Back to power: perspectives and limits of the Lula government

Image: Elyeser Szturm


The success of the new government depends on abandoning neoliberalism and adopting a developmental strategy.


Lula won by a narrow margin the presidential elections. It was a great victory for Lula and the Workers' Party, PT, when we look at Brazil's recent history. In the 2018 election, Lula was arrested and ineligible, convicted in 2017 on false accusations of corruption. In late 2019, the Federal Supreme Court overturned the verdict after messages leaked between the judge and prosecutors.

Lula and the PT had faced political setbacks in the past. In 2005, the Mensalão scandal, a monthly payment to parliamentarians in exchange for government support, became a symbol of the fight against corruption. It was also an attempt to remove the PT and its political coalition from power. Despite attacks from the mainstream media and the condemnation of some PT leaders, Lula was re-elected in 2006 and Dilma Rousseff in 2010. The Brazilian GDP grew 4,05% a year between 2002 and 2010.

The great political setback began in 2013, when the first street protests took place in the PT governments. The conservative middle class, initially absent, joined in by questioning corruption and the costs of the 2014 World Cup, increasing pressure on the government. As a result, President Dilma Rousseff's popularity has plummeted. Groups with right-wing and far-right connections emerged in the United States.

Despite growing political and economic problems, Dilma Rousseff won the 2014 elections. In the campaign, she argued against low economic growth and high unemployment. However, despite the cyclical crisis that began in the second quarter of 2014 due to the drop in the profit rate (Marquetti et al, 2020b), it implemented austerity policies in 2015. The result was a 3,8% drop in GDP in 2015, followed by a further drop of 3,6% in 2016. The economic crisis and the impact of allegations of corruption in the so-called “Operation Lava Jato” played an important role in the soft coup of 2016.

Vice President Michel Temer took power, suggesting a series of measures aimed at increasing profitability. The main objective was to reduce labor costs and fiscal deficits. It included proposals to change the minimum wage indexation rule, reform labor legislation and social security. Other neoliberal measures were also in sight, such as the elimination of constitutional rules on spending on education and health, promoting both privatization and trade liberalization. The government managed to implement some of the neoliberal reforms. However, political scandals reduced the chances of traditional right-wing parties winning the 2018 elections.

Operation Lava Jato began in early 2014, investigating money laundering and corruption at Petrobras by various political parties. Lula became the main defendant, and his arrest in 2017 was celebrated as the main achievement of the 'Operation Lava Jato'. In addition, Lula was also prevented from running for president, which allowed Bolsonaro to win the 2018 election. The situation could hardly get any worse for Lula and the PT.

In power, Jair Bolsonaro launched an ultra-right neoliberal agenda, reforming the pension system, privatizing public companies, ignoring environmental laws, while attacking minority rights and democracy. Brazil is the second country with the highest number of deaths from covid; the official statistic was close to 700 in December 2022, while the number of known cases was over thirty-six million. The annual GDP growth rate was 0,6% in the first three years of government, and the expected growth rate in 2022 was 2,8%. Furthermore, the inflation rate increased from 3,75% in 2018 to 10,06% in 2021, and the expected inflation in 2022 was 5,88%. Even considering the problems associated with the pandemic and the war in Ukraine, economic performance has been dismal.

Inequality and poverty increased. Compared to 2020, average per capita household income decreased by 6,9% in 2021; the poorest 10% class lost the most, 32,2%; the class of more than 10% to 20% poorest lost 19,8% of household income per capita (IBGE, 2022).

Soon, the economic question was the biggest concern of the voters, being fundamental for Lula's victory. His political support was based on voters with a monthly income of up to two minimum wages. They suffered the worst with the return of neoliberalism and the economic crisis. Lula organized a grand coalition; the vice president is Geraldo Alckmin, a former member of the Brazilian Social Democratic Party, PSDB, and presidential candidate in the 2006 and 2018 elections. The PSDB supported major neoliberal institutional reforms in the 1990s, becoming the main party in opposition when the PT was in power. The political challenge is how to govern with this grand coalition, especially when the government has to face difficult choices about managing the economy.

Increasing GDP growth is needed to unite and expand the political coalition and implement the redistributive policy promised during the campaign. Despite Bolsonaro's defeat, his party is the largest in the Chamber of Deputies. Pro-Bolsonaro candidates won important state elections, such as in São Paulo, Rio de Janeiro and Minas Gerais. Without economic growth, Bolsonarism will remain a political force for years to come.

The article investigates the prospects and economic limits of Lula's third term. We address these issues by employing the rate of profit and its determinants. The profit rate is fundamental for the functioning of capitalist firms for the different schools of economic thought. The fall in profitability after the 2008 crisis due to the crushing of profits and the fall in the terms of trade played a decisive role in the end of the political coalition organized by Lula, opening the possibility for the soft coup in 2016.


The profit rate and its components in Brazil: 2000-2021

The profit rate is a central determinant of expected profitability, playing a key role in the business cycle (Weisskopf, 1979). The higher rate of profit increases the expected rate of profit, which boosts investment, expanding production and employment. The fall in the rate of profit reduces expected profitability, reducing investment and aggregate production. Economic policy can increase investment and capital accumulation in the short term. However, in a context of falling profit rates, investment and capital accumulation will decline in the medium and long term. It is necessary for investment to be under the control of society so that the rate of accumulation does not fall with a decrease in the rate of profit.

The trajectory of the rate of profit depends on three factors related to the types of crises in a capitalist economy, as suggested by Weisskopf (1979). First, profit crushing is a decrease in the share of profits due to the greater bargaining power of workers. For economic and political reasons, wages can rise faster than labor productivity. Second, the decline in installed capacity utilization due to lack of aggregate demand. Third, the fall in the potential productivity of capital due to the increase in the organic composition of capital.

This phenomenon is usually associated with technical change, capital accumulation, and mechanization, but it also occurs when the price of capital goods rises faster than the GDP deflator and the terms of trade decline in an open economy. Regardless of its origin, the drop in the rate of profit results in a reduction in investment and capital accumulation and, consequently, in lower economic growth.

The rate of profit is the ratio of profits to the capital advanced in production. Weisskopf (1979) proposed a decomposition of the profit rate, r, into the share of profits, π, into the level of utilization of installed capacity, u, and into the potential productivity of capital, ρ. The profit rate is calculated as follows:

where Z is net income, K is net capital stock, X is net output, and XP is the net potential product. For information on the data, see Marquetti et al. (2023).

The rise or fall of the rate of profit has important political consequences in a democratic society. Changes in the potential productivity of capital occur in the medium and long term, and their influences are associated with institutional changes in capitalist economies. The interplay between functional income distribution and capacity utilization captured by Goodwin cycles has important policy consequences. The increase/decrease in the use of installed capacity expands/reduces the bargaining power of workers with consequences for profit sharing and profit rate.

The capitalist will respond politically to a profit squeeze by withdrawing support from the ruling coalition in power. Workers also responded to the drop in capacity utilization, rising unemployment, and reduced bargaining power and wage participation by voting against the government in power. Economic conditions are a key ingredient in the votes of workers and capitalists (Fisher, 2018). However, capitalists have the greatest economic and political power to influence and change the democratic system. This is especially true in countries without a democratic tradition, as in the Brazilian case.

Looking at changes in the three variables over time can help to better understand the trajectory of PT governments at the beginning of the 1st century, shedding some light when comparing the current economic and social conditions that the new government faces with the previous ones. Figure 2000 presents Brazil's profit rate, r, and net investment, I, between 2021 and 2021. Changes in the net profit rate precede movements in net investment. The result is consistent with Grazziotin et al. (1950), which shows a Granger causality of the rate of profit for capital accumulation in the Brazilian economy between 2016 and XNUMX.

Figure 1: The rate of profit, r, and net investment, I, Brazil: 2000-2021
Source: Marquetti et al. (2023)

Table 1 shows the decomposition of the profit rate and the GDP growth rate by presidential terms between 2002 and 2021. The profit rate remained stable in the period due to the slight increase in the potential productivity of capital. This result reflects the deindustrialization of the Brazilian economy in the period. Deindustrialization is a structural change in which economies move from sectors with low to high capital productivity. In the processes of demechanization, there is a movement contrary to that investigated by Marx in his analysis of the fall in the rate of profit. Manufacturing's share of added value at current prices dropped from 15,27% in 2000 to 11,97% in 2021; was 14,97% percent in 2010.

Table 1: The decomposition of net profit rate and GDP growth rate by presidential term, Brazil, 2000-2021, %

Source: Marquetti et al.

Figure 2 shows the profit rate and its components between 2000 and 2021. The profit rate did not show a trend during the period, only cyclical movements. Despite the drop in the profit share, the profit rate increased between 2002 and 2007, driven by greater utilization of installed capacity and increased potential capital productivity. Between 2007 and 2015, the profit rate fell due to the decline in the share of profits and in the utilization of installed capacity. The profit rate expanded between 2015 and 2021 with the increase in the share of profits and the higher utilization of installed capacity.

Figure 2: The rate of profit and its components, Brazil, 2000-2016
Source: Marquetti et al. (2023)

From the pink wave to late neoliberalism: the Brazilian economy in the XNUMXst century

The positive perspectives for the new Lula government are based on the popular approval of the PT governments in the years 2002-2014. The period covers Lula's two terms, between 2002 and 2010, and the first Dilma government, between 2011 and 2014. The economic and political crises affected Dilma Rousseff's second term, which resulted in her impeachment in 2016.

The period comprises the pink wave, the cycle of left-wing governments that took office in several Latin American countries around 2000. The pink wave combined redistribution of income to work, poverty reduction and greater national autonomy. The investigation of the Brazilian pink wave helps to understand the possibilities and limits of the new Lula government.

Neoliberalism's inability to promote economic growth and maintain profitability in the 1990s played a major role in the Workers' Party victory in 2002. There were two other reasons for the victory. First, Lula organized a broad alliance between different social sectors, including the fractions of the working class and the bourgeoisie (Boito Jr. and Saad-Filho, 2016). José Alencar, an industrial capitalist, was the candidate for vice president. Second, Lula signed the Letter to the Brazilian People in July 2002, informing the financial sector that the government would maintain some neoliberal economic policies, such as high real interest rates. This movement reduced the opposition of the financial bourgeoisie to the new government.

In power, the Workers' Party's economic policy was pragmatic and moderate, combining elements of developmentalism and neoliberalism. Political and economic reasons determined which of them would be hegemonic. In the first two years, a neoliberal economic policy prevailed. The government maintained the regime of inflation targets and floating exchange rates, committing itself to fiscal balance through primary surplus targets. Henrique Meirelles, formerly an international bank executive, was appointed president of the Central Bank. A redistribution policy for the poor was consolidated through the unification of several conditional cash transfer programs in Bolsa Família.

On the political side, relations with the Legislative Power depended on a broad political coalition, as usual in Brazil. The grand alliance implied political constraints for the government, which did not have a majority in the legislature. The Mensalão crisis in 2005 stemmed from an attempt to raise political support in the legislature. To overcome the crisis, the government formed a new political alliance with the Brazilian Democratic Movement Party, PMDB, the largest party in Congress.

Economic changes occurred in the period, developmentalism became hegemonic and Guido Mantega replaced the Minister of Finance, Antonio Palocci Filho. Fiscal policy and income transfer programs gained prominence in terms of demand expansion and production growth. The new minimum wage policy came into force at the end of 2006, linking its rise to previous inflation and GDP growth, making it possible to increase the share of work in household income and consumption. The Economic Acceleration Program, PAC, a set of public and private investments, was launched in 2007 under the leadership of Dilma Rousseff.

Demand for commodities increased and the terms of trade improved in the period. Commodity prices rose 135% between 2002 and 2007 (IMF, 2022), which, associated with a high interest rate, led to an appreciation of the real. This made it possible to combine real wage increases with inflation control. As a side effect, there was greater de-industrialization and an increase in the political power of agribusiness.

Economic growth between 2003 and 2007, combined with rising terms of trade, allowed for simultaneous growth in the rate of profit and the wage share. This was the basis that supported social and political stability in the Lula years, resolving contradictory interests from different sectors of society.

As the utilization of productive capacity and profit rates increased, allowing for higher real wages, there was no greater contradiction between the interests of workers and capitalists. As shown in Figure 3, this movement was observed in the first Lula administration. It displays the scatterplot between capacity utilization and wage share between 2000 and 2021. The data are consistent with a Goodwin cycle, establishing a non-linear relationship between capacity utilization and wage share.

Capitalists and workers shared economic growth with higher profits, wages and jobs. These were the central principles of the PT's success: economic conditions reduced social class disputes (Marquetti et al., 2020b; Martins and Rugitsky, 2021). The high real interest rate that benefited the financial elites was accepted by the popular sectors, while the expansion of wage share in income was not contested by the capitalists.

Figure 3: The relationship between the use of installed capacity, u, and the wage share, 1- π, Brazil: 2000-2021.
Source: Marquetti et al. (2023).

The economic landscape changed after the financial meltdown in 2008. Expansionary fiscal and monetary policies to stimulate demand for manufactured goods worked to avert a major economic crisis. The GDP growth rate reached 7,5% in 2010. The neoliberal crisis affected the Brazilian economy in the 2010s, when the terms of trade declined, and attempts to maintain a high level of capacity utilization resulted in a drop in participation of profits on income and the rate of profit.

The slowdown in world trade and the adoption of the quantitative easing by the United States induced a shift in global demand towards countries with a growing domestic market and an appreciated national currency. The strategy adopted by the Dilma Rousseff government was to stimulate private investment through changes in interest and exchange rates. The approach produced some devaluation of the national currency but failed to boost economic growth. There were cost-cutting measures, such as increasing tax breaks and subsidies, and using public banks to reduce spread in interest rates.

The government hoped that the policies would result in higher after-tax profits and greater private investment. Public investment would play a complementary role in restoring growth. Fiscal balance would be established by economic growth that would provide greater tax collection. In this scenario, the financial sector would have to accept a lower interest rate and competition from public banks.

However, falling profit rates due to the profit squeeze prevented private investment from recovering. There are clear limits on the government's ability to reconcile the different interests of social classes. Policies to value the minimum wage and maintain low unemployment rates were maintained in a context of rising labor costs. Low unemployment reduced the cost of job loss and increased workers' bargaining power.

The financial sector understood the economic policy as the end of the commitment assumed in the Letter to Brazilians. There was a misconception about neoliberalism by the Dilma Rousseff government. The policies adopted were consistent with a sharp split between financial and productive capitalists. One of the main features of neoliberalism is the fusion of productive capital with financial capital under the leadership of the latter.

In addition, the social unrest that emerged in 2013 and the lower economic growth intensified the dispute between social classes and reduced the government's popularity. In 2014, Dilma Rousseff was re-elected by a narrow margin. During the campaign, Dilma Rousseff recognized the economic problems and proposed gradual adjustments to preserve employment and economic growth. In a neoliberal twist, however, she appointed Joaquim Levy, a Chicago-trained economist, as finance minister to reconnect with the financial bourgeoisie.

An economic austerity policy was implemented. The inflation rate reached 10,6% in 2015 after a sharp rise in administered prices, while investment and GDP fell by 14% and 3,8%, respectively. At the end of 2015, the government tried to change course, replacing Joaquim Levy with Nelson Barbosa, who proposed a mild austerity combining spending and tax increases with a pension reform, but it was too late.

In the same period, a political crisis erupted around the Petrobras corruption scandal. Media coverage of the car wash operation damaged the government's image. As it later became clear, the main objective of the operation was to prosecute and arrest Lula and demoralize the PT. With the increase in economic problems, an association between the economic crisis, PT governments and corruption emerged in the media. The adverse political climate associated with the rupture of the class conciliation established in Lula's first election, generated the social and political conditions for the impeachment of Dilma Rousseff.

The neoliberal turn of 2015 and the political effects of the car wash operation reduced the political support of popular sectors, which did not mobilize to defend the PT government. Furthermore, the bourgeoisie perceived the neoliberal turn as too lenient to reduce workers' bargaining power and insufficient to restore profitability. As the political crisis unfolded, the Dilma Rousseff government was left alone, becoming easy prey for the political articulations that led to its downfall through a parliamentary coup.


late neoliberalism

The PMDB, the party of Vice President Michel Temer, launched the document “Bridge to the Future” in October 2015, containing measures to restore profitability by reducing labor costs and implementing fiscal austerity. The proposals called for a radical and complete neoliberal turn. The coup and the full implementation of neoliberalism marked the end of the Brazilian pink wave. As of 2016, there was an increase in the rate of profit, and the parliamentary coup already produced the expected results from the point of view of the bourgeoisie.

However, mistrust and attacks on the political system continued after the coup. Although the main target of the car wash was Lula, it transcended the PT, reaching the Temer government and the political parties in Congress. Fierce defense of capitalist interests and political scandals resulted in low popularity. The demoralization of the PT and the political system and dissatisfaction with the government opened up the possibility for an extreme right candidate. Lula, however, was the favorite for the 2018 election, even though he was condemned by Judge Sergio Moro, who later became Jair Bolsonaro's Minister of Justice. Lula was arrested and barred from running after the Supreme Court rejected his habeas corpus.

This paved the way for Jair Bolsonaro's victory and the return of the Brazilian army to the political scene. Jair Bolsonaro's political support was heterogeneous, including conservative and far-right groups, evangelicals, relevant military segments, sectors linked to agribusiness and commercial entrepreneurs, and neoliberal groups led by Minister of Finance Paulo Guedes, an economist trained in Chicago.

Jair Bolsonaro's government promoted social security reform and introduced a series of deregulations, including lowering environmental and labor protection standards. The independence of the Central Bank was approved, in addition to regulatory frameworks that facilitate private management in areas such as natural gas and sanitation. The privatization of Eletrobrás and the sale of several Petrobras assets, such as BR Distribuidora and refineries, completed a representative picture of the deepening of the late neoliberal project. There was a disorganization of the functioning of the State.

The Covid-19 epidemic has had a major impact on Brazil. While late neoliberalism was effective in reducing the wage bill and increasing the rate of profit, it was ineffective in protecting the health and income of workers and the poor. Initially, the Bolsonaro government adhered to the 'herd immunity' thesis, refusing to act to slow the spread of the coronavirus. Several health ministers were appointed without a clear strategy for dealing with the pandemic.

Political and social pressures prompted the government to act. In April 2020, the National Congress approved a law on emergency cash transfers to mitigate the social and economic effects of the pandemic, promoting short-term income growth and poverty reduction. Bolsonaro's approval rating grew in 2020 during the pay period. With the end of emergency income transfer programs, there was a rapid increase in poverty due to high unemployment and falling real wages. The main component of income for Brazilian families is income from work. Wage participation declined sharply during late neoliberalism, as can be seen in Figure 3.

The combination of the neoliberal agenda and the pandemic has led to a sharp drop in the population's standard of living. Inflation grew rapidly in the second half of 2021, the Ukraine War further impacted real income and the well-being of the population. The drop in living standards and the dire social situation, with the return of hunger, led conservative politicians to exert pressure on the government. In 2022, a new program, 'Auxílio Brasil', which violated fiscal rules, and the reduction of indirect taxes on fuels were implemented to reverse the government's decline in popularity. In the third quarter of 2022, there was a drop in the IPCA and a slight recovery in employment.

The measures restored part of Bolsonaro's popularity, but were insufficient to guarantee his re-election. The workers and the poor population supported Lula. There are limits to the drop in real wages and family income in societies with regular elections. For the first time since redemocratization, the president was defeated in the re-election attempt. Lula's two percent margin of victory shows the polarized political environment the new government will face. The following sections present the proposed measures and discuss the perspectives and limits of the new government.


Measures proposed by the PT

On October 27, 2022, just three days before the second round, Lula launched a new letter, the “Letter for tomorrow's Brazil”. The letter presents the main proposals of the new government, summarizing the debates throughout the campaign in 13 priority points. The document has a broader focus than the 2002 'Letter to Brazilians', which focused on the financial market. On December 22, 2022, the Final Report prepared by the Government Transition Cabinet reaffirmed the priority points raised in tomorrow's Letter to Brazil.

The priority points can be summarized in eight economic proposals. The measures can be described as: (i) Review of the income transfer program; (ii) Provide real gains to minimum wage beneficiaries and retirees; (iii) Renegotiation of the debt of citizens in economic difficulties and providing access to credit to the highly indebted population; (iv) Income tax exemption for citizens earning up to R$5.000,00 per month, accompanied by tax reform; (v) Encouraging public and private investments in infrastructure; (vi) Use of public banks and state-owned enterprises to increase investment and service delivery; (vii) Reindustrialization, modernization of the country and entry into digital technology; (viii) Combating deforestation, achieving zero carbon dioxide emissions in electricity supply, encouraging sustainable agriculture, mining and extraction.

Both documents emphasize the need for a quick recovery of state capacities for planning, executing and implementing public policies. The structure and organization of the state suffered in several dimensions under the government of Jair Bolsonaro (Lotta; Silveira, 2021). There was dismantling of public education and health policies, restriction of social participation, weakening of social control mechanisms and obstruction of access to individual, social and economic rights. The Final Report points to the need to review and plan various actions to foster the State's capacity for action through the reorganization of ministries and repeal of various instructions and decrees of the previous government.

There is also a sense of urgency regarding Brazil's repositioning in the international community and its forums, recovering part of the soft-power lost in recent years. In this sense, the proposals aimed to restore Brazilian influence in forums such as MERCOSUR and BRICS, as well as in other international institutions associated with the United Nations.

It also seeks to implement a new environmental policy to improve its image and facilitate access to international funds to preserve the Amazon rainforest. International funds are available to combat climate change and Brazil can benefit from the resources. In addition, the new international position can reduce domestic political opposition, helping to alleviate pressures and promote necessary reforms. The external scenario and the way Lula deals with internal political pressures are fundamental to his success.

One of the first measures taken by the new government was a Proposal for a Constitutional Amendment, PEC, to raise the spending ceiling for the 145 Budget by R$2023 billion. of Tomorrow, such as Bolsa Familia of R$600, with R$150 per child up to six years old; increase in the real minimum wage; increased resources for education and public health. The PEC also makes it possible to increase federal investments by R$ 70,4 billion.

These measures likely have the potential to stimulate short-term growth by employing expansionary fiscal policy. The new government should sustain the slight economic recovery process started with the opportunistic measures adopted by Jair Bolsonaro. The last months of 2022 saw a recovery in employment and growth. The new PT government will have to face strong opposition from the right and extreme right. In this polarized environment, combating rising unemployment is essential to preserving popularity. The PEC opened some fiscal space in the first year of the new government.


Economic Perspectives

For the new government, the expansion of aggregate demand and the use of installed capacity will stimulate economic growth. In the short term, economic policy will combine fiscal expansion, increased social transfers to low-income families and an increase in the real minimum wage. While it may promote growth and meet initial expectations surrounding the new government, there are risks to the sustainability of a long-term growth trajectory. In particular, in the case of a fall in the rate of profit caused by profit crushing.

In addition, there are fiscal limits to the expansion of public investments. In the second quarter of 2022, federal government revenue reached 32,1% of GDP and expenditure was 37,2%. Of the total expenses, 24% went to the payment of interest and 40,9% to the payment of social security and assistance benefits, while investment reached 0,67% (STN, 2022). There is room to ease monetary policy in the short term; the basic interest rate was 13,75%, and the inflation rate in the last 12 months was 5,9%. The real interest rate is 7,41% per annum.

An increase in the bargaining power of workers is expected. A new rule will be proposed to raise the minimum wage above inflation. In 2006, the valuation law was instituted, which corrected the minimum wage according to annual inflation and the GDP growth rate of the two previous years. Between December 2002 and December 2014, the real minimum wage increased by 82%, real GDP expanded by 50,7% in the period. From 2016 to 2018, the minimum wage increased in line with inflation due to the slowdown and decline in GDP. In 2019, the Bolsonaro government eliminated the policy that considered GDP growth as an element to raise the minimum wage. With the new government, there is also the possibility of reviewing labor laws with the expansion of workers' rights and the strengthening of unions.

Figure 4 presents capacity utilization in Brazilian industry from the first quarter of 2000 to the third quarter of 2022. The dotted line displays quarterly data and the solid line shows the four-quarter moving average. Industrial capacity utilization in 2022 was similar to that of the first half of 2004. The result is consistent with the data observed for the entire economy and in the Goodwin cycle in Figure 3. From this perspective, in 2021 and 2022 the economic situation is comparable to prevailing in the early 2000s. Thus, a wage-led growth strategy can stimulate output growth in the short term. Despite the drop in profit sharing, the profit rate would increase with greater use of installed capacity, a movement analogous to that which occurred in Lula's first term.

However, greater economic growth in the medium and long term requires greater capital accumulation. In the Letter to Tomorrow's Brazil, references to the expansion of capital accumulation are in encouraging public and private investment in infrastructure, the use of state-owned companies to increase investment and the reindustrialization of the country. Figure 5 shows that capital accumulation determines long-term GDP growth. To raise Brazil's long-term growth to four percent (the average performance during Lula's first two terms), it is necessary to expand capital accumulation by four percent.

Figure 4: Industrial capacity used, Brazil, I.2000 – III.2022
Source: FGV (2022)

Over the past 70 years, Brazil has gone through two phases in terms of economic growth. First, during developmentalism between 1947 and 1980, the GDP growth rate was 7,4% per year. Brazil was one of the most dynamic economies in the world, the industrial sector led the growth with import substitution industrialization. The erosion of this process began in 1973, with the end of the Golden Age of capitalism, there was a drop in the rate of profit in the Brazilian economy (Marquetti et al. 2023).

Figure 5: Capital accumulation, gK, and GDP growth rate, gX, Brazil, 19502021
Source: Marquetti et al. (2023).

Second, during neoliberalism, from 1980 to 2021, GDP expanded at 2,3% per year, a decline of more than 5%. Neoliberalism can be divided into four subperiods. First, from 1980 to 1989, the lost decade when the economy stagnated, high inflation and import substitution industrialization was abandoned. Second, between 1989 and 2002, when neoliberalism was widely implemented. There was the opening of commercial and financial accounts, the privatization of public companies, the reduction of the state's role, the control of inflation in 1994 with the Real Plan and the adoption of the inflation targeting regime in 1999. In third place, between 2003 and 2014, Brazil implemented policies that combined developmental and neoliberal elements. GDP grew by 3,4% per year, the best economic performance since 1980. Fourth, in late neoliberalism, between 2016 and 2021, the average growth rate of the Brazilian economy was 1,2% per year.

Lula's third term has the difficult task of reactivating long-term economic growth, increasing capital accumulation to four percent a year. Holding the potential productivity of capital constant, GDP would also grow at four percent. For this, net investment should be quadrupled, corresponding to an investment rate of about 25% with the current capital productivity. The possibilities for expanding the investment rate will be either by increasing the profit rate or by adopting a new development strategy with the abandonment of neoliberalism.

There is a contradiction between expanding investment in infrastructure and promoting reindustrialization with an increase in the rate of profit. In developing countries, mechanization and labor productivity growth are not associated with increased profit rates (Marquetti et al., 2020a). On the contrary, in the long term, the increase in labor productivity is associated with the intensification of the use of capital and the decrease in profit rates.

Therefore, abandoning neoliberalism and replacing it with a new institutional framework capable of combining greater economic growth with job creation and environmental preservation is the way forward for Brazilian development. Restoring capital accumulation and reducing carbon dioxide emissions is a challenge for the new government. Marquetti et al. (2019) show that reducing emissions in line with the commitments made in the Paris Agreement requires reducing capital accumulation in developing countries or employing techniques with high rates of savings in energy use. It is well known that countries with high growth have been increasing energy intensity to boost their economies (Von Arnim and Rada, 2011).

The attempt to reindustrialize the economy must also consider macroeconomic policies. It is necessary to coordinate industrial strategy and short-term macroeconomic policy to succeed in reindustrialization (Nassif et al., 2018). In the long term, it is necessary to have a strategic development plan. Pochmann (2022) referred to the need for the state to resume economic planning. It is also essential to establish a new set of state-owned companies to expand investments in Brazil. Roberts (2022) pointed out that state-owned enterprises have played a role in the growth of the Chinese economy, maintaining high investment rates despite declining profit rates.

Transformations in the capitalist economy over the last decade have put neoliberalism on the defensive. Even the IMF, a central advocate of neoliberalism, has drawn attention to the fact that neoliberal policies have increased inequality and undermined long-term growth (Ostry et. all, 2016). Undoubtedly, there are political, economic and environmental limits to the implementation of a national development strategy. However, this is the path for the country to return to growth at rates close to four percent a year.


Final considerations

This article investigated the perspectives of Lula's third government, analyzing the profit rate and its main determinants from 2000 to 2021. The profit rate and its components in 2021 were similar to those found in the early 2000s, particularly capacity utilization installed and profit share.

Perhaps the main difference is that the profit rate was declining in 2002. Currently, the profit rate is increasing due to the expansion of profit share and capacity utilization.

Comparing the current situation with that prevailing in 2002 presents an overview of the challenges that the new government will face. An economic policy capable of increasing demand through redistribution to the poor and expanding labor participation can boost economic activity in the short term. It could also be essential to consolidate the political coalition that supported Lula's election and contain the opposition. However, the limits represented by the Goodwin cycle may occur more quickly in the current period.

The main challenge for the government is the expansion of capital accumulation in the medium and long term. After 1980, capital accumulation and GDP growth declined sharply with the fall in the rate of profit and the adoption of neoliberalism. There are references in the documents of the new government about stimulating capital accumulation, such as reindustrialization and increased investment in infrastructure. Capital accumulation capable of providing four percent GDP growth requires abandoning neoliberalism and adopting a national development strategy with a new set of institutions. The backward countries without a development project were not able to approach the leaders.

The main results of the study can be summarized as follows: (1) Economic success depends on greater or lesser degrees of freedom in the political and even economic scope; (2) The re-establishment of developmental institutions on a renewed basis is part of the solution for the new government; (3) There is a need to redesign and stimulate state-owned enterprises to boost capital accumulation and output growth; (4) Convergence between industrial and macroeconomic policies is necessary; (5) Only a departure from neoliberalism can stimulate economic growth and structural transformation of the national economy.

These are elements that policymakers must consider. The trajectory of the rate of profit is contradictory and presents both opportunities and dilemmas for the new government. There is the possibility of exploiting the opportunities and circumventing the class dilemmas involved in promoting economic growth. The adequate design of the policies to be proposed is fundamental for the success of the new government.

However, even if there is short-term success in stimulating growth, the government will face difficulties in promoting changes of a deeper nature due to political constraints. The Brazilian bourgeoisie does not show signs of moving away from the central principles of neoliberalism, even in an international context of revision of this conceptual framework. The grace period with the new government should be brief. The economic and political outlook remains highly challenging, even for someone with the qualifications and experience of President Luiz Inacio Lula da Silva.

*Adalmir Antonio Marquetti Professor at the Department of Economics at the Pontifical Catholic University of Rio Grande do Sul.

* Alessandro Donadio Miebach Professor at the Department of Economic Sciences at the Federal University of Rio Grande do Sul.

*Henrique Morrone Professor at the Department of Economic Sciences at the Federal University of Rio Grande do Sul.


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