with. Consequently, many surrendered to the liberal orthodoxy and to the “modernity” it promised. Or they sold their business enterprises to multinational corporations and became rentier capitalists— something that served their interests, but damaged the country (which, as we have already seen, handed over its domestic market to the multinational corporations without receiving anything equitable in return), and reduced the manufacturing industry’s political power within the country. In the last few years, however, after the failure of the economic policies proposed and adopted by the liberal orthodoxy became clear, these industrial entrepreneurs, led by the Federation of Industries of the State of São Paulo (FIESP), and the Institute of Studies for Industrial Development (IEDI), began to change. Their macroeconomic advisory teams improved; their criticisms were no longer limited to the excesses of trade liberalization or to the lack of an industrial policy. Now they also began to criticize the high interest rates and the appreciated exchange rate. Yet they remained perplexed, probably because hegemonic neoliberal thought weighed very heavily on them. They realized the problem, but were hesitant about coming up with a solution. On the other hand, they continued to regard the state and its technobureaucracy as their opponents, without realizing that setting them in opposition was the strategy that the North was using to divide the nation. Paulo Cunha (2006, p. 23), who was the most important intellectual leader of Brazilian industrial entrepreneurs from the 1970s on, and who was indignant at the near-stagnation of Brazil’s economy, criticized the government’s macroeconomic policy, but in the end focused his criticism on the size of the state. He affirmed a liberal tenet: “Brazil is trapped by its state.” A restoration of the alliance between the industrial entrepreneurs and the state technobureaucracy will be necessary for the resumption of development. However, during the Rousseff administration, this search for an agreement failed decisively because the government was unable to provide the industrial entrepreneurs with conditions that were conducive to investment. It was therefore unable to interrupt the deindustrialization that had been underway since 1990. Although they were aware of the importance of an exchange rate policy, the industrial entrepreneurs, along with most economists, didn’t understand the Dutch disease; nor were they able to criticize the policy of creating growth with foreign savings (which meant debt for Brazil) or to demand a current account surplus.

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Comparing Brazil’s industrial elites with its intellectual elites, I would conclude that the former are more identified with the nation than the latter, as their interests are more identified with national interests. The intellectuals, in the era of globalization, are often characterized by deracination, a distancing from their national bases. The higher quality of foreign universities, particularly of some universities in the United States, has become a source of cultural dependency. Actually, all the elites, including the industrial entrepreneurs, live in a constant state of ambivalence. It is an ambivalence that the elites of the East Asian countries, for instance, do not share. Sometimes the industrial entrepreneurs identify themselves with developmentalism, sometimes they are economically liberal and dependent. Such cultural dependency has not been surprising, given the soft power that the United States and, more broadly, the rich countries command. It is expressed in many other ways: For instance, on the Left, it is expressed in the view that a depreciation of the real would be “unacceptable” because it would reduce wages in the short term. On the Right, it is present in the assumption that current account deficits, which actually finance consumption, are OK because “they bring foreign savings.” The point is that both stances, that on the Left and that on the Right, aid the domination by the North. The collapse of the national-popular pact that Lula tried to lead in his administraton occurred during the Rousseff administration, when the long-term evaluation of the exchange rate, between 2008 and 2014, reduced dramatically the profit rate of the manufacturing industry. This collapse was the outcome of the policy mistakes made by both Lula and Rousseff in the first ten years of their administrations. In this period they kept the public accounts balanced, but left the exchange rate to appreciate strongly, turning well managed tradable non-commodity business enterprises noncompetitive. Their profit rate evaporated, which led me to say that PT, despite the effort of Lula and Rousseff to come to a developmental pact with the businessmen, had invented a new type of capitalism: “a capitalism without profits.” On the other hand, the Workers Party made a major mistake when it got involved directly with corruption—something that is unacceptable. Corruption in endemic in Brazil, but it is an individual affair when politicians are involved. PT didn’t understand that and used corruption to finance the party. When this was discovered—first in the Mensalão scandal and then in the scandal involving Petrobras—it got demoralized. For sure, the media and officials of the Lava Jato operation proved to be biased against PT, but the Right in Brazil would not have had the capacity to initiate the parliamentary coup against Rousseff if PT hadn’t been demoralized by the scandals. Today the Brazilian elites are supporting massively the government of a vice president, Michel Temer, who is leading a radically neoliberal policy agenda, although he campaigned twice for President Dilma Rousseff. His administration is marked by a profound illegitimity that is reflected in the full

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rejection of his administration in all political surveys. And I don’t see the possibility that the policies he is adopting will lead Brazil on the route of economic growth. His administration acts as if the only problem of Brazil was fiscal—which is deeply false. Since 2015, Brazil has faced a fiscal crisis, the origins of which were in the mistakes made by the Rousseff administration in 2013 and 2014. Before that, the public accounts of Brazil were right. And before that the Brazilian economy was already quasi-stagnant due to the exchange-rate interest rate trap that has blocked growth since 1990. Notes

1. The use of the term “consumption bubble” to define the Lula administration’s economic policies was suggested by César Benjamin (2013). 2. Consumer credit increased enormously in Brazil since “consigned credit” (crédito consignado) was introduced into the Brazilian legal system, in December 2003. It is a loan whose installments can be directly deducted by the banks from the borrower’s paycheck. 3. Assuming that a country would like to have a rate of investment of 28 percent of GDP, from which 7 percent should correspond to public investments, and that a public deficit of 3 percent of the GDP is considered compatible with the desired stability of the ratio of public debt to GDP, the public savings will have to be 3 percent of GDP. 4. China, Taiwan, and India remained steadfast, whereas Thailand, South Korea, Indonesia, and Malaysia partially surrendered to the new ideas, particularly to the idea of growth through foreign indebtedness, and they therefore suffered during the Asian financial crisis of 1997. 5. Emília is a fictional character, a rag doll come to life, with an irreverent and independent personality, who was featured in the fantasy novels of Brazilian writer José Bento Renato Monteiro Lobato. 6. The Qualis system, used by the Coordination for the Improvement of Higher Education Personnel (CAPES) Foundation, an agency of the Ministry of Education, to rank graduate programs, is a perfect example of the alienation of the Brazilian economists. According to this system, economics papers published in good foreign academic journals receive a score several times higher than a publication in a good Brazilian academic journal. The argument offered is that “it is more difficult to publish in foreign journals,” which is true, or that their impact is greater, which is also true.

26 Brazil’s Capitalist Revolution, Democracy . . . and Then?

In this book I have tried to develop a narrative of the political and social construction of Brazil and, in particular, of Brazil’s capitalist revolution. That is, a narrative of the decisive transformation of Brazilian society at the economic and political levels that took place between the 1930s and the 1970s in the context of the Nation and Development Cycle. And then, subsequently, in the setting of the Democracy and Social Justice Cycle, I provided an analysis of the democratic transition, of the construction of a social state, and of the decrease in inequality that has taken place since the 1980s. In the first chapters, I also briefly examined the reasons for Brazilian backwardness in relation to the United States and, during the Empire, the process of the construction of the state and of the integration of Brazilian territory. In the preceding chapter we saw the Democracy and Social Justice cycle come to an end in a major economic and political crisis. My purpose in dividing the history of independent Brazil into three major cycles, and then subdividing the last two cycles into five political pacts, was to try to provide a broad and reasonably ordered vision of Brazil’s development. A vision that gave more emphasis to the class coalitions than to the class struggle, but that did not ignore the latter. A vision that emphasized the economic and political domains, but attributed the proper weight to politics and, therefore, to the institutional and ideological aspects of Brazilian society. And a vision that, during the last two great cycles of the state–society relationship, identified four major economic and political crises in the twentieth century: in the early 1930s, in the early 1960s, in the 1980s, and the present economic and political crisis, which was developing in 2013, but really exploded in 2015. I divided the Nation and Development Cycle (1930–1980) into two pacts, each one based on a class coalition: the 1930 National-Popular Pact and the 1964 Authoritarian-Modernizing Pact. They were successful in pro365

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moting economic development, but mostly in the framework of authoritarianism. And I divided the Democracy and Social Justice Cycle in three pacts, each one also based on a class coalition: the 1977 Democratic-Popular Pact, which ensured the transition to democracy, but failed to stabilize the economy; the 1991 Liberal-Dependent Pact, which was successful in stabilizing prices, but failed to stabilize the state finances or to reignite economic growth (which had stopped during the 1980s Foreign Debt Crisis); and, finally, the failed 2003 National-Popular Pact, attempted by the first left-wing government in the country’s history, installed when the Workers’ Party (PT) won the 2002 presidential election. The PT was successful in reducing the high economic inequality in Brazilian society, but the developmental pact that it sought to build never succeeded because the PT governments were unable to overcome the quasi-stagnation that had characterized the Brazilian economy since 1980—with a per capital growth of only about 1 percent a year. Throughout the book, I tried to briefly discuss the most relevant theories that explain this complex economic, social, and political construction that is Brazil. In the period of massive development, in the Nation and Development Cycle, the Brazilian state was a developmental state. Economic liberalism prevailed only for brief periods, always after a crisis. This happened in 1945–1947, in 1954–1955, and in 1964–1967, but only during the last period was it successful. Economic liberalism prevailed for a slightly longer period in the 1990s, but failed in equal measure, mostly because it was irresponsible from the standpoint of the exchange rate, and thus led the country into crises. This does not mean, however, that the developmental periods always achieved good economic outcomes. Whereas the developmentalism of Getúlio Vargas and of the military regime led to a huge industrialization and was, most of the time, responsible from the fiscal and exchange-rate point of view, the developmentalism of Juscelino Kubitschek was populist on both grounds, José Sarney’s was populist in fiscal terms, and Fernando Henrique Cardoso’s and Luiz Inácio Lula de Silva’s administrations were marked by exchange rate populism. The Nation and Development Cycle was the period of Brazil’s capitalist revolution, of the formation of the Brazilian nation, and of Brazil’s industrialization. In contrast, the Democracy and Social Justice Cycle saw the formation of Brazilian civil society, the country’s democratic transition, and the fight to reduce the enormous inequalities in Brazilian society. The first cycle—the State and Territorial Integration Cycle—was authoritarian, but it established the conditions for the affirmation of civil rights and of democracy. The fact of having once been authoritarian does not contradict the experience of the countries that had previously achieved their capitalist revolutions. None of them achieved these revolutions in the context of democracy because, before capitalism and, therefore, before the surplus appropriation through profits were realized in the market, the conditions for democratic

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regimes did not yet exist. Universal suffrage and the alternation of power were nonviable as long as the economic surplus was appropriated through the direct control of the state. During the second cycle—the Nation and Development Cycle—there was a period of relative democracy (1945–1964), but authoritarianism prevailed. Only in the third cycle, the Democracy and Social Justice Cycle, was democracy finally achieved and institutionalized. What is Brazil today, after this long evolution? Today, Brazil Is a Society . . .

It is an incomplete nation, it is a national-dependent society, it is a nation in search of a national development strategy; it is a nation that rejects the liberal state, but is not yet able to reconstruct and renew the developmental state; it is an economy that has grown slowly since 1980, and that needs to dramatically increase its investment rate, but has been unable to overcome the trap of high interest rates plus an overvalued exchange rate; it is an alive and active civil society that guarantees a consolidated democracy; it is a society in which inequality still dominates, but where the fight for social justice is alive; it is a society that contributes to the world’s environmental protection; it is, finally, a lively democracy, an almost participatory one.

Is it an incomplete nation? Yes. Brazil built its nation vigorously between 1930 and 1980, with national-developmentalism as its banner. But this developmentalism started to lose its strength in the 1970s, when it was adopted by the military regime. By this time, the associated dependency theory had become prominent in the democratic intellectual milieu, and it affirmed that dependency was, after all, unavoidable, that it was part of the natural order of things. In the 1980s, Brazil went through a huge financial crisis due to its foreign debt. And in the early 1990s, it became submissive toward the North, given the absolute neoliberal ideological hegemony of that decade.

Is it still a national-dependent society? Yes. Brazilian society never evolved into a strong nation, as the societies of the rich countries did, and as the societies of the emerging Asian countries did. The fact that the capitalist revolution was carried out late, already under the aegis of a modern industrial imperialism, contributed to this weakness; but this same imperialism did not prevent the emerging Asian countries from building cohesive nations after they had achieved their political independence. The central characteristic of Brazilian elites has always been their ambivalence— ambivalence toward justice, ambivalence toward the nation—an ambivalence that the song “Fado Tropical,” by Chico Buarque de Holanda and Ruy

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Guerra, characterized so well: “Oh, this land is still going to fulfill its ideal: It will become a huge Portugal. . . . Even when my hands are occupied with torturing, choking, slaughtering, my heart closes its eyes and sincerely cries.” Due to its contradictory nature, the Brazilian elite sometimes identifies itself with the nation, participates in a developmental class coalition, makes commitments to its people, and adopts its interests. But sometimes it considers itself ethnically European, politically neoliberal, and culturally “modern”; and then it forgets the nation, tries to associate with the North’s elites, and subordinates itself to them. Is Brazil a society in search of a national development strategy? Yes.

Brazil already had a national development strategy between 1930 and 1980, and since the mid-2000s, it has been trying to resume it on new grounds, but without success. For this reason, the country is now counting on a new theoretical system—new developmentalism—but has not yet been able to apply it. This developmentalism, in the theoretical framework of new developmentalism and particularly of new-developmental macroeconomics, as well as in the current context of democracy, must be social because the voters demand and social justice requires the gradual reduction of economic inequality. It needs to combine growth with stability and reduce social and economic inequalities, a task that will definitely not be easy. It needs to guarantee a satisfying profit rate to Brazilian enterprises and growing wages to the workers. It will therefore have to involve compromises. But compromises alone will not be enough. Imagination and courage will also be necessary. Is Brazil a nation that rejects the liberal state, but is not yet able to reconstruct and renew the developmental state? Yes. The liberal state,

which limits itself to guaranteeing property and contracts, and to keeping the public accounts balanced, does not lead to a catch-up with the developed countries. The achievement of a developmental state requires the existence of a reasonably competent state, supported by a developmental class coalition composed of the industrial entrepreneurs, workers, and the public technobureaucracy. It also requires a sound fiscal situation. During the Lula administration, the commodities boom made it possible to fulfill these conditions. But the deterioration of the economic situation that followed showed how difficult it is today to form a developmental class coalition in Brazil. The Brazilian industrialists remain ambivalent in relation to economic liberalism and developmentalism, while the rentier and financier elites strongly defend liberalism and association with global elites. Is Brazil a country that needs to increase its investment rate? Yes. The level of savings in Brazil is low. But, in order to increase it, it is useless to urge economic agents to save more and then invest. Instead, Keynesian logic,

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according to which investment determines savings, leads to the conclusion that the state must implement two measures: first, establish lucrative investment opportunities for the industrial entrepreneurs, while guaranteeing them domestic credit; second, achieve positive public savings, instead of just a primary surplus. But Brazil is still caught in the trap of high real interest rates, and is unable to neutralize the tendency toward currency overvaluation. The power of the commodity exporters has been the main obstacle to establishing a variable tax on their exports, a tax that would neutralize the Dutch disease and allow the exchange rate to approach the industrial equilibrium level, but would not have additional cost for commodity exporters who would be compensated by the depreciation caused by the export tax. Is Brazil a society in which inflation has ceased to be the fundamental problem? During the period of high inertial inflation, this was the great

evil faced by the Brazilian economy. As it would be for any other country, inflation is still a problem, but it must not have absolute priority over an exchange rate target and a growth target. Brazilians cannot remain hostages to inflation. Yet the cost of controlling inflation remains high in Brazil because indexation was not fully extirpated from the Brazilian economy. A reform forbidding the state to engage in any contract including an indexation clause is badly needed. Does Brazil have a lively and active civil society that guarantees an institutional democracy? No, Brazil’s civil society is not as cohesive as it

was when the people first fought for democracy. It is still a lively and active civil society, still defending social and political rights, but, from the early 2010s, part of the middle class made a turn to the right, and Brazil turned into a divided society. What happened in Brazil is similar to what happened to the United States. In the 1960s, when I was a student in that country, it was a cohesive society that served as an example for the rest of the world; since the neoliberal turn of the 1980s, the United States is a divided society. It is common to hear that the United States has undergone a “Brazilianization,” insofar as inequality increased sharply, but it is also reasonable to say that Brazil suffered an “Americanization,” as in the last 30 years it also became a divided society. Is Brazil a society in which inequality still dominates, but in which the fight for social justice is alive? No. Since the 1980s civil society

defended social rights and was building a social state in Brazil. The 1988 Constitution institutionalized the advance toward a participatory democracy, despite the restrictions imposed by capitalism. Public expenditures in fundamental education and in a universal health system increased substantially, and mechanisms of income transfers have managed to practically

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eliminate extreme poverty, even if much poverty remains.1 Yet, the failure of the Left, in office between 2003 and 2015, to achieve more equitable distribution, as well as failing to lead the country to resume economic growth, opened door for a rightist or neoliberal turn of the Brazilian elites. And now, the government that resulted from the parliamentary coup—the impeachment of Dilma Rousseff—is poised to dismantle the social or welfare state. Is it a society that still discriminates against blacks and those of mixed race? Yes, but the policy of quotas for students coming from public

schools, combined with racial quotas, shows that the society has decided to face this problem.

Is it a society that fights for environmental protection? Yes. The prob-

lem is relatively new, having only entered the world agenda at the Stockholm Conference of 1972. It is a fundamental problem for the future of Brazil and for humankind, and Brazilians are aware of it. They began working on it back in the 1970s, when the Brazilian state began to define the first public policies aimed at preserving the environment. And the Brazilian state has been even more concerned about the issue since it became clear that stopping pollution was not enough, that a more serious problem, that of the survival of humankind, was at stake due to climate disruption. But the world has not greatly progressed on this matter since 1972. According to a survey by the United Nations Environment Programme (UNDP), of the ninety goals established in 1972, there were significant advances on only four, on eight there was regression, on twenty-four there was stagnation, and on fourteen progress could not even be measured due to a lack of data. Nevertheless, beyond having entered the global agenda, environmental protection has become the new utopia—in some ways, replacing the socialist one. Environmentalism replaced it because, in 1989, a socialist utopia seemed unattainable. This does not mean that environmentalism is all that viable, as shown by the opposition of the two major economic powers—the United States and China—and by the scarce results achieved since 1972. However, there has been great progress with the Kyoto Protocol, which came into effect in 2005. The logic of Brazilian policy on this matter has been that the Kyoto commitment is feasible, and that it implies mutual concessions that might no longer be necessary because technological development very often enables a higher income coupled with better environmental protection. Is Brazil a lively democracy, but only “almost” participatory? Yes, it is a

much better democracy than its level of economic development might predict. But it is far from the democracy dreamed of by every Brazilian. That is because the elected politicians do not have the moral standards and

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republican spirit that one should reasonably expect from them; because the big media are controlled by business entrepreneurs who are liberal in economic terms and are dependent from the national standpoint; because Brazilian democracy is still a democracy of elites, even if it is gradually becoming a public opinion democracy; in other words, because the Brazilian political system only minimally meets the requirements of a democracy (i.e., the guarantee of civil rights and universal suffrage). However, the increasing participation of the people in most elections of mayors, governors, and presidents indicates considerable progress in the quality of Brazil’s democracy. Finally, I believed that the Brazilian democracy was becoming a stronger democracy because the nation and civil society already have a public space in which to express their demands and debate a growing number of national issues, but after the 2016 impeachment I must recognize that I was too optimistic on that matter. Conclusion

The fundamental challenge that Brazil’s democracy still faces is how to resume the accelerated economic development the country experienced between 1930 and 1980. Some people consider this to be impossible because Brazil is already caught in the “middle-income trap.” Actually, Brazil ceased catching up in the 1980s because it adopted the growth with foreign savings policy; became indebted in foreign currency; and suffered the major 1980s Foreign Debt Crisis, along with high inertial inflation. From the 1990s on, after this financial crisis had been overcome and the high inertial inflation it had caused had been brought under control, the Brazilian economy did not resume growth, as I and many others assumed it would, because, on the one hand, Brazil had already lost its idea of nation, and, on the other, the new democracy was dominated by a high preference for immediate consumption. These two cultural traits joined forces to make the Brazilian economy a victim of fiscal and exchange rate populism—when a state spends more than it brings in, resulting in fiscal deficits and in the state’s inability to achieve public savings, which are needed for financing public investments (fiscal populism); and, mainly, when the population spends more than it gets, incurring high current account deficits and a corresponding long-term overvaluation of the national currency, which depresses profit rates of the manufacturing industry and causes deindustrialization (exchange rate populism). Although liberal economists always defend fiscal adjustments (even in times of crisis, when they are not justified), they happily tolerate an overvalued exchange rate and chronic current account deficits, which, they believe, indicate that the country is successfully implementing the growth with foreign savings policy and could thus

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expect a rise in investment, despite all evidence to the contrary. Liberal orthodoxy was more directly responsible for exchange rate populism; vulgar Keynesianism, for fiscal populism. Both currents coincided with and contributed to the loss of the idea of nationhood and the high preference for immediate consumption. For new developmentalism to be fully effective, Brazil’s civil society must recognize the necessity of a national development strategy, reorganize itself as a nation, and build a developmental state again. Strictly speaking, it would be necessary to persuade the people—the mass of voters. But in our imperfect democracy, the people have little power, and the fundamental consideration for the politicians making government decisions is the legitimacy of their economic policies being guaranteed by the support of the economic and intellectual elites. However, it would not be easy to persuade the Brazilian elites of the superiority of development macroeconomics over conventional macroeconomics, or of new developmentalism over liberal orthodoxy. This is not only because of their dependent mindsets, they also have difficulty distinguishing between new developmentalism and populism. New ideas take time to be accepted. The ideological hegemony of liberal orthodoxy was almost absolute in the 1990s, so there was no room for theoretical alternatives or practices. But the situation changed at the beginning of the 2000s, when the failure of the Washington Consensus to promote economic development and ensure financial stability became evident. It definitely changed when the 2008 global financial crisis showed that, even for the rich countries, market deregulation was a huge mistake. The new developmentalism and developmental macroeconomics, to which I have contributed, would be an effective way to counter the preference for immediate consumption, which prevents countries like Brazil from growing and catching up. For Brazil to actually have a national development strategy again, the main economic condition, besides a rejection of fiscal and exchange rate populism, is the establishment of an exchange rate policy that neutralizes the tendency toward cyclical and chronic overvaluation, and that makes the currency float around the industrial equilibrium (Brief Theories 7 and 8). But for a permanently competitive exchange rate to be achieved, the current account must show a small but permanent surplus. The neutralization of the Dutch disease and the rejection of a growth with foreign savings policy will necessarily result in such a surplus. For that, some changes will be required: 1. The state must impose an exchange-rate export retention or tax proportional to the severity of the Dutch disease. 2. The state must reject the three habitual policies that cause current account deficits in developing countries: the growth with foreign savings policy, the policy of sustaining high interest rates as the

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basis for the Central Bank’s monetary policy, and the use of the exchange rate as an anchor for controlling inflation. 3. The workers must accept a temporary reduction in their actual wages caused by the one-time depreciation that will lead the exchange rate to the industrial equilibrium.2 4. The commodity exporters must understand that (1) the one-time devaluation caused by the variable exchange-rate retention will eventually compensate them for what they have paid, and that (2) if the international price of the commodity falls strongly, the Dutch disease will cease to exist, and the percentage retention will be zero. 5. Brazilian society must accept the temporary increase in inflation caused by the depreciation. 6. The state must be prohibited, by law, from making any new contracts with an indexation clause, as such a prohibition will substantially reduce the inertial component of inflation and make it less costly to keep it under control.

We have already seen that it is not easy to solve the problem of chronic currency overvaluation. Provided that the growth of the current account deficit stays at a rate equal to the increase in GDP, and that the country’s international reserves remain high, there is no risk of a financial crisis. Under this scenario, Brazil could go on indefinitely maintaining low growth rates and remaining uncompetitive in international markets. To improve on this situation, it is not enough to have a policy of capital controls and of purchasing and selling reserves by the Central Bank. The government must neutralize the Dutch disease and reject the three habitual policies, which cause the long-term overvaluation of the real. Today, globalization is in retreat and liberal orthodoxy is no longer hegemonic worldwide, but developmental macroeconomics and new developmentalism have been unable to replace it. Yet, in Brazil we are facing the resurgence of neoliberalism, after its 1991–2002 failure in promoting economic development, despit the neoliberal reforms that were adopted. This is mostly because the Brazilian elites are dependent or colonized, and because politicians, even on the left, are not sure that there is a developmental alternative to liberal-orthodoxy and to developmental populism. My fundamental concern, from 2001, was to develop a developmental macroeconomics and the corresponding policies that play this alternative role. Brazilian economists, the heterodox as well as the orthodox ones, are victims of cultural dependency, and continue to be influenced by foreign economic models. Meanwhile, as of January 2016, Brazil is back in a state of economic and political crisis, and most orthodox economists have only one recipe: austerity; whereas most Keynesian and developmental economists also have only one recipe: fiscal expansion. This means that none of these

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groups of economists can offer a national project for Brazil. But this project can only be reindustrialization with income redistribution and environmental protection. And the method for achieving this can only be the rejection of fiscal and exchange rate populism, and the disposition to find creative solutions to the many problems that all nations face. Notes

1. According to the economist Ricardo Paes de Barros, who made a decisive contribution to reducing misery in Brazil by means of income transfer, “there is no country in the world that can say: ‘today, I have no poor,’ because there will always be somebody who has just split up, lost his/her job, become sick” (Interview in Folha de S.Paulo, March 3, 2013). 2. In January 2016, when I finished writing this book, devaluation was not required because a fall in the prices of Brazilian commodity exports and the economic crisis had caused the depreciation of the real to R$4.10 per dollar—above the R$3.80 that corresponded to the industrial or competitive equilibrium exchange rate.

Abbreviations

ABC ANPEC ARENA BNB

BNDES CAPES

CEPAL

CEXIM

CND/EESP

CNI

CONCEX

Combined reference to the municipalities of Santo André, São Bernardo do Campo, and São Caetano do Sul, all of them in the São Paulo metropolitan area. Associação Nacional dos Centros de Pós-Graduação em Economia (Brazilian Association of Graduate Programs in Economics)

Aliança Renovadora Nacional (Brazilian Renewal Alliance) Banco do Nordeste do Brasil (Bank of Northeast Brazil)

Banco Nacional de Desenvolvimento Econômico e Social (National Bank of Economic and Social Development)

Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (Coordination for the Improvement of Higher Education Personnel)

Comissão Econômica para a América Latina e o Caribe (Economic Commission for Latin America and the Caribbean)

Carteira de Exportação e Importação (foreign trade division of the Bank of Brazil)

Centro de Estudos do Novo Desenvolvimentismo/ Escola de Economia de São Paulo (Centre of New Developmentalism/São Paulo School of Economics)

Confederação Nacional da Indústria (National Confederation of Industry)

Conseiho Nacional do Comércio Exterior (National Board of Foreign Trade) 375

376

List of Abbreviations

COPOM

Monetary Policy Committee

DEM

Democratas (Democratic Party)

DASP

EBAPE

ENADE ENEM FGV

FIESP FTAA

FUNCEX GDP

GEIA HDI

IBGE

IBRE

IEDI

IMF

Departamento Administrativo do Serviço Público (Administrative Department of Public Service)

Escola Brasileira de Administração Pública e de Empresas (Brazilian School of Public and Business Administration) Exame Nacional de Avaliação de Desempenho dos Estudantes (National Exam for the Assessment of Student Performance) Exame National do Ensino Médio (National High School Exam)

Fundação Getúlio Vargas (Getúlio Vargas Foundation) Federação das Indústrias do Estado de São Paulo (Federation of Industries of the State of São Paulo) Free Trade Area of the Americas

Fundação Centro de Estudos do Comércio Exterior (Foundation Center for the Study of Foreign Trade) Gross domestic product

Grupo Executivo da Indústria Automobilística (Automotive Industry Executive Group) Human Development Index

Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics) Instituto Brasileiro de Economia (Brazilian Institute of Economics)

Instituto de Estudos para o Desenvolvimento Industrial (Institute of Studies for Industrial Development)

International Monetary Fund

INPC

Índice Nacional de Preços ao Consumidor (National Consumer Price Index)

IPEA

Instituto de Pesquisa Econômica Aplicada (Institute for Applied Economic Research)

IOF

ISEB

Imposto sobre Operações Financeiras (Tax on Financial Operations)

Instituto Superior de Estudos Brasileiros (Higher Institute of Brazilian Studies)

List of Abbreviations

LIBOR

London Interbank Offered Rate

MDB

Movimento Democrático Brasileiro (Brazilian Democratic Movement)

MARE MST

NAFTA NICs OTN PAC

PAEG PCB PDS

PDT PFL PL

PMDB PNAD PND

Ministério da Administração Federal e Reforma do Estado (Ministry of the Federal Administration and State Reform ) Landless Workers Movement

North American Free Trade Agreement Newly Industrialized Countries

Obrigação do Tesouro Nacional (National Treasury Obligation, i.e., National Treasury Bond) Programa de Aceleração do Crescimento (Growth Acceleration Program)

Programa de Ação Econômica do Governo (Government Program of Economic Action)

Partido Comunista Brasileiro (Brazilian Communist Party) Partido Democrático Social (Social Democratic Party)

Partido Democrático Trabalhista (Democratic Workers Party)

Partido da Frente Liberal (Liberal Front Party) Partido Liberal (Liberal Party)

Partido do Movimento Democrático Brasileiro (Party of the Brazilian Democratic Movement) Pesquisa Nacional por Amostra de Domicílios (National Household Sample Survey)

Plano Nacional de Desenvolvimento (National Development Plan)

PP

Partido Progressista (Progressive Party)

PPP

Purchasing power parity

PPA

PPB

PPS PR

PSB

PSD

377

Plano Plurianual de Ação (Multi-Year Action Plan)

Partido Progressista Brasileiro (Brazilian Progressive Party)

Partido Popular Socialista (Socialist Popular Party) Partido da República (Party of the Republic)

Partido Socialista Brasileiro (Brazilian Socialist Party)

Partido Social Democrático (Social Democratic Party)

378

List of Abbreviations

PSDB

Partido da Social Democracia Brasileira (Brazilian Social Democratic Party)

PSOL

Partido Socialismo e Liberdade (Socialism and Freedom Party)

PSI PT

PTB

PUC-Rio SELIC

SENAI

SUDENE SUMOC SUS

UDN

Programa de Sustenção do Investimento (Investment Sustaining Program) Partido dos Trabalhadores (Workers’ Party)

Partido Trabalhista Brasileiro (Brazilian Labor Party) Pontifícia Universidade Católica do Rio de Janeiro (Pontifical Catholic University of Rio de Janeiro) The Central Bank of Brazil’s basic interest rate Serviço Nacional de Aprendizagem Industrial (National Industrial Apprenticeship Service)

Superintendência do Desenvolvimento do Nordeste (Northeast Development Agency) Superintendence of Currency and Credit

Sistema Único de Saúde (Unified Health System)

União Democrática Nacional (National Democratic Union)

UNASUR

Union of South American Nations

URV

Unidade Real de Valor—(Real Unit Value)

UNCTAD Unicamp

USP

WTO

United Nations Conference on Trade and Development Universidade Estadual de Campinas (State University of Campinas)

Universidade de São Paulo (University of São Paulo)

World Trade Organization

In this book, “$” refers to US dollars unless otherwise indicated.

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Index

Abink Commission, 130 Abranches, Sérgio, 245 Acemoglu, Daron, 60 Additional Act of 1834, 72n4, 249 Administrative Reform in the Era of Vargas (Reforma Administrativa na Era de Vargas) (Wahrlich), 108 Africa, 33, 177, 255 Agencies, government, 106–107, 138–139 Alarmism, 141, 144, 146 Alencar, Chico, 246 Alencar, José de, 49 Alencastro, Luiz Felipe de, 42 Alexander the Great, 97 Almeida, Rômulo de, 129, 134–135 Álvares de Azevedo, Manuel Antônio, 49 Alves Branco Tariff of 1844, 50 Amaral, Azevedo, 92, 117, 128 A América Latina (Latin America) (Bomfim), 55 Amorim, Celso, 19, 312 Andrada, Martim Francisco Ribeiro de, 90n4 Andrada brothers, 44 Andrada e Silva, José Bonifacio de, 44, 63, 72n4 Andrade, Antonio Paes de, 250 Andrade, Mário de, 92 Animal Farm (Orwell), 144 ANPEC. See Brazilian Association of Graduate Programs in Economics

April Package, 207–210, 216 Aranha, Osvaldo, 17, 131 Arantes, Rogério Bastos, 251 Araújo, Cícero, 249, 332 Araújo, Eliane, 319n18, 345 Araújo Castro, José Augusto de, 18, 26n7 ARENA. See Brazilian Renewal Alliance Argentina, 178, 199, 204, 223, 228n4, 281 Arida, Pérsio, 202, 204, 269, 284n2, 295n2 Arns, Paulo Evaristo, 155 Arraes, Miguel, 215 Arruda, Maria Arminda do Nascimento, 172 Asia, 33, 255, 367 Aureliano, Liana Maria, 115n13 Australia, 28 Austria, 97, 104, 258 Authoritarianism: April Package and, 207–210, 216; capitalism and, 114n4; in context, 173–174; hidden, 155; instrumental, 96, 114n5; torture and, 155, 160, 162; Vargas and, 96, 97–98 Authoritarian-Modernizing Pact (1964–1979), 8tab, 9, 11, 365–366; Castelo Branco and, 157–160; in context, 12tab, 194–195, 207, 213; military developmentalism and, 162–164; “modernizing tripod

399

400

Index

model” and, 160–161; with technobureaucracy industrialized, 161–162 Automobile industry, 132, 142, 193, 318n1 Automotive Industry Executive Group (GEIA), 138 Aztec people, 34

Bacha, Edmar, 202, 284n2 Bairoch, Paul, 33–34 Baker, James, 228n2, 230 Baker Plan (1985), 15 Balassa, Bela, 189n1 Barbosa, Ruy, 75–76, 90n3, 117 Barbosa Lima Sobrinho, Alexandre, 94 Barickman, Bert J., 46 Baron of Rio Branco, 15–16, 63 Barreto, Tobias, 54, 55, 117 Barros, Alexandre Rands, 38 Barros, Ricardo Paes de, 354n4, 374n1 Basbaum, Leôncio, 75 Basilio, Flavio A. C., 345 Bastos, Pedro Paulo Zahluth, 131 Batista, Paulo Nogueira, Jr., 264 Bauer, Otto, 359 Belgium, 3, 27, 94 Belluzzo, Luiz Gonzaga, 256, 265n1 Beltrão, Hélio, 116n18 Benjamin, César, 364n1 Bhaduri, Amit, 334 Bielschowsky, Ricardo, 115n11 Bilac, Olavo, 80–81, 92 Blecker, Robert A., 334 BNDES. See National Bank of Economic and Social Development BNDS. See Brazilian National Development Bank Bolivia, 17, 19 Bolsa Família, 277, 300, 338, 340–341, 354n2, 354n3 Bomfim, Manoel, 55, 92 Bonaparte, Napoleon, 15, 97 Bonavides, Paulo, 250 Boschi, Renato Raul, 232 Bosi, Alfredo, 48–49 Bourgeoisie, 171, 180n4, 207, 231–232; April Package and, 208–210; with conservative reflex (1979), 213–216; media controlled by, 219; political hegemony project and, 218–219

The Bourgeois Revolution in Brazil (A Revolução Burguesa no Brasil) (Fernandes), 171, 180n4, 231–232 Brady, Nicholas, 228n2, 230, 268 Brady Plan, 230, 235 Brandão, Gildo Marçal, 13–14 Brazil: The Interrupted Construction (Furtado), 222 Brazilian Association of Graduate Programs in Economics (ANPEC), 204, 257 Brazilian Communist Party (PCB), 104, 120–121, 128, 170 Brazilian Democratic Movement (MDB), 209, 210, 214, 273 Brazilian Economy on a Forced March (A Economia Brasileira em Marcha Forçada) (Castro, A. B., and Pires, F. E.), 221 Brazilian Institute of Economics, Sociology, and Politics (IBESP), 25n3 Brazilian Institute of Geography and Statistics (IBGE), 109, 319n13, 341, 354n6 Brazilian Labor Party (PTB), 121, 128, 247 Brazilian National Development Bank (BNDS), 130, 158 Brazilian Progressive Party (PPB), 219n3 Brazilian Renewal Alliance (ARENA), 161, 209, 211, 213 Brazilian School of Public and Business Administration (EBAPE), 116n18 Brazilian Social Democratic Party (PSDB), 235, 246 Brazilian Socialist Party (PSB), 215 The Brazilian Inflation (A Inflação Brasileira) (Rangel), 154, 189n2, 201 Brazil-United States Mixed Committee, 130 “Bresser Plan,” 222, 228n2, 235, 269 Bresser-Pereira, Luiz Carlos: influence of, 6n6, 62n4, 103–104, 114n4, 175, 202, 205n5, 219n1, 228n2, 253n1, 290, 333, 336n7, 343, 354n14; role of, 175, 193, 212, 218n2, 220n9, 259, 283n1, 290, 314, 320n25, 343

Index

BRICs, 299, 318n5 Brizola, Leonel, 215, 252 Bruno, Miguel, 348–349 Buarque de Holanda, Sérgio, 51, 54, 68, 139 Bueno, Clodoaldo, 16 Bulhões, Otavio Gouvea de, 130, 159, 181

Cadernos de Nosso Tempo (Workbooks of Our Time) (“Itatiaia Group”), 121 Caldeira, Jorge, 61 Campos, Roberto, 116n18, 129, 159, 164n4, 181, 220n7 Campos Sales, Manuel Ferraz de, 74, 77–78 Canada, 26n8, 28, 359 Cano, Wilson, 101 CAPES Foundation. See Coordination for the Improvement of Higher Education Personnel Foundation Capitalism, 7, 9, 91; authoritarianism and, 114n4; coffee and manufacturing industry, 101–103; DASP and government bureaucracy, 106–110; defined, 40, 357; education and, 41; global influence, 14–15; industrial entrepreneurs, origins of, 103–105; with industrialization, beginnings, 97–100; with national and nationalist revolutions, 92–93; with national-developmentalism, 110–114; neoliberal, 10, 35; 1930 Revolution and, 94–97; with professional middle class, 105–106; rent-seeking and, 116n19, 136; technobureaucratic, 164n3, 194–195 Capitalismo Dependente e Classes Sociais na América Latina (Fernandes), 172–173 Capitalist revolution, 7, 27–28 Cardoso, Adalberto, 47 Cardoso, Ciro Flamarion, 31, 39–40 Cardoso, Fernando Henrique: dependency theory and, 167, 169–170; direct investments and, 134; elections and, 247; legacy, 240–241, 242, 284n10; middle class government and, 75; NAFTA and, 18; with overvaluation of national cur-

401

rency, 125; Real Plan and, 267, 272–278, 284n8; role of, 78, 103, 219n1, 220n10, 239, 251, 290 Cardoso, Ruth, 278 Cardoso de Mello, Zelia, 255, 259 Carneiro, Ricardo, 335n1 Carone, Edgard, 76, 80, 81 Carpeaux, Otto Maria, 83 Carteira de Exportação e Importação (CEXIM), 129 Carvalho, Fernando José Cardim de, 189 Carvalho, José Murilo de, 48, 52, 53, 74, 82; on Conservatives and Liberals, 64; military government and, 79–80 Casa-Grande & Senzala (The Masters and the Slaves) (Freyre), 28–29 Castelo Branco, Humberto de Alencar, 154; administration (1964–1967), 18, 157–160; developmentalism and, 185–186 Castro, Antônio Barros de, 193, 221, 350–351 Castro, Fidel, 26n6 Castro Alves, Antônio de, 73, 361 Catholic Church: human rights and, 155; protests and, 210; PUC-Rio, 202, 204, 232, 263, 295n1; role of, 55, 213, 215 Cavalcanti, Amaro, 102 Caxias, Duke of, 63 Censorship, 159–160, 210 Central Bank of Brazil: role of, 137–138, 257, 290, 293, 295, 295n1; SELIC, 303, 326, 328 CEPAL. See United Nations Economic Commission for Latin America and the Caribbean Cervo, Amado Luiz, 16 CEXIM. See Carteira de Exportação e Importação Chang, Ha-Joon, 35, 88, 178 Chesnais, François, 265n1 Children, 46, 57, 340 Chile, 199, 203, 228n4 China: economic growth in, 87–88; GDP, 255; imperialism and, 33–35; quasi-stagnation and, 349–351; role of, 93, 255, 318n5, 344, 364n4 Chronic Inflation (Pazos), 204 Civil rights, 245, 354n1

402

Index

Class: alliance, collapse of, 212–213; coalitions with developmentalism and populism, 111–114; in context, 300–301, 318n8, 319n10. See also Bourgeoisie; Elite; Free workers; Middle class; Upper class; Working class Classical developmentalism, 20, 88 CNI. See National Confederation of Industry Coase, Ronald, 59 Coffee: financial crisis and, 76, 98–99, 142–143; growers in upper class, 10, 73; manufacturing industry and, 101–103; role of, 84–85, 225; slavery and, 50, 84, 85; sugar industry and, 120; wage labor and, 85–86 Cold War, 141, 274 The Collapse of a Class Alliance (Bresser-Pereira), 212, 220n9 Collor de Mello, Fernando: elections, 253; impeachment of, 267; inflation and, 259–260, 262; role of, 222, 247, 255, 358 Collor Plan, inflation and, 259–260, 262 Colombia, 17, 160 Colonialism (1532–1822): in context, 8, 27–28; mercantilism with, 28, 34; nationalist explanation and imperialism with, 33–36; nineteenth century and, 36–38; by settlement, 28–32, 36–38; slavery with, 28–32, 38–42 Communism, 146. See also Brazilian Communist Party Comparative advantage, 20, 33, 85, 87–88, 128 Comte, Auguste, 73, 83 “Concentration of income and the economy’s recuperation” (BresserPereira), 193 CONCEX. See National Board of Foreign Trade Conservative Party, 50, 70 Conservatives, 63–67 Constant, Benjamin, 64, 73, 83, 91 Constitution (1988), 249–252 Consumer credit, 355, 364n2 Consumption bubble, 355, 364n1

A Contribution to the Critique of Political Economy (Marx), 244 Coordination for the Improvement of Higher Education Personnel (CAPES) Foundation, 364n6 Copernicus, 188 COPOM. See Monetary Policy Board Corbisier, Roland, 360 Corden, W. Max, 147 Coronéis (plantation owners), 47, 62n2 Coronelismo, 56–57 Coronelismo, Enxada e Voto (Leal), 78 Corporations. See Multinational corporations Corrêa, Serzedelo, 102 Cosmopolitanism, 118–119 Costa, Cruz, 83 Costa, Emília Viotti da, 50 Costa, Wilma Peres, 38, 46 Costa e Silva, Artur da, 159; administration of, 157, 158, 160, 185, 186; technobureaucracy and, 161 Cost-push inflation, 154–155, 185, 186 Coups. See Military coups Coutinho, Carlos Nelson, 306 Coutinho, Luciano, 265n1, 319n19 Couto, Claudio Gonçalves, 251, 324 Covas, Mário, 235, 252 Crisis, of capitalism, 9. See also Financial crisis Cromwell, Oliver, 67, 93 Cruzado Plan (“Economic Stabilization Plan”): collapse of, 256, 260, 267; in context, 219, 221, 225, 229; Democratic-Popular Pact and, 232–234; elements of, 228n1 Cuba, 325 Cuban Revolution, 18, 26n6, 141, 144 Culture: censorship and, 159; identity and, 19, 359–360; influences, 92, 361; policy, 312 Cunha, Eduardo, 329 Cunha, Euclides da, 92 Cunha, Mario Wagner Vieira da, 108–109 Cunha, Paulo, 319n17, 362 Currency: depreciation, 326–327; dollar shortage, 186–187; National Treasury Bonds and, 269; overvaluation of national, 121–125, 124fig; SUMOC, 131, 133–134,

Index

143; URV and, 271–272. See also Dutch disease Cury Barros, Samir, 354n7 Cycles, 13–14, 192tab. See also Political pacts, cycles and

D’Araújo, Maria Celina, 108 Darwin, Charles, 188 DASP. See Public Service Administrative Department Datafolha, 284n10, 331 Dean, Warren, 101 Debt. See Foreign debt; Public debt Declaration of the Rights of Man (1789), 69 Deindustrialization, 34–35, 147, 276, 343, 344 Delfim Netto, Antônio, 181, 184, 185, 189n2; Dutch Disease and, 260–261; role of, 198, 200, 214 Democracy: consolidation of, 253n1; with Constitution (1988), 249–252; media with limited, 174; people and, 239–243, 369; with presidential elections (1989), 252–253; quality of, 244–249, 370–371 Democracy and Social Justice Cycle (1980–2014), 8tab; BNDES and, 140n1; in context, 8, 10, 13, 221, 337, 353, 365, 366; state with, 11 Democratic Labor Party (PDT), 215 Democratic Party, 70 Democratic Social Party (PDS), 211, 218, 219n3 Democratic-Popular Pact (1980–1987), 8tab, 9, 11; class alliance, collapse, 212–213; collapse of, 230–232; in context, 207–208, 229–230, 234–237, 366; Cruzado Plan and, 232–234; Diretas Já campaign and, 216–218; financial crisis and, 12tab; in 1977, 210–211, 250; “opening,” advances and setbacks (1974–1978), 208–210. See also Bourgeoisie; Working class Deng Xiaoping, 349 Deodoro da Fonseca, Manuel, 74, 77, 155 Dependency: with development, levels of, 26n8; NAFTA, 18, 19; national,

403

174–179, 367; of upper class, 7. See also Liberal-Dependent Pact Dependency and Development in Latin America (Cardoso, F. H., and Faletto), 169–170 Dependency theory: in context, 102–103, 165–167, 266n7; Fernandes and, 171–174; hegemony imperialism and, 176–179; national-dependent interpretation of, 174–179; versions of, 167–170 Depreciation, currency, 326–327 Developing Brazil: Overcoming the Failure of the Washington Consensus (Bresser-Pereira), 283n1, 314 “Developing countries,” 42n1 Development, 169–170, 290; BNDES, 130, 138, 140n1, 189; BNDS, 130, 158; dependency with levels of, 26n8; economic, 10–14, 88; IEDI, 308, 319n17, 362; obstacles to, 30; OECD, 37; political pacts and cycles with interrupted, 10–14, 11tab, 12tab; “productive sophistication” and, 87; social structure with institutions and, 59–62; strategy for national, 368, 372–373; SUDENE, 139; UNCTAD, 140n7. See also Nation and Development Cycle Developmental macroeconomics, 20–21 Developmentalism, 110; with class coalitions and populism, 111–114; classical, 20, 88; economic liberalism and, 62n6; with foreign debt and growth policy, 186–189; military, 162–164; nationalism with, 118, 119; return of, 185–189; social-developmentalism, 318n4. See also New developmentalism “The Development of Underdevelopment” (Frank), 165 Diaz-Alejandro, Carlos F., 205n4 Diniz, Eli, 232 Diplomacy, foreign relations and, 18 Direct investments, 284n11; arguments against, 135–136; domestic market occupation (2011) and, 137tab; government and, 134–137 Diretas Já campaign, 207, 210, 216–218, 230

404

Index

“Disguised tax,” 182, 333–334 Dolhnikoff, Miriam, 65 Dollar shortage, 186–187 Domestic market, direct investments (2011), 137tab Domestic savings, 135, 170, 189, 279, 281tab Domination. See Dependency Os Donos do Poder (The Power Owners) (Faoro), 51 Dornelles, Francisco, 232 Dos Santos, Theotonio, 168–169 Draibe, Sônia, 115n13 Drummond, José Augusto, 90n5 Duarte, Nestor, 50, 53, 56, 92, 140 Dutch disease: in context, 170, 177, 276, 283n1, 334, 343, 354n14; defined, 5n1; influence of, 122, 123–124; liberal orthodoxy and, 23; neutralization of, 36, 102, 115n9, 119, 147–148, 182, 183, 186, 187, 195, 260, 262–263, 280, 300, 350, 355; taxes and, 148, 260–261; triggering of, 268, 289, 347 Dutra, Eurico Gaspar, 127

EBAPE. See Brazilian School of Public and Business Administration “Economia brasileira: crítica à razão Dualista” (Oliveira, F.), 180n5 A Economia Brasileira em Marcha Forçada (Brazilian Economy on a Forced March) (Castro, A. B., and Pires, F. E.), 221 Economic History of Brazil. See História Econômica do Brasil Economic liberalism, 62n6, 69 Economic populism, 188, 237n2 “Economic Stabilization Plan.” See Cruzado Plan Economy, 11, 37, 60, 159; ANPEC, 204, 257; BNDES, 130, 138, 140n1, 189; CEPAL, 25n3, 100, 128, 148, 179n1; China with growth, 87–88; complexity index (1963–2013), 345fig; in context, 7, 20–21, 29, 62n6, 69, 180n5, 188, 193, 221, 237n2, 318n7; development of, 10–14, 88; direct investments issue, 134–137; “Encilhamento” policy and, 75; growth (1871–2014), 11tab; growth of per

capita GDP (1930–2014), 12tab; IBESP, 25n3; manufacturing industry share of GDP (1947–2015), 13fig; national currency, 121–125, 124fig; nineteenth century, income per capita (1870–2014), 37fig; political, 20, 244, 296n3; politics and socioeconomic groups, 119–125; principles for sound, 350; World Bank, 71, 178, 219n4. See also Cruzado Plan; Dutch disease; Financial crisis; GDP; Income; Inflation; Inter-national Monetary Fund; Macroeconomics; Real Plan Education: CAPES Foundation, 364n6; capitalism and, 41; of elite, 46, 53, 55, 56, 363; higher, 352–353, 363; literacy and, 156n3, 164n5, 278, 340; reform, 278, 339; scholarships from government, 42n10 Edward III (King of England), 88 Edwards, Corwin D., 129 Elections, 246–247; in context, 297–298, 305–306; democracy and 1989 presidential, 252–253; Diretas Já campaign and, 207, 210, 216–218, 230; “parties of affairs” with, 284n7; pretense of, 51; trade union, 146; voters and, 48, 72n6, 115n8, 156n3, 164n5, 245, 247 Eletrobras, 129 Elite, 179; education of, 46, 53, 55, 56, 363; imperial, 39, 42n7, 47; nation with alienation of, 361–364; with neoliberalism, 263–265; political, 46–49, 53, 55, 62n5; with taxes, 256. See also Landowners Elizabeth I (Queen of England), 27, 97 Empire, 54; constitutional monarchy and, 67–71; in context, 8, 43–44; liberals and, 69–71; Ottoman, 33. See also State; State and Territorial Integration Cycle ENADE. See National Exam for the Assessment of Student Performance “Encilhamento” policy, 75, 86 ENEM. See National High School Exam England, 88, 94, 97; dependency on, 7; Industrial Revolution, 15, 20, 27, 30, 66; with slavery, 49

Index

Entrepreneurs. See Industrial entrepreneurs Environmental protection, 370 Eris, Ibrahim, 260 Um Estadista do Império (A statesman of the empire) (Nabuco), 54 Ethnicity, of industrial entrepreneurs, 104tab Evans, Peter, 195 Evolução Política do Brasil (Political Evolution of Brazil) (Prado), 68 Exchange rates: confiscation, 125n2, 343; in context, 205n5, 275, 285–286, 301–302, 314, 374n2; Dutch disease and, 147; effective, 115n10; after financial crisis, 304; financial crisis with, 127, 130–131; industrial equilibrium, 315fig, 319n21, 319n23, 320n24; inflation and, 199; with macroeconomic tripod, 286–290; populism, 237n2; real, 115n10, 261, 314–315, 315fig; variations in (1995–2015), 292tab Exploitation, 167–168 Exports, 129; taxes, 102, 143, 333–334; trade terms (2002–2014), 299tab; wage- or export-led model, 333–335. See also Manufactured goods, exporting of

Faletto, Enzo, 134, 167, 169–170 Fanelli, José Maria, 226 Faoro, Raymundo: influence, 140; role of, 45, 51, 52, 53, 62n8; on Vargas, 139 Fausto, Boris, 42n6 Federal Board of Foreign Trade, 107 Federalism, 63–67 Federation of Industries of the State of São Paulo (FIESP), 151, 214, 308, 319n17, 362 Feijó, Carmen, 345 Feijó, Diogo Antônio, 72n2 Fernandes, Florestan: DemocraticPopular Pact and, 231–232; role of, 40, 171–174, 180n2, 180n3 Ferreira, Gabriela Nunes, 65 FGV. See Getúlio Vargas Foundation FIESP. See Federation of Industries of the State of São Paulo

405

The Fight for the Industrialization of Brazil (A Luta pela Industrialização do Brasil) (Luz), 101 Figueiredo, Argelina Cheibub, 247 Figueiredo, João Baptista, 197, 210, 212, 214 Filho, Daniel Aarão Reis, 121 Financial capital, 164n2 Financial crisis: coffee and, 76, 98–99, 142–143; in context, 221–222, 228n2, 285–286; DemocraticPopular Pact and, 12tab; “Encilhamento” policy and, 75; with exchange rate, 127, 130–131; exchange rates after, 304; foreign debt and, 36, 196, 257; global (2008), 309–313, 311tab, 373; Great Depression, 15, 98–99, 112; with inertial inflation and stagnation, 222–226; modern, 15; with negative public savings, 226–228, 227tab; in 1980s and Washington Consensus, 257–258, 264, 267, 283n1; Ponzi scheme and, 328–329; recession, 325–330, 342, 347; stabilization plan (December 1991), 263–264. See also Inflation Fiori, José Luís, 309 First Republic (1889–1930), 9; in context, 25n1, 54, 70; foreign relations and, 15 Fiscal populism, 237n2, 355 Flassback, Heiner, 140n7 Fonseca, Gelson, Jr., 26n6, 26n7 Fonseca, Hermes da, 80 Fonseca, Pedro Cezar Dutra, 97, 107 Foreign debt: current account and (1971–1981), 197tab; developmentalism with, 186–189; financial crisis and, 36, 196, 257; military government and, 81, 196–197; role of, 229 Foreign relations: diplomacy and, 18; liberal orthodoxy and new developmentalism, 22tab–25tab; new developmentalism and, 20–25; with political pacts and cycles, 15–25 Foreign savings, 196; investments with domestic and, 281tab; role of, 278–279 Forjaz, Maria Cecilia, 82

406

Index

Formação do Brasil Contemporâneo (Formation of contemporary Brazil) (Prado), 29 Formalism, with technobureaucracy, 138 Fraga, Armínio, 265n6, 295n1 France, 7, 27, 94 Franco, Itamar, 230, 267, 268 Franco, Wellington Moreira, 331 Frank, Andre Gunder, 165, 167 Free Market Act, 131 Free Trade Area of the Americas (FTAA), 18, 312 Free workers, 40, 58 French Revolution, 15, 38, 69, 93 Frenkel, Roberto, 226 Freyre, Gilberto, 28–29, 62n9; influence, 92, 117, 119; oligarchy and, 50–51 FTAA. See Free Trade Area of the Americas Funaro, Dílson, 221, 232, 235, 308, 362 Furtado, Celso: on coffee and manufacturing industry, 102; on import substitution, 152; influence, 92, 117, 128, 176, 193, 222; 1930 Revolution and, 98–99; patriarchy and, 46; role of, 9, 20, 27, 30, 59, 84, 90n3, 148; SUDENE and, 139

Gabriel Palma, José, 87, 179n1 Gaetani, Francisco, 115n15 Gala, Paulo, 284n14 Gama, Luiz, 73 Gama, Manuel Jacinto Nogueira da, 90n4 Garrastazu Médici, Emílio, 162, 163 Gaspari, Elio, 291 GDP (gross domestic product): China, 255; in context, 13fig, 181, 191, 221, 225, 299, 319n22, 358, 364n3; decline, 132, 152, 200, 322, 337; growth of per capita (1930–2014), 12fig; with industrial cycles (1955–1981), 192tab; public debt ratio to, 23, 356, 364n3; public savings and, 227, 262; real growth rates (1995–2015), 287fig GEIA. See Automotive Industry Executive Group

Geisel, Ernesto, 111, 164, 171; administration, 210, 257; April Package and, 207–209; foreign debt and, 196 Gellner, Ernest, 34 The General Theory of Employment, Interest and Money (Keynes), 122 Germany, 15, 17, 93, 97 Getúlio Vargas Foundation (FGV), 115n15, 116n18, 133 Gil, Gilberto, 312 Gini coefficient, 338, 339fig, 341 Global financial crisis (2008), 309–313, 311tab, 373 Globalization, 19, 255, 256 Globalization and Competition (Bresser-Pereira), 283n1, 320n25 Glorious Revolution (1688), 27, 69 Gold, 45, 225 Gonçalves Dias, Antônio, 49, 361 González, Felipe, 278 Gorender, Jacob, 31 Goulart, João, 18, 144, 145, 151 Government: agencies, 106–107, 138–139; with bureaucracy consolidated, 137–140; in context, 73–74, 127–128; DASP and bureaucracy of, 106–110; direct investments issue, 134–137; with education scholarships, 42n10; industrial revolution and, 85–89; with Kubitschek and manufacturing industry, 132–134; from mercantilism to industrial capital, 84–85; middle class, 74–76; military and, 79–81; with “politics of governors,” 76–79; Vargas administration, 128–132. See also Military government; State Government Program of Economic Action (PAEG), 159 Governors, “politics of,” 76–79 Graham, Lawrence S., 115n15, 138 Great Depression, 15, 98–99, 112 Greece, 208, 209 Gros, Francisco, 265n6 Gross domestic product. See GDP Growth Acceleration Program (PAC), 312, 346 Gudin, Eugênio, 102, 115n11, 117, 129 Guerra, Ruy, 367–368

Index

Guerreiro Ramos, Alberto, 117, 128, 145, 155, 156, 158, 172 Guevara, Che, 18 Guimarães, Samuel Pinheiro, 16, 234 Guimarães, Ulysses, 250 Guizot, François, 64

Haber, Stephen, 37, 60 Hausmann, Ricardo, 344 HDI. See Human Development Index Hegemonic imperialism, 176–179 Henry VIII (King of England), 27 “Heterodox shock,” 203 Higher Institute of Brazilian Studies (ISEB), 9, 25n3, 43, 92, 114n1, 128, 140n6 Hirschman, Albert, 20 História da Política Exterior do Brasil (Cervo and Bueno), 16 História Econômica do Brasil (Economic History of Brazil) (Prado), 29 Holanda, Chico Buarque de, 367–368 Hong Kong, 183 Hoz, José Alfredo Martinez de, 199, 223 Human Development Index (HDI), 10–11 Human rights, 69, 155 Hyperinflation, 203, 222, 225, 228n6, 259 “Hyperinflation and Stabilization in Brazil: The First Collor Plan” (Nakano and Bresser-Pereira), 259

Ianni, Octavio, 97, 107, 114n6, 115n14, 180n2 Ianoni, Marcus, 59, 267 IBESP. See Brazilian Institute of Economics, Sociology, and Politics IBGE. See Brazilian Institute of Geography and Statistics Identity, culture and, 19, 359–360 IEDI. See Institute of Studies for Industrial Development Iglesias, Francisco, 94 IMF. See International Monetary Fund Impeachment: of Collor de Mello, 267; of Rousseff, 329–333, 370 Imperial elite, 39, 42n7, 47. See also Empire

407

Imperialism, 357; colonialism with nationalist explanation and, 33–36; dependency theory and hegemonic, 176–179; industrialization and, 117–125 Imports, 129; coefficient (1901–2013), 153fig; substitution, 114n2, 152–153 Inca people, 34 Income, 37fig, 192tab; distribution (1960 and 1967), 194tab; “middleincome trap,” 41; redistribution, 300; in upper and middle classes, 192–194. See also Wages Indebtedness. See Foreign debt; Public debt India, 318n5; imperialism and, 33, 34–35; role of, 94, 255, 355, 364n4 Indonesia, 364n4 Industrial capital, 84–85 Industrial entrepreneurs: capitalism and origins of, 103–105; ethnic origin of São Paulo, 104tab Industrial equilibrium exchange rate, 315fig, 319n21, 319n23, 320n24 Industrial production (2000–2012), 311tab Industrial revolution: growth of, 27, 38; with industrialization or “productive sophistication,” 87–89; influence, 42n4, 61–62; origins of, 85–89 Industrial Revolution, England, 15, 20, 27, 30, 66 Industrialization: capitalism with beginnings of, 97–100; deindustrialization, 34–35, 147, 276, 343, 344; with GDP (1955–1981), 192tab; growth of, 142; IEDI, 308, 319n17, 362; imperialism and, 117–125; index of terms of trade (1901–2013), 100fig; NICs, 183, 189n1, 256; “productive sophistication” or, 87–89; role of, 89; SENAI, 107 The Industrialization of São Paulo (Dean), 101 Industrializing, of technobureaucracy, 161–162 Inertial inflation: in context, 221–222, 268–269; financial crisis with stagnation and, 222–226; military

408

Index

government and, 200–204; negative public savings and, 226–228. See also Real Plan Infant mortality, 278 A Inflação Brasileira (The Brazilian Inflation) (Rangel), 154, 189n2, 201 Inflation: Collor Plan and, 259–260, 262; in context, 151–152, 189n2, 267–268, 369; cost-push, 154–155, 185, 186; exchange rate and, 199; hyperinflation, 203, 222, 225, 228n6, 259; import substitution, exhaustion of, 152–153; with macroeconomic tripod, 286–290; policy, 290–293, 292tab; protests, 155–156; rates, 132, 225–226, 263, 270; stagflation and, 197, 222, 255–256; “zero,” 234. See also Inertial inflation; Real Plan INPC. See National Consumer Price Index Institute for Applied Economic Research (IPEA), 228n5, 318n7 Institute of Studies for Industrial Development (IEDI), 308, 319n17, 362 Institutional Act No. 5, 159, 163, 210, 212 Institutional Act of 1834, 64 Institutions: economy and, 60; social structure with development and, 59–62 Instrumental authoritarianism, 96, 114n5 Integralism, 108, 116n17 The Integration of Black People into Class Society (Fernandes), 40 Interest rates, 122; in context, 285–286, 290, 336n5; high, 293–295, 303; for public debt, 189, 339, 341, 348; reduced, 316; SELIC, 303, 326, 328 Interministerial Price Commission, 185 International Monetary Fund (IMF): Collor Plan and, 259; public accountancy and, 227; role of, 35, 71, 125, 178, 200, 223–224, 257, 267, 276–277, 352; with stabilization plan (December 1991), 263–264

Interpretation of the Additional Act, 72n4, 249 Investment Sustaining Program (PSI), 307 Investments, 140n7; conditions for, 123; with foreign and domestic savings, 281tab; increasing rate of, 368–369; Real Plan and savings (1994–1999) without, 281–283; savings substitution (1993–1999) and (2000–2005), 283tab. See also Direct investments IOF. See Tax on Financial Operations IPEA. See Institute for Applied Economic Research Iran, 19 ISEB. See Higher Institute of Brazilian Studies Italy, 3, 14, 97, 110 “Itatiaia Group,” 25n3, 121

Jaguaribe Hélio, 16, 58, 110; direct investments and, 134; influence, 117, 126n3, 128; ISEB and, 140n6 Jagunços (warlords), 44, 62n2 Jancsó, István, 39 Japan, 10, 35, 93, 94, 225 João I (King of Portugal), 42n7, 44, 51 John Paull II (Pope), 155 Junqueira Freire, Luís José, 49 Justice. See Social justice

Kakwani, Nanak, 354n4 Kandir, Antônio, 260 Kennedy, John F., 146 Keynes, John Maynard, 25, 99, 122, 188, 201, 348 Klein, Herbert, 37 Kregel, Jan, 140n7 Kubitschek, Juscelino: administration (1956–1960), 18, 66, 113, 120, 132–133, 164; industrialization and, 142; inflation and, 151, 154; with manufacturing industry, consolidation of, 132–134; Plano de Metas and, 130, 132, 133, 138, 140n8 Kyoto Protocol, 370

Lacerda, Carlos, 131 Lafer, Celso, 16, 138, 140n8

Index

Lafer, Horacio, 129, 131 Lahuerta, Milton, 243 Lamounier, Bolívar, 219n1, 247 Land Act, 45, 49 Landless Workers Movement (MST), 298 Landowners, 56, 62n2; coffee crisis and, 143; oligarchy of, 50–54, 57; as political elite, 46, 47; slavery and, 49 Latin America (A América Latina) (Bomfim), 55 Lava Jato Operation, 329–331 Lavalle, Adrian Gurza, 47 Law of value, 199 League of National Defense, 80 Leal, Victor Nunes, 56–57, 78, 140 Ledo, Joaquim Gonçalves, 44 Leff, Nathaniel, 37 Legislative branch, 245, 252 Lemos, Miguel, 83 Leroy-Beaulieu, Paul, 29 Lessa, Renato, 77–78 Levine, Robert M., 46 Levy, Joaquim, 330 Lewis, W. Arthur, 20, 42n9 Lewis Turning Point, 41, 42n9, 342 Liberal Alliance, 95 Liberal Front Party (PFL), 215, 217–218, 235–236, 247, 273 Liberal orthodoxy (1990–2002), 10; Dutch disease and, 23; macroeconomics and, 22, 25; new developmentalism and, 22tab–25tab, 346 Liberal Party (PL): in context, 50, 72n2, 215; role of, 63, 65 Liberal-Dependent Pact (1991–2002), 8tab, 9, 11; in context, 12tab, 255–257, 268, 353, 366; with stabilization plan (December 1991), 264. See also Neoliberalism Liberalism: in context, 163; economic, 62n6, 69; political, 69–70; role of, 83 Liberals: Federalism, Conservatives, and, 63–67; identified, 69–71; neoliberal capitalism, 10, 35; new developmentalism and orthodoxy of, 22tab–25tab; 1930 Revolution and, 96 Lima, Luiz Antônio de Oliveira, 205n7 Lima, Olavo Brasil de, Jr., 247

409

Limongi, Fernando, 247 Lins de Barros, João Alberto, 129 Listen, Yankee (Mills), 26n6, 141 Literacy, 340; rate, 278; voters and, 156n3, 164n5 Locke, John, 67, 69 The Long Sunrise (O Longo Amanhecer) (Furtado), 90n3 Lopes, Francisco L., 202, 203, 204, 269, 295n1 Lopes, Isidoro Dias, 81 Lopes, Lucas, 129, 139 Lopes, Luiz Simões, 107, 109, 115n15, 129 Lorscheiter, Ivo, 155 Lott, Henrique Teixeira, 132 Loureiro, Maria Rita, 115n11 Love, Joseph L., 46 Lula da Silva, Luiz Inácio: administration, 241–242, 293, 298–304, 322, 363, 368; consumption bubble and, 355, 364n1; deindustrialization and, 343; elections and, 247, 252, 297–298; legacy, 239; Lulism and, 304–308; Real Plan and, 289; role of, 19, 215, 260 A Luta pela Industrialização do Brasil (The Fight for the Industrialization of Brazil) (Luz), 101 Luz, Nícia Vilela, 101

Machado, Luiz Toledo, 91 Macroeconomics, 228n2; liberal orthodoxy and, 22, 25; new developmentalism and, 20–21, 121–122; tripod, 286–290 Maddison, Angus, 37, 225 Magalhães, Gonçalves de, 48 Mainwaring, Scott, 247 Malan, Pedro, 295n1 Malaysia, 364n4 Management Reform of 1995, 278, 313 “Manifesto of the Eight,” 212 Mantega, Guido, 299, 309–310 Manufactured goods, exporting of: in context, 181–182; developmentalism and, 185–189; model, 182–184; share of (1964–2014), 184fig Manufacturing industry: coffee and, 101–103; in context, 346–347;

410

Index

GDP share (1947–2015), 13fig; growth of, 86; Kubitschek and consolidation of, 132–134 Mao Zedong, 349 March of the Family with God for Freedom, 146, 335n4 Marconi, Nelson, 345 Marcos dos Santos, Ronaldo, 32 MARE. See Ministry of the Federal Administration and State Reform Marglin, Stephen, 334 Marini, Ruy Mauro, 167, 168 Marson, Izabel Andrade, 47 Martins, José de Souza, 245 Martins, Luciano, 52, 79, 81–82, 110, 140, 219n1 Marx, Karl, 31, 59, 60, 111, 244 Marxism, 52, 168, 169, 180n2, 357 The Masters and the Slaves (CasaGrande & Senzala) (Freyre), 28–29 Material industries, 142 Matijascic, Milko, 318n7 Mayan people, 34 MDB. See Brazilian Democratic Movement Media: censorship, 159–160, 210; control of, 219, 248, 371; with democracy, limited, 174; influence, 219, 248, 363 Medialdea, Bibiana, 285 Meira, Lúcio Martins, 138–139 Meirelles, Henrique, 318n3, 319n14, 323 Mello, Evaldo Cabral de, 54 Mendes, Teixeira, 83 Meneguello, Rachel, 247 Menem, Carlos, 319n15 Mensalão scandal, 305, 307, 319n16, 322, 363 Mercadante, Aloízio, 318n4 Mercantilism: colonialism with, 28, 34; government from industrial capital to, 84–85; influence, 20, 69; Portugal and, 15; slavery and, 30–31 Methuen. See Treaty of Methuen Mexico, 94, 183, 200; NAFTA and, 18, 19, 359; role of, 255 Middle class: decline, 341–342; government, 74–76; growth of, 57–58, 93; income concentration in, 192–194; professional, 105–106, 318n9; public jobs for, 55, 105

“Middle-income trap,” 41 Military coups: conditions absent for, 236–237; in context, 149n1, 158; dependency theory and, 166; 1964, 9–10, 15, 144–148; against Vargas, 121, 127, 128–129, 131, 132, 155 Military developmentalism, 162–164 Military government: Castelo Branco administration, 157–160; in context, 191–192, 360; emergence of, 79–81; foreign debt and, 81, 196–197; income concentration and, 192–194, 192tab, 194tab; industrializing technobureaucracy, 161–162; inertial inflation and, 200–204; with military, developmentalism of, 162–164; mistakes of 1979–1980, 198–204; “modernizing tripod model,” 160–161; technobureaucraticcapitalist model, 164n3, 194–195; “Tenentismo” and, 81–83 Mills, C. Wright, 26n6, 141 Minas Gerais, 32; gold in, 45; political elite in, 46; role of, 74 Minimum wage, 211, 277, 317; drop, 153, 194; increase, 193, 298, 299, 300, 301–302, 311, 338 Ministry of the Federal Administration and State Reform (MARE), 251 Mixed race: cultural identity and, 19, 359; in praise of, 29, 42n3; public jobs and, 55; racism and, 29, 39, 40, 245, 370 Moderating Power, 67–68, 72n1, 72n5, 75 Modern Art Week, 92 “Modernizing tripod model,” 160–161 Modiano, Eduardo, 202 Monarchy: in context, 43; empire and constitutional, 67–71; imperial elite and, 39, 42n7, 47 Monetary Policy Board (COPOM), 294 Moniz Bandeira, Luiz Alberto, 92, 132 Monteiro, Euler Bentes, 213 Monteiro Lobato, José Bento Renato, 92, 361, 364n5 Montoro, André Franco, 216–217, 235 Moore, Barrington, 93 Morais, Prudente de, 58, 74, 75; financial crisis and, 76; military government and, 79

Index

Motta, Fernando C. Prestes, 220n6 MST. See Landless Workers Movement Multinational corporations, 134, 136, 144–145, 178, 266n8 “Mundell-Fleming trilemma,” 287 Murders, 155 Murtinho, Joaquim, 102 Myrdal, Gunnar, 20

Nabuco, Joaquim, 40, 54, 73 Nabuco, Maurício, 107, 115n15 NAFTA. See North American Free Trade Agreement Nakano, Yoshiaki, 201, 202, 204, 259, 269, 290 Nassif, André, 345 Nation: construction of, 62n3; in context, 355–357, 367–371; with elite class alienated, 361–364; incomplete, 367; lack of, 55, 74, 369; loss of, 263, 357–361 Nation and Development Cycle (1930–1980), 8tab; in context, 8, 9, 10, 13, 41, 62, 70, 91, 221, 308, 353, 365–366, 367; state with, 11 National Bank of Economic and Social Development (BNDES), 130, 138, 140n1, 189 National Board of Foreign Trade (CONCEX), 158–159 National Confederation of Industry (CNI), 308 National Consumer Price Index (INPC), 224 National Democratic Union (UDN), 70–71, 131, 145, 158 National dependency, 367; with dependency theory, interpretation of, 174–179; hegemony imperialism and, 176–179 National development strategy, 368, 372–373 National Exam for the Assessment of Student Performance (ENADE), 278 National Guard, 62n2, 62n7, 80 National High School Exam (ENEM), 278 National Household Sample Survey (PNAD), 301, 341, 354n4, 354n6 National Iron and Steel Company of Volta Redonda, 108

411

National Service of Industrial Apprenticeship (SENAI), 107 National Treasury Bonds, 269 National War School, 141 National-developmentalism, capitalism with, 110–114 Nationalism: capitalism with national revolutions and, 92–93; colonialism with imperialism and, 33–36; decline of, 143; with developmentalism, 118, 119; Romanticism and, 48–49 National-Popular Pact (1930–1960), 365–366; in context, 9, 12tab, 92, 117–119, 137, 141–144, 366; end of, 141–148; national currency and, 121–125, 124fig; socioeconomic groups and politics, 119–125 National-Popular Pact (failed) (2003–2014), 8tab “Natural resource curse,” 23 “The Natural Resources Curse” (Bresser-Pereira), 343 Neary, J. Peter, 147 Neoliberal capitalism (1979–2008), 10, 35 Neoliberalism: Collor Plan and, 259–260, 262; in context, 25n2, 113, 255–257; mistakes with, 260–263; 1980s crisis to Washington Consensus, 257–258, 264, 267, 283n1; with subordination to north, 256–257, 263–265 Neri, Marcelo, 318n9, 354n4 Netherlands, 27, 94, 147 Neves, Tancredo, 215, 216–217, 231 New developmentalism: foreign relations and, 20–25; liberal orthodoxy and, 22tab–25tab, 346; macroeconomics and, 20–21, 121–122; principles, 21 New Zealand, 28 Newly Industrialized Countries (NICs), 183, 189n1, 256 Nicol, Robert C., 101 NICs. See Newly Industrialized Countries 1930 Revolution: capitalism and, 94–97; influence, 81–82, 98–99, 115n13 Nineteenth century: colonialism and, 36–38; income per capita (1870–2014), 37fig

412

Index

Nobre, Marcos, 323 Nonfinancial firms, net profits (2005–2014), 317fig North, Douglass, 37, 59, 60 North American Free Trade Agreement (NAFTA), 18, 19, 359 Northeast Development Agency (SUDENE), 139 Novais, Fernando, 30–31 Nunes, Edson de Oliveira, 140 Nurkse, Ragnar, 20

O Longo Amanhecer (The Long Sunrise) (Furtado), 90n3 O’Donnell, Guillermo, 207 OECD. See Organisation for Economic Co-operation and Development Oil, 196, 201, 300, 354n15 Oligarchic Pact (1822–1889): in context, 8tab, 9–10, 45, 47, 49; empire and constitutional monarchy, 67–71; Federalism, Conservatives, and Liberals, 63–67 Oligarchy, of landowners, 50–54, 57 Oliveira, Dante de, 216 Oliveira, Francisco de, 42n6, 180n5, 244, 306 Oliveira Vianna, Francisco José de, 92, 96, 117, 128, 138 “Opening”: advances and setbacks (1974–1978), 208–210; in context, 207 Oreiro, José Luis, 319n18, 345 Organisation for Economic Co-operation and Development (OECD), 37 Orthodoxy. See Liberal orthodoxy Orwell, George, 144 Ottoman Empire, 33

PAC. See Growth Acceleration Program Pactos Políticos (Political Pacts) (Bresser-Pereira), 220n9 PAEG. See Government Program of Economic Action Paim, Antônio, 72n1 Paiva, Glycon de, 129 Palocci, Antonio, 318n3 Paraguayan War, 73, 74, 86, 155 Partido da Praia (Party of the Beach), 47, 48

“Parties of affairs,” 215, 246, 273, 284n7 Party of the Beach. See Partido da Praia Party of the Brazilian Democratic Movement (PMDB), 215, 217–218, 234–236 Party of the Republic (PR), 215 Pastore, Affonso Celso, 200–201 Patriarchy, 45–46 Patrocinio, José do, 73 Pau-Brasil Manifesto, 92 Paula, Luiz Fernando de, 280 Paulani, Leda Maria, 95, 136, 304 Pazos, Felipe, 201, 204 PCB. See Brazilian Communist Party PDS. See Democratic Social Party PDT. See Democratic Labor Party Pedro I (King of Brazil): abdication of, 67; Liberals and, 64; role of, 43, 46, 72n3, 72n4 Pedro II (King of Brazil): legacy, 63; with legitimacy lost, 74; Moderating Power and, 67–68; role of, 45, 48, 50, 72n3; slavery and, 68 Peixoto, Floriano, 74, 75, 77; military government and, 79; role of, 92, 155 Peláez, Carlos Manuel, 101 Pena, Afonso Augusto Moreira, 76 People: democracy and, 239–243, 369; rising up, 155–156. See also Protests Pereira, Jesus Soares, 129, 134–135 Pereira, José Clemente, 44 Pernambuco, 46–48, 215 Peru, 17 Petrobras, 19, 129, 137, 329, 363 PFL. See Liberal Front Party Pinto, Álvaro Vieira, 117, 128 Pires, Francisco Eduardo, 221 Pires, José Maria, 155 PL. See Liberal Party Plan of Macroeconomic Control (Bresser-Pereira), 228n2 Plano de Metas (Targets Plan), 130, 132, 133, 138, 140n8 “Plano Real.” See Real Plan Plantation owners (coronéis), 47, 62n2 PMDB. See Party of the Brazilian Democratic Movement

Index

PNAD. See National Household Sample Survey Polanyi, Karl, 47 Policies: COPOM, 294; culture, 312; developmentalism with foreign debt and growth, 186–189; “Encilhamento,” 75, 86; inflation, 290–293, 292tab Political economy, 20, 244, 296n3 Political Evolution of Brazil (Evolução Política do Brasil) (Prado), 68 Political Pacts (Pactos Políticos) (Bresser-Pereira), 220n9 Political pacts, cycles and, 220n9; with development interrupted, 10–14, 11tab, 12tab, 13fig; foreign relations, 15–25; global influences, 14–15; history of, 7–10; state-society, 8tab Political populism, 113, 114n7 Politics, 68; with bourgeoisie and hegemony, 218–219; elite with, 46–49, 53, 55, 62n5; IBESP, 25n3; liberalism and, 69–70; “of governors,” 76–79; socioeconomic groups and, 119–125 Pontifical Catholic University of Rio de Janeiro (PUC-Rio), 202, 204, 232, 263, 295n1 Ponzi scheme, 328–329 Populism: with class coalitions and developmentalism, 111–114; economic, 188, 237n2; fiscal, 237n2, 355; political, 113, 114n7; role of, 233 Portugal, 368; colonization by, 28–34; mercantilism and, 15; role of, 7, 43–44, 49, 51–52, 56, 208, 278 Positivism, 73, 83, 89n1 Positivist Society of Brazil, 83 Poverty, 25, 245, 300, 301, 319n11, 341 Power, 51. See also Moderating Power The Power Owners (Os Donos do Poder) (Faoro), 51 PP. See Progressive Party PPB. See Brazilian Progressive Party PPS. See Socialist Popular Party PR. See Party of the Republic Prado, Caio, Jr., 29–30, 50; industrial entrepreneurs and, 103–104; patriarchy and, 46; slavery and, 68

413

“Praieira Revolution,” 47 Prebisch, Raúl, 20, 88, 117, 128, 333 Precapitalist societies, 7 Privatism, 46, 56 Privatization, 267 Pro University Program. See ProUni Productive sophistication, 87–89, 177, 346 Professionals, middle class, 105–106 Progressive Party (PP), 219n3, 335n2 Property rights, 37–38, 59–61, 69, 113 Protests: April Package, 209–210; failed, 335n4; inflation, 155–156; with people rising up, 155–156; role of, 220n8; trade unions, 214 ProUni (Pro University Program), 42 PSB. See Brazilian Socialist Party PSD. See Social Democratic Party PSDB. See Brazilian Social Democratic Party PSI. See Investment Sustaining Program PSOL. See Socialism and Freedom Party PT. See Workers’ Party PTB. See Brazilian Labor Party Public accountancy, 227 Public accounts, 113, 285, 322, 363–364, 368 Public debt: in context, 293–294, 303, 327; GDP ratio to, 23, 356, 364n3; growth of, 228, 233, 279; interest rates for, 189, 339, 341, 348 Public jobs: growth, 138; for middle class, 55, 105 Public Ministry, 329, 336n6 Public savings: GDP and, 262; inertial inflation and negative, 226–228; in 1979–1988, 227tab; role of, 356 Public Service Administrative Department (DASP): creation of, 115n16; government bureaucracy and, 106–110; role of, 17, 129 PUC-Rio. See Pontifical Catholic University of Rio de Janeiro

Quadros, Jânio, 18, 144, 145, 151 Qualis system, 179, 364n6 Quasi-stagnation: China and, 349–351; in context, 337; with insufficient savings, 347–349; since 1981,

414

Index

343–347; public technobureaucracy and, 351–353; with social progress, history of, 338–343 Queiroz, Maria Isaura Pereira de, 45

Race, 104tab. See also Mixed race Racism, mixed race and, 29, 39, 40, 245, 370 Radicalization, 141, 144–146, 325 Railways, 86 Ramos, Alberto Guerreiro, 247, 360 Rancière, Jacques, 248 Rangel, Ignácio: “import substitution” and, 114n2; inflation and, 154–155; influence, 117, 128, 184, 185, 189n2, 201; oligarchy and, 51; patriarchy and, 46; role of, 30, 50 Read Irving & Cia, 90n4 Reagan, Ronald, 222–223, 256, 257 Real exchange rate, 115n10, 261, 314–315, 315fig Real Plan (“Plano Real”): Cardoso, F. H., and, 267, 272–278, 284n8; in context, 10, 125, 199, 204, 205n6, 267–268; explanation of, 268–272; influence of, 289, 292; investment with foreign and investment savings (1992–2004), 281tab; savings substitution (1993–1999) and (2000–2005), 283tab; savings without investment (1994–1999), 281–283; Washington Consensus, second, 278–281 Recession, 325–330, 342, 347 Reform: basic, 144; education, 278, 339; management, 278, 313; MARE, 251; opposition to, 145 Reforma Administrativa na Era de Vargas (Administrative Reform in the Era of Vargas) (Wahrlich), 108 Rêgo, Walquiría G. D. Leão, 65–66 Reinert, Erik, 35, 88, 178 Renan, Ernest, 360 Rents, 210, 336, 353; capitalism and rent-seeking, 116n19, 136; Ricardian, 23, 116, 147–148, 176 Republican Party, 70, 73 Republican state, 76, 336n7 The Republican Invention (Lessa), 77–78

Resende, André Lara, 202, 204, 269, 284n2 Retail sales, 310–311, 311tab Retirement, 336n9 Revista de Economia Política, 296n3 A Revolução Burguesa no Brasil (The Bourgeois Revolution in Brazil) (Fernandes), 171, 180n4, 231–232 Rezende, Felipe, 328 Ribeiro, Darcy, 361 Ribeiro, Renato Janine, 323–324 Ricardian rents, 23, 116, 147–148, 176 Ridenti, Marcelo, 146 Rights: civil, 245, 354n1; human, 69, 155; property, 37–38, 59–61, 69, 113; of voters, 72n6, 115n8 Robinson, James A., 60 Robinson, Joan, 201 Rodrigues, José Honório, 44, 156 Rodrigues, Leôncio Martins, 247 Rodrigues Alves, Francisco de Paula, 76 Rodrik, Dani, 280 Romanticism, nationalism and, 48–49 Romero, Sílvio, 42n3, 54, 55, 92, 117 Roosevelt, Franklin D., 129 Rousseff, Dilma: administration, 273, 305, 307, 313–318, 321–325, 324fig, 363; impeachment of, 329–333, 370; recession and, 325–330; role of, 13, 247, 260, 299 Rozenwurcel, Guillermo, 226 Rugitsky, Fernando, 220n5 Russia, 93, 318n5, 319n15. See also Soviet Union

Saes, Décio, 26n4, 45 Safatle, Vladimir, 307–308 Salama, Pierre, 344 Sallum, Brasílio, Jr., 274–275 Salte Plan, 127 San Tiago Dantas, Francisco C., 82 Santa Rosa, Virginio, 81, 82 Santos, Wanderley Guilherme dos, 96, 243 São Paulo: ethnicity of industrial entrepreneurs from, 104tab; FIESP, 151, 214, 308, 319n17, 362; political elite in, 46; Republican Party of, 73; role of, 74; unemployment in, 151; USP, 172, 232; wages (1965–1970), 195tab

Index

Sarney, José: administration, 232–236, 257; with legitimacy lost, 231, 235; role of, 26n7, 113, 217, 222, 228n3 Saudi Arabia, 148 Savings: domestic, 135, 170, 189, 279, 281tab; foreign, 196, 278–279, 281tab; interest rates and, 294; without investment (1994–1999) and Real Plan, 281–283; public, 226–228, 227tab, 262, 356; quasistagnation with insufficient, 347–349; substitution (1993–1999) and (2000–2005), 283tab Say’s law, 122 Schmitter, Philippe C., 207 Schneider, Ben Ross, 140 Scholarships, education and, 42n10 Schumpeter, Joseph, 59, 201, 348 Schwarcz, Lilia Moritz, 44–45, 48 Schwartzman, Simon, 64, 126n3, 140 Schwarz, Roberto, 180n2, 360 Second Opium War (1858), 35 Second Vatican Council, 155 SELIC (Central Bank of Brazil’s basic interest rate), 303, 326, 328 SENAI. See National Service of Industrial Apprenticeship Serra, José, 193, 295n2 Settlements, colonization by, 28–32, 36–38 Siciliano, Alexandre, 76 Silva, Ana Rosa Cloclet da, 44 Silva, Golbery do Couto e, 64, 216 Silva, Ricardo, 114n5 Silva, Sérgio, 102–103 Silveira, Antonio Francisco Azeredo da, 164 Simonsen, Mário Henrique, 164n4, 197, 201 Simonsen, Roberto, 92, 101, 107, 114n3, 115n11 Singapore, 35, 183 Singer, André, 305, 329–330 Singer, Hans, 20 “Six Interpretations on the Brazilian Social Formation” (BresserPereira), 175 Slavery, 338; coffee and, 50, 84, 85; colonialism with, 28–32, 38–42; end of, 10, 32, 38–39, 40, 54, 68, 73; landowners and, 49; legacy,

415

38–42; mercantilism and, 30–31; privatism and, 46; support for, 68 Smith, Adam, 59, 69 Soares, Mário, 278 Sobrinho, Alexandre Barbosa Lima: direct investments and, 134–135; influence of, 164; role of, 81, 92, 94 Social Democratic Party (PSD), 121, 128, 236, 247, 275 Social development. See National Bank of Economic and Social Development Social justice, 369–370. See also Democracy and Social Justice Cycle Social progress: Gini coefficient and, 338, 339fig, 341; history of, 338–343; social indicators (1980–2014), 340tab Social structure: institutions and development, 59–62; objectives and ideologies, 72n7; state and traditional, 57–62. See also Class Social-developmentalism, 318n4 Socialism and Freedom Party (PSOL), 246, 298, 318n2 Socialism or Fascism: The New Character of Dependency and the LatinAmerican Dilemma (Dos Santos), 168–169 Socialist Popular Party (PPS), 273, 331 Socioeconomic groups, politics and, 119–125 Sociology: IBESP, 25n3; role of, 82–83, 114n6, 169, 171–172, 175 Sodré, Nelson Werneck: influence, 117; on National Guard, 80; role of, 55, 58, 82, 90n4, 95 Sola, Lourdes, 115n11 Son, Hyun H., 354n4 South Korea, 35, 183, 349, 364n4 Souza, Gustavo J. G., 345 Souza, Jessé, 40, 300, 325 Souza, Maria do Carmo Campello de, 140 Souza, Paulino José Soares de, 63, 65–66 Souza, Paulo Renato de, 295n2 Soviet Union, 255, 263, 274 Spain, 33, 34, 208, 209, 278

416

Index

Stabilization plans: December 1991, 263–264; failure of, 269 Stagflation, 197, 222, 255–256 Stagnation, 193, 222–226. See also Quasi-stagnation State: in context, 43–45; with Democracy and Social Justice Cycle, 11; initial precedence of, 45–48; interpretations of, 49–57; with Nation and Development Cycle, 11; republican, 76, 336n7; with social structure, traditional, 57–62; taxes and, 52; territorial unity and, 48–49 State and Territorial Integration Cycle (1822–1889): in context, 8, 9, 13, 70, 366; foreign relations and, 15; political pacts and, 8tab State University of Campinas (Unicamp), 232, 318n4, 335n1 A statesman of the empire. See Um Estadista do Império State-society political pacts and cycles, 8tab Steel industry, 17, 142 Stockholm Conference of 1972, 370 “A Strategy of Development with Stability” (Bresser-Pereira and Nakano), 290 Substitution imports, 114n2, 152–153 SUDENE. See Northeast Development Agency Sugar cane, 28, 47–48 Sugar industry, 120 Suicide, 131, 134 Summerhill, William, 60 SUMOC. See Superintendence of Currency and Credit Sunkel, Osvaldo, 179n1, 202 Superintendence of Currency and Credit (SUMOC), 131, 133–134, 143 Suplicy, Eduardo Matarazzo, 340 Surplus: with macroeconomic tripod, 286–290; trade, 310 SUS. See Unified Health System Suzigan, Wilson, 101, 115n12 Sweden, 97

Taiwan, 35, 183, 349, 364n4 Targets Plan. See Plano de Metas Tariff Act of 1958, 143

Tavares, Maria da Conceição, 152, 182, 193, 222–223 Tavares Bastos, Aureliano Cândido, 65, 66 Tax on Financial Operations (IOF), 310 Taxes, 284n9, 310; “disguised,” 182, 333–334; Dutch disease and, 148, 260–261; elite with, 256; exports, 102, 143, 333–334; increases, 262, 339, 345; reduction, 326; state and, 52; system, 211, 219n2, 233; Tariff Act of 1958, 143 Technical progress, types of, 89 Technobureaucracy: capitalism and, 164n3, 194–195; formalism with, 138; military government industrializing, 161–162; quasi-stagnation and public, 351–353 “Technostructure,” 107, 115n14 Teixeira, Anísio, 117 Temer, Michel, 331, 363–364 “Tenentismo,” 81–83 Territorial integration: in context, 43–45; unity and, 48–49. See also State and Territorial Integration Cycle Terrorism, 215–216 Textile industry, 86, 100 Thailand, 364n4 Thatcher, Margaret, 256, 257 Therborn, Göran, 220n7 Thiers, Adolph, 64 Thirlwall, Anthony P., 333 Thirlwall’s Law, 187 Topik, Steven, 86 Torres, Alberto, 92, 117 Torres, Ary, 129 Torture, 155, 160, 162 Trade: agencies, 107; comparative advantage and, 88; CONCEX, 158–159; FTAA, 18, 312; industrialization and index of terms of (1901–2013), 100fig; landowners and, 57; NAFTA, 18, 19, 359; surplus, 310; terms (2002–2014), 299tab; terms of, 140n3; UNCTAD, 140n7; WTO, 334. See also Exports; Imports Trade Agreement of 1827, 33 Trade and Navigation Treaty of 1810, 33

Index

Trade unions: in context, 149n1; elections, 146; protests, 214; role of, 143–144 Trans-Amazonian Highway project, 164 Treasury Department, US, 257, 303 Treaty of Methuen, 30 Turkey, 19, 94

UDN. See National Democratic Union Ulyssea, Gabriel, 354n7 UNASUR. See Union of South American Nations UNCTAD. See United Nations Conference on Trade and Development Underdevelopment and Stagnation in Latin America (Furtado), 193 Unemployment, 151, 339, 342, 346 Unicamp. See State University of Campinas Unified Health System (SUS), 231, 325, 337 Union of South American Nations (UNASUR), 19 Unit of Real Value (URV), 271–272 United Nations Conference on Trade and Development (UNCTAD), 140n7 United Nations Economic Commission for Latin America and the Caribbean (CEPAL), 25n3, 100, 128, 148, 179n1 United States: Brazil-United States Mixed Committee, 130; dependency on, 18; industrial revolution in, 27, 38, 61–62; Iran and, 19; with nation, construction of, 62n3; role of, 94, 225; settlements, 28; stagflation and, 222, 255–256; Washington Consensus and, 257–258, 264, 267, 278–281, 283n1 Universal Declaration of Human Rights (1948), 69 University of São Paulo (USP), 172, 232 Upper class: coffee-growing, 10, 73; dependency of, 7; imperial elite, 39, 42n7, 47; income concentration in, 192–194 Uricoechea, Fernando, 52 Uruguay, 17, 63, 65–66

417

URV. See Unit of Real Value USP. See University of São Paulo

Value, law of, 199 Vargas, Getúlio: administration (1930–1945), 17–18, 56, 66, 78–79, 82, 128–132, 274; administration (1950–1954), 128–133, 138, 139, 156; authoritarianism and, 96, 97–98; FGV, 115n15, 116n18, 133; foreign relations and, 16; government bureaucracy and, 107–110; industrialization and, 97–98; influence, 113; legacy, 91, 166; Liberal Alliance and, 95; military coup against, 121, 127, 128–129, 131, 132, 155; National-Popular Pact (1930–1960) and, 92; role of, 39–40, 64, 115n15, 116n18; suicide and, 131, 134 Vasconcelos, Bernardo, 63, 72n2 Vazquez, Juan Noyola, 202 Veblen, Thorstein, 59, 60 Velloso, João Paulo dos Reis, 184, 312 Venezuela, 148 Vianna, Francisco José de Oliveira, 360 Vianna, Luiz Werneck, 322 Vidigal, Gastão, 129 Villa-Lobos, Heitor, 92 Villela, Annibal Villanova, 101 Violence, 155, 209, 215–216. See also Torture Volcker, Paul, 222, 223 Volta Redonda, 17, 108, 110, 142 Voters: election and participation of, 48, 245; growth in numbers, 247; literacy and, 156n3, 164n5; rights of, 72n6, 115n8

Wage labor, coffee and, 85–86 Wages, 54, 319n13; average, 194; Cruzado Plan and, 229; exportor wage-led model, 333–335; increases, 233, 317; in São Paulo (1965–1970), 195tab. See also Minimum wage Wahrlich, Beatriz, 108, 116n18 Warlords (jagunços), 44, 62n2 Washington Consensus: first, 257–258, 264, 267, 283n1; second, 278–281 Webb, James W., 90n2

418

Index

Weber, Max, 139 Weffort, Francisco C., 217 Weingast, Barry R., 60 Werneck Vianna, Luiz, 170 Whistle blowers, 336n8 Whitehead, Laurence, 207 Wicksell, Knut, 201 Williamson, John, 204, 258 Williamson, Oliver, 59 Wirth, John D., 46, 108 Women, 30, 69, 245, 340, 351 Workbooks of Our Time (Cadernos de Nosso Tempo) (“Itatiaia Group”), 121 Workers: free, 40, 58; MST, 298 Workers’ Party (PT): rise of, 366; role of, 20, 71, 246, 247, 276, 297

Working class, 214 World Bank, 130n7; Collor Plan and, 259; role of, 71, 178, 219n4, 257, 352 World Cup (1970), 163 World Development Report (World Bank), 140n7 World Investment Report (UNCTAD), 140n7 World Trade Organization (WTO), 334 World War II, 17 WTO. See World Trade Organization Yeltsin, Boris, 319n15

“Zero inflation,” 234

About the Book

Spanning the period from the country’s independence in 1822 through mid-2016, Luiz Carlos Bresser-Pereira assesses the trajectory of Brazil’s political, social, and economic development. Bresser-Pereira draws on his decades of first-hand experience to shed light on the many paradoxes that have characterized Brazil’s polity, its society, and the relations between the two across nearly two centuries.

Luiz Carlos Bresser-Pereira is professor emeritus of politics and economics at the Getulio Vargas Foundation. In addition to his long academic career, he has served as Brazil’s minister of finance, minister of federal administration and state reform, and minister of science and technology, and also as secretary of the government of the state of São Paulo.

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