Brazil in Transition: Beliefs, Leadership, and Institutional Change 9781400880942

Citation preview

Brazil in Transition

The Princeton Economic History of the Western World Joel Mokyr, Series Editor A list of titles in this series appears at the back of the book

BRAZIL IN TRANSITION Beliefs, Leadership, and Institutional Change Lee J. Alston, Marcus André Melo, Bernardo Mueller, and Carlos Pereira

Princeton University Press Princeton and Oxford

Copyright © 2016 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TR press.princeton.edu Jacket art: Tarsila do Amaral, São Paolo, 1924. Oil on canvas, 57" × 90". Courtesy of Pinacoteca do Estado de São Paulo. All Rights Reserved Library of Congress Cataloging-in-Publication Data Names: Alston, Lee J., 1951– author. Title: Brazil in transition : beliefs, leadership, and institutional change / Lee J. Alston, Marcus André Melo, Bernardo Mueller, and Carlos Pereira. Description: Princeton : Princeton University Press, [2016] | Series: The Princeton economic history of the Western world | Includes bibliographical references and index. Identifiers: LCCN 2016005035 | ISBN 9780691162911 (hardcover : alk. paper) Subjects: LCSH: Brazil—Economic policy. | Brazil—Social policy. | Brazil—Politics and government. Classification: LCC HC187 .A55875 2016 | DDC 330.981—dc23 LC record available at http://lccn.loc.gov/2016005035 British Library Cataloging-in-Publication Data is available This book has been composed in Sabon and Helvetica Neue Printed on acid-free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

To Mary, and our grandchildren, Anya and Luke, who were born while this work was in progress To Bella, Binha, and Dani with love To Suely, Beatriz, and Henrique and to my parents, Charles and Suzana To the memory of my father, Carlos, and to my mother, Annete

CONTENTS

List of Illustrations List of Tables Preface Abbreviations

xi xiii xv xvii

Part I. An Overview of Brazil in Transition: Beliefs, Leadership, and Institutional Change

1

Chapter 1. Introduction

3

Economic Development and Critical Transitions Brazil: This Time for Real? A Sketch of the Conceptual Framework Analytical Narratives and Economic Development Road Map for the Book Chapter 2. A Conceptual Dynamic for Understanding Development Beliefs, Leadership, Dominant Network, and Windows of Opportunity Difference in Difference in Changing Beliefs Overview of Dominant Network, Beliefs, and Institutions in Brazil from 1964 to 2014 1964–1984 1985–1993 1994–2014 Summary Part II. Introduction to the Case Study of Brazil, 1964–2014 Identifying Beliefs Appendix: A Primer on the Brazilian Political System Chapter 3. From Disorder to Growth and Back: The Military Regime (1964–1984) From Chaos to a Short Period of Order From Order to Unsustainable Growth

3 7 14 16 19 24 24 28 33 33 36 38 39 41 45 50 54 54 59

viii

•

Contents

The Miracle Fades Back to Disorder The Decline of Developmentalism Chapter 4. Transition to Democracy and the Belief in Social Inclusion (1985–1993) A New Belief Emerges The Transition to Democracy Codifying Beliefs: The Constitution of 1988 The Constitution-Making Process The Constitution’s Delegation of Powers to the President Back to Uncertainty and Chaos Failures of the Brazilian Economic Plans before the Real The Collor Government: Great Hope, Huge Disappointment Chapter 5. Cardoso Seizes a Window of Opportunity (1993–2002) The Real Plan Early Institutional Deepening: Constitutional Amendments Coalition Management under Cardoso Asserting Fiscal Control over States Staying the Course against the Early Opposition to the Real Plan Sustaining Stability in the Face of External Shocks Cardoso’s Second Term: Combining Macro Orthodoxy with Social Inclusion The Reassertion of Presidential Fiscal Authority Conclusions Chapter 6. Deepening Beliefs and Institutional Change (2002–2014) The Uncertain Transition Continuity in Change Deepening the Social Contract Checks and Balances vs. Strong Presidential Powers The New Economic Matrix and Dilma’s Policy Switch Beliefs? Really? . . . Really! The Messy Process of Dissipative Inclusion Conclusion

64 67 70 71 71 72 76 78 87 90 91 93 97 99 103 107 108 110 116 117 119 120 122 122 126 128 138 150 154 161 165

Contents

•

ix

Part III. A General Inductive Framework for Understanding Critical Transitions

169

Chapter 7. A Conceptual Framework for Understanding Critical Transitions

171

Understanding Critical Transitions How Does Our Framework Fit in the Literature? The Building Blocks of Our Conceptual Framework Windows of Opportunity Dominant Network Beliefs Leadership Institutions Economic and Political Outcomes Dynamics Argentina: An Illustrative Use of the Framework The Camelot Years: 1912–1930 Electoral Fraud and the Rise of Perón: 1930–1946 Instability Is the Rule: Oscillations between Populism and Military Rule: 1946–Present Concluding Remarks Chapter 8. Conclusion Better and Worse at the Same Time Assessing the Framework Brazil and the Critical Transition Afterword References Index

172 173 176 176 177 180 186 189 190 191 199 200 201 204 207 209 210 214 216 221 227 243

ILLUSTRATIONS

Figure 1.1 Brazilian GDP per capita growth relative to the rest of the world Figure 2.1 Autopilot and critical transitions Figure 2.2 Comparative change in beliefs: government vs. individual responsibility, 1989–1993 and 2010–2014 Figure 2.3 Comparative change in beliefs: hard work vs. luck and connections, 1989–1993 and 2010–2014 Figure 2.4 Total governmental expenditures (percent of GDP) Figure 3.1 Percentage of bills enacted by proponents in Brazil (1946–1985) Figure 6.1 Country risk, exchange rate, and commodity prices for Brazil Figure 6.2 Per capita social spending in US$ at constant 2005 prices Figure 6.3 Federal social spending, 1995–2010 Figure 6.4 Real minimum wage evolution, 1984–2012 Figure 6.5 Poverty and inequality, 1981–2009 Figure 6.6 Changes in the composition of social classes Figure 6.7 Household per capita income (deciles) in Brazil, 1976–2009 Figure 6.8 Changing combinations of inequality and redistribution over time Figure 6.9 The quality of public administration in Latin America Figure 7.1 Dominant network Figure 7.2 Expected outcomes given a set of formal institutions Figure 7.3 Expected outcomes from all possible formal institutions Figure 7.4 Choice of formal institutions given beliefs Figure 7.5 Autopilot and critical transitions Figure 8.1 Better institutions with more discontent

9 27 31 32 37 56 123 130 131 132 134 135 136 138 142 178 181 182 183 191 212

TABLES

Table 1.1 Table 2.1 Table 8.1

Number and Percentage of Countries: High, Low, and Transition Brazilian Development, 1964–2014 GDP Growth and Inflation

5 34 219

PREFACE

Why isn’t the whole world developed? Why do some countries break from their past and enter the rank of sustainable economic, legal, and political development? These questions are the Holy Grail for the social sciences and motivate our book. We chip away at the fundamental question of development by building a framework to understand the dynamics of development of Brazil, from 1964 to 2014. Brazil is currently on the trajectory of a critical transition to sustainable development. To complete a transition requires an iterative process of institutional deepening. Our analytical framework is inductive from the case of Brazil, but it can yield insights for development in other countries. Our hope is that other scholars will take the framework, and with modifications, apply it to understand development in other countries, and ultimately better understand the general process of development. In our intellectual journey, we acquired many debts to many scholars and organizations. The project got off the ground thanks to the Rockefeller Foundation hosting us as residents in Bellagio. It was an intellectual experience we will never forget. We benefitted enormously from detailed comments provided by the anonymous reviewers for Princeton University Press and from a book conference at Northwestern University, funded by President Schapiro at Northwestern University and Princeton University Press. Joel Mokyr and Marlous van Waijenburg organized the conference, and the participants deserve to be named: Hoyt Bleakley, Alan Dye, Joseph Ferrie, Brodwyn Fischer, Regina Grafe, Stephen Haber, David D. Haddock, Anne Hanley, Daniel Immerwahr, John Londregan, Noel Maurer, Joel Mokyr, Aldo Musacchio, Nicola Persico, Frank Safford, William Summerhill, Marlous van Waijenburg, John Wallis, and Sam Williamson. Sonja Opper kindly organized an earlier book conference at Lund University in November 2013. We thank the discussants—Thomas Brambor, Christer Gunnarsson, and Carl Hampus-Lytkens—and the participants. We benefitted greatly from lengthy discussions and correspondence at critical times of our journey with Alan Dye, Thráinn Eggertsson, Avner Greif, Murat Iyigun, Douglass North, James Robinson, John Wallis, and Barry Weingast. We thank William Summerhill for a discussion about the substance of our afterword. From a variety of people we received helpful comments on drafts: Eric Alston, Martin Andersson, Andy Baker, Robert Bates, Michael Bordo, Eric Brousseau, David Brown, Charles Calomiris, Victor Fleischer, Patrick François, Steven Haber, Joseph Jupille,

xvi

•

Preface

John Londregran, Thomas Mayer, Tomas Nonnenmacher, Sonja Opper, Samuel Pessoa, Laura Randall, Hugh Rockoff, Jerome Sgard, Kenneth Shepsle, Richard Sicotte, Stefan Voigt, Steven Webb, and Eugene White. Throughout the project and for suggestions for a title we thank Robert Higgs. Presenting seminars and receiving comments at the following conferences and universities clarified where we were going astray: Getulio Vargas Foundation; a conference at Washington University honoring Douglass North’s ninetieth birthday; the Economic History Association Annual Meetings (Boston and Washington, DC); the workshop on Legal Order, the State, and Economic Development in Florence, Italy; the International Society for the New Institutional Economics Annual Meeting; and seminars at Columbia University, Indiana University, Rutgers University, University of British Columbia, University of Chicago, University of Colorado (Institutions Program and School of Law), and the University of Hamburg (Institute of Law and Economics). We thank our series editor, Joel Mokyr, and our editor at Princeton University Press, Seth Ditchik, for believing in the project, for their comments, and for their patience. We thank Patty Lezotte at the Ostrom Workshop at Indiana University for copyediting and cheerfully pulling it all together during crunch times. Lee Alston thanks the faculty and staff at the Institute for Behavioral Science at the University of Colorado for their support from 2002 to 2014 and the staff at the Ostrom Workshop at Indiana University for helping to finish the project. The material is based on work by Alston supported by the National Science Foundation under Grant No. OISE-1157725. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Science Foundation. Carlos Pereira is grateful to the National Council for Scientific and Technological Development (CNPq) for a research fellowship and Frederico Bertholini for research assistance. Our personal debts know no bounds. Lee Alston thanks his wife, Mary, who believed in the project and who patiently listened to endless laments and lectures at dinners. Marcus André Melo thanks his family for supporting him throughout the entire journey of discussing, writing, and rewriting the book materials. Bernardo Mueller thanks Suely, Beatriz, and Henrique. For encouragement, support, and endless interactions in what sometimes seemed an interminable process, Carlos Pereira would like to thank his wife, Ana Paula.

ABBREVIATIONS

ARENA BNDES BNH BRIC CIESP CIP CNI CPI FHC FIESP FSE GDI GDP IA IDB IEDI IMF IPEA IPF ISI MDB MP MST NBER OECD PACTI PAEG PBQP PCI

Aliança Renovadora Nacional Brazilian Development Bank National Housing Bank Brazil, Russia, India, China Center of the Industries of the State of São Paulo Inter-ministerial Price Council National Confederation of Industry Corruption Perceptions Index Fernando Henrique Cardoso Federation of the Industries of the State of São Paulo Fundo Social de Emergência gross domestic income gross domestic product Institutional Act Inter-American Development Bank Instituto para o Estudo do Desenvolvimento Industrial International Monetary Fund Institute for Applied Economic Research institutional possibility frontiers Import Substitution Industrialization Movimento Democrático Brasileiro Ministério Público Landless Peasant Movement National Bureau of Economic Research Organization for Economic Cooperation and Development Program of Support to the Improvement of the Technological Capability of Industry Economic Action Program Brazilian Program of Quality and Productivity Program of Industrial Competitiveness

xviii

• Abbreviations

PDC PDS PFL PICE PISA PL PMDB

Christian Democratic Party Partido Democrático Social Liberal Front Party (Partido da Frente Liberal) Industrial and Foreign Trade Policy Programme for International Student Assessment Liberal Party Brazilian Democratic Movement Party (Partido do Movimento Democrático Brasileiro) PND National Development Plan PR proportional representation PROES Program of Reduction of the State Participation in Banking Activity PSD Social Democratic Party PSDB Brazilian Social Democracy Party PSOL Partido Socialismo e Liberdade PT Workers’ Party PTB Brazilian Labor Party SOE state-owned enterprise SUS Unified Health System TCU National Audit Tribunal UDN União Democrática Nacional URV Unidade Real de Valor WVS World Values Survey

PART I An Overview of Brazil in Transition: Beliefs, Leadership, and Institutional Change

CHAPTER 1

Introduction

Since 1994, Brazil has been on a relatively virtuous path of economic and political development, though there have been bumps in the road. Is twenty years long enough to conclude that Brazil is still on the road to a sustainable developmental path whose hallmarks are social inclusion with steady economic and political development? Or, were the past twenty years simply a flash in the pan similar to the short-lived Brazilian miracle of the late 1960s and early 1970s? This time, the miracle is for real because of a change in beliefs in Brazilian society and consequent changes in economic and political institutions. Today, the dominant belief held among those in power as well as the majority of the population is in “fiscally sound social inclusion.” How did this belief emerge? And, moreover, what are the forces that will sustain it? To understand the changes in Brazil over the past fifty years, we wed the concepts of windows of opportunity, beliefs, dominant network, leadership, institutions, and economic and political outcomes into a framework to understand the dynamics of institutional change and the beliefs within which they are nested.1 Development is contextual; that is, each country must find its own way. Brazil is no exception, though the concepts developed in this book have purchase in understanding institutional development or persistence elsewhere. Economic Development and Critical Transitions Our main theme is the process of development in the modern world. The purpose is to better understand the forces leading some contemporary societies to achieve economic and political development while most societies remain in autopilot. “Development” may seem fairly intuitive; yet, all countries manage to grow during some periods and almost all develop to 1 We build on an expanding literature on institutions, beliefs, and leadership. For books for the primarily academic audience, see Acemoglu and Robinson (2006); Eggertsson (2005); Greif (2006); North (2005); North, Wallis, and Weingast (2009); North et al. (2012); and Schofield (2006). A recent contribution reaching the general audience is Acemoglu and Robinson (2012). The list of articles dealing with the topic is voluminous and we will reference them when specifically relevant.

4

•

Chapter 1

some extent over time. However, few countries manage to complete what we call the “critical transition,” which is a more fundamental change in a country’s circumstance than simply increases in GDP. To see that the process of development entails a transition from one state to another, rather than simply an incremental change along a continuum, note that it is common for analysts—whether growth theorists, development economists, political scientists, journalists, or others—to classify countries into two broad groups. There are rich and poor countries; developed and developing; center and periphery; First World and Third World (the Second World disappeared with the fall of communism); industrialized and nonindustrialized; and open-access and limited-access orders. Although the labels and the associated theoretical approaches differ, the basic notion is that there are two categories. It is natural then for the interest to center on trying to understand the determinants of the transition from one group to the other. It turns out that recent cases of countries making the transition are quite rare. It is not simply a matter of time until most countries grow themselves from the bottom to the top category. In table 1.1, we used the Maddison Project data set to classify each of the countries for which there was GDP per capita data, as being in the high income, low income, and middle/transition categories.2 We did this for three different years spanning the data set—1900, 1950, and 2008. In order to classify the countries, the choice of cutoff for the high group was chosen somewhat arbitrarily to include countries that are normally accepted as being “developed” at that time, and the cutoff for the low group was set at two-thirds (66.7 percent) of that level. Given the propensity to classify all countries into just two groups, the countries between the low and the high groups are considered as being in transition from one to the other. As expected, there are fewer countries in the high GDP per capita group than the low group (note that in 1900, the limited data availability biases upward the proportion of those in the high group). Strikingly, the number of countries in the transition group is always relatively small—less than 10 percent. The last row in the table names the countries in the transition group, which allows one to see that this group would be even smaller if we reassigned the special cases (Puerto Rico, Kuwait, UAE in 2008, and war-torn Europe in 1950). Furthermore, some of the transition countries are transitioning downward (such as Argentina and Uruguay in 1950), corroborating the notion that countries making the transition from the bottom to the top group is a relatively rare occurrence. Although the numbers in table 1.1 depend on the criteria used to classify the countries (see note to table), the general conclusion that there is a small high-income group and a 2 The Maddison Project data is described in Bolt and van Zanden (2013).

Introduction

•

5

Table 1.1. Number and Percentage of Countries: High, Low, and Transition 2008 Stage of development High Low Transition Countries in transition

GDP/P

N

1950 %

>$18K 27 17 $12K 13 9 and $5.5K 13 9 $3.7K 10 7 and $2.8K 13 30 $2.8K 4 9 and $18,000), Low (GDP/P < $12,000), Transition ($12,000