The New Developmentalism and the Challenges to Long-Term Stability in Brazil

Revisiting the Old Developmental State

In the era of classical growth, the monocultural production and export of commodities frequently exposed the Brazilian economy to external vulnerabilities such as price shocks. In the first decades of the twentieth century, such a growth regime had failed to capitalize the creation of a manufacturing sector and left Brazil dependent on industrialized nations to supply processed goods. The dual disruptions of the Great Depression and World War II punctuated the persistent vulnerability of classical, export-oriented growth, which, as structuralists argued, did not create the conditions for deep industrial development and left issues such as unequal exchange and widespread poverty unresolved. In order to achieve an industrial breakthrough that would permit a nation like Brazil to catch up with other industrialized nations, it would be necessary to implement a set of sustained state interventions in the interests of domestic industry. O’Hearn (2001: 5) explains: “Exit from a sub-optimal path is not possible by individual actions but takes a ‘big push’ by a central authority such as a developmental state, which co-ordinates actions by many individuals until they achieve exit into a new, more productive equilibrium path.”

The transition from reliance on agrarian production toward manufacturing proved to be politically contentious, as entrenched and emerging factions vied for influence in the new configuration. It was not until the mid-1950s that a political consensus in support of a national industrialization project began to emerge. This agenda required building coalitions among actors with competing political interests, including the still powerful rural elites and a growing urban populace: “labor; the professional, managerial, and bureaucratic middle class; and the manufacturing sector” (Haggard, 1990: 173).

The Vargas and Kubitschek administrations pursued rapid industrialization by infusing a more active Brazilian state with domestic and foreign capital. In 1952 the state established the Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development—BNDES) through a partnership with the U.S. Export-Import Bank. As a key planner, administrator, and financier, the BNDES became one of the most visible and influential tools of state-managed industrialization.

By the end of the 1950s the presence and influence of the state had increased considerably. The federal government created state-owned enterprises to manage the planning and financing of industrialization. The growth of durable and nondurable manufacturing accelerated, with foreign capital dominating the former and domestic capital the latter. Additionally, the state implemented a series of trade and monetary policies in order to steer the growth agenda. The utilization of foreign exchange controls in certain economic sectors led to currency overvaluation and the subsequent institutionalization of import licensing. The law of similars imposed high tariffs on imported goods that domestic firms produced or intended to produce. Yet, in spite of increased state involvement and the proliferation of import-substitution strategies, the growing importance and influence of foreign capital and technology called into question whether such an industrialization strategy was actually national developmentalism (Baer, 2001; Chilcote, 1990; Haggard, 1990). Kohli (2004: 180) has argued that Brazilian elites often employed a “shallow” nationalism in which they utilized developmentalist and structuralist discourse to promote national growth while routinely aligning themselves with and courting foreign capital.

In the late 1960s the increased influence of international capital and the diversification of industrial and agricultural production signaled structural shifts in policy strategy. In addition to continuing investment in established industries, the state began investing in telecommunications, nonferrous metals, information technology, and aeronautics. In the agricultural sector, production expanded beyond coffee to include soy, pulp, and paper. Additionally, the military regime centralized control over economic activities by establishing holding companies to manage state-owned enterprises, with private foreign and domestic capital limited to minority shareholder status (Baer, 2001; Evans, 1979; Gereffi, 1990; Haggard, 1990).

In this phase, a triple alliance emerged between domestic capitalists, federal bureaucrats and politicians, and foreign capitalists that shaped national development strategies and labor policies. In particular, maintaining high growth rates and suppressing wages were key concerns within the triple alliance. Although annual growth rates in the 1970s hovered around 7 percent, many of the benefits of growth were narrowly distributed (Drake, 1996; Evans, 1979; Haggard, 1990). It was revealed in 1977 that, in order to avoid wage increases that were legally mandated to rise with inflation, the military government had been manipulating public data on inflation and productivity levels. In 1970 real wages were 42 percent of their 1959 value, and by 1976 wages had dropped to only 34 percent of that value (Seidman, 1994). The deeply held belief that economic growth should not be hampered by income redistribution was encapsulated by an oft-repeated slogan of the time: “Grow the cake now, divide it up later” (Dyer, 2008).

Throughout the 1970s a series of trends threatened the structural stability of national growth and solidified the conditions for a collapse in the 1980s. First, related to decreasing real wages, production patterns were tailored to the consumer interests of the wealthy and the small middle class. These narrow consumption patterns were associated with capital-intensive production, which required importing expensive machinery. Second, the high cost of importing capital machinery greatly strained the public budget, led to balance-of-payments crises, and increased the external debt. Third, increased borrowing from international commercial banks during the oil boom led the state to delay devaluing an overpriced currency and addressing inflationary pressures (Baer, 2001; Kohli, 2004). Bresser-Pereira (2009) suggests that these problems could have been avoided had Brazil shifted toward an export-led model with selective import-substitution elements as the East Asian developmental states did.

The 1982 debt crisis signaled the demise of the old developmentalism. From the 1950s onward, an expanding state apparatus finally began to crack, with deepening consequences over the next two decades. Factors such as deteriorating internal coordination, widespread clientelism, and societal fragmentation led to massive misappropriation of funds. The historical problem of tax evasion exacerbated a worsening situation (Weyland, 1998).

Overall, the old developmentalism left behind a complicated legacy. On one hand, social and economic inequality persisted. Rather than strengthening developmental autonomy through industrialization, Brazil amplified its external vulnerability by becoming more dependent on foreign direct investment, commercial debt, and foreign technology for industrial production. Additionally, an overvalued currency and inflation plagued monetary stability. On the other hand, the old developmentalism advanced Brazil beyond the classical model that relied disproportionately on agro-exports. The government created industries, such as automobiles, telecommunications, and aircraft, that are today the few high-value-added goods that Brazil mass-produces and exports. The diversification of agriculture enabled Brazil to reduce food imports and eventually become a world leader in agricultural production. Thus, sectors that developed in this period were integral to Brazil’s financial rise in the twenty-first century.

Examining the New Developmentalism

Throughout the 1980s and 1990s, market fundamentalism restructured the political economy in Brazil. Several major trends were prominent agents of change in this period. Industrial restructuring altered the productive arrangement and geographical location of manufacturing firms (Antunes, 2000; Humphrey, 2003). Labor flexibilization policies weakened regulation, increased informalization, and led to decreased worker benefits (Berg, 2011; Pochmann, 2009). The state divested itself of and privatized most formerly state-owned enterprises (Schapiro, 2010). Foreign direct investment inflows lagged in the 1980s but greatly accelerated in the 1990s during the Cardoso administrations (Abu-El-Haj, 2007). However, orthodox strategies failed to deliver their stated promise as balance-of-payments crises, growing external debt, and hyperinflation persisted. Fundamentalist policies were associated with high unemployment, declining wages, and rising poverty.

In the late 1990s Brazil began to push back on the dominant paradigm and implement a variety of heterodox strategies. The government enacted policies for industrial development, global competitiveness, and innovation with extensive state financial and administrative support. Far-reaching social and labor policies reduced poverty and increased income levels across the nation. The scope and persistence of these interventions have led some scholars to claim that Brazil is reinstituting developmentalist practices but with designs that are structurally different from those of the old developmentalism.

Several scholars have forcefully articulated a vision of Brazil’s so-called new developmentalism: Bresser-Pereira (2004; 2009; 2011), Sicsú, de Paula, and Michel (2005; 2007), and Schutte (2012). These interpretations rest on the thesis that the new developmentalism relies on the collaborative pursuit by a strong state and a strong market of inclusive growth in the home economy and deep economic engagement abroad.

The first line of argument largely deals with macroeconomic strategy in relation to wage and monetary policies. Bresser-Pereira (2009; 2011) distinguishes the new developmentalism from its predecessor by highlighting two interdependent conditions: structural development macroeconomics and growth with domestic savings. He asserts that there is strong continuity between the orthodox and the new developmentalist macroeconomic strategies. Indeed, the orthodox era, especially during the Cardoso administrations, laid the macroeconomic foundation for Brazil’s global emergence over the past decade. Under the 1995 Real Plan, tightened tax collection, pension reform, and inflation targeting collectively shaped the financial and fiscal landscape that Lula would inherit upon taking the presidency in 2003. That Lula vowed continuity in his monetary strategies led his first term to be labeled “Cardoso’s third term” (Amann and Baer, 2000; Roett, 2011: 111).

However, Bresser-Pereira (2004) states that, while market orthodoxy and the new developmentalism set similar macroeconomic policy objectives, they have different motivations. Both paradigms prioritize positive trade balances, but the motivation for market orthodoxy is to repay creditors, whereas that of the new developmentalism is to strengthen the state’s fiscal health in order to finance a national development project. While the role of the central bank in orthodox strategy should only be to address inflation, the new developmentalism, in addition, emphasizes full employment.

Thus, structural development macroeconomics promotes growth with domestic savings instead of the growth with foreign savings of the old developmentalism. Bresser-Pereira (2011: 117) argues that the current model “asserts the importance of an income policy that keeps wages growing with productivity and an exchange rate policy that neutralizes the overvaluation tendency.” However, the exchange rate policy is still not truly flexible. According to many monetary policy makers in Brazil, other emerging markets, particularly China, have manipulated the value of their currencies. In response, Brazil recently adopted a “dirty float” strategy. According to Finance Minister Guido Mantega, “For us the ideal is a floating currency, without manipulation. But if the whole world is going to manipulate their exchange rates, we will too. Our system is a dirty float, like everyone’s. We could not sit there watching others appropriating our market and ruining our industry” (Leahy, 2012).

In the second argument, Sicsú, de Paula, and Michel (2005; 2007) emphasize the centrality of inclusive growth to the new developmentalism. Certain conditions must be present for this to materialize: (1) There must be a strong market and state. (2) Only a strengthening of these two institutions and the implementation of adequate macroeconomic policies will sustain high rates of growth. (3) A strong state and a strong market can only be constructed through a project for national development that is sustained by social equity. (4) It is impossible to achieve a reduction in social inequality without sustaining high rates of growth. Thus, Sicsú et al. push back on a fundamental assertion of the old developmentalism—that rapid industrialization and capital accumulation will resolve issues of poverty and inequality. In the new developmentalism, activist policies interact to ensure that high growth is coupled with robust redistribution, eventually creating a feedback loop.

The combination of social and labor policies has enabled inclusive growth. For instance, reversing trends in labor informalization and unemployment has resulted in improved tax collection, stronger fiscal health, and increased household incomes. From 2004 to 2010, the number of employees with formal worker cards went from 54.9 percent to 59.6 percent, a trend that has been attributed to enhanced labor regulations and work site inspections (Berg, 2011; MTE, 2009; Pires, 2008). In the 2000s there have been concurrent increases in formal employment, with the volume of newly created formal-sector jobs in 2010 nearly tripling the amount in 2000 (Neri, 2010). Additionally, labor formalization has strengthened the financial health of numerous social programs, which were in danger of becoming insolvent after a prolonged period of reduced worker contributions (Pochmann, 2009).

Moreover, there has been a strong relationship between income policy and poverty reduction programs. The minimum wage has more than doubled since 2003, rising from R$281 to R$622, with incremental increases up to R$817 expected by 2015 (Berg, 2011; Martello, 2011). These increases directly affect the Beneficio Prestado Continuado (BPC) pension program, which has expanded coverage to nearly 90 percent of elderly Brazilians. This monthly payment is denominated in terms of the minimum wage, meaning that mandatory salary increases also strengthen the incomes of pension earners and the households in which they live (Seidman, 2010). Since the late 1990s the Bolsa Família (Family Grant) cash transfer program has steadily grown, disbursing a record R$17.1 billion and reaching more than 50 million individuals in 2011. Such income-based social protection has rippling consequences. For example, every R$1 spent in the BPC program has a multiplier effect of R$2.2 on family income. It is estimated that during the 2009 crisis cash transfers “led to an injection of US$30 billion into the economy and created (or saved) potentially 1.3 million jobs” (ILO, 2011: 95).

The combination of rising wages, increasing formal-sector job growth, and expanding social protection has resulted in major shifts in class composition in Brazil. The largest decreases have been in the impoverished and poor Class D/E, which has dropped nearly 25 percent between 2003 and 2009. Importantly, the middle-income Class C has seen almost 30 million new entrants since 2003. Brazil has also achieved its lowest levels of inequality since 1960. Analyses have suggested that labor income accounts for more than 66 percent of the decrease in inequality, while means-tested income transfers and social protection programs are responsible for 17 percent and 15.7 percent, respectively (Neri, 2010; Scorzafave and de Lima, 2010).

The combination of pro-poor policies and sustained public investment in infrastructure has been instrumental in propelling the growth of Brazil’s internal market. The two infrastructure initiatives, PAC and PAC2, will have funneled nearly US$900 billion into the domestic economy between 2007 and 2014 (Loudiyi, 2010). The domestic consumer base for Brazilian goods, defended by an active monetary policy, proved valuable in the 2009 financial crisis. A stimulus package that included increased public spending, credit expansion, the acceleration of a nationwide housing program, a cut in interest rates, and a deepening in coverage for social programs dulled the effects of the crisis (Barbosa and Souza, 2010; Morais and Saad-Filho, 2012). Moreover, sustained domestic demand has helped to ease the shock of the recent drop in commodity exports (Economist, 2013).

Schutte (2012) extends the theses of Bresser-Pereira and Sicsú et al. by connecting the domestic to the global. According to Schutte, international insertion and sustained global competitiveness are the best tools for maintaining robust and inclusive domestic growth. By engaging in extensive diplomatic efforts and deepening foreign relations through public- and private-sector actions, internationalization seeks to penetrate and consolidate positions in new markets and enhance Brazil’s presence on the global stage. In this sense, the export bias that was prevalent in the old developmental state has been discarded.

Schutte (2012: 74) argues that Brazil’s foreign policy strategy is to link “internal neo-developmentalism efforts with proposals for changes in global governance.” A series of actions repositioned the nation among global actors. During Lula’s first term there was a diplomatic rearticulation of Brazil’s role in the global economy in which it asserted its autonomy and strengthened multilateral relations. This involved pushing for reforms and more influence in traditional international institutions such as the World Trade Organization, the United Nations, and the Group of 20 and pursuing greater South-South cooperation by increasing diplomatic and economic involvement in developing regions, especially Latin America and Africa. Multiple government agencies, many of which have been created since the late 1990s, blended economic objectives with foreign policy: the Ministry of Development, Industry, and Foreign Trade, the Agency for the Promotion of Exports, the National Council for Industrial Development, the Brazilian Agency for Industrial Development, and the Brazilian Agency for Cooperation.

Schutte (2012: 67) states that the BNDES has become an important foreign policy instrument for entering new markets and increasing “power and influence” throughout the globe. In addition to financing domestic activities, the BNDES and its subsidiaries lend capital to export-oriented firms and Brazilian multinational firms operating in external markets. Between 2002 and 2012, the BNDES-Exim on average disbursed US$6.6 billion annually to Brazilian exporters (BNDES, 2013). Concurrently, firm managers and policy makers recognize that in a globalized economy maintaining competitiveness requires gaining a larger market share. Mergers and acquisitions have become a vehicle through which Brazilian enterprises can capture greater segments of domestic and foreign markets. From the mid-1990s on, Brazilian firms, using BNDES financing, began a process of consolidation in the domestic economy. Between 2005 and 2010 the BNDES disbursed about US$10 billion in loans and/or security underwriting for mergers and acquisitions by domestic firms. In 2005 it capitalized a merger in a foreign market for the first time. This trend would continue in the following years as the BNDES spent billions of dollars, nearly 20 percent of its annual disbursements, to finance the multinationalization of Brazilian firms, both as a lender for mergers and acquisitions and as a corporate shareholder (Amann and Baer, 2008; Arbix and Caseiro, 2011a; Souza, 2010).

In summary, the new developmentalism has multiple components that work to achieve sustained growth and economic stability over the long term. Macroeconomic stability is pursued through an active monetary policy that guards against inflation, promotes income increases in line with productivity, and prevents currency overvaluation to support domestic firms and ensure the competitiveness of Brazilian exports. Antipoverty programs, wage increases, and employment formalization contribute to and sustain a robust internal market. The expansion of state credit through the BNDES and other regional banks enables the capitalization and expansion of Brazilian firms of all sizes. The acquisition of a larger market share in the international economy provides Brazilian firms with more opportunities for continual growth over the long term. Underanalyzed in this framework is the crucial role of technology in improving production.

The New Developmentalism: A Problematic Paradigm?

The scholars just mentioned articulated a growth agenda that aims to place Brazil on a path to economic stability, constant growth, and increasing standards of living. This vision, however, lacks important details on how to maintain growth in the medium and long term. While it is clear that Brazilian policy makers have dismissed orthodoxy, there are several contradictions in Brazil’s trajectory that make problematic the assertion that a new developmentalism has truly taken hold. This uncertainty is revealed in three interconnected ways: (1) the ambiguity in the types of products that drive and sustain growth, (2) the absorption of public and private capital flows by traditional sectors, and (3) an absence of mechanisms for accountability and oversight within the state. The interaction of these factors has prevented the new developmentalism from achieving its promised results.

First, a discussion of the materiality of production and the way in which Brazil engages the international market is largely absent in the new developmentalist framework. This problem has recently become apparent as the structural conditions that enabled Brazil’s financial ascent over the past decade have begun to unravel. From 2002 on, several macro-environmental factors in the international economy coincided with domestic exchange rate policies to facilitate Brazilian growth, among them the lingering consequences of the 1999 devaluation of the real, an additional devaluation of the real due to uncertainty surrounding the 2002 presidential campaign, the return of growth in the international economy, which enabled an expansion of the volume of exports and high commodity prices, and a moment of high liquidity in the international market, which permitted low interest rates and an increase in demand for Brazilian exports (Carcanholo, 2012). While the Brazilian state has constructed a complex apparatus to exploit this financially fortunate moment, the international insertion has largely been supported by a sustained high demand for commodities rather than value-added goods.

Between 2000 and 2011 annual growth averaged nearly 3.4 percent, but it slowed to 0.9 percent in 2012 (CEPAL, 2013). The expansion of commodity exports greatly slowed in 2012, largely because of decreased demand from China. For the first time since 2000 (with the exception of the 2009 postcrisis period), basic commodities, which account for the largest share of exports, experienced negative growth (MDIC, 2013). Although growth was predicted to reach 3 percent in 2013, with exports of soy and iron ore projected to rebound, the recent slowdown highlights the continued structural vulnerability of dependence on basic commodities and the need to move toward more technologically advanced production (Goodman, 2013).

To explore this issue, it is useful to look at Block’s (2008) discussion of the purpose and functions of the developmental state in the United States. A central objective of developmentalist policies is to reorient a nation’s industry toward the production of high-value-added goods. As Block (2008: 2) notes, the U.S. government has long maintained a “hidden developmental state” that provides sustained public investment for research and development in order to encourage the creation, commercialization, and absorption of new technology into the business economy. He argues that “governments do this because they recognize that in a competitive world economy failing to create new high- value-added economic activities in the home economy will ultimately threaten their citizens’ standard of living.”

Since the late 1990s, the Brazilian state has taken steps to promote more sophisticated production at home and abroad. Arbix and Martin (2010: 18), while they do not call this a new developmentalism, elaborate: “The goad of industrial policy under Lula has been to redefine the policy’s scope and tools, to drive the country into knowledge-intensive sectors, seen as the only way to sustain long-term growth.” To achieve this end, policy makers and firm managers pursue two strategic tracks: constructing a national system of innovation in Brazil in order to continuously create homegrown technology and internationalizing production to acquire innovation from outside (Arbix and Caseiro, 2011a; Arbix and Martin, 2010).

Domestically, Brazil has implemented numerous policies to strengthen science, technology, and innovation: the 1999 Sectoral Funds Law, the 2004 Innovation Law, the 2005 Law of Common Goods, the 2007 Action Plan, and the 2008 National Plan for Science, Technology, and Innovation, to name a few. Additionally, policy makers increased funds for the national innovation agency Financiadora de Estudos e Projetos (Studies and Projects Financing—FINEP) and the BNDES to promote science, technology, and innovation projects and start-up firms. Financing has been channeled into decentralized networks in business communities, universities, and public and private research centers. The federal government and the Ministry of Education have strengthened scientific infrastructure by expanding graduate training for researchers in Brazil and abroad. As part of the expansion of the federal university system, more than 600,000 spaces have been earmarked for students to receive science, technology, and innovation training. Modifications in patent and innovation financing laws also complement the human and institutional investments in scientific infrastructure (Cavalcante and Uderman, 2012; MEC, 2011; Schapiro, 2010). These actions correspond with the claim by Amsden and Hikino (2000) that, within the framework of the World Trade Organization, science, technology, and innovation networks in the home economy remain viable and important targets for extensive state subsidies to support the maturation of new industries. Externally, Brazilian firms have established subsidiaries in high-income nations to take advantage of advanced research and development hubs and supplier networks, enabling firms to absorb innovative information and new technology. There is evidence that this trend exists across multiple sectors of varying sophistication (Arbix, 2010; Arbix and Caseiro, 2011b).

Yet, in spite of these efforts, public and private capital flows are persistently absorbed by traditional sectors, which remain the main drivers of growth. The lending patterns of the BNDES show disproportionately strong support for firms in traditional sectors: mining, soy, sugar, pulp and paper, petroleum, and gas. Since 2003, incumbent firms received a majority of the near trillion reais in BNDES disbursements, while recipient firms in innovative sectors accounted for a small fraction. Thus, according to Tautz et al. (2010), the execution of industrial policies under the Lula administrations represented an alignment of public funds with the interests and strategic demands of firms in traditional sectors. Arbix and Caseiro (2011b) have criticized the BNDES for financing mergers in sectors in which technological capacity is low, as it does not foster a path toward the productive transformation necessary to alleviate structural vulnerability. Schutte (2012), however, does not view these tendencies as entirely problematic, as he sees Brazil’s future strength on the global stage flowing through its endowments as an agriculture and energy exporter, especially as the biofuel sector expands and the pre-salt deposits begin production.

In external markets, the most lucrative sectors have been those that produce low-value-added exports. Between 2000 and 2011, the composition of exports began to diverge in favor of primary commodities. In 2000, manufactured goods represented nearly 60 percent of the value of all exports, but this figure gradually dropped to almost 30 percent by 2011, largely because of the increased export of iron ore, soy, and petroleum. The deepening of this tendency has led to concern about the reprimarização of the economy: the return to dependence on the performance of mineral and agricultural exports (Filgueiras et al., 2010; Gonçalves, 2010; Magalhães, 2010; Mineiro, 2010). A similar pattern is present in Brazil’s outward foreign direct investment in the private sector. Manufacturing has persistently accounted for a small fraction of all outward investment, with the finance and mining and gas sectors absorbing the majority. From 2007 to 2011, finance (37 percent) and mining and gas (32 percent) dominated average annual flows of investment, with manufacturing (6 percent) trailing considerably (Banco Central do Brasil, 2013a).

Moreover, the concurrent internationalization of firms and state capital presents an additional challenge. Implicit in the new developmentalist framework is that international engagement supports domestic growth, which requires symbiotic capital flows. Yet, Brazilian multinational firms have been reluctant to repatriate surplus. Between 2007 and 2011, more than 70 percent of direct investment went to tax havens, and in 2011 this figure reached 80 percent (Banco Central do Brasil, 2013a). While firms have internationalized with public financing, they have been unwilling to bring surplus back to the domestic economy, which violates a crucial link in the developmentalist state-market relationship. Although federal receipts have reached nearly 35 percent of GDP and public debt is at its lowest level since 2002, the long-term utilization of tax havens may eventually splinter any developmentalist design (OECD, 2011; Tesouro Nacional, 2012). Furthermore, foreign direct investment inflows played an integral role in financing the current account surplus between 2003 and 2007, a vulnerable situation highlighted by the recent outflow and stagnation of foreign direct investment (Banco Central do Brasil, 2013b; Smolinski, 2013).

Finally, the absence of strong mechanisms for accountability and oversight of industrial policy tools is a contributing factor to the continued privileging of traditional sectors in public and private capital flows. This disciplinary capacity was an integral component of the developmental states of South Korea and Japan. Chibber (2003) and Amsden (1990) emphasize the importance in these cases of the principle of reciprocity: when the state gives public resources to private firms, recipient firms must respond with high performance and cooperation with the state. Amsden (1989) argues that it was the South Korean state’s ability to discipline big business toward meeting its objectives of transformation and high performance that set the nation apart from other late industrializers. Further, South Korea’s transition to a manufacturing-led export strategy materialized only because of its ability to exercise leverage over firm managers. Similarly, in both Japan and South Korea oversight was continually reinforced through the actions of single, compact agencies that performed planning and financial functions, which helped to ensure that public resources were devoted to developmentalist purposes (Dore, 2000; Johnson, 1982).

In Brazil, state financing lacks the same degree of organization. In spite of the wave of privatizations in the 1990s, a large segment of the banking sector in Brazil is still under state control. Several state-owned banks, such as Caixa Econômica Federal, Banco do Nordeste, and Banco do Brasil, perform influential roles nationally and regionally. Yet, because of its outsized domestic and global presence, the combination of the BNDES’s financial power and its relative autonomy is one of the most problematic features of the so-called new developmentalism. A central flaw in the discourse of the new developmentalism is that there is a strong justification for the state’s duty to intervene in market activities, yet there is an ambiguous role, in both theory and practice, for the accountability and oversight of such interventions. This combination creates a landscape in which firms in traditional sectors are politically and economically well positioned to capitalize on industrial policy tools such as below-market credit. This point of weakness undermines the structural integrity of the new developmentalism and, rather than fostering deep technological change, reinforces path dependency.

Inadequate oversight of the BNDES’s lending practices is likely to stem from the political economy and the challenges inherent in transferring public funds across sectors. According to Chang (1999: 196), “Those who have invested in particular physical capital, skills, contractual relationships, and even political patronage are likely to resist changes, thereby often provoking counteractions from other groups. This makes the developmental process very conflictual.” Schapiro (2011: 20) elaborates on the BNDES and the Brazilian state’s inability to discipline big business: “Although the speeding up of investment in innovation may be in the interest of the whole economy, converting a former development bank which specializes in financing large companies and physical assets into a development bank oriented toward innovation can be blocked or postponed by vested interests, among other elements.” Indeed, between 2002 and 2009 there was a strong tendency for the BNDES to finance the current production of high-performing firms that otherwise could have secured capital in private markets. Thus, the BNDES loans were not low-performing but tended to subsidize the profit margins of successful firms, violating the criteria for industrial policy lending (Lazzarini et al., 2011). While the BNDES is a necessary developmentalist tool, it must operate within clear institutional limits that minimize abuse and optimize efforts at promoting long-term change.

Although the BNDES is a high-performing institution, it is embedded within a bureaucratic framework that lacks sufficient coherence to designate and secure developmental goals. As Evans (1995) has argued, it is this bureaucratic shortcoming that distinguishes developmental states such as South Korea and Japan from intermediary states such as Brazil. In Evans’s typologies, the conceptual design of “developmentalism” implies a productive transformation, something that Brazil’s so-called old and new developmental states have only partially accomplished. Unless strategic reforms are adopted to modify state lending practices, such as establishing clear objectives and procedural oversight, it is likely that the aims of the new developmentalism will fail to materialize and Brazil will remain in an intermediate status. Until then, a central problem in Brazil’s heterodox strategy will continue to be the state’s difficulty in imposing discipline on both big business and itself.

Concluding Remarks

Following a period of market fundamentalism, the discourse of the new developmentalism provided the intellectual and political justifications necessary to rearticulate the role of the state and make important, much-needed shifts in policy such as increasing public investment in social and labor programs. Yet, the failure to incorporate strong disciplinary mechanisms into public financing will prevent the current heterodox strategy from achieving developmentalist results such as moving the productive sectors into a technologically more advanced sphere and reducing reliance on commodities. Unless policy makers develop new modes of oversight and identify clearer goals, the state will continue to reproduce path dependency by devoting public resources to the short-term pursuits of vested interests.

Schutte (2012: 60) argued that Brazil’s ability to weather the 2009 financial crisis was a “turning point” in which “the world began to see Brazil in a different way” and amplified the significance of Lula’s policies from 2003 on. The recent political and economic rupture, which further recontextualizes policy strategies, may provide an opportunity to shift course and correct some of the weaknesses in the current regime. The economic slowdown revealed the continued vulnerability of relying on external consumption of Brazilian raw materials. And the massive street demonstrations in the summer of 2013 exposed popular frustration with political corruption and inadequate access to and quality of public services. The public display of discontent has cast a shadow over the preceding period in spite of the significant transformations that the nation experienced. This dual disruption may jolt policy makers into making important reforms and ushering in a new phase of the national development project.