Saad-Filho Neoliberal Economic Policies in Brazil 1994-2005

New Political Economy, Vol. 11, No.
1, March 2006
Neoliberal Economic Policies in Brazil

(1994 – 2005): Cardoso, Lula and the
Need for a Democratic Alternative
MARIA DE LOURDES ROLLEMBERG MOLLO & ALFREDO
SAAD-FILHO
This article offers a political economy interpretation of the continuation of

neoliberalism in Brazil under the Workers’ Party (PT) administration led by
Luı́s Inácio Lula da Silva from 2003 onwards. Neoliberal economic policies
were closely associated with the government of Fernando Henrique Cardoso
(1994– 2002) and they were widely perceived to have been rejected by voters in
the 2002 elections. Many observers found it surprising that the new administration
maintained its predecessor’s economic programme. The government has also
rejected calls from its core supporters to change course in order to deliver sustain-
able growth and distributional and welfare improvements in Brazil.
It would be unhelpful to approach these apparent paradoxes with schematic
categories such as the ‘ideological capture’ or ‘treason’ of the PT leadership.
While the latter is analytically uninteresting, the former describes reality
accurately but fails to explain it. This article attempts to fill this gap through a
review of the trajectory of neoliberalism in Brazil since 1994. It shows that, in
spite of the difficulties involved in the search for alternatives to neoliberalism
(due, in part, to the economic vulnerabilities imposed by neoliberalism itself),
alternative policies were, and remain, feasible. However, their implementation
requires confrontations with ‘the market’ and the imposition of costs on specific
social groups, especially those that have gained most from the neoliberal
re-regulation of the economy. The government’s reluctance to pursue this
change of course has had severely negative consequences for the majority of
the population, especially the poorest social groups. These are precisely those
that had expressed hopes that Lula’s election would bring about social, political
and economic changes in Brazil.
The political exhaustion of neoliberalism in Brazil, and the rejection of
neoliberal economic policies by the majority (including a significant part of the
elite), were evident in the opinion polls long before the 2002 elections. Many
commentators and political activists claimed that the neoliberal reforms were
Maria de Lourdes R. Mollo & Alfredo Saad-Filho, c/o ASF, Department of Development Studies,
School of Oriental and African Studies, University of London, Thornhaugh Street, London WC1H
0XJ, UK.
ISSN 1356-3467 print; ISSN 1469-9923 online=06=010099-25 # 2006 Taylor & Francis
DOI: 10.1080=13563460500494933
Maria de Lourdes R. Mollo & Alfredo Saad-Filho
the leading causes of Brazil’s persistent economic underperformance, and that

their continuation would lead to the deterioration of the country’s macroeconomic,
social and welfare indicators, and the further deterioration of income and wealth
distribution.
The Cardoso administration was closely associated with the neoliberal
transition. The shortcomings of this administration and the country’s seemingly
intractable economic problems since the currency crisis of 1999 prompted a
drastic decline in the government’s popularity in the run-up to the 2002 elections.
The administration was tainted by accusations of malpractice and corruption, and
most observers agreed that the social tensions in the country had been increasing
dangerously. The neoliberal camp fractured into several factions. Five of the
presidential candidates criticised the government’s track record relentlessly
during the campaign, and the sixth – José Serra, a well-known economist and a
successful health minister, and the official candidate of Cardoso’s coalition –
was ambivalent about the government’s performance. All candidates purported
to offer a left-of-centre alternative to the neoliberal consensus, two of them
representing small parties on the far left of the political spectrum. Cardoso’s
supporters gradually deserted him.
Lula, the founder and leader of the PT and Cardoso’s main adversary in the
previous two elections, acquired an early lead in the opinion polls. In the early
stages of the campaign, it seemed that his victory would lead to a decisive
rupture with neoliberalism. After all, Lula’s trajectory of struggle as a trade
union leader, his unquestionable honesty, the radical image of his party and its
association with left-wing organisations (including Central Única dos
Trabalhadores (CUT), a large trade union confederation, and Movimento dos Tra-
balhadores Rurais Sem Terra (MST), the landless peasants’ movement) seemed to
show that a new political compact was bidding for power in Brazil. Hopes ran high
in the PT camp and among the left. However, these hopes have been dashed. The
Lula administration has been following neoliberal policies with at least as much
determination as its predecessor, in spite of the economic, social and political
costs of this strategy for the PT and its core supporters.
This article explains these policy choices, their successes and limitations in six
sections. The first briefly reviews the theoretical underpinnings of the economic
policies associated with neoliberalism and the political economy critique of
these policies. The second examines the implementation of neoliberal policies
by the Cardoso administration, through the real stabilisation plan. The third
reviews the new policy framework introduced by Cardoso, and continued by
Lula, after the currency crisis of January 1999. The fourth examines the social
and welfare implications of neoliberalism. These three sections show that,
although the neoliberal reforms helped to eliminate high inflation, they also
destabilised the public finances, increased Brazil’s external vulnerability and led
to the deterioration of important social and distributive indicators. Neoliberalism
also reduced Brazil’s economic growth rates, which compare unfavourably with
the growth rates of the previous half-century. In sum, the reforms did not fulfil
the high expectations of the Cardoso and the Lula administrations. The fifth
section explains the continuation of neoliberalism in the Lula administration
and examines its outcomes.1 The sixth summarises the article and draws the
100
relevant conclusions. It also includes pointers for an alternative economic strategy

for Brazil, in order to substantiate the argument that alternatives were indeed
available to the Lula administration. In other words, in the Brazilian case the
claim that ‘there is no alternative’ to neoliberalism is incorrect.
Neoliberal economic policies in Brazil

Brazilian economic policies shifted gradually towards neoliberalism since the late
1980s and with increasing determination in the wake of the real stabilisation plan
of 1994.2 It is well known that neoliberalism is based on the assumption that
market regulation is the most efficient way to coordinate economic activity,3
and the neoliberal transition required the curtailment of the wide-ranging
economic roles of the Brazilian state.4 This included the transfer to ‘the
markets’ of several functions of the state, especially the intersectoral and intertem-
poral allocation of resources (that is, the allocation of capital, labour and output,
and the balance between investment and consumption) and economic management
(through the elimination of strategic planning and the abolition of controls on most
intermediate and consumer goods prices). This was achieved through extensive
regulatory reforms, the closure of several government agencies and departments,
the privatisation of assets worth approximately US$100 billion (18.5 per cent of
gross domestic product (GDP) in 1994) and the liberalisation of domestic
finance, foreign trade, exchange rate movements and the capital account of the
balance of payments.
Advocates of the reforms claim that market processes promote economic
efficiency and growth, gains in employment and distribution, and international
convergence. From this viewpoint, state intervention is justified only to tackle
market failures, which are perceived to be exceptional and largely transitory.
For example, vertical (sector-specific) industrial policies, including tax rebates,
subsidies and shifts in relative prices, are frowned upon because they are
deemed to distort market outcomes.5 Horizontal (across the board) policies are
preferred because they are less discretionary and the liberalisation of trade,
finance and capital flows plays an essential part in the reforms. The threat of
competing imports limits the prices that domestic firms can charge, and the
wages that their workers can realistically demand. At the same time, financial
and capital account liberalisation curtails the state’s capacity to implement non-
neoliberal policies (such as expansionary fiscal and monetary policies), because
of the threat of capital outflows. It will be shown below that these neoliberal
policies can support the elimination of high inflation, but that their economic
and social cost can be very high.
Monetary policy plays a prominent role under neoliberalism. It assumes that the
quantity theory of money is valid and, therefore, that money is neutral in the long
run (that is, it cannot influence the level and composition of output and employ-
ment). It follows that inflation is caused by ‘too much money chasing too few
goods’. Because the state can presumably control the supply of money (for
example, by limiting its deficits and regulating the behaviour of the commercial
banks), inflation is always due to monetary policy mismanagement. One way to
impose ‘healthier’ policies is to reduce the scope for discretion in monetary
101
policy. This can be done, for example, through the imposition of such policy rules
as exchange rate targeting (which increases the influence of foreign capital flows
on the determination of the supply of money),6 or through inflation targeting
(which uses the interest rates to control demand and inflation, regardless of
their consequences for domestic financial stability and the balance of payments).7
These policy rules institutionalise the neoliberal priority of price stability over the
growth of output and employment, and curtail the government’s ability to
implement anti-cyclical policies.
Interest rate manipulation is normally the preferred neoliberal monetary policy
instrument, because it is supposedly non-distortionary: it is taken to affect all
economic agents identically, and the government cannot pick ‘winners’ or
‘losers’. The manipulation of interest rates fulfils four important roles under
neoliberalism: first, demand (inflation) control, which is especially important in
inflation targeting systems; second, the attraction of capital flows to close the
balance of payments and achieve the target level of foreign currency reserves
(these flows also signal the financial markets’ appreciation of the government
policies); third, government financing, especially the regulation of the demand
for public securities (all else being equal, ‘disciplined’ governments implementing
‘credible’ policies should be able to finance their debt at a lower cost than their
‘undisciplined’ rivals); and fourth, achieving the desired level of domestic
savings (there is, presumably, a positive relationship between interest rates and
the savings rate). It follows that the interest rates tend to be higher under neoliber-
alism than under an alternative policy regime, where similar objectives may be
pursued by a broader set of instruments.8 From the neoliberal viewpoint, this is
not necessarily a disadvantage. High interest rates offer incentives to savers and
increase the availability of investment funds, which should lead to higher
growth rates in the long term. High interest rates in the poor countries also
reflect their relative lack of capital, and the attraction of foreign savings should
support higher levels of investment and global economic convergence.
Neoliberal macroeconomic policies have been criticised in an extensive
political economy literature. For example, post-Keynesian and Marxist political
economists reject the claim that greater scope for market processes leads to econ-
omic stability and promotes domestic and international equality. They emphasise,
instead, the destabilising potential of market processes and the role of competition
in the creation of poverty and inequality. Drawing upon empirical studies, they
claim that financial liberalisation and international capital mobility often increase
financial fragility and trigger balance of payments crises.9 They also argue that
financialisation drains resources from production, fosters unemployment10 and
reduces state capacity to stabilise the economy, especially in poor countries.11
Finally, several Marxists claim that competition concentrates and centralises
capital and leads to international divergence.12
These political economists also argue that the higher levels of uncertainty,
volatility and liquidity preference in poor countries can trigger capital flight in
spite of (and sometimes because of) their higher interest rates.13 Capital
account liberalisation facilitates these destabilising flows. Capital flight from the
periphery can also drain resources that might otherwise have supported local
investment and balance of payments stability.14 In sum, the neoliberal reforms
102
foster the expansion of the financial sector, the concentration of income within and
between countries, and the deterioration of working conditions in several indus-
tries.15
Marxists and post-Keynesians reject the neoliberal assumption that higher
savings foster higher investment on two grounds. First, foreign savings often
finance consumption rather than investment and, therefore, replace (rather than
supplement) domestic savings.16 Second, many post-Keynesians claim that prior
savings are not required for investment. For them, successful long-term invest-
ment requires a ‘functional’ financial system, which can satisfy the expanding
credit needs of the economy.17 For these critics of neoliberalism, high interest
rates in short-term assets (especially public securities) compel the financial
institutions to raise their liquidity preference and behave speculatively. This
will reduce the supply of credit for investment and create incentives for foreign
borrowing, which detracts from the development of the domestic financial system.
Finally, all political economists reject the quantity theory of money and the
assumption that money is neutral. In their view, contractionary monetary policies
can have long-term negative consequences for investment, employment, wages
and growth. Their theories of inflation tend to be relatively complex, and to
include the institutional features of the economy, distributive conflicts and the
credit mechanism. They also reject monetary policy rules in most cases. In
order to control inflation, they prioritise the stabilisation of the balance of
payments, fiscal and financial reforms and negotiations between the main social
actors to address the existing distributive conflicts.18
The real plan (1994– 9)

The most significant achievement of the neoliberal decade was the elimination of
high inflation, as shown in Table 1. However, the 1994 real plan was not only an
anti-inflation programme. It also included policies consolidating the neoliberal
transition. These policies, explained in the previous section, included high interest
rates, financial, trade and capital account liberalisation, the privatisation or closure
of state-owned productive and financial enterprises, fiscal and labour market
reforms, de-indexation, currency overvaluation and the closure of several state
agencies and departments.19
These policies were not entirely new. For example, privatisations and trade,
capital account and financial liberalisation were introduced in the early 1990s,
and the systematic reduction of state policy-making capacity started in the
1980s. The real plan was innovative only insofar as it deployed these policies
methodically, as part of an ambitious attempt to eliminate simultaneously two
foes of the neoliberal order – high inflation and the relics of a presumably
exhausted process of import-substituting industrialisation.20
High interest rates played a key role in the elimination of high inflation and the
completion of the transition to neoliberalism. Brazilian real interest rates rose
significantly in 1992, when the capital account of the balance of payments was lib-
eralised.21 They increased further with the real plan, peaking after the Mexican,
Asian and Russian financial crises. Although they declined significantly after
the 1999 crisis, Brazilian interest rates have been among the highest in the
103
TABLE 1. Brazil: macroeconomic indicators, 1990–2003
GDP Real DPD interest Primary

growth rate Inflation rate interest rate DPD payments fiscal surplus
(%) (%)a (%)b (%GDP)c (%GDP)d (%GDP)
1990 24.3 1476.7 25.6 17.6 n.a. 4.6
1991 1.0 480.2 8.6 15.9 29.5 2.7
1992 20.5 1157.8 37.9 15.6 47.3 1.6
1993 4.9 2708.2 9.5 17.0 67 2.2
1994 5.9 1093.9 32.0 21.7 32.2 5.2
1995 4.2 14.8 33.5 22.7 7.5 0.3
1996 2.7 9.3 16.8 26.1 5.8 20.1
1997 3.3 7.5 16.6 29.3 5.2 21.0
1998 0.1 1.7 26.5 34.1 7.9 0.0
1999 0.8 20.0 4.7 39.4 13.2 3.2
2000 4.4 9.8 7.2 39.4 8.0 3.5
2001 1.3 10.4 6.5 41.6 8.8 3.6
2002 1.9 26.4 27.0 44.1 14.2 3.9
2003 0.5 7.7 15.3 44.0 7.9 4.3
2004 5.2 12.1 3.9 45.0 7.1 4.6
a
General Price Index, domestic availability (IGP-DI).
b
Calculated from monthly Selic rates and centred IGP-DI.
c
Net domestic public sector debt (December, excluding 1990 ( ¼ January 1991).
d
Nominal interest payments by the municipal, state and federal governments (including social
security), the central bank and the state-owned enterprises.
Sources: Central Bank of Brazil (http://www.bcb.gov.br) and Ipeadata (http://www.ipeadata.gov.br).
world for at least a decade. High interest rates helped to attract large inflows of
foreign capital, especially in the early and mid-1990s, leading to a significant over-
valuation of the currency, the real (see Table 2 and Figure 1). This overvaluation
was deliberately pursued by the Brazilian authorities, in order to boost the impact
of the liberalisation of imports.22 Currency overvaluation and import liberalisa-
tion, along with fiscal reforms and de-indexation, were the functioning core of
the real plan.
The new policy regime lifted real wages by 15 per cent in dollar terms in the
mid-1990s.23 This wage increase, the accelerated liberalisation of imports and
the resumption of consumer credit transformed the possibilities of consumption.
The country was transfixed by the appearance of previously unavailable consumer
goods, at affordable prices and available on credit. Import liberalisation and
inflation stabilisation ensured Cardoso’s presidential election in 1994 and his
re-election in 1998. Cardoso presented his government as the harbinger of ‘mod-
ernisation’ and the standard-bearer of the ‘new globalised economy’, and he set
out to eliminate the ‘distortions’ arising from import substitution. However,
Cardoso’s policies had a severe impact on the balance of payments, local industry
and employment. Imports climbed from US$27.8 billion in 1992 to US$43.1
billion in 1994 and US$75.7 billion in 1998. Over the same period, the trade
balance shifted from a surplus of US$12.1 billion to a deficit of US$16.7
billion, and the current account moved from a surplus of US$6.1 billion to a
104
TABLE 2. Brazil: selected balance of payments indicators, 1990– 2004 (US$ million)
Trade Current Portfolio Interest Foreign International

Exports Imports balance account FDI investment paymentsa debt reservesb
1990 35,166 28,010 7156 23784 364 472 10,868 123,439 28183
1991 34,917 28,136 6780 21407 87 3808 9493 123,910 213,035
1992 39,873 27,818 12,055 6109 1924 14,465 8278 135,949 16,964
1993 42,509 34,456 8053 2676 799 12,325 9329 145,726 25,214
1994 47,937 43,128 4809 21811 1460 50,642 8140 148,295 37,887
1995 51,435 62,384 210,949 218,384 3309 9217 10,427 159,256 50,918
1996 52,785 67,065 214,280 223,502 11,261 21,619 12,389 179,935 60,059
1997 59,870 77,269 217,399 230,452 17,877 12,616 13,500 199,998 52,106
1998 59,037 75,722 216,685 233,416 26,002 18,125 15,321 241,644 34,362
1999 55,206 63,381 28176 225,335 26,888 3802 17,100 241,468 23,861
2000 64,584 72,444 27860 224,225 30,498 6955 17,096 236,156 31,541
2001 67,545 72,653 25109 223,215 24,715 77 17,621 226,067 27,797
2002 69,913 61,749 8164 27637 14,108 25119 15,275 227,689 16,339
2003 83,531 63,668 19,863 4177 9894 5308 15,328 235,414 20,525
2004 108,917 80,020 28,897 11,669 8695 24750 15,289 220,182 27,541
a
Net interest paid on bonds and foreign and intercompany loans.
b
Adjusted (excluding IMF loans).
Source: Central Bank of Brazil (http://www.bcb.gov.br).
FIGURE 1. Brazil: real exchange rate (October 2000 ¼ 100). Source: Ipeadata.
deficit of US$33.4 billion. Between 1985 and 1998 consumer goods imports rose
from US$376 million to US$8.2 billion, while the country’s foreign travel deficit
increased from US$441 million to US$4.1 billion.24
This structural shift in the current account created a recurring need for foreign
finance. During periods of relative abundance of foreign capital, especially the
mid-1990s, this was not a serious problem. Brazil easily attracted the required
capital inflows, and accumulated sizable reserves. However, these foreign direct
and portfolio investment inflows and loans increased substantially the country’s
external liabilities. Consequently, the future remittances for debt service and
profit and dividend payments would also increase. Brazil’s reliance on fickle
portfolio capital inflows to provide residual finance when loans and
foreign direct investment (FDI) were insufficient increased the vulnerability of
its balance of payments. Moreover, high rates were needed in order to tap
into these sources of capital, which helped to perpetuate the misalignment of
the real.
This was not the only vicious circle created by the real plan. The foreign capital
inflows had to be sterilised in order to limit the expansion of the monetary base.
The rapidly rising domestic public debt and its spiralling cost (caused by the
high interest rates) forced the government to maintain the high interest rate
policy, in order to stabilise the demand for public securities.25 Finally, high inter-
est rates depressed investment and growth, which limited the expansion of the tax
revenues and increased the nominal public sector deficit further. In order to finance
the state budget under these circumstances, the government was forced to raise tax
rates and impose new taxes. In essence, under neoliberalism the state budget
was used to transfer income and assets – averaging 8.6 per cent of GDP over
ten years – from the taxpayers to the holders of public securities via the financial
system.26 This exercise is wholly regressive in distributive terms, and it contri-
buted to the stagnation of the economy, the deterioration of income distribution
and the shift of economic and political power towards finance.27
106
It was difficult to reduce interest rates under this policy mix because, as was
shown above, it could become impossible to finance the federal budget and the
balance of payments. Lower interest rates could trigger capital outflows (or, less
dramatically, a reduction of the inflows below the requirements of the balance
of payments), potentially leading to a collapse of the real. Alternatively, lower
interest rates could reduce the demand for public securities, making it harder to
finance the public deficit and, potentially, leading to the monetisation of these
securities. This would trigger the transfer of these funds to the dollar market,
devaluating the currency, creating an inflation bubble, or both.
Although the real plan eliminated high inflation, the neoliberal reforms created
a macroeconomic policy trap from which Brazil was unable to extricate itself. The
tensions generated by the vicious circles described above, and the mounting fiscal
and currency costs of the stabilisation plan, eventually became unsustainable.
They were the main causes of the balance of payments crisis of January 1999,28
which cost the central government approximately 5.6 per cent of GDP.29 In con-
trast, the crisis was very profitable for the private financial sector. For example,
several financial institutions reported profits for January that were twice as high
as their previous annual profits.30
The new policy regime (1999– )

The Cardoso government introduced a new macroeconomic policy regime shortly
after the currency crisis, including a combination of inflation targeting, large fiscal
surpluses and the managed fluctuation of the real. The aim of these policies was to
preserve the low inflation regime achieved in the previous period, stabilise the
domestic public debt, reduce interest rates and the current account deficit, and
stabilise the exchange rate.31 These policies and objectives have been continued
by the Lula administration.
This policy regime has been only partially successful. The devaluation of the real
triggered not only a temporary inflation bubble in 1999 (and again in 2002), but also
a permanent increase in the rate of inflation. The government’s inflation targets have
not normally been achieved without ‘adjustments’ (see Table 3). Even more
TABLE 3. Brazil: inflation targets and outcomes (per cent)
1999 2000 2001 2002 2003d 2004

d
Target point 8.0 6.0 4.0 3.5 4.0; 8.5 3.75; 5.5d
Tolerance banda +2.0 +2.0 +2.0 +2.0 +2.5 +2.5
IPCAb 8.9 6.0 7.7 12.5 9.3 7.6
IGP-DIc 20.0 9.8 10.4 26.4 7.7 12.1
a
The target range increased from 2.0 per cent to 2.5 per cent in July 2003.
b
IPCA is the price index used to assess the inflation targeting programme. It is calculated by the
Brazilian Institute of Geography and Statistics (IBGE).
c
IGP-DI is a consumer price index traditionally used to measure the rate of inflation. It is calculated
by the independent Getúlio Vargas Foundation (FGV).
d
Target adjusted during the year.
Source: Central Bank of Brazil (http://www.bcb.gov.br).
107
seriously in the long term, the degree of indexation of the economy has been
increasing, which reduces the efficacy of monetary policy instruments for inflation
control.32 For example, most privatised utility companies incorporate variations of
the exchange rate into their pricing models, even if they produce non-tradable goods
using domestic inputs. The government has also found it necessary to sell dollar-
linked securities at times of political uncertainty or exchange rate volatility. More
than ten years after inflation stabilisation, the Brazilian economy continues to be
highly sensitive to fluctuations in the price level, and the mechanisms introduced
to cope with high inflation are still being used.
The exchange rate has also shown periodic signs of instability (see Figures 1
and 2), either because of fluctuations in the availability of foreign exchange or
because of ‘political uncertainty’ from the point of view of the financial
markets. Its volatility has hindered the growth of exports and created costs for
the foreign debtors, including some of Brazil’s largest corporations (most
famously the Globo media conglomerate). The swings of the exchange rate
have had political implications; for example, the currency crisis of 1999 perma-
nently damaged Cardoso’s reputation and the 2002 crisis compelled Lula to
endorse neoliberal economic policies. Finally, the threat of another currency
crisis has been prominent on the list of worries of the current administration.
The limited decline of real interest rates after the currency crisis is due to three
main reasons. First, the vicious circles described in the previous section were not
addressed consistently, as discussed. Second, the inflation-targeting regime
demands higher interest rates whenever inflation exceeds the desired range,
which has happened frequently. Finally, high interest rates help to stabilise the
flows of foreign capital under the floating exchange rate regime.33 These high
interest rates have made it difficult to stabilise the domestic public debt in spite
of the extraordinarily high primary fiscal surpluses achieved since 1999. The
growth of domestic debt is due to both the high costs of financing the outstanding
FIGURE 2. Brazil: nominal exchange rate (R$/US$). Source: Conjuntura Econômica, March 2005.
108
stock of securities and its partial indexation to the exchange rate. When the real
loses value, as it did in 1999 and 2002, the trade and current accounts tend to
improve, but inflation, the domestic public debt and its service payments automati-
cally increase. Moreover, because current policies automatically blame excess
demand for any increase in the rate of inflation (regardless of the level of capacity
utilisation or the rate of unemployment), inflation stabilisation will always require
higher interest rates and a higher fiscal surplus, perpetuating the shortcomings of
the currency policy regime.
Manufacturing output expanded after the devaluation of the real, and substan-
tial FDI inflows took place between 1998 and 2001. However, FDI has targeted
primarily manufacturing production and services for the domestic market, rather
than much-needed exports.34 Even more worrying for the neoliberal strategy,
FDI has been declining in both absolute and relative terms. The absolute fall is
an international phenomenon, following the collapse of the ‘dot.com’ bubble.
However, the Brazilian share of world FDI also fell, from 2.7 per cent in 2001
to 2.5 per cent in 2002 and only 1.5 per cent in 2003. FDI in Brazil as a share
of ‘emerging market’ investment declined from 9.6 per cent in 2001 to 8.7 per
cent in 2002 and only 5.3 per cent in 2003.35 This decline has been attributed to
the relatively unattractive prospects of the local market, which has been depressed
by stagnant wages, high unemployment, expensive credit and inadequate infra-
structure provision. Portfolio capital inflows have also declined, in spite of high
interest rates. Their volatility may substantiate the hypothesis of Calvo, Leiderman
and Reinhart that these flows are determined primarily by the circumstances of
financial markets in developed countries, rather than policy choices in emerging
markets.36 In this case, the neoliberal argument that ‘policy credibility’ and
high interest rates are sufficient to attract large and dependable capital inflows
is invalid. This would also lend credence to the political economy claim that
capital tends to leave the poor countries for trade, investment and financial
reasons, leading to international divergence, rather than convergence.37 In other
words, it is unwise for poor and middle-income countries to finance rigid
current account deficits with fickle capital inflows.
The economic limitations outlined above help to explain why the Brazilian
trade balance reacted slowly after the currency crisis. The trade balance only
achieved a surplus in 2001 and the current account in the following year. The
recent expansion of Brazilian exports has brought much-needed relief to the
balance of payments. However, it has been largely due to the favourable market
conditions for some of the country’s main crops and the excellent performance
of the agribusiness sector. The relatively slower growth of manufacturing
output and processed exports has raised the spectre of the re-primarisation of
the Brazilian economy, which would hardly be conducive to the creation of
quality employment and the improvement of social welfare. Finally, Brazil’s
foreign debt has expanded significantly during the neoliberal decade, from 27.3
per cent of GDP in 1994 to 47.2 per cent in 2003.
The vicious circles described in the previous section were only partly addressed
by the policy regime adopted after the crisis of the real. High interest rates con-
tinue to be used to attract speculative capital inflows, or to limit outflows and
ensure the solvency of Brazil’s balance of payments. Domestically, high interest
109
rates are still used to control demand (inflation) and to avoid capital flight from the
public securities to foreign currency. In spite of their pivotal role in the current
policy framework, high interest rates have imposed a low growth regime in the
country, including high financial costs, generous rewards for speculative
behaviour, low incentives for productive investment and high uncertainty and
volatility.38 They may also feed cost inflation, especially in the oligopolised
sectors. The persistence of these vicious circles seems to indicate that the neoli-
beral approach to the problems of the Brazilian economy may be either insufficient
or wrong.
Growth, unemployment and inequality under neoliberalism

It was shown in the preceding sections that Brazil received significant foreign
resource inflows after 1994, loans, FDI and portfolio investment. However,
these inflows triggered correspondingly large capital outflows in the form of
debt service payments, profit remittances, divestment and capital flight. The net
foreign resource inflows were insufficient to compensate the contraction of
public and private investment and the decline of the savings rate.
This was unexpected. In the early 1990s, it was claimed that financial liberal-
isation, the privatisation of most state-owned banks and the internationalisation
and consolidation of the financial institutions would increase the efficiency of
the financial sector, raise the savings rate and improve the availability of funds
for long-term investment. In reality, both savings and investment rates declined.
The savings rate fell eight points since the mid-1980s, to only 20 per cent of
GDP, while the investment rate fell from an average of 22.2 per cent of GDP in
the 1980s, to 19.5 per cent in the 1990s, and 18.9 per cent in 2000 –4. The
inflows of foreign capital may have contributed to this trend, by replacing
rather than supplementing domestic savings. In this case, foreign capital may
have financed consumption rather than investment.39 The decline of the invest-
ment rate goes a long way towards explaining the falling growth rates in Brazil.
Between 1994 and 2004, the average annual economic growth rate was only 2.7
per cent; in contrast, between 1933 and 1980 the economy expanded, on
average, by 6.3 per cent per annum.
Economic underperformance over long periods, high interest rates, excessively
rapid import liberalisation and the structural transformation of Brazilian industry
through mergers and acquisitions and the ‘flexibilisation’ of the workforce have
led to a significant deterioration of the labour market.40 The capacity of the
economy to create new jobs has been declining, and national levels of unemploy-
ment and underemployment have risen, even when compared to the ‘lost decade’
of the 1980s. The open unemployment rate in the six largest metropolitan areas41
increased from 4.4 per cent of the labour force in the late 1980s to 6.7 per cent
in the late 1990s; in São Paulo it rose from 6.5 per cent to 10.6 per cent. These
trends have continued. In the last two years of the Cardoso administration,
the average rate of unemployment in the metropolitan areas was 11.5 per cent
(11.7 per cent in São Paulo), and it has increased to 11.9 per cent (12.2 per cent
in São Paulo) in the first two years of the Lula administration. São Paulo has
been undergoing a clear process of deindustrialisation, with severe implications
110
for employment and poverty in the area (see Figures 3 and 4). The destabilisation
of the Brazilian labour market is also evident in the rapid increase of irregular
employment (empregados sem carteira) since the mid-1990s.
Unemployment and underemployment are only two of the factors contributing
to the growth of poverty and marginalisation during the neoliberal period.
Other influences are the low average wages in the country and the concentration
of income. Average wages have tended to decline since the late 1990s because
of the economic slowdown and the structural transformation of the labour
market. The wages and employment conditions of several categories of workers
have deteriorated significantly, especially in the standardised (durables and
non- durables) consumer goods sector. For example, the average monthly wage
in the large metropolitan areas declined from R$1,017 in the first quarter of
2002 to R$957 one year later and R$912 in early 2004, with a small recovery
to R$928 in the first quarter of 2005.42 The lower middle class (earning
between two and five minimum wages) has been hit especially hard, as shown
in Table 4.
Brazil is famously one of the most unequal countries in the world, and this
pattern of inequality has not changed under neoliberalism. Although the Gini
coefficient declined marginally, from 0.61 to 0.59 between 1990 and 2001,43
this has only brought it back to the level of the early 1980s. There is no evidence
that there has been a break with the old patterns of inequality in the country.
For example, the share of wages in the national income has been declining
since 1999, while the share of profits has continued to grow under the PT
administration (see Table 5).
Finally, Brazil has failed to converge towards the rich core of the world
economy. Brazilian per capita income fell from 21.6 per cent of the developed
country average in 1980 to 16.5 per cent in 1995 and 15.5 per cent in 2001.44
FIGURE 3. São Paulo metropolitan area: open and disguised unemployment (% labour force).
Source: Seade/Dieese (http://www.seade.gov.br).
111
FIGURE 4. São Paulo metropolitan area: real wage income (main employment), 1992 (Q1 ¼ 100).
Source: Seade/Dieese (http://www.seade.gov.br).
Neoliberalism in the Lula administration

During the 2002 campaign, many activists and commentators on the left as well as
the right argued that Lula’s election would reduce sharply the leverage of financial
capital over economic policy-making in Brazil, and that his administration would
suspend the payments of the country’s external debt and the government’s dom-
estic public debt.
These conjectures did not seem far-fetched. Early in that year, several financial
institutions expressed their concerns by refusing to purchase federal securities
maturing after 31 December (the last day of Cardoso’s presidency). The weekly
open market auctions became largely fruitless, as the brokers demanded ever-
increasing interest rates to roll over the government debt. If these rates were not
forthcoming the brokers liquidated their positions and shifted funds to the dollar
market, devaluing the real. At the same time, their international partners down-
graded Brazilian bonds and foreign debt certificates, allegedly because of the
perceived lack of policy credibility in the country. The foreign banks used the
same pretext to recall their short-term loans and commercial credit lines, half of
which were lost in a matter of weeks. The dollar rose steadily from R$1.95 in
January to a peak of R$3.99 in October; domestic inflation was only 4 per cent
during that period.
TABLE 4. Brazil: wage levels, in multiples of the minimum wage (% of the workforce)
,1 1–2 2–3 3–5 5 – 10 .10

March 2002 11.1 26.4 18.1 15.4 11.1 8.4
March 2005 16.7 34.0 13.3 15.9 10.0 6.1
Source: IBGE-PME (http://www.ipeadata.gov.br).
112
TABLE 5. Brazil: distribution of national income, 1999– 2003 (per cent)
1999 2000 2001 2002 2003

Wages 45.3 45.2 44.6 43.7 42.9
Self-employed income 6.7 6.3 6.1 5.5 5.4
Profits 48.0 48.5 49.3 50.8 51.7
Source: IBGE, national accounts (http://www.ipeadata.gov.br).
The unfolding crisis had serious political repercussions. The mainstream media
demanded that ‘all’ presidential candidates (that is, Lula) must vouch for the
continuity of Cardoso’s neoliberal policies in order to ‘calm the markets’. Even-
tually, exhausted by their tribulations and apparently concerned for the balance
of payments, the minister of finance and the president of the central bank demanded
on television that ‘all’ candidates should explain their economic policies to ‘the
markets’. Lula’s leadership on the polls was shrinking rapidly, and he caved in.
On 22 June, Lula issued a ‘Letter to the Brazilian People’ declaring that his gov-
ernment would respect contracts (in other words, service the domestic and
foreign debts on schedule) and enforce the International Monetary Fund (IMF) pro-
gramme agreed by the Cardoso administration. This was sufficient to calm the
media and secure Lula’s leadership on the polls. This letter also gave Lula the
opportunity to broaden his coalition further towards the right.
Lula would have sailed to victory with barely another glitch, but finance
increased the stakes further. It now demanded institutional guarantees of the
continuity of neoliberalism, especially an independent central bank committed
to a ‘responsible’ monetary policy and a new agreement with the IMF spanning
well into the new administration. This agreement was reached in record time
and signed on 4 September 2002. It states that
a combination of a worsening external environment and increased

uncertainty among investors about the future course of economic
policies has led to a deterioration in financial market variables
in recent months. The . . . new Stand-By Arrangement with the
Fund . . . [is] designed to safeguard economic stability, and
provide a framework for the continuity of core macroeconomic
policies next year [under the new administration].45
The Brazilian government also agreed to submit a constitutional amendment

granting independence to the central bank. In exchange, the IMF offered loans
of US$30 billion, of which only US$6 billion would be available immediately.
The rest would be available to the new government, but only if its economic
policies conformed with IMF expectations. Lula agreed again. His blessing to
this agreement opened to the PT the doors of financial institutions and conserva-
tive governments around the world.
Lula took office on 1 January 2003. His government has enforced a thoroughly
neoliberal economic policy, earning the grudging admiration of backers of
Cardoso, as well as warm praise from the IMF46 and expressions of support
113
from the US government.47 The Lula administration is committed to neoliberalism

at three levels. First, politically, Lula has never qualified the pledges in his ‘Letter
to the Brazilian People’. Quite the contrary: he has gone out of his way to reassure
‘the markets’ on several occasions. It would be idle to speculate about whether
Lula has been genuinely converted to neoliberalism or whether he simply believes
that there is no alternative. What matters is that his government has shown an even
deeper commitment to economic orthodoxy than its predecessors. Second, the
government’s economic team is drawn entirely from neoliberal circles. Finance
minister Antonio Palocci was previously the PT mayor of Ribeirão Preto in São
Paulo state, where he imposed stringent expenditure cuts and a municipal privati-
sation programme that was criticised widely within the party. His closest aides
have impeccable credentials, being either trusted civil servants or well-known
mainstream economists, and the president of the central bank is a former chairman
of BankBoston. This team would be unlikely to consider non-mainstream
economic policies seriously. Third (and, in this context, unsurprisingly), the
government has maintained the entire policy framework developed by the
previous administration after the debacle of the real. The inflation targeting
regime continues to require high interest rates, which prevents the economy
from generating the new skilled, formal sector and highly productive jobs that
are essential to lift millions out of poverty, improve the distribution of income
and fulfil the PT’s social commitments.
The government has defended its economic policies vigorously, claiming that
they will help to reduce inflation, stabilise the domestic debt, improve the invest-
ment climate and attract foreign capital. It argues that these capital inflows will
support technological upgrading and productivity growth, and that economic
stabilisation will allow the interest rates to decline gradually. The government’s
commitment to these mainstream economic policies, its promotion of investors’
interests and its reliance on the allocative efficiency of the market leaves economic
policy hostage to the humours of the leading financial institutions – as was shown
in 2002. The influence of these institutions is clear in the importance achieved by
the ‘Brazil risk’ indicators, especially J.P. Morgan’s emerging markets bond index
plus (EMBI þ ). This index is tracked on the daily press, and discussed widely and
authoritatively in the country. A declining index always leads to extensive self-
congratulation by the authorities, while its increases invariably trigger heated
debates in the media and in Congress. In these cases, ‘policy adjustments’ are
always forthcoming in order to steer the economy in the ‘right’ direction.
Inflation control has posed difficult challenges for the Lula government.
Although high inflation has been eliminated, it has proven difficult to achieve
the government’s targets, in spite of the central bank’s aggressive manipulation
of interest rates. These difficulties seem to indicate that, although demand contrac-
tion (that is, higher unemployment and lower wages) can suppress bouts of high
inflation, the current Brazilian inflation is not caused by excess demand. Other
relevant factors are the impact of high interest rates on the industrial costs, the
pass-through effect of exchange rate fluctuations and the indexation of public
utility prices. In these circumstances, the devaluation of the real can have a
lasting inflationary impact – first, directly, through higher imports prices and,
later, through the automatic increase of utility prices regardless of the suppliers’
114
production costs. Finally, the imposition of higher interest rates to dampen rising
inflation introduces further cost pressures into the economy. These cumulative
processes were especially obvious during the inflation bubbles of 1999 and
2002 –3, which were absorbed only slowly and at a high cost.48 Finally, the gov-
ernment remains committed to the proposed operational independence of the
central bank, in spite of strong resistance in Congress and in society.
The contractionary policies in the first year of the Lula administration reduced
the GDP growth rate to 0.54 per cent ( –0.9 per cent per capita) in 2003. Economic
performance improved in the following year, when GDP expanded by 5.2 per cent
(3.7 per cent per capita), largely through the success of the agribusiness and export
sectors, which were stimulated by the devaluation of the real. Relief at this
outcome was tempered by the realisation that this was the rebound after a very
poor year, that these GDP growth rates were below Brazil’s historical average
and that several comparable countries grew faster in 2004. This includes not
only China (9.5 per cent growth), India (6.7 per cent), Malaysia (7.1 per cent),
Russia (6.8 per cent), Thailand (6.1 per cent) and Turkey (8.1 per cent), but
also other Latin American countries, among them Argentina (8.2 per cent),
Chile (5.8 per cent), Uruguay (12.0 per cent) and Venezuela (18.0 per cent). In
Latin America as a whole, average growth in 2004 was 5.5 per cent, which was
also above the Brazilian performance.
Finally, the Lula administration took the initiative to increase the government’s
fiscal surplus target from 3.75 per cent of GDP (agreed with the IMF) to 4.25 per
cent, in order to dampen the growth of the domestic debt and facilitate the
reduction of the interest rates in the wake of the 2002 crisis. This ambitious
target was achieved in 2003 and the fiscal surplus in 2004 was even higher, at
4.6 per cent of GDP. In spite of these surpluses, the domestic public debt continues
to hover between 40 –50 per cent of GDP. It has become obvious that the debt is
far more sensitive to the level of interest rates and the changes in the exchange rate
than to the size of the fiscal surplus. Achieving the desired surpluses has required
severe expenditure cuts, especially in public investment and the government’s
flagship social programmes. These cutbacks have helped to perpetuate Brazil’s
glaring deficiencies in infrastructure, especially the road network and the port
sector, and the country’s seriously deficient public health and education sectors.
They have also restricted the government’s capacity to expand its programmes
of income support, food supplements (especially Fome Zero) and land reform.
It is clear that Brazilian economic policy and performance hinge around the
level of interest rates. This is the most important instrument of inflation control
and, partly for this reason, interest rates are the most important reason for the
chronic underperformance of the economy and the main explanatory factor for
the expansion of the domestic public debt since 1992.49 In the first four months
of 2005 the base (Selic) rates have risen, on average, to 18.9 per cent per
annum, which exceeds their average level in 2004 of 16.4 per cent. It is likely
that real interest rates in 2005 will be higher than in the recent past. Given the
worsening prospects for the international economy, it seems certain that the
GDP growth rate in 2005 will be lower than in 2004 (estimates point to 3.5 per
cent). By the same token, the domestic debt and its ratio to GDP will tend to
increase, which is likely to trigger another round of public expenditure cuts.
115
The mainstream offers a feeble explanation for the high level of interest rates in
Brazil and the large spreads charged by the country’s financial institutions.50 It
claims that high interest rates are due to the lack of credibility of economic
policies and the high probability of violation of contracts, either because of arbitrary
government decisions or because of distortions and inefficiencies in the legal system
(jurisdictional uncertainty).51 These factors may be influential, but it is far from clear
that they play a leading role in the determination of the interest rates, for two reasons.
First, other countries with high levels of jurisdictional uncertainty have significantly
lower interest rates than Brazil, including Argentina, where the ‘rules of the game’
have changed sharply several times during the last thirty years, China, where a power-
ful Communist Party still holds dictatorial power, Malaysia, which imposed capital
controls arbitrarily after its currency crisis, Nigeria, where institutions remain
fluid, and the political system is heavily tainted by accusations of corruption, and
Turkey, where the economy has been battered by severe crises during the last gener-
ation, often requiring significant institutional adjustments. Second, the mainstream
interpretation completely bypasses the potential influence of the concentration of
the Brazilian banking sector on the costs and spreads charged by these institutions.52
The economic policies of the Lula administration are unlikely to dent the level
of unemployment or promote the sustained recovery of real wages. Even more
worryingly, the vulnerability of the balance of payments and the fiscal and finan-
cial fragility of the economy may not permit a sustained period of rapid growth.
The inability of the administration to conjure the ‘growth extravaganza’ repeat-
edly promised by the president during his first year in office has bred widespread
scepticism and sapped the government’s popularity. The administration’s indefa-
tigable pursuit of short-term ‘credibility’ with the financial markets has under-
mined important potential sources of growth in the economy. In particular, the
government has failed to promote the integrated development of the country’s
manufacturing base and to pursue an aggressive policy of export promotion in
priority manufacturing sectors (such as pharmaceuticals, electronic consumer
goods, automobiles and capital goods). Economic underperformance will even-
tually sap the ‘credibility’ that the government has been trying to amass.
Supporters of the administration have put forward two not entirely compatible
arguments to justify the government’s commitment to neoliberalism. On the one
hand, the country’s economic situation does not offer any alternative. The slightest
hint of an economic policy change would trigger catastrophic capital flight; the
real would collapse, and the Brazilian economy would crash just like Argentina’s
did in 2001 –2. The most important experiment with a left-wing administration in
Latin America since Allende would fail. On the other hand, it is claimed that there
is no alternative to neoliberalism, and it is futile to look for other policies. What
distinguishes governments in today’s world is their probity, efficiency, credibility
and capacity to implement targeted and compensatory social policies, and the PT
excels in all these areas. Therefore, Lula should continue to be supported by the
progressive camp.
These arguments are untenable. Argentina’s economy collapsed because of
its government’s unwarranted commitment to neoliberalism. The contrast
with Allende’s Chile is also misguided, because Lula has studiously avoided
confrontation with moneyed interests either at home or abroad, except in
116
multilateral trade negotiations, and has never hinted that his administration might
lead a constitutional transition to socialism. Finally, alternatives to neoliberalism
are feasible, as has been shown by China, Malaysia and South Korea over long
periods of time53 and, more recently, by Argentina.54
It follows that the main reason explaining the current administration’s contrac-
tionary fiscal and monetary policies is political: the government wishes to signal to
‘the markets’ and to the international financial institutions its commitment to neo-
liberalism. It also expects that its policy reforms will foster a more favourable
investment climate through a stable macroeconomic environment, and through
the provision of subsidised credit (especially via the state-owned Banco Nacional
de Desenvolvimento Econômico e Social) and labour market reforms. However,
the administration’s policies are unlikely to foster long-term growth. It would
be unwise to rely on erratic portfolio flows and FDI in disparate sectors to
trigger a sustained cycle of economic growth in Brazil. The political economy lit-
erature on industrial policy has convincingly shown that, in a large middle-income
country, growth depends critically on the capacity of the government to foster an
economic environment favourable to long-term investment in strategically import-
ant areas through funding guarantees, indicative planning and supporting public
investment.55 Finally, the attempt to use fiscal and monetary policy instruments
to satisfy the short-term interests of the financial markets may be inefficient in
the long term,56 and it may limit the capacity of the administration to deliver
the promised benefits to its core supporters – the poor urban workers, the lower
middle class and the organised rural workers. Alternatives to neoliberalism
must be considered, following the legitimate expectations of the majority. It
would be profoundly destabilising for the democratic process and the rule of
law if the substantive decisions about the course of economic policy were
excluded from public debate, or if it was perceived that it is impossible to
pursue alternatives to neoliberalism by constitutional means.
Conclusion: escaping from neoliberalism

Experience in Brazil and elsewhere shows that the neoliberal reforms do not offer
a consistent blueprint for a development strategy based on equality and the realis-
ation of human potential. The mainstream economic strategy relies heavily on
variables that countries like Brazil influence only marginally, especially the avail-
ability and cost of foreign finance. It fragments the productive base, shifts the
engine of growth towards externally financed consumption and investment in
non-traded goods, erodes salaries and employment levels and conditions,
increases the vulnerability of the balance of payments and has been associated
with fiscal and currency crises. In Brazil, the economic stagnation induced by
the disintegration of import substitution and the transition to neoliberalism has
become entrenched. The rising levels of unemployment and underemployment
and the stagnation of wages have neutralised the distributive gains initially
achieved through the real plan. In their choice of economic policy and their deter-
mination to achieve short-term financial market ‘credibility’, the administrations
led by Fernando Henrique Cardoso and Luı́s Inácio Lula da Silva are indistin-
guishable. However, their strategy is flawed. The poor performance of the
117
Brazilian economy during the neoliberal decade was due to both internal and
external factors but, increasingly, it is the outcome of the shortcomings of the
neoliberal accumulation strategy. Therefore, this strategy is hardly deserving of
credibility.
It is important to explore the potential of alternative (democratic) economic
strategies to limit the social, economic and political damage inflicted by neoliber-
alism and redress some of the profound inequalities in the Brazilian economy and
society. This cannot be done here in detail,57 but it is useful to outline the general
features of these strategies. This will illuminate the shortcomings of neoliberalism
from another angle, and substantiate the claim that there are alternatives to the
policies of the Brazilian government.
This article has argued that the most important macroeconomic limitations to
growth in Brazil are the fiscal, financial and balance of payments constraints.
These constraints have prevented the emergence of an economic environment
conducive to growth, employment generation and social inclusion. Alternative
policies seeking to address these constraints should depart from three principles.
First, their implementation requires confronting selectively the hegemony of
neoliberalism in the economy, and curtailing the influence of the financial interests
on the availability and use of foreign exchange, the allocation of resources and the
solvency of the state. Second, these policies should seek to improve the living
standards of the majority through the expansion of investment and output in
priority sectors, the improvement of the distribution of income and wealth, and
the sustained increase in wages, employment and consumption. These outcomes
must be independent from trickle-down effects and they should be unambiguous
across a broad spectrum of measures of welfare. Third, these policies should be
efficient, consistent and sustainable. Policies that are excessively costly to
implement and monitor, generate significant traps and disincentives or create
macroeconomic instability should be avoided.58
In the light of these principles, policy change in Brazil should focus on the
following areas. First, significant policy changes are impossible with an open
capital account of the balance of payments. An orderly (limited) closure of the
capital account might involve, for example, central bank regulations imposing a
significant increase in the risk imputed to foreign currency assets in order to
raise their accounting cost to Brazilian firms, especially the banks. The central
bank will also need to restrict the flows of international capital through the dom-
estic financial system, especially the CC-5 accounts (foreign currency accounts
that are frequently used for capital flight). The monetary authorities should also
impose costs on volatile capital, such as a quarantine following the well-known
Chilean model, and increase the taxes due on dividend payments and the repatria-
tion of profits. These restrictions will make it possible to reduce interest rates and
the risk of capital flight. In turn, lower interest rates will improve the budgetary
position of the state, support domestic investment, reduce the incentives for
foreign borrowing and foster the development of the domestic financial system.
Second, in order to increase the level of income and employment on a long-term
basis and satisfy the immediate economic demands of the majority, it is essential
to introduce a new industrial policy raising state capacity to direct the allocation of
resources both intersectorally and intertemporally. This should include the
118
expansion of infrastructure and sectors with high employment-generating capacity

(such as housing and road building and repair), and incentives for those sectors
able to generate endogenous technical progress, replace imports and consolidate
existing industries (such as the telecommunications equipment, steel and
chemicals industries).59
Third, these policies will require a tax reform promoting distributive outcomes,
including lower indirect taxes and correspondingly higher direct taxes. However,
this tax reform will be insufficient to fund the programmes outlined above.
Adequate funding will require changes in the relationship between the state and
the financial system. For example, the private financial institutions should be
induced to increase the resources allocated to strategically important sectors and
the remaining state-owned banks, Banco do Brasil and Caixa Econômica
Federal, must be protected from predatory competition. In order to release the
required resources, interest rates will have to decline, and the spreads and fees
charged by the private banks also need to fall. This may be facilitated by regulat-
ory reforms (including changes in the direction of official credit flows and restric-
tions on public securities trading) and the fuller use of the lending potential of the
state-owned banks. It will also be necessary to impose tighter controls on the
privatised utility companies and infrastructure providers, introduce stronger
labour laws and health and safety rules, and increase significantly the supply of
basic public goods (especially health services, education and public security) in
order to achieve rapid improvements in social welfare. Finally, these measures
should be supported by the rapid redistribution of unproductive land, not only
in order to increase agricultural output and employment, but also to improve the
distribution of wealth and political power in Brazil.
It is impossible to achieve these ambitious objectives within a neoliberal frame-
work in which the state signals its priorities mainly through interest rate changes,
finances its policy initiatives at market prices and must compete against private
interests in order to achieve socially desired outcomes. The policies outlined
above and the regulatory apparatus required for their implementation will be
opposed by many. It will be claimed that these rules and programmes are either
unnecessary or unenforceable, that their outcomes will be inefficient, and that
the attempt to change course will be counterproductive because of the loss of
government policy ‘credibility’. These arguments are invalid. The concepts of
‘credibility’ and ‘rationality’ have been hijacked by mainstream economics and
redefined in the light of abstract ‘market laws’ concocted by orthodox economics.
Middle-income countries’ economic policies are presumed to be ‘credible’ either
if they include fiscal restraint, fixed exchange rates, monetary control through high
interest rates and sterilisation or fiscal restraint, floating exchange rates and
inflation targets backed up by interest rate adjustments. However, experience
during the last decade suggests that Brazil’s social and economic problems are
too severe, and too deeply ingrained, to be resolved by spontaneous market
processes. Similarly, the vicious circles described in this article cannot be dis-
armed by laissez-faire policies.
Obviously, no-one should underestimate the difficulties and risks associated
with the attempt to implement alternative policies in Brazil. But Brazil is a
relatively large and politically important country: it should use these assets in
119
order to pursue a socially desirable economic strategy. The successful implemen-

tation of alternative economic policies will increase the long-term credibility of
Brazilian economic policy, and improve the country’s prospects from the point
of view of potential investors in priority sectors. This strategy will also reduce
the country’s dependence on fickle international financial flows. Finally, it will
open the possibility of a cycle of democratic development, including the distri-
bution of income and wealth, social inclusion and the satisfaction of the basic
needs of the majority of the population. This is what Lula’s election meant to
the majority of his voters.
Notes
The authors are grateful for the generous comments of two anonymous referees. MLR Mollo acknowledges the
financial support of CNPq.
1. This article was completed in May 2005.
2. Governo do Brasil, Exposição de Motivos n. 393 do Ministro da Fazenda (Congresso Nacional, 1993).
See also Edmar Bacha, ‘Plano Real: Uma Segunda Avaliação’, in IPEA/CEPAL (eds), O Plano Real e
Outras Experiências Internacionais de Estabilização (IPEA, 1997), pp. 34 –62; Rudiger Dornbusch,
‘Brazil’s Incomplete Stabilization and Reform’, Brookings Papers on Economic Activity, No. 1 (1997),
pp. 367–94; Alfredo Saad-Filho & Eduardo Maldonado Filho, ‘Economia Brasileira: da Heterodoxia ao
Neomonetarismo’, Indicadores Econômicos, Vol. 26, No. 3 (1998), pp. 87–103.
3. For an overview of neoliberal economic policies, see Ben Fine, Costas Lapavitsas & Jonathan Pincus (eds),
Development Policy in the Twenty-first Century: Beyond the Post-Washington Consensus (Routledge, 2001);
Ben Fine & Colin Stoneman, ‘Introduction: State and Development’, Journal of Southern African Studies,
Vol. 22, No. 1 (1996), pp. 5–26; Charles Gore, ‘The Rise and Fall of the Washington Consensus as a
Paradigm for Developing Countries’, World Development, Vol. 28, No. 5 (2000), pp. 789–804; Alfredo
Saad-Filho & Deborah Johnston (eds), Neoliberalism: A Critical Reader (Pluto Press, 2005).
4. See Luiz C. Bresser-Pereira, Economic Crisis and State Reform in Brazil (Lynne Rienner, 1996).
5. From this viewpoint economic fluctuations are exogenous and transitory. They are generally due to mis-
guided government intervention or irrational private (for example, herd) behaviour, resulting from market
imperfections. Crises triggered by bubbles are analysed by Roger Farmer, The Macroeconomics of Self-
Fulfilling Prophecies (MIT Press, 1993); Ronald McKinnon, Money and Capital in Economic Development
(Brookings, 1973) argues that financial repression undermines growth performance; Ronald McKinnon, The
Order of Economic Liberalisation (Johns Hopkins University Press, 1993) and Paul Krugman, ‘What Hap-
pened to Asia?’ (1998), http://web.mit.edu/krugman, review the potential consequences of regulatory
failure and moral hazard for the financial markets.
6. Maria de Lourdes R. Mollo, Maria Luı́za F. Silva & Thomas Torrance, ‘Money and Exchange-Rate Regimes:
Theoretical Controversies’, Economia Contemporânea, Vol. 5, No. 1 (2001), pp. 5–47.
7. Philip Arestis & Malcolm Sawyer, ‘Inflation Targeting: A Critical Appraisal’, Greek Economic Review
(forthcoming 2006).
8. Philip Arestis & Malcolm Sawyer, ‘New Labour, New Monetarism’, European Labour Forum, Vol. 20,
No. 1 (1998), pp. 7–21.
9. See, for example, Philip Arestis & Murray Glickman, ‘Financial Crisis in Southeast Asia: Dispelling Illusions
the Minskyan Way’, Cambridge Journal of Economics, Vol. 26, No. 2 (2002), pp. 237 –60, Gabriel Palma,
‘Three and a Half Cycles of “Mania, Panic and [Asymmetric] Crash”: East Asia and Latin America
Compared’, Cambridge Journal of Economics, Vol. 22, No. 6 (1998), pp. 789–808; Maria de Lourdes
R. Mollo & Adriana Amado, ‘Globalização e Blocos Regionais: Considerações Teóricas e Conclusões de
Polı́tica Econômica’, Estudos Econômicos, Vol. 31, No. 1 (2001), pp. 127–66.
10. See François Chesnais, ‘Mondialisation Financière et Vulnérabilité Systémique’, in François Chesnais (ed.),
La Mondialisation Financiére: Genèse, Coût et Enjeux (Syros, 1996), pp. 251– 95; Robert Guttman, How
Credit-Money Shapes the Economy – The United States in Global System (M. E. Sharpe, 2000).
11. See Dominique Plihon, ‘A Ascenção das Finanças Especulativas’, Economia e Sociedade, No. 5 (1995), pp.
61–78 and Suzanne de Brunhoff, ‘L’Instabilité Monétaire Internationale’, in Chesnais (ed.), La
Mondialisation Financiére, pp. 33–58.
120
12. See Paul Cammack, ‘Sign of the Times: Capitalism, Competitiveness, and the New Face of Empire in
Latin America’, Socialist Register 2005 (Merlin, 2005), pp. 256–70; and Mollo & Amado, ‘Globalização
e Blocos Regionais’.
13. See Adriana Amado, ‘The Regional Impact of the Internationalization of the Financial System: The Case of
Mercosul’, in Philip Arestis, Meghnad Desai & Sheila Dow (eds), Methodology, Microeconomics and
Keynes, Vol. 2 (Routledge, 2001), pp. 351 –73; Sheila Dow, Money and the Economic Process (Edward
Elgar, 1993).
14. See François Chesnais, La Mondialisation du Capital (Syros, 1994); Mollo & Amado, ‘Globalização e
Blocos Regionais’.
15. See Gérard Duménil & Dominique Lévy, ‘The Neoliberal Counter-Revolution’, in Saad-Filho & Johnston,
Neoliberalism: A Critical Reader, pp. 9–19; and Pierre Salama, ‘La Financiarisation Excluante’, in
Chesnais, La Mondialisation Financiére, pp. 213– 50. The deteriorating distribution of income in the
world economy is documented by Branko Milanovic, ‘True World Income Distribution, 1988 and 1993:
First Calculation Based on Household Surveys Alone’, Economic Journal, Vol. 112, No. 476 (2002),
pp. 51–92.
16. See also Guillermo Calvo, ‘The Management of Capital Flows: Domestic Policy and International
Cooperation’, in G. K. Helleiner (ed.), The International Monetary and Financial System (Macmillan,
1996), pp. 67–89; Guillermo Calvo, Leonardo Leiderman & Carmen Reinhart, ‘Inflows of Capital to
Developing Countries in the 1990s’, Journal of Economic Perspectives, Vol. 10, No. 2 (1996), pp. 123–
39; Martin Feldstein & Charles Horioka, ‘Domestic Savings and International Capital Flows’, Economic
Journal, Vol. 90, No. 358 (1980), pp. 314– 29.
17. See Victoria Chick, ‘Finance and Investment in the Context of Development: A Post-Keynesian Perspective’,
in Joseph Halevi & Jean-Marc Fontaine (eds), Restoring Demand in the World Economy (Edward Elgar,
1998), pp. 47– 69; Rogério Studart, Investment Finance in Economic Development (Routledge, 1995).
18. For an analysis of Brazilian inflation along those lines, see Alfredo Saad-Filho & Maria de Lourdes R. Mollo,
‘Inflation and Stabilization in Brazil: A Political Economy Analysis’, Review of Radical Political Economics,
Vol. 34, No. 2 (2002), pp. 109– 35.
19. For a review of the real plan, see Saad-Filho & Mollo, ‘Inflation and Stabilization in Brazil’. De-indexation is
the abolition of ‘automatic’ price increases in response to the latest inflation index (or variations in the
exchange rate). A typical example is the determination of wages, in conditions of high inflation, by last
month’s nominal wage, marked up by the current month’s inflation rate. Although indexation can help to
protect real incomes, it also perpetuates past inflation (inflation inertia), making it difficult to reduce inflation
in the long term.
20. See Alfredo Saad-Filho, ‘The Political Economy of Neoliberalism in Latin America’, in Saad-Filho &
Johnston, Neoliberalism, pp. 113–9.
21. See Alfredo Saad-Filho & Lecio Morais, ‘The Costs of Neomonetarism: The Brazilian Economy in the
1990s’, International Papers in Political Economy, Vol. 7, No. 3 (2000), pp. 1–39.
22. See Alfredo Saad-Filho & Lecio Morais, ‘The Costs of Neomonetarism: The Brazilian Economy in the
1990s’, in Philip Arestis & Malcolm Sawyer (eds), Neo-Liberal Economic Policy: Critical Essays
(Edward Elgar, 2004), pp. 158– 93.
23. Bacha, ‘Plano Real: Uma Segunda Avaliação’; Dornbusch, ‘Brazil’s Incomplete Stabilization and Reform’.
24. CEPAL, Anuario Estadı́stico de América Latina y el Caribe (ECLAC, 2003), table 293.
25. Saad-Filho & Morais, ‘The Costs of Neomonetarism’.
26. Conjuntura Econômica, March 2005, statistical appendix, p. XI.
27. For a similar interpretation of the neoliberal transition in the advanced economies, see Gérard Duménil &
Dominique Lévy, Capital Resurgent: Roots of the Neoliberal Revolution (Harvard University Press, 2004).
28. For a detailed account of the crisis, see Edmund Amann & Werner Baer, ‘The Illusion of Stability: The
Brazilian Economy under Cardoso’, World Development, Vol. 28, No. 10 (2000), pp. 1805–19; Lecio
Morais, Alfredo Saad-Filho & Walter Coelho, ‘Financial Liberalisation, Currency Instability and Crisis in
Brazil: Another Plan Bites the Dust’, Capital & Class, No. 68 (1999), pp. 9–14; Maria de Lourdes
R. Mollo & Maria Luı́za F. Silva, ‘A Liberalização do Câmbio no Brasil: Revisitando a Discussão dos
Pressupostos Teóricos Embutidos nas Prescrições Cambiais Alternativas’, Estudos Econômicos, Vol. 29,
No. 2 (1999), pp. 189 –227.
29. See Saad-Filho & Morais, ‘The Costs of Neomonetarism’.
30. Bank profit rates in Brazil are usually around 11 per cent. In January 1999, the profit rate of several large
banks reached between 200 and 400 per cent. Total bank profits in 1998 were R$1.8 billion; in the month
121
of January 1999, these profits reached R$3.3 billion (Folha de S. Paulo, 6 March 1999, p. 2 –2). George Soros
famously declared that the devaluation of the real had only a small impact on the international financial
system because it had been widely anticipated, and because Brazil offered protection mechanisms
unavailable to investors elsewhere.
31. See Mollo & Silva, ‘A Liberalização do Câmbio no Brasil’; Alfredo Saad-Filho & Lecio Morais,
‘Neomonetarist Dreams and Realities: A Review of the Brazilian Experience’, in Paul Davidson (ed.), A
Post Keynesian Perspective on 21st Century Economic Problems (Edward Elgar, 2002), pp. 29 –55.
32. Luiz C. Bresser-Pereira, ‘Macroeconomia do Brasil pós-1994’, Análise Econômica, Vol. 21, No. 40 (2003),
pp. 7 –38.
33. Michel Aglietta, La Fin des Devises Clés: Essai sur la Monnaie Internationale (La Découverte 1986).
34. See Mariano Laplane & Fernando Sarti, ‘O Investimento Direto Estrangeiro no Brasil nos Anos 90:
Determinantes e Estratégias’, in Daniel Chudnovsky (ed.), Investimentos Externos no Mercosul (Papirus,
1999), pp. 125–79.
35. SOBEET Report, Folha de S.Paulo 5 September 2003.
36. Guillermo Calvo, Leonardo Leiderman & Carmen Reinhart, ‘Capital Inflows and Real Exchange Rate
Appreciation in Latin America’, IMF Staff Papers, Vol. 40, No. 1 (1993), pp. 108 –51.
37. See Palma, ‘Three and a Half Cycles’; and Anwar Shaikh, ‘Foreign Trade and the Law of Value: Part I’,
Science & Society, Vol. 43, No. 4 (1979), pp. 281–302, and ‘Foreign Trade and the Law of Value: Part
II’, Science & Society, Vol. 44, No. 1 (1980), pp. 27– 57.
38. For a similar analysis in the case of South Korea, see Arestis & Glickman, ‘Financial Crisis in Southeast
Asia’ and Ha-Joon Chang, ‘The Triumph of the Rentiers?’ Challenge, Vol. 43, No. 1 (2000), pp. 105–24.
39. Bresser-Pereira, ‘Macroeconomia do Brasil pós-1994’.
40. Mário Pochmann, O Trabalho sob Fogo Cruzado: Exclusão, Desemprego e Precarização no Final do Século
(Contexto, 1999).
41. São Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Recife and Salvador.
42. http://www.ipeadata.gov.br.
43. World Bank, Inequality in Latin American and the Caribbean: Breaking with History?, 1 April 2004, p. 400,
http://www-wds.worldbank.org/default.jsp?site¼wds.
44. World Bank, World Development Indicators, CD Rom, 2003.
45. Brazil – Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understand-
ing, August 29, 2002, http://www.imf.org/external/np/loi/2002/bra/04/index.htm, paragraph 26
(emphasis added).
46. In their Article IV consultation with Brazil in March 2005, the IMF executive board ‘welcomed Brazil’s
impressive economic achievements over the last two years, and the remarkable track record of
performance . . . which reflected the [Brazilian] authorities’ continued pursuit of strong macroeconomic
policies and steady progress with structural reforms . . . [IMF] Directors [also] congratulated the authorities
for consistently achieving high primary fiscal surpluses . . . Looking ahead, the authorities’ reform agenda –
including central bank autonomy, reform of the state-level VAT, and further measures to enhance the
business environment – covers important areas. Other critical reforms would include measures to increase
budget flexibility, address the large remaining imbalances in the pensions system, promote financial inter-
mediation, and reduce labor market informality through reforms of the labor code, so as to substantially
increase flexibility in labor contracts’ (http://www.imf.org/external/np/sec/pn/2005/pn0541.htm#
P25_355#P25_355). IMF first deputy managing director, Anne Krueger, added that the ‘impressive track
record of program implementation [under the stand-by arrangement], together with the continued pursuit
of sound macroeconomic policies and steady progress with structural reforms are clearly paying
off . . . The central bank’s steady tightening of monetary policy in recent months has been prudent . . .
Reflecting recent developments, financial market sentiment is very positive . . . The government’s agenda
for 2005 includes important tax reforms and further measures to strengthen the business environment’
(http://www.imf.org/external/np/sec/pr/2005/pr0564.htm).
47. See, for example, http://www.whitehouse.gov/news/releases/2003/06/20030620-3.html and http://
www.state.gov/secretary/rm/2005/43863.htm.
48. Luiz C. Bresser-Pereira, ‘Macroeconomia Pós-Plano Real: As Relações Básicas’, in João Sicsú,
Luiz Fernando de Paula & Renaut Michel (eds), Novo-Desenvolvimentismo – Um Projeto Nacional de Cres-
cimento com Eqüidade Social (Manole, 2005), pp. 3– 48.
49. See Saad-Filho & Morais, ‘The Costs of Neomonetarism’.
122
50. Average bank spreads in Brazil reached 43.7 per cent in 2003. This is significantly higher than elsewhere; for
example, Argentina (15.4 per cent), Chile (3.5 per cent), the Euro area (3.1 per cent), India (5.4 per cent),
Mexico (0.7 per cent), Russia (9.1 per cent), South Korea (2.2 per cent) and the USA (3.0 per cent). See
http://www.iedi.org.br.
51. Pérsio Arida, Edmar Bacha & André Lara-Resende, High Interest Rate in Brazil: Conjectures on the
Jurisdictional Uncertainty, unpublished manuscript, 2004.
52. Bresser Pereira, ‘Macroeconomia Pós-Plano Real’.
53. For a review, see Manuel R. Agosı́n & Diana Tussie (eds), Trade and Growth: New Dilemmas in Trade
Policy (Macmillan, 1993); Alice Amsden, ‘Bringing Production Back In – Understanding Government’s
Economic Role in Late Industrialization’, World Development, Vol. 25, No. 4 (1997), pp. 469 –80; Alice
Amsden, The Rise of the Rest: Challenges to the West from Late Industrializing Economies (Oxford
University Press, 2001); Ha-Joon Chang, The Political Economy of Industrial Policy (Macmillan, 1994);
Ha-Joon Chang, Globalisation, Economic Development and the Role of the State (Zed Books, 2003);
Ha-Joon Chang & Ilene Grabel, Reclaiming Development: An Alternative Economic Policy Manual (Zed
Books, 2004); Gary Gereffi & Donald Wyman (eds), Manufacturing Miracles: Paths of Industrialization
in Latin America and East Asia (Princeton University Press, 1990).
54. Sebastián Barros, ‘Kirchner’s Argentina: Between Populism and Centre-Left’, paper presented at the
Conference, Left of Centre Governments in Latin America: Current Prospects and Future, Institute for
the Study of the Americas, University of London, 18 March 2005.
55. For an overview of this approach to industrial policy, see Amsden, ‘Bringing Production Back In’; Chang,
The Political Economy of Industrial Policy; Ha-Joon Chang, Kicking Away the Ladder? Policies and Insti-
tutions for Economic Development in Historical Perspective (Anthem Press, 2002); Sonali Deranyiagala,
‘From Washington to Post-Washington: Does It Matter for Industrial Policy?’, in Fine et al., Development
Policy in the Twenty-first Century, pp. 80 –98; Dic Lo, ‘Techno-Economic Paradigm Versus the Market:
On Recent Theories of Late Industrialization’, Economy and Society, Vol. 24, No. 3 (1995), pp. 443–70.
56. For a case study, see Vivek Chibber, Locked in Place: State-Building and Late Industrialization in India
(Princeton University Press, 2003).
57. See the papers in Análise Econômica, Special issue on ‘The Lula Administration’, Vol. 21, No. 40 (2003) and
João Sicsú, José Luı́s Oreiro & Luiz Fernando de Paula, Agenda Brasil: Polı́ticas Econômicas para o
Crescimento com Estabilidade de Preços (Manole, 2003). For an overview of the international literature
see, among others, Hulya Dagdeviren, Rolph van der Hoeven & John Weeks, ‘Poverty Reduction with
Growth and Redistribution’, Development and Change, Vol. 33, No. 3 (2002), pp. 383–413; Arthur
MacEwan, Neo-Liberalism or Democracy? Economic Strategy, Markets, and Alternatives for the 21st
Century (Zed Books, 1999); J. Mohan Rao, The Possibility of Pro-Poor Development: Distribution,
Growth and Policy Interactions, unpublished manuscript, 2002; José A. Ocampo, ‘Rethinking the Develop-
ment Agenda’, Cambridge Journal of Economics, Vol. 26, No. 3 (2002), pp. 393–407.
58. Lecio Morais & Alfredo Saad-Filho, ‘Snatching Defeat from the Jaws of Victory? Lula, the Workers’ Party
and the Prospects for Change in Brazil’, Capital & Class, No. 81 (2003), pp. 17–23; Alfredo Saad-Filho,
‘New Dawn or False Start in Brazil? The Political Economy of Lula’s Election’, Historical Materialism,
Vol. 11, No. 1 (2003), pp. 3–21.
59. See Maria da Conceição Tavares & Luiz Gonzaga Belluzzo, ‘Desenvolvimento no Brasil – Relembrando um
Velho Tema’, in Ricardo Bielschowsky & Carlos Mussi (eds), Polı́ticas para a Retomada do Crescimento:
Reflexões de Economistas Brasileiros (IPEA/CEPAL, 2002), pp. 3–48.
123

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New Political Economy, Vol. 11, No.

Neoliberal Economic Policies in Brazil

This article offers a political economy interpretation of the continuation of

the leading causes of Brazil’s persistent economic underperformance, and that

relevant conclusions. It also includes pointers for an alternative economic strategy

Neoliberal economic policies in Brazil

The real plan (1994– 9)

TABLE 1. Brazil: macroeconomic indicators, 1990–2003

GDP Real DPD interest Primary

Trade Current Portfolio Interest Foreign International

The new policy regime (1999– )

TABLE 3. Brazil: inflation targets and outcomes (per cent)

1999 2000 2001 2002 2003d 2004

Growth, unemployment and inequality under neoliberalism

Neoliberalism in the Lula administration

,1 1–2 2–3 3–5 5 – 10 .10

Source: IBGE-PME (http://www.ipeadata.gov.br).

TABLE 5. Brazil: distribution of national income, 1999– 2003 (per cent)

1999 2000 2001 2002 2003

Source: IBGE, national accounts (http://www.ipeadata.gov.br).

a combination of a worsening external environment and increased

The Brazilian government also agreed to submit a constitutional amendment

from the US government.47 The Lula administration is committed to neoliberalism

Conclusion: escaping from neoliberalism

expansion of infrastructure and sectors with high employment-generating capacity

order to pursue a socially desirable economic strategy. The successful implemen-

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