Macro at the Corners: Economic Policy in Stormy Waters

For several years Brazil was considered an outstanding outsider in the Latin American region due to its excellent economic record from the mid- sixties to the early eighties. Those were the ‘Brazilian miracle’ years, with GDP per capita continually increasing by a yearly rate of over 6 per cent from 1968 to 1980. Until the early nineties, the country followed the ISI model, with the strong involvement of multinational (market- seeking) companies (MNCs), which permitted Brazil to definitively leave behind a backward economy. In sum, foreign investors in tandem with local companies and the national government recreated a so- called triade (Evans, 1995), which was highly successful in converting Brazil into Latin America's industrial powerhouse and rapidly transforming the local society and the state.

As widely observed in other Latin American countries at the time, the Brazilian state adopted a more proactive role, and the society (or some portions of it) began to enjoy the emergence of the ‘welfare state’. From the start, the substitutive model profited from instruments and policies tools available in the developmental large class, including a multiple exchange rate policy and a crawling peg scheme, which periodically adjusted the local currency to the US dollar (Canuto and Holland, 2001).

The large degrees of freedom in policymaking were, certainly, highly correlated to the capital account foreclosure alternative being adopted. Isolation, in turn, granted monetary authorities important degrees of freedom in their design of monetary policy. Nonetheless, this highly autonomous environment presented some negative side effects, particularly for those at the central bank: monetary policy became highly dependent on the fisc. Furthermore, as industrialization advanced, the country became more nor less dependent on foreign inputs, pushing the economy to a recurrent balance- of- payments crisis – a pattern also observed in Argentina. Last but not least, and in order to bypass the increasing saving gap imposed by the model, the government began to rely on foreign credits.