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Dilma Rousseff’s development dilemma

Can a fourth victory for the Workers’ Party secure Brazil’s state capitalism?

Jewellord Nem Singh, Lecturer in Development, University of Sheffield

Jewellord Nem SinghBrazilians voted yesterday (26 October) for the incumbent Dilma Rousseff, securing the Workers’ Party (PT) its fourth electoral victory. In a very tight race with Aecio Neves of the Brazilian Social Democratic Party (PDSB), Rousseff won by a three per cent margin, indicating the fragility of her victory in what has been considered as one of the most unpredictable electoral race since the return of democracy.

After years of economic prosperity, the patterns of growth are not promising. Can a fourth term for the PT change the fortunes of Brazil? Importantly, what has the PT government achieved in the last ten years? Speculating about Brazil’s future requires us to look back at the country’s political economy since the debt crisis. Above all, we need to recognise both the successes and shortcomings of the PT government to understand the political challenges ahead of the next government.

Commodity booms, policy choices and Brazil’s growth trajectory

In 2010, Dilma Rousseff won the presidential elections owing to Lula da Silva’s popularity among the poor. She promised continuity with Lula’s economic and social policies, which coheres around what Luiz Carlos Bresser-Pereira calls ‘new developmentalism’. The key to PT’s electoral legitimacy lies on the return of growth, investment, and greater confidence in Brazilian political economy. Brazil’s trajectory of economic growth, particularly between 2003 and 2009 (see Figure 1), in part draws from the relative capacity of the PT government to manage the commodity boom. Brazil, being a resource-intensive economy, has benefited enormously from high commodity prices for its agricultural exports and other higher valued commodities.

Partly, it was also the increased access of low-income groups to the market, boosting domestic consumption, which should be credited to microfinance. Beyond luck and good timing, policy choices do matter.

In Brazil, policy continuity is key to its economic strategy. Thanks to Fernando Henrique Cardoso‘s Real Plan in 1994, his efforts to bring back macroeconomic stability, to control inflation, and set out a series of liberalization reforms were accompanied by a political consensus around some degree of market reforms. A stable political environment regained the trust of financial institutions and foreign investors.

Under the PT government, Lula’s strategy was to finance domestic companies with the view of making them globally competitive firms. Some examples include the rapid expansion of Brazilian firms operating in Africa and Latin America, notably Petrobras in the global energy industry and Vale in the mining sector. In addition to non-renewable commodities, there is also an emerging market for renewable energy, notably biofuels. As my fieldwork in August 2014 shows, Brazil’s highly successful ethanol programme – initially financed by the state in its early years – is now beginning to find its niche in Africa, where a biofuels revolution is taking place.

Figure 1 Brazil’s Growth Rates over the Years

 figure 1Source:  World Development Indicators, 2014

What is probably more striking is the clarity of an industrial strategy in Brazil, notably through the Brazilian National Development Bank (BNDES). As my colleague Eliza Massi details in her PhD thesis, the BNDES was instrumental in supporting Brazilian firms during the 1960s and 1970s, and is also indispensible in financing the development of emerging national champions.

In my conversation with Lula’s appointed BNDES President Carlos Lessa, he suggests that the time and tested strategy has always been to build new comparative advantages by forging linkages across sectors and seeking winners that can compete in a globalised economy. My research shows evidence that Brazil’s development strategy is rooted on a pragmatic understanding of market reforms through the selective implementation of liberalisation and deregulation.

Demystifying poverty in Brazil

Brazil’s record of poverty reduction through its set of social programmes is rather impressive. Social spending as a share of GDP had been increasing since the mid-1980s and several social programs were initiated even during the height of neoliberal reforms under Fernando Cardoso. From 1985 to 2009, social spending almost doubled in percentage terms from about 13.3 percent of GDP in 1985 to 22.8 percent of GDP in 2009. The share of the total population living in condition of extreme poverty fell from about 15 percent in 1999 to 7.27 percent in 2009. Inequality, which had been decreasing slowly along the years as a result of macroeconomic stability and increasing social spending in education, health, and social assistance programs, was accelerated. Increases in minimum wages (in real terms) and expansion of income transfer programs, such as the Bolsa Família program, reduced inequality and allowed the inclusion of millions in the consumer market. As Figure 2 shows, poverty in Brazil was on a steady decline. The Real Plan ended hyperinflation that typically hit the poor hardest. With political stability and modest growth, the PT came to power with an agenda of tackling poverty and inequality without going against the market.

Brazil offers a model of social development that builds upon policy cohesion, political consensus and ideological pragmatism. Continuity of macroeconomic discipline combined with increased social activism provided credibility and popularity to Lula da Silva PT government. Lula’s social policies facilitated the expansion of credit, which had the net effect of increasing consumer spending and expanding aggregate demand. Consistent with this pragmatic approach, the government’s response to the 2008 international financial crisis was the adoption of a countercyclical fiscal policy, with increases in public expenditures, via tax breaks, expansion of social programs, subsidised housing credit, and expansion of credit from the BNDES.

Therefore, Lula da Silva combined a focus on macroeconomic stability, maintaining policies and objectives inherited from Cardoso, with policies for social and financial inclusion and expansion of the domestic market. To put it simply, Brazil’s innovations in social policy have clearly impacted on market access of low-income groups, but importantly, it provided short-term support for the destitute and the chronic poor in the country.

Figure 2 Percentage of People Living Below the Poverty Line, 1981-2012

figure 2Source: IPEA Data, 2014

Note:  The percentage of the population whose household income is below the domestic poverty line. For further details, see http://www.ipeadata.gov.br/#.

The challenges ahead

This election revolved around corruption and economic competence of the PT. In the last six months, the image of Petrobras was tainted as a corruption scandal involving state managers, politicians, and some PT members exploded after Paulo Roberto Costa began to confess the overpriced contracts in building refineries in Northeastern Brazil, costing the national oil company at least US$2.67 billion. No longer the engine of Brazil’s prosperity, Petrobras today stands wounded and struggling to recover – its market capitalization has shrunk to $93 billion from $236.5 billion before the end of 2010 when Rousseff took office. Jim Chanos even went as far as saying Petrobras has a bleak future regardless of who sits as president.

Some business groups in the oil industry also blame Rousseff, the company director by virtue of BNDES’ majority voting capital shares, for using the state enterprise as a political tool. Petrobras incurred losses after the PT decided to subsidise fuel for the poor as a counter inflationary measure.

The future of the company is now in question. Foreign investors are concerned about its financial health, and its commercial strategy in doubt if sustainable over the long term. Perhaps more importantly, Petrobras managers are confronted whether their business model remains viable in the face of corruption. Now that economic growth is slowing and the excitement around Brazil’s oil discovery faded, Dilma faces a bigger problem regarding her development strategy. State capitalism in Brazil has always treaded the difficult balance between state intervention and freedom for the private sector. Oftentimes, excessive intervention has backfired – one simply needs to look at Venezuela as an extreme case of political intervention. The challenge is whether Brazil’s brand of state capitalism – however stable and moderate compared to other radical Left governments in Latin America – can secure sustainable growth through industrialization whilst delivering social development for the poor.

 

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Comments (2)

  1. Please, consider this comment as the other one had very many English grammar mistakes.

    Thank for this article, but I am not sure how you can write an article about Dilma’s development dilemma in a political economy blog ignoring all the social tension and conflicts that exist in the Brazilian society, especially in terms of: i) the economic-political differences between these two parties; ii) the conservative media; iii) and the political structure in Brazil. This kind of “neutrality” undermines your analyses and, most importantly, omits, for instance, one of the real challenges of the new president: that is: to govern/to rule within a political structure in which its legislature had long been a cesspit of venality and opportunism as, in short, federal governments may not have the majority seats in Congress. This generates corruption, alliances and several distortions in any government and its development plan. Your “neutrality” can be verified when you talk about economic growth and poverty during the 1990s and 2000s. You show a kind of “average improvement line” in the Brazilian economy since the 1990s, but the reality is: the rate of fixed capital accumulation, for instance, from 1994 to 2003 was stagnated! The Brazilian economy suffered a process of deindustralisation! If this was not enough, during this same period, real wages declined. Besides, your own graphic about poverty line shows a very different trend from 1994-5 to 1999/2000s. That is, there was a kind of stable then-downward trend… the scenario was not as good as you described! Furthermore, you consider the stabilization of the Brazilian Economy as the mainstream economists do…like if this plan “solved” all the Brazilian economics problem and was the basis for all better economic polices after 1994. But this is not true. And, as a political economist, you should know the political consequences and class positioning of this plan. For instance, being part of a range of neomonetarist policies, the Real Plan provided to financial investors, especially foreign investors, gains that they had never dreamed of; meanwhile, the figures for poverty, class stratification, income distribution and taxes were very high. You also completely ignore the international scenario…and the determination and impacts that the latter have had on the Brazilian strategy of development. I am not saying that your approach should include all these points, but ignoring them it is just wrong, and it does not show the real Brazilian scenario, let alone Dilma’s challenges. As political economists, we should bring political, income distribution and social issues to our analysis…we should show the contradictions and, most important, the complex scenario. It is this that makes us different from mainstream economics’ analysis. There are so many political-economic differences between these parties, and these differences are responsible for the massive disparities between the 1990s and 200Os, including the emergences of the new developmentism, for instance. These differences have marked the fate of all Brazilians, and they should/must be part of any political economy analysis.

    Carolina Alves

  2. “… electoral legitimacy lies on the return of growth, investment, and greater confidence in Brazilian political economy … Social spending as a share of GDP had been increasing …” The problem is that people tend to rely on the state for economic development. As if the “Wild West”‘s successes were not just the opposite. In Brazil, things won’t change and that fragile “social justice” be bought with tax dollars and debt, unless the true reforms are in less, not more state. Ask any Brazilian entrepreneur in private and they will tell you you cannot “turn an honest centavo” if you follow all the rules. Brazilian “regulation” and bureaucracy have made it impossible to run an economy – state planning is all that’s left and Rousseff unfortunately won’t improve things until the cash register runs dry.

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