An Ungovernable Country

With the onset of the Washington Consensus in the 1980s, Brazil’s economy began grinding to a halt. The extraordinary growth that had set it apart in the decades after the Second World War quickly came undone as public investment receded, demand dropped, and deindustrialization set in. For the economist Luiz Carlos Bresser-Pereira, this resulted in a state of “near stagnation,” from which Brazil is still yet to recover. 

Getting beyond this state of affairs will require the adoption of new macroeconomic and industrial policies, he argues. To that end, Bresser-Pereira has developed a theory of a “new developmentalism.” Key to the theory is the idea that the exchange rate is of maximum importance for the competitiveness of domestic industry and investment. 

At 91, Bresser-Pereira remains one of the most important intellectuals in the country. A professor at the Getúlio Vargas Foundation since 1959, he is an economist, political scientist, business administrator, and lawyer. He was Minister of Finance (1987) in the José Sarney administration and Minister of Federal Administration and State Reform (1995–98) and Minister of Science and Technology (1999) in the administration of Fernando Henrique Cardoso. Since leaving public office, he has devoted himself exclusively to academic life. 

Phenomenal World editors Hugo Fanton and Maria Fernanda Sikorski spoke with Bresser-Pereira in late June about the political and economic situation in Brazil amid Lula’s third term. The interview, conducted before the announcement of a 50 percent tariff on Brazilian exports to the United States, provides an overview of new developmentalism, and analyzes the consequences of Brazil’s semi-colonial position in the global market, as well as the obstacles to structural change in the national economy.

Interview with Luiz Carlos Bresser-Pereira

Hugo Fanton: Yesterday, the National Congress overturned the presidential decree that increased the rates of the Tax on Financial Operations (IOF). Can we begin with your analysis of the relationship between the executive and legislative branches during Lula’s third presidential term?

BRESSER-PEREIRA: In the case of the IOF, Congress revoked the presidential decree that imposed a tax increase. The government needs to raise taxes because fiscal spending is—necessarily—very high. The lack of support from the legislature is a problem in itself, but in addition, the volume of amendments is immense and impacts the federal government’s ability to direct fiscal spending and make public investments of greater quantity and quality. 

Since 2015, when Congress approved an amendment to the Constitution that made parliamentary amendments mandatory, Brazil has become an ungovernable country, or at least almost so. The electoral system for the Federal Legislature uses proportional representation but, absurdly, it uses open lists. This results in a huge proliferation of candidates, and makes running in an election very expensive, which in turn usually leads to the election of elitist parties. Created by the 1988 Constitution, this model only became governable because of the so-called “coalition presidentialism.”1 The term, coined by political scientist Sérgio Abranches, refers to the way in which the president of Brazil forms parliamentary majorities. In a system characterized by extreme multipartyism (in the 2022 elections, 23 parties were elected to the Chamber of Deputies), legislative support for the government depends on agreements (often spurious) and alliances between parties with heterogeneous positions on the political spectrum.

In most developed countries, the party that wins the executive election has a majority in Congress; if it is not absolute, then it is at least substantial, allowing it, with a few alliances, to implement its political agenda. Because of the open list system, this rarely happens in Brazil. Coalition presidentialism has been the solution; the president usually does not have a majority in Congress, but he can buy deputies—literally buy them. The government only releases funds from parliamentary amendments if it has support in Congress. From 2015 onwards, however, members of Congress have become increasingly “independent” from the president, and so governing the country has become extremely difficult.2Dilma Rousseff began her second presidential term in January 2015 already under pressure. December of that year was marked by a definitive break with the government by the majority of the Chamber of Deputies, chaired by Eduardo Cunha, who initiated impeachment proceedings against Dilma. At the same time, also in 2015, Congress approved the first Constitutional Amendment (No. 86/2015) that made parliamentary amendments mandatory—the next decade would be marked by numerous other measures aimed at increasing the legislature’s interference in the public budget.  Sérgio Abranches addresses this problem of governability in a recent interview with Valor Econômico. He says that Brazil has a dysfunctional Congress that only looks after its own interests and has no concern for the public interest. Most deputies and senators work simply to defend their own prerogatives and ensure their re-election. 

MARIA SIKORSKI:  It is Congress that advocates austerity because it imposes fiscal surplus rules on the government, but sees no problem with amendments.

BP: Congress is not in favor of austerity. That’s just talk. Orthodox economists are in favor of it, but Congress, even though it speaks in the name of orthodoxy, absolutely does not want to raise taxes or cut spending.

MS: The theory of new developmentalism advocates a form of fiscal adjustment that allows public accounts to be balanced without harming social spending and investment. Along the same lines, in your book, In Search of Lost Development, you advocate a fiscal rule model that adopts nominal (rather than primary, as is usually the case) targets, i.e., that includes interest payments in the account and also includes a target for public investment. Given this, what is your assessment of the fiscal framework implemented by the government in 2023, which adopts primary result targets and has a surplus bias, determining that the rate of growth of expenditures must always be lower than that of revenues?

BP: The spending cap previously in place was absurd; no civilized country would impose such a cap. Now that a new fiscal framework has been proposed to replace the cap, a lot more is at stake: the government also needs to ensure the feasibility of the increase in social spending promised by Lula’s campaign. Haddad has been incredibly skillful in achieving both of these things in the face of an uncooperative parliament.

That said, a higher primary surplus target should be achieved through both spending cuts and tax increases. The Brazilian government has a constitutional responsibility for health and education spending and a growing commitment to social assistance spending—not only because the population is aging, but also because the volume of income transfers has grown significantly since the pandemic, making programs such as the Bolsa Família no longer as inexpensive as they initially were. Meanwhile, the Brazilian tax burden has remained virtually unchanged: since the 2000s, it has hovered around 32 percent. It needs to increase. Many argue that Brazil’s tax burden is very high, but this is not true. In the case of countries that have never had the burden of social welfare, this might be true. But we do have it, albeit modestly: the Unified Health System is the greatest achievement of Brazilian democracy. 

In addition, the budget also needs to make space for public investment. Historically, attempts to solve the problem of infrastructure investment through concessions, public-private partnerships, and privatization have failed. The privatization of monopolistic sectors, such as infrastructure in general, makes no sense. The fact is that without raising taxes, maintaining social spending and resuming public investment is impossible. This issue of tax increases, though, is incredibly hard to raise. Fernando Haddad is trying, but yesterday, for example, Congress overturned the tax review he attempted to implement. 

hf: In addition to fiscal disputes, Lula’s third term has also been marked by clashes over monetary policy. Lula himself has repeatedly criticized the high (and, during much of his current term, rising) basic interest rate. What is your take on the Central Bank’s performance so far?

BP: Why are interest rates high in Brazil? Nakano and I were the first to seriously discuss this issue, back in 2002, when we published an article showing that our real interest rate was much higher than the international rate plus country risk. We argued that, since financial liberalization made it difficult for the national currency to depreciate, this interest-rate differential existed to attract foreign capital. That was, in practice, the moment when I broke with Fernando Henrique Cardoso’s economists—all of them, except André Lara Resende, perfectly neoliberal. Since then, my explanation for high interest rates has always had two factors: first, the need to attract capital and second, the political power of the Brazilian financial-rentier system. 

Recently, however, I published an analysis in Valor Econômico adding another idea (which deserves more serious research): in addition to political and economic factors, interest rates in Brazil are high because they have become customary. I identify two historical facts that are essential to the creation of this custom. The most important, in my view, happened in 1964, with the military coup.

The military reinstated the savings account system and decided that these investments would be remunerated at a real—not nominal—interest rate of 6 percent per year. Today, to give you an idea, many capitalists in the global North are happy with 3 percent. Real interest rates of 6 percent per year were absolutely incompatible with the nature of savings accounts, but no one questioned the decision. Since the 1930s, there had been a usury law (still in force today) that criminalized the charging of real interest rates above 12 percent per year. Apparently, paying half that for a fixed-income product with virtually no risk seemed great. 

The second historical fact dates back to redemocratization. The text of the 1988 Constitution set a maximum limit of 12 percent a year for real interest rates, reinforcing the usury law criterion. The adoption of a constitutional ceiling for interest rates was the work of my dear friend Fernando Gasparian, who fought hard for this during the constitutional convention. Congress ended up approving the cap, but with an annual rate of 12 percent. This illustrates how complicated the issue was: on the one hand, there was a limit, but on the other, the limit was extremely high! 

But even though the limit was high, the issue did not go unnoticed. The financial market protested, economists said it was not compatible with the country’s macroeconomic reality, and after a while, the article was eventually removed from the Constitution. From that clash onwards, high interest rates became the norm. That is why I say it is a matter of habit: in Brazil, real interest rates of 4 or 6 percent are absolutely commonplace. The result is a huge capture of public assets: resources that could be used for productive investment are diverted to the financial market. 

There are two fundamental captures of Brazilian public assets. Interest is by far the most important. The other is the result of the privileges of the public bureaucracy. When I was carrying out administrative reform as a minister under Fernando Henrique, I tried to limit this second problem. At the time, I came up with the idea of using the salaries of Supreme Court justices, without any perks, as a ceiling for public service remuneration. We managed to apply this for some time, but the perks soon reappeared—this time, of course, duly “legalized” by the Supreme Court. In any case, the privileges of the high bureaucracy are pocket change compared to interest.

MS: Continuing with the topic of monetary policy, what about the current inflation target? Should it be higher? 

BP: It should be higher, without a doubt. Inflation is not a good thing, but 5 percent inflation is normal in a country like Brazil. The economy is capable of adjusting to this level, which would even allow for reasonable adjustments in relative prices. This would make the Central Bank’s job easier. 

You asked me what I thought about the Central Bank’s actions. Although this latest interest rate hike was somewhat abrupt, I think Galípolo did more or less what he had to do, because inflation was rising. As we discussed, the Central Bank’s work is constrained by factors that determine a kind of floor for Brazilian interest rates. This floor also has another consequence. There are countries that fight inflation by raising real interest rates from 0 or 1 percent to 3 percent, for example. Although this is a large increase, it is only two or three percentage points. In Brazil, to combat inflation, the real interest rate is raised by four or five percentage points. 

MS: Why is the transmission of monetary policy weak?

BP: You can do all the econometric studies you want, but this is a consequence of the factors that establish the basis for real interest rates. Instead of talking about transmission mechanisms, I usually put the question in simpler terms: it’s one thing to go from 1 percent, it’s another thing to go from 5 percent.

MS: In 2023 and 2024, Brazil’s average annual growth was 3.3 percent, with an average per capita growth of 2.9 percent. This is much higher than the figure recorded in the period from 2015 to 2022, when GDP was almost stagnant, with an average annual growth of 0.2 percent. How do you interpret this recovery?

BP: Since 1999, after leaving Fernando Henrique’s government, I have been talking about the near stagnation of the Brazilian economy. But the 2.9 percent per capita growth you pointed out cannot be called near stagnation. This figure surprised economists in general. Projections have failed multiple times in the last three years because it is a really difficult issue to explain. 

Unlike in previous periods, the last ten years have been relatively free from Dutch Disease, largely because the price of commodities exports is not high, which means that the exchange rate hasn’t risen significantly and so domestic industry has remained competitive. Prior to that, Brazil did experience two recent cycles of Dutch Disease: the first, which began in the last decade of the last century, ended in the middle of the first decade of this century, and the second ended in 2015. Since then, the cycle has stalled and the exchange rate has remained at a reasonable level for industry; it has neither increased nor contracted. Unless I am mistaken, the industry’s share of GDP is more or less stable at around 11 percent.

That said, regarding growth in 2023 and 2024, the only explanation I can come up with right now is that increased fiscal spending has led to increased demand. Under the Bolsonaro administration, and thanks to the pandemic, public spending increased substantially. Under the current Lula administration, there has been another increase to meet campaign promises. These are demand-side factors that provide a greater stimulus to the economy. 

The problem is that, if this analysis is correct, it could foster a populist outlook for the economy. Although the short-term results are positive, eventual mismanagement of public accounts could end up not only reversing these effects but also undermining the very possibility of adopting a long-term development project.3N.E.: Historical cycles of economic populism in Brazil, on the left and right, have been analyzed by Bresser-Pereira at various points in his intellectual career. The book Populismo econômico: ortodoxia, desenvolvimentismo e populismo na América Latina (Economic Populism: Orthodoxy, Developmentalism, and Populism in Latin America), edited by the interviewee and published in 1991, is a seminal work that can be consulted (<)a href='https://www.bresserpereira.org.br/books/populismo-economico/000-populismo-economico.pdf'(>)here(<)/a(>). The budget needs to account for expenses such as those that have marked the recent period, but not only that. We spoke earlier about the importance of a small nominal deficit—not zero, but small—rather than a large primary surplus for development. The primary result, although it has some logic in terms of imposing limits on public debt growth, also has the ideological element of hiding interest. I advocate the adoption of the nominal result as a criterion because it is obviously essential that we pay less interest. But it is also important that there is fiscal space for public investment. 

hf: Could you talk more about the relationship between exchange-rate policy and development in Brazil?

BP: Between 1950 and 1980, Brazil grew extraordinarily. After Japan, it was the fastest-growing country in the world. The exchange rate was controlled during this period. Tariffs were one of the main mechanisms. Since the 1958 tariff law, we have adopted very high tariff barriers, which have acted as an instrument of currency depreciation. Before that, we used import-control mechanisms, currency auctions, and exchange-rate control systems.

Of all the variables that influence economic development, in my view, the exchange rate is one of the most important. The most important is the rate of profit: without profit, there is no capitalism. There must be a reasonable rate of profit for there to be investment. The interest rate is important, of course, but, as we discussed, the Central Bank operates within a certain framework. In short, the government needs an exchange-rate policy. 

There are two main causes for currency appreciation above the healthy limit for domestic industry. One is Dutch Disease, which is cyclical in nature. The other, also central to the theory of new developmentalism, is the current account deficit. When there is a current account deficit, there is necessarily a corresponding appreciation of the exchange rate, because it means that, in liquid terms, there is more capital coming in than going out. 

The current account deficit must be reduced in some way. It is possible to reduce it without an inflow of capital by reducing reserves. But assuming that the government does not intend to touch the reserves, the country needs to adopt a policy aimed at eliminating the current account deficit. If the current account is consumption, a current account deficit is extra consumption. In other words, the country is consuming more than it produces. Eliminating the deficit therefore means tightening the belt. This means reducing wages. This is something that can only be done at the beginning of a government’s term, never at the end. 

It turns out that in Brazil (and in Latin America in general), there is a religious belief that a current account deficit is good because it means being able to increase foreign savings. At the beginning of Fernando Henrique’s administration, the question of what development strategy was to be adopted was a big issue. The answer was very simple: increase foreign savings. One of the fundamental pillars of the new development, however, is to show that there is no sustainable growth with foreign savings, because this appreciates the exchange rate and undermines the competitiveness of domestic industry. 

I recently published a new book, called National Project Against Near Stagnation (2025), arguing two things. First, the Ministry of Finance must recognize that Brazil is susceptible to the Dutch Disease—even if it is not manifesting itself now—and therefore, if there is a new cycle of commodity price increases, it must do its best to prevent damage to industry. Second, the Ministry of Finance should have at least a small department dedicated to exchange rate policy, i.e., that the ministry should be concerned with having a reasonable degree of control over the exchange rate. 

So far in Lula’s third term, however, nothing has been done in this regard, mainly because the government already faces so many problems with the “market” that an exchange-rate policy of any kind could become another source of conflict. There is a mistake, however, in this political calculation: it is impossible to win over the financial market. The government has just learned a lesson in this regard. 

ms: In this context, how do you analyze the current government’s resumption of industrial policy, represented by programs such as Nova Indústria Brasil (New Industry Brazil) and the new Growth Acceleration Program (PAC)? Can this be interpreted as a first step toward the adoption of a national development project in a broader sense?

BP: Industrial policy can only be made affordable with the application of tariffs. In this respect, customs tariffs are the most important industrial policy in the history of capitalism. Every developed country, starting with England, developed by adopting high customs tariffs. But in Brazil and Latin America, the brainwashing carried out by economic liberalism was so brutal that it made economists forget this. They continue to argue in favor of industrial policy, but they do not include tariffs in their framework. It’s ridiculous. Without tariffs, industrial policy is nothing more than subsidies. Tariffs are not expensive: they are a tax that you create. Not to be used like Trump, of course, but it is a tool that can be used by Brazil. 

I support the government, but I can’t say that it is trying to spearhead a development project. Brazil continues to be dominated by economic liberalism. The United States itself abandoned this type of ideology some time ago, Europe is more or less on the same path, but we remain trapped by it. 

Brazil has not had a development policy for a long time. The military had one. Getúlio Vargas had one. But since the 1980s—with some exceptions during Lula’s first terms, because there was a major effort to expand social policy, although this did not exactly constitute a development strategy—we have not had a development policy. 

hf: Do current historical conditions make it impossible to pursue a growth agenda, as Brazil did so successfully until the 1980s?

BP: I don’t think they make it impossible, but I am convinced that Brazil will only emerge from this situation—which in my view is still one of near stagnation—when it abandons liberalism. Although there has been some growth in the last three years, the fact is that there is no such thing as a genuine development project simply because there is no liberal development project: the liberal project is to do nothing. Our trade and financial liberalization has been a disaster. In addition, there is a question of political economy: governments go through elections, they face Congress. For a development project to be viable, society as a whole must be united around it. 

ms: When Lula was elected, the president of the United States was Joe Biden, who wanted to make the country “a modern supply-driven economy,” in the words of Janet Yellen.

BP: Clearly developmentalist.

ms: Exactly. But two years later, halfway through Lula’s presidential term, Trump took office. Do you think there was a break in the dynamic of Brazil’s external integration between the Biden and Trump administrations? 

BP: In this recent period, there has been a political shift in the United States. If, in the 1980s, there was a neoliberal shift, between 2017 and 2022 there was a fundamentally developmentalist shift, mainly due to China’s success. In my view, this is the most important factor to consider. I don’t see a major break between Biden and Trump. It could be said that the shift continues today, but in Trump’s case, I prefer to characterize his politics as interventionist. It is a chaotic administration—so much so that it has earned the nickname TACO (Trump Always Chickens Out)4 In Portuguese, “Trump always cowers.”—constantly backtracking on its decisions.

hf: Does this developmental shift in the United States change the conditions for policy-making in Brazil?

BP:  It is to be expected that, as usual, after eight or ten years, Brazil will realize that economic liberalism does not work. Lula and Haddad know this very well, but it is important that Congress—which has become oriented toward rentierism—understands this issue, as well as business leaders. Then, perhaps, the conditions would be in place for a development project to be formed, though this will take time. Brazil’s reaction is always very slow. This is because we are a colony. 

Until 1822, Brazil was a colonial country. Then, until 1930, it was semi-colonial. It became an independent country in the 1930s, though only until 1990, when Brazil, which had previously been subject to England and France, became subject to the United States. It was a return to semi-colonial status. 

And since the 1990s, neoliberalism has been the fundamental instrument of imperialism to prevent Brazil’s development. There was a last attempt at development during the Sarney administration (1985–90). I, who was Minister of Finance for a little over seven months, ended up being defeated, to some extent, by the developmentists themselves. Sarney no longer wanted to make fiscal adjustments, and I saw that I had no chance of remaining in the government, so I left. And then, in a year and a half and in grand style, Maílson [da Nóbrega] led Brazil into a period of hyperinflation. In the last month of the Sarney administration, inflation was at 82 percent.

Returning to the subject, it is Brazil’s status as semi-colonial country that explains its slow and submissive economic culture, happy to adopt foreign values—in this case, neoliberal values. For a submissive country, getting rid of these values is a slow and difficult process, whereas the country that subjugates, being a metropolis, can do so more quickly.

hf: How might your concept of the new developmentalism illuminate a path forward for Brazil?

BP: I formulated a detailed answer to this question in the appendix to my book O novo desenvolvimentismo (The New Developmentalism), published last year. There, I start with the 1970s because I believe that was the last decade in which the Brazilian economy adequately grew. It could be said that during Lula’s first terms in office, the country grew reasonably well, but this was in large part thanks to the commodity boom. In my view, two fundamental issues separate the current economic conditions from those that were driving growth into the 1970s.

The first is that since the 1970s, public investment has fallen sharply—because public savings have fallen sharply. In the 1970s, public savings stood at around 4 percent. By the early 1980s, this figure had plummeted to -2 percent. In other words, in that period alone, there was a six percentage point drop, which is crazy. The impact of this on Brazilian growth was enormous. Public savings are important because the state needs to be able to save in order to invest, especially in monopolistic sectors like infrastructure. I am not advocating nationalization in general, but I do believe that the state should invest in monopolistic sectors. 

The second is the dynamics of the exchange rate. There was a lot of privatization in the 1980s, which contributed to a reduction in public investment and, in theory, should have stimulated the private sector to increase its investment rate. But public investment fell and the private sector remained the same, with no increase at all. This is due to the exchange rate. The exchange rate appreciated so much that, at various times, it made private investment unviable. If, for the public sector, the fiscal issue is the key variable, for the private sector, it is the exchange rate. That is why it is necessary to have an exchange-rate policy that takes into account both the current account deficit and possible cycles of Dutch Disease. 

In macroeconomic terms, the new developmentalism advocates for a decent exchange-rate policy that keeps the exchange rate reasonably competitive for industry and substantially higher public investment. 

Other than that, from a political economy perspective, a national development project—in Brazil, Latin America, or any underdeveloped country—must necessarily be anti-imperialist, because it must combat economic liberalism. Furtado and Prebisch were anti-imperialist. They were at the Economic Commission for Latin America and the Caribbean (ECLAC), a United Nations (UN) agency, so they used terms like “center” and “periphery,” but the fight was against economic liberalism—against the empire, therefore. 

Look, I myself believe that the market is better than the state at coordinating the entire economic system of competitive companies. But we must understand that this is not enough, that the state needs to intervene moderately in the economy to develop and direct development. And that implies adopting an anti-imperialist policy. The import-substitution policy in Brazil was anti-imperialist. Since we ceased to be independent, however, the main instrument of imperialism to block our development has been economic liberalism.

hf: Is it necessary to address the issue of dependency?

BP: After I left Fernando Henrique’s government, I decided to reread Dependency and Development in Latin America. It was only then that I really discovered what associated dependency was. Soon after, I published an article called “From ISEB and ECLAC to Dependency Theory,” the inaugural work of my critique of dependence theory. 

The historical fact that confused Fernando Henrique, as it had previously confused Hélio Jaguaribe, was this: at the time of import substitution, Brazilian anti-imperialists—or nationalists—said that the United States—the “center”—was against Brazil’s industrialization. However, starting in the 1950s, large American companies began to invest in Brazil, followed by European and Japanese companies. Given this, how could one explain that the center was against the industrialization of the periphery? Jaguaribe attempted an answer, and ten years later, Fernando Henrique concluded the reasoning as follows: if the role of imperialism is to prevent the industrialization of underdeveloped countries, the fact that companies from the “center” were investing in Brazil could only mean that there was no imperialism, because these companies were helping the country to industrialize.

It is linear reasoning; not dialectical, not intelligent. The big mistake in this explanation is that it ignores the fact that American companies and the American state are not the same thing. Companies need profits and seek profits wherever they can. When Brazil and other countries in Latin America adopted a policy of industrialization through import substitution, they raised customs tariffs sharply. This caused foreign companies to lose market share. The only way for these foreign companies to recover part of this market was to invest in the industry of these countries. However, private American business interests and the interests of the US government did not, of course, perfectly align. And the government was not (and is not) interested in the industrialization and development of Brazil. For me, this is the blind spot in Fernando Henrique’s dependency theory. Apart from that, in practice, it also became clear that growth based on foreign savings does not work.