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Financial Liberalization and Economic Policy Options: Brazil 1994-2003

Presentation by Maria Alejandra Caporale Madi, 2004

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What: The paper focuses on the consequences of financial liberalization and recessive macroeconomic adjustment in Brazil covering the period from 1994 to 2003. The orthodox therapy has proved to create a "financial trap", reinforcing the inability to achieve sustainable economic development. Emphasis is given to the crucial economic issues in the agenda of President Cardoso (1995-2002). Finally, the continuity of the "financial trap" after President Lula's election and the challenges to develop a long-term financial system are discussed. Who: Relevant for anyone teaching or studying financial liberalization and its consequences in Brazil. How: Can be used for a background reading as a case study on financial liberalization.





Financial Liberalization

and

Economic Policy Options:

Brazil, 1994-2003












Profa. Dra. Maria Alejandra Caporale Madi,


Instituto de Economia/UNICAMP














April, 2004

Financial Liberalization and Economic Policy Options:

Brazil, 1994-2003






Maria Alejandra Caporale Madi

Instituto de Economia/UNICAMP




Abstract

The paper focuses attention on the consequences of financial liberalization and recessive macroeconomic adjustment in Brazil between 1994 and 2003. The orthodox therapy has proved to create a “financial trap”, reinforcing the inability to achieve sustainable economic development. Emphasis is given to the crucial economic issues in the agenda of President Cardoso (1995-2002). Finallly, the continuity of the “financial trap” after President Lula’s election and the challenges to develop a long-term financial system are discussed.


Introduction


In recent years, after recurrent global crises, there has been broad recognition that the present operation of financial markets does not generate market equilibrium and economic growth. Otherwise, it leads to instability and growing poverty. In fact, the indicators of economic and social performance were not satisfactory in Brazil between 1994 and 2003: financial liberalization has been associated with recessive macroeconomic adjustment and stabilization policies. This paper states that the implementation of this orthodox therapy in Brazil, which is aimed to obtain approval from financial markets, has proved to create a “financial trap”, reinforcing the inability to achieve sustainable economic development.

Section 1 reviews the main economic effects generated by the openness of capital account, emphasizing the problems of macroeconomic management in a context of financial liberalization. Section 2 describes the crucial issues in the adjustment program implemented by President Cardoso (1995-2002) and sketches the macroeconomic performance of Brazilian economy between 1994 and 2002. Section 3 focuses on President Lula´s economic policy options in 2003, discussing the continuity of the “financial trap”: the limits of fiscal adjustment, the asymmetric role of monetary policy and the effects of capital inflows on the evolution of public debt, exchange rate and external vulnerability. Section 4 outlines the main structural changes observed in Brazilian financial system and discusses the challenges to develop a strong long–term financial pattern. The last section summarizes some policy lessons to manage financial integration in order to achieve the goal of growth.


I - Capital account openness and economic policy options


The multilateral institutions that defend financial liberalization, such as IMF, consider this question unavoidable through development process, indicating that its long-term benefits can be noticed in better allocation of global saving (Fischer, 1997). Among other benefits of financial integration with foreign markets are: a) the less cost of domestic credit, as domestic saving effort is complemented with foreign savings; b) the possibility of diversifying risk by acquiring positions in assets not available in domestic markets; c) the possibility of supplementing residents´ investments with foreign investments, having access to new technologies and to new markets; d) the delivery of more efficient and complete financial services for residents in a new environment characterized by competition between domestic and foreign players.

The problem of low real interest rates, emphasized by financial repression theory, is also a criticism to the operation of monetary policy through credit policy. This idea has really had considerable effect on World Bank and IMF economic policy recommendations to developing countries. In this theoretical approach, the evolution of real interest rates can generate distortions in the price system, reducing the relative size of financial system and the rate of economic growth. There is a narrow connection among the evolution of real interest rates, macroeconomic saving, the size of financial intermediation and the rhythm of economic growth.

When evaluating the problems of financial markets in developing countries, this approach gives emphasis on the distortions caused by monetary policy as it tends to determine interest rates below its equilibrium level (natural rate). Consequently, financial deepening and the increase of domestic saving become difficult. Focus is also given on the segmented character of financial markets and on low economic efficiency, that result of government controls, especially on credit markets. In general, in a context of financial repression negative or too low positive real interest rates are associated with high and increasing inflation. As the result of the evolution of real interest rates and of the practice of interest rate ceilings in credit markets, the final effect of state intervention is the reduction of savings and bad allocation of resources. Government is responsible for the disequilibrium between savings and investment in the long term. It is suggested financial liberalization – the end of controls on interest rates, credit and foreign markets- so as to get over the restrictions observed in investment and development processes. Financial liberalization is understood as a precondition to overcome the lack of efficiency of domestic financial intermediation (Madi, 1993).

Under this perspective, some necessary conditions to achieve a successful financial liberalization process are pointed out. McKinnon (1988) states that, in order to avoid some problems associated with financial openness, some issues must be analyzed, such as, the processes of price stabilization and banking system and other financial intermediaries deregulation. After reviewing the Latin America and Asian experiences, McKinnon defends a chronological sequence for the process. First, price stabilization is crucial to achieve real interest rates and financial intermediation growth. Second, only after obtaining some degree of financial deepening, including the development of non banks activities in capital markets, it is possible to deregulate the banking system. In his approach is the lack of domestic savings, as a result of the previous evolution of real interest rates, that prevents the growth of financial intermediation and becomes an obstacle for development.

In a context of financial liberalization, investors punish errors of economic policy options, idea that is associated with the concept of credibility (Grabel, 2000). In other words, the policy of deregulation of capital flows has potential of success since governments adopt not only the right macroeconomic policies but also implement prudential measures and efficient supervision practices on financial systems. On the other hand, the World Bank (1991) believes that commercial openness can cope with a higher participation of developing countries in global income, promoting the convergence of income patterns all around the world.

The nineties showed the fallacy of arguments under FMI and World Bank proposals, when we look to the process of financial liberalization from a Latino American perspective. UNCTAD (2002) states that, in the 1990s, the results of commercial liberalization were the growth of participation of emergent countries in international commerce, without having increased their participation in global income in the same proportion. That happened because the value added to exports is relatively small when compared to capital-intensive products exported by developed countries. Among emerging economies, the only exception are the countries of Eastern Asia. The virtuous relationship between commerce and growth is not automatic, but depends on the composition of exports and the participation of developing countries in international productive networks and flows of foreign direct investment.

In the 1990s, international financial markets proved to be unstable and inefficient from the productive perspective, that is to say, international flows of capital were not able to finance the amount of investment necessary to encourage development. Another consequence of liberalized system is that the costs of finance had the tendency of being high: the volatility of capital flows and price assets increased the risks of banking systems, what pushed domestic interest rates (Akyüz,1993). Financial crises have shown the fragility of exchange rate regimes and balance of payments vulnerability, in the context of current international financial architecture.

Last decade was a period of global liquidity, in which a fast expansion of private capital flows was observed. This event was determined by the evolution of American monetary policy and the deregulation of markets. The demand for financial assets, generated by this new debt cycle, included risk evaluation in rate returns, that were compatible with the inconvertibility of currencies in that region. In Latin America, the debate in last decade was focused on the sustainability of these flows of capital that financed deficits in current accounts. The main objective of economic policy was to support stable debt and capital flows, instead of preserving competitiveness or employment. IMF suggestions, to increase capital formation by attracting external saving flows, as a result of fiscal austerity and high real interest rate, are exactly the opposite to the recommendations based on a Keynesian approach, that states that the existence of saving does not lead to development. Under the Keynesian perspective, investment is not limited by previous saving, but by lack of credit and high real interest rates. The precedence of investment over saving must be understood in the context of the circuit investment-finance-saving-funding.

In the model of balance of payments adjustment adopted in Latin America, during the 90s, it is supposed money demand as an stable function of income level; an expansion of money supply has direct effects on aggregate demand (for a given level of product) and, through this way, on domestic price level, causing balance of payments deficits and loss of international reserves. It is believed that markets, without state intervention, are inherently stable.

Under this perspective, external disequilibrium is determined by economic policy options. Permanent external disequilibrium is a monetary phenomena: Central Banks are active in maintaining the stock of money supply totally incompatible with the demands of external equilibrium. Generally, the financing of fiscal deficits, through monetary base expansion, is the cause of external disequilibrium. The ex-ante savings-investment disequilibrium, covered by credit expansion (public deficit), causes the global balance of payments deficit. In other words, the tendency of keeping the domestic income level too high, vis à vis its non-inflationary level, is responsible for this fact.

To Friedman (1962) the adoption of a flexible regime would let the economy achieve general equilibrium. Each country has to take care of its monetary policy, leaving to the free exchange markets the determination of currencies relative prices. Friedman states that speculation is stabilizing. The point is that, in the long run, in the process of balance of payments adjustment, the domestic price level and the stock of money supply become compatible with internal and external equilibrium. Monetarists believe that changes in current good prices are the result of the monetary policy implemented by the Central Bank. Money demand is considered stable: the instability of prices is the result of the instability of money supply, that depends on government expenses financed by emission, or yet on the adoption of policies that try to reduce temporarily the natural unemployment rate (Madi, 1993).

In monetarist economic policy recommendations, the monetary and credit restrictions may contribute to balance of payments adjustment. Credit restraint tends to increase domestic interest rate, contributing to commercial deficit reduction through the reduction of imports. The increase in domestic interest rates, in relation to international interest rates, can attract capital flows that may help to finance the global balance of payments deficit. If Central Banks implement operations of sterilization, they will delay the adjustment process. The solution to external disequilibrium imposes the reduction of aggregate spending, and, consequently, of growth.

In monetarist macroeconomic models is given emphasis to the idea that variations in domestic money supply constitute, besides real income, a key-issue to understand the relationship between price variations and exchange rate fluctuations (Brunhoff,1998). In short, in fixed exchange rate regime, the exchange rate is given and the level of international reserves and monetary base fluctuate. In a flexible exchange rate regime, the monetary rule is given, conditioning the evolution of exchange rate. Exchange rate fluctuations make possible a direct and quantitative control on money supply (Madi,1993).

Under this approach, monetary policy subordinates fiscal policy. In the orthodox view, the point is the size of public deficit and its effects on monetary expansion – and on inflation- or yet the crowding-out effect in financial system after the expansion of public spending. The financing of public sector needs, trough monetary expansion or public debt, must be compatible with monetary targets.

In a context of capital mobility, the exchange rate fluctuations confirm the subordination of exchange rate policy to monetary policy. That flexibility cannot be understood as instability, that is caused by the variability of expectations on the future of exchange rates. The evolution of exchange rates plays an important role in the prediction of the future evolution of monetary policy. The difference between international interest rates and domestic interest rates must be equal to differential of inflation rates observed between countries.

The point is that this approach relies on the exogenous nature of money supply and the duality “real versus monetary” when analyzing the dynamics of the capitalist economy, withdrawing the active role of money and its non-neutral effects. In the monetarist view, market imperfections may be corrected, since adequate policies are implemented.

Brunhoff (1998) points out that financial instability means price instability in financial asset markets. The instability of exchange rates is a related question, since domestic currencies assume the character of financial assets, that compete among them. The monetarist approach withdraws this monetary problem, as well as the portfolio analysis does. Currently, in the lack of international monetary system, the determination of exchange rates depends on the hierarchy among monetary policies and the arbitrage/speculation made by financial markets. (Tavares e Melin,1998)

Plihon (1998) argues that in the new liberal agenda full employment and deflation are complementary objectives. In fact, Brunhoff (1998) emphasizes that the huge growth of deregulated finance has been associated with monetarist deflation domestic policies. Chesnais (1998) also pointed out this idea, explaining the logic of high real interest rates. In his own words (Chesnais,1998:51): “A pattern of high financial return was universally imposed by financial markets, with local variations, depending on the influence of financial arbitrages on domestic monetary policies. The evaluation of domestic currencies in exchange markets was submitted to this new financial regime, as well as the practices of Central Banks”.

Central Banks continue having influence on domestic credit cost through the management of interest rates. However, its autonomy has been reduced. The level of domestic interest rates depends not only on the management of domestic currency in exchange market but also on the new international financial pattern - high returns and low inflation.

The inability of answering to external shocks was the permanent trait of this economic policy option, based on IMF recommendations. Flassbeck (2001) criticizes this logic because it neglects the crucial problem in international commerce of goods, services and capital, that is, the price and wage inflexibility as well as the need to preserve competitiveness. The short-term approach that focuses on financing current account does not consider the different institutional arrangements in labor markets, as well as the different rates of growth experienced by countries after commercial and financial openness.

Since the eighties some economists have recognized the “incompatibility’ of three situations: one country cannot have, at the same time, free capital markets, fixed exchange rate regimes and autonomy of monetary policy. In order to continue the process of financial liberalization, governments have to reduce public expenses and wage costs have to be cut down.

The defense of exchange rate flexibility, in the orthodox view, focuses on the argument that exchange rate fluctuations can equilibrate the gap between prices and costs among countries. As a result, Central Banks rescue the autonomy of monetary policy. To Flassbeck (2001) flows of capital do no play that stabilizing role. Otherwise, after exchange rate crises in the nineties, instability seems to happen in spite of the exchange rate regime chosen.

Flassbeck (2001) discusses the viability of unilateral options of exchange rate regimes in a multilateral world, in which the advance of market globalization continues despite the lack of global institutions or yet the absence of a global approach to economic policy. Directing attention to a canonic discussion between fixed or flexible exchange rate regime sets aside the essence of the problem, that is, the unstable effects of increasing capital mobility and the loss of autonomy of economic policy. Flassbeck states that it is impossible to think about autonomy or independence of monetary policy in a context of capital account openness. In spite of the exchange rate chosen, the autonomy of monetary policy is limited by international financial markets demands.

In this context, exchange rate crises may also happen as result of quick reversal of an asset cycle in the central countries of global system. This is explained in a context of radical uncertainty, in which decisions to balance risks and yields, in order to achieve performance goals, are not predictable. The role of expectations and strategies is crucial in Post-keynesian arguments. The principle of uncertainty is based on the idea that the past is irrevocable and the future is unknown. Keynesian uncertainty means that the future value of variables is not known. Under this perspective, the process of decision making is based on conventions.

A Post-keynesian approach to the transmission mechanism of monetary policy is based on the existence of a monetary economy which foundations are credit relations, organized markets of financial assets, speculation and uncertainty. In this economy, money means the representation of liquid wealth, the link between present and future. Money has a non-neutral nature, or yet, it affects spending decisions. Money cannot be seen only as a medium of exchange, because money demand, for its value reserve function, is unstable as a result of uncertainty about the future and speculation.

Crises in emergent markets have shown sources of fragility of these economies: its dependence on favorable access conditions to international financial markets, the random behavior of investors and capital flows, the narrow interconnection between exchange and bonds markets- especially public debt markets. The vulnerability of domestic currencies in emergent countries, as a result of changes in market opinions, is not independent of the global financial cycle, that threatens the sustainability of exchange rate regimes. As a consequence, the success of stabilization plans depends on the access to international financial resources. The volatility of exchange rates, nurtured by speculative behavior, brings higher risks to emerging economies. The side effects of financial integration – including changes in macroeconomic stability- can occur when changes in net capital inflows are too fast.


2 - Adjustment program and economic performance: Brazil, 1994-2002


Throughout the 1990s, the option of economic liberalization in Brazil was maintained in order to finance its current account deficit and take advantage of the long-term benefits defended by multilateral institutions. Between 1994 and 2002, challenges and risks involved Brazilian economy. Presidente Cardoso´s election in 1994 was a guarantee that the stabilization program, initiated while he was Minister of Itamar Franco´s government , would be maintained.

In the middle of 1994 was implemented an stabilization plan, Real Plan, based on some principles: a) the inertial character of Brazilian inflation and the need to promote the end of the process of indexing the economy; b) the believe that the contraction of aggregate demand through high real interest rates and credit restriction was the way to stabilization; c) the administration of nominal exchange rate would condition domestic price determination; d) the adjustment of global balance of payment deficit would be achieved by capital inflows, that is, the ex-ante saving-investment problems would be get over by the attraction of external savings.

The economy was opened to massive entry of capital. Such inflows were reactions to differentials between domestic and foreign interest rates and to adjustments in the composition of portfolios of foreign investors. This process involved: a) exchange rate appreciation; b) current account deficit; c) increase is public debt.

Soon after the stabilization plan, the expansion of aggregate demand was transitory, since an inevitable correction in domestic demand was forced soon after the Mexican Crisis. This, indeed, was also the case after the Asian crisis, where changes in expectations of returns on assets, hedging strategies and fear of contagions led to increased volatility in exchange markets, considerable reversion in capital flows and fall in the prices of domestic assets in capital markets. The impact on the evolution of international reserves (see Table 1) was a decisive factor in the implementation of the new exchange regime.


Table 1

Brazil: International reserves, millions of US$,,1994-2002


Year

International Reserves - international liquidity - except gold

International Reserves - international liquidity - gold

1994

37388.5

1417.7

1995

50073.2

1767.1

1996

58729.5

1380.6

1997

49507.0

2665.7

1998

41865.3

2691.2

1999

35279.3

1063.0

2000

32433.5

578.0

2001

35563.0

303.0

2002

37448.0

375.0

Source: IPEA


The relationship between financial liberalization and the “financial trap” must be connected with the relationship among monetary policy, fiscal policy and exchange rate policy. Monetary policy option became subordinated to the financial deficit of public sector. In a context of global liquidity, the management of domestic interest rates attracted capital inflows that were sterilized so as to avoid the inflationary effect of monetary expansion in the short-term. Otherwise, this policy did not only increase short-term public debt but also the importance of interest rate policy to avoid speculative movements against domestic currency.

To avoid speculation in exchange rate market, emphasis was given to interest rate policy in open market operations (SELIC), that was managed in order to avoid instability of nominal interest rate in the short term. As a result, grew the importance of the financial dimension of public deficit. In spite of the fiscal austerity option, the increase of financial charges was unavoidable. The financial dimension of public deficit is incompatible with proposals that focus on fiscal reform to sterilize financial pressure. The participation of domestic public debt in GDP grew as the burden of financial charges was superior to the performance of GDP (see Table 2).


Table 2

Brazil: Public Debt as % of GDP, 1994-2002


Year

Public Debt/GDP

1994

21.58

1995

25.19

1996

29.33

1997

30.04

1998

35.55

1999

38.99

2000

39.66

2001

42.16

2002

42.66

Source: IPEA


As a matter of fact, the sterilization option to manage the influx of capital flows was decisive to understand the growth of public debt (see Table 2). However, liquidity preferences and changes of market expectations have played an important role in the autonomous growth of the stock of public debt. It may also be emphasized that the composition of public debt reflects the uncertainty and liquidity premium required by financial market. After the Asian crisis and in the pre-election period the preference for foreign currency was responsible for the increase of the part of domestic public debt indexed to the dollar (Table 3).


Table 3

Brazil: Composition of Public Debt - Open Market - %- 1994-2002


Year

Exchange rate

SELIC

prefixed rate

1994

8.29

16.03

40.20

1995

5.29

37.77

42.70

1996

9.38

18.61

61.00

1997

15.36

34.78

40.91

1998

21.00

70.98

1.68

1999

24.24

61.09

9.19

2000

22.28

52.25

14.76

2001

28.62

52.79

7.82

2002

22.38

60.83

2.19

Source: IPEA


In a context of capital inflows, the relationship between nominal exchange rate and nominal interest rate shows the elasticity of international reserves to the management of interest rate. Speculative movements may be stopped by exchange rate devaluation or the adoption of a higher interest rate. Exchange rate liberalization and financial liberalization, have been conditioning, since 1991, the real power of Central Bank to manage interest and exchange rate. The defense of a desirable level of international reserves became the criteria utilized to guide Central Bank interventions in exchange market. In other words, free exchange market in Brazil operated under the control of Central between 1994 and 2002. Although the determination of the exchange rate was conditioned by expectations and actions of market agents, the relative size of Central Bank, as the main buyer and seller of reserves, turned to be crucial.


Chart 1

Brazil: Nominal exchange and interest rate, 1993-2002

Source: Banco Central do Brasil and IPEA. Elaborated by the author


After the Mexican crisis, the option was to elevate the nominal interest rate, maintaining the administered exchange rate regime. This option put an end to the short cycle based on the expansion of the consumer goods sector. After the Asian crisis, in spite of the increase of nominal interest rate at the beginning of 1998, the loss of international reserves continued through this year. The evolution of domestic interest rate was subordinated to speculation with exchange rate (see Chart 1).

It is possible to state important differences in the relationship between exchange rate and interest rate in the periods before and after the devaluation of the real in 1999. In the period before the devaluation, any threaten involving a quick loss of international reserves and the viability of the administered exchange regime imposed a huge increase of interest rate. After the devaluation, and as a result of the adoption of a flexible exchange rate regime, the threaten of exchange speculation has had less impact on interest rate level (see Chart 1).

The management of exchange rate till the beginning of 1999 did not avoid its appreciation that influenced in a negative way, the export sector performance (see Table 4). However, it was important as a mean of attraction of capital flows. The adoption of a more active exchange rate policy (diminishing the differential exchange rate-interest rate) could have effects on the accumulation of international reserves, diminishing the inflows of short-term capital.

Before the currency crisis, domestic interest rate was used to stimulate capital inflows and avoid quick reversal of resources in domestic financial markets. During the crisis, the loss of reserves affected Central Bank, Treasury and the exchange rate. Central Bank fragility resulted of the loss of power on the evolution of exchange rate, as a consequence of the loss of international reserves and the power of act against speculative movements. In this context, the exchange rate became fragile as a consequence of the intense devaluation of the real. Finally, Treasury had its financial situation deteriorated, as a result of the increase of interest rate and the liquidity preference of public debt holders.

After President Cardoso´s reelection, exchange rate was devaluated and was adopted a “dirty floating” regime in 1999. As a consequence of this option, the sustainability of exchange rate was possible with less international reserves and less pressure upward on interest rate (see Chart 1).

When we analyze the relationship between monetary policy and domestic public debt, in the period 1994-2002, some facts can be emphasized: a) the accentuated increase of international reserves was managed by sterilization and cause the increase in public debt; b) the stock of public debt, and its participation in GDP put pressure upward interest rate; c) in the context of quick reversal of international reserves, Central Bank has to sell public debt indexed to the dollar, as a kind of hedge to investors, minimizing the speculation against the real. Central Bank became a prisoner of Treasury. The liquid character of financial wealth conditioned the behavior of Central Bank.

In contrast with the arguments under orthodox therapy, the adjustment of public accounts are permanent (Tavares e Melin,1998), as a result of disequilibrium between flows and stocks of wealth and income. These disequilibrium cannot be faced by fiscal austerity, but imposes the need of restructuring the Brazilian economy financial pattern.

Plihon (1998) gives emphasis on the responsibility of high interest real rates in the degradation of public finance: monetary control leads to the decrease in growth that increases public deficits and leads to the growth of public debt, that causes the maintenance of high real interest rates. This leads to the increase in speculative finance and of financial instability, reducing the rhythm of investment. To stabilize the relation public debt/GDP, the rate of GDP growth must be, at least, equal to the rate of interest. If the rate of interest is increased, staying above the rate of GDP growth, deficit and public debt would increase faster than GDP. In fact, financial charges increase as a result of the high interest rate policy, in spite of the efforts on primary surplus.

It must also be discussed the fragility of the insertion of Brazil in international capital markets. The results observed in capital account were caused by short-term instruments and by speculative capital until 1998 (see Table 5). The flows of foreign direct investment increase in a significant way after 1996, but after 2001 they began to reduce its contribution to capital account.


Table 4

Brazil: Balance of Payments (in millions of US$), 1994-2002


Balance of payments

1994

1995

1996

1997

1998

1999

2000

2001

2002

Commercial account (fob)

10466

-3466

-5599

-6753

-6575

-1199

-698

2650

13121

Exports of goods

43545

46506

47747

52994

51140

48011

55086

58223

60362

Imports of goods

-33079

-49972

-53346

-59747

-57714

-49210

-55783

-55572

-47240

Services and incomes (net)

-14692

-18541

-20350

-25522

-28299

-25825

-25048

-27503

-23229

Services

-5657

-7483

-8681

-10646

-10111

-6977

-7162

-7759

-5038

Receipts

4392

4929

5038

6876

7897

7194

9498

9322

9606

Expenses

-10049

-12412

-13719

-17522

-18008

-14171

-16660

-17081

-14644

Current Account

-1811

-18384

-23502

-30452

-33416

-25335

-24225

-23215

-7718

Capital and Financial Account

8692

29095

33968

25800

29702

17319

19326

27052

8856

Brazilian Direct Investment

-690

-1096

469

-1116

-2854

-1690

-2282

2258

-2482

Foreign Direct Investment

2150

4405

10792

18993

28856

28578

32779

22457

16590

Portfolio Investment

50642

9217

21619

12616

18125

3802

6955

77

-5119

Derivatives

-27

17

-38

-253

-460

-88

-197

-471

-356

Other

-43557

16200

673

-4833

-14285

-13620

-18202

2767

-210

Errors and omissions

334

2207

-1800

-3255

-4256

194

2637

-531

-836

Global balance result

7215

12919

8666

-7907

-7970

-7822

-2262

3307

302

Source: Banco Central do Brasil


It must be noticed that after the Asian crisis there has been a fly to quality in international capital markets, being reduced the access to international capital flows between 1998-2002 (CEPAL, 2003). This fact can be observed through the evolution of country risk after 1998 till 2002 (see Table 5). This last year was particularly influenced by the results of pre-election research that point out Lula as the future president of Brazil.


Table 5

Brazil: Country Risk, 1995-2002


Year

Country Risk

1995

983.06

1996

560.80

1997

583.86

1998

1121.46

1999

707.14

2000

775.90

2001

888.17

2002

1569.42

Note: This measure of country risk is the result of the

transformation of the evolution of C-bonds in basis-points.

Source: Banco Central do Brasil and IPEA


As we can see in Table 6 , the expansion of external debt (private and public) was due to the access to international capital markets in a favorable international context. The continuity of this process depends on the maintenance of the expansionist American monetary policy.


Table 6

Brazil: Registered External Debt (private and public)

in millions of US$, 1994-2002


Year

Private external debt

Public external debt

1994

32804

86864

1995

42145

87168

1996

59863

84229

1997

91555

76205

1998

128329

92021

1999

105891

97448

2000

106296

89883

2001

99903

92818

2002

85232

110355

Source: IPEA


The composition of public debt conditioned the management of interest rate and the relationship between Central Bank and the banking system. Banks have been increasing the participation of public debt on their financial statements. The another face of this fact is the low participation of credit in GDP at the end of Cardoso´s government (see Table 7).


Table 7

Brazil: Participation of credit in GDP, in %, 2001-2002


Period

Free Resources

Directed Resources

Total

June-01

15.17

8.69

25.66

Dec-01

15.50

9.30

26.44

June-02

15.86

9.19

26.62

Dec-02

13.38

9.00

23.83

Source: Banco Central do Brasil


The main objective of Cardoso´s agenda was price stabilization. As a consequence of the “financial trap” the evolution of GDP was conditioned to the reduction of the volume of investment (see Tables 8 and 9) . The evolution of rate of unemployment and real incomes of people employed reveal the kind of adjustment implement (see Tables 10 and 11)


Table 8

Brazil: Rates of growth (1960-2000, in%)


Period

GDP

Population

GDP per capita

1961-1970

6.17

2.89

3.19

1971-1980

8.63

2.44

6.04

1981-1990

1.57

2.21

-0.63

1991-2000

2.65

1.43

1.20

Source: Banco Central do Brasil



Table 9

Brazil: Volume of investment, 1997-2002

Base 1990=100


1997

128.30

1998

127.89

1999

118.62

2000

123.91

2001

125.22

2002

120.01

Source: IBGE



Table 10

Brazil: Open Rate of Unemployment, 1994-2002

Metropolitan Areas (in%)


1994

3.78

1995

4.95

1996

4.25

1997

5.53

1998

7.13

1999

7.11

2000

5.58

2001

6.43

2002

6.17

Source: IPEA


Table 11

Brazil: Average real income of people employed. 1994-2002


Period

In Millions of US$

Base 1999 = 100

Dec/94

8239

114

June/95

8741

117

Dec/95

10060

128

June/96

10069

124

Dec/96

10928

134

June/97

10081

126

Dec/97

10969

139

June/98

9662

124

Dec/98

10320

138

June/99

6378

120

Dec/99

6919

128

June/00

6891

121

Dec/00

7101

129

June/01

5445

116

Dec/01

5927

117

June/02

5153

112

Source: Banco Central do Brasil


After the implementation of the floating rate regime with inflationary targets to guide Central Bank decisions in 1999, the evolution of prices did not let the government achieve the targets proposed (see Table 12). This shows the difficulties of guiding economic policy by rules in a context of financial openness and inconvertible currency. The performance of inflation rates was particularly affected by administered prices in privatized sectors, external shocks and evolution of profit margins, in spite of the evolution of aggregate demand.

The “financial trap” shows the impossibility to obtain, at the same time, monetary stabilization, capital mobility and autonomy of monetary policy. Financial liberalization requires monetary stabilization and free capital mobility: there is no autonomy of monetary policy. This is conditioned by the investors demands that express expected yields. Markets impose a kind of “tyranny” on economic policy.


Table 12

Brazil: Rates of Inflation (1993-2002)


Year

IPC - FIPE

INPC

IPCA

IGP-DI

IGP-M

1994

941.251

929.32

916.46

1.093.85

1.246.62

1995

23.1663

21.98

22.41

14.77

15.24

1996

10.0348

9.12

9.56

9.33

9.19

1997

4.8257

4.34

5.22

7.48

7.74

1998

-1.7953

2.49

1.66

1.71

1.79

1999

8.63

8.43

8.94

19.99

20.1

2000

4.3841

5.27

5.97

9.8

9.95

2001

7.1335

9.44

7.67

10.4

10.37

2002

9.9005

14.74

12.53

26.41

25.3

Source:Banco Central do Brasil


3 - President Lula´s economic policy options in 2003


When the favoritism of Lula became public in 2002, there was a domestic financial crisis. The speculation against the real required an increase of interest rate and the participation of public debt indexed to the dollar. The interdependence between macroeconomic policy and “the financial trap” was clear: the threaten to loose international reserves and the overshooting of exchange rate imposed the need of increasing interest rate (see Table 13). The effects on public debt showed the dependence of its evolution to the level of nominal interest and exchange rates.


Table 13

Brazil, Nominal Interest and Exchange Rate, 2001-2003


Year

SELIC in %

R$/US$

2001

19.05

2.3196

2002

23.03

3.5325

2003

16.91

2.8884

Source: Banco Central do Brasil


After Lula´s election, it was observed a continuity in macroeconomic policy. In spite of the pre-election debate when PT documents showed the need to abandon Cardoso´s agenda, Lula´s agenda reinforced the power of monetary policy to overcome the domestic financial crisis. The idea of an independent Central Bank, as a guarantee of the stabilization process and of the inflation target rules, was adopted. Brazilian Central Bank would be free from pressures of Treasury to finance deficits or yet be involved in credit policy. Brazilian Central Bank has only to be worried about prices, growth would be a result.

In the name of the need to defeat inflation, to obtain approval from financial markets and to equilibrate public accounts, Lula´s economic policy options cannot dismantle the “financial trap’, adopting , in the first year of his government, an agenda of economic policy that had deleterious effects on employment and poverty. In 2003, the rate of open unemployment in metropolitan areas increased to 10.63% and the real income of people employed decreased in 12.0%. The decision of financial and non financial enterprises was conditioned to this context. The government experience through 2003 showed the lack of autonomy and the asymmetric role of monetary policy.


Table 14

Brazil: Composition of Public Debt - Open Market- in %- 2002-2003


Year

Exchange rate

SELIC

Interest-fixed rate (pre)

2002

22.38

60.83

2.19

2003

10.79

61.35

12.45

Source: IPEA


In 2003, the evolution of public debt reflected the effects of country risk and the performance of balance of payments (see Charts 2 and 3), diminishing the participation of public titles indexed to the exchange rate (see Table 14). Lula’s option was to increase the credibility of its government, keeping the monetary policy centered in rules, so as to have decisive impacts on expectations, country risk and the behavior of economic agents. Restrictive monetary policy had proved to be powerful as an instrument to deflate demand, but it had no favorable effects on expectations on future demand conditions, depressing investment decisions. The process of financial deepening in Brazilian economy advanced due to the differential between profitability in financial and productive spheres. Unemployment turned out to be a permanent and cumulative process, because of the evolution of effective demand.

The option of increasing the interest rate in January of 2003 was aimed to obtain credibility from financial markets. In this way, part of global liquidity was captured by Brazilian companies, strengthening their debt positions if foreign currency, in spite of exchange rate risks. The weak demand for hedge positions in future markets can be understood as a signal of market confidence on the exchange rate policy in a context of abundant international liquidity.

While the strong inflows tended to appreciate the exchange rate, Central Bank tried to manage international reserves in a pure floating regime through 2003. In other words, Brazilian Central Bank decided not to make interventions in exchange rate market, abandoning, in principle, the practice of dirty floating. The aim was to use the exchange rate appreciation as an anchor to stabilize prices, after the pass through observed in 2002. This option of non intervention continued till January of 2004, when Central Bank reintroduced the dirty floating interventions in a explicit way.

The fact is that Lula inherited a process of balance of payment adjustment that began after the devaluation of the real and had finally, in 2003, had positive impacts on exports, while imports remained reduced because of the low rate of Brazilian economy growth. In 2003, it was observed the first current account surplus in years that contributed in a positive way to the global result (see Chart 2).


Chart 2

Brazil: Balance of payments, global result, 1993-2003


Source: Banco Central do Brasil . Elaborated by the author

Chart 3

B
razil: Nominal Exchange rate and Country Risk, 1994-2003

Source: IPEA and Banco Central do Brasil . Elaborated by the author


Grabel (2000) points out that credibility is not sufficient against instability caused by speculation. Lula´s agenda continues relying on the same arguments used by his predecessor: the credibility of Central Bank policy - that relies on its independence- is decisive to achieve, in the long run, stability in exchange rate markets.

In a Post-keynesian approach, the microeconomic fundamentals of the financial structure conditioned the results of Central Bank options. Uncertainty, non-coordinated decisions and instability of money demand are crucial in this approach (Davidson, 1978). The speculative nature of money demand is an obstacle to production and employment. The capitalist economy is inherently unstable, does not presenting the tendency to auto-regulation so as to achieve growth and full employment (Keynes, 1936).

Under this perspective, the influence of monetary policy and its relative autonomy in face to fiscal and exchange rate policies were already discussed. Financial openness limits the autonomy of domestic monetary policy, on the other hand, the relationship between Central Bank and Treasury conditioned monetary management. The theory of financial fragility developed by Minsky (1982) emphasizes the active role of financial institutions and the asymmetric character of the interest rate impacts on spending decisions.

The maintenance of high real interest rate in Lula´s government has deleterious effects on real economy: a) it reinforces the short-term horizon for decision-making; b) it induces foreign indebtedness, arbitrage and interest-rate fixed financial investments; keeps the supremacy of financial capital on productive capital. In General Theory, Keynes stated that in face to uncertainty, the entrepreneurial economy is dominated by speculative decisions. Even institutional investors are guided by the principle of liquidity. The performance of capital markets in this context is speculative. In fact, the structural problem of financing in Brazil is in the whole investment-finance-funding process. The low participation of credit in GDP, the high credit spreads and the fragility of capital markets are obstacles to growth. In spite of the reduction of nominal interest rates initiated in 2003, monetary policy has not obtained the effects expected by government. Keynes had warned about the incapacity of monetary policy to affect entrepreneurial expectations, when these are in a “liquidity trap”.

Under the international financial architecture, the dynamics of emerging economies expresses fragility due to the elimination of the following premises in IMF recommendations: the free movement of capital causes fiscal and monetary disequilibrium in countries with inconvertible currencies. Negotiations with IMF, during the first year of Lula´s government, reinforce fiscal adjustment, elevating fiscal targets to levels not seen before.


4 - Challenges and risks in Brazilian Financial System


The role and influence of interest rate policy are inside the context of analysis of the relationship between investment and financial conditions. Monetary and financial institutions condition Central Bank practices and the evolution of the investment-finance-funding conditions.


It is necessary to inquire about the factors that have influence on credit demand in Brazilian economy. It has been already shown that deflation policies were responsible for the reduction of aggregate demand and affected expectations facing the future of spending in investment and consume. In this contest, credit demand is depressed.

Banking strategies, in a context of increasing competition, turn elastic or inelastic financing conditions as a result of their evaluation on liquidity, risks and returns, in spite of the objectives of Central Bank. There is a narrow relationship between economic conditions and credit supply by banks, as Minsky (1986) had emphasized. The credit supply process in Brazil has been depending on the expectations about the future evolution of economy (spending and profits) and on the validation of cumulated debts. Uncertainty and expectations about the future affect debtor and creditor decisions.

The structure of Brazilian financial system changed substantially in the nineties, especially after Real Plan. The stabilization adjustment was responsible for a reduction of the participation of national financial system in GDP. The negative effects of the end of inflation on banking profitability imposed new adjustments on banking sector. The implementation of BIS patterns of capital requirement adjusted to risk management made part of this changing context since 1994.

From the regulatory perspective, the creation of universal banks in 1988 institutionalized the existence of financial conglomerates, with consolidated financial statements and full mobility to operate in money, exchange, capital and credit markets. Through the nineties, the principal factors that contributed to changes in Brazilian financial sector structure were: stabilization, internationalization, privatization, regulation, competition and technology.

The implementation of PROER, a program directed to the needs of the private banking sector after Real Plan, included: a) administrative, operational and property reorganization, previously authorized by Central Bank; b) financial assistance directed to achieve targets proposed by BIS Agreement; fiscal facilities to cover costs and expenses originated in the modernization processes. Cardoso also implemented the PROES, a program directed to reduce the number of public banks, which objectives were privatization, decreasing its importance in Brazilian banking system. One of the main characteristic of this adjustment was the reduction of the total number of banking institutions, while foreign capital increase its participation in total actives until 2002.

With the openness of banking sector to foreign capital, in the second semester of 1995, it was observed a growing process of mergers and acquisitions in banking sector. In fact, the Brazilian banking system internationalization was justified by the government in order to restructure and strengthen financial system. As a matter of fact, the arguments used by government were the following: foreign banks have better access conditions to new technologies and financial innovations, greater operational efficiency, lower operational costs and better access conditions to new methods of risk management. The new configuration of Brazilian banking sector in terms of national and foreign banks participations in total actives can be observed in Table 15.


Table 15

Brazilian Banking System: Total actives

( in %, 1993-2002)












2002


1993

1994

1995

1996

1997

1998

1999

2000

2001

June

Dec

Foreign control

8.35

7.16

8.39

9.79

12.82

18.38

23.19

27.41

29.86

30.04

27.38

National control

40.67

41.21

39.16

39

36.76

35.29

33.11

35.23

37.21

35.88

36.93

Public Control

13.41

18.17

21.9

21.92

19.06

11.37

10.23

5.62

4.3

5.77

5.87

Caixa Econômica Federal

14.51

14.98

16.4

16.47

16.57

17.02

17.06

15.35

10.97

11.37

11.66

Banco do Brasil

22.93

18.28

13.91

12.52

14.42

17.44

15.75

15.63

16.76

15.94

17.12

Credit cooperatives

0.13

0.2

0.24

0.3

0.37

0.5

0.66

0.76

0.9

1.0

1.04

Total

100

100

100

100

100

100

100

100

100

100

100

Source: Banco Central do Brasil


The restructure of financial system induced to a more privatized and internationalized structure. The concentration in banking system was accelerated after Real Plan. In 1994, there was 243 financial institutions: the ten bigger had 60.2% of total actives and 66.1% of total deposits. In 2002, there were 180 banks. The ten bigger had 68.3% of total actives and 75.7% of deposits. Between 1994 and 1999 there was a reduction of 13% of bank agencies and 14% of employees. Financial institutions redefined their strategic plans, that implied: search of new sources of receipts; definition of segmentation strategies; offer of investment products (mutual funds), insurances, pension funds and products of convenience (debit and credit cards); investments in technology; reduction of employees; mergers and acquisitions. Strategies of reducing costs, increasing economies of scale and scope were decisive.

In the Lula’s agenda, the strategy of expanding the social inclusion in banking system includes the use of remote channels, the expansion of ATMs integrating banks with commerce services, the use of electronic means of payment, besides outsourcing of activities that not belong to the core financial business. The flexibility in bank services expansion, involving new channels of distribution and access to financial services – with emphasis on virtual finance and bank offices- defines broader parameters to regulation directed to consumer protection. Operational risk, inherent to the growing importance of electronic transactions, turns out to be a new component of supervision of banking activities.

The credit boom, soon after Real Plan, in spite of the measures implemented by Brazilian Central Bank to constrain domestic credit, was responsible for high banking profitability, besides the growing importance of non interest incomes. After the Mexican crisis, the active structure of banks reflected the adjustment focused on the increase of the participation of public debt bonds in their portfolios and the reduction of credit operations, after the short spending cycle. Between 1994 until 2002, national private banks kept the leadership in credit market, while it can be observed the declining role of public federal banks in contrast with the performance of foreign private banks (see Chart 4).


Chart 4

Brazilian Banking System: Credit by type of institutions ( 1993-2003)



Source: Banco Central do Brasil . Elaborated by the author


The foreign banks contribution of may be analyzed under a critical perspective, since Brazilian government overstated the effects of their entrance. The openness of financial system has had no effect on the quality and costs of financial services. Paula (2001) shows that there is no clear evidence that foreign banks have more efficiency than domestic banks. Domestic banks have reacted to direct foreign investment in financial system: they have been aggressive in the process of acquisitions so as to preserve the relative positions in market structure.

The ability of banking system to adapt to changes in macroeconomic conditions is justified, in great part, because of the inexistence of long-term credit lines and as the result of the composition of passive structure, concentrated on short-term demands. This particular composition of the financial statements is responsible for their performance.

After the Asian crisis, grew the importance of foreign currency in bank portfolios. Expectations about the future devaluation of the real influenced banks to take liquid asset positions in dollar. After the devaluation of the real until the beginning of 2003, this option was an important source of banking profitability.

The passive composition of banking financial statements expresses the diminishing importance of bank deposits and the strategies in international markets. Private bank adjustment involved the expansion of the mutual fund industry. Changes in passive conditions were also caused by macroeconomic policy, as the real interest rate differential between domestic and international interest rates induced external indebtedness and reduced the passive cost of banks. However, the viability of this process may be questioned in the long run, because of the exchange rate risks associated and the impacts on Brazilian foreign debt.

The concentration of banking portfolio strategies in fixed interest bonds with daily liquidity show that they are not adequate for funding long–term spending. Although many initiatives to transform credits in securities and stimulate variable income titles in mutual funds, in order to pulverize risks and reduce credit costs, they have not yet been successful.

The management of credit risk in banking sector continues to be related to the fragile expectations about future spending. As a result, spreads continue to be high (see Table 16).

Table 16

Brazilian Credit Market: spreads

(free resources, monthly average, 2000-2003)


Period

Consumer

loans

Business

loans

Total

loans

June/00

57.88

12.84

28.37

Dec/00

49.68

12.28

25.95

June/01

45.92

10.76

25.43

Dec/01

50.99

13.31

28.7

June/02

46.61

12

26.92

Dec/02

54.51

16.28

31.05

June/03

58.54

14.62

33.2

Dec/03

50.85

14.4

30.01

Source: Banco Central do Brasil


Chart 5

Brazil: Composition of Capital Account, 1993-2003

Source: Banco Central do Brasil. Elaborated by the author

The macroeconomic policy, focused on reduction of aggregate demand and high interest rates, contributed to the performance of the participation of credit in GDP. Credit risk is considered high by financial institutions in a recessive context. Debtors could commit, their returns with interest payments and amortizations, in an increasing way, becoming financially more fragile. In a context of credit regression, the expansion of credit operations has a short-term character, following demand conditions. The banking adjustment tends to keep the process of shortening active and passive structure, which is incompatible with the development of a long–term final pattern.

On the other hand, the effects of liberalization on capital markets are also far from that. Price asset bubbles are associated with the openness of capital markets, turning the movement of prices extremely dependent on global liquidity. This was observed in 2003, as a result of the return of portfolio investments (see Chart 5) to capital markets in Brazil. Nevertheless, the migration of many open companies to American capital markets and the regression of the number of open companies negotiated in domestic capital markets are signals that financial openness is not the way to improve long-term financing conditions.

From Cardoso’s government perspective, it is undeniable the broad agenda related to long-term finance: credit and capital markets; popularization of financial markets, pension funds, insurances and residential mortgage loans (Secretaria de Política Econômica, 2002). The transformation of credit in securities, the new law of open companies, the strengthen of the CVM (Comissão de Valores Mobiliários), the new payment system, the expansion of financial system by electronic channels and banks offices, the new rules of investment and risk management of pension funds and insurance companies, are some of the examples of the new regulatory context. Cardoso´s and Lula’s agendas aimed to affect the efficiency of Brazilian banking system, increasing the volume and reducing the cost of credit.

Although the stabilization process and the legal changes implemented, the Brazilian economy is still sink into atrophy under the financial perspective. It can be said that the speculative and liquid nature of wealth predominates, concentrated in public debt bonds. Besides, financial integration breads the “financial trap” that prevents sustainable development, particularly because of its effects on the level of interest rates, exchange rate fluctuations and fragility of capital markets.

We can conclude that the arguments used by Cardoso’s and Lula’s options to restructure in financial system are questionable. The new liberal conception of deregulation of markets seems to have not brought more efficiency to financial intermediation in Brazil. International financial markets proved to be unstable and inefficient under the productive perspective during the nineties: we did not observe the allocation of investment necessary to growth.


Conclusions


The orthodox therapy that guided Brazilian macroeconomic adjustment has not been able to sustain an effective long-term stabilization with growth. Fiscal adjustment becomes permanent and the independence of Central Bank is a fallacy. Central Banks does not have power on the complexity of global, innovative and speculative markets. The interdependence of macroeconomic policies turns the idea of autonomy an utopian ideal. It is impossible to think of the Central Bank action s independently of private and public pressure.

The asymmetric role of monetary policy can be surpass, in part, trough the participation of Central Bank in redirecting flows of credit. It is necessary to influence flows of credit, articulate with industrial policy, so as to achieve economic growth. However, the success of the adoption of a selective credit policy would depend on the patterns of businessman expectations and the pattern of returns and risks of financial agents.

Domestic monetary systems, in a context of financial liberalization and unconvertible currencies, do not face financial disturbances easily. The financial crises in the nineties, and the erratic movements of key-currencies show that there is no autonomy of macroeconomic policy. The challenge to increase opportunities of investment and employment imposes the necessity to think about capital controls to short-term capital inflows.

Without questioning the free mobility of capital, but knowing the risks inherent to financial markets operations, international agreements have introduced preventive “codes and patterns”. Under the BIS perspective, the implementation of rules to minimize the effects of banking risk management and to require higher level of capitalization are essential to stability. These preventive measures must be completed by the dissemination of information, transparency, more supervision and contingency strategies to different kinds of stress situations. However, the contradictions created by free capital mobility are not considered. International agreements accept the expansion of universal banks, of private money and of internationalized banks in capital markets, under the WTO logic of liberalization of financial services (Guttmann, 1998)

In this context, it is decisive to underline the importance of supervision of global financial risk. The universal character of banking institutions and products expresses the conflict behind segmentation of supervision in many agencies. The transformation of financial structures, more concentrate and internationalized, induces to question the function of Central Bank as an agency that arbitrates competition. Many factors contribute to the consolidation of larger financial institutions: capital adequacy requirements, development of technology, the elimination of geographic restrictions; the changes in the composition of financial savings (Campilongo, Veiga da Rocha e Mattos, 2000).

One of the great challenges to restructure the international financial architecture is the absence of a common project, with the compliance of all countries, so as to achieve: the adequate provision of liquidity, the recognition of the need of stable financial flows to developing countries and new forms of negotiating debts (Griffith-Jones, 2002). The lack of representation of developing countries in multilateral agencies (IMF, World Bank and BIS) decision-making instances, besides the lack of a common project among medium and low income countries, make the challenges even greater and the possibilities of change more difficult and remote.

The crises observed in emerging countries have revealed reasons to emphasize systemic problems. In this context, the scope of domestic policies to prevent and manage crisis is limited. The global financial integration has augmented the exposure of countries to global macroeconomic and financial conditions, increasing the possibilities of transmission mechanisms provoking instability. In fact, there are limits to the preventive potential of financial regulation. First, there is a delay between regulation patterns and banking practices. Second, the banking structure is vulnerable to changes in macroeconomic conditions. Financial regulation can induce to better practices but cannot eliminate the possibility of crisis. It is necessary a global action, with coordination and coherence in the actions of international agencies.

In Brazil, the true stabilization process requires a new relationship between financial and industrial spheres in a context of growth and income distribution. In this new scene we can emphasize: a) the dynamic and consistent articulation of macroeconomic policies, such as demand policies (fiscal and monetary) and public and rental policies (wage and prices), restructuring the relations between government and private sector. b) the elaboration of a credit policy that can act on credit and debt flows, articulated to institutional investors and capital markets.

That articulation aims to stimulate new investment projects, mobilizing private and public finance and funding. It must considered the intense transformations of Brazilian economy in the nineties in its financial and productive structures. The strategies of international companies and the tendencies of international negotiations and agreements put in evidence new constraints and opportunities.

Brazil has to reformulate its financial policies so as to dismantle “the financial trap”. It is time to think about the adoption of: a) capital controls, that may minimize not only the effects of quick reversal short-term capital flows but also excessive indebtedness in international financial markets; b) a credit policy that could contribute, besides an industrial policy, to economic growth. Globalization is not a miracle way to achieve growth. Developing countries have to adopt selective measures in the context of macroeconomic and industrial policies, so as to be able to grow, reducing external vulnerability. We have to look forward new perspectives and need more coherence in the relationship among commerce, finance and sustainable development.


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