The strength and fragility of the Brazilian economy

Brazil, once a showcase middle-income success story, is now in the throes of an economic and political crisis. While the commodity collapse and China's slowdown have contributed to the country's economic slide, it is the Brazilian economy's vulnerability to massive and uncontrolled capital flows that has brought the country to its current economic state.

Rosa Maria Marques and Paulo Nakatani

ANALYSING the Brazilian economy is a difficult and complex task; the current indicators register results ranging from excellent to mediocre and worrisome, depending on the variable observed. For example, the nation has advanced into modernity in a few sectors, while at the same time, in recent years, new forms of dependency from the centre of capitalism deepened. Further complexities arise when, beyond the economy, one takes into consideration not only the results of so-called 'inclusion' policies and the popularity of President Dilma Rousseff (popularly referred to as 'Dilma'), but also the number of strikes and public displays of disenchantment that are emerging in every corner of the country.

Since the government of Luiz Inacio Lula da Silva ('Lula'), the Brazilian economy has widened its internal market through policies that have raised the minimum wage, transferred income to the poorest within the nation, increased the availability of credit to the low and middle segments of the population, and reduced taxation (mainly on manufactured goods in the essential consumption basket). Such widening of the market, with a low impact on imports, would in theory ensure the maintenance of a certain level of growth, regardless of the international dynamics, and, indeed, it has helped Brazil reach a positive economic performance during the worst of the recent global economic crisis and its aftermath.

The results of the policies of consumption and production stimuli produced a considerable growth of the gross domestic product (GDP). Nonetheless, when the impacts of the global recession deepened with the sovereign debt crisis in Europe, these macroeconomic policies did not yield the same effect, at most achieving modest growth.

The maintenance of floating (market-driven) exchange rates and the priority of obtaining a high primary fiscal surplus and low inflation - the main components of the economic policy adopted by both governments under Fernando Henrique Cardoso - turned the country into one of the main centres attracting foreign funds seeking high returns.1 These money flows from abroad handicapped Brazil's international position, pressuring the currency rate upwards and ensuring the permanence of high interest rates. The result was a persistent deterioration in the current account of its balance of payments, which peaked in December 2013. With respect to the trade balance, besides the unfavourable exchange rate, there was a shift to greater specialisation in the export of primary commodities, especially where demand was most inelastic, such as soybeans.

As for the high primary surpluses (where tax revenues exceed spending, prior to payment of interest on debt), since in order to maintain them government spending must not unduly increase, they constitute an obstacle to any expansion in federal spending, particularly in the social sphere, and to the growth of public investment. More than this, this priority's permanence helps maintain and deepen the neoliberal restructuring 'reforms' of the 1990s. Such restructuring leads to greater privatisation and the adoption of policies in several sectors actively encouraging public-private partnerships, that is the dissolution of public spending. Coupled with this is the new financialised 'model' chosen for the extraction of oil in the Pre-Salt geological formation on the continental shelves off the Brazilian coast.2

Maintaining a large primary fiscal surplus is fundamental for maintaining the financialised macroeconomic model, because the surplus is necessary for the payment of part of the interest on the public debt. The unpaid part transforms itself into new debt, and this is why it has grown exponentially since 1994. Brazil is thus increasingly getting caught in the austerity trap.

Brazil is aiming for a primary surplus equal to between 2% and 2.5% of its 2015 GDP to counter budget deficits in response to Standard & Poor's downgrading of Brazil's sovereign rating for the first time in a decade to a BBB rating - the lowest investment-grade rating. In this way, global finance is removing the previous leeway the Brazilian economy had. As part of this general austerity package geared to the needs of global finance, Brazil's central bank is keeping the benchmark interest rate at 11%.3

Last, the priority of setting low inflation targets keeps the government hostage to financial capital's interests: any elevation in prices brings back the ghost of hyperinflation, and pressures of all kinds arise to increase basic interest rates. In other words, the rigidity imposed by the inflation targets surrenders monetary policy to the interests of interest-bearing capital, mainly composed of foreign capital searching for greater returns in Brazil.

The result of all these factors in the past few years upon the Brazilian economy was a reduction in growth, even though the level of unemployment is the lowest ever observed and the income from labour is still growing, albeit at a decreasing rate. The impression one has is that the governments of Lula and Dilma exhausted their leeway associated with the expansion of the internal market. That is, the choice of widening the internal market (the consumption component) by aiding those with low and middle incomes, while also leaving unaltered the institutions introduced by neoliberalism in the 1990s, has now reached its limit. It is clear that the priority of big capital is not to enlarge the level of productive investment, as long as elevated financial returns are ensured.

It is in the middle of this that the nation which hosted the 2014 World Cup has been experiencing a new phenomenon since June 2013 - manifestations (demonstrations) and protests in the major cities of the country. Although the manifestations occurring today cannot be compared to those of 2013 in quantitative terms, they still continue to be held by the youth, who have no connection to unions and traditional political parties. More recent working-class demonstrations have been directed at questioning the use of public resources in the 'arena' - that is, the soccer stadium - of the world football championship, while financing in the areas of education and health goes wanting. Nonetheless, the popularity of the president resumed its growth to a point where she won re-election, though by a reduced margin.

In March 2015, after Dilma's re-election, middle-class protesters in Brazil, incited by the privately owned mass media, demanded her impeachment, singling out her government with respect to the widespread corruption which in fact is a larger reality pervasive in the country, in order to destabilise her Workers' Party (Partido dos Trabalhadores, PT). This regressive movement should not be confused with the earlier working-class protests against the PT's growing neoliberalism and in favour of substantive change. It does, however, point to the growing frailty of PT rule, ultimately based in the economy.4

Strength and frailty

The situation of the Brazilian economy reveals both its strength and frailty. The results from the income transference policies for the poorest, the strengthening of the minimum wage, and the creation of instruments to provide access to credit for the low- and middle-income classes, as well as the increase in employment and formalisation, demonstrated the nation's capacity to widen the internal market via rising family consumption. And these same policies supported the level of economic activity, even though the performance of the GDP in the past years has been erratic and not robust, indicating how integrated Brazil is in the global market among other things.

Put differently, the process of globalisation of capital, which we saw take place in the last decades, created such a level of interdependency between countries that it is difficult, with the exception of China, for emerging nations to execute an autonomous economic policy - that is, one that is not influenced or harmed by the action of international capital.5

Nonetheless, the growth in family consumption has lost momentum in the past few years, which does not mean it cannot be widened further. But this enlargement would require another kind of policy, not those adopted by the Lula and Dilma governments. The option adopted implied an improvement in the distribution of income among working people, but did not alter the relationship between capital and labour, as media reports of the results of companies and banks demonstrate.

From the side of investment, in spite of the improvement registered in 2013, there are problems looming on the near horizon, driven by the non-resolution of the European crisis, the weak performance of the US economy and the economic situation of Argentina, Brazil's main partner in the Mercosur trade bloc. These problems are likely to be sufficient to inhibit certain types of products as well as to create an internal climate of uncertainty with regard to the future. To this one must add the policy of large fiscal surpluses, which inhibits the capacity of the government to invest, even in projects attached to the strategy of public-private partnerships.

But perhaps the greatest frailty to which the Brazilian economy is exposed derives from the openness to the inflow of foreign capital. Such inflow, largely a result of the enormous liquidity injected into the global economy by the United States in recent years, has been promoted in Brazil, since the 1990s, by the enactment of a series of measures that benefited (particularly fictitious) interest-bearing capital, be it national or international.

In the case of international capital, its massive and uncontrolled entry into the country, in the forms of foreign direct investment and portfolio and derivative investments, holds the nation hostage to market mood swings, US interest rate policy and the strategies of the companies bringing in resources. In 2013, it was enough for the US Federal Reserve to speak of changes in US monetary policy for a large volume of capital to leave Brazil. In such a situation, in spite of all efforts, the government cannot control the exchange rate, which thus remains overvalued.

And it is indeed this same capital, along with its domestic counterparts, that puts pressure on the state to maintain high interest rates, regardless of the fact that these elevate the costs of the three government spheres - federal, state and municipal. The increase in internal debt, together with primary surpluses, inhibits the state from making public investments and funding social programmes, which are, after all, its responsibility.   

Rosa Maria Marques teaches political economy at the Pontificia Universidade Catolica de Sao Paulo. Paulo Nakatani teaches economics and social policy at the Federal University of Espirito Santo. The above is extracted from an article which was first published in Monthly Review (Vol. 67, No. 1, May 2015).


1. Current government expenditures, excluding interest on government debt, are less than tax revenues. There can be a primary surplus but an overall deficit if total government spending, including interest payments, is more than tax revenues.

2. The system of concessions was switched by the shared production model. In the first model, the companies hold the oil and the state receives royalties, special participation and signing bonus (at the time of the signature of exploitation contract, value decided by auction). In the second, the state has some part of the production and the companies receive in oil the cost of exploitation and a part of the difference between the production and the cost of exploitation.

3. Carla Simoes and Mario Sergio Lima, 'Brazil 2015 Primary Surplus Target Wider Than 2014, Budget Shows', Bloomberg Business, 28 August 2014,

4. Alfredo Saad-Filho, 'Brazil: The Debacle of the PT', The Bullet, 30 March 2015,

5. Myles Horton, The Long Haul (New York: Doubleday, 1990), 84.

*Third World Resurgence No. 307/308, March/April 2016, pp 40-42