From stabilization to inclusion

Gaining control of inflation in Brazil required steadfast commitment. As president, FHC struggled with reducing fiscal outlays to meet strict monetary objectives, but confidence in the real had unintended effects as consumers discovered stable buying power.

Market confidence was cultivated by Princeton-trained Arminio Fraga (b. 1957), who served as Governor of the Central Bank of Brazil from 1999 to 2002; his deft hand guided Brazil toward macroeconomic stability (Committee Member Profile: Arminio Fraga, 2013). Fraga argued that factors external to a developing country's domestic fundamentals frequently drove the flow of funds to and from the country. When monetary policy was loose in the main financial centers of the world, developing countries tended to have easy access to capital. Conversely, developing countries faced problems following a Federal Reserve tightening, or negative global shock. In periods of loose monetary policy when capital was too easily available this caused complacency in the developing country's financial sector, associated with loan growth that outstripped real GDP growth several times over, which in turn produced financial fragility in the developing country. The danger signal for investors was the excessive accumulation of short-term debt, which eventually led to crisis when external monetary policy tightened. Fraga's suggestion that capital in an underdeveloped country could sometimes come “too easily” illustrates how far the hybrid model in Cardoso's government was from traditional dependency theorists.

Brazil's hallmark inequality became more apparent as Brazil began to benefit from opening to global markets. Globalization favored the skilled or those tied to commodities in demand from China; those in the informal sector fell behind. After three unsuccessful runs, the election of Luiz Inacio Lula da Silva as president was a tacit acceptance by Brazilian elites of the need to promote social inclusion. Markets were jittery but accepted Lula's domestic populism. Ever the pragmatist, Lula had appointed largely conservative economists to build confidence (Loureiro, 2009, 132). While an experienced team managed monetary and exchange rate policies, he crafted a widening policy space for social supports. His “family purse” became a regional prototype for conditional cash transfer (CCT) approaches. Families received payments to Bolsa credit cards if their children met 85 percent of school attendance norms and completed health checkups. Combined with increases in the minimum wage and healthy GDP growth, Brazilian poverty was cut in half and inequality declined for the first time anyone could remember.

Lula deployed his political skills to build global coalitions among emerging market partners, fortifying not only the South American common market Mercosur but also reveling in the BRICS denomination. Strong macroeconomic fundamentals maximized the opportunities created by attending to the Chinese market for minerals and food. Mining giant Vale brandished its global reach while highly productive agricultural producers created truck queues bringing soya to the Asian market. Large firms such as Gerdau in steel, Odebrecht in construction, or Embraer in aerospace flourished, but SMEs without easy access to preferential capital offered by BNDES, the national development bank, suffocated under high logistics costs and oppressive taxes.

Weaknesses in microeconomic foundations plagued Dilma Rousseff, Lula's successor to the Worker's Party governing mantle. Although Brazil had escaped severe damage from the global financial crisis due to self-insuring reserves of capital, restarting growth was problematic.

When other countries joined in this competitive devaluation process, this was dubbed the “international currency wars” by Finance Minister Guido Mantega (b. 1949) in 2010, a USP Sao Paulo-trained economist with a PhD in sociology (Profile of Guido Mantega, 2010). These “currency wars,” a phrase which quickly became popular, were the result of divergent policy goals. As the USA printed cash to stave off domestic depression, global capital markets channeled some of this liquidity to Brazil. With an ample supply of dollars relative to reals, the Brazilian currency rapidly strengthened. In counterpoint to the received orthodoxy at the time, Mantega used currency controls to fight appreciation and maintain competitiveness in the Brazilian economy. This policy helped international financial institutions to an appreciation of the effectiveness of currency controls in the global economy (IMF, 21 April 2012).

But the currency intervention used to moderate competitiveness effects on the real exchange rate wasn't enough to overcome the lack of structural competitiveness. The two combined to deliver a golpao — a huge punch in the gut — to Brazilian industrial growth. Dilma made gestures toward investment in high technology and innovation but the neglect of infrastructure and education strangled success. Trained by another female economist, Maria da Conceiςao de Almeida Tavares, Dilma's heart is in the structuralist model of state intervention. The straight­jacket of globalization, however, requires that state capitalism be moderated by capital-friendly policies.

Just as Brazil had begun to anticipate the global stage of the World Cup in 2014 and the Olympics in 2016, the microeconomic pressure cooker blew open. Linked by social networks, Brazilians took to the streets to protest against massive investments in athletic complexes while infrastructure decayed. Middle class aspirations veered toward improving education and health services — not a sports party that only elites could afford. Dilma recovered her former self as student protestor imprisoned by the military, and managed new initiatives for the social sector. But the complexities of Brazilao make such band-aid solutions fragile.

Brazil faces tough tradeoffs. Rent-seeking behavior on the part of elites must diminish to create fiscal space for inclusive growth. The Brazilian state cannot continue to provide early pensions for formal sector workers while its public school students cram into two or three poorly- staffed sessions a day. People and businesses cannot continue to suffer the tax on productivity exacted by hours each day wasted in traffic or attending to bureaucratic regulations. With­out a burst in productivity growth rates, Brazil will remain in the middle income trap. But engineering these changes in Brazilao is a formidable challenge. No intellectual leader — neither politician nor economist — appears poised to guide Brazil in this tenuous transition toward sustainable, inclusive growth.