Brazil's macroeconomic policy institutions, quasi-stagnation, and the interest rate - exchange rate trap
Luiz Carlos Bresser-Pereira
In Edmund Amann, Carlos Azzoni and Werner Baer (in memoriam) Oxford Handbook on the Brazilian Economy: 221-240. Original version, "Brazil's 36 years-old quasi-stagnation and the interest rate-exchange rate trap" February 2, 2017.
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.