Few would disagree with the notion that Albert Fishlow is the right person to write the book on Brazil’s transformation over the past 30 years. He has followed the country since the early 1960s and contributed personally to its economic policy debates—both in Brazil and in the United States. He helped train a legendary cohort of Brazilian policy analysts and even helped establish one of Brazil’s most influential economic research institutes, the Instituto de Pesquisa Econômica Aplicada (IPEA).
Fishlow’s new book, O novo Brasil: as conquistas políticas, econômicas, sociais e nas relações internacionais (The New Brazil: Political, Economic, Social and International Relations Achievements), lives up to expectations. A detailed analysis of political, economic, social, and external change in the turbulent years of Brazil’s “New Republic,” it is also a painstakingly documented, factual and critical presentation of Brazil’s journey from the days of Tancredo Neves (elected president in 1985 but too sick to take the oath of office), through the administration of President Fernando Henrique Cardoso (1995–2003), to the meteoric rise of former President Luiz Inácio Lula da Silva (2003–2010). It takes as its starting point the Diretas Já—Direct [Elections] Now—movement in 1983, which began to bear fruit once military rule ended in 1985.
As Edmar Bacha—a member of the team who developed the Plano Real (Real Plan) in 1994 and a former Brazilian Development Bank (BNDES) president—observes in the preface, “Under the New Republic, Brazil experienced transformative changes. We missed an interpreter; someone with a solid formation, deep and detailed knowledge, critical detachment, and why not say it, a love for the country, to explain these transformations. We now have it.”
The book’s 10 chapters are divided into two parts. The first part focuses on the return to democracy and on the struggle to achieve inflation stabilization with the Plano Real; the second deals with the 15 years from 1995 to 2010: the Cardoso and Lula administrations. It documents the social achievements of both Lula administrations. But it also provides a commanding analysis of why and how the preconditions for Lula’s success were set in the Cardoso administrations.
Chapter seven, for instance, summarizes economic developments and policies over the course of the four administrations and concludes that “two presidents with different political perspectives and priorities produced consistent economic policies.” Despite the similarities, however, growth under Cardoso was mediocre, but it was explosive under Lula. Real per-capita income stagnated under Cardoso, but it boomed under Lula. On average, in the last four years of the Cardoso administration, the Brazilian economy created 668,000 jobs per year in the formal sector. In the last four years of Lula, it generated more than double that number: 1.7 million jobs per year. Total credit volumes and access to credit shot up under Lula and the percentage of the population living under the poverty line dropped from 28.1 percent in 2003 to 15.3 percent in 2009.
The achievements are remarkable. But what Fishlow makes clear is that the explanation for this success was not a divergence from past policy, but rather a policy continuum.
The continuum Fishlow refers to can be hard to see. Cardoso ruled under the shadow of the long period of structural adjustment in the 1990s. From 1995 to 2002 there were major negative shocks, including the aftermath of Mexico’s 1994 Tequila Crisis and the immediate post-9/11 economic slowdown in the United States.
Lula was luckier. He came to power just as China emerged on the global scene after joining the World Trade Organization. The 2001 recession in the U.S. and the aftermath of the September 11 attacks ushered in a period of unprecedented monetary easing with a combination of tax cuts and expenditure increases that ultimately destabilized the global economy.
But in the shorter run, these policies—along with the rise of China to worldwide economic prominence—produced a boom in commodity demand and prices that was extremely beneficial for Brazil. By the early 2000s, Brazil was prepared to fully and productively take advantage of positive external shocks, which propelled growth and help sustain it even today. It was this period that allowed Brazil to rapidly accumulate external reserves and go from being a net borrower to a net creditor—two factors that would prove critical during the 2008–2009 economic crisis.
As Fishlow points out, the biggest macroeconomic changes came in early 1999 with the introduction of a floating exchange rate, a commitment to stabilize and then decrease the debt-to-GDP ratio (the Fiscal Responsibility Law), and inflation targeting.
Fishlow’s contribution is to uncover how much went into creating the Fiscal Responsibility Law that passed in 2000—what he calls “financial restructuring” or the making of the modern Brazil. According to the author, the key was to pair privatization and debt restructuring to create a financial system that could for the first time extend credit to the private sector.
As part of this, discipline was injected into administering public finances at the sub-national level so that fiscal federalism could work, despite the vicissitudes of the political system. Privatization boosted productivity and investment, and it also helped finance the huge cost of private and public debt restructuring that Fishlow estimates at 14.1 percent of GDP. “Combined, these two processes—financial restructuring and privatization—contributed to the creation of a modern Brazil. Both served the country well, despite criticism.”
Even that was not enough, however. Part of the “new deal” post-1998 was the incessant increase in the tax burden, a historically unprecedented doubling of the tax burden from 17 percent of GDP in 1997–1998 to 34 percent of GDP by 2008 and nearly 37 percent of GDP today. The point here is that Cardoso built the fiscal space that future governments have used to fuel both growth and social programs.
This fiscal space came in handy when Lula fought the external crisis in 2009–2010 and went on a spending spree to bolster the election prospects of his successor.
Cardoso failed to build a leaner and more efficient state. But he did create the conditions for fiscal and financial stability. Lula wanted to create a larger and more activist state but resisted until 2009.
This is what we have today. The Brazilian private sector and the electorate at large endorse it wholeheartedly. Is it sustainable? Can public expenditures continue to grow at a faster rate than GDP, as they have done for 12 years since 1999? More importantly, is this in the long run a contribution to growth and welfare?
O novo Brasil does not answer these questions. But it frames the context for an informed, objective discussion. The larger contribution of Fishlow’s work is to have produced an accessible, well-written and pithy account of Brazilian economic, social and external policies in the past quarter of a century, set in their specific political contexts.
Its companion English language version, Starting Over: Brazil Since 1985, which came out after the Portuguese version—deals with much of the same material but is reconfigured. Both are excellent analyses of the changes and challenges that Brazil has faced since its transition to democracy.