Not Even Past: Bravado Meets Reality in Brazil

After riding a commodity boom for some time, the Brazilian economy is in trouble—deep trouble. Again. This is hardly “stop-the-presses” stuff, of course, for throughout its history the country’s economic fortunes have often risen and fallen with the prices of global commodities. Before iron ore, soybeans, and oil, there were boom/bust cycles involving sugar, gold, coffee, rubber, and, for a short time in the ’60s and ’70s, manufactured goods. Indeed, according to numerous scholars, commodity cycles, as much as anything else, have shaped Brazilian history, making it, in the old wisecrack, always the country of the future.

This time was said to be different, though. Domestic political reforms, macroeconomic progress, innovative equity-oriented social policies, and, last but certainly not least, the increasingly powerful role of China in the Brazilian economy were said to be game-changers. The fact that Brazilian economist (and former finance minister) Maílson da Nóbrega wrote a book in 2005 entitled The Future Has Arrived (O futuro chegou) is telling in this regard. So, too, was Brazil’s growing assertiveness on the world stage in the first decade of this century, assertiveness manifested in part by distancing itself from policies supported by the United States. Until the last year or so, Brazil’s political leaders and chattering classes had increasingly taken pride in uttering the word não (no), particularly when it came to matters relating to the Estados Unidos.

In retrospect, such moments of bravado can be seen as period pieces, capturing for posterity the frisson of excitement of peoples and countries who expected the dawn of a new age, but found something else instead. In the case of Brazil, such utterings seem like verbal BRIC-a-brac, ornamental posturing in a puffed-up “emerging economy” just before boom went bust. Alas, given the current global economic outlook, the future for Brazil still looks distant. This is so in large part because, as Faulkner might have said, Brazil’s past is hardly dead—it’s not even past.

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It is understandable that so many were so sure, beginning in the mid-1990s, that Brazil was going someplace. Many of them pointed particularly to 1993–94, when the “Plano Real” was being implemented, culminating with the issuance of a new real (Brazil’s national currency) formally pegged to the US dollar, as marking both the end of a protracted period of political and economic instability and the starting point for a “rise.” Such enthusiasm was not illegitimate: The country had just suffered through a lengthy period of considerable political and economic pain and seemed at last to have found a viable path to recovery.

Think back a bit about Brazilian history over the past half-century. A military dictatorship between 1964 and 1985, which, economically speaking, started off relatively well—a series of liberalizing economic reforms under the ruling junta early on helped to usher in the so-called economic miracle of the 1968–73 period—but which, like most military dictatorships, had much blood on its hands and ended badly. The economic miracle, such as it was, was not miraculous for very long, and was followed by two very tough decades for the Brazilian economy. Expectations—or at least hopes—notwithstanding, Brazil had not been transformed into a developed country by the generals nor by their civilian successors in the late ’80s and early ’90s. Indeed, one can argue that even today—despite its status as a capital letter in BRIC and its sense and reputation as an emerging economic star, its size and potential, its many natural and human assets, and its significant strengths in a number of economic areas—Brazil’s status as an “upper-middle-income” country is not completely secure.

Why not? In shorthand form, because the export-led growth spurt of the late ’60s and early ’70s—a spurt in which infrastructural improvements and export of manufactures and commodities had figured prominently—was over in a flash, losing momentum as the troubled ’70s wore on and decelerating sharply in the ’80s. (Whereas GDP grew at an annual rate of more than 7 percent in the 1960s and 1970s, for example, growth in GDP averaged only a third as much over the last two decades of the 20th century.) And because, after two decades of economic gains beginning in the ’90s, Brazil finds its economy once again in serious peril.

The reasons for the country’s sluggish economic performance before the 1990s are numerous and much debated, with interpretive positions often closely aligned with ideological preferences. While free-marketers emphasize the malign effects over time of specific governmental policies, particularly ISI (import-substitution industrialization) and the Brazilian government’s macroeconomic imprudence (signaled by massive foreign and domestic debt, along with spiraling prices), those on the left tend to point instead—or at least in addition—to oil shocks, global inflationary pressures, predatory foreign lenders, and harsh therapeutic austerities imposed on Brazil by the International Monetary Fund and other adherents of the Washington consensus. Despite their differences, people associated with both camps generally agree that the high levels of income and wealth inequality in the country, stark regional disparities in development, dearth of investment in infrastructure and human capital, and political corruption, along with what Daron Acemoglu and James Robinson (authors of Why Nations Fail) would call the “extractive” institutional regime characteristic of Brazil, played prominent roles as well.

And people in both camps would likely agree that things began to improve in some ways in 1993, when the implementation of the Plano Real started, with progress accelerating after the dollar peg, in July 1994, and the election of Fernando Henrique Cardoso as president later in the same year. How much improvement was in fact made is still open to debate, but no one argues that things were better before the Plano Real and before the sociologist-turned-politician took the reins of power.


For all the country’s problems when Cardoso assumed the presidency, at the time Brazil also possessed a portfolio of assets that was exceptionally broad and deep, one that, with the discovery of the (supposedly) huge “sub-salt” oil deposits off the coast, grew more impressive still under Cardoso (1995–2003) and his successors, Luiz Inácio Lula da Silva (2003–11) and current President Dilma Rousseff. Indeed, in a parlous world of scarce resources, the assets available for deployment in Brazil, even in its darkest hours, would exceed the wildest dream of many a head of state, president, or prime minister today. For starters, Brazil is the fifth-largest country in the world in both area (more than 8.6 million square kilometers) and population (more than 204 million, as of July 2015). The country is blessed with a bounteous resource base, with massive stocks of iron ore, tin, nickel, and aluminum among other minerals, as well as plentiful water resources and hydropower facilities, and, by a wide margin, the world’s greatest stock of tropical rainforest. Brazil’s ambitious plans for its oil fields off of Rio de Janeiro may or may not ever be reached—given the high costs of extraction and the history and culture of Petrobras, the hugely indebted semi-public company that controls the fields—but the nation is a top-ten producer of oil in any case, and the world’s second-leading producer of ethanol behind the United Sates. Moreover, Brazil’s sugar-based ethanol is produced much more efficiently than the corn-based ethanol in the US, and most experts consider Brazil’s biofuel program the most efficient one in the world.

Ethanol, of course, is but one use made of the cane sugar produced in Brazil, the world’s leading sugar producer by far. In addition, Brazil has long been the world’s leading coffee producer and recently surpassed the US as the world’s leading soybean producer. It ranks near the top in the production of cereals (fourth), meat (third), fruits (fourth), and cocoa (seventh), and stands at number six overall in the value of agricultural GDP.

To fill out the country’s economic profile, Brazil is also still one of the world’s leading manufacturing powers (despite or because of its long history of protectionism), with significant strengths in industries of various kinds and of varying levels of sophistication, ranging from textiles, shoes, and cement to iron and steel to motor vehicles, machinery, and aircraft. The service sector, which accounts for almost two-thirds of employment, is similarly diverse, with a well-developed FIRE sector (finance, insurance, and real estate) and a large and growing tourism industry, the expansion of which is expected to accelerate with Rio hosting the Summer Olympics this year.

In other words, despite the serious economic problems President Cardoso faced when taking office on January 1, 1995, and the serious problems the country continues to face today—not always the same problems, as we shall see—the Brazilian economic cupboard was hardly bare. Not then, not now, not ever.


In some ways, of course, it is a mistake to focus too much attention on the onset of Cardoso’s presidency per se. Appointed minister of finance in 1993 under acting President Itamar Franco (whose predecessor, Fernando Collor de Mello, had been impeached for corruption), Cardoso was involved with drafting the Plano Real and making it fully operationalized on July 1, 1994. Briefly put, the plan was intended, first and foremost, to end, at long last, the “lost decade” associated with the debt crisis and the hyperinflation of the 1980s and early 1990s. Although the proximate causes of the crisis were related to Brazil’s inability to adjust to a variety of changes—the spike in oil prices in the ’70s, the wanton recycling of petrodollars in the form of loans, frequent balance-of-payments deficits, currency depreciation, etc.—deeper-seated factors were also at work. During the entire second half of the 20th century, Brazil was plagued by high rates of inflation. According to some, the country had the world’s highest rate of inflation over the course of that period, with the debt crisis of the ’80s and ’90s exacerbating rather than inaugurating Brazil’s problems with inflation and exposing rather than sparking the country’s macroeconomic weaknesses.

The formulators of the plan thus had their work cut out for them, and in retrospect did reasonably well—at least for a time. The relatively comprehensive scheme they developed drew heavily from the constellation of ideas often subsumed under the term “Washington Consensus,” a rubric associated in particular with the IMF. The Brazilian version of the scheme sought at once to reduce the government’s budget deficit and stabilize state fiscal policy by increasing taxes; encourage privatization; lessen inflationary biases in the economy; open up the economy by reducing tariffs; create a trade/payments surplus; and increase foreign-currency reserves. If such policies began to show progress, the hope was that international confidence in Brazil’s macros would grow, lessening the chance of currency attacks. Then, the pièce de résistance: the introduction, beginning in July 1994, of the new, highly valued real pegged to (and continually indexed against) the US dollar, which would hopefully bring a realistic chance for price stability to return, unemployment to drop, and a new era of solid, sustainable growth to commence.

Mirabile dictu, some signs of progress were quickly made on these fronts, and Cardoso, running on the Plano Real package, defeated da Silva for the presidency in the fall of 1994. During his first term in office, moreover, he continued to push, indeed, deepened his commitment to a reform agenda. To what end? Again, there is disagreement. At first blush, the 10-year figures seem to suggest that the ’90s constituted a second “lost decade” for Brazil. The annual rate of economic growth over the course of the decade (1.7 percent) was even lower than it had been in the ’80s (2.9 percent); the investment rate in constant prices was lower; export growth was lower; and the rate of unemployment higher.

Upon closer inspection, however, other patterns begin to emerge. From 1995 to 1999, the economy on balance performed better than it had in the first half of the decade. Prices quickly stabilized with the introduction of the new real. The annual inflation rate, which in 1993 was a staggering 2477 percent, fell to 22 percent by 1995. The reduction in tariffs and the privatization push, along with the strengthened currency, led to increases in both imports and foreign portfolio and direct investment. The strength of the real also hurt the current accounts picture somewhat—imports were “cheap” and, not surprisingly, grew faster than “expensive” exports. The government’s fiscal deficit also increased. But even so, the strength of the dollar-peggedcurrency—and, with it, growing investor confidence—drew in foreign capital that could be used to shore up the current account and the government’s still weak fiscal position.

To be sure, in a literal sense, the Plano Real didn’t last all that long. The global reverberations of the Asian financial crisis of 1997–98 led to a brief, but sharp recession to Brazil, forcing Cardoso, early in 1999, to devalue the real by 8 percent, thereby ending the dollar peg and allowing it to float once again. But by stepping back a bit and looking at the big picture, it is clear that the basic economic principles animating the plan were still more or less in place and that, in comparison to the lost decade of the ’80s, the economy was in better shape. The promotion of economic stability was still a major governmental goal after the real began to float again, structural reforms of some significance had been made, investor confidence was returning, and a margin of hope had been regained. For a time at least.


Indeed, in retrospect the period between about 1995 and 2010 looks like something of a second “golden age” for Brazil, the first and more literal golden age—famed historian Charles R. Boxer’s term—having run from about 1695 to 1750, when Brazil was the leading gold producer in the world. That Brazil did so well in the late ’90s and for a few years after was due to a variety of factors that in some ways can be likened to a harmonic convergence.

In the first decade of the new millennium, Brazil did not grow as rapidly as the other BRICs, but it did grow much faster than it had over the previous two decades. Between 2000 and 2008, for example, real GDP in the country grew at an annual rate of 3.7 percent, as opposed to 10 percent in China, 7.2 in India, and 6.9 percent in Russia. Unemployment was not low, but not dangerously high either, averaging about 8 percent over the 2000–2010 period, which figure was lower than the levels in India and Russia (as well as the US). After a growth pause in 2009 associated with the aftershocks of the financial crisis, Brazil stormed back, achieving an annual growth rate in GDP of 7.7 in 2010 and almost 4 percent in 2011.

Moreover, the reform architecture built during Cardoso’s first presidential term held up for the most part during his second term and during both of da Silva’s terms in office. The steps initiated in the ’90s had rendered the Brazilian economy more competitive, drawing in foreign investment, much of which went into infrastructure and plant improvements. Foreign portfolio and direct investment in turn aided productivity further, boosting exports. Not surprisingly, foreign investment and export earnings also helped to maintain the value of the real and to keep exchange rates stable. Brazil’s current accounts moved into positive territory early in the 2000s, under da Silva, and remained there until 2008. Despite a surge in governmental spending, the lessons of the past remained on the minds of policymakers, and, until well into the Rousseff regime, public finances remained solid, with primary fiscal surpluses (the fiscal balance before interest payments) positive throughout the decade.

The economic picture described above—solid growth and improved fundamentals—emboldened the government to tackle certain structural weaknesses in the Brazilian economy, most notably, deep poverty and profound levels of income and wealth inequality. This was especially the case after the election of da Silva to the presidency in 2003, which began the period, still with us today, of domination by the Workers Party (PT) and its allies. The most prominent and effective of the policy initiatives in this realm—the cash-transfer program, known as the “Bolsa Família”—has, since its establishment in 2003, become both well known and widely emulated around the world. The program was designed to address both poverty and inequality simultaneously via cash transfers to families below a certain income threshold. In exchange, recipient families with children had to agree to keep them enrolled in school and to keep their childhood vaccinations up-to-date. For its part, the government would provide education free of charge to those families that could not afford fees.

Almost immediately after implementation, the program became wildly popular, and data collected in subsequent years have offered convincing evidence that it has achieved impressive results. Poverty rates in the country have fallen, inequality levels (though still extremely high) have been reduced, school enrollments are up, and human capital—as reflected in labor market results—has improved. Other complementary programs, such as the anti-hunger program “Fome Zero” and the rural electrification program “Luz para Todos” have done so as well. Yet its expansion over the years—around 14 million families, comprising over a quarter of the entire population, are now enrolled—has driven up costs of the program considerably, a trend that will likely continue.

By the end of da Silva’s second term, indeed, even during the first few years of Rousseff’s presidency, it was not difficult to make the case that Brazil was in a good place. Over the course of the previous two decades, the country’s economy had been stabilized. Policymakers had implemented some much-needed reforms along with policy innovations that seemed to be reducing poverty and inequality in the country. The Brazilian middle class, at once expanding and consolidating, seemed to be benefiting too.

But as Warren Buffett once remarked with regard to the financial crisis of 2007–08, “It’s only when the tide goes out that you learn who has been swimming naked.” And in the case of Brazil, the receding tide has shown what was actually taking place on what might be called China Beach. For it is increasingly clear today that much of Brazil’s economic and social progress since the mid-1990s, especially in the first decade of the new millennium, was underpinned (when not directly underwritten) by China, Brazil’s increasingly interlinked economic partner located on the far side of the Pacific Rim.


For a decade and a half, the relationship between Brazil and China seemed a classic win-win in which each BRIC was able to leverage the other in building an increasingly ambitious economic edifice. But it turned out to be short-lived, even illusory.

China’s ascent is without a doubt the most important economic story of our time. How else could one categorize the economic experience of this massive country, a country whose GDP grew at an average annual rate of 10 percent for 35 years? (In other words, a growth rate that led to a doubling in GDP every seven years!) Such a protracted period of robust growth was made manifest in many ways, one of which was particularly important to the relationship with Brazil. Rapid growth occasioned a seemingly insatiable demand in China for the wide array of raw materials and commodities needed both to accommodate the country’s vast (rapidly urbanizing) population and to make possible the country’s massive industrial surge. For its part, Brazil, as we have seen, was blessed with a rich resource base, was already deeply involved in mineral and commodity production, and was eager to expand exports of the same. This being the case, Brazil began working hand-in-glove with China, providing ever-growing proportions of the raw materials and commodities fueling China’s dynamic growth.

And for well over a decade this economic symbiosis seemed a shrewd economic strategy. By 2013, China had overtaken the US as Brazil’s leading trading partner, with Brazil’s total trade with China having risen in value from about $2 billion in 2000 to $83 billion. Over the same period, Brazil’s exports to China—mainly raw materials and primary commodities—rose in value from about $1 billion to $40.6 billion. By 2009, for example, about two-thirds of the value of Brazilian exports to China derived from iron ore and soybeans, with most of the remainder coming from petroleum, and low-value-added manufactures such as wood pulp and leather. By then, about 15 percent of total Brazilian exports went to China and 14 percent of Brazil’s total imports came from China, a profound role for one trade partner, especially one so far away.

The relationship with China constituted new facts on the ground for Brazil, facts that impeded the growth and in many cases reversed the fortunes of exporters of manufactured goods. China’s insatiable demand for raw materials and commodities, and the nature of the direct and indirect investments it made in Brazil—led to what many label, accurately if inelegantly, the “primarization” of Brazilian exports since 2000, which is to say the increasing dominance of raw materials and commodities in the mix. Between 1991 and 2006, for example, manufacturing exports never comprised less than 51 percent of Brazil’s total merchandise exports, and their share was generally in the mid-50s. With China’s arrival, the share comprised by manufacturing exports had fallen to 39 percent by 2009 and has remained in the mid-30s ever since.

This trend was reinforced by the surge of investment into Brazil from other areas, often by investors hoping to “play” China by investing in commodity production in Brazil rather than by investing in China itself because of the uncertainty and lack of transparency in that country. And certainly, the increasing strength of the real—as exports surged, investment poured in, and huge new deposits of petroleum were found—added a punctuation point to primarization. Taken together, these considerations held back manufacturing exports from Brazil, with a few notable exceptions such as aircraft, regional jets in particular. In a technical sense, China’s economic presence alone may not have brought down Brazil with a documented case of the dreaded “Dutch disease,” that is, a condition in which export surges (in this case, surges of raw materials and commodities) lead to large inflows of foreign capital and the sharp appreciation of the currency (as was true of the real), making Brazilian manufactured goods (generally not very efficient to begin with) increasingly expensive. But the Chinese partnership at once revealed and exacerbated a “resource curse,” a situation whereby countries with abundant resources often fare less well than those without them. (Nigeria, let me introduce you to Singapore.)

So powerful had China’s role become in Brazil by 2010 that the health of the Brazilian economy became heavily influenced, if not dependent upon developments in the Middle Kingdom. If it was not quite correct to say that when China caught a cold—and it caught a bad one in 2012 that continues to linger—Brazil contracted pneumonia, it is nonetheless undeniable that the slowdown in China’s growth in recent years, as it attempts to reconfigure its export-driven growth model and restructure its domestic economy, has clearly had an adverse impact on Brazil, revealing Brazil’s deep social fissures and underlying economic weaknesses.

With sharp reductions in China’s demand for both iron ore, which had fed all of those construction cranes in Beijing and Shanghai, and soybeans, which had fed all of those Chinese swine, a number of emerging economies went into deep tailspins, but none more than Brazil’s. The fact that the value of Brazil’s exports to China fell by 19 percent between January 2015 and the end of July is suggestive in this regard. So is the related fact that Brazil’s economic growth rate, which had fallen to a paltry 0.1 percent in 2014, fell into negative territory in 2015, with GDP shrinking by 0.7 percent in the first quarter and by 1.9 percent in the second quarter. The economy continued to shrink through the last two quarters of 2015, with the annualized rate for 2015 coming in at a negative 3 percent.  Respected forecasters, including the Central Bank of Brazil, also predict negative growth in GDP on the order of 2.5–3.0 percent in 2016, meaning that 2014–16 constitutes by far the toughest times for the Brazilian economy since the global economic crisis and, in some ways, since the early 1990s.

And that’s not the half of it. The real fell to its lowest level ever against the dollar in September 2015 before rising a bit. Inflation is on the rise, with consumer prices increasing by about 9.5 percent in the 12 months ending August 31, 2015, the highest annualized rate in a dozen years and far ahead of the Central Bank’s target of 4.5 percent. Unemployment reached 8.6 percent in the period between May and July last year, the federal government’s primary fiscal balance is again negative, and in 2014 the trade balance was negative for the first time in well over a decade. In September 2015, Standard & Poor’s downgraded the country’s government bonds to junk status.


Although it is difficult to make predictions, especially about the future (an aperçu attributed to the late Yogi Berra), Brazil is clearly facing tough times, particularly in light of the other crises Rousseff is facing relating to corporate and governmental corruption, which may lead to her impeachment. As in the past, the country will probably muddle through with a possible bump of sorts from the 2016 Olympics—assuming it doesn’t botch them too badly and that the Zika virus doesn’t scare tourists away (two big assumptions)—and a still full natural resource bank.

Perhaps the most troubling thing about Brazil’s situation today is that even after economic reforms, two decades of reasonably good economic policies, what seemed a blessed economic union with China and what was, by and large, a favorable market environment for BRICs in general, Brazil was so poorly positioned to respond to the ebbing of the commodity surge. In spite of the progress that had been made since the early 1990s, post-surge Brazil—the seventh-largest economy in the world, whether measured in nominal terms or by purchasing power—still ranks much, much lower in GDP per capita. Despite considerable progress in reducing income inequality in the country, Brazil remains one of the most unequal countries on Earth, and regional inequalities, particularly between northern and southern states, remain egregious. Economic productivity—the relationship between inputs and output—is low; educational levels and achievement very weak (“much closer to Burkina Faso than to Finland,” as Brazilian journalist Marco Prates puts it); and infrastructure poor. The country has squandered much of its “demographic dividend” and, with the demographic transition well advanced (particularly in the wealthier south), Brazil’s population profile will likely be less conducive to growth going forward. According to Transparency International’s “corruption index,” Brazil fares poorly, ranking 74, and in the IMD World Competitiveness Yearbook 2015, Brazil ranks 56, just behind Bulgaria, and one place ahead of Mongolia, not the company a supposedly high-flying BRIC economy wants to keep.

All of this said, according to the World Bank, in 2015 Brazil, warts and all, is considered an upper-middle-income country. Countries in this category range in gross national income per capita between $4,125 and $12,735. Brazil’s was $11,530, putting it near the top of the upper-middle-income range. Whether or not it completely deserves that characterization, and whether or not it will remain in the upper-middle-income category, are questions that history will judge.

Much depends on how Brazil weathers the present difficulties and those that lie ahead. Economists and politicians seem divided on how to move, with some arguing that Brazil should turn inward and develop its own resources—including its human resources—and its own large domestic market. Ironically, others (such as the McKinsey Global Institute, the research side of the New York–based McKinsey consulting firm) argue just the opposite. The lessons of the relationship with China notwithstanding, Brazil’s principal problem, in its view, is that its economy is not open enough. Only by connecting in a more thoroughgoing way with global factor and product markets—and global networks—does Brazil have a chance to ascend to the ranks of, say, the elite Organization for Economic Co-operation and Development (and OECD-like standards of development), and, in so doing, to bring about the inclusive growth the country has never had.

The most concerning thing about Brazil going forward—whatever the economic strategy it pursues—might be the possibility that the country is already ensnared in the so-called middle-income trap. Countries in such a predicament find their economies stagnating after reaching a certain developmental level because their manufacturing and labor costs are too high to allow them to compete with lower-cost producers, but their labor forces are insufficiently skilled and efficient to compete further up the value chain.

Whichever path Brazilian policymakers choose, they must deal with the heavy burdens of the country’s past: For starters, the legacy of slavery, gross inequality, poorly developed human capital, “extractive” administrative regimes, etc. Development trajectories may not be completely path-dependent, but they are at the very least path-influenced or path-inflected. With this in mind, maybe the well-worn adage that “Brazil is the country of the future—and always will be,” a riff on the title of an admiring 1941 book by the expat novelist Stefan Zweig, is not quite right. Harking back to the Faulkner line we invoked at the outset, perhaps it would be more appropriate to say that in Brazil the past is not past—and never won’t be.

Peter A. Coclanis is the Albert R. Newsome Distinguished Professor of History and director of the Global Research Institute at the University of North Carolina at Chapel Hill.

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