By LUIZ CARLOS BRESSER-PEREIRA*

Considerations on the obstacles to the resumption of growth in Brazil

The Brazilian economy and more broadly the Latin American economy have been almost stagnant for 40 years. In Brazil, which, as in East Asia, growth was accelerated between 1950 and 1979, in the 1980s it stagnated due to the great external debt crisis and high inflation and, from 1990 onwards, it began to grow very slowly because, as I will argue in this article, public investment was low and trade liberalization, by implying overvaluation of the exchange rate in the long term, almost made private investment in industry unfeasible. New developmentalism, which emerged 20 years ago to address this problem, has a little-known diagnosis and solution for it.

Around 1980, the advanced capitalist countries changed their economic policy regime: from social-democratic and therefore slightly developmentalist to a conservative and neoliberal regime. Core capitalism, which was characterized by moderate state intervention in the economy and a nationalist perspective since World War II, abandoned developmentalism and embarked on neoliberalism – a liberal form of capitalism in which, on the economic level, the state only guarantees the property and contracts and keeps fiscal accounts balanced, leaving the rest to the market. O mainstream Economics, which had been Keynesian since World War II, became neoclassical again – it became what I will call conventional economics, and economic policy shifted from being Keynesian and developmental to being guided by liberal orthodoxy.

The neoliberal turn was not limited to the countries of the North; since the mid-1980s, rich countries, led by the United States, understood that it was legitimate to impose the same neoliberal form of capitalism on the rest of the world. While Latin America bowed to this pressure, East Asian countries maintained their developmental states – all but China submitted to the new truth, but only partially. They had the paradoxical advantage of not having natural resources, which spared them the need to neutralize the Dutch disease.

They just opened up their economies on the trade plane, but high tariffs weren't necessary for them because they don't have Dutch disease and therefore don't need to use import tariffs to neutralize this greater competitive disadvantage. Furthermore, its external debt at the time of the great crisis was much smaller than that of Latin American countries. After a slight crisis around 1980, they started to grow again and, today, South Korea, Taiwan and Singapore are rich countries, while China, which later began to industrialize rapidly, is heading towards the same result.

 

almost stagnation

For some time, Brazil, which had industrialized since the 1930s through the adoption of the import substitution model – a developmental strategy – resisted this external pressure, but, weakened by the great external debt crisis and high inflation, in 1990 it deferred to the North and engaged in neoliberal reforms – trade liberalization, financial liberalization, privatization and deregulation. With that, he succumbed to the myth that the market “always knows what's best”; believed in the promise that countries that adopted neoliberal reforms and did not run into chronic public deficits would resume growth and realize the catch up – the gradual attainment of the per capita income level of rich countries. It is not surprising that this was not fulfilled.

Table 1: Per capita growth of Latin America and East Asia before and after the 1980s

Sources: World Bank. Latin America: Brazil, Mexico, Argentina and Colombia; East Asia: South Korea, Indonesia, Singapore (1954-60 period excluded).

As Graph 1 and Table 1 show, which compare the growth rates of the two regions and before and after the neoliberal turn, we see that before 1980 East Asia was already growing faster than Latin America and Brazil, but in this country the difference was very small. This changed radically from the 1980s onwards. The graph shows Brazil's near stagnation and the continuation of accelerated growth in East Asia. The 1980s are not on the table, a decade of total stagnation. Even with this exclusion, the difference with East Asia is very large. While, since the 1980s, per capita growth in Latin America has fallen to 1,5% and in Brazil to 1,2% a year, that of East Asia has been 5,0% a year, or, if excluding China, 3,7% per year.

In Brazil, near stagnation occurred in conjunction with deindustrialization. Graph 2 shows the dramatic process of de-industrialization. From the 1980s to 2018, the industrial sector's share of GDP has dropped from around 26% to 11%. The graph shows that deindustrialization took place in two waves. The first was from 1986 to 1998; it begins with the collapse of the Cruzado Plan in 1986, the commercial and financial liberalization in 1990-92, and the period of extreme overvaluation of the national currency immediately after the Real Plan of 1994, which stabilized prices. Between 1999 and 2005, the exchange rate remained competitive, but after 2003, with the tree of exports from commodities, the rate started to depreciate and, from 2005 to 2018, we had the second wave of deindustrialization. Throughout both waves, private investment remained depressed.

The second wave of deindustrialization is intriguing because it coincides with the only period (2005-2010) since 1980 in which Brazilian industry growth rates were satisfactory. This can, however, be explained by the tree by commodities – by the increase in prices of the main commodities exported by Brazil, which made them competitive at a profit rate considerably higher than normal.

Figure 2: Manufacturing industry in Brazil, 1948-2018 (% of GDP)

Source: MORCEIRO, PC (Brazilian Journal of Political Economy, vol. 41n^o 4, October 2021). Methodological influence on Brazilian deindustrialization. Obs.: Series adjusted to the 2010 IBGE System of National Accounts, with correction for methodological changes and dummy financial.

There is a direct causal link between deindustrialization and near stagnation. Economic development means an increase in per capita income, which is equivalent to an increase in per capita labor productivity as long as the ratio of the labor force to the population remains constant. In turn, productivity gains in developing countries derive mainly from the transfer of labor from activities with low to high per capita added value: in practice, from agriculture to manufacturing. Deindustrialization goes in the opposite direction – which certainly reduces the productivity of capital and the rate of growth. As Gabriel Palma puts it, in a biting tone, “it makes no difference to them whether a country produces microchips ou potato chips.” In Brazil, this absurd notion prevailed until the mid-1950s and was summed up in the adage, “Brazil is an essentially agricultural country”. However, the developmental strategy of industrialization was so successful from 1930 to 1960 that, in the mid-1950s, no one dared to repeat such an absurdity anymore. Since the 1990s, however, people have returned to thinking in terms of economic liberalism and the near stagnation of the Brazilian economy has been consolidated.

 

New historical facts and near stagnation

In order to understand the near stagnation of the Brazilian economy, we need to consider the historical facts new that caused such a change. It makes no sense to explain what is new with old variables – to explain this poor performance with facts that are not new historical facts. I hear that the country did not have institutions guaranteeing the right to property and contracts, or that it did not spend enough on basic education, or that it did not invest enough in infrastructure. These three variables are conditions for economic growth, but they are not new historical facts. Education has been neglected in Brazil, but since the democratic transition of 1985 the country has spent more on education and there have been clear signs of progress in this area.

Institutions defended property and contracts no better before 1980 than after. It is true that institutions are not as strong or legitimate in Brazil as in more advanced countries, but it could not be otherwise. Institutions are one of the three instances of any society. The other two are the economic instance and the cultural or ideological instance. The three are interdependent, in each historical moment, one can be more or less advanced than the others, but these delays are resolved. Only investments in infrastructure have been relatively smaller since 1980, first due to the great external debt crisis, and after this crisis was overcome, because governments began to dedicate themselves more to privatization than to investing in this fundamental area for economic development. with the argument that private companies would assume this role. It makes no sense to privatize naturally monopolistic or quasi-monopolistic companies that the market is by definition incapable of regulating. After privatization takes place, private companies raise prices, reduce the quality of services, and only carry out a portion of the contracted investments.

Extensive neoliberal reforms were carried out from 1990 onwards, but given the poor results that the Brazilian economy is showing, neoliberals say that “reforms are lacking”. Is not true. The main new historical fact that occurred in Brazil and in the other Latin American countries were these reforms, mainly the commercial and financial liberalization, which, after all, constituted a major obstacle to the country's development. As I will argue later, Latin American countries, including Brazil, have fallen into a trap – not the middle-income trap proposed by liberal orthodoxy, but the liberalization trap. These two reforms were carried out between 1990 and 1992. They plus the fiscal crisis are the three new historical facts that explain the long-term near stagnation of the Brazilian economy.

The market is an institution that unsurpassably coordinates the competitive sectors of the economy, but the “reformists” expect much more from the market than it has to offer. The result was the economic failure of neoliberalism. Neoliberal reforms, which become the cure for all ills, were, as I will argue in this paper, the main cause of Brazil's near stagnation since 1990. They were also behind the decline in growth in rich world countries, but these countries have more developed markets and state intervention may be more moderate than what is necessary for developing countries.

New developmental economic theory asserts that capitalist societies are dynamic societies that require constant reforms, but reforms that are sensible, not neoliberal ones – institutional reforms that promote education, science, technology and productive sophistication; encourage savings and investment; tightly regulate the financial sector; carry out the ICMS reform to create a value added tax that is payable where the good is purchased; a tax reform that is progressive; prohibit the privatization of monopoly activities because the market is, by definition, incapable of coordinating them; and hinder the legal capture of public property. This capture conflicts with republican rights – the right of every citizen to have public property used for public purposes rather than authorized by ill-conceived laws. It takes place through abusive interest rates on the public debt, tax exemptions that constitute a mere privilege, abusive remuneration of public servants, even more abusive advantages obtained by politicians seeking re-election.

Neoliberal reforms are radically liberalizing and intrinsically ideological, harming rather than promoting development. They serve the interests of the financial-rentier coalition of classes that became dominant with the Neoliberal Turn. These are reforms that presume, against all evidence, self-regulated markets. These are reforms based on neoclassical economic theory whose models are not based on observation of reality, but derive from logically deduced axioms. At its heart are the general equilibrium model, the concept of rational expectations, and the “law” of comparative advantage that give rise not to a science but to an ideological castle built in the air.

The two graphs and two tables in this article raise a question: why did Brazil lag so far behind East Asia? Prior to 1980, both regions prioritized industrialization and infrastructure investment and adopted industrial policies, but East Asian countries invested more in primary education, carried out land reforms, enjoyed lower inequality, more staunchly avoided fiscal populism, and they were more economically nationalistic because, unlike the Brazilian economic elite, East Asian elites never believed that they were “white and European”. These differences are enough to explain why East Asia grew slightly faster than Latin America until 1980, but not why, since the 1980s, Latin America has shown near stagnation while East Asia has continued to grow.

The reasons why Brazil stagnated in the 1980s are well known: the second oil shock, in 1979, the sharp rise in interest rates in the United States, the foreign debt crisis of the 1980s, which, in the cases of Brazil and Argentina was aggravated by high inertial inflation. But, despite overcoming these problems in the early 1990s, Brazil did not resume growth.

We can distinguish four explanations for the quasi-stagnation after 1990: the liberal-orthodox, the post-Keynesian, the classic developmentalist, and the new-developmentalist.

The liberal-orthodox explanation is that Brazil continued not to give education the importance it deserves, did not carry out the necessary reforms, and did not control fiscal populism as much as it should have; the post-Keynesian explanation attributes low growth to the trend towards chronic insufficient demand associated with external constraints – the shortage of dollars; the classical developmental explanation coincides with the post-Keynesian interpretation and adds a political economy consideration: the change of economic policy regime from developmental to liberal; finally, the new developmentalist explanation follows the two immediately preceding ones, but criticizes post-Keynesianism for its misunderstanding of external constraint and its lack of historical perspective;^[1] and criticizes classical developmentalism for not having a macroeconomics of development, for being pessimistic about the export of manufactured goods, for the lack of a model of the Dutch disease and its neutralization, and for the lack of a critique of the policy of growth with foreign savings. As we will see in this article, there are four new developmentalist explanations for the near stagnation in Brazil and, more broadly, in Latin America from 1990 onwards: the fiscal crisis of the State, trade liberalization, financial liberalization, and deindustrialization itself.

 

The general conditions of capital accumulation

In order to evaluate these explanations, we must consider the general conditions of capital accumulation that historically define the role of the State in the economy. First, the two conditions that liberal orthodoxy also shares: (1) guaranteeing property and contracts and thus the correct functioning of markets and (2) developing fundamental education, science and technology.

Classical developmentalism added six conditions or economic roles: (3) encourage private investment, (4) promote increased savings in the long term (in the short term, as Keynes taught, investment creates savings); (5) discourage luxury consumption; (6) plan investment and invest in infrastructure, in the basic inputs industry and in the oil and mining sector (naturally non-competitive sectors); (7) adopt industrial policy.

Keynesian theory added (8) building an internal financial system capable of financing investment, in this having been preceded by the Schumpeterian view; (9) and counteract the trend towards insufficient demand with countercyclical monetary and fiscal policy. This ninth role proved to be particularly important and implied a revolution in economic theory and policy.

Finally, new developmentalism added a tenth role to the general function of the State of guaranteeing the general conditions for investment: (10) rejecting current account deficits and guaranteeing a competitive exchange rate to companies – mainly industrial companies – access to both internal and external demand. In this way, new developmentalism radically and counterintuitively rejected current account deficits and placed the exchange rate at the center of economic development theory.

New developmentalism is a new theoretical approach that has been emerging in Brazil in the last 20 years. Its origins lie in Marxist political economy, post-Keynesian economic theory, and classical developmentalism. It includes a political economy and an economic theory.

As a political economy, new developmentalism works with the historical concept of capitalist revolution – the formation of the nation-state and the industrial revolution that each people must carry out in order to modernize and grow. It distinguishes two historical forms of economic coordination of capitalism – the developmental and the liberal. Capitalism always emerges – carries out its capitalist revolution – in a developmental historical framework. In England and France, it emerged within mercantilism, which is the first historical form of developmentalism.

Once a country has completed its capitalist revolution, the market tends to become better structured and economic development tends to be relatively self-sustaining but continues to require moderate state intervention. In the process of capitalist development, England and France went through all its phases, first the mercantilist, then the liberal, and finally the social-democratic developmental one. However, since the 1980s in central countries and the 1990s in Latin America, capitalism has become neoliberal.

It was a historic regression that cost all Western countries dearly.

As an economic theory, new developmentalism is, from its inception, an open, development-oriented economic theory. The objective is to understand the determinants of growth with stability in countries whose companies are or should become internationally competitive, and to discuss which policies the State should adopt to guarantee the general conditions of accumulation - those that assure these companies equal conditions in the competition with those located in other countries. Growth depends directly on two variables: the investment rate and the productivity of capital, the investment rate depending on the general conditions of capital accumulation, the productivity of capital, on economic policies that are difficult to identify and enumerate that can neutralize the tendency for the product-capital ratio to fall or the consequent fall in the rate of profit studied by Marx.

New developmental microeconomics adopts the “subsidiarity principle” regarding the roles of the market and the State – the market should be chosen to coordinate an economic sector whenever such sector is characterized by competition, or, in other words, the market is the institution to be used when a market is competitive. New developmentalism divides national economies into a competitive sector, which the market must coordinate, and a non-competitive sector to be coordinated by the state.

It is assumed that the State takes care of the basic conditions of capital accumulation, builds the institutions that guarantee the right to property and contracts, treats primary and secondary education as a universal right, does the same in relation to health, promotes the science and technology, create a national financial system to finance investment, invest in infrastructure, establish an industrial policy that regularly monitors the international competitiveness of the companies benefited by it, and adopt an active macroeconomic policy.

In order to grow with stability, in addition to meeting these macroeconomic growth conditions and promoting long-term savings habits among the population, each national economy must exhibit a high investment rate, which depends on the expected rate of profit and the cost of capital. . The interest rate is essentially determined by the central bank, while the expected rate of profit depends on the existence of internal and external demand. The country has no control over external demand and, as Keynes argued in the first chapter of General Theory, domestically, aggregate supply does not automatically create sustained domestic demand.

Thus, the investment rate depends on domestic demand, which, in turn, depends on an active macroeconomic policy. The objective of such a policy is not only to keep demand sustainable, but also to keep the exchange rate competitive, which, as the economic theory of new developmentalism argues, plays a fundamental role in the process of investment and growth: it ensures or denies access demand for companies that are technologically and administratively competent. This last condition is often not verified in Brazil, where there is a tendency towards cyclical and chronic overvaluation of the exchange rate, which is a serious problem.

In order to maintain sustainable demand and a competitive exchange rate, new developmentalist macroeconomics requires the State to make efforts to keep balanced not only the fiscal account, but also the external or current account, and to keep the five macroeconomic prices “right” .

Keeping the fiscal account “balanced” includes (a) adopting a countercyclical fiscal policy, (b) keeping current spending balanced, (c) financing public investment with public savings complemented by monetary financing (purchase of new treasury bills by the central bank ) whenever full employment is absent and inflation is under control.

Keeping the current account “balanced” means that the current account must be balanced or in surplus; Current account deficits must be avoided. This is the most counterintuitive of the policies advocated by new developmentalism, which starts from the surprising premise that countries often have current account policies. This alone can explain both the chronic current account deficits that Latin American countries and the United States have, and the equally chronic current account surpluses that countries like East Asia and Germany have. Were it not for these policies, the exchange rate would balance the national currency around the current equilibrium, not fully, but also not always pointing to a chronic deficit or surplus.

New developmentalism rejects something that seems obvious: that capital-poor countries must rely on net capital inflows from capital-rich countries. In this regard, new developmental economics notes that (a) foreign borrowing should be avoided because there is a close link between current account balance and the exchange rate; current account deficits make the country's currency overvalued, make good companies less competitive, and discourage, if not impede, private investment; (b) this rejection is ignored by economic theory, but not by countries like Germany and those in East Asia that adopt the policy of running current account surpluses – something unfair to competitors, but which keeps the national currency competitive. It is worth noting that, if the country has the Dutch disease and manages to neutralize it, it will have a surplus in the current account because it will move from the current balance to the industrial one, which is, by definition, more depreciated than the balance that brings the current account to zero. from the country.

In fact, an unneutralized Dutch disease, current account deficits and an overvalued currency are a form of exchange rate populism in Brazil: they artificially increase workers' wages and the incomes of rentiers (voters), while discouraging investments, thus compounding , an intrinsically flawed policy.

Keeping macroeconomic prices “right” does not mean keeping prices as they are set by the market. This is the neoclassical right price concept. Instead, it just means keeping the level interest rate around which the central bank carries out its monetary policy, keep wages growing with productivity, keep inflation under control, keep the exchange rate competitive. Only then will efficient companies have a satisfactory rate of profit that motivates them to invest.

 

Explanations of Liberal Orthodoxy

Let's go back to the near stagnation of Brazil and Latin America. Liberal orthodoxy claims that import substitution industrialization legitimized through the infant industry argument was an expensive and inefficient way of allocating factors of production adopted by Latin American countries; “It was mere protectionism”. Is not true. If the only justification for export tariffs and export subsidies on manufactured goods were the infant industry argument, the charge of protectionism and the evils it causes would be real.

But new developmentalism has given the issue an entirely new dimension when the country is rich in natural resources and exports commodities, as is the case in Brazil and practically all Latin American countries. Countries in these conditions suffer from Dutch disease, a market failure that makes the exchange rate uncompetitive because exports of commodities are profitable at an exchange rate substantially less appreciated than that needed to make industrial enterprises employing the most advanced technologies competitive. Tariffs were used to neutralize this larger market failure.

I will return to this topic in the next section.

Liberal orthodoxy also offers an institutional explanation that has allowed some neoclassical economists to give a historical dimension to their theories of economic development. The new institutionalists tell us that institutions are fundamental to growth, that they are meant to secure property rights and contracts – which is true, but then the problems begin. The role of reforms would be to eliminate interventionist “bugs” created by the state and allow markets to function well. The market is flawed, says liberal orthodoxy, but more serious are the flaws of the state – an indefensible generalization.

It doesn't matter how many and how profound the reforms already adopted have been – and they were huge in Brazil, more than enough to change the political regime from developmentalist to liberal. For “reformists” (a way in which liberal economists characterize themselves), reforms are never enough. But Brazilian institutions did not get worse compared to the period before 1980. On the contrary, after the democratic transition of 1985, institutions in Brazil became better, except for the neoliberal reforms.

But liberal orthodoxy offers a third explanation – the problem is spending, fiscal populism, for which it has a remedy: fiscal austerity and high interest rates. In the short term, as she believes that once the market is liberalized, the state has ensured fiscal balance, and the central bank raises interest rates at any threat of inflation, all economic problems will be resolved. When the economy is meeting these conditions the country will live Panglossian in the best of all possible worlds. And when reality does not correspond to this ideal, the solution is austerity: fiscal adjustment and an increase in interest rates. The amount of money in an economy cannot be controlled by the central bank, because it is endogenous, and there are other causes of inflation besides excess demand. Fiscal balance is undoubtedly necessary, but a countercyclical fiscal policy is even more necessary. Fiscal adjustment cannot, therefore, be the solution for everything. It is necessary to control public expenses and a fiscal ceiling is recommended, but a ceiling proportional to GDP, not fixed; and a ceiling only for current expenditure, not for public investment, which previously needs a fiscal minimum.

Orthodoxy ignores the exchange rate problem, and when, within the framework of a cyclical process, the exchange rate appreciates in the long term, it shows itself to be a right-wing populist and rejects depreciation, just like left-wing populists. The populist left rejects necessary depreciation because it will temporarily reduce the purchasing power of wages; the populist right acts in the same way to avoid the loss of purchasing power of the income of rentiers and financiers, and to avoid the reduction in interest rates that is necessary for the devaluation to become real – well, nothing worse for rentiers and financiers than the reduction of the interest rate. As if that were not enough, it rejects public investment in non-competitive economic sectors, mainly infrastructure, when these investments are historically a condition for growth.

The fourth and final explanation offered by liberal orthodoxy is the middle-income trap. In this case, contrary to the second and third explanations, there is a new fact: the country is no longer poor and has become a middle-income country. But why does a country stop growing when its per capita income becomes average? Research on the subject defines “middle income” so broadly that the concept becomes vague. The ranges used to measure the existence of the middle income trap are varied and wide, ranging from $2.000 to $16.000 PPP. Such large intervals make the concept of average income indeterminate. The literature on the causes of the trap emphasizes the quality of institutions, demographic problems, lack of economic infrastructure, poor quality of education, and lack of stimulation for learning, research and technological development – ​​nothing that is really unique to countries that have reached middle income. .

And, as with institutional and fiscal explanations, the problems cited do not correspond to new historical facts that became evident when the country reached average income. The problems already existed, but they did not prevent growth. Therefore, the defenders of this thesis do not have good reasons to affirm that a country stagnates when it reaches the average income. Furthermore, they do not explain why near-stagnation did not happen in rich countries and, more recently, in East Asian countries.

 

The New Developmentalist Explanation

The neoliberal turn originally took place in the advanced countries around 1980. Of the ten roles of the State referred to above, government programs obedient to liberal orthodoxy retained only the first two. The rest was up to the market… Around 1990, under pressure from the rich world, Brazil and the other Latin American countries submitted to the “new truth”. The United States spearheaded the process of change using the World Bank and transforming GATT into the WTO. Latin American countries have abandoned their national development projects aimed at industrialization and assumed the myth that markets self-regulate automatically generate growth. Dependent, liberal elites in Latin America ignored the fact that the competition that defines capitalism does not only exist between companies, but also between countries; they ignored that countries that do not have a national development project – a competition project – will not grow.

Classical developmental economists have been trying to explain the poor performance of Latin American economies since the 1990s. The causes of the stagnation of the 1980s are well known. They were the great foreign debt crisis and inflation, which was especially high and inertial in nature in Brazil. From the moment, however, in the first half of the 1990s, when both the external debt problem and high inflation were reasonably resolved, it was to be expected that economic development would resume, but this did not happen. While liberal orthodoxy insisted without any foundation that it was the policy of import substitution that was causing the near stagnation, classical developmentalism was more correct in attributing it to the abandonment of the developmental policies that had been so successful until 1980.

But this explanation has a problem: it is too general. Classical developmentalists have not explained why trade liberalization, which implied abandoning the import substitution model and the industrial policy associated with it (high customs tariffs), was a basic cause of this quasi-stagnation. They focus on the criticism of financial liberalization and the consequent loss of control over capital inflows and outflows. Great, but they didn't add that this loss of control had the deleterious result of the practical impossibility of the country having an exchange rate policy.

New developmentalism was born from the recognition, already in 1999, of the near stagnation of the long term, and, two years later, from the formulation of the initial hypothesis of the new-developmentalist theory – the hypothesis that the adoption of the policy of growth with foreign savings was responsible for by the exchange rate appreciation and the loss of competitiveness of companies located in the country. In this way, new developmentalism was asserting that chronic current account deficits were associated with an appreciated exchange rate in the long run, and was placing the exchange rate at the heart of economic development theory. This hypothesis was later identified as the “trap of high interest rates and the appreciated exchange rate”, and, from 2018 onwards, I started to call it also “trap of liberalization”.

Why were trade and financial openness so detrimental to the development of Latin American countries, including Brazil, and not just them? Financial openness was harmful because it prevented countries from controlling the inflows and outflows of capital and seriously hampered the capacity of states to keep the exchange rate stable and competitive. Trade liberalization made it impossible for the State to guarantee the tenth general condition for capital accumulation – a competitive exchange rate for those industrial companies that are already competitive from a technical point of view (because they use the best technology available in the world).

The role of the equilibrium (or “current equilibrium”) exchange rate is to ensure these companies are economically competitive, but when the country adopts the policy of growth with foreign savings (the policy of current account deficits financed by net of capital), this role ceases to be fulfilled. The exchange rate associated with current account deficits becomes appreciated in the long run and companies cease to be competitive. This even in an economy that does not have the Dutch disease. If you have Dutch disease, the problem gets worse, because in that case the competitive balance for manufactured goods becomes the “industrial balance”. The exchange rate, which was already appreciated for all goods due to the policy of growth with foreign savings, becomes even more appreciated for companies that produce goods and services tradable non-commodity.

In addition to having an exchange rate policy that stabilizes and keeps the exchange rate competitive, the country must try to keep the other four macroeconomic prices “right”. The interest rate, the inflation rate and, to a certain extent, the wage rate already controlled by the state and its central bank. But one must try to monitor the expected rate of profit. Conventional economic theory usually ignores it, but the rate of profit is after all the most important macroeconomic price. Economic policy makers must always be clear to themselves that investment projects will only be carried out if the expected rate of profit is satisfactory – it is reasonably higher than the cost of capital.

Armed with this summary of the economic theory of new developmentalism, I return to the question: how does new developmentalism explain the near stagnation of Latin America and, in particular, of Brazil? Latin American countries have many characteristics in common: with the exception of Mexico, they are exporters of commodities; they export unsophisticated products produced at low wages; virtually everyone has Dutch disease. But they differ greatly in size, level of economic development and economic relationship with the United States.

New developmentalism attributes the near stagnation of Latin American countries including Brazil from 1990 onwards to three policies and one omission; (a) trade liberalization, which meant that the country stopped neutralizing the Dutch disease through import tariffs and export subsidies on manufactured goods; (b) financial liberalization, which eliminated the possibility for the country to have an exchange rate policy; and (c) the establishment of a high interest rate level around which the central bank executes its monetary policy. In Brazil, this last policy, in addition to reflecting the revulsion that the high inflation of 15 years (1980 to 1994) provoked in Brazilians, reflected the capture by rentiers and financiers of public assets, since who ultimately pays the interest is mainly the State. The justification offered was that in addition to combating inflation, the high interest rate attracted foreign capital. In fact, it was attractive, but the mistaken premise was that capital inflows into the country would increase the country's investment rate, that foreign savings added to domestic savings, when, in fact, it replaced domestic savings. Brazil does not consider that an appreciated currency encourages consumption while discouraging private investment in industry. The political omission refers to the government's lack of interest in increasing public investment and, therefore, seeking to recover public savings that had fallen dramatically in the 1980s.

 

The third argument for non-protective tariffs

There are two arguments in the economic literature for the adoption of non-protective import tariffs, both of which are well known. The first is the infant industry argument which was originally developed by Alexander Hamilton (1792) and Friedrich List (1841). When the country is starting industrialization or a certain sector (industry) is starting to be implemented, the tariffs are legitimate, not protectionist. The second, also applicable only at the beginning of industrialization, is the “big push” with which Rosenstein-Rodan founded classical developmentalism in 1943: tariffs are necessary and therefore legitimate so that industrial projects using the best technology can compete with similar projects in other countries – a condition that does not it is present in the non-industrialized country because they do not have the positive economic externalities that exist in the industrial poles of the industrialized countries. The simultaneous promotion by the State of a set of investments in industry would solve this problem. The problem with this second argument is the financing of this set of investments.

In the 2000s, new developmentalism added a third and powerful argument for the adoption of import tariffs and export subsidies on manufactured goods – an argument that applies not only at the beginning of industrialization, but when the country has Dutch disease: the Dutch disease neutralization argument. Dutch disease is a competitive disadvantage that exporters of commodities they encounter as they seek to industrialize because commodities can be exported profitably at an exchange rate significantly more appreciated than the one that makes investment projects in the industrial sector competitive.

However, many exporting countries commodities (affected, therefore, by the Dutch disease) intuitively adopted this neutralization policy although their economic policy makers were not aware of the Dutch disease model, which was only fully developed in Bresser-Pereira (2008). They didn't know the model, but since they weren't radically liberal economists, they had a sense of it. They knew that in order to develop the country needed to industrialize, and they realized that the import tariff in particular was a condition for its industrialization. The United States, for example, maintained very high import tariffs until 1939, when it had long ceased to have an infant industry. Since, however, since the end of the XNUMXth century they had become oil exporters, they had the Dutch disease.

The same happened in the Latin American countries that industrialized the most. Its import substitution model no longer benefited from the arguments of infant industry and the big push, but its high tariffs did not constitute protectionism, but neutralization of the Dutch disease.

From this theoretical premise, we understand why trade liberalization in Brazil in 1990 (and in other Latin American countries around that year) was so harmful because it appreciated the exchange rate in the long term, caused a relative decrease in private investments in industry, the loss of the ability to export manufactured goods, and the brutal de-industrialization that then begins. The opening meant the interruption of the mechanism that neutralized the Dutch disease and immediately made the industry uncompetitive in Latin American countries. After the Second World War, with economic development and the reduction of the distance between the central and periphery countries, the “protectionism issue” had become the great divider among economists. Within the framework of neoliberal hegemony that began with the Neoliberal Turn of 1980, conventional economic theory redoubled its criticism of tariffs and the protectionism they would imply.

A criticism that classical developmental economists proved unable to refute because the two arguments they relied on had weakened because industry was no longer nascent in Latin American countries. Since the beginning of the 1990s, exactly when external pressure for openness was strongest, these developmental economists, who in the 1950s defended economic planning, had started to preferentially adopt industrial policy, but were unable to defend the important industrial policy : tariffs and customs subsidies.

 

Growth policy with foreign savings

To understand Brazil's near stagnation since 1990, it is not enough to consider the elimination of tariffs and subsidies that neutralized the Dutch disease. There is a second cause associated with the exchange rate: the policy of growth with foreign debt or current account deficits, or even with “foreign savings” – the name that its defenders like to use based on the mistaken assumption that foreign savings it always adds to domestic savings – a policy that appreciates the exchange rate in the long run (as long as the deficit is maintained).

While the Dutch disease makes only the exchange rate for industrial goods appreciated or uncompetitive, the net capital inflows needed to finance current account deficits make the exchange rate appreciated not only for the industrial sector, but also for commodities. The role of tariffs and subsidies is to bring the industrial balance back to the current balance by raising the cost of imported goods, while the role of the policy of rejecting the growth-with-external-debt policy is to prevent this generally adopted policy from for the country to appreciate the exchange rate, or if the exchange rate was already appreciated because the country already adopted that policy is, with the suppression of the deficit, to bring the exchange rate back to competitive equilibrium.

When there is no Dutch disease, prevent the entire economy from becoming uncompetitive; when there is Dutch disease, in addition to the policy of avoiding current account deficits, it is necessary to adopt the policy of tariffs on imports of manufactured goods and, so that companies in the country can also export manufactured goods on an equal basis with companies located in other countries, the policy of export subsidies for these goods.

Why do Brazil and developing countries, except those in East Asia, insist on having current account deficits? They insist with an excuse – the thesis that deficits bring foreign savings to the country in addition to domestic savings – something that is only true when the country is already growing at an accelerated pace, investment opportunities are great, and the marginal propensity to consume increases. In this case, the substitution rate of domestic for foreign savings, which is generally high, falls and foreign savings are added to domestic savings. Brazilian economists, like other Latin American economists, think that the country should aim for a current account deficit that is as large as possible, but which is safe; do not lead the country to a balance of payments crisis.

And for that, they count on the support of liberal orthodoxy and international financial institutions, starting with the World Bank. It is enough for them that the deficit is not greater than GDP growth, so that the external debt-GDP ratio does not increase, and thus does not increase the risk of an exchange rate crisis. Therefore, they defend an exchange rate that is much more appreciated than the one that new developmentalism recommends. I call this foreign debt equilibrium exchange rate. I later found out that it is the rate that John Williamson and the Washington Consensus call the “fundamental equilibrium exchange rate”.

Thus, when, around 1990, Latin American countries opened their economies, their policy makers failed to neutralize the Dutch disease (tariffs that had not been raised for this purpose, but had this consequence) and the industrial companies in the region started to face a first competitive disadvantage. The exchange rate overappreciated from the point of view of industrial companies, but the Dutch disease was responsible for this appreciation up to current equilibrium, because it pulls the real exchange rate only up to current equilibrium. What we saw, however, were current account deficits that involved an even stronger exchange rate overvaluation that also involved commodities, even to a lesser extent. The appreciation occurred because the additional capital needed to finance this deficit is additional capital supply inflows that appreciate the national currency by pulling the real exchange rate below the current equilibrium.

In 1994, when Brazil overcame the external debt crisis and high inflation, its international credit was restored and the Brazilian government became involved in the policy of growth with foreign savings. Given the abundant capital in the rich world seeking investment opportunities and the higher interest rates in these countries, net capital inflows appreciated the new currency, the real, discouraging investment and encouraging consumption.

There is another justification for chronic current account deficits – they would be a consequence of Engel's Law (as family income increases, the percentage of income spent on food decreases); they would therefore be structural and inevitable. Indeed, the external constraint that was at the heart of Prebisch's formulation of classical developmentalism – it asserts that developing countries face two income elasticities perverse when compared with industrialized countries: while in these countries the income elasticity of demand for primary goods is less than one, the income elasticity of demand for manufactured goods in developing countries, primary exporters, is greater than one. This restriction can be considered structural. As Prebisch noted, the external constraint is an additional obstacle that underdeveloped countries have to growth because it requires the market-determined current equilibrium exchange rate to be depreciated more than it would have been in the absence of the constraint. It is a constraint that can only be overcome in the long run through industrialization; a “growth model with external constraints” cannot be derived from it, nor should it be “resolved” by resorting to foreign savings.

In the economic theory of new developmentalism there is a real, or nominal, exchange rate and three equilibria: the current equilibrium (which intertemporally balances the country's current account), the industrial equilibrium (which makes investment projects competitive that use the best technology), and the balance of the external debt – the exchange rate, which keeps the external debt-GDP ratio constant. Left to the market, the nominal exchange rate floats around the current equilibrium – a balanced exchange rate (because it zeroes out the current account) but, if the country has Dutch disease, an uncompetitive exchange rate for industry . For new developmentalism it is essential that the exchange rate be competitive and therefore, in relation to Brazil that has Dutch disease, proposes that the government (adopt policies that push the current balance towards industrial balance; proposes a devaluation once and for ALL accompanied by an exchange rate policy that, once the Dutch disease is neutralized (making the current equilibrium equal to the industrial equilibrium), keeps the exchange rate floating around that equilibrium.

Only then will Brazil be able to industrialize again. However, in Brazil and in other Latin American countries, the exchange rate tends to fluctuate around the balance of the external debt (which corresponds to an exchange rate that is even less competitive than the current balance) because national governments adopt the policy of growth with foreign savings and, that is, adopt the policy of incurring current account deficits.

This policy may seem absurd, but the interests behind it are huge. The governments of Latin American countries are happy when the country incurs current account deficits because they believe in growth with foreign savings, because they use the exchange rate as a nominal anchor against inflation, and because they benefit from exchange rate populism to the extent that that serves the short-term interests of internal consumers. Rich countries are interested in current account deficits on the periphery of capitalism because they are thus increasing capital exports in the short term and increasing exports of products with high added value per capita in exchange for primary products with low added value per capita, limited productive sophistication, and low wages.

Both governments and economists – and not just orthodox economists – understand that countries should incur chronic current account deficits up to the limit considered “safe” – the one that does not cause a balance of payments crisis. As a result, the nominal rate fluctuates around the external debt balance, and all companies in the country lose competitiveness. At the present time (from 2014 to early 2022), the exchange rate does not pose a problem because the government has lost any confidence both internally and externally and the economic crisis has become chronic. As a result, the exchange rate is not appreciated, but depreciated. But as soon as the situation returns to normal – which will not happen this year – the exchange rate will again be overvalued most of the time.

 

The explanation of new developmentalism

We saw that Graphs 1 and 2 and Table 1 show the lamentable performance of the Brazilian economy since 1980. Four new historical facts explain this near stagnation: (1) the fiscal crisis of the State, associated with the passage of public savings to the negative side and the consequent reduction in public investment; (2) financial liberalization, which freed capital flows and facilitated two misguided policies: running current account deficits and raising interest rates to attract capital; (3) trade liberalization, which dismantled the mechanism that neutralized the Dutch disease, thus re-establishing major competitive disadvantages for the country; and (4) deindustrialization, which, combined with the inevitable increase in the capital intensity of capital accumulation, reduced the productivity of capital.

Table 2: Brazil – comparison between the 2010s and the 1970s

Source: IBGE

The first new historical fact that caused the current stagnation was the fiscal crisis of the State that took place 40 years ago, in the context of the great external debt crisis of the 1980s, and until today has not been resolved. The Brazilian government had adopted a policy of growth with foreign debt and pressured state-owned companies to contract debts in foreign currency. In 1979, the United States dramatically raised interest rates to control stagflation. In addition to triggering the debt crisis, these two facts, together, caused a large drop in the rate of profit of state-owned companies, which lost the ability to contribute to the formation of public savings necessary to finance public investment.

Thus, public savings, which were positive and represented around 4% of GDP in the 1970s, became negative in the early 1980s and remained so in the following years. As these companies operated in monopoly or quasi-monopoly markets, they would have no difficulty raising their prices and realizing profits, but in the 1990s Brazil moved from a developmental policy regime to a liberal one, privatized them, and public savings have remained negative ever since.

Brazil had grown and industrialized between the 1930s and the 1970s, relying on investments made by state-owned companies in infrastructure and in the sectors of basic inputs. These investments were financed by the large profits of these companies that were monopolists or quasi-monopolists. But the military government used these companies to control inflation, thereby reducing their profits, while encouraging them to obtain international financing. Thus, public savings which, in the 1970s, were positive, around 5%, and which financed public investments, have since become negative at around 2% of GDP.

This 6 percentage point change, which has since turned negative, I called at the time the “state fiscal crisis”. As Table 2 shows, while the ratio of private sector investment to GDP remained close to 17,5%, public sector investment fell by half, from 7,8% to 3,2% of GDP. In the 2000s, the government made a major effort to reverse this trend and increased public investment, but with the recession that began in 2014 and the resulting fiscal crisis, from 2015 onwards the government adopted the well-known austerity policy of orthodoxy. including a procyclical policy that reduced public investment to around 1% of GDP. As a result, the recovery of the economy after the 2014-16 recession was anemic and, at this moment, the country is again in recession.

In the 1990s, the sharp increase in the tax burden should have changed the situation, but it did not, and for a legitimate reason, the increase in social spending, and another illegitimate reason, the huge interest payments on the public debt because of the literal capture of public assets by rentier capitalists and financiers. The increase in social spending resulted from popular pressure for more and better public services, especially education, health and social security – the creation of a welfare state in Brazil, which was part of the political agreement reached in the transition process of 1985. Interest payments, which in the 2010s averaged 6% of GDP each year, were caused by the policy of attracting foreign capital to Brazil and by the power of the coalition of financial-rentier classes whose economists was mistakenly attributed to controlling high inertial inflation in 1994.

The second new historical fact that explains Brazil's near stagnation was the trade liberalization of 1990, which drastically reduced import tariffs and export subsidies on manufactured goods with which Brazil neutralized the Dutch disease. The successful industrialization of Brazil from the 1930s to the 1980s was possible because policy makers, who did not know the concept and model of the disease, knew that growth meant industrialization and that this required the use of import tariffs.

Dutch disease is a major competitive disadvantage faced by exporting countries. commodities because booms of Ricardian prices and/or rents make their exports commercially viable at an exchange rate more appreciated than that required by the competitiveness of the production of other non-tradable goods commodities using the best technology available. If the disease is not properly neutralized in the domestic market through import tariffs and in foreign markets through export subsidies, it will be practically impossible for the country to industrialize and reach productive sophistication.

Prior to the 1980s, policymakers in Latin America were not aware of the Dutch disease, but they knew that growth required industrialization or structural change. Thus, intuitively or pragmatically, they adopted high import tariffs that neutralized the Dutch disease. And, from 1967, Brazil also adopted export subsidies that allowed the country to become a major exporter of manufactured goods in the 1970s. Tariffs and subsidies are not the ideal mechanisms for neutralizing the disease because they only neutralize it in the intern market.

A tax on exports of commodities variable according to its international price would be technically higher, but when the commodity that causes the disease is agricultural and involves a large number of producers, it is more politically feasible to use tariffs (and subsidies) than to impose a tax on exports. In oil-exporting countries, the export tax is the ideal way to counteract the disease, but it also causes a political problem: it depreciates the currency, which, in the short term, reduces wages and real incomes.

The third historical fact was the financial liberalization of 1992, as it created greater potential for Brazil to run into current account deficits and an increase in interest rates to attract the foreign capital needed to finance these deficits. The justification for current account deficits was that they would be “foreign savings”; the justification for high interest rates was that they were necessary to “fight inflation”. However, this growth through the foreign debt policy, in most cases, increases consumption, not investment. Recurring current account deficits and high interest rates represent a major policy mistake because the additional capital inflows caused by current account deficits appreciate the national currency, make the exchange rate overvalued in the long run, and discourage investment by part of capable and efficient industrial enterprises.

These three historical facts affected the investment capacity of the Brazilian economy and reduced its growth rate. But there is a fourth problem: the decline in capital productivity, such that, in the 2010s, capital accumulation caused a smaller increase in GDP than the same investment would have done in the 1970s. As shown in Table 2 , the capital productivity, or marginal product-capital ratio, which is simply measured by dividing the increase in GDP by the investment rate in these two decades, fell from 0,40 to 0,04. A huge fall.

A different methodology, which compares the value of capital stocks in the two periods, results in a smaller but still significant drop, from 0,56 to 0,38. How to explain such a drop in the productivity of capital? The general explanation for the drop in the marginal output-capital ratio is the tendency to adopt technologies that save labor and increase labor productivity, but use more capital rather than less. This involves the widespread use of new technologies that replace labor with capital, rather than technologies that replace old machines with new, cheaper, or more efficient ones.

This is a technical problem for which there is no simple solution. When capitalist economies grow, they replace labor with capital, which tends to reduce the productivity of capital because it involves an increase in the capital-labor ratio and replaces old machines with better ones. But the second movement is faster paced than the first; there is the classic tendency of the rate of profit to fall, which Marx was the first to formulate. The profit rate does not fall and the economy stagnates, either because wages grow less than labor productivity, or because greater monopoly power allows companies to increase their profit margins.

This analysis is of a very abstract nature, which represents a challenge for capitalist development anywhere and not just in Brazil. But the fall in the productivity of capital was too great to be explained in this way alone. We can also mention the enormous and premature de-industrialization suffered by the Brazilian economy, the fact that, as shown in Graph 2, the participation of the industrial sector fell from 26% of GDP in the 1980s to 11% in 2018. a direct causal link between deindustrialization and near-stagnation. Essentially, because premature deindustrialization is the opposite of productive sophistication – it means transferring workers and technicians with a certain degree of industrial education and training from high-paying manufacturing jobs to low-paying service jobs. This transfer reduces labor productivity and causes a reduction in the per capita growth rate.

New developmentalist economic theory argues that this double liberalization, the fall in the State's investment capacity and the fall in capital productivity associated with deindustrialization are the true explanations for Brazil's near stagnation since the 1990s. regime from a developmental policy to a liberal one in 1990, ten years after the Northern Neoliberal Turn. Similar facts happened in Latin America. Thus, Brazil and Latin America as a whole did not fall into the middle-income trap, but into the liberalization trap. This is what Bresser-Pereira, Araújo and Peres demonstrated in a recent article based on an econometric study, entitled “An alternative to the middle-income trap".

 

What to do?

In East Asia, none of the four new historical facts that stopped Latin America's growth were present. Countries like South Korea and Taiwan have not suffered a fiscal crisis, they are not exporters of commodities, so they do not face the Dutch disease, they opened their economies in a moderate way, they did not adopt the policy of incurring current account deficits or high interest rates to attract capital inflows. Its elites never considered themselves European, and always placed the nation's interests as their main criterion of economic policy.

For this reason, they did not undergo early de-industrialization and continued to develop from the 1980s onwards, albeit a little more slowly. The Brazilian reality is very different. But, given the new ideas that new developmentalism brings, many of them based on the successful experience of East Asia, what should Brazil do? The most general condition is political; it is not only the center-left, but also the center-right abandoning neoliberal policies and taking the Brazilian economy back to developmentalism; it is right and left to differentiate themselves not by development policy, but by income distribution policy. This is not impossible because neoliberalism has become demoralized in the rich world and now rich country governments are bringing the state back into the economy. The Biden government is the most obvious sign of this change.

New developmentalism attaches great importance to a competitive exchange rate and sees the Brazilian economy being appreciated cyclically. It depreciates in crises, but then appreciates itself again. However, the last financial crisis in Brazil took place in 2014 and until today it has not appreciated again – it has not returned to its “normal” level, at the current equilibrium exchange rate which, according to calculations by the Center for New Development at EAESP/FGV, should be approximately R$4,00 per dollar. Instead, it fluctuates around R$5,50 per dollar – a level more depreciated than the industrial balance itself, which, according to our calculations, is R$5,00 per dollar.

This does not mean that the currency problem has been resolved. It just means that Dutch disease is not currently severe, the current equilibrium is only 20% less than the industrial equilibrium. The exchange rate is still depreciated because the economic crisis has lasted seven years. It started in 2014, with a sharp drop in the price of commodities coupled with a fiscal crisis and continues to apply today; the country has just returned to a “technical recession”, now accompanied by an increase in interest rates, which the crisis had initially caused. The crisis is for political reasons, because companies and the financial market, both domestic and international, do not trust Brazil and its government. They lack confidence in general, and specifically in making investments, because the exchange rate makes industrial projects competitive today, but companies know that once normality returns, it will appreciate again.

The new president to be elected at the end of this year will face a very difficult situation given the excesses of the current government, but he will have an opportunity to stabilize the exchange rate around industrial equilibrium without depressing the purchasing power of workers and rentiers. . These yields have been depressed since the exchange rate depreciated in 2014.

The neutralization of the Dutch disease should be done through a bill that defines a new policy of tariffs and customs subsidies – which defines two tariffs for each good: a single import tariff and a single export subsidy for manufactured goods, and a second different tariff for each type of good, similar to but significantly lower than the current tariff. The single tariff for all goods will vary according to the average price of commodities most exported by the country, and may be called the “single neutralization tariff”. It could reach zero if international prices fall too much.

The subsidy should only be the single neutralization subsidy, equal to the single tariff. When, in 2008, I formulated the new-developmentalist model of Dutch disease, I adopted as a neutralization strategy a variable tax on the export of commodities which pushes current equilibrium down to the level of industrial equilibrium, because the cost of commodities after-tax increases and its supply curve shifts upward to a more depreciated exchange rate level. This is a more elegant way of neutralizing the Dutch disease from an economic point of view, but I eventually convinced myself that this method is politically unfeasible due to the large number of producers and exporters of soy and other agricultural products. Nothing prevents the two methods from being combined, giving a lower weight to the import tariff.

The new government, in addition to keeping the exchange rate at the right level – around industrial equilibrium – should once again control capital inflows and outflows – a policy that has always had strong support from post-Keynesian economists. It should, through the central bank, control the level of the interest rate so that it is relatively low. And, through agreements in which the state acts as an intermediary between companies and labor, the state must firmly adopt policies that keep wages growing at the same rate as productivity. By managing the other four macroeconomic prices and the two macroeconomic accounts, the profit rate of companies producing tradable goods does not commodities will be satisfactory and will motivate companies to invest.

Since Brazil submitted to neoliberalism, governments have been trying to solve the problem of necessary investments in infrastructure through the use of foreign investment. Naturally unsuccessful; outside investors are only interested in public companies that have already proved profitable. Only in the PT governments (2003-2014) was there an effort to increase public investment, but the results were modest given the lack of public savings.

Despite the substantial increase in the tax burden up to 2002, public savings continued to be negative, whether for legitimate reasons such as spending on education, health and basic income, or illegitimate ones, such as brutal spending on interest. Convinced that it will not be possible to increase public savings, I have been proposing an increase in public investment through its monetary financing within the limit of 5% of GDP. This policy, which was widely used by rich countries to face Covid-29, should also be used by Brazil for investments in infrastructure. The thesis that the issuance of currency causes inflation is a myth that is now largely refuted by reality. It can only indirectly cause inflation because investments have increased demand above aggregate supply. For this reason, the liberalization of the corresponding expenses, in addition to being subject to strict budgetary control, must be suspended by decision of the National Monetary Council whenever excess demand causes an increase in inflation.

Macroeconomic policies are a priority, but they must be complemented by supply-side policies, mainly an education policy and another one for investments in infrastructure, and a new industrial policy. In relation to this, Nassif and Morceiro (2021), in a recent work, defined six missions for industrial policy and identified some priority industrial subsectors: sectors related to health and the pharmaceutical industry, the reindustrialization of some intensive niches in sophisticated work , such as the chemical and aerospace industries, the motors and batteries sector, IT services, and in infrastructure the expansion of green subsectors.

In terms of distribution, support for the State's major social services and a progressive tax reform should be aimed at reducing inequality. In terms of protecting the environment, it is necessary to adopt comprehensive policies to protect the Amazon rainforest and reduce carbon dioxide emissions. These two fundamental problems are only stated here; them out of the problem of almost economic stagnation here. In Brazil, the most serious problem is economic inequality, but, in the context of near stagnation, it only gets worse.

In short, East Asian countries limited or, in the case of China, simply rejected neoliberal reforms, and continued to grow; they have been able to remain more open on a commercial level because they don't have the Dutch disease to counteract. Meanwhile, Brazil and other Latin American countries were trapped in the liberalization trap. East Asian nations are more cohesive because their elites know they are Asian, while Latin American economic elites often believe themselves to be “white and European” and submit more easily to elites in the white North.

In addition to these two more general considerations, new developmentalism explained Brazil's near stagnation with four new historical facts. The first was the state's fiscal crisis, whose origins date back to the 1970s, when the military government used state-owned companies to finance development. This policy did not prevent the reduction of economic growth; it only reduced the capacity of state-owned enterprises to generate profits, while increasing the external debt. When they recovered, in the 1990s, they were privatized. The second new fact was trade liberalization, which put an end to a policy that had been fundamental to industrialization: the neutralization of the Dutch disease; the third, financial liberalization, which took away from the State the ability to control the inflows and outflows of foreign capital and, consequently, to manage its exchange rate, in addition to having facilitated the adoption by the Central Bank of a policy of high interest rates, which constituted an enormous capture of public assets by rentiers and financiers and an important cause of the non-resolution of the fiscal crisis.

The fourth new historical fact was the de-industrialization that these reforms caused; it is, in itself, a cause of low growth as it takes job opportunities away from specialized workers whose work has high per capita added value and transfers them to services that generally employ less educated and poorly paid workers.

* Luiz Carlos Bresser-Pereira He is Professor Emeritus at the Getúlio Vargas Foundation (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (Ed. FGV).

Originally published on political economy magazine, vol. 42, no. 2, April-June/2022.