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Neoliberalism

DECEMBER 26, 2018

Bolsonaro’s Brazil: Chicago Boy-style Neoliberalism

by WOUTER HOENDERDAAL

 

On January 1, 2019, Jair Bolsonaro will begin his four-year term as Brazil’s president. Everyone expects his government to follow a neoliberal path. The only question that seems to remain is how far they can actually go.

When it comes to neoliberal reforms, all eyes are on Paulo Guedes, Brazil’s next minister of the economy, who will head a ‘super-ministry’ that combines finance, industry, trade and planning.

Guedes is a committed neoliberal. He not only earned his PhD at the University of Chicago where he was taught by the extreme right-wing economist Milton Friedman, but he is also a well-known fan of the Chicago boy economists who managed Chile’s economy during the Pinochet dictatorship, turning Chile into the first experiment in neoliberalism in Latin America.

During that time Guedes taught economics at the University of Chile, demonstrating he has no moral objections serving under a right-wing authoritarian, be it General Pinochet of Chile or Brazil’s incoming president Jair Bolsonaro. And when it comes to Brazil, Guedes is set on a “Pinochet-style” fix of the economy: “The Chicago boys saved Chile, fixed Chile, fixed the mess”, he stated in a Financial Times interview. Guedes now has set his sights on ‘fixing’ the Brazilian economy in a similar way.

In the last few weeks, it has become clear that Guedes has surrounded himself with other Chicago graduates. Joaquim Levy, who apparently has no problem shifting his political allegiance in order to get into any position of power, will head the powerful Brazilian Development Bank. Another Chicago graduate, Roberto Castello Branco, will serve as Petrobras chief executive. Several other Chicago trained economists such as Ruben Novaes are also given important positions in finance and trade. Bloomberg refers to this gathering of neoliberal fanatics as “Milton Friedman’s Brazil moment”, and international investors and news outlets such as the Financial Times and the Wall Street Journal do not attempt to hide their enthusiasm, because they know what is about to happen.

Guedes wants to implement the usual neoliberal reforms such as privatization, deregulation and the liberalization of trade. One can get an idea about the likely outcomes of such neoliberal policies when looking back at another period of neoliberal reform in Brazil that began in 1990.

The year 1990 ushered in the neoliberal age in Brazil, which made Brazil a relative latecomer compared to other Latin American countries. Among several policies, programs such as privatization, deregulation and the opening up of the economy to foreign trade were core aspects of the neoliberal agenda.

Privatization means selling off State-owned enterprises. Between 1991 and 2005, over 120 State-owned enterprises were auctioned, beginning with mining and steel industries and then followed by petrochemical, fertilizer, aerospace and telecommunication companies plus parts of the power generation and distribution systems, ports and railways. Barriers against the entry of foreign capital were lifted, which allowed foreign, mainly Western, multinationals to get their share of the spoils from privatization and deregulation.

Because the government sold to the highest bidder, the main beneficiaries were giant domestic corporations and foreign multinationals. U.S. and European firms came to own increasingly larger shares of the Brazilian economy, including public utilities, the financial sector and many of Brazil’s most traditional brands.

The way these programs were carried out favored profits over wages, economist Werner Baer writes. They were not designed to benefit working people and may have even worsened the country’s notorious wealth and income inequality.

Besides privatizing large parts of the economy, the 1990’s also witnessed Brazil opening itself up to the global economy. With the stroke of a pen, tariffs and other non-tariff barriers were drastically reduced over a period of only a few years. This was an enormous break with the past, because it marked the end of a four-decade period of protectionism. The result, especially when considered from a long-term historical perspective, was a stunning shift within the economy.

Although Brazil’s State-led industrialization program between the 1950s until the 1980s was not as successful as the ones carried out in Japan or South Korea, it did lead to a relatively well-diversified manufacturing sector. The sudden shift to free trade, something which Japanese and Korean policymakers had always resisted, exposed Brazil’s industry to Western competition. Most of the Brazilian producers were not yet capable of handling this. As a result, many industries collapsed or were taken over by Western capital, including the auto part industry, one of Brazil’s key manufacturing sectors.

While the share of medium and high-technology products in Brazil’s manufacturing dropped because domestic producers were unable to compete with foreign corporations, Brazil increasingly imports its high-technology products from abroad. Even Brazil’s pride, the aircraft producer Embraer, imports most of its equipment from the West.

In response to the industrial downturn, Brazil’s economy shifted to areas in which it has a comparative advantage, which unfortunately means agriculture and raw materials, such as soybeans, iron ore and oil. According to the World Trade Organization database, in the years following the neoliberal reforms the share of manufactured products dropped from nearly 60% of exports to under 40% while the share of basic products (agriculture and raw materials) increased from 42% to around 60%.

The neoliberal reforms thus pushed Brazil back towards its traditional colonial service role within the global economy, one in which Brazil produces the low value-added raw materials in exchange for foreign high value-added manufactured goods.

Whereas Korea, the Island of Taiwan and more recently mainland China (who all have resisted the full implementation of neoliberalism) have guided their economies away from primary commodities and towards industrialization, Brazil’s economy under neoliberalism has moved in the opposite direction.

Guedes obsession with privatization and other neoliberal reforms will only reinforce this unfortunate development that began with the embrace of neoliberalism in the 1990s. Ironically, perhaps the only one who can restrain Brazil’s Chicago boy is Bolsonaro himself.

Bolsonaro has never been a true neoliberal. On the contrary, the president-elect feels nostalgia for the military dictatorship that ruled Brazil from 1964 until 1985. Under military rule, Brazil’s economy was guided by State interventionist policies – the opposite of neoliberalism. But although the economic policies implemented by the Brazilian Generals violated many neoliberal principles, the outcome for the population, as described in detail by the historian Thomas Skidmore, was very much the same in at least one important aspect: economic growth under military dictatorship mainly benefited wealthy elites, and inequality, already very bad in Brazil, actually increased.

So although only Bolsonaro may be in a position to put the brakes on some of the neoliberal reforms his economic team wants to unleash, one should not expect economic policy that benefits working people, but policy that is designed to benefit groups who love neoliberalism and supported Bolsonaro’s campaign for the presidency, such as wealthy landowners and the financial sector. Meanwhile, foreign investors and Western multinationals will also surely reap many of the spoils.

If a new wave of neoliberalism sweeps Brazil, it will almost certainly reduce prospects for meaningful economic development that benefits the majority of people. Events in the past few decades have already demonstrated neoliberalism’s harmful effects on many occasions, including in Brazil itself. Unfortunately, history is on the verge of repeating itself once again.

 

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