Globalization Tames the Left in Brazil

Brazil elected a progressive president, yet failed to tackle a long legacy of economic injustice. Instead, President Lula da Silva, a trade union activist born into poverty, was timid with economic policies: Playing it safe, Brazil embraced its traditional role of exporting resources abroad and allowing other countries to manufacture and innovate. For example, the nation’s trade patterns with China entail steady exports of soybean and imports of manufactured goods. South America’s leading power has immense public debt, and the da Silva administration did not attempt to lower interest rates that hover near 20 percent. Such high rates benefit the wealthiest investors, while slowing new business growth or job creation. Critics suggest that the government could have tried a lower interest rate or other policies that might have benefited the economy and a majority of Brazilians. Combining a stable economy with some progressive financial policies could have led to innovation and long-term security for Brazilians, but the da Silva administration did not even try. – YaleGlobal

Globalization Tames the Left in Brazil

A timid administration squandered an opportunity to forge a vibrant new economic path
Thomas I. Palley
Tuesday, September 5, 2006
No playground for the poor: Populist President Lula has been unable to reduce the massive income inequality plaguing Brazil

WASHINGTON: This October Brazilians will go to the polls in an election that constitutes a referendum on the presidency of Lula da Silva. As the candidate of the Workers Party, or Partido dos Trabalhadores (PT), Lula was elected in 2002 on a platform of progressive social democracy. Yet over the last four years, his macroeconomic policies have been marked by extreme caution and capitulation to the pressures of globalization. Consequently, Brazil has missed a golden opportunity provided by a robust global economy to chart a new and vibrant economic trajectory.

Lula's presidency provides another example of the timidity of the left in the era of globalization. Having fought so long and hard for power, his government has drawn back when the opportunity to govern finally arrived.

This timidity is the product of a combination of financial market intimidation and lack of intellectual confidence bred from the triumph of neoliberalism. Additionally, leftist politicians are also in the business of re-election, which means they often play it overly safe once in office.

Brazil faces a huge legacy of economic injustice that globalization has made even more difficult to remedy. This injustice is evident in Brazil's widely recognized massive income inequality, which a 1997 IMF working paper termed among “the most unequal in the world.” Comparable statistics are hard to come by, but in 1989 the ratio of the top 20 percent’s income share to the bottom 20 percent’s share was 32.1 for Brazil, compared with an average of just 6.3 for industrial and high-income developing countries over the period from 1960 to 1990.

Remedying this inequality is a challenge requiring patience and good judgment, for history imposes constraints and poorly conceived attempts to rectify past injustices can do more harm than good. Overly aggressive policies can cause major economic dislocation by undermining property rights and business confidence upon which the economic system rests. The net result is that redistribution can shrink the economic cake so much that even though the poor get a larger share, they are worse off because the absolute size of their piece falls.

Globalization has amplified these difficulties since capital can now flee more quickly than ever before, when confronting governments in pursuit of redistribution policies. In financial markets, the threat of increased taxation can trigger a rush for the exits and financial crisis. With so many countries competing for foreign direct investment, corporations have a wide range of options and can readily redirect investment elsewhere. Moreover, tariff elimination has removed a powerful incentive for multinational corporations to avoid tariff penalties by producing within a country.

All progressive governments must be sensitive to these dangers and Brazil especially so, because it has a high level of foreign indebtedness and a history of hyperinflation and financial crises. Indeed, in 1999 and 2000 Brazil experienced successive exchange-rate crises, and there was much talk prior to the 2002 election of massive capital flight in the event of Lula winning. Though down as a result of recent robust exchange rate appreciation, Brazil’s official foreign debt was still approximately 25 percent of the GDP at the end of 2005.

Lula's administration is rightly aware of these constraints. But it is one thing to be aware of constraints, and another to capitulate and be complicit with them. The fact that the possibilities for correcting past economic inequities are so limited requires the government to use the little space and few tools it has to good effect. It is here that Lula has failed Brazil.

Interest-rate policy, with its impact on the government budget and the economy, has been the source of that failure. Brazil has a large public debt on which it must pay interest. Yet, guided by neo-liberal financial policies, the Lula government has kept interest rates near 20 percent for its entire term. The result is that Brazil's government budget has become a giant machine for recycling scarce tax revenues back to Brazil's wealthy elites in the form of interest payments. In effect, the government's high interest-rate policy has created a situation whereby Brazil's scarce tax revenues, which should have been used to correct past inequities and promote growth, have instead ended back in the pockets of the wealthy.

High interest rates have also done serious harm by slowing economic growth and retarding job creation, thereby further injuring Brazil's workers. Though Brazil's headline numbers have looked good compared to the 1980s, growth has actually been significantly below par. The last four years have been a period of global economic boom during which world interest rates touched 40-year lows. On top of this Brazil entered the period with a highly competitive exchange rate, and it has especially benefited from the commodity price boom. Yet despite this once-in-a-generation fortuitous circumstance, Brazil has grown slower than the Latin American average because of self-inflicted high domestic interest rates.

The finance ministry's defense is that financial realities have compelled this policy, but such a defense rings hollow. The government has vigorously embraced tight monetary policy and never tested the possibility that interest rates could be lowered significantly without triggering higher inflation or financial crisis. Additionally, the government has consistently ignored other financial policies that can restrain inflation without imposing high interest rates on the public debt. Though trumpeting its early repayment of IMF loans, the reality is that the PT government has capitulated to financial markets, thereby reducing growth and undermining Brazil's already limited ability to correct past inequities.

Ironically, Lula's presidency has also witnessed a cementing of Brazil's role in the new neoliberal global economic order, with Brazil increasingly reverting to its historical role as a supplier of primary products to the global market. In the second half of the 20th century, Brazil looked to move away from that role by becoming a global manufacturing powerhouse. However, over the last four years, commodity exports of iron ore and agricultural products have increasingly become the engine of Brazilian economic growth.

This turn of direction has been promoted by the same neoliberal financial policies that have so hamstrung Brazil's budget. High interest rates have made Brazilian financial markets highly attractive, causing large international inflows of financial capital that have appreciated the exchange rate by approximately 50 percent over the last four years. This appreciation in turn diminished the international competitiveness of Brazilian manufacturing.

These developments are reflected in the rapidly growing trade relationship with China that has Brazil supplying agricultural products, particularly soy, in exchange for manufactured goods. Though the Brazilian government celebrates growing trade with China, the emerging pattern of trade carries grave dangers. If China's impact on manufacturing in Mexico and elsewhere is a guide, then Brazilian manufacturing faces a potentially devastating competitive threat. Whereas Chinese policymakers have strategically engaged the global economy using an under-valued exchange rate and capital controls, Lula's neoliberally inclined financial advisers have dismissed such policies.

Lula's 2002 victory was an historic event that broke with Brazil's past, with voters electing as president a trade union activist who was born in poverty. However, his government's lack of policy courage and imagination means that it has failed Brazilian workers. The root of this failure is the embrace of neoliberal financial policies. Everyone recognizes that it is difficult to adopt progressive financial policies in times of economic crisis, but now the Lula government suggests that such polices are also impossible in good times. That's a somber message about the implications of globalization for social democracy.

Thomas Palley runs the Economics for Democratic and Open Societies Project, and is the former chief economist of the US-China Economic & Security Review Commission. He is the author of “Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism” (Princeton University Press, 1998). His writings can be found at www.thomaspalley.com.

© 2006 Yale Center for the Study of Globalization

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