REPATS, Brasília, V.6, nº 2, p 426-452, Jul-Dez, 2019
THE BRAZILIAN POST-NEOLIBERAL EXPERIMENT
*O EXPERIMENTO PÓS-NEOLIBERAL BRASILEIRO
James Tiburcio
**ABSTRACT: The post-neoliberal experiment in Brazil hinged on the idea that the state should take an increasingly greater role in most aspects of a country’s life, especially the economy and in its general development mode. From the early 2000s, the return of the state, powered by the so-called “New Left” post-neoliberal policies and governance stance seemed to work as a novel approach to a return of the all-encompassing socially inclusive welfare state. Until the second semester of 2015, the project of post-neoliberal inclusive development attained remarkable success. Benefitted by a benign global economic scenario, buoyed by China’s growth and bolstered by rising commodity prices, the Brazilian state created and maintained food and social security policies, and reached a certain level of improved fiscal policy and reduced external and internal debt. The tensions of overt and covert agreements between government and businesses, weak governance mechanisms and growing unsustainable social expectations foundered the experiment. I specifically examine the roles of BNDES, Petrobras, the Bolsa Família program, China as a trade partner and the Lava Jato Operation as drivers of the multiple crises Brazil faces in 2016. This article explores the unsustainability of the economic and political basis of the post-neoliberal experiment in Brazil (2003-2014) and argues that it in fact ended in the first semester of 2015.
Keywords: Brazil, Post-Neoliberalism, BNDES, Bolsa Família, China
RESUMO: O experimento pós-neoliberal no Brasil se baseou na ideia de que o Estado deveria ter um papel cada vez maior na maioria dos aspectos da vida do país, especialmente na economia e em seu modo geral de desenvolvimento. Desde o início dos anos 2000, o retorno do Estado, alimentado pelas políticas e posição de governança pós-neoliberais da "Nova Esquerda", parecia funcionar como uma nova abordagem para o retorno do estado socialmente abrangente, incluindo o bem-estar social. Até o segundo semestre de 2015, o projeto de desenvolvimento pós-neoliberal alcançou um sucesso notável. Beneficiado por um cenário econômico global benigno, impulsionado pelo crescimento da China e impulsionado pelo aumento dos preços das commodities, o estado brasileiro criou e manteve políticas de alimentos e previdência social, alcançando um certo nível de política fiscal aprimorada e redução da dívida externa e interna. As
tensões de acordos abertos e secretos entre governo e empresas, mecanismos fracos de governança e crescentes expectativas sociais insustentáveis fundaram o experimento. Examino especificamente os papéis do BNDES, da Petrobras, do programa Bolsa Família, da China como parceiro comercial e da Operação Lava Jato como propulsores das múltiplas crises que o Brasil enfrenta em 2016. Este artigo explora a insustentabilidade da base econômica e política do posto. - experimento neoliberal no Brasil (2003-2014) e argumenta que de fato terminou no primeiro semestre de 2015.
INTRODUCTION
1. BEFORE THE NEOLIBERALS
The neoliberal experiment in Brazil and other South American countries came after various experiments in `inward-directed development`, putting in practice South American economic structuralism and its tenets. Raul Prebish, Celso Furtado, Anibal Pinto and H.W. Singer, among others, were the main theorists of this period, all direct or indirect influencers of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC or in Spanish CEPAL). During the colonial and early post-colonial period, most South American countries were engaged in the world economy almost exclusively as outward-oriented commodity export economies. The First World War (1914-18) and the Great Depression (1929-39) provided the necessary impulse for some countries (to continue) to diminish their dependence on outward-oriented commodities and insist on an import substitution model, seen by most at the time as the way to develop. The period between the 1930s and 1960s, concentrated most import substitution investments, although since the 1890s, “a sustained significant reduction in the share of imports in the domestic supply of industrial goods” was already occurring albeit without “direct intervention in the allocation of scarce foreign exchange”, by the government (Abreu, Bevilaqua & Pinho, 2006:155). In Brazil, very importantly, import substitution was inextricably a result of the coffee export economy. An interventionist nationalist state strongly relied on a protectionist policy regime influenced by a rising pent-up demand of emerging, aspiring urban middle classes. Together they leveraged the local business classes to take the fore in their respective sectors, with crucial state-backed “nationalized” and international investments (Abreu, Bevilaqua & Pinho, 2006:155).
There are two main established interpretations of the agreements and arrangements between government, industrialists and coffee growers and traders in this first Structuralism-directed period. Furtado (1959) emphasized the differences between the coffee elite and industrialists; especially regarding the exchange rate policy and the socialization of losses connected to the minimum
prices policies. He also explored in a limited way the manner in which the import substituting industry once well-established defended a devaluation of the foreign exchange rate in Brazil (1959). Dean (1969), representing the revisionist literature, stressed the complementary relationship between agriculturalists and industrialists, as ‘membership’ in one group was not exclusivist; a relevant number of them had investments and business interests in both economic sectors.
A supplementary interpretation focuses on the absence of any commitment to
laissez-faire by any relevant political or economic force in Brazil in the 1930s.
According to this interpretation, with the entanglement of elite interests came Brazil’s position as the main coffee supplier of the world for close to a century. Brazil was a price-making export economy that made its domestic economic policy relevant to international coffee prices. That, in its turn, allowed for rent-seeking activities, which were scarcely possible in similar economies (Abreu, Bevilaqua & Pinho, 2006).
Topik (1987) argues that the Brazilian state was probably the most interventionist state in South and Central America even prior to the export economy debacle of 1929. Instead of an economy dominated by European and North American capitalists as previously believed, the Brazilian Republican state (1889-1930) was at the realm and in control of the most expressive sectors of the economy – coffee, trade, railroads and industry. Domestic interclass disputes and international engagements structured agricultural and industrial policies, as the state acted in a comparatively independent fashion, detached from the wants and preferences of civil society (Topik, 1987).
From 1930 onwards, different versions of Brazilian economic structuralism survived 3 coup d’états, 1930, 1945 and 1964, to, for at least four decades –, successfully establish industrial complexes in Brazil, some of them important monopolies in the telephony, oil and steel sectors. Initially, the Brazilian state intervened in a decisive manner only normatively in the economy throughout the 1930s. Its main targets were the protection of the coffee complex, which had reached its peak in 1928 and from then started a slow decline (Abreu, 2008). The government also continued and deepened its intervention in the foreign exchange
market, before becoming involved in production. Between 1933 and 1937, the Brazilian state consolidated its role as an interventionist not just normatively through sectoral policies but also as a producer of steel, iron ore and oil (Abreu, 2008:11).
There is no evidence of an openly ideologically oriented intervention. The state moved in to guarantee supply shortages caused by the First World War and later in response to the Great depression. There was no growth strategy or political or ideological motivation.1By 1964, industry had supplanted agriculture and
corresponded to more than double of that of agriculture, 32% to 16%, respectively (Abreu, 1999, 2010).
Import-substitution industrialization made rapid economic growth and diversification of the economy possible in a relatively short span of time. Brazil, for example, outgrew most other Latin American countries, at 7 percent per year (average annual rate of growth of the gross domestic product). Industry had an average annual growth rate of over 9 percent between 1950 and 1961, agriculture grew by 4.5 percent a year. The structure of the manufacturing sector also underwent substantial transformation. Clothing, textiles in general, and food products had lower growth rates, whereas chemical, electric equipment and appliances, transport equipment and machinery industries increased (CEPAL, 1966; Abreu, 2008).
By the late 1970s Brazil had earned a reputation as the “miracle economy”, and by the early 1980s, Brazil was among the leading industrial nations. But, the model was nearing exhaustion. There was increased political and economic risk, the ‘Petrodollars’ were drying up, and the Brazilian economy for most of the 1980s
1 “Between 1928 and 1932 imports fell by 60% in volume and exports by 16%. In dollar terms
imports fell by 70%, while exports were reduced by almost 50%. So terms of trade deteriorated by almost 30% and the capacity to import by 40%. Imports were crowded out by other types of expenditure in foreign exchange as shown by the gap between the shrinkage of capacity to import and of import volume. The average mil-réis-US dollar devaluation was 8% in 1930 and 55% in 1931 so that, as domestic prices fell by 11-12% in both years, real devaluation of the mil-réis was of more than 110% in relation to the dollar. The significant expenditure-switching caused by devaluation and discretionary controls on imports had important beneficial consequences on the level of domestic output as spare industrial domestic capacity was put to use. That there was scope for such a switch tends to qualify the more extreme criticisms of the inefficiencies of import-substitution which had begun with the first big spurt in industrial growth in the early 1890s.” Abreu, 1999:11.
came to a halt (Baer, 2001). Structuralism started to fail as neoliberal thinking was already being shaped in international financial institutions. To its numerous critics, ISI was imprudent and ill advised. According to this view, the government became unduly involved in the economy. Political appointments dominated keys economic positions, and unnecessary legislation clogged the economy and discouraged entrepreneurship. ISI did leave a legacy of economic distortion and biases as the growth it stimulated relied on significant increases in imports, particularly of inputs and equipment, and also the foreign-exchange policies resulted in insufficient export growth.
Additionally, the necessary foreign capital attracted starting in the 1950s ensued the first large foreign debt crises that culminated in the 1980s. Import substitution increased the balance of payments issue that it was expected to ease. Nonetheless, despite all its failings, ISIS was a relative success and added more controversy to the ‘state-led development’ debate, rather than cement the validity of the liberal laissez-faire ideology (Lustig, 1988).
2. THE NEOLIBERAL EXPERIMENT IN BRAZIL
Brazil transitioned from ISI to an economic policy of neoliberal character roughly from 1990. Starting in 1982, Brazil’s gradual return to democracy was conducted by a generation of politicians and activists still traumatized by a right-wing, state-centric capitalist and authoritarian regime. Their response was to support a more neoliberal ideology that favored less state power and entrusted more to the market. Consequently, the political and ideological backdrop was propitious for the introduction of Washington Consensus neoliberal policies (Crocitti and Vallance, 2012).
A ‘post-ISI stagnation’ had settled in and Brazil was seemingly rudderless, trying to find a new dynamic source of growth. Latin American economies were still cultivating their domestic economies as they tried simultaneously to spur growth pegged to industrial exports, in a bid to emulate the ISI years’ growth, as shown in Table 1 below (Baer, 1972; Amann & Baer, 2012).
Table 1: Key economic indicators for Latin America during the Import Substitution period versus Neoliberal period.
Source: Hira, 2007 based on the Oxford Latin American Database.2
A new old style of development was the new promise for Latin America (Fishlow, 2000). The term ‘Washington consensus’, “[…] the lowest common
2 Notes in the original: “Author Calculations from GDP 1970 $PPP; SD= standard dev. Of nominal
exchange rate; govt. deficit is LCU (rev-expenditures)/revenues; GDFI (%of GDP); External Debt, current $, Arg fr. 1967-70, Chile 1996-99; MVA/GDP based on LCU current[.]” Hira, A. 2007. “Did ISI fail and is neoliberalism the answer for Latin America? Re-assessing common wisdom regarding economic policies in the region.” Brazilian Journal of Political Economy, vol. 27, nº 3 (107), pp. 345-356, July-September/2007.
denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989[,]” was often used as a synonymous to neoliberalism in the early 1990s (Williamson, 1990). Whether or not such a consensus existed, it soon became irrelevant as different Latin American countries set out to implement reforms according to the items of the original Washington Consensus plus an ‘augmented’ Washington Consensus shopping list: 1. Fiscal discipline; 2. Reorientation of public expenditures; 3. Tax reform; 4. Financial liberalization; 5. Unified and competitive exchange rates; 6. Trade liberalization; 7. Openness to DFI; 8. Privatization; 9. Deregulation; 10.Secure Property Rights; 11. Corporate governance; 12. Anti-corruption; 13. Flexible labor markets; 14. WTO agreements; 15. Financial codes and standards; 16. “Prudent” capital-account opening; 17. Non-intermediate exchange rate regimes; 18. Independent central banks/inflation targeting; 19. Social safety nets; 20. Targeted poverty reduction (Rodrik, 2006).
In Brazil, the administration of president Fernando Affonso Collor de Mello, applied the first interventions following the neoliberal primer. But as previous plans – Cruzado Plans I and II (1986), Bresser Plan (1987), Verão Plan (1989) – , Collor Plan I in 1990 and Collor Plan II in 1991, failed miserably to put an end to the seemingly endemic and uncontrollable turbulence in the Brazilian economy. The fundamental disequilibria in foreign trade and domestic expenditure were still left unresolved (Fishlow, 2000).
Real change seemed to arrive with then minister of finance Fernando Henrique Cardoso in 1994 and his Real Plan. The stabilization of the Brazilian economy was achieved through painful and restrictive fiscal and monetary policies, general privatization of public firms, indexation of prices, financial and commercial liberalization and the transference of various state programs to the third sector (Garcia et al., 2015; Cohn, 2000). Cardoso and his team used a strategy of constant over appreciation of the Real (the new Brazilian currency), in some moments with de fato parity with the U.S. dollar. In order to achieve that, there was widespread use of price indexation and manipulation of the exchange rates. Speculative funds poured into Brazilian financial markets as the highest real interest rates in the world enticed many to take the risk. It worked until
Brazilian monetary reserves were insufficient to counter speculative pressures on the Real, as by then, the country owed 244 billion U.S. dollars or 46 percent of GDP to foreign creditors (Evangelist & Sathe, 2006).
3. THE DEMISE OF THE NEOLIBERAL EXPERIMENT
Brazil remained fragile. The state was downsized; practically all public firms, lucrative or not were privatized, trade and finances liberalized, and Washington Consensus orthodox monetary and fiscal policies implemented. The other side of the coin was the creation of a “vicious dynamic” of short-term speculative investment in detriment of long-term productive ones. Simultaneously, the Brazilian state was deprived of all policy instruments that would have allowed it to steer the economy in turbulent times.
As a result, throughout the 1990s and early 2000s, Brazil was repeatedly battered by external crises and its own troubles: Mexico in 1994, Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina and the United States in 2001. Inflation continued to threaten, as the smallest sign of economic growth seemed to activate what were considered dangerous inflationary sparks. Those were put out by more restrictive monetary and fiscal adjustments that in their turn fed back the vicious dynamic (Krugman, 1999).
The 1990s were a model of Brazilian Exclusive Development as social indicators failed to capture any benefits of the structural adjustment policies. Urban and rural violence, unemployment, poverty and food insecurity continued to plague the country. The ‘reform decade’ did not turn out as planned (Baumann, 2001). Supporters of the neoliberal experiment started looking for holes in the plan so as to explain what Brazil and Brazilians had done wrong as the neoliberal recipe, if strictly followed, should have resulted into a very different picture (Huber & Solt, 2004).
Those closely linked to the World Bank and the International Monetary Fund (IMF), among other supporting institutions, insisted that being more dependent on markets was usually beneficial even to extremely fragile economies as the Brazil economy was (Walton, 2004). Culprits were easy to find as the true positive effects of neoliberal policies depended exactly on those items
most Latin American countries had not done a good job changing: distribution of assets, structural policies and political and social institutions, education and infrastructure (Walton, 2004).
In terms of impacts on growth, neoliberal policies in the 1990s had a mixed scorecard. Trying to determine whether Latin America and Brazil were simply victims of the times, rather than of the Washington Consensus and neoliberal policies and practices has been tried however unconvincingly. The ‘Washington Consensus’ view valued more economic stability over growth. Probably the least contested legacy of the economic policies of the period was the considerable reduction of high inflation and fair enhancement in the fiscal and debt positions (Baumann, 2001).3
As to social conditions and inequality, Brazil experienced some unexceptional distributional improvement in the 1990s. Trade liberalization, financial liberalization, capital account opening, and tax reform were correlated to increases in either wage or household income inequality while varying results were attributed to privatization (Perry & Olarreaga, 2006). Latin America continued to be characterized both by “weak institutional conditions and high levels of inequality in terms of asset ownership and political influence” (Walton, 2004:176).
4. THE RISE OF THE POST-NEOLIBERAL EXPERIMENT IN BRAZIL Neoliberalism was defeated in a number of Latin American countries through the ballot box. Hugo Chávez in Venezuela, Néstor Kirchner in Argentina, and Evo Morales in Bolivia were among the first to implement economic policies at odds with the apparent prescriptions of the Washington Consensus.
3 “While there have been gains, the past decade was also deeply marred by crises in Mexico
during 1994 and 1995 and in Argentina and Venezuela since 2000. These have had profound effects on both economic conditions and the well-being of the people. The scourge of instability has not been resolved. In most cases internal problems—especially of public and private debt— were powerfully magnified by the herd-like and destabilizing behavior of private financial capital flows. This has led to a shift in thinking on policies toward the opening of capital accounts. It is
now generally recognized that this is desirable only after robust financial systems have been developed.” Walton, 2004:171. (Emphasis added).
In Brazil, Luiz Inácio Lula da Silva won the 2002 presidential election and took the oath of office on January 1, 2003. Rather than by ideological opposition, neoliberalism was turned down due to its poor economic performance that resulted in the defeat of the governments that had supported and implemented its policies. The neoliberal model was incapable of consolidating the social forces that were essential for its consolidation, and that resulted in the workings of the many crises that ended up barring its stabilization (Sader, 2008).
The post-neoliberal period was ushered in as an inclusive development drive. The poor would be equally valued, and all marginalized groups would be considered by the state as it worked toward addressing all development issues (Stuart, 2011; Hickey, 2013). The Brazilian post-neoliberal experiment under Lula and later under Rousseff, can be viewed as a genuine effort by Brazilian democratic institutions to promote sustainable growth and diminish poverty.
The rise of the post-neoliberal experiment in Brazil is almost inseparable with that of Luiz Inácio Lula da Silva and the “Partido dos Trabalhadores”, the Workers’ Party. Although Lula’s first act was to establish the Secretariat for Social Services with a mandate to eliminate the scourge of hunger from the lives of at least 20 million Brazilians, the Workers’ Party rise to power did not mean automatic governmental policy changes as it continued the orthodox economic reforms started by Collor de Mello and deepened by Cardoso. President Lula was a master in juggling seemingly opposing interests and putting forward his political agenda. His work philosophy was one of continual accommodation of divergent interests.
To the ideologists of the post-neoliberal state, Lula would have to create a new model of socialization, re-found the state around the public sphere, rehabilitating “the public domain, the universalization of rights, and thoroughgoing de-marketization” (Sader, 2008:23). At the same time, large Brazilian and multinational corporations had contributed heavily to the previous government candidate and to Lula and they also demanded stability and some market-oriented policies continuation.
Not surprisingly, the government formed by president Lula was since its inception an ‘endless internal contests’ one: the renewed Left, which believed
itself the bearer of a national inclusive development project, reclaiming social justice versus those that stood by the previous neoliberal model (Kliass, 2011). The neoliberal order believed that inclusive social policies were essential for both distribution and growth, but only as complements to market-oriented policies. For them, institutions for social protection were to be “efficient risk-management mechanisms”, that were put in place to manage social risks (Walton, 2004).
Demands from all social movements that supported his candidacy for a reversal of the de-nationalization drive that had occurred in the twelve preceding years and also for novel ways of political articulation were somewhat louder and a Brazilian inclusive development model was cast out of the ashes of the neoliberal experiment (Kaltwasser, 2011). Some started to believe that Brazil would be able to find a unique combination of economic and social policies and institutions to advance a Brazilian century (Amann & Barrientos, 2014).
Already in his presidential campaign, Lula chose to walk the middle path, somehow accommodating neoliberals and, what I will term, Center-Left and Left ‘inclusivists’. Lula won a presidential election in his fourth try, mostly hinging on his working-class popular appeal, the Brazilian economic crisis of 1999 that had disillusioned the middle-classes and drained part of its support for the ruling party and, very importantly, the assurances he gave the business sector and investors that he would maintain the macroeconomic policies of his predecessor. In order to seal the deal, he chose José Alencar Gomes da Silva, a self-made multimillionaire, as his vice president (Applebaum & Bernstein, 2014).
The presidential elections results were not repeated in the elections for the House of Representatives, the Senate and state governments. That forced the Workers’ Party to further compromise its ideological positions and look further afield for allies to make the country governable. The broader alliance came to include longtime allies, such as the Communist Party of Brazil and the Brazilian Socialist Party but also the Liberal Party (the vice president’s party), and the Party of the Brazilian Democratic Movement (PMDB). The PMDB was among the parties of the coalition of the Cardoso government; it simply switched sides once its former partner, the Party of the Brazilian Social Democracy (PSDB), lost the
2002 elections – almost a party tradition since the 1988 Constitution (Zucco, 2008).
4.1. The unsustainable heaviness of the state
Lula brought back a Brazilian version of state capitalism on steroids, adapting his ideals to reality. State capitalism is old news in Brazil. As Hagopian (1986) assessed in 1986 based on a case study of the Brazilian state of Minas Gerais, “[s]tate capitalism empowers state elites, politicizes the economy and the implementation of public policy, and establishes state clientelism as the dominant form of political representation” (Hagopian, 1986), so it continued to be in the post-neoliberal era.
Table 2: Summary of Brazil’s “bite off more than you can chew” approach, 2002-2016
Overreach 2014 Fifa World Cup
2016 Olympic Games
More say at the United Nations
Blocking a U.S. free-trade plan for the Americas BNDEs portfolio larger than the World Bank's
Losses Investment grading
Social gains of the boom period
Misleading
signs China`s indefinite rise
Oil prices Commodities boom Overvalued currency Misguided decisions
Spending its commodity windfall before its oil and ore were out of the ground
Issued cheap loans to big companies with government ties
Government budgeting assuming indefinite commodity high prices
Missed
opportunities Political system reform
Tax reform
Labor laws reform
Under Lula, the Brazilian government launched policies that put state agencies at the center of economic development. The Lula government more than doubled infrastructure spending as compared to its predecessor, with infrastructure spending boosting the expansion of Brazilian state construction and manufacturing companies. Lula also either took back state control of many Brazilian state companies that had been partially privatized or boosted the government’s stake in companies until the government had enough of a stake to assume de facto control of the companies.4
Lula’s main instrument at the center of Brazilian Neostructuralism development was the National Bank for Economic Development (BNDES). The bank, established in 1952, was a key agent in the Brazilian ISI and later, in 1982, through the creation of an investment arm, started investing in equity of Brazilian companies. Under Cardoso in 2002, the BNDES had already been reinstated as the centerpiece of the implementation of investment policies of the Brazilian state. By the time Lula ended his second mandate, BNDES had invested with varying stakes in more than two hundred of Brazil’s largest corporations. The policy became informally known as the “National Champions creation program” which was carried out by the bank until 2013 (Lueders, 2013). The bank invested heavily in the petrochemical, pulp and paper, cold storage, steel, orange juice and cement sectors. BNDES also supported most of the same companies and others through long-term loans with below-market interest rates (BNDES, 2013). By 2009, the thirty largest Brazilian multinationals had either BNDES loans or direct or indirect BNDES participation (Almeida, 2009).
Evaluations of the BNDES record from 2002 onwards vary mostly across ideological lines (Torres Filho & Costa, 2012). The bank did substantially contribute to the Brazilian economy by aiding some companies that had real world leader potential, making their strategies viable and strengthening their competencies. BNDES reach is shown on Figure 1, below. The other, mostly opposing view, is that productivity stagnated in most of the sectors supported by
BNDES and that many of the projects could have been financed without recourse to public funds (Lisboa & Lazzarini, 2015).
Figure 1: Selected BNDES-related equity holdings (as of 2015)
Source: Financial Times.
http://www.ft.com/cms/s/0/c510368e-968e-11e4-922f-00144feabdc0.html#axzz42OEwZ94w
Considering the first, BNDES strategy supporters call attention to the bank’s credit system coverage, which by 2014 reached around 277 thousand medium to micro companies, representing 50% of the investment made by the bank in industry, agriculture, trade and service sectors. Concurrently, its equity arm, covered close to the universe of the 100 largest Brazilian companies (91 out of 100), and 783 of the 1000 largest. Contrary to what its critics often cite, BNDESPAR, BNDES equity arm, utilizes market interest rates and has as its main source of resources its own portfolio flow and does not use neither resources based on the Long-term Interest Rate (TJLP) of the Brazilian National Treasury nor those of the Workers Assistance Fund (FAT) (Salcedo & Marques, 2015).
One of the most significant criticisms to BNDES, however, especially since Lula’s first term, is that it has distorted market signals. Due to its access to lower interest rates, lower than market prices credit, government programmatic support
and general preferences, it has dominated a larger than advisable chunk of the credit market, for a market economy, and in so doing hampers competition among private banks and generates much moral hazard. BNDES is also seen as the financier of the “Four Sisters”, Odebrecht, OAS, Camargo Corrêa and Andrade Gutierrez, engineering and construction companies that have consistently won the most relevant government contracts in their area of expertise in the last 45 years. They are at the epicenter of the graft scandal revealed by the Brazilian Federal Police and prosecutors in the Lava-Jato Operation (Branford, 2016).
Petróleo Brasileiro SA - Petrobras
Corruption and mismanagement derailed one of the most promising Brazilian success stories. A November 2014 report by a gas and oil industry research firm stated, “[a] new Dilma Rousseff regime would indicate another four years of high taxes, strict local content rules, stifling bureaucracy, and corruption and mismanagement within Petrobras.”5 The report was quite accurate as Brazil’s
largest company became engulfed in one of the largest corruption, bribery and money laundering scandals in Brazilian history during Rousseff’s second term.
President Rousseff, first as Brazil’s Minister of Mines and Energy (2003-2005) and then as Chief of Staff of the Lula government, was on the board of directors of Petrobras between 2003-2010, until she resigned in order to run for president.6 The president’s connections to the energy sector in Brazil are old and
deep and until 2014 she had used them to her full advantage. Petrobras’ crude oil production had hit an all-time high in October 2014, driven by the development of reserves in the so-called “pre-salt” areas of Campos and Santos Basins and that despite falling oil prices acting as harbingers of a not so rosy near future.7
In 2010, Petrobras, a semi-public corporation, became the fourth-largest company in the world, measured by market capitalization, and the second in the
5 BNamericas. 2014. Outlook: 2015 Signals Broad Shift. Oil and gas Intelligence Series report 6 Rousseff was Secretary of Energy (1993–94 and 1998–2002) for two governments of the state
of Rio Grande do Sul before joining the Lula government.
7 “The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and
are located in ultra-deep waters in a large portion of the Brazilian coast. It is called pre-salt because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre” is used because these rocks were deposited before the salt layer. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea.” (Trefis, 2014).
oil sector, only behind Exxon Mobil (Millard, 2010). By October 2013, Petrobras became known as the world’s most indebted oil company. Pushed by the Lula government dream of making Petrobras the largest developing country company in the world, the company contracted dollar-denominated debt in order to develop the “pre-salt” fields. It was a risky bet and the government lost it (Connors & Kiernan, 2015).
Figure 2: The (market) rise and fall of Petrobras.
Source: Damodaran, 2015.
The tide began to turn when the Brazilian Federal Police and public prosecutors launched Operation Lava-Jato (Car Wash) and started revealing Brazil’s largest corruption and money laundering scandal. At the crux of the scandal is private funding of political campaigns in exchange for contracts in infrastructure projects. “In what one of the suspects has called “institutionalized corruption,” the cartel of Brazilian companies conspired over several years to deliberately overcharge Petrobras by between 1% and 3% on a number of contracts with third parties. The excess funds were used in part to finance the political campaigns of politicians linked to the ruling coalition (sometimes in the form of legitimate contributions to political parties) and in part for bribes to Petrobras officials.” (Kamm, 2015). Table 1 summarizes the companies, their gross revenue in 2013 and their situation as investigations proceed.
Table 3: Engineering and construction companies implicated in Operation Car Wash. Company Gross revenue - 2013 (in R$ billion) Status Odebrecht 10.1
President and CEO sentenced to 19 years in prison.
Andrade
Gutierrez 5.3 CEO arrested.
OAS 5.1
Former president and present president arrested. 5 OAS executives already sentenced.
Camargo Corrêa 4.8
Executives arrested and convicted of corruption and membership in a criminal organization. 2 executives convicted of 38 counts of money laundering.
Queiroz Galvão 4.7 CEO sentenced to 13 in prison Galvão
Engenharia 3.9 CEO arrested.
Mendes Júnior 1.7
Former CEO sentenced to 19 years in jail.
Engevix 3.3
Owner sentenced to 19 years in prison.
UTC 3.2 CEO sentenced to house arrest.
Sources: various
Lava Jato has become synonymous with decadence and shame in Brazil. It has
opened Brazil’s business class rotten practices and also demonstrated the temerity of having an outsized company as Petrobras dominating the Brazilian economy. Likewise, the muddy dynamics of Brazil’s political system and its tentacles and implications into the corporate Brazilian world have been laid bare. Three other crises derived from Lava Jato: a corporate crisis as a unsurprisingly high number of the biggest companies have been implicated; they now face bankruptcy as their credit lines and ongoing contracts have been frozen; an economic crisis as the first crisis is dampening investment and bringing the country closer to stagflation; and a political crisis as practically all nationally relevant politicians, including the iconic Lula da Silva, and many politicians from the ruling coalition, speakers of the Chamber of Deputies and the Senate as well,
have been implicated. The overlapping nature of the crises is placing increasing pressure on the social, economic and political fabric of the country. It remains to be seen what – social forces, or who – a national savior, might be able to keep the country away from collapsing.
Bolsa Família
Bolsa Família (Family Stipend) is part of the larger government policy network, “Brazil without Extreme Poverty” initiative (Brasil sem Miséria) within the general framework of the food security policy, known as National Food and Nutritional Security Policy (PNSAN). The program has its roots in the Cardoso government and has suffered multiple changes until reaching its present form.
The program offers four different categories of benefits, basic, variable, variable for young people and overcoming extreme poverty category. The basic category covers families in extreme poverty and pays a monthly stipend of 77 BRL (Reais). The variable category pays 35 BRL to poor and very poor families that have children between the ages of 0 to 15, pregnant and/ or lactating women, up to a maximum monthly amount of 160 BRL, that is, five stipends per family. Families in extreme poverty are allowed to be included in the basic and variable categories simultaneously up to an upper limit of 230 BRL. The variable for young people pays 42 BRL to poor and very poor families that have teenagers between the ages of 16 and 17, enrolled in a school. Each family can have up to two stipends simultaneously, receiving a maximum amount of 84 BRL. In The overcoming extreme poverty category, the amount paid is calculated using the family per capita income and benefits already received from the program. Families in this category are allowed to accumulate benefits from the other categories up to a monthly stipend of 306 BRL. The Ministry of Social Development updates the amount of the benefit yearly.8 Amounts, payment dates, account balance and
other details are easily accessible through different websites and blogs apart from
8 The last 16.6 percent increase was vetoed by president Dilma Rousseff in January 2016 as her
government struggled to adjust to the demands of the Annual Budget Law and the Fiscal Responsibility Law.
automatic telling machines (ATMs). The benefit is accessible using an ATM debit card, preferentially issued to a female head of the household.
The Bolsa Família Program has been widely studied and hailed as one of the most effective food security and inclusive development public policy in the world (Soares et al., 2010; Castiñeira, 2009; Glewwe and Kassouf. 2012). It can be considered the most effective and stable column on which the post-neoliberal experiment in Brazil rested. Bolsa Família is credited for halving Brazil’s extreme poverty from 9.7 to 4.3 percent and for lowering income inequality by 15 percent. And all that, spending only 0.5 percent of the Gross domestic product (GDP) and about 2.5% of total government expenditure. The program covers about 11.2 million families, or about 50 million Brazilians (around 25 percent of the total Brazilian population (Figure 4. 2016 estimates, place Brazilian population at around 209 million).
Bolsa Família has also become a powerful political weapon apart from a social
welfare success. Since the inception of the program, the Workers’ Party has won three presidential elections and seemed poised to remain in power for the foreseeable future (that is, until 2015). By targeting mainly rural areas in the poorest regions of Brazil, the program influenced a substantial fraction of the electorate to switch sides and then, remain faithful to PT.
Support for the program was not a consensus even among members of the Workers’ Party itself. “The PT has a strategy to be in power for 25 years. Bolsa
Familia is a part of that strategy because the programme is seen as extremely
popular. But why is bolsa familia so applauded? The conservatives say, 'Look we gave 70 reais per month to the poor so that's good. But it's neoliberalism … People who don't understand Brazil think bolsa familia is the greatest thing, but bolsa familia is rubbish."9
To the critics, economic growth, the introduction of a minimum wage and universal pension schemes are much better, effective and more just than bolsa
familia type of schemes, “which millions miss out on because they cannot
9 Lena Lavinas, professor of welfare economics at the Federal University of Rio de Janeiro and
a member of the PT, cited in Watts, 2013, “Brazil's bolsa familia scheme: political tool or social welfare success?” The Guardian, 19 December 2013.
manage the complex bureaucracy, or they fail to meet the conditions.” (Watts, 2013:2). “A large and diverse body of scholarship has provided ample evidence that the more universal social-protection systems are, the more redistributive their impact.” (Lavinas, 2013:38). And, Bolsa Familia is not universal. Also, most policymakers and academics agree that an exit strategy is as important as a welfare program itself and Bolsa Família lacks one.10
Figure 3: The population of the Big 3 of the Americas (2013).
Sources: World Bank, IBGE and others.
Available at: https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=brazilian%20population
4.2. Dependence on exporting commodities to China
At the very bottom of Brazil’s fall and the failure of the post-neoliberal experiment is simply China’s economic downturn. Brazil locked itself in a dependent relationship, too close for comfort. China wobbled and Brazil stumbled. An export-oriented economy, Brazil depends on shipments of raw materials and manufactured goods, 46 percent of total exports and 38 percent respectively. China corresponds to 19 percent of total exports and its slowdown has deeply affected its most important supplier of commodities. BNDES primed Brazil’s
10 Soares (2012:13), on the other hand, points out that, “If poor families are families with virtually
no human capital, no social capital and no social networks, then the search for exit strategies is pointless.”
economy to keep China supplied with iron ore, soybean and beef, taking the two countries bilateral trade from $2 billion in 2000 to 83 billion in 2013, as China left the United States behind as Brazil’s largest trading partner.
Brazilian securities markets also benefited as many preferred to invest in Brazil as an indirect investment in China, due to Brazil’s more transparent stock market. By February 2016, Brazil led world losses as the most important Brazilian benchmark equity index, the Ibovespa, sank and hit close to decade low levels on recession forecasts. The Real, the Brazilian currency, followed suit, and from being one of the most overvalued developing world currencies, in a few months, lost more than a third of its value against the US dollar. Commodity-dependent economies predictably enjoy a decade of boom, followed by two decades recovering from the eventual slump (Sharma, 2015) and Brazil headed that way once again (Figure 4). As forecasts repeatedly indicated that Latin America’s largest economy was heading to its deepest recession in more than a century, the “resource curse” started taking its hold on the Brazilian economy.11
Figure 4: What is going wrong for Brazil
Source: The Wall Street Journal. Lyons, J. How Brazil’s China-Driven Commodities Boom went Bust. August 27, 2015.
http://www.wsj.com/articles/how-brazils-china-driven-commodities-boom-went-bust-1440728049
11 The resource curse, also known as the “Dutch diseases”, describes the way countries endowed
with vast natural resources tend to do worse than those countries without them. The “curse” manifests when the relatively easy cash flows from commodity sales pushing currencies to be overvalued and leading governments to populist, short-termed policymaking. When the resource boom runs its course, countries are left severely exposed. “
CONCLUSION
The fall of the post-neoliberal experiment in Brazil started in the second semester of 2014, as Brazil seemed to have had definitely set out on a stable development path while simultaneously diminishing inequality and poverty (Amann & Barrientos, 2014). President Lula made a successor in Ms. Dilma Rousseff, who had been one of his most loyal and efficient ministers although she had never held any elected office before. President Rousseff continued to increase government spending as compared to the Lula administration, to such lengths that in her first term, government stimulus funding could not be spent within a given fiscal year for most years. Ministries, state government, municipalities and government schemes were unable to realize the budget. Stepping up, Mr. Lula’s governing dynamics, Rousseff proceeded to subordinate large parastatal corporations to her bidding and went on to curtail the Brazilian Central Bank’s quasi independence, forcing it to lower interest rates according to her government’s wishes.
But as discussed, the unsustainability of the economic and political basis of the post-neoliberal experiment in Brazil (2003-2014) was sealed by the impeachment of Ms. Rousseff and it in fact ended in the first semester of 2015. This exploratory bibliographic review of the post-neoliberal experiment in Brazil put forward evidence that the state is no stranger to the economy in Brazil and since the late 1800s it has played multiple active roles. In the 1930s, it started to play a “new and expanded” role and never really left (Bulmer-Thomas, Coatsworth & Conde, 2006:2). In different guises and roles, the state has been almost omnipresent through the different stages of the country’s economic history and even now in the Bolsonaro government, despite its attempts to privatize and dismantle some agencies, it seems to be drawn back to the Brazilian state control cycle. If it will try to be an agent of inclusive development in a post-neoliberal setting remains to be seen.
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