Making Capitalism Work: The Brazilian Model

    São Paulo building

    São Paulo buildingAt the height of the crisis of 2008, Brazilian entrepreneur Roberto Medina published an “Open Letter to Wall Street” as a full page advertisement in the New York Times:

    Open Letter to Wall Street

    First of all, this crisis will be over for sure. Just like many others have in several different places in the world. A crisis is part of a strengthening and maturing process of all institutions. We learn to walk by falling…

    It is always through moments of crisis that the best opportunities come up. And we would like to talk about one of these opportunities: Brazil. Brazil is one of the biggest emerging markets in the world. We are the biggest food producer on the planet. We have the richest biodiversity on Earth and we have recently found out that we will soon become one of the biggest oil producers in the world.

    We are part of a 180 million potential consumers’ market and one of the most desired tourist destinations. Our democracy is consolidated, our industry is strong, our inflation has been under control for many years, and our vast territory assures that we have many places for investments.

    Therefore, as we know, soon people will start considering where to invest, we tell you, invest in Brazil.

    Grupo Artplan, New York Times advertisement, October 6, 2008

    This reads like advertising copy, and its author is a publicist best known for promoting Rock-in-Rio concerts. But it has a ring of plausibility. Of course, the São Paulo stock exchange crashed like the others around the world and the government had to infuse money into the banks and cajole them into resuming lending. But Brazilians are accustomed to crises of this sort, and have built institutional structures to deal with them.

    Not only are private banks more conservatively regulated than those in the United States, but Brazil has three large federal banks that contribute much stability to the system. The largest bank in the country, the Banco Nacional de Desenvolvimento Econômico e Social (BNDES), has as its mission financing projects that are important for the development of the country. It loaned out 64 billion reais (US$ 29.9 billion) in 2007. This includes funding many cooperatives and micro-businesses.

    The Caixa Econômica Federal, entirely controlled by the government, finances construction and infrastructure projects. The Banco do Brasil, the largest bank by assets, is partly privatized and its shares trade on the stock market, but it is government controlled.

    “Socialism” is not a dirty word in Brazil as it generally is in the United States. A March, 2006, survey commissioned by a Workers Party think tank found that 49% of Brazilians thought that “socialism continues to be an alternative to resolve social problems,” while 24% thought that “socialism was a good solution but it no longer has a future,” 16% thought that “socialism never was a good solution for social problems,” and 13% did not know. Support for “socialism” was not related to income or educational level; it was common in all social classes.

    But neither is “capitalism” rejected by Brazilians. In a 2002 Pew survey, 70.5% of the respondents thought that the impact of “large companies from other countries” was good for the country. Fifty-six percent agreed that “most people are better off in a free market economy, even though some people are rich and some are poor. But only 30.7% were willing to support the closing of large, inefficient factories when it was necessary for economic improvement. The rest agreed that this was too much of a hardship for people.

    Despite all the talk of a move toward the left in South America, President Lula da Silva resists efforts to pigeon-hole him, as in this interview with a news magazine:

    CartaCapital: Are you on the left?

    Lula da Silva: You know I never like to label myself as on the left. I am a lathe mechanic and I arrived at the presidency of Brazil through hard work and a lot of patience…

    CartaCapital: Why not accept the definition of Norberto Bobbio? To be on the left is to fight for equality?

    Lula da Silva: I don’t have to be on the left to fight for equality… If fighting for equality is the great definition of being on the left, there is no one more leftist than me in the world. In truth, I fight for everyone to be able to enjoy the results produced by the nation. And I think this can be achieved.

    Interview with CartaCapital, December 2005

    The former President of Portugal, Mário Soares, raised the issue of the “left” in an interview in February, 2008:

    Mário Soares: Tell me one thing, Mr. President. With your experience as a labor leader and as a politician, from the beginning until now, do you believe there is still a division between right and left in the world or is it ending?

    Lula da Silva: I believe it exists. We have a lot of people on the right and a lot of people on the left. What has happened is that the experiences that we have had, for example, of socialism implanted in the world, if we take the revolution of 1917 and others, people have come to perceive that the dream, that of socialism

    Mário Soares: totalitarian..

    Lula da Silva: …has not survived, because at some point the mistake…

    Mário Soares: but the utopia, equality, is maintained.

    Lula da Silva: The utopia continues. Why did my party never want to define itself as a socialist party? It is because every time we had this discussion, we raised the question: what kind of socialism? This is a discussion sociology will have to have to deal with in more depth. But I think the left continues to exist, the utopia continues to exist. We still want to construct the just world we dreamed of. But when you reach the presidency, of a state or a city, you no longer have the right to dream, you have the right to do things, because the mandate is for four years and if you dream too much you end up not doing anything. So I resolved to adopt, first of all, an administrative pragmatism.

    Interview for Radio and Television of Portugal, February 20, 2008

    Lula states that he is not a socialist, but a social democrat. Yet he is the leader of a party which, as recently as August, 2007, reaffirmed its commitment to “socialism” as its guiding principle. This is less of a contradiction than it might appear because the Workers Party defines “socialism” as a system with competitive multiparty elections, full respect for human rights, and a mixture of private, cooperative and state ownership of property. This view evolved through long years of debate between factions within the Workers Party. Political scientist André Singer explains:

    “Up until 1990 the Workers Party could be seen at times as a democratic party committed to ample liberty to dispute government offices through elections, and at other times as a party for which the electoral struggle is only a step towards the conquest of hegemony, after which only the parties which do not oppose the working class will persist…

    “State ownership of the means of production has never been a typical theme of Workers Party socialism. With regard to property, the Workers Party position has been to privilege social ownership without eliminating, by decree, private ownership…

    “The defeats of Lula in 1994 and 1998 were felt as hard blows by the party and the party’s attention was turned towards the immediate tasks of government, or to the Democratic Revolution. Socialism was not discussed after 1991, and beginning in 1995 the Democratic Revolution became the name of the reforms the Workers Party wanted for Brazil. Socialism continued to be “a possibility open to humanity in the era of capitalism” according to the 1999 program.

    “The theme of socialism only returned to the Workers Party through a series of debates organized in the first semester of 2000 … and directed by Lula.”

    These debates took place in a conference on the “Socialist Economy” sponsored by a Workers Party think tank. Meeting with leading socialist intellectuals and activists, Lula stated “I think that, in this forum, we are constructing, together, an understanding of socialism which will be really at the level required by the demands of the new century and that this will prepare us to struggle for victories that are imperative and unavoidable in the grave scenario of social crisis, injustice and inequality that have been imposed on Brazilians for a long time.”

    The principal speaker at the conference was Paul Singer, father of political scientist André Singer, quoted above, and a University of São Paulo economist who has long been one of the Workers Party’s principal theorists. Singer’s writings on socialism have not received the attention they deserve outside Brazil, but he has been close to Lula for many years.

    Singer advocates a vision of socialism as worker self-management with worker-owned firms competing in a democratic marketplace. He opposes the Soviet model of socialism as a state monopoly of the means of production because it led to a monstrous concentration of power, the exact opposite of the withering away of the state that Marx and Engels had anticipated.

    Paul Singer insists that every citizen has the right to organize his or her economic activities as he or she chooses, with only slavery and indentured servitude prohibited. This means that socialism must emerge gradually from within capitalist societies. True socialism cannot be imposed by a revolutionary party with a monopoly of state power.

    Singer concludes that: “the socialist economy will probably suffer (for how long no one knows) competition with other modes of production. It will be permanently challenged to demonstrate its superiority in terms of self-realization of products and satisfaction of consumers. This leads to the conclusion that the struggle for socialism will never cease. If this is the price which socialists must pay to be democrats, I venture to say that it is not too much.”

    After Paul Singer’s address at the conference, Lula criticized the activists for spending too much time on theoretical argumentation in the false expectation that everything would be taken care of once the Workers Party took power. Even after many decades of dictatorial power, the Cuban and Soviet governments had not solved the problems. He thought the Workers Party should put more effort into setting good socialist examples in the towns where they held the mayor’s office or in non-governmental settings. He stated that:

    “I think that actually existing socialism  –  speaking here of the real and not the utopia  –  has never resolved a crucial problem in its relationship with society, with production, which is how to deal with inequalities.

    “The human being is eminently competitive. To the extent to which one blocks the competitive capacity of the human being and makes it that everyone receives the same thing within a factory, you cut off the possibilities of that factory being successful. People are leveled off at the bottom instead of at the top. Socialism was not able to resolve this problem.

    “I am a great fan of the Cuban Revolution. I think that everyone in the PT is. But they have not resolved the crucial problem of democracy and of some liberties without which there is no socialism. I am the greatest deliverer of medals to Cuban workers. Every time I go there I am invited to a ceremony at the Central Organization of Cuban Workers. They have a worker there with thirty medals on his chest. That is his prize for production. If there were some improvement in his quality of life, he would be more pleased.

    “The Soviet Union lasted 70 years and whenever you questioned someone, they would say “Socialism is a process.” A process that lasted 70 years. Cuba, if you go there and ask, but when will it get better? They say, “It is a process.” A process that has been there for 40 years! We are not going to wait 40 years to reach power. In my opinion we will reach it sooner than that. But what will we then do in practice? What government action and what party action? I think the PT could do infinitely more than it does.”

    Remarks at a Conference on Democracy and Socialism, 2000

    Two years later, Lula was in power and he appointed Paul Singer to run a new Secretariat of Economic Solidarity within the Ministry of Labor. Singer didn’t have to start from scratch. The Economic Solidarity movement, as it is known in Brazil, had mobilized in the 1980s and 1990s under the auspices of the Caritas movement and the Landless Farmer’s Movement.

    It had first been institutionalized in the state government of Rio Grande do Sul in 1999. Paul Singer brought new energy and national scope to the movement. As of 2007, there were 21,859 employee owned enterprises in Brazil. The largest number, 9,498, were in the impoverished northeastern region of the country. These enterprises had 1,687,496 employees, including 645,504 in the northeast. Of these, 63% are men and 37% are women.

    The Economic Solidarity movement has focused most on the underprivileged sector of the population including the 45% of Brazilian workers who are in the “informal” sector without the protection of the country’s extensive labor legislation. For many of these workers, Economic Solidarity enterprises serve as a vehicle for integrating into the formal structure of society.

    Economic Solidarity also works with individuals released from mental hospitals and prisons. Funding is raised through community banks, credit cooperatives and rotating funds. More than 30 Brazilian universities maintain incubators for popular cooperatives, providing technical assistance and support.

    Many of these firms are small and economically vulnerable. Only 14% are formally organized as cooperatives, 55% are more loosely organized associations, and 27% are just informal groups. In some cases, small businesses reorganize as cooperatives to get a break from Brazil’s restrictive tax and labor legislation. The emphasis of Paul Singer’s secretariat has been on working with poor and impoverished populations that have few alternatives, not on competing with viable private enterprises in more lucrative segments of the economy.

    The Economic Solidarity movement comes out of a socialist tradition and could be considered a form of “actually existing socialism,” but the word is not used in the official documents. If it is socialism, it is market socialism, the enterprises compete in the marketplace and the workers decide on pay scales and incentives. Economic Solidarity is not a so much an assault on capitalism, but an alternative for those who have not found inclusion in the capitalist economy or who prefer working in a cooperative environment.

    As a mechanism for social inclusion, economic solidarity is grouped in Lula’s annual report with a program that is capitalist in inspiration, the microcredit program. This program was inspired by the work of Muhammad Yunus in Bangladesh whose Grameen Bank pioneered in offering very small loans to poor people to start small businesses. Sometimes these businesses employ only one person, but others hire workers as well.

    In Brazil, there are 150 different banks and other entities offering microcredit loans. Between 2003 and 2007, 926 million reais (US$ 431 million) in consumer loans and 253 million reais (US$ 118 million) in micro-entrepreneurial loans have been given out. The average micro-entrepreneurial loan is 964.63 reais (US$ 449).

    The Banco Popular do Brasil alone has given out 3.2 million loans. The microcredit initiatives are part of a program of making banking services more accessible to people of low income so they can use bank accounts and debit cards to handle their money and to make small loans.

    The economic solidarity and microcredit programs are a significant but modest segment of the Brazilian economy. The economic solidarity firms employ approximately 1,600,000 people in a labor force of approximately 100,000,000. There are no precise figures on the number of people employed in microcredit operations, but it may be of the same approximate magnitude.

    These programs are most valuable for building the culture of transformation among people who have been mired in the culture of poverty. For Lula, the important thing is that people are getting the help they need to take control of their own lives, not whether they do it in a “capitalist” or a “socialist” manner.

    The Fernando Henrique Cardoso government that preceded Lula’s fixed many of the problems that had retarded Brazil’s capitalist economy for many years. Most importantly, the Cardoso government stabilized the currency, reformed the banks, placed strict controls on spending by state and local governments, cut back on government bureaucracy and began the process of social security reform.

    These reforms had stabilized the economy but they had not brought about the rapid economic growth everyone expected. Many on the left, including the left of the Workers Party, interpreted this as a failure of “neoliberalism” and wanted to renationalize industries and increase government spending.

    The most important decision Lula made as president was to resist these pressures and to continue with Cardoso’s economic model even though it had not yet born the fruit of rapid economic growth. He was strongly criticized for this; one of the most common criticisms was that his government was nothing more than “Fernando Henrique’s third term.” He managed to weather these criticisms and get re-elected despite the corruption scandals and the lackluster economic growth.

    And then the economy took off and all was forgiven. Lula’s approval ratings skyrocketed. Not only was the economy growing, but income was being redistributed and all the social indicators were improving. Average income was up 3.2% 2006 to 2007 and the GINI index of inequality had declined to .534 from .588 in 1997.

    The income distribution had improved slightly with the richest 10% of the population having 43.2% of the income, down from 44.6% in 2004. Illiteracy declined from 10.4% in 2006 to 10.0% in 2007. The average Brazilian woman had 1.95 children, down from 6.3% in the 1960 census, putting Brazil below the zero population growth rate.

    The public gave Lula the highest presidential popularity rating in Brazilian history in September, 2008: 64% “excellent or good” in the DataFolha poll and even higher in some others. Lula was ecstatic, telling Argentine interviewers:

    “Brazil is living through its best historical moment. Brazil today is experiencing an almost magic time: combining economic growth with redistribution of income, with the improvement of the quality of life of the poor, raising the poor up into the middle class. It has a political process with a reasonable import and export policy, it has 200 billion in reserves, it no longer owes anything to the International Monetary Fund. I would say we are living in a glorious moment.”

    Lula da Silva, Interview with Clarín, September 2008

    The capitalist economy that bore these fruits was nothing new or innovative, just a combination of standard policies and reasonably good luck. The national development bank invested heavily in energy and transportation projects, including highways, railroads and marine shipping. The government also invested significantly in technology development, indeed Lula highlighted technology as the first item in his annual report to Congress.

    The Lula government also took specific measures to facilitate entrepreneurialism, including simplifying regulations and taxes for small businesses, and cutting down on the bureaucracy that make it difficult to start a business. Lula’s annual report to Congress boasts that as of 2007, the average time spent on registering a new business had been cut to 20.3 days.

    The largest single sector of the economy is commercial agriculture, which contributed 25% to the national product. It grew very rapidly during Lula’s term, exports increased 16.3% a year on average from 2002 to 2007. Agrarian reform continued, with 67,535 families settled in 2005, but this was more important as a social inclusion program than as a contributor to the national income.

    Brazil’s agriculture benefited greatly from a global increase in food prices, as well as in demand for ethanol from sugar cane. The biggest downside was the increased pressure on the environment as developers moved in on lands that should have been protected for environmental reasons or for the benefit of native communities. There is strong legislation for these things, but enforcement is erratic.

    Manufacturing exports grew 11.9% in 2007, compared to 2006, reaching a total of US$ 89.4 billion. Brazil’s largest market for manufactures continues to be the United States, but the proportion going to other countries is increasing. China has been a large consumer of Brazilian foodstuffs and raw material exports, and also a large supplier of imported consumer goods.
     
    The Brazilian economy was hit hard by the recent global financial crisis, but it was prepared to deal with it. Lula observed:

    “This crisis may hit Brazil much more lightly than it hit the countries where it originated. We must not forget that this is the first crisis that hit first in the rich countries and is later coming to the periphery. The countries that are giving solidarity to the world economy are precisely the peripheral countries such as Brazil, China, India, South Africa, Mexico, Latin America and others.

    “We are not involved in this financial crisis, but we may receive as a result of this financial crisis the second step which is a possible recession in the developed world which will cause problems with the exports of all the world’s countries, including Brazil. But even in this way, I think Brazil will suffer less because we have greatly diversified our international partners. Ten years ago we had practically 27% of our commercial balance with the United States. Today we have a little more than 14% with the United States… 

    “We have a credit problem, because I don’t know where all these trillions of dollars went, that are flying from bank to bank, from paper to paper… Do you know that game with chairs, where there are five chairs for six people, and quickly five sit down and one is left standing? I think the bankers are doing this, because suddenly the money has disappeared. There is no credit in Germany, no credit in France, no credit in England, no credit in Brazil. Where did all this money go?

    “We, thank God, have very strong public institutions  –  The Bank of Brazil, Caixa Econômica, BNDES  –  therefore we are buying shares from investment banks that had problems, and we will buy more. We are reducing the banks’ compulsory deposits with the government so they can increase their lines of credit.

    “Even Bush is talking about buying shares of banks. This means that the heart of the capitalist regime is beginning to have a taste for the role of the state, which has been demoralized for the last 30 years.

    “We still have an important instrument to face the crisis which is the potential of the domestic market. This is why I don’t want to cut credit, because people need credit. And I have said at meetings… “They are talking about a crisis, but no one has to stop buying their television or their refrigerator.” Because if people aren’t buying, the factories won’t be producing, the stores won’t be selling, and then we really will be in a recession.”

    Lula da Silva, speech to the Brazilian Society for Progress in Science, October 21, 2008

    Brazilian is a mixed economy, including major “socialist” and “capitalist” elements. These are not viewed as enemies, but as contributors to the diversity needed to accomplish the Lula government’s goal: “sustainable development with social inclusion.”

    The state plays a critical role is in the financial sector where it maintains stability and channels significant credit to agricultural settlements, micro-enterprises and worker-owned companies. The state also operates important redistributionist programs, the most important of which is the Bolsa Família (Family Stipend) program that channels money directly to the poorest families in return for promises to keep their children in school.

    Worker owned and managed enterprises are part of the picture, as are small and micro-businesses. Both play important roles in including marginal and excluded populations. The engine that drives the economy, with all its “socialist” elements, is the corporate “capitalist” economy that generates economic growth and pays taxes.

    The Brazilian model should be studied carefully by those looking for an alternative to the bubble-driven speculative model that has just collapsed in the United States. And Brazil should indeed be considered by investors looking for a good place to put their money for long-term, sustainable growth.

    Ted Goertzel, Ph.D. is Professor of Sociology at Rutgers University in Camden, New Jersey. He is the author of a biography of Fernando Henrique Cardoso, available in English and in Portuguese. He can be contacted at goertzel@camden.rutgers.edu and his WEB page can be found at http://goertzel.org/ted.

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