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Brazil after the Great Recession: Searching for a Coherent Developmental Strategy
40° Encontro Nacional de Economia - Área 5 - Crescimento, Desenvolvimento Econômico e Instituições
Philip Arestis, University of Cambridge, UK; and University of the Basque Country, Spain. Email:
[email protected]
André Moreira Cunha, UFRGS, and Research Fellow at CNPq, Brazil. Email: [email protected]
Fernando Ferrari-Filho, UFRGS and Research Fellow at CNPq, Brazil. Email: [email protected]
Julimar da Silva Bichara, Universidad Autónoma de Madrid, Spain. Email: [email protected]
Abstract:
This paper analyzes the Brazilian economy in terms of its recent performance, considering the major
transformations of the global order posed by the global financial crisis and, moreover, by China´s rise.
We review some historical and theoretical aspects of macroeconomic management in a developmentalist
perspective. We then analyze the policy efforts to overcome the impact of the ‘Great Recession’ and to
sustain the dynamism of the economy. We also take a fresh look at the empirical evidence concerning the
regressive pattern of structural changes in Brazil. Our evidence and analysis suggest that development
policies will only deliver consistent and positive results if the previous flaws of the policy framework,
inherited from the neoliberal period, are reversed.
Key Words: Great Recession, Brazil, macroeconomic and development policies, structural change.
JEL: O2; O11; O54
Resumo: O presente trabalho analisa o desempenho recente da economia brasileira a partir das
transformações na ordem internacional derivadas da crise financeira global e, principalmente, da ascensão
da China. Parte-se de uma revisão teórica e histórica da gestão macroeconômica em uma perspectiva
desenvolvimentista. Na sequência são analisados os esforços de política econômica empregados para
enfrentar a “grande recessão” e sustentar o dinamismo da economia. São apresentadas evidências
empíricas de que o Brasil experimenta um padrão regressivo de mudança estrutural, o que nos leva a
concluir que políticas desenvolvimentistas só serão capazes de produzir resultados robustos se houver
uma reversão do arcabouço de políticas herdado do período neoliberal.
Palavra-Chave: Grande Recessão, Brasil, Políticas macroeconômicas e desenvolvimentistas, Mudança
estrutural
Brazil after the Great Recession: Searching for a Coherent Developmental Strategy
1. Introduction
Since the late 1990s conventional economic wisdom has been challenged by the increasing
instability of the financial markets and the emergence of new economic powers that have not been strictly
following the so-called Washington Consensus, particularly China and India. In this context, the global
financial crisis, which began in August 2007, and induced the ‘Great Recession’ (GR), has substantially
altered the dynamic process of the international economy. Governments of advanced and emerging
countries have responded to the GR with massive fiscal and monetary stimulus, by rescuing financial and
non-financial corporations and by reintroducing a more hands on approach to deal with the economic
problems (Griffith-Jones, Ocampo and Stiglitz, 2010; Arestis, Sobreira and Oreiro, 2011). Brazil is not an
exception. Alongside the countercyclical policies aimed at smoothing the negative impacts of the external
environment, the central government has been trying to implement more active developmental policies.
This paper discusses and analyses this new landscape. Our main contribution is to discuss the
recent economic performance of Brazil, the country involved with major transformation of the global
order. We argue that Brazil has to face at least three interconnected major issues: firstly, it must re-orient
its macroeconomic policy in line with the new global environment of higher financial instability and less
buoyant markets; secondly, it has to establish a new development strategy to cope with the challenges
posed by China´s rise as a global power; and, thirdly, this development strategy must inform the
government´s other policies, including macroeconomic policies, in order to avoid the lack of coherence
and strength that have characterized previous efforts to push the Brazilian economy on a sustainable path
of economic growth.
We proceed as follows: after this Introduction we review some historical and theoretical aspects of
macroeconomic management from a developmentalist perspective; we then analyze the Brazilian
economic performance and the policy efforts to overcome the impact of the GR and to sustain the
dynamism of the economy; we take a fresh look at the empirical evidence concerning the regressive patter
of structural change in Brazil; the final section summarises and concludes.
2. Historical and Theoretical Background
We argue in this section that the heterodox traditions – from Keynes (1964) to the Developmental
State paradigm (Khan and Christiansen, 2010) – offer a better rationality and way to the reconstruction of
a coherent set of policies designed to develop an emerging country such as Brazil. There are historical
and theoretical arguments that support this position.
Between the 1820s and 1930s, Latin American countries followed an outward development
model, based on production and trade specialisation in agriculture and mining. As showed by Unctad
(2003), the export-led model based on agriculture and mining did not deliver stability, self-sustained
growth and the modernization of the institutions and the economy.1 During this period the region
experienced fiscal and external imbalances, which had to be financed by volatile capital flows, thanks to
the fact that the export sector, mainly dependent on commodities, was incapable of generating enough
hard currency to finance the merchandise imports demand and other financial commitments. Capital flow
reversals were frequent, and government used to be pressured by creditors to promote deflationary
adjustments in domestic income and absorption.
According to the Unctad (2003): “During the first 100 years of its independence, Latin America sought rapid and close integration into the
world economy, pursuing a policy of what is now called outward-oriented development in conditions of highly volatile capital flows and
periodic financial crises ... Despite success in expanding exports, trade was unable to act as an engine of industrialization and growth within
the region because the export sector in most countries was not sufficiently large ... Even those countries that were relatively successful in
expanding the industrial sector could not translate these gains into growth of manufactured exports” (p. 129).
1
2
As stressed by Prebisch (1984) and Furtado (1964), between the second half of the nineteenth
century and the first decades of the twentieth century, the business cycles of Latin American peripheral
countries were tightly correlated with the core countries business cycles, led by Great Britain, the then
hegemonic power. Industrialisation and urbanisation at the core increased the demand for natural
resources at the periphery, which helped to improve the terms of trade. In such a context commodities
price cycles and financial cycles, both exogenously determined, have always been essential for the
internal economic dynamics in Latin America.
The interwar crisis opened the room for a radical change. The breakdown of the global trading
system, the collapse of the gold standard, the outbreak of the Second War, and the hegemonic transition
from Great Britain to the United States brought to an end the export-oriented model. Latin American
countries started to manufacture goods previously imported from the ‘centre’, in a process lately named
‘import substitution’. The ‘development from within’, led by the State, generated reasonable results until
its crisis in 1980s.
This historical background informs many contemporary commentators, who have been arguing
that in order to recover its capacity to grow in a sustainable way, Brazil and other emerging countries
should adopt a new developmental approach, where the State would resume an activist role (Sicsú et al.,
2005; Cimoli et al., 2009; Peres and Primi, 2009; Khan and Christiansen, 2010; Carneiro, 2010; BresserPereira, 2011; De Paula, 2011). There is no consensus on how to name this new strategy or about how far
should the State go to manage the economy.2 In common these analysts share a critical perspective on
economic orthodoxy and inherit the insights of heterodox traditions rotted in the works of Keynes (1964),
Schumpeter (1961), Prebisch (1984) and Kaldor (1967), among others, and, also, in the more recent
Development State paradigm (Khan and Christiansen, 2010). Therefore, they are all critics of the
Washington Consensus and its corollary, the so called New Consensus Macroeconomic (NCM), which,
prior to the global financial crisis, was considered by orthodoxy as the only set of macroeconomic
policies to be adopted by advanced and emerging countries (Arestis and Sawyer, 2010).
This historical summary is important to our argument for at least two main reasons. Firstly, the
first generation of development economists produced their theories under the influence of the crisis on the
liberal order and the new belief in State activism. Macroeconomic and development policies at both
centre and peripheral countries were set to overcome what was then perceived as structural flaws of free
markets. It took at least two generations until the hegemonic return of neoliberal arguments and policies.
Secondly, some structural features of the outward oriented model pursued by Latin American countries,
particularly the overdependence on production and export of natural resources, returned in the early
twenty-first century. Differently from the previous period, countries like Brazil are not fighting to
industrialize their economies, but, instead, they are trying to avoid re-primarization of their exports and
deindustrialization.3
Contemporary policymakers must deal with a crucial task of coordinating the short-term
requirements of stabilisation policies with the long-term requirements of the development process, in a
context of globalisation and instability. Economic orthodoxy used to offer simple answers to very
complex problems. Therefore, growth would be achieved by market forces, and governments should only
guarantee sound money and ‘good governance’ (Arestis and Sawyer, 2010). In short, one should follow
the Washington Consensus and its corollary, the NCM. Unfortunately, policymakers in peripheral
countries, despite their ideological commitment with orthodoxy, face more blurred and complex realities.
Bresser-Pereira (2011) argues that the ‘new developmentalism’ would be an alternative strategy to both conventional
orthodoxy and the old-style Latin American national developmentalism.
3
It refers to the composition of exports, where raw materials share on total exports surpass manufacturing products share,
particularly technology-intensive products. Therefore,‘re-primarization’ cum deindustrialization represents a perverse
structural change which tends to reduce the income elasticity of exports and to increase the income elasticity of imports
(Bresser-Pereira, 2009 and 2010; Oreiro and Feijó, 2010).
2
3
There is, of course, the Keynesian framework, which provides better anchors for policymakers
who want to promote stability and growth.4 The reconciliation between short – and long – run policy
goals could be attained because Keynesian tradition has been developed to deal with two majors issues:
(i) in the short run, macroeconomic policies should stabilize demand levels in order to guarantee full
employment; and (ii) in the long run, development policies must create a social and economic
environment, where private wealth creation is compatible with a reasonable pattern of income
distribution. Therefore, Keynesian policies go far beyond short-term stabilization policies, encompassing
a developmental perspective with a strong moral reasoning: economic growth must be considered as a
mean to an ultimate end, which is to promote an affluent (and less unequal) society.5
Harcourt (2008), Dutt (2010), Taylor (2004 and 2011), among others, emphasize that Keynesian
growth theory has evolved from the original insights of Keynes (1964).6 Accordingly, a capitalist
economy is a monetary economy where aggregate demand plays a crucial role in determining the levels
of output and employment. Such an economy is characterized, inter alia, by the fact that the decisionmaking behaviour of individuals occur in an uncertain environment. Therefore, decisions are affected by
psychological factors.7 Unemployment is not necessarily a temporary phenomenon and employment is
determined in production markets rather than in labour markets. Fearing the future individuals can
increase they demand for money or highly liquid assets and, as a consequence, private demand for
consumer goods and investment goods might not be sufficient to guarantee full employment. In an
uncertain environment money is not neutral and macroeconomic policies can affect the levels of income
and employment, both in the short and the long term. Keynesian growth models share at least one main
feature: aggregate demand is a key determinant of the long-term pace of economic growth (Dutt, 2010, p.
42). Other traditions, classical and neoclassical, are supply-driven and consider that economic growth is
explained by the accumulation of factors of production – capital and labour – and the efficiency (or
productivity) in their use.
Keynesian economic policy, in both conception and practice, is intended to maintain levels of
effective demand for the purpose of mitigating involuntary unemployment by stabilizing business
peoples’ state of confidence.8 The focus of Keynes (1964; see, also, Skidelsky, 2009) proposal was the
4
See, among others: King (2003; 2008); Harcourt (2008); and Davidson (2011). King (2008) summarizes the origins of the
Post Keynesian view as follows “The origins of Post Keynesian economics may be traced back to the publication of the
General Theory in 1936, since Keynes's masterpiece was open from the outset to alternative interpretations ... One of them, the
IS–LM model developed by J. R. Hicks, James Meade and others, subsequently formed the core of the neoclassical synthesis
model of output and employment in the short run. However, the Cambridge (UK) Post Keynesians, including Richard Kahn,
Nicholas Kaldor, Joan Robinson and Piero Sraffa, directed their early criticisms against the long-run component of the
neoclassical synthesis, the Solow growth model, in which full employment was ensured by capital–labour substitution along a
well-behaved aggregate production function. The ‘Cambridge capital controversies’ of the late 1950s and early 1960s
demonstrated the analytical failure of neoclassical growth theory, and were an important episode in the emergence of the Post
Keynesian school... Subsequently Robinson, Kaldor and the American Sidney Weintraub attacked the monetarist theory of
inflation, emphasizing the causal role of the rate of change of money wages and arguing that monetary growth was the effect of
inflation, not its cause. Kaldor, Weintraub and another American, Paul Davidson, were early advocates of the theory of
endogenous money.” (pp. 2-3). Harcourt (2008) argues that “Post-Keynesianism is an extremely broad church. The overlaps of
each end of a long spectrum of view are marginal (sic), often reflecting a little more than a shared hostility towards mainstream
neoclassical economics and methodology ...” (p. 2).
5 For a detailed analysis of the Keynesian framework see Keynes (1964), Minsky (1986), Davidson (2011), Harcourt (2008),
and Arestis and Sawyer (2010). Extensions and contributions from convergent traditions, particularly the Latin American
structuralism, can be obtained in Prebisch (1984), Furtado (1964), Peres and Primi (2009), Tregenna (2009) and Palma (2007,
2011).
6 Nevertheless, as Dutt (2010) points out: “... Keynes´s theory had much in common with the earlier dynamic theories of
economists like Malthus and Marx, and, indeed, with some of his contemporaries, most notably Kalecki” (p. 41).
7 Taylor (2011) suggests that “Fundamental uncertainty, the absence of Say´s Law, and the presence of tensions between
collective social actors characterized Keynesian economics” (p. 215).
Keynes (1964) proposed a new social philosophy in order to address the fact that “[t]he outstanding faults of the economic society in which
we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (p. 372).
8
4
power that the State should hold to steer the economic system, given that, if left to the free workings of
market, the economic system and economic policies themselves – unless there was coordination among
them – would contribute not to solving, but to enlarging the main problems of monetary production
economies.
On this particular issue, Keynesian economic policies are structured so as to make it possible to
manage endogenous features in monetary, fiscal and exchange rate policies (Arestis and Sawyer, 2010;
Taylor, 2004, 2010; Davidson, 2011). Nowadays, the globalization process tends to disrupt not only
domestic markets but also whole countries, especially emerging countries, by establishing a kind of
extended financial casino; the current international financial crisis is a good example to the nature and
problems of the globalization process.9
In a Keynesian perspective, the achievement of full employment must be considered a major
goal for economic policy.10 For that purpose, Keynes (1964, chapter 24), after identifying the main faults
of the entrepreneur economies, that are “its failure to provide for full employment and its arbitrary and
inequitable distribution of wealth and incomes” (p.372), suggests fiscal policy to be used, which through
the multiplier effect, and the community’ propensity to consume, as well as low interest rates to stimulate
investment and to promote “the euthanasia of the rentier” (p.376), and “a (…) comprehensive
socialisation of investment” (p. 378) should assure full employment. Going in this direction, de Carvalho
(1992) argues that, in a Keynesian perspective, “[f]ull employment policies should be implemented by the
combination of (…) fiscal policies, income policies and monetary policies.11 Fiscal policy should be
designed to obtain global long-term employment stability; income policies should obtain price stability;
Monetary policy would then have the role (…) of preventing changes in the state of liquidity preference
(…)’ (p. 212). Thus, the macroeconomic policy of national economies should be coordinated in such a
way as to (i) operationalize fiscal policies designed to expand effective demand and reduce social
inequalities; (ii) make for more flexible monetary policy so as to galvanize levels of consumption and
investment; and (iii) coordinate and regulate financial and foreign exchange markets in order to stabilize
capital flows and exchange rates. In short, taking up the idea of Minsky (1986), there is a need for State
intervention and regulation through Big Government and Big Bank.
The State is the social entity capable of gathering together the greatest amount of the information
available in society and, at the same time, it is the social legislator with legal competence to safeguard
institutions’ ongoing existence and to alter them as required by the evolution of the different social
systems. It is, thus, up to the State, for the collective good and not for private interest, to coordinate
economic activity. In an uncertain world, where agents risk their power of command over social wealth in
order to gain more such power in the future, economic policy should be the greatest source of solidity for
private enterprise. It should guarantee the dynamics of increasing wealth which, consequently, maintains
and expands the society’s inclination to consume, thus enhancing investors’ prospects.12
Sharing convergent insights and stimulated by the major historical transformation of the first half
of the twenty century, the first generation of development economists used to think in terms of structural
problems. This means some characteristics of a country that undermines its potential to advance in the
same supposed ‘natural path of development’ once followed by the rich countries. In this context,
Keynesians and other heterodox economists13 assumed that investment is a key determinant of income
9
For a more detailed discussion of the globalization process and the global financial crisis, see: Griffith-Jones, Ocampo and Stiglitz (2010)
and Arestis, Sobreira and Oreiro (2011).
10 “The achievement of full employment is a widely accepted major policy objective for Post Keynesian economists, and policies and
institutional arrangements supportive of high levels of demand are advocated” Sawyer (2008, p. 101). See, also, King (2003; 2008); Arestis
and Sawyer (2011, chapter 3); and Davidson (2011).
11 For a recent assessment of Keynesian income policies see, among others, Sawyer (2008); and Davidson (2011, chapters 10, 17 and 18).
12 On this point, Minsky (1986) argues that “[i]f the market mechanism is to function well, we must arrange to constrain the uncertainty due
to business cycles so that the expectations that guide investment can reflect a vision of tranquil progress”. (p. 6)
13
Particularly in Keynesian, Kaldorian and Latin American Structuralist traditions (see, among others, Palma, 2007; Tregenna,
2009; and Thirlwall (2011).
5
expansion. Moreover, for Keynesians the economic growth process is not sector-indifferent or linear and
stable. That is, manufacturing matters and governments must have an active role to support structural
transformations (Palma, 2007; Tregenna, 2009). The so-called Kaldor’s laws (Kaldor, 1967; Thirlwall,
2011) express how import the manufacturing sector is. Accordingly, this sector has special growthenhancing characteristics, where it would be possible to identify a strong connection between the rate of
growth in manufacturing and the total income growth, which is the Kaldor’s (1967) first growth law. The
second law, known as Verdoorn’s law (Verdoon, 1949), suggests that because of static – thanks to
economies of scale – and dynamic economic returns derived from capital accumulation, technological
progress and learning by doing, the productivity of the manufacturing sector is positively related the
growth of the manufacturing sector. The third law claims that there is a positive relationship between the
productivity of the non-manufacturing sector and the growth of the manufacturing sector (Kaldor, 1967;
Thirlwall, 2011).
Emphasizing this point, the higher the growth of the manufacturing sector and its productivity,
the higher will be the growth of the whole economy and the productivity of other economic sectors.
Further arguments are relevant: Hirschman (1958), who claims that manufacturing leads economic
growth thanks to its backward and forward linkages to other sectors; Kaldor (1967), Robinson (1962) and
Schumpeter (1961) who stress that technological progress has, at least in a certain extent, an endogenous
dynamics associated with the capital accumulation led by the manufacturing sector; and by PrebischSinger14 and Kaldor-Thirwall15, who link income-elasticity differences in manufacturing products and
natural resource-intensive products to balance of payments constraints to economic growth. The latter is
in a context where primary-product prices tend to decline in relation to manufacture product prices in the
long run. It is also possible to argue that in order to achieve growth-cum-stability, governments must
prioritize the industrialization process or to avoid the de-industrialization one.
Based on these historical and theoretical arguments we analyze the recent performance of the
Brazilian economy in the next two sections.
3. The Recent Performance of the Brazilian Economy
After three decades of rapid economic growth and modernization, between 1950s and 1980s,
Brazil experienced a quarter of a century of semi-stagnation and instability. Hoping to overcome
macroeconomic imbalances, governments abandoned the developmental strategies outlined in section 2
and adopted market-friendly structural reforms inspired by the Washington Consensus. Despite the
success in controlling high inflation, the expectations of development were not fully fulfilled (Arestis and
Saad-Filho, 2008; De Paula, 2010).
Table 1 explores the main characteristics of recent Brazilian governments (Fernando Henrique
Cardoso, Lula da Silva and Dilma Rousseff). It shows a non-exhaustive recollection of policies and
indicators. Due to lack of space we focus on the coherence, or lack of it, between macroeconomic and
development policies, instead of a detailed analysis of each policy.16
14
See Prebisch (1984) and Thirlwall (2011).
See Thirlwall (2011).
16
For details see, among others: Arestis, De Paula and Ferrari-Filho (2007); Arestis and Saad Filho (2008); Bresser-Pereira
(2009 and 2010); Carneiro (2010); De Paula (2010).
15
6
Table 1. Main Policies and Outcomes – Brazil, 1995-2011
Presidency
Fernando Henrique Cardoso
Main characteristic: coherence
between macroeconomic and
development policies, both
mainly following the Washington
Consensus Paradigm
1995-1998
Real Plan (1994/1995); Financial
Crises – Mexico (1995), Asia
(1998), Russia and LTCM (1998)
1999-2002
Inflation Target Regime (1999);
Financial Crises (2000-2002) –
Argentina, Dotcom Bubble, 9/11.
Luiz Ignácio Lula da Silva
Main characteristic: lack of
coherence between
macroeconomic and
development policies
2003-2006
Buoyant international markets
(2003-2008); China´s rise
2007-2010
Global Financial Crisis
Dilma Rousseff
2011 – Present
Main Characteristics: in search
for coherence between
macroeconomic and
development policies
Policies
Macroeconomic Policy: mainly orthodox (new
consensus macroeconomic). Focus on monetary
stabilization (Real Plan) thorough exchange rate
based strategy (1995-1998) and the introduction of
inflation target regime (1999 – present).
Fiscal surpluses and free floating exchange rate
regime (from 1999 onwards).
IMF stabilization plans: 1998-2002.
Procyclical policies during financial crises
Development Policy: Washington Consensus type
of structural reforms: privatization, deregulation,
financial sector reform, capital account
liberalization, administrative reform, private sector
pension reform, fiscal responsibility law, etc.
Macroeconomic Policy: mainly orthodox (new
macroeconomic consensus). Inflation target regime,
fiscal surpluses, free floating regime.
From 2006 onwards, particularly after the global
financial crisis, pragmatism and countercyclical
policies.
Development Policies: income distribution (“Bolsa
Família”, real increase in minimum wage, job
creation); recovery in public investments (PAC and
Minha Casa, Minha Vida); proactive external policy;
credit expansion, particularly through state owned
banks (BNDES, BB and CEF).
Macroeconomic policy:
Coordination between monetary and fiscal policy;
pragmatism within the police framework inherited
from Cardoso and Lula da Silva´s governments.
Macroprudential regulation and mild capital
controls.
Development policy:
More activism. Widening and deepening of Lula´s
policies; industrial, innovative and trade policies
(“Plano Brasil Maior”).
Economic Performance
Main outcomes 1995-2002
GDP growth average: 2.3%
Real Interest Rates*, Average (%):
58%
Inflation rate average (IPCA): 9.2%
Credit/GDP (Average): 23%
General government net debt/GDP
(2002): 60.6%
General government net
lending/borrowing (Average, % of
GDP): -4.9%
Current Account/GDP average: -3.3%
Exports (US$ billion):
1995: 46
2002: 60
Gini Index 2002: 0.589
P&D/GDP (1996-2002 Average):
0.9%
Poverty line in 2002: 26.7%
Health expenditure, public (% of GDP
- average): 3.0%
Public spending on education, total (%
of GDP): 4.1%
Main outcomes 2003-2011
GDP growth average: 3.9%
Real Interest Rates*, Average (%):
40%
Inflation rate average (IPCA): 5.9%
Credit/GDP (Average): 36%
General government net debt/GDP
(2011): 36.4%
General government net
lending/borrowing (Average, % of
GDP): -3.1%
Current Account/GDP (average): 0.2%
Exports (US$ billion):
2003: 73
2011: 256
Gini Index 2011: 0.541
P&D/GDP (2003-2008 Average): 1%
Poverty line 2011: 12.8%
Health expenditure, public (% of GDP
- average): 3.5%
Public spending on education, total (%
of GDP): 4.8%
Source: Author´s elaboration based on: (i) Ministry of Finance (2012a; 2012b); (ii) Brazilian Central Bank (www.bcb.gov.br); (iii)
IPEADATA (www.ipeadata.gov.br); (iv) World Bank (http://data.worldbank.org/); and (v) IMF Word Economic Outlook Database, April
2012 (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx). Access on 25/04/ 2012. Note: (*) Real interest rate is the
lending interest rate adjusted for inflation as measured by the GDP deflator.
We observe that Fernando Henrique Cardoso´s two terms were broadly coherent, pursuing a
Washington Consensus type of strategy. The first Lula da Silva’s term mainly followed Cardoso in
macroeconomic policies, while his second term introduced more ambitious development policies.17 That
17
See, among others: Paulani (2008); Carvalho (2008); Bresser-Pereira (2009); and Serrano and Summa (2011).
7
is to say, Lula da Silva´s kept the macroeconomic framework based on the inflation targeting regime, the
target for primary budget surplus and the flexible exchange rate in a context of free capital mobility.
Nevertheless, his government reinforced income distribution policies.18
The orthodox macroeconomic policies followed by Fernando Henrique Cardoso and Lula da
Silva resembled the New Consensus Macroeconomics. Monetary policy had a deflationary bias, where
rising interest rates to control domestic demand was the main way to keep inflation under control. The
consequences of high interest rates were: (i) a serious constraint on economic growth, through the price of
credit and entrepreneurs’ poor expectations and; (ii) it increased public debt, which was formed mainly by
indexed bonds or short-term fixed rate bonds, and currency overvaluation. Dominated by the goal of
obtaining an average primary surplus of 3.25% of GDP in order to maintain some fiscal balance and to
stabilize the public debt, fiscal policy did not really pursue austerity. In fact, in all the years that the
government set targets for primary surpluses, it was not saving anything, but it was substituting payments
for rentiers with public investment and social programs. The modus operandi of the inflation targeting
regime plus the adoption of a floating exchange rate regime, under the conditions of full liberalisation of
the capital account, resulted in volatility of the nominal exchange rate and the appreciation of the real
exchange rate.
Due to the economic policy strategy based on inflation targeting, an increased primary surplus
target and flexible exchange rate, Brazil’s GDP performance was poor: from 2003 to 2006, the average
growth rate of Brazil was, approximately, 3.5% per year. Moreover, the inflation rate was maintained at
high level in relation to other inflation targeting countries, averaging 6.4% per year. In 2007, at the start
of Lula de Silva’s second mandate, economic policy – and particularly fiscal policy – underwent a slight
change. At that time, however, the Brazilian Central Bank (BCB) continued to operate monetary policy in
such a way as to meet inflation targets; fiscal policy was directed at supporting the implementation of the
Growth Acceleration Programme (PAC).19 In addition, Brazil and most other emerging countries
benefited from higher commodity prices, which contributed both to their achieving significant current
account surpluses and accumulating international reserves.
Lula da Silva’s response to the global financial crisis (GFC) represented an important shift from
previous episodes of crises, where central government pursued procyclical policies, usually within the
framework of the IMF stabilization programs. The central government responded to the contagion effect
with a broad variety of counter-cyclical economic measures.20 The Brazilian Central Bank (BCB) eased
monetary policy by lowering the policy rate and by increasing liquidity in the interbank market. Stateowned banks – Brazilian Development Bank (BNDES), Banco do Brasil (BB) and Caixa Econômica
Federal (CEF) – were oriented to supply credit to the economy, in a context where private banks (national
and foreign) became reluctant to expand credit facilities to consumers and corporations. Fiscal policy was
expansionary, aiming at boosting aggregate demand and mitigating the negative impact of the crisis on
the level of economic activity through three major channels: additional government spending, tax cuts and
subsidies. The rise in government spending covered, among other things: (i) an expansion of the Growth
Acceleration Programme (PAC); (ii) the start up of a programme of government incentives and subsidies
for housing construction, called Minha Casa, Minha Vida (‘My House, My Life’), targeted at low and
middle-income households; (iii) budget transfers to municipalities; (iv) extension of unemployment
insurance benefits; and (v) real increase in minimum wage. Beyond the stimulus package, the Brazilian
18
For example: (i) minimum wage increased 66% in real terms from 2002-2012, reaching the highest level in four decades;(ii) income
transfers to families, including ‘Bolsa Família’, reached an amount of 8.6% of GDP in 2011; it was 6.8% of GDP in 2002. In terms of the
composition of central government spending, the Ministry of Finance (2012a) states that “From 2002 to 2011, primary spending rose from
15.7% of GDP to 17.5% of GDP. The increase is mainly explained by income transfers, which increased 1.8 pp in the period ... Investment
and education spending also grew respectively by 0.2 pp and 0.3 pp of GDP since 2002. On the other hand, payroll costs and other expenses
have been reduced.” (p.83). Moreover, since 2003 the economy has created more than 17.3 million formal jobs” (p. 34).
19 PAC had three main objectives: stimulate private investment; increase government investment in infrastructure; and remove the main
obstacles to economic growth (bureaucracy, inadequate norms and regulation).
20 See, Cunha et al. (2011) and Ministry of Finance (2012a, 2012b).
8
government also adopted other counter-cyclical macroeconomic policies, as well as labour policies and
sector specific measures.
As a result of the economic policy ‘flexibility’, as well as the policy response to the international
financial crisis in 2009, the Brazilian average growth rate increased over the period 2007-2010 by 4.5%
per year.21 Regarding the inflation rate over the same period, it, surprisingly, decreased to an average rate
of 5.1% per year. Domestic demand sustained economic growth, while inflation behaviour was mainly
influenced by the sharp fall in the commodity prices in the second half of 2008, by the deceleration of the
domestic economy in 2008 (last quarter) and 2009 and by the domestic currency appreciation in 2009 and
2010.22
It is important to stress that, on the one hand, Brazil’s reaction to the international financial
crisis, although rather delayed, was successful because Brazil did not have a high level of external debt (it
is currently a net creditor to the international markets), the composition of its public debt improved,23
enabling the BCB to build up foreign exchange reserves. On the other hand, although Brazil’s economic
recovery restored flows of international capital once again, it posed long-standing problems associated
more with the period of prosperity. These include the tendency for the real to appreciate, affecting
industry and the balance of trade,24 and, until 2010, the BCB’s predisposition to subordinate fiscal policy
to the primacy of monetary policy.
In late 2010 and in 2011, the first year of Dilma Rouseff’s term, the central government faced the
dilemma of going for moderate economic growth to face inflationary pressures. At the same time, the
volatility in financial markets due to the euro area crisis, the competitive pressures from other countries in
domestic and external markets, the lack of strength in manufacturing sector – industrial production grew
only 0.3% in 2011 – the appreciation of domestic currency, the major deficiencies in infrastructure and
the poor quality of public services and institutions, among other factors, have raised doubts about the
prospects of the Brazilian economy. Monetary and fiscal policies were reverted to previous conventional
lines and, in 2011, the Brazilian economy went through a process of growth slowdown: the GDP
increased 2.7%, a modest rate and below the regional average (Ministry of Finance, 2012b).
The BCB introduced several macroprudential measures to deal with the financial markets
instability, particularly the potential disruptive effects of an excessive absorption of private capital flows
(Ministry of Finance, 2012b). Moreover, in order to face the development challenge, Dilma Rousseff
launched her own programmes, which apparently were set to deepen Lula da Silva’s previous efforts,
such as ‘PAC phase 2’25 and the Brasil Maior Plan, the new industrial policy.
The Ministry of Finance (2012a) summarizes the official perspective as follows: “After two decades of low economic dynamism, the
progress of the Brazilian economy has been considerable in recent years. The economy entered a period of robust expansion, based on a
development model focused on domestic market strengthening, with job creation and income distribution, promoting investment and
expanding credit market, with inflation under control, and outstanding sound fiscal and financial systems. Thus, Brazil has reached high
levels of growth, combined—in an unprecedented manner—with justice and social development. Far different from the former financial and
currency crises, Brazil has vigorously faced one of the most serious and profound ongoing global crises. In the past, same magnitude crises
have driven the economy into imbalances in the balance of payments, public debt increases and higher country risk perception, inhibiting
new investments and damaging economic growth. Nowadays, the macroeconomic results are worthy to be recorded. From 2002 to 2012,
average inflation has fallen from 15% to less than 5% per year, public debt to GDP ratio has declined by almost half, exports have risen by
more than five times, poverty has shrunk by more than 50%, and the country grows twice as much as experienced in previous decades” (p.
136). Giambiagi and Pinheiro (2012) offer a critical assessment from a conventional perspective; for a heterodox view see Carneiro (2010)
and Serrano and Summa (2011).
22 See Banco Central do Brasil, ‘Inflation Reports’ (several issues). Available at: http://www.bcb.gov.br/?INFLAREPORT. Access on
20/06/2012. See, also, Ministry of Finance (2012a; 2012b).
23 In the late 1990s and early 2000s, a considerable portion of the public debt was indexed to the exchange rate, while at present nearly all
public debt is indexed to the real.
24 Further details can be found in Bresser-Pereira (2010).
25
The PAC 2 will invest R$ 1 trillion within 2011-2014 in infrastructure projects, where nearly 50% of the total will be directed to the
energy sector and 30% housing (Minha Casa, Minha Vida). In 2011, the amounts committed to PAC reached R$ 35.4 billion, which
represents a 20% increase when compared to 2010, and a 121.3% expansion between 2007 and 2011. In 2012 it is expected to reach R$ 42.6
billion. (Ministry of Finance, 2012a and 2012b).
21
9
It is reasonable to argue that one main feature of the period post-2006 is the lack of coherence
between macroeconomic and development policies, because the latter has become more ambitious and
developmentalist in nature, while the former has mainly been routed in an orthodox framework. In other
words, the Brazilian economic policy is still based on monetary regime dominance (it means, inflation
targeting regime). This explains why in 2010 and 2011 the BCB increased the interest rate to keep
inflation under control, the government decided to increase primary surplus target and the Brazilian
currency has continued its appreciation process.
It must be recognized that the economic policy introduced by the monetary authorities since the
early 2011 is different from those adopted during the Lula da Silva government. The new government has
tried to coordinate fiscal and monetary policy to increase the pace of interest rate reduction. It has also
used State-owned banks more aggressively to boost competition in credit markets and, therefore, to
reduce interest rates to consumers and corporations. The monetary authorities have adopted broader
strategic capital controls to avoid the appreciation of the real.26 Finally, the new industrial policy seems to
be more ambitious and reliable.27 Nevertheless, it is still not clear if Dilma Rousseff’s government will be
able to deal with the contradictions of pursuing a developmentalist strategy without major changes in the
underlying macroeconomic policy framework.
4. Brazil in a Sino-Centred Global Economy: Back to the Past?
Brazil is a nation under construction. Recent improvements barely overcome the burden of a
quarter of a century of semi-stagnation and of centuries of a pattern of development unable to include all
segments of the population (Furtado, 1992). Moreover, growth acceleration and macroeconomic
performance have been associated with a regressive pattern of specialization in production and trade.
These facts have raised concerns about the pattern of the relationship with China and other peripheral
countries. In a context where experts have suggested that global economy would increasingly be Asiancentred in the decades to come,28 there are those who fear that Brazil and other Latin American countries
will become merely satellites, trapped in a typical ‘South position’ as suppliers of natural resources and
importers of manufactured products.29 This section provides some evidence in that direction.
Figure 1 illustrates that, despite the recent growth acceleration, GDP growth during the
globalization era has been disappointing. As a consequence, Brazil´s share in world income has been
falling since 1980. In this context, the 2004-2011 boom can be interpreted, simply, as an incipient
recovery. The same is true if we look to merchandise trade. Figure 2 shows that despite the five-fold
increase in nominal exports from 2001 to 2011, Brazil´s share has been basically the same since 1980. In
fact, and early 1980s, Brazil, Mexico, China and Korea had similar shares in world trade. Three decades
later, Brazil has basically the same share, while the others have increased their shares markedly,
particularly China.
According to the Ministry of Finance (2012b): “Due to the great volume of capital coming into the country, the Brazilian Government
decided to take some macroprudential measures in order to mitigate the effects of the strong inflows of short-term capital. The main
instrument used was the Financial Transaction Tax (IOF) for some capital categories, such as investments in equities, fixed income and
directs loans, depending on the term of the transaction” (p. 119).
27 It comprises: (i) taxation measures, such as payroll tax benefits for specific sectors, tax (IPI) reduction and payment postponement (PISCofins); (ii) government procurement for machinery and health sectors; (iii) foreign trade finance; (iv) trade defense to avoid fraud and
circumvention; (v) incentives to information technology and communications sectors; (vi) the new Automotive Regime (2013-2017) with
incentives to research, development and innovation; (vi) credit facilities to fund production, investment and innovation. The details can be
found in Ministry of Finance (2012b).
28 See: Goldman Sachs (2007) and CEPAL (2001).
29 Jenkins (2010) and Phillips (2011) review the recent debate.
26
10
Figure 1 – Brazil’s Gross Domestic Product”: Growth and Share of the World Total
(A) GDP growth, 1910-2011 - 10 Years Moving Average
(%)
(B) GDP based on purchasing-power-parity, 1980 - 2011
(share of world total, %)
4,10
10
Globalisation
(1980 s onwards)
9
3,90
3,70
8
7
3,50
6
3,30
5
4
3,10
National Developmentalism
(1950 s to 1980 s)
3
2,90
2
1
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
2,50
1980
2,70
1910
1914
1918
1922
1926
1930
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
0
Source: Author´s calculations based on IMF World Economic Outlook Database, April 2012. Available at:
(http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx (obtained on 25/04/2012).
Figure 2 – Merchandise Exports in Selected Economies, 1980-2010
(B) Share of World Total (Average, %)
(A) Exports Value - US$ Billion
8
250
7
200
6
5
150
4
3
100
2
50
1
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
0
Brazil
China
1980-1985
Korea, Republic of
1986-2000
Mexico
2001-2010
Source:
Author´s
calculations
based
on
the
WTO
Database.
(http://stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language=E
25/04/2012).
Available
(obtained
at:
on
Contributors from different theoretical backgrounds,30 converge to the diagnosis that the lack of a
robust long-term recovery in investment and productivity seem to undermine the overall performance of
the economy.31 Figure 3 presents the evidences. Brazil used to be a catching-up country during its
developmentalist era (1950-1980), when the level and the growth of productivity were superior to those
observed in other emerging markets. Nevertheless, during the globalization era all indicators of efficiency
(labour productivity and total factor productivity) and capital accumulation were disappointing.
In 2011, for instance, Gross Fixed Capital Formation reached only 19.6% of GDP, which is higher
than the 16% to 17% of GDP average obtained from 2002 to 2009. Central government investment has
30
Differences emerge when contributors try to explain why the country has experienced negative performance in investment and efficiency.
For the sake of simplicity we should divide explanations into two groups: (i) conventional wisdom, based on neoclassical arguments, that
argued sustained State intervention during the developmental era distorted the fundamental prices and the institutional environment, which
reduced saving and discouraged the entrepreneurs to invest (Bacha and Bonelli, 2004; Bonelli and Pessoa, 2010; Fishlow and Bacha, 2010);
(ii) alternative interpretations, mainly heterodox, argued that Brazil took the wrong policy pack since the late 1980´s, where the Washington
Consensus type of reforms and policies, particularly the financial openness, introduced excessive macroeconomic volatility and weakened
the State capacity to sustain investments and to stabilize the overall economy (Arestis, De Paula and Ferrari-Filho, 2007; Arestis and SaadFilho, 2008; Bresser-Pereira, 2009; Carneiro, 2010; see, also, Palma, 2007 and 2010; Rodrik and Mcmillan, 2011).
31 This should not be surprising simply because as Taylor (2011) suggests: “Economists use two key variables to analyze growth of real
output per capita. One is investment, or gross fixed capital formation; the other is the rate of growth of labor productivity. Investment adds to
the existing capital stock and serves as vehicle for new technologies to boost productivity” (p. 173). Moreover, Taylor (2011, pp. 177-179)
shows that it is possible to generate growth accounting equations similar to those derived from Solow-Swan model based only on national
income and production account numbers, where output growth is decomposed into three components: growth rates of labour, capital and a
surplus. Neoclassical models use the Solovian total factor productivity growth (TFPG) as a proxy of this general surplus. Therefore “The
macroeconomy can get alone without a neoclassical aggregate production function” (p. 177). Taylor (2011) also argues that “It seems
moderately more enlightening to think in terms of separate rates of labor and capital productivity increase rather than bundle them up into
TFGP, but mainstream economists analyzing sources of growth invariably do the latter” (p. 179).
11
fluctuated around 1% of GDP (Ministry of Finance, 2012a), while the empirical literature suggests that
public sector should invest 5% do 7% of GDP (Spence, 2012). This relative recovery has not been enough
to reach previous levels of investment – around 25% of GDP – that seems to be necessary to boost
productive capacity in the country. In fact, Spence (op. cit.) reports that empirical literature states that
investment ratio of 25% to 35% of GDP would be necessary to sustain high levels of economic growth.
The higher levels of economic growth (Figure 1) and productivity (Figure 3) observed during the
period of industrialization and urbanization led by the State (the national-developmentalist era) fits in
with the Kaldor´s growth laws, in the sense that the manufacturing sector dynamism spilled over to the
rest of the economy (Bresser-Pereira, 2010; Carneiro, 2010). As argued by Rodrik and McMillan (2011),
echoing Kaldor (1967), diversification of production and international trade structures is at the core
growth of the acceleration processes. Therefore, it is not surprising that the lack of economic strength has
coincided with an anaemic and unstable performance of the manufacturing sector, coupled with the ‘reprimarization’ of exports and the structural problems, such as lack of a modern infrastructure, widespread
informality and so on (Rodrik and McMillan, 2011).
Figure 3 – Productivity Indicators and Investments in Selected Economies, 1960-2011
(B) Labour Productivity Catching-up (United States = 100)
(A) Labour Productivity, 1960-2011 (GDP per Person
Employed, in 1990 GK $)
70
68.155
60
45.158
50
43.275
40.953
40
29.874
30
20
7.992
1.120
Japan
United States
Germany
10
Mexico
India
South Korea
8.939
1.998
19.725
14.914
14.196 12.696
China
13.690
6.148
4.451
Brazil
80.000
70.000
60.000
50.000
40.000
30.000
20.000
10.000
-
80
0
Brazil
South
Korea
China
1950-1980
1960 2011
Mexico
1981-2000
Germany
Japan
2001-2011
(D) Labour Productivity Growth
Advanced Economies (Log scale)
(C) Labour Productivity Growth
Emerging Economies (Log scale)
12
12
11
11
10
10
9
9
8
8
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
6
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
7
7
Germany
Brazil
South Korea
India
China
163
160
45
40
158
35
141
140
116
30
109
93
100
98
89
25
0
Germany
United
States
China
India
Japan
South Korea Brazil
Mexico
East Asia & Pacific (developing only)
High income: OECD
Latin America & Caribbean
Brazil
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1978
1976
1974
1972
1970
1968
10
20
1966
15
40
1964
60
1962
20
80
1960
120
Japan
(F) Gross capital formation, 1960-2010 (% of GDP)
(E) Total Factor Productivity - Cumulative Growth, 1990- 2009
(1990=100)
180
United States
Mexico
1980
6
India
Source: Author´s calculation based on: (i) Productivity indicators: The Conference Board Total Economy Database™,
January 2012. Available at: http://www.conference-board.org/data/economydatabase/ (obtained on 25/04/ 2012); and (ii)
Gross Capital Formation – World Bank. Available at: http://data.worldbank.org/ (obtained on 25/04/ 2012).
12
Figure 4 reveals that the manufacturing sector has reduced its relative share on GDP 32 and on total
employment (Figure 4). As stressed by Palma (2007; 2011) Brazil had apparently suffered from a
premature deindustrialisation. In 1980 Brazil had the largest manufacturing sector among developing
countries, ranked in the eighth position with a 2.6% percent of the world total production. To put it in
perspective, China ranked twelfth, with 1.7%, and South Korea ranked twentieth-eighth with 0.6%. In
2010, Brazil ranked eleventh, behind China, South Korea, India and Mexico.33
Table 2 suggests that the exports structure also changed. Between 1997 and 2010, primary
products and natural-resource-intensive manufactures increased their share in total exports from 52% to
66%, while labour and scale-intensive manufactures experienced a share reduction from 33% to 20%.
These sectors have been subjected to intense competitive pressures from China and other Asian
economies, both home and abroad, particularly in Latin American markets. Moreover, according to the
exports concentration index, Brazilian exports have concentrated, particularly in markets located in
Africa, Asia and Europe (Lélis, Cunha and Lima, 2012).
Figure 4 – Evolution of the Manufacturing Sector in Brazil 1950-2010*
Sources: United Nations Statistics Division - National Accounts; Groningen Growth and Development Centre 10-sector database, June
2007. Available at: http://www.ggdc.net (obtained on 25/04/ 2012). Note: (*) Panel A – Manufacturing Sector (% of GDP); Panel B –
Manufacturing sector value added as a share of total value added; and manufacturing employment as a share of total employment.
Table 2 - Brazil´s Technological Intensity of Exports and Imports, 1997-2010 (Pavitt Taxonomy*)
Exports
Primary Products
Manufactures - Natural Resources-Intensive
Manufactures - Labor-Intensive
Manufactures - Scale-Intensive
Manufactures - Specialized Suppliers
Manufactures - Science-based
Non Classified
Total
1997
22,5%
29,3%
10,6%
22,0%
9,7%
4,4%
1,5%
100,0%
2010
42,6%
51,8%
23,9%
32,6% 5,7%
14,1%
7,0%
4,9%
1,9%
100,0%
Imports
66,5%
19,8%
1997
13,5%
19,9%
10,3%
17,9%
21,8%
16,6%
0,0%
100,0%
2010
14,0%
20,6%
9,2%
20,1%
19,6%
16,4%
0,0%
100,0%
Source: Author´s estimation using Pavitt (1984) taxonomy and data from Global Trade Information Services (GTIS).
32
At current US dollars prices. Source: United Nations Statistics Division - National Accounts. Available at:
http://unstats.un.org/unsd/snaama/Introduction.asp (obtained on 05/05/2012).
33 See Palma (2007, 2011), but predominantly United Nations Statistics Division - National Accounts. Available at:
http://unstats.un.org/unsd/snaama/Introduction.asp (obtained on 05/05/2012).
13
Figure 5 reveals that the manufacturing sector had an increasing external deficit between 2008 and
2011, while primary products performed a massive surplus. It vividly shows the contradictions of the
recent economic recovery: global, particularly Chinese, demand stimulates natural resources trade
surplus, while Chinese and other Asian countries competition both at home and abroad, in a context of
buoyant internal markets and currency overvaluation in Brazil, has been pointed out as a source of the
manufacturing sector trade deficit and de-industrialisation pressures (Bresser-Pereira, 2010; IEDI, 2011,
2012). Conventional arguments, inspired by Ricardian and neoclassical trade models,34 suggest that
Brazil will be better off in this ‘re-orientation’ of its production and international trade (Bonelli and
Pessoa, 2010; Fishlow and Bacha, 2010). Rich in natural resources, the country’s destiny would be to
supply food, minerals and oil to old and new global powers. The heterodox perspective highlighted in
section 2 argues that in order to guarantee a stable long-term development path, Brazil should not
abandon the post-1930 national industrialization project. On the contrary, this should be renewed and
adapted to current circumstances and challenges (Peres and Primi, 2009; Bresser-Pereira, 2010).
Figure 5 – Brazil: Trade Balance in Selected Sectors, 1989-2011 (US$ billions)
100,0
78,5
80,0
60,0
40,0
29,8
20,0
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-20,0
1989
0,0
-40,0
-60,0
-48,7
Natural Resources and Other
Manuf.
Total
Source: IEDI (2011; 2012).
Recent data suggests that Brazil in not an exception. Many Latin American countries have
experienced similar trends. For instance, in 2010, primary products represented 54% of total exports in
the whole region.35 Trade with Asia is particularly characterized by a North-South pattern, where Latin
American countries export natural resources-intensive products and import manufactured products.
Except from intra-regional trade and the Mexico-United States trade, the North-South pattern is dominant
(Cepal, 2011).
Calderón (2008), Cepal (2011), Cesa-Bianchi et al. (2011), ADB (2012), among others, provide
evidence for Latin American countries, including Brazil, which shows increasing links with the new
emerging global power, China. As we argued in section 2, the outward oriented model followed by Brazil
and most of peripheral countries until 1930s, was characterized, among other things, by the close business
cycles synchronization with the core economies, particularly UK, the then hegemonic power.
Urbanization and industrialization at the centre created a huge demand for food and raw materials. These
economies also needed markets and investment alternatives. Both dimensions interacted in a way that
amplified the reflexive and dependent nature of peripheral economies.
The following empirical exercise suggests that this might be happening again. In order to assess if
Brazilian business cycle synchronization with its main trade partners is associated with the trade intensity,
we use the empirical strategy pioneered by Frankel and Rose (1998) and expanded by Calderón (2008),
among others. Firstly, we calculate the business cycles synchronization between Brazil and its main trade
34
For full references see Thirlwall (2011).
ECLAC's Statistical Yearbook 2011. Available at: www.eclac.cl (obtained on 20/04/2012).
35 See
14
partners,36 between 1975 and 2010, measured trough the 15 year-window rolling correlations of real
output fluctuations using Hodrick-Prescott and Baster-King filters.37 Secondly, we construct the bilateral
trade intensity between countries i and j, in time t, using two proxies, also proposal by Frenkel and Rose
(1998):
I. ITT (Trade Intensity weighted by the total trade): ITTijt = (Xijt + Mijt) / (Xit + Xjt + Mit + Mjt),
Where: Xijt represents the total export of country i to country j, at time t; Xit and Mit
represent the total export and import of the country i, respectively.
II. ITY (Trade Intensity weighted by GDP, represented by Y): ITYijt = (Xijt + Mijt) / (Yit + Yjt)
We further estimate equation (1), as per below, proposed by Frankel and Rose (1998), that is:
Corr (v, s)ijt = α + β ITijt + εijt
(1)
Where: Corr (v, s)ijt denotes the correlation of business cycles between country i and j, at time
t; IT refers to the intensity of trade, proxied by ITT or ITY; α and β are the regression coefficients to be
estimated.
Figure 6 reports that the country business cycles have been much more correlated with China and
other Asian economies than with the United States, Brazil´s former main trade partner. Business cycles
synchronization can be explained by trade channels. Calderón (2008) found similar results considering
Latin American countries in their relation to China and India. Cesa-Bianchi et al. (2011) also showed that
the long-term impact of a China GDP shock on the typical Latin American economy has tripled since the
mid-1990s, while the long-term impact of a US GDP shock has halved. In a recent report, the InterAmerican Development Bank (IADB, 2012) assumes that the evolution of Chinese economy has become
increasingly important to the region.
-0,4
-0,4
-0,4
-0,6
-0,6
-0,6
-0,8
-0,8
-0,8
-1
-1
Chile
Japão
China
Venezuela
Coreia do Sul
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
-0,2
1977
2009
2007
2005
2003
2001
1999
1997
-0,2
1995
-0,2
1993
0
1991
0,2
0
1989
0,2
1987
0,4
0,2
1985
0,6
0,4
1983
0,6
0,4
1981
0,6
1979
0,8
1977
1
0,8
1975
1
0,8
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1
1975
Figure 6 – Business Cycles Synchronization between Brazil and Its Main Trade Partners, 19752010*
-1
Itália
Alemanha
GB
Rússia
Holanda
Argentina
França
Espanha
EUA
Source: Authors´ calculations based on the ‘World Development Indicators’. Available at: http://data.worldbank.org (obtained on
10/01/2012. Note: (*) 15 Year-Window Rolling Correlations of real output fluctuations using Hodrick-Prescott filter.
Table 3 reports the results of our regressions: β was statically significant in our four estimations.
We use two filters (Baster-King and Hodrick-Prescott) and two different proxies for trade intensity (ITT
and ITY). According to the underlying literature, a positive β suggests that higher trade intensity reinforce
36
Argentina, Bolivia, Colombia, Ecuador, Paraguay, Peru, Venezuela, Uruguay, Canada, Mexico, United States, Germany, France, Holland,
Italy, Spain, Angola, Algeria, Egypt, Nigeria, South Africa, Saudi Arabia, United Arab Emirates, India, Indonesia, Japan, South Korea,
Malaysia, Singapore, Thailand, Philippines, Vietnam, Turkey, and Russia. They represented 63% of Brazilian total exports in 2011.
37 The data of trade are of IMF, of Direction of Trade Statistics, and the GDP are of WDI-World Bank.
15
business cycles synchronization. Considering this piece of evidence and previous trade performance
indicators, it should be the case that in the Brazilian case there is a specialization trend typical of the
North-South pattern, more precisely exporting natural-resources and importing manufactured products.
Our results confirm previous ones, particularly Calderón (2008). It also reinforces the perception that
Brazil and other Latin American countries have been much more connected to China (Cepal, 2011; CesaBianchi et al., 2011; IADB, 2012; Jenkins and Barbosa, 2012).
Table 3 – Effects of Trade Intensity on Business Cycles Synchronization, Brazil, 1975-2010
Filter
GDP
Baster King
GDP
Hodrick Prescott
Trade Intensity
ITT
14,099***
(-2,461)
19,572***
(-2,983)
* p<0.05, ** p<0.01, *** p<0.001
Standard Deviation in parenthesis
ITT - trade intensity weighted by total trade;
ITY - trade intensity weighted by GDP
ITY
86,779***
(-15,1)
117,826***
(-18,353)
To estimate the equation we used trade intensity (IT) as Instrumental Variable (IV) to solve the homogeneity between trade and GDP.
The IT was estimated through a traditional gravitational model, i.e., using Language, Frontier and Distance as instruments.
After that we estimate the equation using a Panel Data model. The Hausman test shows that Two-Stages Least Squares (2SLS) is efficient
and the Sargan Test support the null hypothesis that the all the instruments (IV M odel) were valid.
In short, recent literature and our own results suggest that robust growth in China in recent years
has created some externalities for Latin American countries. In natural-resource-rich countries the
Chinese demand for agricultural and mineral commodities has resulted in trade surpluses, which
contributed to a virtuous cycle of growth with less external and fiscal vulnerabilities. Countries already
characterized by a high degree of specialization in commodities production and exports have reinforced
their pattern of international integration. At the same time, countries with larger manufacturing sectors,
such as Brazil, have concentrated their exports on commodities. As a result, manufacturing sector
experiences massive trade deficits, and there is a renewed stimulus to the previous process of deindustrialization.38
In this section we have showed that the recent economic growth acceleration was not strong and
sustained enough to overcome the quarter of century of semi-stagnation experienced after the 1980s debt
external crisis. Brazil´s infrastructure, technological capabilities, social institutions, particularly in
education, housing and health care, and business environment should be markedly improved to attain the
requirements of a modern and affluent society.39, 40, 41 To overcome recent and historical structural
38
Previous studies provided evidence that China´s exports have been dislocating other countries exports and, therefore, Chinese competence
in manufacturing has stimulated deindustrialization among developing and advanced countries. See, among others, Greenway, Mahabir,
Milner (2008), Giovannetti and Sanfilippo (2009), Wood and Mayer (2010), Giovannetti, Sanfilippo and Velucchi (2011), Lélis, Cunha and
Lima (2012) and Jenkins and Barbosa (2012).
39 According to the ‘World Competitiveness Report 2011-2012’, Brazil ranks 53 in a group of 141 countries. See
http://www3.weforum.org/docs/WEF_GCR_CountryProfilHighlights_2011-12.pdf (obtained on 27/04/2012). OECD states that “Brazil
under-invested in infrastructure for over three decades, and infrastructure investment rates have come up only slowly since 2007.
Infrastructure needs are sizeable in almost all sectors” (http://www.oecd-ilibrary.org/economics/promoting-infrastructure-development-inbrazil_5kg3krfnclr4-en; obtained on 27/04/2012).
40
The ‘Global Information Technology Report 2010-2011’ ranks Brazil in the 56 position among 138 countries
(http://www3.weforum.org/docs/WEF_GITR_Report_2011.pdf; obtained on 27/04/2012). This report states that Brazil is a contradictory
country where the ‘modern business’ segments can rapidly and efficiently incorporate new technologies, while the more deep social
capabilities and infrastructure are very deficient.
41
The World Bank ranks 127 in a list of 183 countries, where 1 is the best business environment for small and medium enterprises, and 183,
the worst. Brazil´s performance is far worse than the regional average. It is also worse than most of its main competitors among emerging
markets.
See
“Doing
Business
2012”.
Available
at:
http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/profiles/country/BRA.pdf (obtained on 27/04/2012).
16
weakness, the country needs coherence and strength in its policies. Indeed, it needs an alternative
development strategy based on the heterodox tradition, which we explored in section 2. We strengthen
this conclusion further in what follows in our ‘final remarks’ as in section 5.
5. Final Remarks: In Search for Coherence and Robustness
During the 1990s and early 2000s Brazil followed macroeconomic and development policies
characterized by their coherent and faithful adherence to the Washington Consensus. Instead of growth
and stability that economic orthodoxy would suggest, the country experienced semi-stagnation and
macroeconomic instability. However, since 2004 a positive combination of growth acceleration,
macroeconomic resilience, income redistribution and poverty reduction has created a new socio-political
environment.
The presidencies of Lula da Silva (2003-2010) and Dilma Rousseff (2010 - today) have been
pushing more ambitious development goals. Nevertheless, their economic policies have been associated
with contradictions. On the one hand, macroeconomic policies have mainly been conventionally framed,
while pragmatically managed after the global financial crisis. On the other hand, development policies
have been based on a more hands-on and State-led approaches. In view of this contradiction
macroeconomic variables, such as exchange rates, interest rates, taxes and so on, which can be influenced
by policymakers, have not contributed to the developmental effort. From a historical and theoretical
perspective (section 2) we assume that the Keynesian tradition, enlarged by other heterodox contributions,
provides a better framework to pursue coherence and strength between macroeconomic and development
policies.
We have also argued that it is far from clear how strong and sustainable the recent economic
recovery will be, particularly if we consider the domestic economic and institutional flaws and the
external challenges (section 3). Agriculture and mining, despite its importance and competitiveness,
cannot provide enough jobs, income, taxes and dynamic efficiency gains to sustain a country with the
dimensions and complexities of Brazil. Therefore, the deindustrialisation process and the ‘reprimasization’ of exports must be taken as serious threats.
Thus, the challenge of the Brazilian government is to keep its developmental agenda and
economic policies not only in response to international financial crises, but, mainly, in normal times. The
search for coherence and strength in this heterodox perspective leads to the necessity to overcome the
conservative trap created by the New Consensus Macroeconomic framework. In other words, economic
policy should be reoriented towards enhancing employment and economic activity. The Brazilian
exchange rate should be administrated by the BCB, an efficient anti-speculation mechanism to control (or
regulate) capital movements should be created in an attempt to prevent financial and exchange rate crises
and avoid exchange rate appreciation as well as balance the balance of payments; also to introduce
structural economic initiatives to improve income distribution and to reduce the social gaps and
infrastructure bottlenecks.
Development policies will only deliver consistent results if the government is able to face the task
of avoiding previous flaws of the policy framework inherited from the neoliberal period, such as: (i) to
reduce deflationary impacts of monetary policy; (ii) to use fiscal policy to stimulate income growth and
distribution, which means to promote investment in public utilities, to adopt progressive taxation 42 and to
implement social programmes aimed to reduce inequality; (iii) to manage capital flows, exchange rate and
financial sector prudential regulation in order to limit currency overvaluation pressures and boom and
The Brazilian tax system has historically been contributing to increased inequality. There are few progressive taxes – those aimed toward
the rich – such as personal income tax (IRPF) and property tax (IPTU). Indirect taxation prevails. These are the cases of the federal sales tax
(IPI), the contribution to welfare financing (COFINS) and the state tax on goods and services (ICMS), which are added to the overall cost of
products. They are collected by businesses and therefore included in the prices paid by consumers. Therefore, the poorest deciles of the
population pay 32.8% of their income in taxes, while the richest deciles pay only 27.7% (Pochmann, 2008, Oliveira, 2010).
42
17
bust credit cycles; and (iv) to pursue industrial, innovation and trade policies to improve competitive
capabilities of the manufacturing sector.
Finally, and as we suggested in section 4, China´s rise represents an additional challenge, in the
sense that it tends to reinforce the problems associated with the so-called ‘natural resources curse’ and the
deindustrialization. To overcome these problems, macroeconomic and development policies must be
coherent and strong enough to complete the Brazilian modernization process in the context of a
globalized and unstable world.
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