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Eat me or drink me?

The dilemmas of Brazilian economic growth are far older and more complex than our vain philosophy supposes

ILLUSTRATIONS JOHN TENNIEL/ALICE COMMENTED EDITIONAt the beginning of the book by Lewis Carroll, the entry of Alice into Wonderland was, essentially, a question of growing or not growing. Faced by a flask, with the direction “Drink me”, the girl drinks the contents and realizes that she is “shrinking like a telescope”, which would guarantee that she would pass through a small door and reach the enchanted garden. But the situation changes and she has to grow. There then appears a cake with the message “Eat me”. She obeys, and grows to the point of banging her head on the ceiling of the room. She starts to cry. What lesson can Brazilian economists draw from Alice? Well, above all, that unfortunately, and however much the former minister Delfim Netto may believe in this, a cake does not make a country grow. Secondly, that decreasing and growing with such speed does not lead anyone to Wonderland without the help of a magic rabbit.

“Brazilian economic growth has been stagnated for 25 years, at the mercy of the humors of the market and of possible situations of disequilibrium. It is a complex question, because there are two important groups of policies in an economy: macroeconomic policy, which deals with stability, and the policies for development, responsible for long-term economic growth. In Brazil, there has not been any significant modification in either of these groups in the long term”, observes Ricardo Carneiro, an economist from Unicamp and the organizer of the recently launched study Supremacia dos Mercados [Supremacy of the Markets] (Editora Unesp/FAPESP). Far more intricate than Alice’s ups and downs, the growth of the Brazilian GDP is equally erratic. “Recent growth has not escaped from the stop and go pattern of the last few decades, which becomes evident in the volatility of the GDP, but above all in the volatility of investment” or, in the words of the economist from UFRJ Carlos Lessa, former president of the BNDES, in a recent interview, “the most that the country manages is a “hen’s flight”: one year the rate improves a little bit, the hen jumps up, but it is not sustained, so it goes back again to the floor of the hen run”.

Let’s go to the figures. For ten years, the Brazilian economy has been growing at a pace lower than the international average. The phenomenon is not recent. The Brazilian GDP expanded 2.3% in 2005, while in the rest of the world, according to the IMF, it expanded 4.3%. 19 times in the last 25 years, the Brazilian economy grew less than the world economy. Every hundredth counts: if Brazil grows, as the government states, 3.5% instead of 4.5% in 2006, it will mean that R$ 19.7 billion will have failed to be generated as wealth. The country is losing relative importance in the world economy and is becoming poorer in comparison with the other nations. A study that has just been published by the Institute of Applied Economic Research (Ipea), connected to the Ministry of Planning, the so-called Agenda for Economic Growth and Reduction of Poverty, the country will only manage to grow at rates of 5% a year in 2017. Even so, if a strong fiscal and tax readjustment is done, besides reducing the tax burden and increasing the level of investments, in particular in works of infrastructure to prevent bottlenecks in energy and logistics, which impede growth.

“Drink me or eat me?” “The idea of stop and go can be taken in the following sense: there is a process, in general of low growth, and besides it being low, it is volatile. The empirical characterization of stop and go is precisely the low growth of the product and of investment, with high volatility. This demonstrates that we do not have a model for growth implemented in the economy, which is moved as a result both of the international scenario, more or less favorable, and of the handling of the macroeconomic policy on interest and exchange rates”, Carneiro analyzes. Although the low Brazilian development is particularly worrying, there is, according to the study Latin America and the Caribbean: forecasts for 2006-2007, by Cepal, “a relative homogeneity in the growth rates in 2006 of the Latin American countries, between 3 and 6%, with the exception of Argentina and Venezuela, which will grow at rates higher that 6%”. The success on the River Plate may be a key to understanding our “unsuccess”. “The Argentinean example is emblematic. Kirchner, more conservative than Lula, was obliged to promote changes, because the picture reached breaking point. There may possibly be a reversal in Brazil leading to a breaking point. A deepening of the scenario may open the field for the current model to be buried, as was the case in Argentina”, Carneiro reckons. What model?

Between the 1930’s and the 1970’s, Brazil and other countries of Latin America grew at extraordinarily high rates. The developmentalist, or national-developmentalist, model took advantage of the weakening of the center to formulate national strategies for development that implied the protection of the nascent national industry and forced promotion by means of the State. “The nation was capable of using the State as an instrument for defining and implementing a national strategy for development. It was not a question of replacing the market by the State, but of strengthening the latter, for it to manage to create conditions for companies to be able to invest, for businessmen to be able to innovate”, observes Luiz Carlos Bresser-Pereira in his most recent article, “The New Developmentism”. According to him, from the 1980, there was the so-called “foreign debt crisis”, which induces a new political bias in the economy. With the rise in American interest rates, Brazil saw itself obliged to face up to the drying up of the external sources of financing and put as priorities the containment of imports and the increase of exports. The international context was not favorable and these actions failed, bringing the so-called “lost decade”.

ILLUSTRATIONS JOHN TENNIEL/ALICE COMMENTED EDITIONThis frustration, in the 1990’s, for the neoliberal strategy on stabilization and development to win over Brazil, whether under the name of the Washington Consensus, or as “conventional orthodoxy”. “Outside the liberal model for managing the economy, nothing seemed possible or viable. The postulates are there: economic stability with the control of inflation is a necessary and sufficient condition for growth, the opening up to abroad, independently of the timing or extent, is always virtuous, the intervention of the State is most times negative and must be minimized, restricting itself to the creation of a juridical-institutional environment for the operation of the market forces”, observes economist Luiz Gonzaga Belluzzo in his Blockages to growth. “The incapacity of this policy for promoting sustained growth is undisguisable. Despite this, the proposals for change have been disqualified.” With inflation overturned, it used to be believed that the new strategy would start a wave of intense productive modernization, in particular in industry. The fittest companies would survive the challenge of competitiveness, and corporate interests, seen as responsible for stagnation, would be dismantled. Brazil could count on the generous support of foreign capital, with financial and technological injections coming from the globalized economy.

“It was the end of developmentism and the acceptance that the nation-states had lost relevance. The free markets, including the financial ones, would take care of promoting the economic development of everyone”, writes Bresser-Pereira. With one fundamental and symptomatic detail. “While the Latin American countries were losing control over the foreign exchange rate, through the opening up of financial accounts, and saw their rates appreciate by accepting the strategy of growth with foreign savings, proposed by Washington, the Asian countries maintained their surpluses and the control of their foreign exchange rates.” Moreover, while the Latin American countries accepted indiscriminately the liberalizing reforms, carrying out, Bresser notes, “irresponsible privatizations of monopolist services and opening up their capital account”, the Asians were more prudent. Today, the economists envy the growth of the GDP of nations like Korea and China. “It was fundamental to promote competitiveness through market mechanisms. The a priori choice of strategic sectors and companies became anathema. In the place of sectorial policies, horizontal policies that simultaneously stimulated all the sectors to produce in conditions of price and quality of the world market”, observe Mariano Laplane and Fernando Sarti, both from Unicamp, in their study Prometheus Bound, part of The Supremacy of the Markets.

“Bound, like Prometheus, in Aeschylus’s play, by the very incapacity to resume industrial development, Brazil wasted, and is wasting, available opportunities in a favorable international context”, they evaluate. To intensify things, the fiscal crisis of the 1980’s, which was a byproduct of the external crisis, made, in the imagination of the citizen, the distortion associate itself directly with the inefficiency of the State, transformed into a villain. “The local elites stop thinking with their own heads, they accept advice and pressures coming from the north, and, without a national strategy for development, the countries see their development staunch. It was a negative proposal, which supposed the possibility of the markets coordinating everything automatically and the State ceasing to carry out the economic role that it has always had in the developed countries: complementing the coordination of the market to promote development and equity”, notes Bresser-Pereira. The neoliberal result was no better than the “lost decade”.

“If the success of any strategy for development must be a reduction in the distance that separates us from other developing countries, which have taken advantage of the opportunities, the neoliberal strategy must be evaluated as a resounding failure”, Laplane and Sarti observe. Since the end of the 1980’s, Brazilian companies have reorientated their growth towards the export market, making localized defensive investments (rationalization and modernization), to the detriment of investments in expansion or installation of new productive units. The adjustment of the 1990’s worsened the picture. Companies reacted to the opening up to abroad by increasing specialization and rationalization, with a strong reduction in employment. Everything happened with low investment and by the search for foreign partners, in an intense process of denationalization. “Producers stayed restricted to the previous advances made abroad and there were no domestic innovative efforts. It was the adoption of incorporated technology, which led to the increase in imports, seen as a cheaper and shorter route to have access to foreign innovations and to gain competitiveness”, the researchers observe.

The option was for “drink me”, which led, they note, to a “regressive specialization” of Brazilian industrial production and, as a consequence, industrial expansion only took place with an increase in the demand for hard currency. The authors reject the threadbare thesis of the “exogenous” factors (crises in Mexico, Asia, Russia etc.) as attenuating factors to explain the failure of the model. “The unsatisfactory results were a consequence of the productive transformations themselves that occurred, independently of the external shocks”, they warn. After all, however much we exported, we would import far more. The so-called obsession for inflationary stability, the hallmark of the neoliberal model, Bresser and Carneiro observe, became the central objective of the macroeconomic policy, achieved by means of foreign exchange, monetary and fiscal management. “The much praised stability of prices, at the cost of a trifling growth, by basing itself at a first moment on the overuse of the exchange rate anchor, and at a second moment, on a precarious policy of inflation targets, demanding high real interest rates, ended up by producing macroeconomic instability by expanding the domestic public debt and driving a new cycle of external indebtedness, in part by the attraction of short-term foreign capital”, in Belluzzo’s evaluation. The foreign money was arriving, but it stayed little time in Brazil.

While this happened, in Asia, countries like China were investing in a program of reforms that combined an aggressive export strategy, attracting foreign direct investments in the liberated zones, and all this regulated with strong intervention of the State. Accordingly, the Chinese, with growing competitiveness (although one may now fear a brake on this 10% annual growth, seen as unsustainable by economists), are becoming the largest receivers of American direct investment, at the same time gaining increasing participation in the market of the United States. The two-way route not adopted by Brazil (which was only concerned with the entry of foreign capital) was fatal to our model for growth. Also, the “concentrated deconcentration” of the world GDP benefited China and the developing Asians. We took another road and we continue on it. “Faced by a strong expansion in liquidity and in international trade, in 2003, the option chosen was to widen the immediate gains by means of the appreciation of the local currency. If this kept the inflation rates low and allowed consumption abroad, it sacrificed the increase in the international reserves obtained with the improvement in the exports, and a better competitiveness of the exports of manufactured goods”, Belluzzo notes.

The researcher puts as an attenuating factor, at a first moment, the desire to construct a sphere of credibility for the current government. “The inflexibility of the Brazilian regime when  faced by the characteristic of price formation has implied an abusive use of the interest rate and sacrificing the growth of the product and of employment to achieve the targets”, he warns. For Carneiro, the situation is even more precarious. “The maintenance of past policies has generated an external vulnerability. The gains came from the exports, and so the growth did not take place because of a specific policy practiced by the government. On the contrary, the appreciation of the real goes against the current of the increase in exports, and we will soon arrive at a dilemma to sustain this growth, and it also stimulates imports.” So growth can be 4% in one year, and in another, nothing. “The government has not outlined a long-term horizon for development. The State needs to act more decisively, signpost which the priority sectors are, create credit, tariff, and tax incentives. It also has to maintain policies for social development. If there is no policy for accelerated growth, the social policy, individually, does not sustain itself”. Nor do the high interest rates help.

“Interest rates on a high level are a powerful discouragement for growth. You just have to highlight the notion of opportunity cost that is present in the rate. In the Brazilian case, high interest rates are offered, on securities with high liquidity and low risk, which offer an alternative to productive investment’, in Belluzzo’s analysis. Furthermore, the country’s infrastructure has to be expanded. “It will be difficult for the expansion of investments to be carried out without a decisive participation of the public sector, which is contradictory to the current magnitude of the primary balance.” Bresser-Pereira proposes the adoption of the new developmentism, which rejects the idea that countries with medium development need external savings to grow, as the liberal orthodoxy preaches. “History teaches us that countries develop almost exclusively with internal resources. The Asians have resorted very parsimoniously to external savings, in general, growing with a surplus in current account.” The new developmentism, he continues, believes in the management of the foreign exchange rate, which implies a moderate interest rate, which makes it possible to buy reserves when the capital inflows are very high.

“To ensure the continuity of growth, in particular the resumption of growth, the developmentist State would have to be contrasted with the regulatory State. Its central mission would be to make it viable to increase the rate of investment, but not necessarily nor as a priority by means of minimizing the jurisdictional risk (as in the case of the Law on Bankruptcies, the Agencies, or the independence of the Central Bank)”, Belluzzo and Carneiro ponder. ‘The crucial role of the State would be the creation of mechanisms of coordination and support affording private investment less insecurity as to the long-term course of the economy. Overcoming this constraint is one more challenge for overcoming the unbearable lightness of growth.” Will it be possible? For Laplane and Sarti, if “the wasting of opportunities for growth is a result of the anti-growth bias of the macroeconomic policy and of the absence of an industrial strategy of the FHC era, the Lula government has not been capable of reversing this picture.” Or, according to economist Eduardo Gianetti, from Ibmec, ‘it is not by dint of monetary and foreign exchange policy that we will resume sustained growth; we are going to have to meddle with structural things that have up to now not been an object of the government’s attention”.

“I will not do any magic with the economy”, claimed the recently elected president. We will certainly not reach Wonderland with enchanted potions or cakes. “Even with the gale in favor, only a black magic symposium will be capable of producing a sustained growth of 5% a year with the key prices of the economy, the foreign exchange and interest rates, completely out of place”, wrote Belluzzo in the Carta Capital magazine. Unfortunately, there are more mad hatters than magic rabbits in our economy.