Neo-Dependency in Brazil

The reign of Brazil’s longest continuous ruler since the Second World War is drawing to a close. Elected in 1994, Fernando Henrique Cardoso engineered the lifting of a constitutional prohibition on Presidential re-election—dating back to the foundation of the Brazilian Republic in the late nineteenth century—to roll over his tenure for another four years in 1998. Today, as the economic horizon darkens, and he seeks to install a Gore-like successor, a historical verdict on the experience sometimes hailed by admirers as the equivalent of a tropical social-democracy is approaching. Cardoso entered political life as a high-profile critic of ‘dependent development’, famous for arguing that, while the bourgeoisie in Brazil was incapable of leading a successful programme of independent industrialization, the association of national with international capital in the periphery of the world system—which he implied was inevitable, short of a social revolution—would not lead to convergence of Third World with metropolitan societies. It would on the contrary perpetuate deep social and economic inequalities, loss of control over the direction of national development, and vulnerability to external financial shocks.footnote¹ Such were the axioms of sociologist. What have been the lessons of the politician?

When Cardoso first set out his theory, Brazil was under a military dictatorship dedicated to fast growth along import-substitution lines—the path set by the Revolution of 1930 that first brought Vargas to power. Amidst tough repression, industrialization proceeded at a cracking pace behind high tariff barriers through the late sixties and most of the seventies. From the mid-sixties onwards, however, the pattern of development in Brazil diverged in certain crucial aspects from the traditional import-substitution road. For this was a period in which the rise of the Eurodollar market opened up huge, previously non-existent opportunities for governments to recur to rapidly expanding private sources of lending. The Brazilian military could, for the first time since the war, embark on a gigantic borrowing spree on world-capital markets, contracting loans particularly from core-zone banks—rather than, as in the past, from governments or semi-official lending institutions—to drive development. Indeed, in the midst of a world recession, the Geisel government of 1974–79 launched an ambitious state-sponsored ISI programme in the area of heavy industry, with the declared aim of moving Brazil into the status of a developed country before the end of the decade.footnote²

The onset of record-high real international interest rates after 1980, which simply demolished most of the periphery, brought this model of debt-driven development to an abrupt end. Pressure from all sectors of society soon led the weakened military regime to withdraw to the barracks, thus ushering in the ‘New Republic’ in 1985. For a decade, as a burgeoning labour movement arose outside a conservative civilian establishment, the weak Presidencies of Sarney and Collor attempted to revive growth, the first by timid measures of social redistribution, the second by preliminary doses of neoliberalism—principally trade liberalization and deregulation—imposed as a condition for restructuring the country’s foreign debt under the Brady Plan.footnote³ Neither was able to halt ever-accelerating inflation. By the time Collor was impeached and his Vice President Itamar Franco took over, prices had exploded into hyper-inflation—an increase of over 2,000 per cent in 1994.

It was in these drastically altered conditions that Cardoso carved his path to power. Appointed Finance Minister by Franco in May 1993, he assembled a team of Ivy League technocrats who devised a stabilization plan submitted to the President in December 1993. The Plano Real, however, was much more ambitious in conception than a mere scheme for stabilization. From the outset, its central premise was that only by slashing inflation could an attractive investment climate be created for foreign investment by multinationals in Brazil, and only massive inflows of such productive capital from abroad could provide a new and sound basis for long-term domestic growth. Technocratic doctrine held that FDI would perform multiple services to the country: it would help finance balance-of-payments deficits, modernize industrial structures, develop advanced technology, promote productivity and boost the international competitiveness of Brazilian exports. In fact, a central section of the stabilization plan advocated modernization of the economy with the help of foreign capital. To this end, Cardoso recommended elimination of the barriers to foreign companies in the exploitation of natural resources, and to enable multinational corporations to participate in the privatization of strategic state enterprises in the infrastructure sector.footnote⁴

But it was the capacity of the stabilization strategy to restore confidence and credibility abroad that would determine the massive inflows of long-term productive capital Cardoso’s team expected to attract. It therefore encouraged the entry of short-term speculative funds into Brazil, by an unprecedented liberalization of the capital account and huge interest-rate differentials with the rest of the world, with the aim of rapidly increasing foreign-exchange reserves to clinch the success of monetary stabilization.footnote⁵ When the new currency, the real, was launched in July 1994, and with much fanfare pegged at parity with the dollar, Brazil already had $40.3 billion in foreign exchange reserves, 70 per cent accumulated since Cardoso was appointed Finance Minister—suggesting that from the start he expected to rely on a steady stream of external finance to help him stabilize the country. Two years later, he was telling an interviewer: ‘We have something that neither Marx nor Weber nor anyone else imagined—they couldn’t have done: capital has internationalized rapidly and is available in abundance. Some countries can take advantage of this excess of capital, and Brazil is one of them’.footnote⁶ Foreign capital became central in a strategy based on an overvalued exchange rate and import liberalization, seeking to emulate the initial ‘success stories’ of neoliberal stabilization in Mexico and Argentina.

Intellectual justification for this course of action was in plentiful supply. Economist Gustavo Franco, Director of International Affairs at the Central Bank between 1994 and 1997 and then its President until January 1999, the chief neoliberal ideologue of the regime and architect of the overvaluation of the currency, was an ardent proponent of import liberalization and the ‘strategic value’ of external deficits. Throughout the years of the Plano Real, Franco insisted, in academic papers as well as in the media, that since import liberalization increases efficiency, productivity and competitiveness, current-account deficits are a means by which ‘foreign savings contribute to economic development’. According to Bernardo Kucinski, ‘Cardoso considered Franco’s ideas as a kind of Copernican Revolution’. Those who criticized this strategy, and warned that it would make the economy increasingly vulnerable to international shocks, were labelled by Cardoso and his advisers as so many ‘catastrophists’, ‘alarmists on duty’, or ‘grave-diggers of the real’. The President himself coined a neologism to ridicule anyone who disagreed with his policies. They were neobobos—that is, neofools.footnote⁷

On the surface, Cardoso’s confidence in the descent of manna from the North was more than vindicated. In net terms, total inflows of foreign capital jumped from $14.3 billion in 1994 to $34.2 billion in 1996.footnote⁸ Volatile portfolio investment played a major role in this influx, accounting for some 46.5 per cent in 1993, 58 per cent in 1994, 45.9 per cent in 1995 and 32.4 per cent in 1996. Later, after Congress removed various constitutional impediments to their operations in 1995, massive inflows of foreign direct investment by multinational corporations began to enter the country. Annual net FDI leapt from $3.9 billion in 1995 to $9.6 billion in 1996, $17.8 billion in 1997, $26.3 billion in 1998, $29.9 billion in 1999, reaching $30.5 billion in 2000. According to UNCTAD, the stock of foreign direct investment in Brazil grew from $42.5 billion (6 per cent of GDP) in 1995 to $197.7 billion (21.6 per cent of GDP) in 1999.footnote⁹ But throughout the Plano Real, Brazil also relied on inflows of short-term speculative funds amounting to a net total of some $23 billion. To attract this hot money, the government offered investors not only one of the world’s highest interest rates, but also the ability to move their funds out of the country at any time, through highly advantageous tax-exempt mechanisms known as CC5s—bank accounts for non-residents with free access to floating exchange rates. Investors were further lured with hedge mechanisms, such as exchange-indexed government treasury bonds, to insure that they would retain the value of their assets when they left.footnote¹⁰