Incentives within the political system during the 1985–2018 period made exceedingly difficult a shift toward either a more effective developmentalism or a more liberal market economy. Among the political institutions that drove this equilibrium were: 1) an electoral system that fragmented political party representation; 2) coalitional presidentialism, whereby a strong president sought to overcome fragmentation by providing incentives to coalition partners. Many of the 3) president’s tools of coalition formation were derived from the developmental state apparatus, including appointments and fiscally opaque instruments. The fragmentation of party life, alongside the many veto players engendered by coalitional presidential system, enabled 4) the emergence of both pluralist and corporatist forms of interest representation. The complementarities between these four political institutions had concrete effects: a resolute political system, in which change was slow and incremental, marked by long-term reciprocal relations between private firms and public actors, defensive parochialism, weak checks and balances, and weak controls on the developmental state apparatus.

Because of the economic power of incumbent firms and the political power of multiple veto players, changes to the developmental state were usually incremental. This contributed to the protagonism of the civil service as a change agent. Drawing on three case studies, the chapter illustrates how epistemic communities within the bureaucracy guided a variety of innovations across unconnected policy arenas: fiscal, health, and anti-corruption. Although policy innovation by the bureaucracy was incremental, slow, and often restricted to particular “islands of excellence” within the archipelago of state agencies, it was nonetheless essential to the most important accomplishments of the past generation. Civil service incrementalism, however, may have made change away from the overarching systemic equilibrium of the developmental state less likely, by exacerbating the fiscal quandary, sustaining the coalitional presidential system, and suppressing demands for more radical reform.

The institutional complementarities of that marked Brazil’s political economy between 1985 and 2018 period were placed under considerable strain by the recession, fiscal crisis, corruption investigations, and political upheaval that culminated in the 2018 election of Jair Bolsonaro. An open question was whether the multiple and overlapping crises of the 2010s would destabilize the institutional equilibrium that had prevailed over the previous generation. To evaluate this question, this chapter summarizes the contributions of this manuscript to our understanding of Brazil’s political economy under democracy. It then describes how past reform efforts failed to move the political economy away from the status quo equilibrium, and the ways in which institutional complementarities shaped the pace and scope of change. It concludes with an evaluation of the “stress test” posed by the Bolsonaro administration, pointing to the importance of changes in the political realm for resolving Brazil’s long-term economic developmental challenge.

Between 1985 and 2018, Brazilian economic well-being stagnated, with lackluster growth and regressive public policies destroying citizens’ life opportunities. There is considerable consensus about the sources of this low-level economic equilibrium, including low savings, low investment, and modest human capital improvements. Despite this consensus, and despite decades of reform, however, the overall institutional equilibrium changed only marginally. Drawing on the study of varieties of capitalism, this chapter describes how institutional complementarities drove actors’ incentives toward a collectively suboptimal equilibrium. Complementarities within and across five domains sustained the equilibrium: 1) the macroeconomy of a middle-income developmental state, 2) the microeconomy of firm organization; 3) the coalitional presidential political system; 4) the weak control mechanisms this political system set in place; and 5) an autonomous bureaucracy that permitted incremental reform but in consequence, may have moderated demands for more dramatic reforms while deepening fiscal constraints and impelling policymakers to preserve the tool kit of the developmental state.

This chapter analyzes Brazil’s 500 largest firms and financial institutions in the mid-2010s to evaluate how well corporate life fit into a Latin American variety of capitalism that Schneider (2013) termed “hierarchical market capitalism.” While Brazil adhered to the general characteristics of the hierarchical market economy (HME), Brazilian firm life differed from other HMEs in the region due to significant state activity, the presence of large but relatively undiversified business groups, and credit and equity markets with a large dose of state participation that enabled firms to behave and organize in ways that differed from their regional peers. Five characteristics of Brazilian firm life stood out: the segmented firm structure; the muscular influence of developmentalist policy tools on firms; the segmentation of labor markets; the segmentation of skills; and the segmentation of social policy provision. This segmentation had a variety of implications for firms’ incentives to participate in politics.

Developmental states must be politically strong to design, implement, and recalibrate developmental strategies. They must have the capacity to provide rents to firms that nudge them up the innovation frontier, as well as to demand reciprocity, or returns on those rents. Achieving these goals requires effective instruments of control. Analyzing four developmental programs undertaken by various governments during the 1985 to 2018 period – the Manaus free trade zone, the automotive regime, the ethanol program and the Greater Brazil Plan – this chapter demonstrates the endemic weakness of controls. The Brazilian developmental state was ineffective at controlling rents in ways that channeled business energies in strategically productive long-term directions. The causes of weak control included political factors associated with the coalitional presidential system and the weakness of checks and balances, bureaucratic factors such as the fragmentation of oversight, economic factors such as incumbent firm influence, and judicial factors such as the toothless policing of illicit links between firms, the developmental state apparatus, and the political realm.

Ideas provided the ballast for the continuity of the economic policy commitments of this era. Developmentalism – the notion that underdevelopment can be overcome “through capitalist industrialization, planned and supported by the state” (Bielschowsky, 1988) – served as a long-term constraint within institutions, pointing toward particular equilibrium outcomes, prioritizing between conflicting alternatives, and providing guidance that drove diverse and uncoordinated actors toward particular preferences and behaviors. As a consequence, even under the most reformist of governments, including at the height of the “Washington Consensus,” Brazilian policymaking was far more gradual, inward-looking, and accepting of an active role for the state in regulating and shaping markets than its large Latin American peers. Using Argentina and Chile as comparisons, the chapter illustrates how developmentalist ideas remained relatively embedded in Brazilian policymaking, academia, and popular thought, even as the “old’ developmentalism was supplanted by a “new” variant.

The Brazilian developmental state changed significantly after 1985, with new rhetoric about equality, a commitment to fighting inflation, and a three-pronged policy set combining fiscal responsibility, a floating exchange rate, and inflation targeting. Yet many elements of the “old” developmental state remained intact, including a large state role, a complex monetary regime, muscular industrial policies, low economic integration, and a segmented labor market. The fight against inflation generated incentives for politicians to employ “fiscally opaque” policy instruments drawn from the tool kit of the developmental state. The fiscal imperative combined with fiscally opaque instruments contributed to the high cost of credit and low investment, driving firms to demand state succor. The fiscal imperative and the power of interest groups meant that the burden of balancing the fiscal accounts fell disproportionately on the less well-off. The ensuing demand for social spending meant that economic growth, by default, became a residual.