Brazil's 36 years-old quasi-stagnation and the interest rate-exchange rate trap
Luiz Carlos Bresser-Pereira
Written for the book edited by Edmund Amann, Carlos Azzoni and Werner Baer (in memorian), Oxford Handbook on the Brazilian Economy. February 2, 2017, version. This is a more actualized version of the Discussion Paper with the same name.
Per capital income in Brazil has grown by around 1% a year from 1981; this implies quasi stagnation for a country that is supposed to be catching up. Four historical new facts explain why the investment rate and growth have been so low after the 1994 Real Plan: the reduction of public savings required to finance public investment, and three facts that reduce private investments: the end of the unlimited supply of labor, a very high interest rate, and the long-term overvaluation of the national currency. This interest rate-exchange rate trap, which represents a major competitive disadvantage for the manufacturing industry, is in place since 1990-92, when trade and financial liberalization dismantled the mechanism that neutralized the Dutch disease, while a liberal policy regime turned dominant and industrialization ceased to be viewed as a condition for growth.