The problems the Brazilian economy now faces reveal that ‘hybrid’ development models are no panacea for sustained growth
In September 2013 President Dilma Rousseff of Brazil cancelled her state visit to the United States scheduled for the following month. At the time, the Brazilian government made clear its dissatisfaction with explanations provided by Washington about its monitoring of Rousseff’s cell-phone records, as revealed in documents leaked by former NSA contractor Edward Snowden.
Fast forward now to July 2015. Re-elected President Rousseff, facing a severe economic and political crisis at home, visited Washington with an agenda of renewing ties and promoting business opportunities between Brazil and the US.
Her new tune is the soundtrack of the more humble position in which Brazil now finds itself. The context is a world where emerging markets are indisputably more relevant players in global politics than in the immediate post-Cold War years. Yet it is also a world in which the BRIC countries (with the possible exception of India) offer a far less glamorous view of economic growth than was generally assumed from 2005 to 2013.
In the past two years the decline of the Brazilian economy has become more evident and a recession-cum-inflation scenario has led to a substantial fiscal ‘adjustment’ (the euphemism of choice for austerity). Despite being politically controversial even within the President’s party, contractionary fiscal and monetary policies have become the government’s priority. Significant budget cuts and higher interest rates (some of the highest in the world) are certainly a far cry from Rousseff’s stance in her 2014 campaign for re-election.
What’s more, these economic challenges are taking place in an environment of deep distrust. The federal police, backed by a surprisingly daring and determined faction of the judiciary, is going even further with investigations of the ‘Carwash’ bribery scheme involving politicians, former Petrobras executives, CEOs of private constructions companies, and their various brokers. So far, no evidence has been revealed that ties former President Lula or Rousseff herself to corrupt deals that looted some of the resources of Petrobras. Nevertheless, given the company’s systemic importance in the Brazilian ‘real economy’ and its domestic capital markets, negative ripple effects are being felt. The losses recorded by companies that are part of Petrobras’s outsourcing network have resulted in job losses. They add to the growing numbers of unemployed workers in most industrial and service sectors.
Meanwhile, the Worker’s Party that has ruled Brazil for the past 12 years has been gutted of founding members who are now serving their prison sentences (albeit not incarcerated) and has lost its credibility as a mostly-ethical counterforce in the still relatively aristocratic political machinery of Brazil.
In short, the severity of the political problems facing a president 6 months into a four-year mandate and with 10% approval rating cannot and should not be underestimated.
Yet Brazil’s economic crisis is not a result of political distrust; it goes far deeper. To be sure, Brazil’s ascendant trajectory as a BRIC was boosted by the boom in commodity prices and this is now over. Yet, just as current troubles are not easily explained by political malaise, economic relapse is not simply a result of exogenous shocks.
Under Rousseff, Brazil has attempted to replace the ‘Washington Consensus’ with what the government calls the ‘New Economic Matrix’. This is predicated on lower interest rates, ‘competitive’ (i.e. devalued) exchange rates (in theory more than practice) and tax benefits to some sectors of the economy – all to boost growth as part of a broadly ‘neodevelopmentalist’ trajectory.
Developmentalism, of course, has a long history in Brazil and was by no means reinvented by Rousseff and her team. This history is one of some victories, such as the industrial development of the 1950s and 1960s largely achieved via import-substitution industrialisation. Yet such advances left a large bill to be defaulted on in the 1980s. The lesson was learned in the 1990s and carried forward by the Lula Presidency that preceded Rousseff’s. In fact, what was critical in the aftermath of the 2008 crisis was the government’s markedly more competent external debt management, which provided the necessary ‘fiscal room’ for the implementation of countercyclical policies.
However, indebtedness has reemerged recently as a problem resulting from Rousseff’s particular adventure in countercyclical policy-making. This refers to credit expansion at both the household and state levels, mostly undertaken through public banks. In particular, the mighty national development bank (BNDES) was boosted by substantial Treasury transfers masked through fiscal gimmicks in the ever more opaque public budget. Courtesy of these unsavoury manoeuvres, the embattled Rousseff administration is now facing charges from the national public accounting tribunal of exceeding the limits imposed by the Fiscal Responsibility Law of 2000, itself created precisely to shield public spending from political cycles and unaccountable practices.
Moreover, in the absence of productivity growth, the expansion of credit to stimulate consumption in an economy close to full employment served only to feed inflation which has stayed well beyond the more symbolic than restrictive inflation targeting regime’s higher band of 6.5% annually.
The Brazilian economy’s various challenges reveal that neodevelopmentalism had little that was ‘new’ to add to what has long been known as an inflationary and ultimately unsustainable approach to growth. Such an approach was based on internal consumption, lower interest rates despite prevailing fiscal excesses, and administered prices that do more to burden domestic industry (particularly Petrobras in the case of gas prices) than detain the rise of inflation. Indeed, Brazil, like many troubled European economies, is now back to the kind of ‘discipline’ more characteristic of neoliberal political economy than ‘state capitalism’.
So do all expansionary experiments lead back to austerity? Are economies not condemned to freedom, as in the old existentialist mantra, but rather to pleasing international investors’ fiscally conservative expectations?
Brazil’s current experience leaves little room for creative hybridity. Yet it is premature to endorse the view that neoliberal convergence is the (socially costly) ‘equilibrium’ to which all adventurous economies inevitably return in an effort to reverse downward spirals. There is room for effective inventiveness, of course. Brazil has shown that to be the case, particularly with social policies that generated results and were copied around the world. Brazil’s troubles are not the result of its success in curbing inequality.
Rather, they result from the opposite of innovation. As a repackaged yet typically unsustainable form of developmentalism, Rousseff’s ‘new economic matrix’ has actually undermined the well-established and path-dependent development trajectory set up by Cardoso and astutely followed by Lula. This will now have to be painfully rebuilt, brick by brick.