A TALE OF TWO CYCLES AND THE UNDERLYING LONG TERM CHANGESSeminário em honra a Albert Fishlow

Pedro MalanMonica B. de Bolle

Preliminary DraftA TALE OF TWO CYCLES AND THE UNDERLYING

LONG TERM CHANGES 

Pedro S. MalanMonica B. de Bolle

              It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair,we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way— in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

Charles Dickens, A Tale of Two Cities, 1859

    

Versão preliminar do trabalho apresentado em seminário em homenagem ao professor Albert Fishlow, em 3 de julho de 2015, no Instituto de Estudos de Política Econômica (Casa das Garças), Rio de Janeiro. Os autores agradecem a generosa ajuda de Carolina Melchert Marques, Valéria Duboc Andreiolo e Carla Emilia Brunet Lopes. Os erros que permanecem são de exclusiva responsabilidade de Pedro Malan.

Outline

1. Why two cycles, and 35 years apart?

2. The two cycles compared• The International Conditions and the Balance of Payments Accounts• Origins: Some Key Domestic Dimensions of both Cycles• Consequences: Policy Responses to The Different Ways the Cycles Ended

3. The longer term underlying domestic transformation• Urbanization and Demographics: Deep Tectonic Shifts• Responses to Growing Demands and Expectations: How “State Intensive”?

 4. The long term underlying “External” Trasformation

• Primary Products, Manufactured Goods, Terms of Trade: The Case for Industrialization

• Quest for Modern Industry and Modern Technology: How “State Intensive” is the Promotion of Industrialization and International Competitiveness?

 5. Concluding observations: Back to our recurrent traps?

Footnotes

Tables and Graphs

IntroductionThis article is a tribute to Professor Albert Fishlow. The relationship between cycles and long term structural changes have always been dear to his mind and heart. The title of the paper is, of course, taken from Dicken’s justly famous book – and from Fishlow, who wrote the excellent “A Tale of Two Presidents: The Political Economy of Crisis Administration” (1). The pont of departure of the article goes back to the PhD dissertation of one authors, who had Fishlow as his thesis supervisor in Berkeley, entitled “Foreign Exchange – Constrained Growth in Semi-Industrialized Economies” (1997) (2). In the part about Brazil, the thesis sustains that from the 1940’s to the mid - 1970’s, Brazilian economic growth had, as the (ex-ante) fundamental macroeconomics binding constraint, the balance of payments restrictions – except for an extraordinary growth cycle in the period 1968 to 1973. The present paper shows that the country had to wait for 35 years to experience another, similar, non-foreign-exchange constrained cycle of relatively high growth: 2003 – 2008, followed by a major boom year in 2010. Section I tries to explain why focus on two cycles, and 35 years apart. Section II compares the two cycles in three dimensions: (a) the international “origins” and their reflection on the Brazilian balance of payments accounts; (b) the additional domestic “origins” of the cycles, in terms of some key, common elements; and the (c) some “consequences” of the policy responses to the different ways in which each cycle came to its end. Since history never repeats itself, and the two cycles differ, not only for being 35 years apart, Section III focuses on longer term structural domestic changes in Brazil which underlined both cycles, trying to suggest some additional reasons for the recurrent Brazilian “macroeconomic trap” (3). Section IV attempts to take the same longer term view for the external front, with comments on the old case for industrialization, the hypothesis about long run terms of trade deterioration, and the ongoing debates about “de-industrialization” and the so called middle-income and lower-growth traps. Section V presents concluding observations.

1. Why two cycles, and 35 years apart?

Brazilian Foreign Loans

BRAZILIAN FOREIGN LOANSEMPIRE

Year Nominal Value Percent Price of the Issue Purpose Bankers£

1824 1,333,300 5 75To cover deficits, floating debts, interest and amortization on previous loans................

Bazeth, Tarquhard, Grawford & Co., Fletcher, Alexanders & Co., Thomaz Wilson & Co.

1825 2,352,900 5 85 .... Do .......................................................................... N. M. Rothschild1829 769,200 5 52 .... Do .......................................................................... N. M. Rothschild and Thomaz Wilson & Co.1839 411,200 5 76 .... Do .......................................................................... Samuel & Philipps.1843 732,600 5 85 .... Do .......................................................................... Goldsmid, Thompson & King1852 1,040,600 4-5 95 .... Do .......................................................................... N. M. Rothschild & Sons.1858 1,526,500 4-5 95-5 For the extension of the D. Pedro II Railroad................ Do.1859 508,000 5 100 To repay the balance of the loan of 1824 Do.1860 1,373,000 4-5 90 For the extension of the Pernambuco Railroad............. Do.1863 3,855,300 4-5 88

To cover deficits, floating debts, interest and amortization on previous loans................ Do.1865 6,363,600 5 74

1871 3,459,600 5 891875 5,301,200 5 96-5

1883 4,599,600 4-5 89 For the improvement of railroads, water supply for the capital and other services............................................. Do.

1886 6,431,000 5 95 To cover deficits, floating debtsv.................................. Do.1888 6,297,300 4-5 97 For the construction and extension of Federal railroads Do.1889 19,837,000 4 90 Conversion .................................................................. Do.

Brazilian Foreign Loans

BRAZILIAN FOREIGN LOANSREPUBLIC

Year Nominal Value Percent Price of the Issue Purpose Bankers

£1895 7,442,000 5 85 For the East Minas Railroad Co. with the guarantee of the National Treasury Do.1898 8,613,717 5 100 Funding Loan Do.1901

16,619,320 (Rescision) 4 100 Redemption of the repurchased railroadsDo.

1902 Do.1905 Do.1903

8,500,000 5 90 For the improvement of the port of Rio de Janeiro Do.1905 Do. 1906 1,100,000 5 96

For the Brazilian Lloyd Do.1910 1,000,000 4 90 Do.

1908 4,000,000 5 96 For the improvement of drinking-water for the Federal capital and the construction of federal railroads Do.

1910 10,000,000 4 87.5 Conversion and redemption of bonds of the East Minas RR. and of State of São Paulo Loan Do.

1911 4,500,000 4 92 For the improvement of the port of Rio de Janeiro Do.1911 2,400,000 4 83 For the roads of Ceará Do.

1913 11,000,000 5 97 For the ports of Pernambuco, Paranaguá and Corumbá and the Brazilian Western Minas RR Do.

Century of public finance

1914 14,502,396 5 100 Funding Loan................................................................. Do.

Century of public

finance

1927 8,500,000Francs 6.5 91.5 Consolidation of the floating debt................................. Do.

1908-1909 100,000,000 5 100 For the Itapura-Corumbá Railroad.................................. Banque de Paris and Pays Bas, Société Générale, Compti or Nationale d'Escompte.

1909 40,000,000 5 95.25 For the improvement of the port of Recife.................... Banque Française pour le Commerce et l'industrie, Crédit Mobilier Français.

1910 100,000,000 4 89.5 For the Goyaz Railroad.................................................. Crédit Mobilier Français.1911 60,000,000 4 83 For the roads of Bahia................................................... Caisse Commerciale et Industrielle.

1916 25,000,000 5 86.88 Repurchase of the branch line Curralinho to Diamantina Banque Française pour le Commerce et l'Industrie, Crédit Mobilier Français.

1922 14,850,500U.S.$ 5 100

1921 50,000,000 8 98 Obligations of the Treasury......................................... Blair & Co.

1922 25,000,000 7 96.5 Obligations of the Treasury and electrification of railroads..................................................................... Dilion, Read & Co.

1926 60,000,000 6.5 90.5 Consolidation of the floating debt............................... Do.

1927 41,500,000 6.5 92.5 ...Do............................................................................ Do.

Brazil: A Study of economic typesBrazil: A Study of economic typesBrazillian dollar bonds

Borrower Amount Issued Percent Year Offered by Price

Federal Government 50,000,000 8 1921 Blair & Co., Inc 9825,000,000 7 1922 Dillon, Read & Co. 96 1/260,000,000 6 1/2 1926 Dillon, Read & Co. 90 1/241,500,000 6 1/2 1927 Dillon, Read & Co. 92 1/2

Rio de Janeiro City 12,000,000 8 1921 Dillon, Read & Co. 97 3/430,000,000 6 1/2 1928 White, Weld & Co. 97

1,770,000 6 1928 White, Weld & Co. 99 Ceará State 2,000,000 8 1921 J. S. Bache & Co. 99 1/2Maranhão State 1,750,000 7 1928 Baker, Kellogg & Co. 94 Minas Geraes State 8,500,00 6 1/2 1928 National City Co. 97 1/2

8,000,000 6 1/2 1929 National City Co. 87 Paraná State 4,860,000 7 1928 Chase Securities Corp 98 Pernambuco State 6,000,000 7 1927 White, Weld & Co. 97 3/4Rio de Janeiro State 6,000,000 6 1/2 1929 E. H. Rollins & Sons 91 1/2Rio Grande do Sul State 10,000,000 8 1921 Lee, Higginson & Co. 99 1/2

10,000,000 7 1927 Lee, Higginson & Co. 98 23,000,000 6 1928 White, Weld & Co. 94 1/4

Cons. Municipal 4,000,000 7 1930 J. G. White & Co., Inc. 97 Porto Alegre City 3,500,000 8 1922 Lee, Higginson & Co. 99

4,000,000 7 1/2 1926 Lee, Higginson & Co. 96 2,250,000 7 1928 Lee, Higginson & Co. 97 1/2

Santa Catharina State 5,000,000 8 1922 Halsey, Stuart & Co. 101 São Paulo State 10,000,000 8 1921 Speyer & Co. 97 1/2

15,000,000 8 1925 Speyer & Co. 99 1/27,500,000 7 1926 Speyer & Co. 96 1/2

15,000,000 6 1928 Speyer & Co. 94 1/235,000,000 7 1930 Speyer & Co. 96

São Paulo City 8,500,000 6 1919 Imbrie & Co. 95 1/24,000,000 8 1922 Blair & Co., Inc 100

Total 414,130,000

Taxas médias decenais de crescimento do PIB, 1940-2005 (%)

PIB per Capita, 1900-2005 (R$, a preços de 2005)

Picos* Vales*

Recessões Expansões Ciclos

Número de meses de pico a vale

Número de meses do vale anterior a este pico

Pico a Pico Vale a Vale

out/80 (IV) fev/83 (I) 28 - - -

fev/87 (II) out/88 (IV) 20 48 88 68

jun/89 (II) dez/91 (I/92) 30 8 28 38

dez/94 (I/95) set/95 (III) 9 36 66 45

out/97 (IV) fev/99 (I) 16 25 34 41

dez/00 (I/01) set/01 (IV) 9 10 38 31

out/02 (IV) jun/03 (II) 8 13 22 33

jul/08 (III) jan/09 (I) 6 61 69 67

Duração média 15,8 28,7 49,3 46,1

*O trimeste estabelecido na datação trimestral é apresentado entre parenteses.

Cronologia Mensal dos Ciclos de Negócios Brasileiros

2. The two cycles compared

Preços de Exportação (Px); Preços de Importação (Pm)Quantum de Exportações e Capacidade para importar Qx Px/Pm

Período PX PM QX Qm Qx Px/Pm 1968-1973          

Index (1967=100) 172 143 209 276 250Average Annual Rate of Growth (%) 9.4 6.2 13.0 18.5 16.7

2003-2008          

Index (2002=100) 204 183 160 200 179 Average Annual Rate of Growth (%) 12.8 10.7 8.4 12.6 10.5

MEMO: 2010          Index (2002=100) 213 196 157 228 1982010/2009 Rate of Growth (%) 20.5 3.9 9.5 16.6 27.9

Índices e Taxas médias anuais de crescimento (%)

Brazilian exports and imports: price and quantum indices - terms of trade and import capacity, 1967 - 75 (1967 = 100)

1967 1968 1969 1970 1971 1972 1973 1974 19750

50

100

150

200

250

300

350

400

Quantum Export

Prices Export

Quantum Imports

Prices Imports

Terms of trade Imports

Import_x000d_capacity

Valu

e U

S$ M

illio

n

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

50

100

150

200

250

300

Capacidade para importar

Px

Pm

Qx

Qm

Px/Pm

QeIc

PePi

Qi

Tti

Px/Pm

Qm

Px

IcPm

Qx

Balance of Payments: Main Accounts (US$ million)

Balance of Payments (US$ million) Average 1968-73 Average 2003-2008I. Current account -1.198 2.807 Trade balance (FOB) 0 35.744 Good exports 3.338 130.711 Good imports -3.338 -94.968 Services and income -1.218 -36.640 Services -587 -9.578 Income -630 -27.062 Interests costs -386 -6.125 Unilateral current transfers 20 3.703II. Financial and capital account 2.162 20.598 Capital account 0 702 Financial account 2.162 19.896 Direct investment 459 12.254 Portfolio investment 87 10.674 Other investments 1.616 -2.724 Amortizations -898 -13.209III. Overall balance 1.103 22.680

Capacidade de Importação

Brazilian Economy in Seventies: Balance of payments

The Brazilian Economy in Seventies

Table A.3. Balance of payments: 1968-75 - summary accounts (US$ million)

  1968 1969 1970 1971 1972 1973 1974 1975I. Trade balance 26 318 232 -341 -244 7 -4,684 -3,514

Exports (FOB) 1,881 2,311 2,739 2,904 3,991 6,199 7,951 8,655Imports (FOB) -1,855 -1,993 -2,507 -3,245 -4,235 -6,192 -12,635 -12,169

II. Balance of Services -556 -630 -815 -980 -1,25 -1,722 -2,463 -3,450Non-factor services -256 -299 -397 -490 -649 -965 -1,490 -1,637Factor services -300 -331 -418 -490 -601 -757 -973 -1,813

- (interest costs) (-156) (-204) (-284) (-344) (-489) (-839) (-1,355)(-

1,1776)III. Current account deficit -530 -312 -583 -1,321 -1,494 -1,715 -7,147 -6,964IV. Capital account 541 871 1,015 1,846 3,492 3,512 6,235 5,912

Direct investment 61 177 132 168 318 940 887 877Loans and financing 583 1,023 1,433 2,037 4,299 4,495 6,886 5,177Amortizations -484 -493 -672 -850 -1,202 -1,672 -1,94 -2,088Short-term capital 381 164 122 491 77 -251 402 1,946

V. Overall balancea (III + IV) 32 549 545 530 2,439 2,179 -938 -1,052

Source: Banco Central do Brasil, for 1975, preliminary estimates.aIt is not exactly the algebraic sum of III and IV due to the 'Error and Omissions' item.

Brazilian Economy in Seventies: Import by major groups

The Brazilian Economy in Seventies

Tabela A. 7. Imports by major groups, 1965-75 (In US$ millions and %)

  Capital goods Raw material Consumer goods Oil products

Value US$ milion

% of total

importsValue US$

milion

% of total

importsValue US$

milion

% of total

importsValue US$

milion

% of total

imports1965 237 25.2 429 45.6 107 11.4 168 17.81966 366 28.1 594 45.6 157 12.0 186 14.31967 459 31.9 594 41.2 216 15.0 172 11.91968 625 33.7 771 41.6 253 13.8 206 10.91969 738 37.0 766 38.4 259 13.0 230 11.61970 946 37.7 927 37.0 360 14.4 274 10.91971 1,339 41.3 1,314 40.5 256 7.9 336 10.31972 1,734 41.0 1,614 38.1 463 10.9 420 10.01973 2,143 34.6 2,606 42.1 716 11.6 727 11.71974 3,108 24.8 5,661 45.2 949 7.6 2.812 22.41975 3,932 32.3 4,501 37.0 828 6.8 2,908 23.9

Source: CIEF, Ministério da Fazenda.          

Brazil Foreign Debt, Capital Flows and International Reserves, 1967-75

Tabela A.4. Brazil: foreign debt and international reserves, 1967-75 (US$ million, year-end balances)

 Total foreign

debtInternational institutionsa

Supplier's credits

Currency loansb Otherc

International reserves

1967 3,344 1,187 307 671 1,179 1991968 3,820 1,383 383 1,083 971 2571969 4,403 1,473 447 1,605 878 6561970 5,296 1,703 611 2,285 697 1,1861971 6,622 1,979 845 3,193 605 1,7231972 9,521 2,266 1,136 5,588 531 4,1831973 12,572 2,659 1,442 7,849 922 6,4171974 17,166 3,782 1,570 11,211 603 5,2521975e 22,171     14,711   4,157

Source: Banco Central do Brasil.ePreliminary estimates. Public Sector Foreign Debt as of 31.12.1975: US$ 11.461 million.aIncludes AID, EXIMBANK, KFW, Cadadian Wheat Board, World Bank, IFC and Inter American Development Bank.bResolution 63, Law 4.131 and Instruction 289.cIncludes compensatory loans plus foreign debt generated by the acquisition of foreign assets in the fields of electricity and telecommunications plus foreign public debt.

Contas do Balanço de Pagamentos (1999-2014)

3. The longer term underlying domestic transformation

Anexos

Some Basic Indicators of Structural Change | Brazil 1950, 1980 and 2010

1950 1980 2010

GDP (U$ billion, Current) 11 252 21431

GDP (U$ billion of 1980) 30 252 5371

Composition (Factor Cost)Primary Sector (%) 24,3 10,0 5.31

Secundary Sector (%) 24,1 38,1 28.11

Terciary Sector (%) 51,6 51,9 66.61

Population (million) 51,9 119,01 190.761

Rural (%) 64 32 161

Urban (%) 36 68 841

(Cities over 20,000) 21 51 1,6502

GDP per capita (U$ Current) 214 2.080 11,2343

GDP per capita (U$ of 1980) 570 2.080 2,8153

Labor force (million) 17,1 43,8 96.6*Primary Sector (%) 60 30 17.4*Secundary Sector (%) 14 24 20.5*Terciary Sector (%) 26 46 62.1*Men (million) 14,6 30,7 54,5Women (million) 2,5 11,5 47,3

Number of Contributors to Social Security (1,000) 2.857 23.782 60,200**

EnergyInstalled Capacity (Mw) 1.883 31.147 112,400***Hydro Eletric Production (Gwh) 5.850 133.767 422,785****Trucks (stock at year-end) 10.966 932.589 2,143,46711

Automobilies (stock at year-end) 200.744 8.155.707 37,188,34111

Average Annual Rate of Growth %1950-1980 1980-2010

- -7,4 2,56

4,1 3,48,4 1,77,4 2,92,8 1,60,5 -0,75,0 2,33,0 12,3- -

4,5 1,03,8 2,80,8 0,85,1 2,25,1 3,82,5 1,95,2 4,8

7,3 3,1

9,8 4,311,0 3,916,0 2,813,1 5,2

Some Basic Indicators of Social Change | Brazil 1950, 1980 and 20101950 1980 2010

Birth Rate (per 1,000 pop.) 44 32 141

Death Rate (per 1,000 pop.) 15 9 61

Life Expectancy at Birth Rate (years) 48,9 62,6 73.92

Southern States 46,8 68,1 75.92

Northeastern States 4,08 53,9 71.22

Infant Mortality Rates 130 86 16,02

Southern States 100 63 11.62

Northeastern States 164 116 19.12

Youth 42 38 361

(Under age 15 as % of total)School Enrollment (1,000)

Primary n.a. 22.522 29,9003

Secondary n.a. 2.812 8233

University n.a. 1.383 5,7733

Literace Rate 18,4 74,5 88.31

(defined as 10 yrs. Or over)Population per Physucuan 2,210 (1960) 1.200 522*Daily Calorie Supply per Capita n.a. 2.529 1,610**

1960 1970 1980 2010***% % % %

Income DistributionTop 5% 27,7 34,9 37,0 30,8Top 10% 39,7 47,8 49,6 43,1Botton 40% 11,6 10,0 9,5 11,3Botton 50% 17,7 14,9 13,4 16,7Gini Coefficient 0,50 0,568 0,592 0.53611

Fontes:1-Base Sidra, IBGE2-Southern Statesse referem ao Paraná, Santa Catarina e Rio Grande do Sul, DATASUS.3-Indicadores Social 2012, IBGE.* "Demografia Médica no Brasil", CMF.** Pesquisa de Orçamentos Familiares 2008-2009, IBGE.***PNAD 2011; parcela dos Top 5% estimada pelo autor.11-Censo 2010, IBGE.

4. The long term underlying “External” Transformation

Preços de commodities de volta à tendência de longo prazo?

4780

5691

6606

7518

8432

934410

25811

17012

08512

99613

91114

82315

73716

64917

56318

47519

39020

30121

21622

12823

04223

95424

86825

78026

69527

60628

52129

43330

34731

25932

17333

08534

00034

91135

82636

73837

65238

56439

47840

39041

305

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

média histórica = 1, preços internacionais deflacionados

1a Guerra Mundial

2a Guerra Mundial e reconstrução da Europa

Crise do Petróleo

Boom da China

Fonte: relatório "Macro Visão: Declínio secular das commodites, de volta à tendência?"

Softs x Softs (trend)

949810

41011

32412

23613

15014

06214

97715

88816

80317

71518

62919

54120

45521

36722

28223

19324

10825

02025

93426

84627

76028

67229

58730

49831

41332

32533

23934

15135

06535

97736

89237

80338

71839

63040

54441

456

0

20

40

60

80

100

120

140

160

Softs Softs (trend)

Hard x Hard (trend)

9498

1041

011

32412

23613

15014

06214

97715

88816

80317

71518

62919

54120

45521

36722

28223

19324

10825

02025

93426

84627

76028

67229

58730

49831

41332

32533

23934

15135

06535

97736

89237

80338

71839

63040

54441

456

0

50

100

150

200

250

300

350

400

Hard Hard (trend)

Hard, Hard Trend x Softs, Softs Trend

0

50

100

150

200

250

300

350

400

0

20

40

60

80

100

120

140

160

Hard Trend

Softs (rhs) Trend

Metals, Metals (trend) x Energy, Energy (trend)

0

50

100

150

200

250

300

350

400

450

500

Metals Metals (trend) Energy Energy (trend)

Commodities x PPI

4780

5783

6787

7791

8797

980110

80511

80912

81513

81914

82315

82616

83317

83718

84019

84420

85121

85422

85823

86224

86825

87226

87627

88028

88629

89030

89431

89732

90433

90834

91135

91536

92237

92538

92939

93340

93941

943

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Commodities PPI: Goods

Some Basic Indicators of Change in External Sector | Brazil 1950, 1980 and 2010

1950 1980 2010Export (U$ million Current) 1.335 20.132 201,9151

Quantum Index 100 441 24881

Price Index 100 324 5761

Primary Products % 87,4 42,6 45.51

Coffe % 63,9 12,5 2.61

Manufactures (plus semi) % 12,6 57,3 54.51

Imports (U$ million Current) 942 22.955 181,7681

Quantum Index 100 447 29041

Price Index 100 536 6531

Oil and Oil Products % 14,8 42,1 14,2Consumer Goods % 13,7 5,6 15.61

Intermediate Goods % 40,7 33,6 49.91

Capital Goods % 30,8 18,7 20.31

Terms of Trade 100 60,5 88,3Purchasing Power of Exports 100 267 2198

1950 1980 2010Foreign DirectInvestiment (U$ millions)

Stocks and year-end 1.000 17.500 682,3463

Flow in year 3 1.532 48,5063

Fontes:  1-IPEADATA.2-Possui 1980 como ano base, IPEADATA.3-UNCTAD.

Concluding observations Back to our recurrent traps?

This article attempted to make the following points:

1.  Among the many cycles of expansion  (of 5 years or more) experienced by the Brazilian economy over the last 100 years (1915-2015), two clearly stand out as extraordinary, in the sense that they were not foreign-exchange constrained: 1968-1973 and 2003-2008, with a remarkable rebound in 2010.

2.  All the other relevant cycles faced balance-of-payments constraints either in the form of insufficient purchasing power of exports (terms of trade times export quantum, which defines import capacity) and /or insufficient inflows of external financing (given previously accumulated external debt stocks and  the terms under which it was contracted). For most of the last 100 years this was the macroeconomic binding constraint on Brazilian growth.

3. The paper presents a comparison of the two cycles and of their domestic and international contexts, showing how these two dimensions mutually reinforced each other. Of course, there were many differences, because the cycles were 35 years apart, but there are some relevant similarities in the unprecedented balance of payments accounts and in the interplay of international and domestic forces.

4. The article attempts to go beyond the international scene and note some key common domestic elements in the “origins” of both cycles, in terms of prior reforms and modernization of institutions. A short observation is offered on the implications of the different ways both cycles ended, one in 1973, the other in about 2010. The consequences of the policy responses post-1973 are still the subject of a lively academic debate. Not as lively though as the ongoing debate about the policy choices underlying “the origins and the consequences” of the second cycle.

5. Given the fact that two cycles were about 35 years apart, and that history never repeats itself, the paper gives some attention to key underlying long term structural transformations experienced by Brazilian society (which were taking place well before the first of the two cycles, continued to play in between them, and will continue to play a key role well into the future.

Concluding Observations | Back to our recurrent traps?

6. The key domestic long term changes in this   paper are: (a) the demographic change, or the speed of the demographic transition in Brazil in the last few decades and (b) the rather impressive process of urbanization in Brazil. Only China and India in the world have increased the absolute number of people living in cities more than Brazil over the last sixty five years. The Brazilian urban population increased from about 18 million in 1950, to 173 million now, an additional 155 million people in urban areas in just 65 years!  In this period, well above the US, which has the third largest urban population in the world.

7. A major implication of these remarkable changes in demographics and urbanization has been, especially over the last half century, exponentially increasing demands for urban infrastructure, both physical (energy, transportation, housing, sewerage and water systems) and social (education, health services, security). These demands have traditionally been seen in Brazil as "state intensive", i.e. requiring Government and State enterprises leading role. The pressure is for increased spending, increased taxation and increased indebtedness at the Federal, State and local governments. The (legitimate) dream is for a sort of Brazilian "welfare state" modeled upon the European social democratic experience.

8. The paper notes that these (ex–ante) plans, desires and attempts to increase public and private consumption and investment, expect that domestic supply will respond properly. When it doesn’t, the country faces its recurrent “macroeconomic trap”, as we have seen many times over the last 100 years: growing inflationary pressures, fiscal problems and growing balance of payments disequilibria on current account – up to the point that they could be financed through the capital account, without undue increase in external debt. A recurrent trap, in part due to recurrent attempts on the part of incumbent policy makers to speed up the rate of growth. But also recurrent because longer term structural changes (domestic and international) generate the need for policy responses – and not just short term – on the part of successive administrations.

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Concluding Observations | Back to our recurrent traps?

9. The two cycles dealt with in this paper allowed the foreign exchange constraint to be relieved, for a while, but a sudden upswing in the purchasing power of exports, combined with easy access to external financing does not affect (but are affected by) longer term processes of change such the forces of demography, urbanization, and the determinants of our international competitiveness (other than exchange rates) in the long run. In this respect,  the three observations mentioned in the previous  section (Paul Krugman, Arthur Lewis and Amartyia Sen) are all correct and remain as valid today as ever. Like Schumpeter’s "creative destruction is the essential feature of capitalism". In the medium and longer term, “almost everything” if not everything depend on them.  10. Whether focusing on the current (2015), painful downward phase of the cycle we are in now, or focusing on the underlying long term changes that will continue to go on, Brazilians should recognize – as Fishlow would have reminded us, through his research – that both cyclical and structural elements of our quandary could reinforce each other, for good or for worse. And that for this reason, both require mutually consistent policy responses, which do not seem to be in place now. 11. “The bias for hope in this situation is that pressures of an intensifying economic crisis are bound to concentrate the country’s minds, energies and political ingenuity. The record thus far is not altogether reassuring. However, it is important to recognize that significant changes are already taking place as both government and society try to sort out what went wrong in the past, to cope with the harsher realities of the present – and to look towards the future with some broadly shared sense of purpose and direction. As we have seen, this was attempted in the [past]. If Brazil is to consolidate both democracy and an open, modern economy, it will have to be tried again”.

12.  The entire previous paragraph was written about 25 years ago. It was the very last paragraph of an article by one of the authors of the present paper, written in the dire conditions of 1990 in Brazil. The country rose to the task and gave support to fundamental changes, especially after the success of the Real Plan in 1994. We conclude this article with the same observation – it will have to be tried again. With due consideration to the interactions between the cyclical and the underlying long term changes. As Fishlow would expect us to do.

Concluding Observations | Back to our recurrent traps?

ON CYCLES: “In misreading the cyclical tendencies of the import substitution process as an indication of insufficient secular market demand, the pessimism of the early 1960’s obscured the extent to which it was supply incentives rather than demand that was driving  the system”.

ON LONGER TERM ISSUES: "Increasingly, it has become apparent that a much smaller part of  increased income per capita is explained by capital accumulation pure and simple. Both technological change and improved quality of the labor force play large roles . Not until relatively late did such factors begin to receive attention in Brazil, masked  by the apparently satisfactory process of import substitution industrial growth”.From “Origins and Consequences of Import Substitution in Brazil” (1972)“As we all have come to appreciate, and Prebisch among the first, import substitution was not an unmixed blessing. It was a second-best policy imposed to tax agriculture and reallocate resources toward industry that was eventually brought down by the very circumstance it was to avert: a shortage of foreign exchange”. “Albert Fishlow’s Comment on Raul Prebisch’s Memoir both in Meier. G. and Seers. D.”Pioneers in Development. Oxford University Press (1984) 

Professor Fishlow: Three Quotes

Developing countries have very substantial potential for growth… before they begin to press against the limits of technological knowledge, but institutional arrangements that are unsuited for innovation  are likely , sooner or later, to circumscribe future growth… few of them, starting  from far behind, can hope to “catch up with the West's interwoven dynamics of technology, industrial production, and economic growth”.

 

N. Rosenberg and R. Birdzell “How The West Grew Rich: The Economic Transformation of The Industrial World”. 1986 p. 328-29

Middle Income Trap ?

How “State Intensive”?

“Não é possível esperar apenas pelas iniciativas particulares e deixá-las atuar desarticuladamente, sem ligação entre si. Por que esperar apenas pela iniciativa privada? Por que não deverá o governo provocar ou chamar a si incumbências que não a interessam ou são superiores às suas possibilidades?”(Edmundo Macedo Soares e Silva) e foram publicadas em dezembro de 1944 no Boletim do Círculo de Técnicos Militares sob o título “A Engenharia Brasileira no Projeto de Volta Redonda: Um Capitulo do Planejamento Econômico”, citado por Pedro S. Malan na abertura do seu artigo ao O Estado de São Paulo em 12 de Janeiro de 2014.  Permita-me o eventual leitor, uma impertinência: em qual das últimas oito/nove décadas de nossa história o texto acima teria sido escrito? A resposta está adiante neste artigo.  Mas me atrevo a levantar a hipótese de que há, de longa data, uma expressiva corrente de opinião no “Brasil profundo” que subscreve – hoje – senão a precisa formulação acima, o espírito que a anima e cuja chama permanece viva entre nós.Parágrafo seguinte à citação acima no mesmo artigo de Pedro S. Malan.

                                                                                                                                                                   Não é necessário, por certo, “apenas esperar” pela iniciativa privada, mas é necessário, sempre, que Governos expliquem e prestem contas ao Parlamento e aos seus cidadãos das razões, por exemplo, que podem levá-lo a conceder acesso privilegiado a recursos escassos a determinados grupos específicos (através de subsídios créditos, isenções e proteções comerciais). Ou quando resolvem “chamar a si incumbências” que consideram que não poderiam ser deixadas a outrem.Mesmo porque, neste último caso, é possível que uma discussão aberta, transparente e não ideologizada mostre situações em que existam “incumbências”, existentes ou programadas que poderiam estar além das possibilidades técnicas, humanas, financeiras e fiscais do próprio Estado – e suas empresas.Pedro S. Malan, O Estado de São Paulo - 12 de Janeiro de 2014. Artigo intitulado “Nem Mínimo nem Máximo: só mais Eficiente”. O dois últimos parágrafos deste artigo.

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Dickens and Fishlow