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Financialization against Industrialization: a regulationnist approach of the Brazilian Paradox

La financiarisation contre l’industrialisation : une approche régulationniste d’un paradoxe brésilien
La financiarización contra la industrialización: un enfoque regulacionista de una paradoja brasileña
Eliane Araújo, Miguel Bruno et Débora Pimentel


La libéralisation commerciale et financière a des conséquences fondamentales sur le développement de l’industrie brésilienne. Dans un contexte d’intensification de la concurrence externe et en l’absence de politique industrielle consistante, la reconfiguration relativement rapide de la forme institutionnelle de l’insertion au régime international induit un changement significatif de la structure industrielle. Ce changement est engagé par l’émergence à la fin des années 1990 d’un nouveau régime d’accumulation à la base d’un nouveau mode de régulation. Certaines études empiriques s’attachent à montrer l’existence d’une désindustrialisation et d’une maladie hollandaise, causées par l’appréciation et la volatilité du taux de change. D’autres entrevoient, au contraire, l’opportunité d’une modernisation grâce à la baisse de prix des biens de capital importés. Cet article présente des données nouvelles témoignant des risques de désindustrialisation et de maladie hollandaise que le débat actuel associe à l’appréciation du taux de change réel. L’étude analyse en outre la portée quant aux perspectives industrielles du pays que recouvre l’impact observable de la contagion de la crise américaine sur l’évolution récente de la croissance. Le régime de croissance est caractérisé dans l’article par la forte emprise de l’accumulation financière que révèlent les restrictions qui en découlent sur l’investissement et la consommation. Cette emprise explique la forte chute de la production industrielle à la fin 2008 quand les marchés financiers globaux ont été largement affectés. En conséquence, la prévision de la performance macroéconomique du Brésil dépend de façon cruciale des réactions du mode de régulation et du régime d’accumulation aux défis que soulève le stade actuel de l’évolution de l’économie globale. L’usage du concept de financiarisation s’avère sur ce plan décisif pour mieux comprendre le rapport entre le changement de la structure industrielle et la libéralisation financière.

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1. Introduction

1Financialization of Brazilian economy is not a new phenomenon. In the 1980s, even before the international literature tackled the topic more adequately by defining the status of the theoretical concept of financialization, Brazil was inserted in the logic of financial accumulation under very specific macroeconomic and structural conditions.

2While acknowledging the importance of micro and sectorial analysis provided by the recent international literature, the approach of the phenomenon of financialization used in this study is essentially macroeconomic. Once consolidated, financialization conditions the growth regime and the macroeconomic policy and conjuncture. Its effects on the evolution of aggregate demand and on the accumulation rate of productive fixed capital would depend on the specific ways in which it develops into a concrete social formation.

3There are financialization patterns that can promote growth (Boyer, 1999) while others may hinder them, although the dynamic stability of such schemes depend on structural or institutional requirements that must be empirically tested in each economy under study.

4Several empirical studies have attempted to detect the impact of national strategies of economic liberalization on the structure of industrial production. In this issue, changes in exchange rate regimes, defined as the set of rules governing the administration of the exchange rate, have proved to be a natural starting point for a robust analysis of the changes in industry, when the degree of trade and financial opening has significantly increased. However, unlike what happens in the international arena, the economic literature of the Brazilian case still needs further studies on the effects of exchange rates on the performance of industry.

5Despite the current discourse about the characteristics almost always regarded as positive of a service-based economy by establishing the use of expressions such as knowledge economy, post-industrial economy and new economy, the historical experience shows that industry is still the basis for development of nations. Even if in current savings services have achieved qualitatively and quantitatively prominent positions, industry remains the main supplier of basic inputs to service activities. The shift from manufacturing employment to tertiary employment does not necessarily imply loss of economic importance in the secondary sector since the creation of value in services remains substantially dependent on the materialization of concepts, technological innovation and infrastructure from industrial productive processes. Reinforcing this tendency of underestimating the importance of the industry, one may add the fact that many activities once considered typically industrial have been reclassified and placed on the list of services, having in mind the fiscal and organizational benefits of outsourcing processes.

6This article proposes an analysis of the relationship between exchange rate and performance of Brazilian manufacturing industry in the period 1980-2008. The impacts of exchange rate over the industrial structure have been broadly studied in the international literature. However, studies about the Brazilian economy have dedicated little attention to this subject. The exceptions are the works of Bresser-Pereira (2007, 2008, 2009, 2010), Bresser-Pereira & Marconi (2008) and Bresser-Pereira & Nakano (2003), which since the beginning of the decade, have discussed the relation between exchange rate and economic growth, highlighting the risks of deindustrialization caused by a persistent tendency to real appreciation of the currency in the Brazilian economy. According to Bresser-Pereira, this process occurs analogously as it happened in the Dutch case, leading the Brazilian industry to specialize in commodities and products with low added-value.

7The main objective is to detect the direction of the changes imposed by the new form of international insertion consolidated throughout the 1990s. Our study provides new empirical evidence on the hypotheses of deindustrialization and of Dutch disease, which mark the current debate on the effects of real appreciation of the exchange rate on the Brazilian economy. Furthermore, it attempts to show how the current regime of financial growth in Brazil is structurally articulated with the latest industry developments. This helps to explain why the U.S. crisis’ channel of transmission took place first through the real economy and not through the financial sphere. The latter reacted in a much more defensive way in face of the deterioration of expectations and the uncertainties that marked the second half of 2008; moreover, the balance sheets of major banks in the country were not involved in products considered as too risky such as the subprime derivatives.

8This paper is structured as follows. Section 2 defines the concept of complementarity and hierarchy of institutional forms and applies these hypotheses to the Brazilian case. This section also seeks to establish three periods characterized by three different configurations of institutional forms in terms of its hierarchy and complementarity. These institutional settings determined the specificities of the modes of regulation and their corresponding growth regimes in each of these periods. The section 3 characterizes the current process of financialization of the Brazilian economy in their origins and forms of development, according to results in Bruno et al. (2009). Two different configurations of the monetary and financial regime are associated with two different patterns of financialization.

9Section 4 discusses the implications of financialization on growth regime, focusing particularly on key changes in the industrial structure. It analyzes the causes of the sharp decline in the share of manufacturing industry in GDP as one of the main stylized facts of recent Brazilian economic developments. The basic premise is that the same institutional structures that reproduce the process of Brazilian financialization also reproduce a persistent tendency to real appreciation of the exchange rate. This has resulted in a progressive loss of competitiveness with regard to the high-value-added industries. But the roles of the institutional form of the State are part of the problems that the Government tries to solve. A vicious circle is established: the increase in domestic interest rates attracts further capital inflows that lead to more appreciation. But as the accumulation of foreign reserves must be sterilized, new internal debt is issued by the State, which pushes up interest rates. As the internationalization of the Brazilian economy develops under the logic and nature of financial accumulation in a global scale, the flows of remittances abroad of profits, interest and other incomes are very high. Permanent pressures on the balance of payments will later require further increases in interest rates, attracting more short-term capital inflows.

10The aim of section 5 is to show how the current regulation mode in Brazil contributed to a rapid spread of the effects of U.S. crisis on the real economy sector, while keeping the banking and financial sector protected from the operations with riskier products, thanks to the high and rewarding internal public debt. It sets out the specificities of the competitive regulation mode and its implications for the spread of the U.S. crisis upon the Brazilian economy.

11Section 6 gives an account of the main findings and reflects on the prospects for the evolution of the national industry.

2. Complementarity and hierarchy of institutional forms: the structural bases for differents growth regimes

12Recent advances in the regulationnist analysis led to a greater understanding of the interactions between institutional arrangements and their impact on macroeconomic dynamics. According to Boyer (1998a), among the explanations for the consistency of a mode of regulation and how it determines the basic macro-regularities of the accumulation of capital, the analysis of the 1973-1998 period highlighted the importance of hierarchy and complementarity in a particular configuration of institutional forms. Two definitions of the hierarchy of institutional forms have been proposed:

13The first definition - an institutional form is superior to another when it can impose restrictions on the structural configuration of the latter. For example, if certain features of the relations between State and economy are essentially due to the prerogatives of the financial markets and result in loss of autonomy of the economic policy, then there are strong indications that the institutional form of state became hierarchically subordinated to the institutional form of the monetary financial status;

14The second definition - an institutional form will be considered superior in the hierarchy to another if its development implies a transformation of this second form, be it within its own configuration, or within its operating logic. According to Boyer (1998b), in contrary to the previous definition, this second form does not imply that the mode of regulation that emerges from this complex set of changes is consistent. It considers the possibility that the institutional form hierarchically subordinate develops in such a way that part of its new features may be in conflict with the settings of other institutional forms.

15In conjunction with the previous definitions, the notion of complementarity of institutional forms allows the development of analyses seeking to identify those factors that contribute to the genesis of a new mode of regulation. The agreements which govern the various spheres of modern societies are not independent, since several processes are combined. Boyer (1998b) lists four main results of recent analysis on this problem:

  • 1 Boyer’s argument is analog to the view of Luckás, presented by Bruno (2005) - « Croissance économiq (...)

16The emergence of an institutionalized commitment incorporates a component of expectation, which in some cases involves the rational analysis of its impacts and its conditions of viability. But this is not a functionalist perspective, as the emergence of a new regime is highly contingent. Boyer notices that history shows that most of the major institutional innovations have largely unexpected effects. However, a form of constructivism is present in the process of creating forms of economic organization, since the corresponding holistic conception implies the consideration of certain interdependencies, the most evident among institutions, organizations and markets1.

  • 2 Boyer still observes that « […]. En conséquence, conformément à l’intuition des théories évolutionn (...)

17Assuming that ex ante a conflict between a number of innovations prevailed apparently unconnected with each other, the economic dynamics driving them is feasible only if certain structural conditions are fulfilled: the ability to respond to a horizon marked by uncertainty, variability of the macroeconomic conjuncture, the recurrence of social conflicts and economic imbalances2.

18But the previous process seems to appeal in a privileged way to randomness and non-intentionality, that can be considered as a plausible hypothesis in the context of technology choices with strong indivisibilities. However, the cognitive content is important for the institutional forms, organizing the coordination of strategies and decentralized activities. In this case, the political process, considered in its ability to solve or reduce conflicts, finds its own sphere of action, conditioning the mutations of the institutional forms.

19The complementarity of the institutions of capitalism may come from the existence of a hierarchy whereby some are designed to be structurally compatible with a dominant institution that imposes its logic beyond its sphere of action. For Boyer, a coherent system is not simply a random result, or a direct effect of political will, but the consequence of a fundamental principle: depending on the society and time, some institutional arrangements are more important than others.

20The new institutional form of insertion into international regime raised the process of financialization of the Brazilian economy to a new level. Our hypothesis is that the current exchange rate regime is subject to the influence of monetary policy, which in turn responds to the demand of profitability in the liberalized financial markets. The floating exchange rate regime, with its tendency to real appreciation, became one of the key pieces of the revaluation of capital in global markets, while serving the goals of inflation control in the framework of an inflation target regime adopted since 1999.

Figure 1. Hierarchy of the institutional forms in three differents growth regimes of brazilian economy (1966-2010)

Figure 1. Hierarchy of the institutional forms in three differents growth regimes of brazilian economy (1966-2010)

Note: The three growth regimes were detected by econometric analysis. See Bruno (2005) and Bruno (2008) for more details.

21As a result, monetary and financial regime (MFR) along with the pattern of international insertion that Brazil adopted and consolidated in the 1990s, are the hierarchically superior institutional forms in the current Brazilian mode of regulation. Its consequences on the evolution of the industry will be the subject of the next section. Figure 1 seeks to clarify the change in the hierarchy of institutional forms in three differents periods with their respective growth regimes. The symbols for the five institutional forms are as follows: IFS = institutional form of State; IFI = institutional form of international insertion; FC = Form of competition; MFR = monetary and financial regime; WLN = wage-labor nexus.

22The first regime corresponds to the growth of the Brazilian “economic miracle” (1966-1974) plus the Second National Development Plan (1975-1979). It was a regime of the profit-led growth type with high rates of accumulation of productive fixed capital, which resulted in average GDP growth of 7% per year. If we consider only the years of the “miracle”, the average rate was 10% per year. The investment was oriented according to the logic of industrialization by import substitution. In this context, the State used several mechanisms to protect the Brazilian industry, shaping and monitoring the evolution of institutional forms of international integration, competition and the monetary-financial regime. Overall, the financial system served the productive accumulation of capital and, consequently, the development of the country’s industrial base. Therefore, the State was the institutional form hierarchically superior to the other four, coordinating and monitoring the evolution of the basic institutional architecture of the model of industrialization by import substitution.

23The second period (1981-1993) was characterized by a crisis or contraction regime, meaning the entry of the Brazilian economy in a long history of macroeconomic and structural problems. The so-called fiscal crisis, the tendencies to stagnation of the product and to the high inflation marked the macroeconomic conjuncture of this period. The Brazilian State lost its ability to promote capital accumulation and the autonomy of economic policy was seriously affected. Priorities changed and the governments of this era found themselves under pressure, urged to take measures to fight inflation and to control public expenditures. The development strategy would then be abandoned with the roles of the State redirected to the question of monitoring external and domestic debts and inflation control. From a regulationnist point of view, the period is also characterized by a certain institutional inertia in that the mode of regulation inherited from the import-substitution period, although in crisis, still kept its main characteristics. Yet, a very important change is observed that will drive trends for the next decade: the State gradually loses its status as a hierarchically superior institutional form and submits itself to pressures from a financial and monetary regime under the control of finances. The form of international engagement, although without significant structural changes, already started to reflect the new priority given to trade and financial liberalization, one of the foundations of the next growth regime.

24The third period (1995-2008) is characterized by the consolidation of an institutional architecture largely favorable to the holders of capital and national and international financial markets. The Brazilian economy achieves price stability for the first time since the Real Plan (1994). In addition, a number of structural reforms are driven by the Brazilian government: privatization, social security reform, administrative reforms and other neoliberal measures that were designed in order to bring the Brazilian economy to a new trajectory of growth. During this period, the institutional form of integration into the international regime, the MFR and the forms of competition are linked as high-ranking authorities, according to the prerogatives of global financial markets.

25Under the pressure of the intensification of international competition, particularly for products imported from Asia, the Brazilian industry was forced to rapidly restructure itself. Without a consistent industrial policy coherent with a strategy of long-term development, various branches of manufacturing industry lost their share in GDP. Under the fixed adjustable exchange rate (crawling peg), from 1994-1999, responsible for the “peg”, the added value of industry that had already been declining during the past decade, remained at a level well below what could be expected for an economy still under development. The incorporation of a floating exchange rate regime, in 2000, would not change this picture of relative deindustrialization or industrial respecialization.

26As one of the direct results of this new mode of competitive regulation, the Brazilian economy would work within a finance-dominated accumulation regime, perpetuating the historic character of the wage labor nexus (WLN) as a hierarchically subordinated institutional form.

27Nevertheless, a brief analysis of the dynamics of the actors involved in these institutional changes could be considered. Banks and rentier classes were the main winners in the crisis regime prevailing during the 1981-1993 period, when economic conjuncture was marked by product stagnation and high inflation. The institutional structures inherited from the previous period of high growth rapidly became the basis for the spreading of the price indexation mechanisms of financial assets linked to the Brazilian government debt. With the high inflation environment that characterized this period, the official currency issued by the State - the M1 - acted as a means of payment and unit of account. The store of value function was maintained by the private banking sector, which created it in an entirely endogenous way, from the internal public debt. Under those macroeconomics regularities, a dual monetary regime emerged: on one hand the means of payment, issued by the State, but continuously eroded by inflation. On the other, the currency issued by the financial private sector, but that guarantee the holder a protection of inflationary losses through generalization and sophistication of institutional mechanisms of prices and wages indexation (monetary correction). This private currency was called “financial currency” or “indexed money” and it was a key factor that allowed the financial expansion and bank accumulation despite an environment of high inflation and stagnation trends.

28If political capital is understood as the power to influence public policy, the transition to the third growth regime not jettisoned the hegemonic bloc. On the contrary, the bank concentration and financial accumulation in the previous period of high inflation gave the financial system and its partners enough political capital to influence decisively the configuration of the new, post-liberalization economic model and the type of economic policy that results from this regulation mode. It is in this context that must be understood the option for a new institutional form of insertion into the international regime. The new configuration for this institutional form should respond to the demand from the banking sector, financial firms and its partners (asset holders of domestic and foreign capital and the rentier classes, too). Therefore, the financial liberalization was a basic condition for adhesion of the Brazilian economy to global markets. This process would overcome both the restrictions of traditional forms of funding and financial revalorization assets based on the domestic market and those dependent on public sector as an intermediary or as a regulatory agent.

29The opening of the Brazilian economy in the 1990s would also open the opportunity for a new alliance between the economic interests of large national firms and foreign capital linked to the agricultural and raw material sectors. Agricultural modernization and the growth of agribusiness then arise as a direct result of this alliance and was structured from its origins as an industry strongly oligopolistic, controlling both the production and marketing of agricultural commodities production. According to Oliveira and Stedile (2005), only 10 multinational companies control the main agricultural activities of the Brazilian economy: Bunge, Cargill, Monsanto, Nestle, Danone, BASF, ADM, Bayer, Syngenta and Novartis.

30The growing participation of commodities in Brazilian exports can be explained by structural specificities of this sector. Based on economies of scale and natural resources exploitation oriented toward the export market, this sector has generated high productivity gains, which compensate the strong tendency to real appreciation of the exchange rate, a key feature of the current institutional form of international insertion. Also, on one hand, the exchange rate appreciation is one of the key conditions to remittance of profits, interest and dividends generated by transnational and national corporations and foreign rentier class. Moreover, the sophistication of financial products and services - particularly derivatives - have allowed the use of protection mechanisms against the strong volatility of the current floating exchange rate, a basic characteristic of Brazil’s floating exchange rate regime. On the other hand, the appreciation of the Real kept down the cost of investment in activities related to agribusiness, because in this sector a significant part of fixed capital and production capital can be imported at lower prices.

31Consequently, the direct interests of the rentier class and the banking and financial system were served through the institutional characteristics of the Brazilian mode of regulation, both during the crisis regime and during the period of economic liberalization. In the first case, it could be done thanks to the process known as “statization of the external debt” and the policies to support the financial system; in the second case, thanks to the neoliberal adhesion of the Brazilian economy to free trade and global financial markets. The financial domination over the conditions of productive capital accumulation and the highly indebted State, for a long period, resulted in an hegemonic bloc formed by the finance and agribusiness. The finance and its structural interdependence with agribusiness was consolidated as a privileged locus of financial capital accumulation and asset-based rentier. Therefore, both sectors have benefited from the current growth regime and the macroeconomic policy.

3. The financialization of Brazilian economy: origins and ways of evolution

32The process of financialization of the Brazilian economy is not new. Its origins lie in the structural and economic conditions of the 1980s, which highlighted the fiscal crisis and high inflation with strong inertial components. After a long period of strong growth between 1950 and 1980, the next two decades were characterized by a tendency to stagnation and a sharp loss of autonomy in economic policy.

33Unable to respond rapidly to the challenges of development, the fiscal policy was progressively reduced to a financial policy for cash management of the Central government. The monetary policy imprisoned itself in the expectations and evaluation criteria imposed by the globalized finance. As a result, inflation targets, systematic search of primary surpluses and real appreciation of the exchange rate came together as the basis of asset accumulation, which had the internal public debt as a starting and final point.

3. 1. State-driven industrialization with weak financial development: the period 1947-1963

34The first period of Brazilian industrialization was characterized by the active presence of the State, but incipient financial structures. The State supported the industrial development projects in the context of import-substituting industrialization strategy. This period is characterized by the implantation of heavy industries – a type of business that typically carries a high capital cost (capital-intensive) and high barriers to entry – and by what was called the Target Plan, implemented between 1955 and 1961.

35The deceleration of economic growth in the years 1962 and 1963 marks the transition to a new pattern of capital accumulation based on a new institutional framework. The Government Economic Action Plan (PAEG) – implemented between 1964 and 1966 – held a series of structural reforms that underpined a new tax system, reformed bank and financial structures and the external sector. The Central Bank of Brazil was created as well as the principal institution dealing with capital markets and government securities. Institutional conditions were established for a new economic policy regime. Under a dictatorial political regime, the five institutional forms, which are the components of the mode of regulation, were quickly reconfigured. The economy was now ready to produce the so called “Brazilian economic miracle” (1967-1973) and, later, the outcomes of the Second National Development Plan (1975-1979).

3. 2. A dual monetary and financial regime (MFR) as a basis for financialization through inflation: the period 1964-1993

36The hypothesis that, in the 1980-1993 period, the Brazilian economy was subject to a process of financialization based on inflationary gains derived from the institutional mechanisms of monetary indexation and indexation of wages and prices have found support in the empirical analysis proposed in Bruno et al. (2009), Bruno (2008) and Bruno (2005). Therefore, financialization, in both micro and macro dimensions, implies a specific institutional environment, without which this process could not emerge nor develop. In other words, specific institutional features of the Brazilian monetary and financial regime were crucial for the rent-heritage accumulation to develop, based on the public external (1980s) and internal (1990s-present) debts.

37A dual and inflationist financial and monetary regime was consolidated throughout the 1980s. At the same time, providing relative protection to economic agents against rising inflation, this regime helped to reproduce itself through the establishment of the indexed currency. The duality came precisely from the coexistence of two currencies: a) the official currency issued by the concept of the M1, and b) the financial-pegged currency that was backed by government bonds, but endogenously issued and managed by private financial sector. The first worked as a unit of account and medium of payment and the second as a store of value and instrument of private enrichment, from assets of high liquidity and profitability with lower risk. It operated as a decoupling of the functions of currency that formed the basis of rentier accumulation and the process of financialization by inflation, while it postponed the violent outburst of a classical hyperinflation.

38To support the hypothesis of the existence of dual RMF as a basis for financialization by inflation, an econometric analysis of the relationship between the aggregate value (AV) of financial institutions and the Brazilian GDP has been made. Graph 1 shows the joint evolution of inflation and the participation of banking and financial sector in GDP, measured by the “financial intermediation services indirectly measured (FISIM)” method used by the IBGE, as recommended by the System of National Accounts (SNA/1993) in the 1947-2010 period. It is clear that the financial institutions expanded their share in GDP as the inflationary process progressed. Since 1970, the higher the inflation rates, the higher the participation of the financial system in the total added value of the Brazilian economy would be. Therefore, the so-called lost decades were certainly not considered as such by this sector. This fact is acknowledged even by the Brazilian monetary authority. The possible existence of causality between these variables still remains to be tested.

Graph 1. High inflation regime and added value for financial firms (1947-2008)

Graph 1. High inflation regime and added value for financial firms (1947-2008)

Source: Own elaboration: IBGE for financial added value and GDP; and Getúlio Vargas Foundation for inflation rate (IGP-DI).

Note: The value added refers only to financial firms and therefore does not include financial income appropriated by individuals, non-financial firms and rentier classes.

39It should be noted that the financial added value (AV) – measured by this international methodology for calculating the economic contribution of financial intermediation – refers only to financial firms and therefore does not include financial income appropriated by individuals, non-financial firms and rentier classes. Consequently, the decline of this index in the post-liberalization period (1995-2010) does not mean a weakening of the financialization process of Brazilian economy. It means that the type of financialization based on inflationary gains was replaced by another one, based on very high interest rates and rentier income.

40The unit root and Johansen’s tests indicate that the series of inflation measured by the IGP-DI (Brazilian general price index) and the financial AV as percentage of GDP cointegrated in the 1964-1993 period, an expression of a long-run relation of equilibrium between these variables. This balance should not be seen as usual in economics, that is, as a result of the compatibility between supply and demand. The fact that these two series share a common trend of evolution can be interpreted as a result derived from a macro-organizational structure or from a specific institutional framework of the monetary and financial system of this period.

41Table 1 shows the inflation-elasticities of the financial AV. In the period 1947-1963, the banking and financial structures are still incipient. The institutional mechanisms of indexation of prices and wages are weak or nonexistent. This fact is expressed in a low and negative elasticity of financial value added with respect to inflation evolution (-0,044).

42On the other hand, in the period 1964-1993, there is a long term relationship between inflation and the financial added value for financial firms. The value of the long-run elasticity is 0,3439. A 10% increase in inflation leads to an average increase of 3.4% of financial AV’s participation in the GDP. The cointegration analysis leads to investigate the existence of causal links between these variables.

Table 1. Relationship between financial av and inflation (1947-2010)


Elasticity values

Granger causality relation


Short-run elasticity = - 0,044

Not significant


Long-run elasticity = 0.3439

Inflation variations cause variations in financial AV
(p = 0.10048)


Not significant


Source: own elaboration based on data from IPEA DATA and IBGE.

43Granger causality test shows that variations in inflation rates precede changes in financial AV, but the opposite was not statistically significant. This result shows the functionality of inflationary gains for financial expansion observed in the 1964-1993 period, which can be seen in Graph 1. However, in the period 1995-2010, the inflation-elasticities of the financial AV are not statistically significant, because the monetary regime is very different as is different the Brazilian mode of regulation in an open economy in terms of trade and financial markets.

3. 3. The MFR to high monetary restriction as a basis of financialization by interest income: the period 1995-2010

44The strong and rapid reduction of inflation and therefore of inflation earnings in the period following the Real Plan, in an environment of financial liberalization and global markets, triggered the process of structural change in the Brazilian banking-financial system. The new axis of financial accumulation then moved towards the derivatives and fixed income securities connected to the public debt, but now under extremely high real interest rates by international standards.

45The inflationary gains are quickly and easily replaced by the interest income and rents with other financial assets traded in an international scale. However, an outstanding characteristic of the Brazilian banking and financial system would still remain: its dysfunctional financial intermediation. Despite its growth over the past four years, the share of loans in GDP is still very low, around 45% of GDP for the first quarter of 2009 and, therefore, well below international standards. The low credit/GDP ratio is the result of an endogenous restriction of financial profitability, for incomes from credit operations represent only 20% of total operating income of the Brazilian financial system, while the income from derivatives and private securities represent about 70%. It clearly means that this revenue composition significantly reduces the amount of resources allocated in credit operations.

46Deliberately promoted by the State as a necessity for the new stage of evolution of the Brazilian economy, the institutional forms of international insertion (IFI) and of monetary-financial regime (MFR) were rapidly transformed, thanks to the removal of various institutional arrangements and rules that restricted the free mobility of capital and import of goods. The institutional architecture correspondent to the mode of regulation and the growth regime based on import substitution would take a solid competitive format, according to the precepts of neo-liberalism. These requirements were partly imposed to emerging countries, and partly voluntarily accepted as the password to enter a world full of virtues and irrefutable economic and social advantages.

47Because of its effects on monetary and fiscal policies, as well as on the pattern of foreign trade, systems of exchange rate emerged as one of the key components of the institutional structure of the monetary and financial regime. In this context, the new MFR that emerged from the transformation of the old mode of regulation is widely constrained by the fixed adjustable exchange rate regime (in effect between 1994 and 1999) and, since 2000, by the current floating exchange rate regime. Its consequences on the evolution of the Brazilian economy and, particularly, the Brazilian industry were crucial and will be the main object of the next section.

3. 3. 1. The structural linkage between internal public debt and interest income

48Public debt has been the main axis of the rentier-asset accumulation in the 1991-2008 period, but in a more explicit way. In fact, in the pre-liberalization period of the 1980s, the fiscal crisis of the Brazilian government was already articulated with the main macroeconomic regularities that allowed the financial accumulation to develop based on inflationary gains and trends to stagnation of the product. However, the very atmosphere of crisis with high inflation hid in a way, the functionality of public debt to financial expansion. Graph 2 describes the trends of public debt and external debt as a percentage of GDP. Note that the net internal public debt expands in a linear deterministic trend, reaching 50% of GDP in January 2009, while in the early 1990s, it was around 18%.

Graph 2. Internal and external public debt in percentage of GDP (1991-2009)

Graph 2. Internal and external public debt in percentage of GDP (1991-2009)

Source: BCB and IPEADATA.

49Therefore, if this trend persists, which implies an average annual growth rate around 3%, then this will lead to a net internal public debt / GDP ratio of around 100% in 2027. This is not an apparent contradiction of this post-liberalization growth regime. Indeed, the Brazilian State plays the expensive role of guarantor of the current institutional form of insertion into the international regime that focuses on more financial and banking accumulation and less on productive capital accumulation. In this growth regime, the “hyperinflation” was quickly replaced by “hyperinterest”, but the process of financialization still remains, strong and diversified in the context of global markets and low domestic inflation. This fact explains the enormous difficulty for the Brazilian economy to operate with interest rates close to international standards.

50This evolution suggests the possibility of an explosive trend for this variable, since the drops in debt / GDP ratio happen rapidly, and soon after they return to the trend of long-term growth. The hypothesis of financialization as a process resulting from specific macroeconomic conditions entails the consideration that the current financial macrostructure in Brazilian economy imprisons public finances because it controls the monetary and fiscal policy by formatting it according to the prerogatives of the rentier accumulation. For this reason, it can be assumed, on the one hand, a partial endogeneity of the public debt in the neoliberal economic model, and on the other hand, the exogeneity of Selic rate, since it became a key instrument of the restrictive monetary policy inherent to interest income financialization. Graph 3 shows the strong positive correlation between the growth of public debt stock (DIVPUBINT) at constant prices, and the accumulated factor of real Selic (FATACSELIC), which attempts to capture the logic of the compound capitalization, practiced by financial markets.

Graph 3. Evolution of the internal public debt stock and of the accumulated factor of real selic (1991-2009)

Graph 3. Evolution of the internal public debt stock and of the accumulated factor of real selic (1991-2009)

Source: Own elaboration from data of IBGE and IPEADATA.

Note: SELIC is the interest rate of Brazilian government. Accumulation factor of real SELIC is the capitalized interest of SELIC. “The Selic is the main settlement and custody system for public sector securities in Brazil. The “Selic” word is the Portuguese acronym for “Special System of Settlement and Custody”(Central Bank of Brazil).

51It is noteworthy that an investor who had acquired a Selic indexed treasury bill in January 1991 and had not sold it, would have its capital multiplied by 7 in January 2009. This is a spectacular interest income, well above international standards, even for an economy still under development. But the question of causal links between these variables is relevant to the empirical support of the hypotheses proposed in this paper.

  • 3 In order to save space, the whole amount of tests pertaining the econometric analyses here develope (...)

52An econometric analysis for the 1996-2009 period reveals that these variables cointegrate, thus enjoying a common trend of evolution. In addition, Granger causality tests (Table 2) showed that variations in Selic rate precede changes in public debt, pointing to the existence of unilateral causality of interest income towards the expansion of public sector debt in Brazil.3

Table 2. Granger causality test for divpubint and fatacselic (1996-2009)

(Pairwise) Granger Causality Test

Sample: 1996:1 – 2009:1

Delays: 2

Null hypotheses:


Statistics F


DLFACSELIC does not cause, in Granger’s sense, DLDIVPUB




DLDIVPUB does not cause, in Granger’s sense, DLFACSELIC



Source: Own elaboration based on data from IPEA DATA and IBGE.

Note: Granger test was conducted for the two series in first difference, since both were I(1).

3. 3. 2. Productive capital formation in two contrasted patterns, but controlled by financialization

53The dynamics of productive investment in Brazil remained clearly cyclic until 2003, undermining the foundations for sustainable economic growth (Graph 4).

Graph 4. Gross fixed capital formation and components: variation rates accumulated in 4 three-months period (1997-2008)

Graph 4. Gross fixed capital formation and components: variation rates accumulated in 4 three-months period (1997-2008)

Source: IPEA.

54To test the influence of financial income on the behavior of the accumulation rate of fixed productive capital, a relation was specified between this variable and two explanatory variables: the gap between productivity and average real wage, as a proxy for the profitability of fixed productive capital (PR-RW) and the accumulated financial income as a percentage of gross disposable income (RDB).

Table 3. Investment relation, profitability and financial income (1991-2009)

Sample: 1991: T3 2008: T4
Observations: 70
Standard error ( ) and statistics t in [ ]












Source: own elaboration based on data from IPEA DATA and IBGE.

Note: Granger test was conducted for the two series in first difference, since both were integrated of order one.

55The estimation results reveal the existence of a cointegration relation. This means that there is a trade off between long-term investment, corporate profit and financial gains, which could be interpreted as a result of the macro-structure basis of this regime.

56In Table 3, the fact that the income elasticity of long-term investment was negative but significant (-0.53), while the financial income elasticity was positive and statistically significant (0.28), is an indication that financialization acts directly upon the decisions of allocation of business savings of the productive sector. Increases in the mass of profit obtained by the growth of productivity gains are not able to boost the investment, because financial assets offer a much more attractive alternative to upgrading in terms of liquidity and risk than the assets that the productive capital formation demands. This empirical evidence supports the hypothesis that financialization by interest elevates the liquidity preference of entrepreneurs and owners of capital and, therefore, tends to hold down the growth rate of the stock of productive capital assets (capital accumulation rate).

57It should be noted, however, that this result is strongly influenced by data from the subsample 1991-2003, when the interest rates remained even higher and the international environment was under the financial crisis of 1995 (Mexico), 1997 (Asia) 1998 (Russia) and 1999 (Brazil); and again Brazil, in 2002/2003, due to the change of government, since the holders of capital and markets feared a significant change in the basic financial macrostructure of the rentier-asset accumulation. In these macroeconomic conditions, the regime of growth fits the finance-dominated accumulation pattern, hampering the rate of accumulation of fixed productive capital.

58In the 2004-2008 period, the international situation became much more favorable to Brazil, the demand for commodities raised, as well as their prices; and with a more enthusiastic internal market, the investment grew again. In these macroeconomic conditions, the characteristic regime is a finance-led growth which may emerge both by the wealth effect derived from the financial income (less likely in the case of Brazil because of the low percentage of population with access to financial assets) and by the greater availability of credit consumption and financing of production and exports.

4. Macroeconomics and sectorial effects of the financialization of Brazilian economy

59This section shows the impacts of financialization on economic growth, investment and industrial structure in Brazil.

4. 1. Low and unstable economic growth

60The Graph 5 shows that the rates of growth of the Brazilian economy have remained significantly below the rates of emerging countries and developing Asia, for the period 1995-2009. Furthermore, these rates are clearly more volatile than the economic growth rates for all countries and regions.

Graph 5. Economic growth in brazil and others countries and regions: a comparison for the period 1995-2010

Graph 5. Economic growth in brazil and others countries and regions: a comparison for the period 1995-2010

Source: World Economic Outlook – IMF

4. 2. A persistent tendency to low and stagnant investment rate

61The explanation for the low and unstable economic growth must be found in the investment behavior that despite the recent recovery is still at levels inconsistent with strong and stable growth. In fact, the Brazilian economy encounters great difficulties in raising its investment rate. Chart 6 shows that within the selected sample of developing countries, Brazil has the lowest rate of investment (an average of only 17, 3% over the period 1995-2009). There is indeed a persistent tendency for the persistence of low rates of investment – gross fixed capital formation – (% GDP) that needs to be analyzed outside views overly optimistic or naive about the Brazilian macroeconomic performance.

Graph 6. Gross capital formation in brazil and others countries: a comparison for the period 1995-2010

Graph 6. Gross capital formation in brazil and others countries: a comparison for the period 1995-2010

Source: World Bank Data.

4. 3. Strong drop of participation of industrial value in GDP

  • 4 Precisely, a drop of 53.37%.

62Graph 7 shows the joint evolution of participation of the manufacturing industry in the total product of Brazilian economy (industrial added value / GDP at basic prices) and of the real effective exchange rate, in value indexes. Two different patterns of evolution of the series were noticed and also the fact that exchange rate appreciation is associated with a drop over 50% of participation of the industrial added value in GDP, in the period of 1980-2010.4

  • 5 Araújo, Bruno and Pimentel (2009) present econometric tests that confirm the existence of cointegra (...)

63Note that the relative drop of the industrial AV began during the preopening period, when the industry growth rate could not be concomitantly regarded as a normal process of economic development, when, in the long run, the services sector increases with a consequent reduction of the relative participation of the industrial and agrarian sectors. Until 1993, the relative participation of the manufacturing industry and the exchange rate shared a common tendency of evolution, suggesting the possibility of integrating these series5. In 1994, these variables disconnected, showing a very different pattern of evolution, where the participation of industrial AV in GDP becomes insensitive to the current exchange rate regime. Furthermore, a point to be highlighted is that in the second period 1994-2010, characterized by the commercial and financial liberalization and by the subsequent structural transformations, this participation represents only half the value observed in 1980. Such information points to the occurrence of a process of relative deindustrialization of Brazilian economy post-opening and post-Real.

Graph 7. Real effective exchange rate and manufacturing industry participation in gdp (1980-2010)

Graph 7. Real effective exchange rate and manufacturing industry participation in gdp (1980-2010)

Source: IPEADATA (2009).

  • 6 Today, the characteristic example of this strategy has been that of the Asian countries, who mainta (...)

64A possible explanation can be obtained considering the structural changes in industry due to the new way of international insertion of the Brazilian economy. In 1980-1993, the configuration of manufacturing industry still reflected the structures of production consolidated during the process of import substitution and, therefore, of the economic model and the correspondent industrial development policies. The exchange rate regime, combined with sectorial policies, was used as one of the key institutions for the development of productive capacity in the industrial sector.6 The industry was composed by sectors constituted under the logic and economic stimulus of the Import Substitution Industrialization model (ISI). Under this model, a competitive or sufficiently depreciated exchange rate provided a macroeconomic environment favorable to industrial investments.

65However, in the passage into the second period, 1994-2008, the new international engagement in Brazil was characterized by an accelerated process of commercial and financial liberalization, together with a strong appreciation of the real exchange rate. The Brazilian option for a new way of joining the international regime without a consistent industrial policy would cause deep changes in the industrial park, removing a significant part of the sectors that produce goods with higher technological intensity and added value. Such sectors would certainly have contributed to reduce the high participation of commodities in exports and, therefore, to reduce the external vulnerability of Brazilian economy during its integration into the globalization process.

4. 3. 1. Evidences of new industrial structure: a cointegration analysis

66As mentioned in the previous section, the behaviour of the series of industrial AV / GDP and of real effective exchange rates, according to Graph 5, suggests a possibility of cointegration among these variables in the period of 1980-1993. In the second period, 1994-2007, the industrial AV / GDP remains stuck in a value close to half of that observed in 1980, a characteristic that will reflect on the Brazilian external commerce, today, strongly dependent on the commodities export.

67The Chow test for structural breaks (1978) was implemented to the exchange rate and GDP series of the manufacturing industry. This test allows to investigate whether two or more periods present significant differences between the parameters that establish a relation between the series. For instance, suppose that the exchange rate positively correlates with the manufacturing industry GDP within a certain period of time, and, they negatively correlate within another period, then the test will indicate this parameter difference and will determine the moment when the structural break occurred. Table 4 presents the result of the Chow test. It shows that the null hypothesis of inexistence of structural break is rejected by this test and it also indicates the fourth quarter of 1993 as the “break” point.

Table 4. Structural break test

Chow test of structural break: 1993:4



Statistics F



Maximum likelihood ratio



Source: own elaboration based on research data

68The relevant conclusion pointed by the test is the existence of two distinct phases in the relationship between the two variables, suggesting the existence of two different regimes of growth in the manufacturing industry. Thus, the analyzed period can be divided into two subsamples : 1980:1 to 1993:3 and 1993:4 to 2008:3. The next step is to verify that the GDP series of the manufacturing industry and exchange rate share a common trajectory of evolution, which can be determined by the cointegration test. The series are cointegrated when the combination of non-stationary series is stationary, that is, the residues of the resulting series are stationary, I(0). It is the same as stating that the variables do not move independently, can have block trajectories, in such a way that, in the long run, they present a type of “equilibrium”.

  • 7 A more complete presentation of Jonhansen procedure can be found in Enders (1995).

69In order to test the non-stationnarity of the series, the existence or not of unitary roots must be tested. Our research used the augmented DickeyFuller test (ADF), which indicates that the series GDPIND (= industrial AV /GDP) and REER (= real effective exchange rate) are non-stationary in both subsamples. In order to identify relations of cointegration between these variables the Johansen7 procedure was used, which determines the number of vectors of cointegration and estimates it. The space of cointegration can be determined by means of two tests of likelihood ratio: Trace and Maximum Value, which are illustrated in Table 5.

Table 5. Johansen Test

Maximum Value

Trace Statistics

Observed Value

Critic value 5%

Observed Value

Critic value 5%

Sample: 1980:1 to 1993:3

r = 0





RImage 9.wmf1





Sample: 1993:4 to 2008:3

r = 0










Source: Own elaboration based on research data.

Note: Constant terms and tendency were included and the model was estimated with 1 delay.

70Considering the level of 5% significance, Table 5 shows that both through the Trace test statistics and through the Maximum Value statistics, the null hypothesis of non-cointegration is rejected and the alternative hypothesis of the existence of a cointegration vector between the series in the first sample is accepted. Yet in the second subsample, the tests indicate that there is no cointegration between the series, that is, they move independently. These empirical results point to the occurrence of significant transformations in the structure of the Brazilian industry, during the period of commercial and financial liberalization post-1994.

71In the first period 1980-1993, the industrial structure was highly sensible to current exchange regime. Such behavior could be noticed by the existence of a long term relation between the participation of the industrial added value in GDP and the real effective exchange rate, given by the cointegration between these two variables.

72In order to verify more precisely the relation between the exchange and the industrial AV the sensibility of the industrial AV was calculated in relation to the exchange rate, both in the short term and in the long run. Table 6 illustrates the results.

Table 6. Elasticity of industrial AV in relation to exchange

1980:1 – 1993:3

1993:4 – 2008:3

Short term elasticity



Long term elasticity


No cointegration

Source: Own elaboration based on research data.

Note: t-test in brackets

73As in the first subsample, the variables have a unitary root and are cointegrated, the Ordinary Least Squares (OLS) method continues as effective as when it was applied to the level series. Thus, the short term elasticity is calculated through the OLS and the long term one through the vector error correction model (VEC). In both models the sensitivity of the industrial AV in relation to exchange is positive and significant, which shows that industry positively responded to exchange rate devaluations. In the long run, an increase of 10% in exchange rate causes an increase of 3.3% in the industrial AV, and in the short term, this increase is of 1.4%. In the second subsample, the inexistence of cointegration between the two series derails the long term elasticity calculation; also the OLS model needs to be used with the series in first difference. In this second period, the sensitivity of industrial AV in relation to the exchange is no longer significant, which confirms the hypothesis that the industry kept under the process of exchange appreciation is no longer sensitive to exchange rate changes.

74The interpretation of the results of the first phase can start from the fact that the industry in this period was composed by sectors constituted under the logic and the economic stimulus of the Import Substitution Industrialization model (ISI). Under the rule of this model, a competitive or sufficiently exchange was one of the basic macro-variables to assure a macroeconomic environment favorable to industrial investment. However, during the second period, 1994-2008, the new way of international engagement in Brazil was marked by an accelerated process of commercial and financial liberalization, together with a strong appreciation of the real exchange rate.

75This new macroeconomic, post-opening environment was determinant to the retraction or closure of several industrial productive units, which found themselves rapidly exposed to international competition, without the intercourse of a consistent industrial development policy, adequate to the needs of national economic growth and development. The hypothesis sustained by this work is that the appreciated exchange regime was harmful to the technologically more sophisticated sectors, favoring the most traditional ones and those connected to primary activities. This regime has changed the kind of specialization of the industry, causing a process of relative deindustrialization of the Brazilian economy.

76In this case, industry lost economic participation even before the economy had reached its highest stages of development. Such deindustrialization has a counterpart, that is, an equally precocious expansion of the services sector (a swelling of the service sector), which leads to precarious work and to high levels of informality, thus blocking economic and social development. Besides, this definition of deindustrialization cannot be solely based on employment levels indicators: the current productive technical bases are capital intensive and their expansion would lead to a drop of employed people, thus mistakenly signaling a loss of participation of industry in GDP.

77It is important to highlight that those sectors that resisted the post-liberalization deindustrialization process of the Brazilian economy are not badly affected by the current regime of floating exchange rate with strong tendency to appreciation. Consequently, this characteristics seems to point to the occurrence of the Dutch disease. According to Pereira (2008), this connected phenomenon is characterized by the expansion, in a country, of the production of tradeable goods, benefiting from some natural comparative advantage (abundance and higher productivity of natural resources, for instance) and the concomitant relative fall of the manufacture activities. As Corden and Neary (1982) and Bresser-Pereira (2008) sustain, a permanent appreciation of the real exchange rate must be associated with a relative increase of the commodity export sector, of higher productivity, and also with a shrink of the manufacturing sector.

4. 3. 2. An sectoral analysis of the manufacturing industry

78In order to analyze eventual changes in the internal structure of manufacturing industry since the economic liberalization, several segments of industrial activities were classified according to the type of intensive factor. The typology was elaborated by OECD, inspired on Pavitt (1984).

79According to this classification, industrial activities can be divided into five groups:

80i) Natural resources intensive industry: the main competitive factor is the existence of a large offer of natural resources in the country.

81ii) Labor intensive industry: the main factor is the high availability of labor at a reduced cost; this is also characterized by the fact that a high degree of technology innovation processes is exogenous, that is, accomplished by other sectors.

82iii) Scale intensive industry: in this group, the competitive factor is the possibility of exploring scale gains, the production being characterized by technological indivisibility. It is formed by large oligopoly companies with high capital intensity.

83iv) Differentiated technology intensive industry: characterized by high acquisition of economies of scope, high diversification of offer and high capacity of productive innovation.

84v) Science based industry: innovative activities with high expenditures in research and development, whose competitive factor is the fast application of scientific research to industrial technologies, and a high power of transmission around the whole economic system.

  • 8 Pesquisa Industrial Anual - Industrial production survey of Brazilian Institute of Geography and St (...)

85Data used to classify industries according to Pavitt (1984) methodology and to calculate participation in industrial activities in relation to the whole manufacturing industry have been retrieved from industry research (PIA)8 of IBGE (2008). Data is divided into two series, the first from 1988 to 1995 and the second from 1996 to 2005. Due to changes in the classification of industrial activities, with the implementation of CNAE (National Classification of the Economic Activity) in 1996, the comparison of some activities between the two periods becomes difficult.

86Tables 7 and 8 present the Industrial Transformation Value (VTI) of industries according to Pavitt (1984) classification. VTI is the difference between the Gross value of industrial production and the cost of industrial operations.

Table 7. Percentage of Participation in the Industrial Transformation Value - 1988 to 1995









Scale production








Natural Resources
































Source: IBGE - Annual Industrial Research

Note: Percent of Participation only in manufacturing industry.

87Analyzing the tables’ data, it is possible to observe that the activities that most increased their participation in the industrial transformation value (VTI) were the natural resources intensive ones, with an increase of almost 4 percentage points in the first PIA series, and of more than 6 percentage points in the second series. The main activity of this group is the production of food, though the activity, but the activity responsible for almost all the growth of its participation was the one connected to petroleum refining.

Table 8. Percentage of Participation in Industrial Transformation Value - 1996 to 2005












Scale production











Natural Resources












































Source: IBGE - Annual Industrial Research

Note: Percent of Participation only in manufacturing industry.

88The scale-intensive activities are those that have greater participation in VTI in both series. Chemicals, metals and vehicles make up a large part of that group with a generally stable participation in the structure of industrial production.

89The other three groups of activities lost participation. The labor intensive group was one of those that presented the higher loss of participation, totalizing 3 percentage points in each PIA series, with a negative emphasis on the participation of the textile and clothing products.

90The differentiated intensive products group witnessed a very significant drop of its participation in the period. This sector is represented by the activities of production of machinery and equipment, and it suffered from the strong impact of trade liberalization and the exchange rate appreciation during the period that led to a large increase of imports of such items. It similarly impacted the production of science-based sectors, responsible for the production of electronics and information technology.

91Therefore, considering the data presented on the participation of industrial activities regarding the value of manufacturing, it is possible to observe that a productive specialization of industrial sectors, with emphasis on natural resources intensive sectors, occurred in the period following economic liberalization, while traditional industries like textiles and clothing, and activities related to the production of machinery and equipment lost relative importance. These sectors were heavily impacted by the large increase in the level of imports after trade liberalization.

4. 3. 3. The effects of exchange rates on foreign trade 9

  • 9 Data from this section are based on the study of foreign trade conducted by the Institute of Studie (...)

92The effects of exchange rate on the industry have direct impact on Brazilian foreign trade, both on the balance of the various export sectors, and on the technological intensity of exports of the Brazilian industry.

93It is well known that the composition of the trade balance is the main indicator of competitiveness of an economy, however, as will be shown later on, Brazilian exports have focused on commodities and goods of less value. Although Brazil exports mainly manufactured goods, its main products are commodities or goods of low technological intensity.

94Table 9 shows the productive structure of the Brazilian trade balance (SBC). Results show the importance of the capacity generated in the trade balance of agricultural sectors, especially those of cereals, animal products and tropical agriculture. As for the underprovided sectors, an emphasis is placed on the chemical industry and machinery (electrical and electronic and other). Traditional export sectors have maintained their ability to generate trade balances, as much as the traditionally underprovided sectors remain that way and, still, the latter have significantly increased their participation in the negative trade balance.

Table 9. Trade balance in US$ billions














Raw Materials







Forestry Products







Topical Agriculture







Animal products














Labor intensive














Electric and electronic machinery







Machinery and Road vehicles







Machinery and other transportations







Other machineries














Source: IEDI (2009)

95Regarding the performance of SBC, the IEDI (2009) draws attention to two fundamental aspects. First, there is a growing antagonistic relationship between the different segments of Brazilian foreign trade: on the one hand, the evident surplus segments and, on the other hand, those with extremely negative results. The second aspect, which is related to the first, refers to the fact that the SBC in the country is increasingly dependent on goods with low added value, little or non-industrialized, which generates jobs that require lower qualification.

Table 10. Trade balance of the Manufacturing Industry in US$ billions



































Manufacturing Industry Products







Source: IEDI (2009)

96IEDI highlights that this aspect cannot constitute a problem for the supporters of the Comparative Advantages Theory or correlated ones, that is, for the idea that each country should specialize in products that have lower costs of production, though it is certainly something negative for those who argue in favor of a project to Brazil undergoing industrialization (IEDI, 2009).

97Another important point is to investigate the technological intensity of products exported by Brazilian industry. Table 10 shows the trade balance data of manufacturing industry in Brazil.

98It is observed that the most important sector in the generation of trade surplus to Brazil, considering the technological content, is the low content, followed by medium-low segment, but with a considerably lower result. The IEDI (2009) points out that the sub-sectors of food, beverages and tobacco, alone accounted for 78.8% of the surplus generated by the sector in 2008.

99For the next underprovided sectors, high and medium-high technology intensity, the two have been running negative trade balances or some very close to zero for all the analyzed periods. Noteworthy is the amount of deficit generated by the segment of medium-intensity (U.S. $ -30.2 billion in 2008). Finally, the high tech segment, in 2008, reached a deficit of U.S. $ -21.7 billion.

100As regards the trade balance generated by the manufacturing industry, a clear upward trend can be noticed between 2003 and 2005. But in 2006, this trend was reversed, and, in 2008, the deficit of the sector was U.S. $ 7.2 billion (Graph 8).

Graph 8. Trade balance in US$ billions (1997-2008)

Graph 8. Trade balance in US$ billions (1997-2008)

Source: IEDI (2009)

101It should be noted that there was a substantial drop in the outer result determined by the negative performance of the manufacturing industry, highlighting that the last deficit experienced by the sector had been in 2001.

102In this sense, the conclusion is that Brazil remains, therefore, dependent on products with low and medium low technological intensity as it refers to the generation of trade balances in the manufacturing industry. At the same time, the sectors of high and medium-high technology are major importers and major generators of deficits. Moreover, we must consider that after several years of important surpluses, manufacturing industry again generates a significant deficit. Besides the concentration of the trade balance in the country for little industrialized goods, there is also a concentration of exports in low-technology goods and imports of products with high technological intensity.

4. 3. 4. The spread of the American crisis and the current mode of Brazilian competitive regulation

  • 10 These data were obtained in the Accounting for Financial Institutions - COSIF elaborated by the Cen (...)

103A characteristic of the banking and financial system in Brazil is its low propensity to expand credit operations. About 84% of its total operating revenue comes from debt and equity securities, with the focus on fixed income securities and derivatives. Less than 10% of its operating revenues come from credit operations. As a result, although on a path of expansion, the credit / GDP ratio reached in early 2009 the low figure of 45% of GDP.10 This implies that Brazilian financial institutions have not engaged in the same proportion as their foreign counterparts, particularly American, in operations with toxic assets like the subprime derivatives. This feature explains why the spread of the American crisis in the Brazilian economy happenned through another channel.

104The crisis reached Brazil through the assets and liabilities of the productive sector, since some 80% of non-financial companies had non-operating income superior to the profit obtained from their activities. This is an important indicator of the financialization of economy and it helps understand why many companies in the productive sector had serious difficulties in the second half of 2008 when the American crisis actually arrived in Brazil. Moreover, considering that the expectations were infected with the generalization of pessimistic behaviors about the unfolding crisis in the country, lines of credit became scarce, prompting the government to encourage public credit.

Graph 9. Brazilian industrial production (1991- 2011)

Graph 9. Brazilian industrial production (1991- 2011)

Source: Monthly industrial research – IBGE

Note: Industrial production in quantum. Deseasonalized series.

Graph 10. Brazilian industrial production by category of good (1991- 2009)

Graph 10. Brazilian industrial production by category of good (1991- 2009)

Source: Monthly industrial research – IBGE

Note: Industrial production in quantum. Deseasonalized series.

105Graph 9 shows that the months of November and December 2008 were very bad for the Brazilian industrial sector, with sharp drop in production. On the other hand, the first half of 2009 already showed a clear recovery, in part by the recovery of expectations, but also by the effects of anti-cyclical policies that the government had taken. The same trends can be observed when considering the industrial production by category of goods (Graph 10).

106Among the main features of the current mode of Brazilian regulation is its high propensity to diffuse external financial shocks into the domestic economy. Recent studies also show that this institutional architecture after the liberalization program adopted in Brazil contributed to a significant increase in the volatility of exchange rates, undermining the foundations of stability of the growth regime (Araújo, 2009). According to Araújo (2009), Brazil stands out as one of the countries with the highest exchange volatility, particularly in the subsample that includes the floating exchange rate regime. At the same time, countries like Vietnam, Malaysia, India and Pakistan, which have been ranked as the most dynamic countries in terms of economic growth, are characterized by low volatility of exchange rates.

107In addition to its high volatility, the level appears to be also harmful to the system of Brazilian growth. However, even though some analysts argue that the real appreciation of the exchange rate did not prevent the growth of gross fixed capital formation, particularly in the period 2004-2008, the disaggregated analysis by sectors of the industry supports the existence of a process of regressive specialization of the Brazilian industry.

Graph 11. Investiment by type of industry – relative participation in the total gross fixed capital formation of brazilian industry (1996-2007)

Graph 11. Investiment by type of industry – relative participation in the total gross fixed capital formation of brazilian industry (1996-2007)

Source: Own calculations based on data from the Annual Industrial Research – IBGE and according to Pavitt classification.

108Graphs 11 and 12 extend until 2007 the analysis proposed in section 3.2, but this time using the data of gross fixed capital formation by sectors of the Brazilian industry. The GFCF in classes based on natural resources is a clear trend of expansion that, along with industry-based scale, reaches a high figure of 70% of the gross fixed capital formation of industry. Meanwhile, the sectors based on science, work, and differentiated technology were all below 10%, highlighting the declining trend in the industry based on science. Therefore, there is an ongoing process of “commoditization” of the Brazilian industry, whose reversal depends on the implementation of an appropriate industrial policy within the frameworks of a consistent strategy of national economic development. The natural resources-intensive sector showed a growth of more than 230% between 2000 and 2007, while in the same period, the science-based industries dropped more than 50% in quantum produced.

Graph 12. Evolution of the investment by type of industry (1996-2007)

Graph 12. Evolution of the investment by type of industry (1996-2007)

Source: Own calculations based on data from the Annual Industrial Research – IBGE and according to Pavitt classification

Conclusion: the prospects for the industry and the Brazilian economy

109Relations between financialization, manufacturing industry and economic growth in Brazil are an important field for further research on the economic development of the country. The duration of a macroeconomic regime subordinated to the financial rentier accumulation does not necessarily imply the impossibility of economic growth, nor that the economy is inevitably doomed to near-stagnation. What empirical evidence shows to countries undergoing a process of financialization is that their economies do not appear able to grow at high and sustainable rates because such schemes are very sensitive to the profile of income distribution (internal market factor) and to changes in the international scenario (external market factor), besides contaminating the expectations of entrepreneurs through short term evaluations of financial markets. After all, a significant proportion of large companies have their asset structure engaged in financial transactions.

110For developing countries, financialization becomes an even bigger structural obstacle, since it causes functional reconcentration of incomes in favor of the holders of capital without necessarily inducing them to raise the level of productive investment, a basic factor in the generation of employment and income. Future work could suggest the development of indicators of financialization at the firm and sector levels, as well as the formulation of a theoretical macroeconomic model that could clarify the conditions of dynamic stability of the growth regime. It therefore goes without saying that the current mode of regulation in Brazil is unfavorable to industrial development, but it is highly advantageous to financial accumulation on the basis of public debt, derivatives and similar financial products.

111The North-American crisis has impacted the Brazilian economy primarily through the directly productive sectors. This was an important difference compared to developed countries where the epicenter of the crisis was located in the financial markets. Because of financialization of various industries and other non-financial companies, the drop in production was expected to be a normal rational behavior facing uncertainty in economic trends that marked the second half of 2008. However, there was also an expectation effect that tightened credit conditions in the Brazilian banking market, even though banks had not been involved in transactions with toxic products such as subprime derivatives. In the Brazilian economy, the axis of the rentier-asset accumulation is in internal public debt, not in the capital markets or in credit operations to households and firms. The pattern of financialization is therefore quite different from the U.S. economy.

112The analysis of the effects of the level of the exchange rate upon the changes in the manufacturing industry structure shows that the sharp decline in the share of industrial added value in the Brazilian GDP can be explained by the tendency of real appreciation of the exchange rate between 1980 and 1993. This fact must, however, be better qualified with regard to the specificities of the pre-liberalization industrial structure. The plants established under the economic and industrial policies associated with the model of import-substituting industrialization enjoyed a high degree of protection inherent in this type of development strategy. However, without having completed their industrialization process, Brazil was reinserted in the international arena with strong competitive disadvantages in strategic sectors such as intensive science and technology. Confronted to an adverse domestic macroeconomic environment (very high rates of interest, lack of industrial and sectoral policies, consistent deficit in transport infrastructure, etc..), the reaction of the industrial park was then clearly defensive, guiding itself towards survival in a context of increasing uncertainty.

113Between 1980 and 1996, the share of manufacturing industry in gross domestic product decreased by 50%. One of the main factors of this development was the strong appreciation that started in the pre-opening period. But despite the liberalization agenda, this loss was not recovered in the 1997-2008 period, when the Brazilian economy consolidated its adherence to the process of commercial and financial globalization. On the contrary, despite the modernization of plants favored by the import of capital goods and higher productivity gains, the industry continued to lose ground between 2004 and 2008, precisely when the Brazilian economy grew at higher rates. Future research is needed to detect the economic reasons behind this behavior. The intensive accumulation path chosen may be an important part of the explanation, but also important is the fact that the industry that survived the appreciation is basically producing goods of lower value.

114Historical analyses and international comparisons show that the changes in the forms of international integration are crucial in the reconfiguration of the industry and, more broadly, of their own domestic economic environment. Going to a different direction compares to the more optimistic views of the neo-liberal tradition, there is no theoretical or empirical satisfactory basis to the view that the processes of economic liberalization are always carriers of profit and irrefutable economic benefits. Asian countries experiences confirm that the use of a consistent development strategy with appropriate industrial policies is a necessary condition that enables the challenges of international competition to become driving factors in developing nations. The mere adherence to an external environment of high competition can lead to losses in important sectors and branches of national industry. Pro-active policies of industrial development should be the basic resource for coping with foreign competition and the acquisition of dynamic competitive advantages.

115The contradictions of the current growth regime and its economic policy are not only apparent, they are very real. Although the various social actors still do not formulate questions nor dissatisfaction with this regime in an explicit way, several macroeconomic problems remains. Some examples can be listed as below: a) a growing internal public debt that have been financed onerously in terms of its duration and fees. A direct consequence is the very low public investment rate; b) the Brazilian industry shows a clear tendency for a specialization in primary commodities. This is a particular kind of deindustrialization that reduces the economic participation of the branches with higher added value, without necessarily eliminating all industries. This structural change has become explicit in the context of trade and financial liberalization process that induced a higher volatility of the real exchange rate and their appreciation; c) the economy has great difficulty in maintaining high and sustainable rates of economic growth, despite the financial and price stability; d) the labor relations have historically been characterized by high levels of flexibility and informality. At present, these conditions emerge as an obstacle to improving productivity regime even if the Government promotes the demand regime through increasing social spending; e) the economy shows a high level of dependence on public funds for financing productive investment and the long term projects; f) the functioning of growth regime is highly dependent on short-term foreign capital inflows and their neo-liberal mode of regulation reproduces this dependence as an endogenous process. In this macroeconomics conditions, the saving rates and investment rates are very low in spite of increasing profit share during the globalization period.

116Under these conditions, a key question can then be formulated in a simple way: can we say that Brazil has in fact a coherent model of social and economic development, or do we admit that it has long been a hotbed of opportunities mainly for short term domestic and foreign capital seeking a rapid and guaranteed revalorization in a global capitalist economy, characterized by great uncertainty and tendencies toward stagnation and financial crises?

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1 Boyer’s argument is analog to the view of Luckás, presented by Bruno (2005) - « Croissance économique, changements structurels et distribution – les transformations du régime d’accumulation au Brésil – une analyse regulationniste », thèse, EHESS, 2005, in the context of ontological and methodological concept of régulation.

2 Boyer still observes that « […]. En conséquence, conformément à l’intuition des théories évolutionnistes, ex post -divers compromis institutionnalisés doivent manifester une certaine compatibilité, ou dans certains cas faire la preuve de leur indépendance. »

3 In order to save space, the whole amount of tests pertaining the econometric analyses here developed will not be presented.

4 Precisely, a drop of 53.37%.

5 Araújo, Bruno and Pimentel (2009) present econometric tests that confirm the existence of cointegration between the series of 1980 to 1993 and a structural breakdown in the relationship between exchange rate and industrial AV in the year of 1993.

6 Today, the characteristic example of this strategy has been that of the Asian countries, who maintain the Exchange rates adequate to the development and consolidation of their industry; see, for example, Araújo (2009).

7 A more complete presentation of Jonhansen procedure can be found in Enders (1995).

8 Pesquisa Industrial Anual - Industrial production survey of Brazilian Institute of Geography and Statistics (IBGE).

9 Data from this section are based on the study of foreign trade conducted by the Institute of Studies for Industry Development (IEDI), 2009.

10 These data were obtained in the Accounting for Financial Institutions - COSIF elaborated by the Central Bank of Brazil.

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Table des illustrations

Titre Figure 1. Hierarchy of the institutional forms in three differents growth regimes of brazilian economy (1966-2010)
Légende Note: The three growth regimes were detected by econometric analysis. See Bruno (2005) and Bruno (2008) for more details.
Fichier image/jpeg, 168k
Titre Graph 1. High inflation regime and added value for financial firms (1947-2008)
Crédits Source: Own elaboration: IBGE for financial added value and GDP; and Getúlio Vargas Foundation for inflation rate (IGP-DI).
Fichier image/jpeg, 284k
Titre Graph 2. Internal and external public debt in percentage of GDP (1991-2009)
Crédits Source: BCB and IPEADATA.
Fichier image/jpeg, 300k
Titre Graph 3. Evolution of the internal public debt stock and of the accumulated factor of real selic (1991-2009)
Crédits Source: Own elaboration from data of IBGE and IPEADATA.
Fichier image/jpeg, 324k
Titre Graph 4. Gross fixed capital formation and components: variation rates accumulated in 4 three-months period (1997-2008)
Crédits Source: IPEA.
Fichier image/jpeg, 176k
Titre Graph 5. Economic growth in brazil and others countries and regions: a comparison for the period 1995-2010
Crédits Source: World Economic Outlook – IMF
Fichier image/jpeg, 212k
Titre Graph 6. Gross capital formation in brazil and others countries: a comparison for the period 1995-2010
Crédits Source: World Bank Data.
Fichier image/jpeg, 244k
Titre Graph 7. Real effective exchange rate and manufacturing industry participation in gdp (1980-2010)
Crédits Source: IPEADATA (2009).
Fichier image/jpeg, 172k
Titre Graph 8. Trade balance in US$ billions (1997-2008)
Crédits Source: IEDI (2009)
Fichier image/jpeg, 120k
Titre Graph 9. Brazilian industrial production (1991- 2011)
Crédits Source: Monthly industrial research – IBGE
Fichier image/jpeg, 176k
Titre Graph 10. Brazilian industrial production by category of good (1991- 2009)
Crédits Source: Monthly industrial research – IBGE
Fichier image/jpeg, 232k
Titre Graph 11. Investiment by type of industry – relative participation in the total gross fixed capital formation of brazilian industry (1996-2007)
Crédits Source: Own calculations based on data from the Annual Industrial Research – IBGE and according to Pavitt classification.
Fichier image/jpeg, 152k
Titre Graph 12. Evolution of the investment by type of industry (1996-2007)
Crédits Source: Own calculations based on data from the Annual Industrial Research – IBGE and according to Pavitt classification
Fichier image/jpeg, 133k
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Eliane Araújo, Miguel Bruno et Débora Pimentel, « Financialization against Industrialization: a regulationnist approach of the Brazilian Paradox », Revue de la régulation [En ligne], 11 | 1er semestre / Spring 2012, mis en ligne le 04 mai 2012, consulté le 17 janvier 2017. URL :

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Eliane Araújo

State University of Maringá-Paraná/Brazil,

Miguel Bruno

Institute for Applied Economic Research and State University of Rio de Janeiro/Brazil,

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Débora Pimentel

National School of Statistical Sciences-Rio de Janeiro/Brazil

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