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Dangers of Residual Dependency in State-permeated Capitalism: The Case of Brazil during Labor Party Rule

Les dangers d’une dépendance résiduelle du capitalisme d’État : le cas du Brésil sous le gouvernement du Parti des travailleurs
Christian May et Andreas Nölke


Contrastant en cela avec l’Inde et la Chine, le Brésil présente quelques différences significatives par rapport au modèle d’économie dominée par l’État. Alors qu’il possède, comme ces deux économies, un marché intérieur important, des complémentarités institutionnelles cruciales et des facultés de coordination entre l’État et le monde des affaires, le Brésil continue de souffrir d’une dépendance résiduelle envers le capitalisme occidental. Dans cette perspective, le Brésil s’est engagé dans une direction prometteuse sous la férule du Parti des Travailleurs (PT). Toutefois, les gouvernements issus du PT n’ont pas été en mesure de parachever les complémentarités institutionnelles du capitalisme dominé par l’État, de manière à rendre l’économie brésilienne plus indépendante des pressions extérieures. Ils ont souffert à la fois d’une capacité limitée à utiliser le large marché intérieur pour soutenir les entreprises nationales brésiliennes, des conséquences négatives de la financiarisation et de nombreuses frictions dans la coordination économique intérieure du fait de la présence contraignante de firmes multinationales étrangères dans des secteurs clés pour le développement de la productivité.

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1For late industrializers, their relationship to global capitalism is of crucial importance. Very generally, emerging economies have two options for their economic catch-up strategies: either opening up towards global capitalism or following a rather protectionist strategy focused on their domestic markets. While the issue of openness versus protection is one of the oldest discussions on economic development, it receives fresh attention in contemporary scholarship on Comparative Capitalism research. From this perspective, these two options relate to two ideal types of capitalism: dependent market economies (DME) versus state-permeated market economies (SME). Whereas DMEs focus on the attraction of foreign direct investments, mainly in Central and Eastern Europe, SMEs develop on the grounds of their large domestic markets, with China and India as leading examples.

2However, most economies do not fit neatly into one of these ideal typical models. They combine features of national control with substantial openness towards external capital. Brazil is one of the most interesting examples of such mixed cases. Due to its large domestic market it has better options for pursuing an SME strategy than many smaller emerging markets. At the same time, external capital has always played an important role in Brazilian economic development. Moreover, the question of external openness in Brazil is politically contested and varies over time. A phase of economic openness during the 1990s has been followed by a domestic focus during the 2002-2016 rule of the Labor Party (PT) which, in turn, is being dramatically reversed by the ensuing Temer government.

3This article sheds light on Brazil during the governments of the Labor Party. The episode is particularly interesting, because the PT pursued a consistent “social-democratic” approach over a period of more than ten years which shaped the institutional character of Brazilian capitalism. Macroeconomically and socially, this period has been relatively successful: Besides regular economic growth (as measured in GDP), capital formation (indicating economic development) and private consumption by households increased substantially (Fig. 1). Net national income per capita rose from little more than 2600 US$ in 2001 to almost 11.000 US$ in 2011, only to fall below 8000 US$ in 2015 (World Bank 2018). When the lower 60% of the population held only 19% of all domestic income, its share rose to 24.4% in 2015 – representing an increase of almost 28% from the perspective of these lower 60%.

Fig. 1. GDP, capital formation and private consumption growth in Brazil, 2001-2016

Fig. 1. GDP, capital formation and private consumption growth in Brazil, 2001-2016

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Source: World Bank 2018

4At the same time, however, Brazil has been depicted as a case of “neo-developmentalist neoliberalism” (Dierckx, 2015, p. 145), or as “liberal neo-developmentalism” (Ban, 2013). In order to move beyond these hybrid and vague labels, this contribution pursues a “Critical Comparative Capitalism (CCC)” perspective that combines some basic assumptions derived from the “Varieties of Capitalism (VoC)”-approach with core insights of Critical Political Economy. We identify three generations of Comparative Capitalism (CC) research within the last two decades (Nölke, 2017). Despite earlier and parallel developments (Jackson and Deeg, 2006), the “Varieties of Capitalism” (VoC) approach as formulated by Hall and Soskice (2001) clearly is the hallmark of the first CC generation. Inspired by microeconomics and rational choice institutionalism, it has constructed a binary juxtaposition of coordinated and liberal market economy types (CME/LME) which both constitute economic equilibria based on specific coordination mechanisms. Subsequent research has demonstrated many conceptual and empirical shortcomings of VoC (see Hancké et al., 2007; Hall and Gingerich, 2009; Bohle and Greskovits, 2012; Bruff et al., 2015). Although the immediate utility of the VoC approach for understanding emerging market capitalism remains limited, yet its conceptual instruments are still very influential for later CC applications. The shortcomings of the VoC research program have led to a flurry of extensions, in particular with a background in historical and sociological institutionalism (e.g. Amable, 2003; Jackson and Deeg, 2006; U. Becker, 2009; Schneider, 2013; Thelen, 2014; McNally, 2017). This “post-VoC” (Bruff et al., 2015, p. 34) research program (as a second generation) has particularly extended its geographical attention towards areas beyond the OECD. It has highlighted the importance of history and politics (instead of economic equilibria) for the emergence of capitalist institutions, of distributive struggles and inequality (not growth exclusively) and of the state for capitalist coordination. Still, the post-VoC agenda usually neither incorporates the demand side (unlike e.g. heterodox economics), nor the interaction of national capitalisms with each other. These shortcomings are important points of departure for a third wave of CC scholarship. This third generation is often also more critical about existing political structures and takes conflicts, power and income inequalities into account (Ebenau, 2015, p. 55-57). On the one side, these “Critical Comparative Capitalism” (CCC) scholars account for the interactions and problematic interdependencies between national varieties of capitalism. Thereby, they highlight unavoidable tensions within the global political economy (e.g., Nölke and Vliegenthart, 2009; Nölke et al., 2015; Nölke, 2016). On the other side, some CCC scholars find themselves in the tradition of the Regulation approach, Dependency theory and Post-Kaleckian Macroeconomics (Stockhammer et al., 2014; Baccaro and Pontusson, 2016; J. Becker and Jäger, 2013; J. Becker, 2014; Jessop, 2014; Gambarotti and Solari, 2014, Suau Arinci et al., 2015). Here, however, the focus is not only on supply-side institutions (and companies), but also on demand side institutions such as collective bargaining and unemployment insurance (and household indebtedness). With these conceptual extensions, especially its macro-economic and political dimensions as well as international scope, CCC moves in fact much closer to a regulationist research programme which ever since argued that the diversity of capitalisms cannot be explained exclusively from a firms' perspective but needs to take the institutional embeddedness of accumlation regimes and regulation modes more seriously (see Boyer, 1990; Boyer and Saillard, 2002; Amable, 2016).

5While CCC looks at the classical VoC institutional spheres and coordination mechanisms, it also takes power relations, distributional issues and the related demand side as well international economic system into account. The next section builds upon recent developments within Comparative Capitalism scholarship, in order to give a theoretical basis for the conceptual juxtaposition of the DME and SME models. The core of the article focuses on Brazil, by first highlighting advances towards state-permeated capitalism during the decade of Labor Party rule in Brazil, before then depicting the residual dependency of Brazilian capitalism and related weaknesses. The main contribution of the article is in the field of conceptual development. It proposes the notion of “residual dependency” in order to depict the substantial problems caused by remaining economic openness in the transition towards a more state-centered development model in large emerging economies. As we shall see, the core problem of residual dependency is more in the political, than in the economic realm.

1. Dependent versus state-permeated capitalism: the ideal types

6In order to demonstrate the usefulness of CCC for the analysis of emerging market capitalism, this section presents the two fundamental alternatives of dependent versus state-permeated capitalism. It aims to explain emerging market capitalism through a set of analytical tools from both recent CCC (domestic market demand, the mode of integration into the international economic system and the nature of the state) and “traditional” VoC approaches (institutional complementarities and overall coordination mechanism). Theoretically, these tools stem from abstract reasoning about different modes of social coordination and the way institutions shape the behaviour of firms and governments, thereby overcoming the preoccupation with economic policy analysis to explain different development trajectories. At the same time, CCC attempts not to deduce macroeconomic structures from the patterns of firm behaviour exclusively (see Boyer, 2005, p. 47). Empirically, these have been validated through matched comparisons for the first decade of the new millennium between China and India (for the SME model) and Poland, Hungary, the Czech Republic and Slovakia (for DMEs).

7With regard to the role of domestic market and the international insertion of national capitalisms, DMEs aim at full integration into the global economy. There are few measures for the protection of national companies and countries are very open for imports. The economic catch-up strategy builds on the attraction of foreign direct investments and the integration into global value chains, even if this implies a high dependence on the economic decision-making of external actors. This gives Western (or “Northern”) transnational capital a powerful position, especially for quick relocation of production to other economies. SMEs, in turn, use foreign direct investments and selective privatizations as modernizing instruments, but only as long as these do not undermine the preponderance of national capital.

8Unlike DMEs, SMEs are generally dominated by national capitalists and a state which is cooperating closely with these business elites. Because of the strong position of national capital, the state does not automatically have to give in to the demands of multinational enterprises but is able to negotiate conditions in exchange for access to its large domestic market. Yet, we do not deal with a “strong”, centralized state, a dominance of public enterprises and centralized economic planning. Rather, we speak of 'state permeation' because state-business alliances often follow their particular interests. This helps to pursue coherent national development strategies and domestic capital has a long-term strategy for its domestic investments, whereas transnational capital is mobile and short-term oriented. The foundation of these strategies are large domestic markets which are much more protected than in DMEs in order to nurture national companies. Financial integration is even more cautious: capital controls and the accumulation of large currency reserves are typical strategies to limit the impact of turbulences on global capital markets.

9DMEs show strong institutional complementarities (or compatibilities) between a system of corporate governance which is controlled by the headquarters of multinational corporations and a system of investment finance that is based on foreign direct investments and foreign-owned banks. Moreover, competitive advantages are based on fairly low labor costs that are a result of an industrial relations regime centering around the appeasement of skilled workers through company-based agreements (instead of sectoral or even national-wide agreements) and the transfer of innovations within multinational corporations.

10The symbiosis of national capital and public authorities and the selective stance towards foreign direct investments enables us to specify the central institutional complementarities of the SME model. Major SME companies are organized by national capital, owned by families and/or the state. This makes SME companies independent from volatile global capital markets and demands by international investors. Moreover, it frequently allows SME companies to enjoy public support (e.g. subsidized credit by state banks). A close cooperation between major companies and public authorities also impinges on industrial relations, as public regulations (and their selective implementation) often help keeping labour costs low. Finally, public interventions also shapes the transfer of innovations and competition policy. A soft protection of intellectual property rights facilitates reverse engineering and subsequent adaption of foreign technologies. At the same time, competition policies are geared towards the temporary protection of individual companies.

11The institutional coherence of capitalist models is crucially determined by their central mechanisms of coordination. In DMEs, these are dominated by the interfirm hierarchies of multinational corporations. The main firm decisions in these economies are not being taken in host countries but rather in TNC headquarters. State-permeated capitalism, in contrast, is dominated by a close cooperation between public and business actors within public-private alliances characterized by interpersonal reciprocity and loyalty. Strong reciprocal norms and, obviously, family ties form the backbone of a close-knit network of mutual obligations and trust that makes economic coordination highly effective.

12These features enable DMEs to be particularly competitive as an assembly platform for semi-standardized industrial goods with a fairly high level of technology. The competitive advantage of companies from state-permeated capitalism, in contrast, consists of serving the domestic market with products and services on a medium level of technology.

2. Advances towards state-permeated capitalism during the decade of Labor Party rule in Brazil

13This theoretical framework enables us to study in how far the administrations led by the Brazilian labor party have had been able to institutionalize a state-permeated form of capitalism. At the same time, it allows us to highlight where Brazil has remained wedded to the more open model of dependent capitalism that had dominated the economy under previous liberal governments (see section 5).

2.1. Domestic market and international insertion

14Compared to other Latin American countries, the large and growing domestic market, in particular mass production for private consumption, has been the backbone for the rise of many well-established Brazilian companies. Production for the domestic market – and the regional markets in Latin America – has historically given rise to a number of Brazilian multinational enterprises such as AmBev (beverages, now part of InBev), meatpacking companies (JBS, Marfrig and BRF), textile producers (e.g. Camargo Correia), cosmetics (Natura), pharamaceuticals (EMS), construction companies and the corresponding engineering bureaus (Norberto Odebrecht, Andrade Gutierrez), IT services (Stefanini, Bematech and TOTVS), autoparts (Weg and Lupatech) and air transport (VARIG and TAM). Among the large, but less internationally oriented companies, are also the major private banks, such as Bradesco, Banco do Brasil and Itaú Unibanco. As mentioned earlier, government support has been crucial for the emergence of these companies, e.g. by stabilizing corporate control, providing investment finance and mobilizing human capital. In some sectors, companies also enjoyed direct state support, such as in government procurement that was essential for the development of large business groups in construction and engineering, or restrictions on foreign carriers in air transport (Schneider, 2013, p. 51).

15After the macro-economic stabilization of the 1990s, the domestic market took over from the export sector as core engine of growth. Between 2003 and 2009, private consumption increased continuously (see Fig. 1). This increase was based on a stable labor market, the creation of new formal jobs, substantial social transfers and wage increases (Melleiro and Steinhilber, 2012, p. 219). Doubling of the minimum wage set the standards for a third of the employed population and provided the basis for the majority of wage negotiations and some important social security standards. Arguably, the increase of the minimum wage was more important than the famous “Bolsa Família” cash transfer program for poor households and the related social programs “Bolsa Escola” and Bolsa Alimentacao” which together only amounted to less than 1% of GDP (Casanova and Kassum, 2014, p. 30-31; Leubolt, 2015, p. 241-242). Brazil's basic social security and pensions system, however, certainly helped with stimulating domestic demand (Jaeger, 2013). Average real income has risen during the last years and has increased the demand for local products and services. According to the IMF, “consumption – both public and private – has accounted for almost all the growth in Brazil” (Ibid., 2013, p. 15).

16Brazil protects its home markets in order to make sure that the domestic industry benefits from increasing demand. It is a widely shared misconception that Brazil’s economic fortunes primarily are dependent on commodity exports in general, and to China in particular. In 2011, Brazil ranked lowest on the export share in GDP (12%) among the top 10 global economies, even after the similarly closed economies of Japan (15%) and the US (14%), and much behind export-led economies such as Mexico (32%) and Germany (50%): “Growth in Brazil is still largely made in Brazil” (Canuto and Schellekens, 2014, p. 3; see also Bizberg, 2014, p. 14). With an average applied tariff rate of 14.1% on non-agricultural goods in 2010, Brazil has a much higher level of protection than the major OECD economies (OECD, 2011). Moreover, in terms of trade-GDP ratio, Brazil is less open than all other Latin American economies (Gaitán and Boschi, 2015, p. 176). The protection of domestic industry has been a strong objective for the major initiative Plano Brasil Maior (“Greater Brazil Plan”) launched in 2011, including preferential treatment in procurement, more active use of anti-dumping and a decrease of import licenses (Arnold, 2011, p. 28; Casanova and Kassum, 2014, p. 39). A special tax on cars that have been built with less than two thirds of locally sourced components has led several foreign car manufacturers to open new plants in Brazil (Casanova and Kassum, 2014, p. 32).

2.2. Institutional spheres and complementarities1

  • 1 Due to space constraints, we will not discuss the full spectrum of VoC institutional spheres, but f (...)

17Brazilian companies are usually in concentrated ownership and controlled by insiders, often dominated by family shareholdings or other block-holders such as the state (Aguilera et al., 2012, p. 326). For 93% of the Brazilian companies, there is one single shareholder which controls a share larger than 20% (Aguilera et al., 2014, p. 45). In 88%, the largest shareholder is of Brazilian origin (Ibid., p. 46). The liberal economic reforms of the 1990s did not end the dominance of domestic capital in Brazilian companies. Families have been moving from majority to minority control (Abu-El-Haj, 2007, p. 106) but were supplemented by domestic banks and institutional investors such as pension funds of major state-controlled companies (Aguilera et al., 2012, p. 322-326). Especially in former public enterprises, such as Embraer, Vale, Oi and CSN the Brazilian state keeps substantial shareholdings or golden shares. Thus, the state can not only prevent the sell-out of strategically important companies but can also use these firms as vehicles for industrial policy. Direct state intervention is rare; more important is the use of indirect channels such as the national development bank BNDES or pension funds related to state-controlled companies. Where families and the state have controlling minority shares, there is no market for corporate control – as characteristic for LMEs – but rather an “insider”-dominated mode of corporate governance. Completely dispersed shareholding is very rare and minority shareholders tend to be disadvantaged by dominating shareholders (Aguilera et al. 2012: 323). Stock markets are rather means for raising capital or organizing the control of companies via pyramid schemes and non-voting shares (Schneider, 2013, p. 151-152; Sibal, 2014, p. 188-190).

18Besides retained earnings, domestic bank loans represent the most important source of finance for Brazilian companies (World Bank, 2014). However, while in DMEs and emerging countries such as Mexico foreign banks account for more than 75% of the domestic banking sector, they play a minor role in Brazil where they only hold about 20% of the total banking assets. This is much less than in DMEs, but still higher than in China and India (Deutsche Bank Research, 2011). Finally, while most ‘private’ banks are actually listed on local stock markets, their shares are controlled by public bodies.

  • 2 Straight state subsidies are also possible and have, e.g., financed a substantial share of Embraer (...)

19Most important, however, is the role of the state for the provision of long-term credit. Direct and indirect state support for investment finance comes in different forms, including tax rebates, guarantees and subsidized credit – all contributing to the finance framework that is more favourable compared to the high interest rates in Brazil.2 Approximately half of the national banking assets in Brazil are held by state-controlled banks, most importantly the public development bank Banco Nacional do Desenvolvimento (BNDES) that has been empowered with Lula taking office in 2003.

20BNDES credit approximates 7.5% of the Brazilian GDP and is four times higher than loans by the World Bank (Lazzarini et al., 2012, p. 32). The objective behind BNDES lending is not to provide credit for small firms facing constraints on the private credit market, but to boost the investments of already profitable firms (Lazzarini et al., 2012). As a consequence, large enterprises receive 70 to 80% of BNDES loans (BNDES, 2012, p. 35). This is part of a ‘national champions’ strategy assisting Brazilian multinationals on the world market. The provision of credit is one arm of this strategy, the acquisition (or retaining) of minority stakes in these companies by its daughter BNDESPAR is another. This idea of “Leviathan as a minority investor” is arguably a distinctive feature of state capitalism in Brazil (Lazzarini and Musacchio, 2014).

21Apart from BNDES, state-controlled banks such as Banco do Brasil and Caixa Economica Federal, whose credit thus represent loans by the state, are important funders for domestic companies. Not only does this permit the state a certain 'grip' on national companies, it also gives borrowing companies a strategic advantage due to lower interest rates, longer credit maturities and fewer conditions for creditworthiness in contrast to global credit markets (Masiero and Caseiro, 2012). Another state lever for long-term investments in Brazil are large pension funds of state-controlled enterprises, such as Previ (linked to Banco do Brasil), Petros (Petrobrás) and Funcep (Caixa Economica Federal). The role of these private funds – with domestic assets approximating 20% of GDP – has become so massive that some observers speak of “pension fund developmentalism” in Brazil (Datz, 2013).

22Thus, compared to companies from liberal economies, Brazilian enterprises are well protected against short-term financial turbulences, as could be seen during the global financial crisis (Ocampo, 2009, p. 19). Domestic banks had no incentives for risky speculation because they earned well on high domestic interest rates.

2.3. Coordination mechanism

  • 3 The importance of personal friendships were highlighted in an interview with an economist at a BNDE (...)

23In historic comparison and in contrast to many other countries in Latin America (Evans, 1995), the Brazilian state under PT rule developed a fairly high degree of autonomy and was able to interfere into the economy even against powerful opposition (Gaitán and Boschi, 2015, p. 179). Still, much of its economic governance was based on informal relations with domestic business. As Lazzarini (2011) demonstrated how these informal networks are not only a product of the established ties between the old oligarchy and the state but have intensified during the privatizations of the 1990s, which usually favored consortia of investors that were active in several companies, and linked to BNDES and state-led pension funds. These connections provide an important guarantee for the long-term stability of Brazilian capitalism (Busch, 2010, p. 117 -143). The powerful role of the state helps to prevent sudden decisions of individual companies that may harm the long-term development of the whole economy, whereas the proximity to business inhibits sudden public decisions that may be harmful to the operations of companies. Reciprocity and continuity in the decision-making between state and business provide for a basic atmosphere of trust, which is an important factor for long-term investment in an ambiguous regulatory and macroeconomic environment.3

24In comparison to other Latin American economies with far more adverse-business-government relations (such as Argentina or Venezuela), the smoothness and reliability of economic decision-making in Brazil stands out. It is based on compromises and piecemeal changes, even radical course changes towards privatization, opening or the reestablishment of state dominance are less pronounced than in most neighbor countries (Busch, 2010, p. 155), at least before the ongoing reforms of the Temer administration. Particularly the Lula administrations have further cultivated the building of consensus and gradual reformism (Casanova and Kassum, 2014, p. 32). Strikingly, the informal cooperation between Brazilian business and government works better than cooperation between organized business associations and the state in other Latin American countries (Schneider, 2015b, p. 48-50). Cooperation between business and state, as well as other social forces, is supported by a developmentalist ideology that highlights common national interests (in contrast to class conflicts).

25These thick ties are, however, are not only beneficial but can also be a liability for economic development, as indicated by many episodes of corruption that are under judicial investigation. Corruption is not a unique to the PT administrations but has been present under Cardoso (Anderson, 2011, p. 4) and the Temer government as well (The Guardian, 2017). However, the often weak parliamentary majorities for the PT governments, together with the individualistic election system and private financing of electoral campaigns, made a certain degree of corruption 'necessary' in order to bring laws through the Congress. Legislators are generally important targets for business lobbying, given their often very powerful role on specific subjects (Schneider, 2013, p. 143-144). Governments thus have to offer strong incentives to convince legislators to support specific legislature and not use their veto power.

  • 4 A focus on economic growth only comes to a more pessimistic assessment, see Bresser-Pereira (2015).

26In sum, state-led capitalism has worked pretty well in Brazil during the 2000s, with satisfactory growth rates that benefitted not only the economic elites, but also led to an impressive reduction of inequality.4 Between 2003 and 2008, Brazil’s real GDP grew by an annual average of 4.2%. After the financial crisis it has rebounded with 7.5% in 2010, but has been reduced to an average of 2.1% in 2011-2013 (G20, 2014, p. 2), with even lower rates in 2014 and a recession starting in 2015. Still, in April 2014, before the recession, the country has hit a historical minimum in the formal sector unemployment rate (4.9%), as well as a historic peak in average monthly real incomes, with gains beyond average in the less developed parts of the country (G20, 2014, p. 8). However, not all sectors have contributed in equal terms to this growth: particularly high rates occurred in construction and utilities, agriculture and mining; below average rates in manufacturing (Ebenau and Liberatore, 2013, p. 114).

3. Residual dependency of Brazilian capitalism and related weaknesses

3.1. Domestic market and international insertion

  • 5 A good illustration for the limited effects of demand stimulation for domestic manufacturing in an (...)

27Brazil’s policy to protect and utilize the domestic market as a foundation for national economic development has been overall successful. Yet is is still marred by contradictions and inconsistencies with regard to the openness towards foreign multinationals and the global financial system. Although domestic demand was at the core of the rejuvenation of growth during the 2000s, the domestic market was never protected against foreign market entry to the same extent as in China and India (Arnold, 2011, p. 29). Much stimulation of domestic demand benefitted foreign multinationals. Hence, the beneficial effects of a growing domestic market had to be shared with foreign multinationals in a more open manner.5 Since the 1990s, many foreign multinationals have set up businesses in Brazil in order to access the growing local markets – in contrast to the motivation of natural resource exploitation that has been typical for investments in other countries of the South (Kingstone, 1999, p. 249; Abu-El-Haj, 2007, p. 107-108).

  • 6 We owe this term to an anonymous reviewer.

28Moreover, a dynamic growth process based on domestic markets is also hampered by the persistent extreme social inequality as well as high taxes and shrinking fiscal resources. During the 2010s, the process of stimulating domestic demand for products and services of Brazilian companies seems to be exhausted. Given the high inequality in Brazil, a more equal distribution of income could further stimulate domestic demand for consumer goods. Large parts of the population lack the means for creating sufficient demand, whereas the wealthier segments others mainly demand foreign (luxury) goods. More extensive redistribution via the tax system, however, may be difficult to implement against the opposition by business and the upper middle classes (see below). Brazil not only has one of the most complicated tax systems of the world but also a comparatively high total tax burden. In 2012, Brazil’s total tax revenues measured 36.3% of GDP, a much higher value not only than the Latin American average of 20.7% (OECD, 2014a) but also in comparison with other large emerging markets such as China and India. While tax revenues have been raised consistently, from about 25% of GDP in the early 1990s, there are strong indications that these increases have reached a plateau. The massive – and ultimately successful – political mobilization against the prolongation of a temporary financial transaction tax (CPMF) in 2007 is an indication for the growing political opposition against higher taxation (Melo, 2014, p. 17-18). At the same time, public social spending in Brazil of over 15% of GDP is already very high, and at more than the double level of China and India (OECD, 2014b, p. 3). Due to the high real interest rates, defended by a politically very powerful rentier class fraction – a phenomenon that could be called “usurious financialization”6 – about half of the federal budget is used to pay off public debt (Dierckx, 2015, p. 153). Given that fiscal resources are also required for further investments into infrastructure, education and innovation policies, there may be limits for additional social or infrastructure programs that could further raise domestic demand.

29Alternatively, domestic demand could (temporarily) be stimulated by increasing private indebtedness. In Brazil, however, a process of modest banking inclusion – for example based on easier access to credit for poor households – also seems to be exhausted during the mid-2010s, due to rising interest rates (Serrano and Summa, 2015, p. 14-16). Easier access to consumer credit for lower and medium income groups has temporarily boosted demand for medium-tech industrial goods (such as fridges and television sets) that can be manufactured domestically during the early 2010s, but heavily increasing private indebtedness has halted this boost of domestic demand. In 2011, the consumer debt service ratio in Brazil has reached 23%, a significantly larger value than in other Latin American countries or even the US (IMF, 2012, p. 5). In the meantime, the negative consequences of this “financialization of social policy” (Lavinas, 2017), where social security benefits often served as collateral for credit to marginalized groups, have become more than obvious. Equally, mortgage credit, which strongly expanded after a series of subsidized mortgage schemes during the early 2010s, still has been kept within certain limits due to fiscal constraints and cannot expand much stronger (López Vicente and Serena Garralda, 2014, p. 21). Also company indebtedness has increased fairly strongly, leading an increase of total household and company indebtedness from 107% of GDP in 2007 to 139% of GDP in 2014 (FAZ, 2015b).

  • 7 Although Brazil has strongly decreased its foreign currency sovereign debt and also has accumulated (...)

30In this fragile context, political turbulences triggered by the BNDES corruption scandal led to a full-blown recession in 2015. Judicial investigations massively rocked the well-oiled networks between representatives of state and business, leading to slower investment activity. Furthermore, several measures to combat increasing public indebtedness were blocked in Congress, where opposition to the president now became even more powerful than before. Subsequently, a loss of confidence in the repayment of debt on the side of transnational capital has led to a rating downgrade and massive capital outflows, triggering a strong and sudden devaluation of the Real (FAZ, 2015b).7 In order to combat rising inflation (also due to rising prices for imported goods), the central bank has dramatically increased the benchmark interest rate Selic (Lewis and Jelmayer, 2015). This led to a decrease of consumer, mortgage and industry lending and a subsequent implosion of domestic demand. Domestic demand reduction led to increasing unemployment, itself leading to a further demand contraction and fewer investments. At the same time, deceasing tax revenues and increasing social security expenses (automatic stabilizers) were leading to increased public indebtedness and even higher interest payments, thereby preventing any major program for public demand stimulation.

31However, this exhaustion of domestic demand-driven growth happened at the same time as export demand-driven growth was weakened as well, in particular due to decreasing demand from (and increasing competition by) China. Although Brazil's export dependency is far less than for the extractivist” export-driven models such as Chile and Venezuela (Jäger et al., 2014) which are far more affected by decreasing demand from China, the decrease of external demand did have an additional effect. Yet, the small share of manufacturing production for export (about 20%) limits the negative effect of this external factor (Jenkins and Freitas Barbosa, 2012, p. 77). Comprehensive macro-economic analyses confirm that the slowdown of Brazilian growth in the 2011-2014 period has overwhelmingly been triggered by a sharp decline of domestic demand and not by lowern exports or external financial conditions (Serrano and Summa, 2015).

32Yet, because of the weakness of both international and domestic demand, growth rates are sluggish since 2011. However, the mid-2010s stagnation of the Brazilian (semi-)state-led model also has supply-side causes that relate to the haphazard process to establish institutions that are necessary for a successful state-driven economy. Most notably, labor productivity stagnates because increased wages have not been met by higher capital accumulation, investments and improvements in education (Canuto and Schellekens, 2014, p. 3-4). Again, financialization plays a negative role, in particular where companies prefer generating income from financial income instead of investing for increasing productivity (Jibril et al., 2018). Correspondingly, domestic manufacturing industry is continuously losing weight vis-à-vis large-scale agricultural exporters as well as services (e.g. finance), thereby weakening the political case for a massive state-led industrialization strategy (Bresser-Pereira, 2015, p. 6-7).

3.1. Institutional spheres and complementarities

33In the following, we try to sketch how recent developments in the currency and capital regime shake the institutional complementarity between corporate governance and investment finance, thereby unleashing what we call residual dependency. Particularly since the privatizations of the 1990s, foreign multinationals are bringing a certain measure of volatility and external dependency into play. 20 out of the 50 biggest companies in Brazil are foreign-owned. Still, these companies are less relevant than in more liberal Latin American countries such as Chile, or even the dependent market economies of East Central Europe (Nölke and Vliegenthart, 2009). As Brazil is far more open to foreign ownership than e.g. China or India (see Nölke et al., 2019), this increases the potential contestation of economic policy-making. Since the 1990s, MNCs have drastically increased their prominence in the Brazilian economy in terms of sales, share of manufacturing or revenues (Schneider, 2013, p. 76). This had the effect “to box domestic firms out of most dynamic manufacturing sectors like electronics and automobiles” (Schneider, 2013, p. 82), thereby leading to a suboptimal sharing of tasks between national and foreign capital in manufacturing.

34However, the capital controls introduced in 2009-2011, aimed at limiting the influence of FDI, are “half-hearted” and very limited in their impact (Dierckx, 2015, p. 154). Moreover, in order to remedy an increasing current account deficit and decreasing capital inflows, these capital controls have gradually been lifted since December 2011. In line with the semi-closed nature of the Brazilian economy, many non-financial companies have made increasing use of corporate bonds, including foreign currency bonds, in order to escape the limitations of the state-controlled Brazilian credit system. By 2014, nearly 20% of total corporate debt financing were issued in bonds (IIF, 2015, p. 2). In addition, many companies turned to a multitude of short-term alternative assets (Kaltenbrunner and Painceira, 2015). With it comes a certain degree of market-mediated vulnerability, in particular when interest rates in the North start to rise again after their low level in the aftermath of the subprime crisis. These currency developments are very detrimental to the investment process in manufacturing industry as “sustained periods of exchange rate appreciation, interrupted by sudden and large depreciations, can have detrimental effects on the tradeable goods industrial sector, which may face competitive pressures and difficulties in forming long-term expectations” (Kaltenbrunner and Paincera, 2015, p. 1301). A more comprehensive developmental state strategy – with lower interest rates, a lower exchange rate and a more progressive taxation – would require far more thorough capital and exchange controls as well as limits of foreign investors on domestic financial markets, in order to prevent massive capital flight and to reduce the problem of sudden stops (Dierckx, 2015, p. 155; Kaltenbrunner and Painceira, 2015, p. 1300).

  • 8 The Dutch disease consists of a competitive disadvantage for the non-commodity tradable goods secto (...)
  • 9 For a more comprehensive perspective on the financialization of the Brazilian economy see Araújo et (...)

35In general, the neo-mercantilist macroeconomic program of the PT governments has remained haphazard, e.g. by shying away from the introduction of more comprehensive capital controls, or by the reintroduction of the mechanism against the Dutch disease before 1990.8 The large trade surplus in the agricultural sector has proved to be a mixed blessing under conditions of a still fairly open financial account, contributing to an over-valuation of the currency and deindustrialization (Diniz and Bresser-Pereira, 2012, p. 207). Between 2003 and 2010, the Real appreciated by 74% against the US$ (Thompson, 2011) being overvalued by 80% by April 2011 according to UNCTAD calculations (Nassif et al., 2011). Although this overvaluation has eased a bit, there is a fairly broad consensus of economists from different theoretical perspectives that long-term overvaluation of the domestic currency is one of the major cases of the mixed Brazilian economic record during the last decades, particularly in manufacturing (Nassif et al., 2015, p. 1314-1315). Whereas companies in the services sector and in commodities can survive a steep currency appreciation very well (Schneider, 2013, p. 150), domestic manufacturers have suffered tremendously under the weight of currency appreciations (Ibid., 168-169). During their fight against the global financial crisis, Western central banks have made matters much worse by flooding global financial markets with liquidity, much of which has found its way to Brazil (e.g. through corporate bonds), thereby further supporting a currency over-valuation and a deterioration of export competitiveness. At the same time, these short-term financial flows – in the absence of currency controls – make Brazil vulnerable to the devastating effects of a “sudden stop”, as witnessed during the speculations about US interest rate increases in 2013 and 2015. Although the devaluation going hand-in-hand with financial outflows may prove to be very helpful in the medium to long-term, sudden currency swings are detrimental for businesses that requires stability for their investment decisions (Casanova and Kassum, 2014, p. 48). And while Brazil successfully has combatted traditional forms of vulnerability to global financial markets based on high public foreign currency debts, it has created new ones based on short-term domestic currency assets (Kaltenbrunner and Painceira, 2015). The failure to provide for effective financial stability with regard to interest rates, currency valuation and capital flows resulted in bursting a central pillar of the state-permeated version of Brazilian capitalism. Brazil has become a victim of the typical negative effects of what has been called “subordinated financial integration” (Kaltenbrunner and Painceira, 2018) or “international financialization” (Nölke, 2018) - in addition to those of the financialization of social policy and of usurious financialization.9

3.2. Coordination mechanism

36Although some industry associations temporarily have supported the labor party governments, this has proven to be an unstable alliance, particularly under economic stress. Under these conditions, the tension between the issues pursued by the labor party – such as rising wages, higher taxation to increase public expenditures, an increased role of public banks and political guidance on investment – and the interests of parts of industry became more obvious. Traditionally, the labor party is not part of the densely-knit network between domestic family capitalists and the state. The rise of the labor party thus somewhat complicated the established coordination processes in the Brazilian political economy, even if fractions of the party have become part of the establishment during the PT administrations.

37While Brazil shares some important state-business-coordination features with other SMEs, it thus features some special properties that make economic coordination more contested. These features include (1) the role of foreign capital as a “third” party, (2) the divisions between domestic capitalist class fractions as well as between these fractions and the new middle class, (3) the working of Congress based on individualism and local constituencies and (4) the additional fragmentation brought about by the rise of the labor party and its allies.

38(1) State-led capitalisms are characterized by the close coordination between representatives of the state (or state-owned enterprises) and domestic capitalists. In Brazil, however, there are traditionally three parties involved. The third party in this tripé (Evans, 1979) is foreign capital – and the domestic capital fractions that are closely linked to it. In Brazil, the role of this third party fluctuates. Whereas the military government made sure that trilateral cooperation serves the needs of national economic development, the liberal reforms of the Cardoso era encouraged the ”fusion of the local bourgeoisie with international capital” (Abu-el-Haj, 2007, p. 92) and the integration of Brazilian capital in global capitalist networks (Flynn, 2007). While the Lula/Dilma governments tried to strengthen the role of domestic authorities and private capitalists, they were unable to completely reverse the expanded role of internationalized capital. The majority of the population considers a prominent role of foreign MNCs as a normal feature of economic life (Schneider, 2013, p. 182). Correspondingly, economic coordination has to take the voice of international capital into account. This leads to a fragmentation of decision-making between business and the state in Brazil and to a more short-term perspective on the side of business, since MNCs - in contrast to many domestic capitalists – “are less interested in national development strategies and more interventionist states” (Schneider, 2013, p. 86).

39(2) The pursuit of coherent national development strategies is also complicated by the various internal divisions in the Brazilian capitalist class and the difficult relations of the latter to the lower middle classes. Quarrels within the Brazilian bourgeoisie already were a pretext to military interventions in the 1960s (Faucher, 1981, p. 13). The Cardoso governments, however, were temporarily able to unify the Brazilian bourgeoisie (Schmalz, 2012, p. 268). This unity has eroded steadily since then. Today, the main dividing line within the Brazilian bourgeoisie on economic policies is between outward-looking factions (agribusiness, allies of foreign capital, rentiers and the financial sector) and factions with a focus on the domestic market (domestic industrialists, trade sector) on the other (Diniz and Bresser Pereira, 2012, p. 195, p. 201). The main battleground between the latter is on macroeconomic policy issues, with the former, more powerful faction preferring a highly valued currency and high interest rates, due to their preference for financial over industrial investments (Bresser-Pereira, 2015, p. 6-7; Dierckx, 2015, p. 147; Leubolt, 2015, p. 199-204). These conflicts, however, are being played out in a very civilized way, in contrast to the more aggressive conflicts between the upper/higher middle classes on the side and the new/lower middle class and the PT government on the other (Anderson, 2011; Saad Filho, 2014; Nowak, 2015, p. 87). During the mid-2010s, the former have taken these conflicts to the streets, massively supported by the mainstream private media.

40(3) Not only the existence of class fractions with very different economic preferences complicates economic decision-making, but also the nature of the Brazilian political system, which is not only fragmented between the federal and the state level, but also features some particularities in the party system. Members of Congress usually are not bound to a major political party, but rather follow individual career incentives. Pork barrel politics are usually more important than party coherence and financial donations by individual companies are crucial for financing elections campaigns (Bazuchi et al., 2013). As an illustration, more than a third of the deputies in Congress switched parties during Lula’s first term and more than a quarter of both Congress and Senate were involved in judicial procedures by the end of his second term (Anderson, 2011, p. 4). Within this difficult legislative system, the Lula and Dilma administrations were only able to pursue their reform agenda in a piecemeal way (Schmalz, 2012, p. 265). This problem has become worse since the 2014 election that resulted in the record number of 28 parties in the Brazilian National Congress. Many powerful positions are occupied by oppositional politicians, many important economic reform projects are therefore blocked in Congress. Thus, disaffection with coalitional presidentialism runs deep in Brazil (Chaisty et al., 2015). Arguably, certain forms of corruption are “necessary” for an effective economic coordination in this context. The mensalão scandal thus was symptomatic for the constant need of the government to mobilize sufficient support in Congress. Similarly, donations to the PT to finance a massive election campaign against heavy opposition by large shares of the upper middle classes and the mainstream mediawere an important element of the 2015 Petrobras scandal.

  • 10 Interview at the Brazilian Agency for Industrial Development (ABDI), March 2013; see also Graf and (...)

41(4) Economic coordination in the Brazilian political system was further complicated – but also democratized – by the activities of the PT-led governments to incorporate social groups that traditionally were unable to participate in policy-making, such as labor. This was done by creating a variety of fora for the formulation of sectoral and pan-sectoral policies, the incorporation of representatives from unions and other groups in public office and the involvement of union-led pension funds in economic decision-making (Boschi, 2012, p. 184). At the same time, the PT governments were able to control more and more parts of the state apparatus in order to implement a change of course in economic matters (Schmalz, 2012, p. 265). The success with regard to an inclusion of previously marginalized groups (such as more radical unions, environmentalists or the landless workers movement MST), however, remains limited and the Lula/Dilma governments can be considered as a deadlocked between antagonist interests (Mellero and Steinhilber, 2012, p. 226). Institutionally, the system of economic coordination has become more complicated because new institutions have been added to older corporatist ones that had been established in the Vargas era (Boschi, 2012, p. 189-190). For example, the Conselho Nacional de Desenvolvimento Industrial (CNDI), established in 2004, only temporarily provided an effective tripartite coordination forum (Balestro, 2014; Schneider, 2015b, p. 41-43). Particularly in industrial and innovation policies, administrative fragmentation still poses a major challenge for a coherent national development strategy.10

  • 11 However, the fragmentation of decision-making between the union, the states and the municipalities (...)

42In sum, economic coordination in Brazil is more contested than in other state-permeated capitalisms, even though fragmentation along federal-state relations is less important.11 The resulting bureaucratic in-fighting and short-termism has negative repercussions on the ability to pursue a coherent long-term national development strategy. Still, in comparison to other Latin American economies such as Argentina – with its massive conflicts between industry and agricultural interests – Brazil is not completely torn apart between fundamentally different interests (Cervo, 2012, p. 29). Economic coordination is very cumbersome, but still can draw on some effective networks between state and domestic capital. The strong opposition by large parts of the Brazilian capitalist classes, the difficulty to gather sufficient majorities in Congress and the increased institutional complexity of the Brazilian state apparatus prevent more thorough economic and social reforms. Instead of implementing a comprehensive long-term development strategy, “Realpolitik” and short-term political pragmatism had to prevail in both the Lula and the Dilma governments.


43In contrast to China and India, Brazil deviates significantly from the model of a state-permeated economy. While it shares a focus on a large domestic market, some crucial institutional complementarities and a substantial ability for coordination between state and business, it still suffers from the remaining residual dependency on Western capitalism. Although Brazilian capitalism is much less controlled by Western (or Northern) multinational corporations than Central Eastern Europe, it still shares some common features and weaknesses that we have termed “residual dependency”.

44From the perspective developed in this contribution, Brazil moved into a promising direction towards macroeconomic autonomy during the rule of the Labour Party. However, PT governments were unable to fully mobilize the institutional complementarities inherent in state-permeated capitalism in order to make the Brazilian economy more 'self-sufficient'. They suffered from a limited ability to use the large domestic market in Brazil for the support of domestic Brazilian companies, from a still too open and volatile financial system, and from numerous frictions for domestic economic coordination due to the forceful presence of foreign multinationals in economic sectors that are key for productivity development. A move towards a domestically oriened accumulation regime has been initiated but insufficiently supported by a coherent mode of regulation, so to speak. Both the close personal alliances between state and business as well as the crucial state support for such an industrial strategy have not been strong enough to serve as an effective guide for economic action. As a result, firms and bureaucracies face uncertainty, leading to inadequate or even contradictory policy and management decisions.

45Given the favourable structural preconditions of the Brazilian economy with regard to the SME model and the beneficial economic policies pursued by the Labor Party governments, we need to conclude that the problem of residual dependency has to be addressed in order to develop a stable catch-up process for Brazil (and other countries that are stuck in a via media between autonomy and full dependency). Instead of the current return to the liberal economic model, Brazil should rather further pursue its path towards state-permeated capitalism. This would however require more thorough limitations on capital flows (more stringent capital controls), the imposition of a mechanism to combat the Dutch disease (for example through an export tax) and the mobilization of higher taxes on the rich, with the receipts to be used for investments into education, innovation and further expansion of domestic demand. Obviously, this would meet fierce resistance by those classes that benefit most from a return to a liberal form of capitalism: rentiers and export-oriented fractions of the Brazilian economy.

46The main problem of Brazilian capitalism today, thus, is political. A successful move towards state-permeated capitalism requires broad political support by the middle classes. The current political system in Brazil, particularly with regard to the status of the legislative, does not allow for a broad coalition for growth based on domestic consumption and production. It is therefore a misconception to assume that the solution would lie in ever more smart economic policies. The problem of residual dependency is not primarily a macroeconomic one that could be tackled by twisting knobs in the well-known repertoire of economic governance. Overcoming this political system is an important precondition for overcoming residual dependency in Brazilian capitalism.

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1 Due to space constraints, we will not discuss the full spectrum of VoC institutional spheres, but focus on corporate governance and corporate finance.

2 Straight state subsidies are also possible and have, e.g., financed a substantial share of Embraer development costs, thus leading to a trade dispute with Canada, due to the competition with Bombardier (Flynn, 2007, p. 19; Goldstein, 2002, p. 111).

3 The importance of personal friendships were highlighted in an interview with an economist at a BNDES conference, Rio de Janeiro, March 2013, see also Novais (2012).

4 A focus on economic growth only comes to a more pessimistic assessment, see Bresser-Pereira (2015).

5 A good illustration for the limited effects of demand stimulation for domestic manufacturing in an economy with a heavy presence of foreign multinationals is the 805 million US$ support package for car production in Brazil in August 2015 – it has been considered a “present” for German manufacturers in the Sao Paulo region (Rüb, 2015).

6 We owe this term to an anonymous reviewer.

7 Although Brazil has strongly decreased its foreign currency sovereign debt and also has accumulated substantial foreign currency reserves, it still has substantial – and strongly increasing – government debt in Real, as well as a huge volume of foreign currency bonds by state-related companies such as Petrobras. Rating agencies increasingly take a broader perspective on debt repayment by not only focusing on foreign currency sovereign debt (FT, 2015). After all, the state could be forced to bail out highly indebted business, as witnessed during the 1980s in Brazil (Bresser-Pereira, 2015, p. 5).

8 The Dutch disease consists of a competitive disadvantage for the non-commodity tradable goods sector, combined with an overly profitable commodity sector, operating via currency appreciation. The Brazilian mechanism, an average import tariff of 45% of GDP, and a subsidy to manufacturing exports of also 45%, was dismantled in 1990; only 12% import tariff remained. A modern mechanism would consist of a tax on the export of these commodities (Bresser-Pereira, 2015, p. 7).

9 For a more comprehensive perspective on the financialization of the Brazilian economy see Araújo et al., 2016.

10 Interview at the Brazilian Agency for Industrial Development (ABDI), March 2013; see also Graf and Stehnken, 2014, p. 164.

11 However, the fragmentation of decision-making between the union, the states and the municipalities still becomes a problem in the tax system, because all three levels exercise the right to tax, sometimes (as in case of property) even on the same taxable event (PATRI, 2015, p. 2). According to the World Bank’s Doing Business 2015 Report, Brazil ranks 177 out of 189 countries on tax policy efficiency (Id.).

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Table des illustrations

Titre Fig. 1. GDP, capital formation and private consumption growth in Brazil, 2001-2016
Légende Access the PDF of Fig. 1
Crédits Source: World Bank 2018
Fichier image/jpeg, 1,8M
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Référence électronique

Christian May et Andreas Nölke, « Dangers of Residual Dependency in State-permeated Capitalism: The Case of Brazil during Labor Party Rule »Revue de la régulation [En ligne], 24 | 2nd semestre / Autumn 2018, mis en ligne le 19 décembre 2018, consulté le 03 décembre 2023. URL : ; DOI :

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Christian May

Research Associate, Institute of Political Science, Goethe University, Theodor-W.-Adorno-Platz 6, 60629 Frankfurt/Main;

Andreas Nölke

Professor, Institute of Political Science, Goethe University, Theodor-W.-Adorno-Platz 6, 60629 Frankfurt/Main;

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Le texte seul est utilisable sous licence CC BY-NC-ND 4.0. Les autres éléments (illustrations, fichiers annexes importés) sont « Tous droits réservés », sauf mention contraire.

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