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Developmental Politics and
Neoliberalism in Developing
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Neoliberalism, Democracy and
Development Policy in Brazil
This chapter offers a political economy analysis of the two systems of accu-
mulation in the post-war Brazilian economy, import-substituting indus-
trialisation (ISI) and new liberalism, and the industrial policies associated
1 The shift across systems of accumulation has been associated
with significant changes in the role, structure, and policies of the Brazilian
state. Section 1 examines the case of ISI, departing from a review of conven-
tional assessments of this system of accumulation and offering an alterna-
tive interpretation of its economic and political structures. This section also
considers the limitations of ISI and the reasons for its crisis in the eighties.
Section 2 focuses on the political transition to new liberalism; that is, the
shift from military rule to democracy. It is argued that this political tran-
sition was functionally articulated with the economic transition to neolib-
eral policies, examined in Section 3. This section begins with a conceptual
review of neoliberal economic policies and reviews their implementation in
Brazil since the nineties, highlighting the significance of the Real stabilisa-
tion plan. The shortcomings and limitations of new liberalism (a system
of accumulation defined through four main features: neoliberal economic
policies, the integration of domestic capital into transnational circuits, a
decisive role for finance in economic policymaking, and political democ-
racy) are studied in detail.
The chapter concludes that both ISI and new liberalism achieved signifi-
cant successes, but both strategies were implemented unevenly and incon-
sistently. These shortcomings can be analysed at two levels: the internal
micro- and macroeconomic limitations preventing these development strat-
egies from achieving their stated aims and the external limitations imposed
by the social conflicts during each period of time.
This chapter argues that industrial policies are closely associated with
specific state structures, economic constraints, and political configura-
tions which can be analysed only concretely. Consequently, there can be
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118 Alfredo Saad-Filho
no general theory of industrial policy, and there is no “optimum path”
of accumulation under late development. Each system of accumulation is
limited by a distinctive set of historically specific economic and political
constraints, which set limits to its potential development. These are exam-
ined in the two Brazilian cases within this chapter. Finally and for these
reasons, it is concluded that industrial policy is irreducibly political and
2 ISI and its limitations
This section reviews the political economy of ISI and the industrial poli-
cies associated with this development strategy. It explains the conventional
interpretations and critiques of this system of accumulation and offers an
alternative interpretation of ISI and its economic limitations.
2.1 Conventional interpretations of ISI
ISI is often presented as the “typical” Latin American economic policy, and
Brazil was a model case of ISI between 1930 and 1980. ISI is generally viewed
as a spontaneous response to three severely adverse external shocks experi-
enced in succession by most countries in Latin America: the two world wars
and the Great Depression. These shocks led to drastic reductions in export
revenues and foreign financial inflows, because of either price or quantity
constraints, and to large fiscal deficits, since a significant part of the state
revenues relied on import tariffs.
Under these circumstances, the balance of payments and the fiscal deficit
could not be financed externally. However, in Brazil sharp exchange-
rate devaluations and rapid monetary expansion helped to preserve the
level of domestic income despite the falling import capacity. This “proto-
Keynesian” policy response helped to alleviate the impact of the crises and
supported local demand for goods and services which, in turn, fuelled the
expansion of domestic manufacturing capacity. The initial response to the
external shocks was later supported by the targeted expansion of the manu-
facturing and infrastructure sectors. These state policies were often called
“populist” by the mainstream economists and “developmentalist” by their
structuralist rivals. They were justified by the strategic imperative to indus-
trialise and modernise a primary-export-dependent economy and reduce
its vulnerability to fluctuations in international trade and in the price of
Rapid manufacturing growth aiming at import reduction and unsup-
ported by significant export growth or diversification reduced the degree
of trade openness of Brazil and other Latin American economies. In other
words, natural resource abundance, foreign exchange scarcity and ISI pushed
these countries towards self-sufficiency, which in turn bred economic stag-
nation either because of technical inefficiencies and rent seeking (for the
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Neoliberalism, Democracy and Development in Brazil 119
mainstream) or because the narrowness of the internal market limited the
scope for domestic production (for the structuralists).
These insights are valuable but insufficient for a balanced assessment of
the experience of ISI. An alternative interpretation, outlined below, offers
the possibility of reinterpreting this development strategy and assessing the
transition to new liberalism.
2.2 An alternative interpretation of ISI
ISI is a system of accumulation based on the sequenced expansion of
manufacturing industry, with the primary objective of replacing imports.
Manufacturing expansion usually departs from the internalisation of the
production of non-durable consumer goods (e.g., processed foods, beverages,
tobacco products, and cotton textiles). It later deepens to include the produc-
tion of durable consumer goods (especially household appliances and automo-
bile assembly), simple chemical and pharmaceutical products (e.g., oil refining
and certain pharmaceutical products), and non-metallic minerals (especially
cement). In larger countries, including Brazil, ISI can reach a third stage,
when the manufacturing structure becomes “complete” (in the structuralist
jargon). This includes the production of steel, capital goods (e.g., industrial
machinery and electric motors) and technologically complex goods such as
electronic machines and those used in shipbuilding and aircraft design and
assembly (see Tables 6.1 and 6.2 and Figure 6.1 ). This gradual “deepening”
of the manufacturing base is accompanied by backward, forward, and hori-
zontal linkages between the established firms. As a result of these processes,
in the 1950s primary exports were no longer the driving force of the Brazilian
economy (see Bulmer-Thomas 2003). Brazil, the world’s largest coffee exporter
in the early twentieth century, offers a particularly striking example of these
processes: agric ultu re dec li ned from 36 per cent of GDP in 1910 to only 10 per
cent in 1980, while manufacturing increased from 14 to 41 per cent of GDP
(Abreu, Bevilacqua, and Pinho 2000, 162).
T he extent of these st ruct ura l sh ifts va rie d gr eatly. For e xa mple, Braz il a nd
Mexico advanced further than Argentina and Peru (not to speak of Ecuador
and Honduras) for several reasons, including market size, government poli-
cies, and the social consensus around the strategy of industrialisation.
Although ISI often starts spontaneously, experience in Brazil and else-
where shows that its success requires activist industrial, financial, and trade
policies and state provision (or state incentives for the private provision) of
finance and infrastructure. The expansion of the state bureaucratic appa-
ratus is also essential, because industrial expansion requires not only suit-
able policies but also law enforcement, labour control, the regulation of
social conflicts, and so on.
Brazilian ISI was associated with a specific structure of property rela-
tions and a peculiar mode of competition. Briefly, the production of non-
durable goods was predominantly undertaken by relatively small family
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120 Alfredo Saad-Filho
firms owned by domestic capitalists. In contrast, durable and capital goods
were typically produced by foreign TNCs and domestic oligopolistic firms,
respectively. Finally, infrastructure and basic goods were generally supplied
by state-owned enterprises (SOEs), and state-owned banks played an impor-
tant role in the provision of credit, especially for industrial development
and economic diversification (Auty 1991; Moreira 1991).
2.3 The politics of ISI
The uneasy coexistence between populism, nationalism, corporatism, and
statism under Brazilian ISI was primarily due to the intense conflicts of
Table 6.1 Brazil: distribution of value added in manufacturing industry,
1919 1939 1949 1959
Consumer goods 80.2 69.7 61.9 46.6
Te xti le s 24.4 22.0 19.7 12.0
Clothing 7.3 4.8 4.3 3.6
Food 32.9 23.6 20.6 16.4
Other 15.6 19.3 17.3 14.6
Consumer durables 1.8 2.5 2.5 5.0
Intermediate goods 16 .5 22.9 30.4 37.3
Metallurgy 3.8 7.6 9.4 11.8
Non-metallic minerals 2.8 4.3 6.5 6.1
Chemical 0.8 4.2 4.7 8.3
Wood 5.7 3.2 4.2 3.2
Other 3.4 3.6 5.6 7.9
Capital goods 1.5 4.9 5.2 11.1
Mechanical 0.1 1.3 2.1 3.4
Electrical 0.0 0.3 0.8 1.0
Transport equipment 1.4 3.3 2.2
Source: Abreu, Bevilacqua, and Pinho (2000, 163).
Table 6.2 Brazil: GDP shares (%), 1910–80
Agriculture Manufacturing Services
1910 35.8 14. 0 50.2
192 0 31.9 17.1 50.9
1930 30.6 16.5 52.9
194 0 25.0 20.8 54.2
1950 24.3 24.1 51.6
196 0 17.8 32.2 50.0
1970 11. 5 35.8 52.6
198 0 10.1 40.9 48.9
Source: Abreu, Bevilacqua, and Pinho (2000, 162).
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Neoliberalism, Democracy and Development in Brazil 121
interest within the elite, especially between agrarian and urban interests,
between manufacturing capital and finance, and between the elite and
other social groups, especially the marginalised but increasingly militant
urban workers and the emerging urban middle classes (Saad-Filho, Iannini,
and Molinari 2007). Stripped of their rich complexity, these conflicts essen-
tially centred on the extent to which resources should be transferred away
from the primary export sector and where they should be allocated – for
example, towards urban industry, infrastructure, or welfare provision and
within these alternatives, to which subsectors, regions, and social groups.
It was widely accepted that, in order to achieve developmental objectives
(synthesised in the goal of industrialisation), extensive state intervention
was required at several levels. Economic interventionism was legitimised
by a nationalist ideology according to which the “nation as a whole” would
progress only through industrialisation. In this developmentalist discourse,
insufficient industrialisation was associated with backwardness and with
the political and economic power of the traditional landed elites, which
should be overcome through state action fostering economic “progress”.
The relationship of nationalism, statism, and developmentalism tended
to become especially pronounced when private capital lacked the capacity
or interest to invest in oil, steel, electricity generation, transport links, or
other strategic areas. In these cases, provision often depended on exten-
sive state intervention, either through the nationalisation of the industry
or through the provision of subsidies for private capital. The management
of the ensuing conflicts of interest was never unproblematic. Contradictory
popular demands, state initiatives, and sectoral pressures were played out
in the media, in educational and research institutions, in state institutions,
1919 1939 1949 1959
Fig ure 6.1 Brazil: distribution of value added in manufacturing industr y, 1919–59
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122 Alfredo Saad-Filho
and on the streets, sometimes violently, and the outcomes were contingent
on timing, circumstances, and the constellation of forces mobilised on each
side. These conflicts were displaced by the 1964 military coup.
2.4 Limitations of ISI
Despite its important achievements, ISI was severely limited across Latin
America and in Brazil specifically. The six most important limitations are
(1) The balance of payments constraint . This constraint, which captures the
relationship between the economy and the rest of the world, is considered
by many Keynesian economists to be the most important limitation to
growth (McCombie and Thirlwall 1994). Under ISI, the balance of payments
constraint took the form of absolute scarcity of foreign exchange, largely
due to the fragility of the export base and lack of reliable access to foreign
capital. Currency shortages restricted growth and induced economic vola-
tility because they limited imports, investment, external market access,
and the availability of technology for manufacturing development. This
constraint was addressed through the cumulative internalisation of the
production of imported goods, the attraction of foreign direct investment
(FDI), and foreign borrowing. However, this approach was limited on two
grounds. First, although ISI reduced the demand for imports of finished
goods, it increased the demand for imported machines (to produce these
goods), oil, and other industrial inputs. Second, the changes in the indus-
trial structure increased the rigidity of the country’s import requirements
because fluctuations in import capacity, due to the decline of the terms of
trade, crop failures, insufficient foreign capital inflows, and so on, no longer
limited the consumption of imported goods, as was the case in the past, but
instead hampered domestic production and employment.
(2) The fragility and inefficiency of the domestic financial system . The Brazilian
financial sector was structurally unsuited for the provision of long-term
finance for industrial development (Studart 1995). This sector developed
in order to finance the production of export crops and trading and specu-
lation with primary products, especially coffee, which normally required
short loan terms and offered relatively liquid and readily available collateral.
Brazilian banks were generally short-termist and speculative, the financial
system was shallow, and financial institutions were generally unwilling or
unable to provide long-term finance to a rapidly expanding manufacturing
sector. Consequently, manufacturing investment was funded primarily by
FDI, foreign loans, state-owned banks, directed credit, state subsidies, and
firms’ own resources. However, this combination of sources of finance is
fragile, and it eventually proved to be unsustainable (see below).
(3) Fiscal fragility . The state played a key role in the vertical deepening and
horizontal integration of the manufacturing sector. The state inf luenced
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Neoliberalism, Democracy and Development in Brazil 123
production and investment decisions through specialist agencies and insti-
tutions, mediated the relationship between domestic and foreign interests,
played a key role in strategic technological development, and subsidised
capital accumulation through the provision of cheap credit, infrastructure,
and inputs. Although activist industrial policies were essential, they were
not adequately financed by the tax system. Brazilian ISI was accompanied
by fiscal deficits, inflation, and the accumulation of substantial foreign and
domestic liabilities by central and local governments.
(4) High inflation . This was typical of ISI for two main reasons (Saad-Filho
and Mollo 2002). On the one hand, social divisions fostered distributive
conflicts, with social groups fighting for shares of the national income
through higher prices, taxes, and wage demands. On the other hand, infla-
tion was the outcome of the limitations of the financial structures under-
pinning the process of accumulation, especially fiscal deficits, lack of bank
finance, and shallow and speculative stock markets, which compelled firms
to rely on price increases to fund investment. This institutional structure
facilitated the adoption of rigid markup pricing rules by the leading firms,
which protected their revenue against demand shifts or adverse fluctuations
in the level of activity. This may have protected investment in key indus-
tries, but it also increased the vulnerability of the economy to inflation due
to distributive conflicts or adverse supply shocks.
(5) High inequality and social tensions . Brazil is one of the most unequal soci-
eties in the world in terms of access to income, wealth, and privilege. ISI
reinforced these inequalities; it did not create sufficient jobs, wages were
permanently compressed by labour abundance and outright repression, and
there was a lack of land reform. Moreover, since manufacturing development
responded to the existing pattern of demand, it was systematically biased
towards relatively expensive durable consumer goods produced by tran-
snational corporations employing capital-intensive imported technologies
(Furtado 1972). These social and distributional features limited the domestic
market, skewed the structure of demand away from mass-consumed non-
durable goods, and frequently blocked the expansion of industry unless
income was concentrated further or consumer credit was made available,
which often required access to foreign finance. These inequalities have
fostered severe social conflicts in Brazil, which reduced the ability of the
state to impose coordinated industrial policies.
(6) Lack of policy coordination . The Brazilian state could rarely exercise the
degree of economic coordination essential for the long-term success of ISI.
Consequently, ISI was often guided by short-term profitability considera-
tions rather than a long-term vision of the needs of accumulation. New
economic sectors would arise, bringing demographic, social, cultural,
and political changes and creating new interest groups that competed for
income, status, and state incentives and increasing the complexity of policy
formulation and implementation. State agencies frequently clashed with
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124 Alfredo Saad-Filho
other agencies with different priorities, and these coordination problems
were worsened by the extent of TNC penetration and the foreign depend-
ence of the manufacturing sector, especially in finance and technology.
These weaknesses help to explain the excessive fragmentation of industry,
the fragility of the national system of innovation, and the failure of most
firms to compete successfully in international markets, perpetuating the
balance of payments constraint. The remarkable success stories in the steel,
auto, and aircraft industries – and temporarily in the defence and telecom-
munications industries – show what the textile, plastics, toy, wood, bever-
ages, processed food, and other sectors were missing. These limitations help
to explain the “stumbling” character of ISI, the volatility of the economic
growth rates, and the reproduction of severe social and economic problems,
including mass poverty, concentration of income, and insufficient infra-
2.5 The crisis of ISI
The limitations outlined in the previous section were due primarily to the
weakness rather than the “excessive” strength or size of the state. In brief,
the Brazilian state was interventionist, but it was institutionally disarticu-
lated and unable to impose consistent priorities over conflicting interests,
especially in the dominant power bloc. This social group generally found
detailed planning and large-scale state intervention unacceptable, because
it upset the political balance within the elite and it sometimes promoted the
interests of the poor majority.
The structural constraints and fragilities of ISI and the strongly negative
impact of the external shocks of the seventies and early eighties made macr-
oeconomic management extremely difficult in Brazil. These shocks showed
that the monetary, financial, fiscal, tax, and exchange-rate policies associ-
ated with ISI had become incompatible with internal and external balance.
The oil shocks and the international debt crisis worsened the balance of
payments constraint and contributed to the development of an acute fiscal
crisis, culminating with a slide towards hyperinflation (see Table 6.3). The
social conflicts intensified, political instability became endemic, and policy
shifts were limited by cumulative institutional weaknesses and growing
political paralysis. The military government lost the capacity to manage the
economy. In the early eighties, it had become widely agreed that political
changes were imperative.
3 The political transition to new liberalism
Between the early seventies and the early nineties, the Brazilian elite gradu-
ally convinced itself that the restoration of economic dynamism would be
compatible with the preservation of the existing patterns of exclusion only
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Neoliberalism, Democracy and Development in Brazil 125
through the introduction of a new system of accumulation. This system,
which can be defined as “new liberalism”, includes four main features:
neoliberal economic policies , the microeconomic integration of domestic capital
into transnational circuits (i.e., denationalisation of firms and their integra-
tion into global value chains), a decisive role for finance in economic policy-
making, and political democracy . This section reviews the political aspect of
the transition to new liberalism.
The defining feature of the Brazilian military regime, in power between
1964 and 1985, was its attempt to preserve social exclusion through the
combination of economic growth with varying levels of repression. The
power of the regime declined gradually after 1974 due to the political
exhaustion of the government’s heavy-handed approach towards dissent
and the economic exhaustion of the regime’s growth strategy. The coun-
try’s foreign debt escalated after the first oil shock, and inflation rose from
20 to 100 per cent in the early eighties. The second oil shock (1979–80) trig-
gered a deep economic crisis and the first GDP contraction since 1929. The
economy stopped responding to the government’s policies, and the military
regime ran out of options.
Table 6.3 Brazil: annual inflation rate (CPI, %)
19 80 85
19 81 91
19 82 95
19 83 164
19 84 179
19 85 228
19 86 68
19 87 367
19 88 892
19 89 1,637
19 90 1,639
19 91 459
19 92 1,129
19 93 2,491
Source: FIPE , www.ipeadata.gov.br/.
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126 Alfredo Saad-Filho
Military rule finally collapsed because of the emergence of a growing
democratic mass movement in the period 1977–85. Political contestation
encompassed a wide range of modalities of struggle, including criticisms
of corruption, economic mismanagement, lack of democracy, and polit-
ical accountability, renewed trade union activity, and mass mobilisation
for economic democracy and political freedom. At this stage, a significant
change took place within the elite: for the first time since 1930, a consensus
emerged around political democracy.
3 This consensus was due to external
pressures as well as domestic developments, and it facilitated the democratic
transition because it defused the conflicts that might have arisen around
the change of political regime (Markoff and Baretta 1990; Weffort 1989). For
this reason, Brazilian democracy did not emerge on the ruins of the institu-
tions left behind by the dictatorship, as was the case in Argentina. Instead,
the military commanders of the regime and the country’s traditional elites
managed to control the democratic transition.
The substance of the elite pact that subsumed the democratic movement
was straightforward. In exchange for political freedom, the redistribution
of economic power was ruled out. Under these limited conditions, the
democratic transition established the most open and stable regime in the
history of the republic. For more than 25 years there has been no press
censorship, no parties or movements of any significance have been banned,
and civil rights are formally guaranteed to a greater extent than in many
“old” democracies. For the first time since the late nineteenth century, the
military only rarely interfere in the political sphere, and the political influ-
ence of religious leaders has been curtailed. Finally, right-wing ideology
has been demoralised, and no influential organisation claims to be either
“conservative” or on the “Right” (however right-wing their policies and
practices may be).
4 The economic transition
Neoliberal economic policies are hegemonic in Brazil and in the world
today (see Saad-Filho and Johnston 2005; Saad-Filho and Morais 2004). This
section reviews the theoretical foundations of these policies and the transi-
tion from economic policies geared to the promotion of ISI to neoliberal
policies in Brazil.
Like all mainstream approaches, at the microeconomic level neoliberalism
presumes that, in a decentralised and deregulated economy, free competi-
tion leads to full employment equilibrium. Consequently, the market rather
than the state should address such economic problems as industrial devel-
opment, international competitiveness, and employment creation. By the
same token, policy-oriented shifts in relative prices and in the allocation
of resources should be avoided. At the macroeconomic level, neoliberalism
argues that the world economy is characterised by the relentless advance of
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Neoliberalism, Democracy and Development in Brazil 127
“globalisation” (usually defined superficially and imprecisely) and interna-
tional capital mobility. They offer the possibility of rapid growth through
the attraction of foreign capital. However, this strategy can be successful
only if domestic policies conform to the short-term interests of the financial
markets. This implies that interventionist policies are unfeasible, because
any policy deemed undesirable or unsustainable by the financial markets
would lead to capital flight, balance of payments crisis, and economic
collapse. “Policy credibility” is essential, and in practice it derives from the
preferences of the international financial conglomerates, the U.S. govern-
ment and the IMF.
4.1 Inflation, stabilisation and industrial policy
It was suggested in Section 2 that in the eighties the Brazilian elite converged
around the view that ISI faced three insurmountable problems: the ineffi-
ciency of the financial sector, continuing industrial backwardness, and the
difficulty of creating a dynamic national system of innovation (Laplane
and Sarti 1999, 198). It gradually became accepted that these obstacles could
be overcome only if the size of the state was reduced through expenditure
cuts, the reform of the fiscal, tax, and Social Security systems, and the
privatisation of state enterprises. It was expected that fiscal reforms would
reduce inflation, while financial liberalisation would increase domestic
savings and investment. Finally, the liberalisation of foreign trade and
capital inflows and the resolution of the remaining conflicts with the inter-
national financial system would facilitate the attraction of direct and port-
folio investment flows and facilitate industrial restructuring in those sectors
compatible with the country’s comparative advantages. Productivity would
rise, followed by a structural improvement in the balance of payments
(Auty 1991; Moreira 1991). In sum, in the neoliberal view the integration
of Brazilian productive and financial capital into transnational conglomer-
ates would drive a virtuous circle of growth that would turn Brazil into a
Thes e policy prescript ions were implemented gradually a nd with increasing
consistency by successive governments. In 1988, during the Sarney admin-
istration, the domestic financial system was reformed; starting in 1989,
international capital flows were liberalised (Studart 1999). The exchange-
rate regime was made increasingly flexible in the following years (Banco
Central do Brasil 1993). From 1990, during the Collor administration, Brazil
reduced import restrictions incrementally and implemented the resolutions
of the Uruguay Round of GATT. The Collor and Franco administrations
adopted strongly contractionary monetary policies in order to control infla-
tion, attract foreign capital, and generate exportable surpluses. The Cardoso
government fully implemented a neoliberal economic strategy, especially
through the Real Plan, and the Lula administration has pursued essentially
the same policies introduced by its predecessor.
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128 Alfredo Saad-Filho
Between early 1992 and mid-1994, Brazilian inflation increased slowly
but relentlessly from under 20 to over 40 per cent per month. Inflation
control was essential for the political legitimacy and economic viability of
the new elite consensus. High inflation was eliminated through the Real
4 This stabilisation plan was also used to legitimise the economic tran-
sition to neoliberalism.
Five policies underpinned the Real Plan. (1) Import liberalisation , because
foreign competition limits the prices that domestic firms can charge
(otherwise their markets will be lost to imports). It also limits the workers’
wage demands, since pay increases could make local firms uncompetitive.
Neoliberals also claim that trade liberalisation forces local firms to compete
against “best practice” foreign producers, which should help to raise produc-
tivity across the economy.
(2) Exchange-rate overvaluation , which reinforces the effect of trade liberali-
sation on inflation and competitiveness. These policies are highly effective
against inflation, and they can be very popular with consumers. However,
their impact on the balance of payments and local industry and employ-
ment can be devastating. Brazilian goods imports increased from US$20.6
billion to US$50.0 billion between 1992 and 1995. Cheap imports badly
harmed the manufacturing industry. In Brazil, the proportion of manufac-
turing value added in GDP reached 41 per cent in 1980. By 2001, this ratio
had declined to 27 per cent. Manufacturing sector employment fell, with
the loss of more than one million jobs between 1989 and 1997, and average
real wages declined by 8 per cent between 1994 and 2001 (Bonelli 1999, 89;
Saad-Filho and Mollo 2006).
(3) Domestic financial liberalisation . It was expected that the deregulation
of the financial sector would help to increase savings and availability of
funds for investment. In fact, the opposite happened; both savings and
investment rates declined. The savings rate fell from 28 per cent of GDP in
the mid-eighties to around 20 per cent in the mid-nineties and below 15
per cent in 2001, while the investment rate fell from an average of 22.2 per
cent of GDP in the eighties, to 18.2 per cent in the nineties, and 16.1 per
cent between 2001 and 06. The inflows of foreign capital may have replaced
rather than supplemented domestic savings, financing consumption rather
than investment (Bresser-Pereira 2003). The decline of the investment rate
helps to explain the dismal growth rates in Brazil: between 1994 and 1999,
Brazil’s average annual real GDP growth rate was only 2.6 per cent (3.2
per cent between 1994 and 2008). In contrast, between 1933 and 1980 the
economy expanded, on average, 6.4 per cent per annum.
(4) Fiscal reforms , in order to address the public sector deficits that presum-
ably induced high inflation. These reforms were largely successful through
privatisations, expenditure cuts, and tax increases (Giambiagi 2007).
(5) Finally, liberalisation of the capital account of the balance of payments ,
which was supposedly essential to attract foreign savings and modern
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Neoliberalism, Democracy and Development in Brazil 129
This policy combination offered a fail-safe strategy to reduce inflation
and simultaneously lock in the neoliberal reforms. Cheap imports were
allowed in, while high interest rates, foreign loans, mass privatisations,
and TNC takeovers of domestic firms brought the foreign capital that paid
for them. Inflation tumbled as consumers gorged on new automobiles,
computers, and DVD players and splashed out on artificially cheap foreign
holidays. Consumer-goods imports increased from US$606 million to
US$8.2 billion between 1985 and 1998. In the same period, foreign travel
spending increased from US$441 million to US$5.7 billion. Neoliberalism
bribed those it had not yet convinced, and it seemed that it could do no
However, the neoliberal reforms did not resolve the shortcomings of ISI
(explained in Section 1-2), and they destabilised the balance of payments
and the country’s productive system. The reforms hollowed out the indus-
trial chains built during ISI and reduced the local content of manufacturing
production. Wages and profits declined because of competing imports, the
rising share of interest in the national income (due to the financial reforms
and the permanently high real interest rates), and the difficulty in devel-
oping new competitive industries. Structural unemployment mounted.
Neoliberalism discarded import substitution and instead promoted “produc-
tion substitution” financed by foreign capital.
4.2 Industrial policy and the restructuring of the
The neoliberal transition introduced a new industrial structure in Brazil,
based upon the microeconomic integration of production and finance
into transnational value chains. It was expected that intensified competi-
tion would lead to partnerships and mergers and acquisitions (M&As) or to
collapse of the inefficient firms, raising average productivity. First, the share
of imported manufactured goods increased sharply (see Table 6.4).
Second, the participation of foreign firms in M&As and the foreign
purchases of minority stakes in domestic companies increased significantly.
Foreign firms participated in 49.1 per cent of the 3276 M&As between 1990
and 1999. Both the number of M&As and the degree of foreign involvement
increased during this period.
5 The most affected sectors were electric and
electronic goods, telecommunications equipment, car parts, and processed
Growing foreign participation contributed to the search for efficiency
gains. The new mode of competition was influential at several levels. First,
it led to a shift in management techniques towards “modern” methods and
the downsizing of the workforce. Second, rising manufacturing unemploy-
ment was reinforced by the introduction of new labour-saving technologies.
Third, firms tended to shift their output mix towards simpler products with
less value added in order to reap efficiency gains. As a result, manufacturing
productivity increased on average by 7.6 per cent annually between 1990
08_9780230294301_cha06.indd 12908_9780230294301_cha06.indd 129 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
130 Alfredo Saad-Filho
and 1997 (Feijó and Carvalho 1998). Coutinho, Baltar, and Camargo (1999,
66, 73) rightly conclude that
[The] avoidance of industrial development policies by the State strongly
contributed to the increasing exposure of domestic industry to imports,
especially in high value added sectors and those with high technological
content. ... [T]he explosion of imports rapidly “hollowed out” the produc-
tive chains, and led to a large reduction in intra-industry demand which
sharply reduced the economy’s capacity to create jobs. ... [T]he frantic
attempts to cut costs have led to successive rounds of innovation and
rationalisation in the productive process that generated strong tensions
in the labour market. ... [This is partly due to the] entry of new competi-
tors and the redefinition of strategic alliances [that] have destabilized the
oligopolistic structures inherited from previous decades. ... The “modern-
isation” of [these] oligopolistic structures has ruptured the existing
supply chains, led to the entry of new [foreign] suppliers, reduced the
degree of verticalisation and increased the import coefficients. ... [The]
higher coefficient of imported inputs and components (and, therefore,
the substantially lower value creation in the country) means that the
success of efforts to stimulate domestic demand for intermediate goods
and employment will tend ... to be very modest.
These heavy blows were softened by the expansion of trade within the
Mercosur group (i.e., Argentina, Brazil, Paraguay, Uruguay) and by the
transfer of some SOEs to Brazilian capital.
4.3 The new policy regime
The Brazilian experience shows that there are two reasons why the new
liberal reforms can secure short-term macroeconomic stability and
Table 6.4 Brazil: import coefficients, 1993 and 1996 (%)
Sector 1993 19 96
1. Standardized capital goods and electronic goods 29 65–75
2. Chemical inputs, fertilisers, resins 20–26 33–42
3. Auto parts, natural textiles, capital goods made to order,
rubber 8–15 20–25
4. Pharmaceuticals, tractors, electric and electronic
consumer goods, glass, chemical goods 7–11 13 –16
5. Synthetic textiles, petrochemical inputs, cars, food, paper,
3 –6 9–12
6. Beverages, shoes, plastics, dairy products, semi-processed
7. Non-tradable goods (cement, inputs, and others) 0.5–2.5 1–4
Source: Coutinho, Baltar, and Camargo (1999, 70).
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Neoliberalism, Democracy and Development in Brazil 131
growth. First, they are part of the conventional wisdom of the age and are
embedded in the belief systems of most domestic and international institu-
tions. Therefore, they are “credible” by definition. Second, if international
liquidity is high and interest rates are low, as was the case in the mid-
seventies and again in the early nineties and after the recovery from the
2000–1 slump, trade and capital-account liberalisation seem to abolish the
balance of payments constraint. They can attract capital inflows to finance
a large trade deficit, allowing consumption, investment, and growth rates
to increase rapidly in a virtuous circle that may last several years. However,
if these foreign capital flows decline, as they did in the early eighties, in the
mid-nineties, in 2000 –1, and since mid-2007, countries following neolib-
eral policies can find themselves in a vulnerable position. The balance of
payments constraint can reappear suddenly, either because of the scarcity of
foreign exchange or because higher international interest rates push up the
domestic interest rates, squeezing the economy both internally and exter-
nally at the same time.
In Brazil, the crisis of the Real Plan, in 1998–9 (Morais, Saad-Filho, and
Coelho 1999), led to the introduction of a new macroeconomic policy
regime that included inflation targeting, large fiscal surpluses, and the
managed fluctuation of the real. The aim of these policies was to preserve
low inflation, stabilise the DPD and the exchange rate, and eliminate the
current account deficit. These policies and goals were also pursued by the
This policy regime has been partially successful. Devaluations of the real
in 1999 and 2002 triggered a temporary inflation bubble, while revaluations
of the currency have been associated with declining rates of inflation (see
Figure 6.2 ; also see Araujo and Leite 2009). Although the government’s infla-
tion targets have normally not been achieved, the inflation rate is relatively
low and stable (Bresser-Pereira 2003; Lima, Maka, and Mendonça 2007).
Permanently high real interest rates during the period of the real (see
Figure 6.3 ) are due to the high costs and continuing inefficiencies of the
Brazilian financial system and the latent conflicts between monetary and
fiscal policy under new liberalism. In summary, contractionary monetary
policy automatically relaxes the fiscal policy stance because of the growth
and high liquidity of the DPD. This leads the government to again contract
monetary and fiscal policy in a vicious circle that can gradually increase the
financial fragility of the state. This conflict requires permanently high fiscal
surpluses (which are politically costly and economically damaging), privati-
sations (which are largely exhausted), or more realistically, the reduction of
domestic interest rates. However, lower rates can conflict with the balance
of payments constraint; they may trigger capital outflows, or they could
reduce the demand for public securities, making it harder to finance the
public deficit and potentially leading to the monetisation of the DPD. This
would trigger a currency collapse, an inflation bubble, or both. However,
since the new policy regime automatically blames excess demand for any
08_9780230294301_cha06.indd 13108_9780230294301_cha06.indd 131 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
Fig ure 6.2 Brazil: real effective exchange rate (REER) (average 2000–100) and inflation rate (CPI) (% per month)
08_9780230294301_cha06.indd 13208_9780230294301_cha06.indd 132 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
Fig ure 6.3 Brazil: real overnight interest rates (annualised monthly rate, %)
Source: Calculated from Ip eadata.
08_9780230294301_cha06.indd 13308_9780230294301_cha06.indd 133 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
134 Alfredo Saad-Filho
increase on the rate of inflation (regardless of the level of capacity utilisa-
tion or the unemployment rate), inflation stabilisation will always require
high interest rates and a high fiscal surplus, perpetuating the limitations of
the current policy regime.
The economic limitations outlined above help to explain why the
Brazilian trade balance reacted slowly after the currency crisis. The trade
balance shifted to a surplus only in 2001 and the current account two years
later. The trade surpluses have proven to be sustained (see Table 6.5). In
particular, expansion of Brazilian exports has brought much-needed relief
to the balance of payments. However, this has been due largely to favourable
market conditions for some of the country’s main commodity exports and
the excellent performance of the agribusiness sector. This, along with the
slower growth of manufacturing output and processed exports, has led to
the re-primarisation of the Brazilian economy, which is not easily compat-
ible with the creation of quality employment and the improvement of social
welfare in a Latin American economy.
5 Conclusion: the limitations of new liberalism
New liberalism includes a hegemonic political settlement (procedural
democracy) and a hegemonic set of economic policies and relations (neolib-
eralism). New liberalism has become the mode of existence of Brazilian
capitalism – a system of accumulation – with a specific material basis corre-
sponding to a particular social structure and relationships between domestic
capital, foreign capital, and the state.
New liberalism has transferred state capacity to allocate resources intertem-
porally (the balance between investment and consumption), intersectorally
(the distribution of investment, employment, and output), and internation-
ally to an increasingly integrated and U.S.-led financial sector. The policy
reforms have dismantled the production systems established during ISI
and the social structures and patterns of employment that corresponded to
them. They have led to the privatisation of the most productive and finan-
cial SOEs and promoted the alliance between foreign and domestic capital
at firm level and the denationalisation of industry and infrastructure. The
transnationalisation of production and finance (i.e., globalisation) was to a
large extent a process of international integration at firm level; it restruc-
tured the “national” system of production at a higher level of productivity
and integrated the local elite internationally. The economy has become
structurally more dependent on foreign trade, investment, and technology.
Brazil’s productive base has shifted away from the long-term requirements
of national accumulation towards the short-term imperatives of global accu-
mulation. The counter-tendencies operating during the Lula administration,
including the state sponsorship of private capital through the national devel-
opment bank, BNDES, have been far too weak to reverse this trend.
08_9780230294301_cha06.indd 13408_9780230294301_cha06.indd 134 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
Table 6.5 Brazil: balance of payments (US$ million)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Goods (FOB) −6,575 −1,19 9 −698 2,650 13,121 24,794 33,641 44,703 46,457 40,032 24,836
Exports 51,140 48,011 55,086 58,223 60,362 73,084 96,475 118,308 137,807 160,649 197,942
Imports −57,714 −49,210 −55,783 −55,572 −47,240 −48,290 −62,835 −73,606 −91,351 −120, 617 −173,107
income (net) −28,299 −25,825 −25,048 −27,503 −23,148 −23,483 −25,198 −34,276 −37,120 −42,510 −57,252
transfers 1,458 1,689 1,521 1,638 2,390 2,867 3,236 3,558 4,306 4,029 4,224
ACCOUNT −33,416 −25,335 −24,225 −23,215
−7,637 4,177 11,679 13,985 13,643 1,551 −28,192
ACCOUNT 29,702 17,319 19,32 6 27,052 8,004 5,111 −7,523 −9,464 16, 29 9 89,086 29,352
Capital account 320 338 273 −36 433 498 372 663 869 756 1,055
Financial account 29,381 16,981 19,053 27,08 8 7,571 4,613 −7,895 −10,127 15,43 0 88,330 28,297
Direct investment 26,002 26,888 30,498 24,715 14,108 9,894 8,339 12,550 −9,380 27,518 24,601
investments 18 ,125 3,802 6,955 77 −5,119 5,308 −4,750 4,885 9,081 48,390 1,133
derivatives −460 −88 −197 −471 −356 −151 −677 −40 41 −710 −312
investments −14,285 −13,620 −18,202 2,767 −1,0 62 −10,438 −10,806 −27,521 15,6 88
ER RORS AND
OMISSIONS −4,256 194 2,637 −531 − 66 −793 −1,912 −201 628 −3,152 1,809
OVER ALL BALANCE −7,970 −7,822 −2,262 3,307 302 8,496 2,244 4,319 30,569 87,484 2,969
Source: Central Ban k of Brazil, www.bcb.gov.br/.
08_9780230294301_cha06.indd 13508_9780230294301_cha06.indd 135 4/20/2012 4:09:19 PM4/20/2012 4:09:19 PM
136 Alfredo Saad-Filho
Equally significantly, the Brazilian state has become profoundly depleted
in the areas of economic planning, control, and policy implementation. In
contrast, state capacity in monetary policy implementation, financial sector
regulation, and security has been extended significantly. The financial
reforms have embedded private sector interests in the policymaking process
through the decisive role of finance in pricing government securities, deter-
mining interest rates, and financing the public sector. The reforms also
increased the role of private financial institutions in the foreign exchange
market and, therefore, in the country’s relations with the rest of the world.
Finally, the neoliberal transition has contributed to the disorganisation
of the workforce and to a significant shift in power away from the majority
regardless of the stabilisation of political democracy – indeed, to some extent
because of it. Rather than rely on military force, the new liberal consensus
has disciplined the working class through contractionary fiscal and mone-
tary policies, higher unemployment and labour turnover, personal debt, and
the continuing threat of inflationary or balance of payments crises should
the distributive conflicts get out of hand. In all these senses, the neoliberal
experience in Brazil has failed to achieve the high expectations that were
manufactured to justify the economic transition. Yet the political transi-
tion has delivered a stable and vibrant (albeit, as in most other countries,
limited) democracy. It is within this duality that the search for progressive
alternatives to neoliberalism must proceed, in Brazil and elsewhere in Latin
1 . The system of accumulation is determined by the economic structures and insti-
tutional arrangements that typify the process of capital accumulation in a specific
region in a cer tain period of time (Fine and Rustomjee 1996). This is a relatively
concrete concept, with no direct relationship with relatively abstract concepts,
such as mode of reg ulation (Aglietta 1979; Boyer 1990).
2 . Import-substituting industrialisation is assessed by Bruton (1998) and Gereffi
and Wyman (1990). For an overview of ISI in Latin America, see Bulmer-Thomas
(2003), FitzGerald (2000), and Thorp (1992). The Brazilian case is reviewed by
Baer (1995), Furtado (1972), and Hewitt (1992).
3 . “Consensus” refers to a substantial measure of agreement on strategic political
projects among social groups which, by virtue of their institutional power and
political influence, can implement these projects through the institutions of the
state. This concept is related to the Gramscian notion of hegemony. Neither of
them presumes unanimity.
4 . Governo do Brasil (1993); also see also Bacha (1997), Dornbusch (1997), Saad-
Filho, Morais and Coelho (1999), and Sachs and Zini (1996).
5 . Price Waterhouse Coopers ( Folha de S. Paulo , 21 January 2000). For similar esti-
mates, see Gonçalves (1999a, 138–42).
6 . See Cano (1999) and Laplane and Sarti (1999, 222–224). “[The] flows of [Brazilian]
exports to the Argentine market are concentrated on medium-high and
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Neoliberalism, Democracy and Development in Brazil 137
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