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The giant that shrunk

Researcher analyzes the difficulties for resuming growth

The dynamism shown by the Brazilian economy in the course of the 50 years between 1930 and 1980 distinguished Brazil in the world scenario. Few were the nations that could boast an average growth of 6% a year, which made the country prominent in the period of modern industrialization. From the 80’s, though, the nation’s economic history took the opposite route, and the average expansion of the Gross Domestic Product (GDP) shrank to something around 2% a year one third of the previous average.

In part, it is true, this trend reflected the global downturn in the rates of growth. What has made part of the economists uneasy, though, is the fact that Brazil has not managed to take advantage of some favorable conditions that, in the course of the 90’s, marked the world economy, including here some emerging countries, and to go back to its original route. The slowing down saw in the new century, the unemployment rates continue to grow, while average real income goes on shrinking. Added together, these indicators have taken Brazil away from the group of countries in which it stood out last century.

This scenario has led some economists to put forward alternatives for breaking this kind of “resistance” to resuming growth. Ricardo Carneiro, a professor at the Economics Institute and a director of the Center for Studies of Economic Circumstances and Policy of the State University of Campinas (Unicamp), is part of this group. This is the reason why he has devoted years to developing research in which he has sought to explain the reasons why the country has not managed to recover its breath and to carry out the necessary correction to its course.

Historical circumstances
The synthesis of this venture, which enjoyed support from FAPESP by means of a scholarship for research abroad, and, afterwards, with the continuation of works in the ambit of the thematic project financed by the institution, resulted in the book Desenvolvimento em crise, A Economia brasileira no último quarto de século – Development in a crisis – The Brazilian economy in the last quarter of the 20th century, which came out last year, from the Unesp publishing house. In it, Carneiro examines the conditions that made it possible for Brazil to grow rapidly between 1930 and 1980; the reasons why they left the scene; and how these factors weighed down in the “exhaustion of the dynamism of Brazilian capitalism”.

The text evidences the permanent interplay between the international and domestic factors that interfered with the vitality of the Brazilian economy; it shows the weight of specific historical circumstances, which one moment would make external determinant factors preponderant, and the next, internal ones, as a stimulus or an obstacle to Brazilian growth; it also points out the different degrees of national dependence on the international economic order.

The relative stability of the standard of technology, which up until the 80’s spread and consolidated the productive-technological matrix that originated in the Second Industrial Revolution, the author of the book sustains, was fundamental for the country to manage to overcome even the adverse international contingencies that marked the period from 1929 to 1950 and keep on growing. In the same direction, the domestic market was extremely pertinent, helping in the growth of the Brazilian product. From the external point of view, there were also contributions from the availability of funding and a prevailing international economic order, whose trade and finance rules favored the peripheral countries, allowing them greater autonomy in planning and carrying out their respective domestic economic policies.

From the domestic angle, the direct intervention of the State in the economy and its liaison with private sector represented another pillar. In structural terms, the combination of the productive sectors that led economic expansion in the period, along with the possibility of synchronizing long term finance for meeting the demand for investments at the terms and in the volumes required were equally pertinent. In the course of this trajectory, there were a few jolts that defined three periods analyzed in Development in a crisis.

The first is located in 1973, the time that the regime of fixed but adjustable exchange rates was dumped, which brought an end to the order of Bretton Woods. This was the name given to the Monetary and Financial Conference that took place in 1944, with the participation of 44 countries and the objective of planning the stabilization of the international economy and of the international currencies, then jeopardized by the Second World War. This meeting saw the birth of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

National plane
On the domestic plane, in the middle of the same decade, while the rise in oil prices was delineating an international and domestic crisis, the Ernesto Geisel government announced, in 1975, the 2nd National Plan for Economic Development (II PND), which intended to transform Brazil into an “emerging power”, and of including it in the list of highly industrialized countries, by means of replacing imports, increasing exports and expanding the domestic consumer market. The relative failure of II PND, which had as a backcloth the growing aggravation of the international conditions and Brazil’s dependence on foreign finance, led to what Carneiro calls the overturning of theory of national-development .

The results that appeared were very different from those desired amongst other things, to raise GDP to US$ 120 billion and per capita income to US$ 1,000, four years layer, in 1979. There followed the 80’s, known as “the lost decade”, characterized by the foreign debt crisis of the peripheral countries and by the transfer of funds abroad, which increasingly disorganized the Brazilian economy and contributed towards letting loose hyperinflation.From then onwards, the vigorous and rapid growth achieved from the 30s was interrupted. The second jolt took place. Brief cycles of recession and expansion in the economy alternate, and the rate of growth just followed the increase in the population. Foreign finance, until then abundant and an important source of investments in the country, disappeared. Simultaneously, payments for servicing the foreign debt narrows down the alternatives for development.

Strictly speaking, the slowing down in the pace of growth was already to be seen in 1974, when the “economic miracle” cycle came to an end. But the arrival of the 80s stamped another profile on it, oscillating between absolute reduction and an intense, but episodic, variation. Between 1981 and 1983, the downturn was sharp. In the interval between 1984 and 1986, in which year the Cruzado Plan was instituted, there was expansion just as marked as the previous slump. Finally, from 1987 to 1989 there was stagnation again.

Pattern of growth
This was the greatest expression of the absence of a pattern of sustained growth, portrayed in the deep uncertainty with regard to the Brazilian economic scenario. Brazil enters the 90s without any vitality, in spite of the recovery in the international scenario, which makes room for opportunities for improvement in the peripheral countries, but shows changes that are translated into immense challenges for the developing nations. With the fall of the international interest rates, financial investments became highly attractive for the peripheral countries. The economic and financial liberalization sponsored by many Latin American countries, combined with the liquidity of capital in search of more attractive profits than those offered by the developed countries, were decisive for putting the continent, and, with it, Brazil, back on the scene again in the international financial circuit.

Back on the international stage and heartened with the expansion of the flows of trade and investments, many amongst these countries plucked up the courage to promote structural reforms in the areas of trade, finance and production. In the world, a global acceleration in the rates of growth is to be seen, albeit in an unequal manner. The proposal for a fully liberal order also takes shape, in which prominence is given to the efficiency of the markets as a mechanism for allocating resources and the idea that interference by the State in the economy is ineffective.

In the wake of globalization, changes of every order and on different planes of the commercial, financial and productive tissue are intense and swift. Many of these changes become protagonists in decisive reversals for the peripheral countries. The speed imparted on the technological innovations in the developed countries, back in the 80’s, for example, meant that many of them ceased to keep updated, which made it difficult or even prevented them from keeping up their respective processes for replacing imports.With this, and on account of the unavailability of technology and of economically viable production scales, it became difficult to bring in the new productive processes instituted in the developed countries.

Globalization imposed profound changes on the behavior of foreign direct investment. Mergers and acquisitions and global sourcing come onto the scene. The joint action of these factors results in overburdening the balance of trade of the peripheral countries. All together, they came to expand remuneration on capital, without the corresponding generation of hard currency, and increased in a global manner the imports carried out by these economies. The problem was aggravated by the volatile nature of a considerable portion of foreign loans. Moreover, the integration of the country with globalization resulted in exacerbated swings in the exchange rates and in excessively high interest rates, a doublet that jeopardized domestic growth.

Brazil did not escape the intensity and the variety of the changes implemented in the 90’s. Together with the resumption of the flows of capital, a currency anchor was adopted, inflation was controlled, imports grew, the process of privatizing the state sector companies put the country in the international limelight, and the role of the State was reduced extraordinarily, while the financial opening up gained ground. Ground that from Carneiro’s point of view, was very liberal, badly regulated, and which allowed excessive external vulnerability for the Brazilian economy. This was visible in the dimensions of the short and long term foreign debt and in the deficient transformation in production, the most obvious result of which is Brazil?s hardly dynamic participation in foreign trade.

With the institution of the Real in 1994, Brazilian economic policy, in an environment of complete financial opening up, adopted a fixed exchange rate. The stabilization program gave an impulse to the recovery of GDP and of earnings, although it did not manage to reduce unemployment substantially. But it soon ran out of breath. The cycle of growth started to decelerate in mid-1997. It did not take long for the effects of the fixed exchange rate on the economy as a whole to prompt a constant and growing deterioration in the indicators, pushing the country into a crisis.

Even so, it was maintained until 1998, when a further correction to economic policy instituted the floating exchange rate, inflation targets, a tighter fiscal policy and an independent monetary policy. “The results of the change, as translated into the timidity of the expansion of GDP, the rise in the level of unemployment and the reduction of average real earnings, inflation, show that this recipe does not work either”, he explains.

According to Carneiro, by adopting the fixed exchange rate system and, afterwards, the floating rate one, Brazil merely replaced the focus of its economic instability. Over 20 years, says he, the villain was inflation. Now, the country has been submitted to the instability caused by the excessive swings in the exchange rate. As an emerging country, indebted and with a low participation in the international market, Brazil does not attract long-term capital, and it suffers from the effects of the volatility of short term capital and from how this is reflected in the increase of the public debt, part of its indexed to the dollar.

“The alternative, for us to resume growth and solve the problems tied up with deceleration, is to abandon the idea that, in a globalized environment, it is possible to promote development simply by deregulating the economy and letting the market conduct the process”, says Carneiro. “Brazil cannot want to sustain a model of economic policy as if it were a developed country.”

The project
Liberalization, Stability and Growth (A Balance and Perspectives of the Brazilian Experience in the 90s) (nº 99/02003-8); Modality Thematic project; Coordinator Luiz Gonzaga de Mello Belluzzo – Economics Institute of Unicamp; Investment R$ 94,388.28