Although Brazil’s tumbling capital market triggered the suspension of numerous initial public offerings (IPOs) planned over the course of 2021, it did not discourage all investors. The logistics start-up Favela Brasil XPress, based in the country’s largest favela, Paraisópolis, went public last November with the expectation of raising R$1.3 million in six months and the ultimate aim to rival Amazon. In the poor communities where some 14 million people live, many of which are effectively controlled by drug traffickers, e-commerce deliveries do not always arrive. By filling this gap, Favela Brasil XPress intends to bring big business to the favelas, where it will become a stand-in for the vitiated state.
Even if Favela Brasil XPress does not succeed (as seems likely given the precipitous rise of interest rates), similar finance initiatives will continue to sweep the country. Brazil’s Landless Workers’ Movement – once a radical campaign for land reform – has recently begun to mirror the activities of agribusiness giants, issuing five-year fixed income securities to invest in organic food production. Two factors explain the prevalence of such ventures. First, they offer basic provisions which can no longer be expected from the public sector. After the 2016 parliamentary coup that removed President Dilma Rousseff from office, a raft of neoliberal reforms were implemented, the most damaging of which was the adoption of a constitutional cap on public spending – now locked in place until 2036. With austerity legally enshrined, new forms of private provision have become crucial to meet people’s essential needs.
Second, such initiatives are connected to a widespread shift to mass-based financialization, fomented by state actions over the past two decades. By now the effects of this process are plain to see. Through fuelling aggregate demand, expanded access to credit promised to create an inclusive mass consumer society. Yet the credit boom came with serious drawbacks. Brazil’s household debt-to-income ratio rose from 18% in 2004 to 60% by late 2021, while total wages never surpassed 45% of GDP in the same period. By the end of 2021, household indebtedness affected 74% of Brazilian families and defaults followed suit, hitting 64 million adults. Rather than a step toward asset ownership, debt has become a means of survival. With the unemployment rate hovering at around 12.5%, wages relatively stagnant, interest rates rising and millions of Brazilians living in poverty, household debt is unlikely to to contract.
Low-income shareholders have flocked to the stock market in the hope of making short-term equity gains. Since 2003, their number has risen from 85,500 to over 4 million. The stakeholder mentality has seeped into society at large: a sure sign that the redemocratization of Brazil has broken with the welfare society envisioned by the 1988 Constitution. As such, the most urgent question facing the country is this: if elected in November 2022, will Lula da Silva’s Workers’ Party (PT) challenge the hegemony of big finance and rescue the economy from rentierism?
To answer, we must first understand how and why this sea change occurred. In the 1980s, when inflation rates started to skyrocket, the banking and finance sector in Brazil developed institutional mechanisms for monetary adjustment, offering inflation-protected gains derived from the public debt. Only firms and the very wealthy, who were the bulk of bank account holders at the time, benefited from such measures. This led to growing autonomy for the financial sector, which came to contest the centrality of the state in crafting macroeconomic policy, while encouraging rentier activity among non-financial firms and high-income households. The mounting influence of the banking and financial sector then shaped the commercial and financial liberalization of the 1990s. Under the Brazilian Social Democracy Party (PSDB), Brazil was integrated into global financial markets, and domestic industry was devastated.
With the Real Plan in 1994, which succeeded in bringing about monetary stabilization, the dynamic of financial accumulation shifted axis. Inflation-protected gains were replaced by high-interest income and other forms of financial income, derived from a new monetary regime that set the lending prime rate (Selic) at stratospheric heights – acting as an anchor to control inflation. The rush to buy Brazilian treasury bonds linked to the public internal debt signalled the opening of a new avenue for financial accumulation, still concentrated among the wealthiest. Profits indexed to Selic consolidated a coalition of rentier and financial interests at the helm of the Brazilian state. In parallel, a wide-array of institutional regulations were laid out for a new stage of capital-market expansion and consolidation.
The electoral victory of the Workers’ Party in 2002 changed the game. On the one hand, it preserved the inflation-targeting regime put in place by the previous government, effectively concentrating wealth. It also passed new regulations to incentivize financial investments and made no attempt to implement a tax reform to curb inequality. On the other, it granted access to credit on an unprecedented scale, promoting a massive process of financial inclusion through the creation of millions of simplified bank accounts (no fees attached) and special loans (some of them underwritten by the State). By failing in the provision of public goods and services, it also paved the way for their recommodification by finance.
Lula’s presidency therefore saw the first great expansion of financial markets in democratic Brazil. He succeeded in turning the public pay-as-you-go civil servants’ pension system into a hybrid scheme with individual private accounts. He also took steps to guarantee creditworthiness for those with no credit records and stimulated the 2004-2008 stock market boom, which attracted huge foreign investments, catalyzing a record number of IPOs. Lula engaged in dialogue with the finance sector and preserved the institutional neoliberal framework established by his predecessor. He did not check Brazil’s integration into global financial markets, nor the autonomy of its Central Bank. At no point, not even after Lula’s reelection with a huge popular mandate in 2006, did the PT government attempt to consistently tax financial wealth, or place a witholding tax on dividends. The counterpart to the implementation of the anti-poverty Bolsa Familia programme, which reached 14 million families with only 0.5% of GDP, was a primary surplus policy that further undermined public provision, allowing the financial takeover of social policy.
The financialization of social policy has been particularly evident in the education and healthcare sectors. The PT’s investment in the Student Financing Fund (FIES) provoked an IPO race that led to a wave of mergers and acquisitions, spawning educational conglomerates among the largest worldwide, whose share prices rose in tandem with the FIES’s expansion of credit. Millions of students were plunged into debt. At the same time, under Rousseff, the healthcare sector was opened to foreign capital, overriding a constitutional norm. Brazil’s public health system became increasingly dependent on private providers – international corporations and investment funds – whose power to dictate regulations grew rapidly. By 2020, the revenues of private healthcare plans that cover only the 25% of the population with the ability to pay were estimated at R$229 billion – almost twice as much the overall budget that allocated to the Ministry of Health in 2022, responsible for caring for the other 75%, or 165 million Brazilians. Most worrying is the fact that even the public sector is trapped in financialized strategies: states and municipalities now invest part of the Public Health Fund in secondary markets to increase revenues, at their own risk, to finance activities that used to be entirely funded through the tax system.
Non-financial firms also increased the share of financial profits in their balance sheets, while the Brazilian National Development Bank (BNDES), responsible for providing subsidized loans for the corporate sector, experienced a downgrade starting in 2014. While financial assets have witnessed an extraordinary surge in value, the investment rate has continued to drop sharply (falling to 14% of GDP in 2021) and the amount of productive assets has stagnated. But with the Selic base rate on the rise yet again, fixed by an independent Central Bank, no one doubts that the public debt can regain its prominence as a driver of the Brazilian financialization, this time in tandem with the rebound of the stock markets.
Financialization accelerated in the wake of the 2015-2016 recession. The Temer government (2016-2018), which took over from Rousseff, passed labour reforms that wiped out an array of employment rights. They stressed the primacy of negotiated settlements over labour regulations, abolished wage parity, enabled greater outsourcing and approved 12-hour uninterrupted workshifts. This caused the informal sector to grow, along with extreme poverty. Bolsa Familia cash transfers were disconnected from rising demand to comply with the new constitutional cap on federal expenditures. Aiming to dismantle state capacity, Temer also undertook major administrative reforms to shrink the number of available careers within the public sector from 300 to around 30, and pushed through pay cuts of up to 25%.
Yet if top-down expropriation depends on a mixture of coercion and consent, the Temer government could no longer elicit the latter. Although he preserved widespread access to credit, popular support was eroded by a deepening economic crisis, high unemployment rates and, above all, coruption allegations. His reforms were met by large protests and a general strike. As his approval ratings plummeted to 3%, Temer lost the political capital necessary to steer the transition towards autocratic neoliberal rule. It was this setback that Bolsonaro sought to rectify by turning radical conservatism (anti-communism, sexism and racism) into the dominant expression of discontent. In so doing, he discharged financial capital from culpability for deteriorating conditions and blamed a series of false culprits: leftists, feminists, migrants, indigenous people.
During his first year in office, Bolsonaro approved a controversial pension reform that raised the retirement age for women and the number of qualifying years of contribution. As the average value of pension benefits from the pay-as-you-go scheme decreased, and the survivor’s allowance was cut by nearly half, the future of the public pension system became increasingly uncertain, causing its deligitimation and increasing the attractiveness of the funded-capitalized pension regime. Bolsonaro also gutted public spending in a number of areas – health, science, social security, the environment. Recently, he approved a new law that modernizes the legal framework for the foreign exchange market and international capitals. An old demand from the financial sector, this controversial law should, among other things, facilitate the dollarization and internationalization of the Brazilian elite’s portfolios, which are currently allocated to assets denominated in national currency.
When Covid-19 arrived in Brazil, however, Bolsonaro’s presidency entered a downward spiral. As well as mishandling the public health crisis, his adoption of a War Budget marked a volte face in his programme to dismantle the public sphere. An Emergency Aid Programme raised the social safety net and provided adequate coverage to 67 million recipients, while cash transfers and furlough schemes kept low-income households afloat, despite the continued underfunding of the healthcare sector.
While such policies reduced the default rate and arrears of families indebted to big finance, they also boosted a new cycle of household indebtedness. Households cut down on balances that were in default while increasing their overall credit load, along with the average payment terms for credit portfolios. This deepened their dependence on financial markets: new loans were taken out, to be paid off over longer timelines. The cycle of financial accumulation expanded, both through a decrease in delinquencies and an uptick in credit supply. Yet, crucially, this new sequence of debt restructuring – suspension, renegotiation and expansion – did not occur within a solid institutional framework, set by the Brazilian state, to regulate the levels and mechanisms of financial expropriation. The process was rather led by the banks, who succeeded in maintaining stratospheric interest rates from previous contracts despite the falling prime rate (2% in December 2020).
The Covid outbreak has therefore had complex implications for the Brazilian political landscape. In one sense, it discredited Bolsonarismo by foregrounding the values that it sought to relegate – science, state management, social provision – and undermining the precepts of its radical conservatism. Opinion polls now forecast Bolsonaro’s defeat in the election this October. Yet, at the same time, the economic problems that Covid has consolidated are likely to destabilize an incoming PT administration. For no matter how much autonomy financial capital is granted, it will be unable to generate an economic rebound without a strong state apparatus – which must be rebuilt after years of gradual erosion.
Will the PT recognize that its previous policies produced an unustainable model rooted in financial expropriation, and take an alternative course? Or will they prove unwilling to challenge the extant economic setup? The former could be done by rescuing policies that were dismissed in by previous PT administrations: promoting the deconcentration of the banking system; breaking with the Central Bank’s autonomy; expanding the supply of public services, at a quantity and quality necessary to remove the sphere of social reproduction from the grasp of the financial sector; passing a progressive tax reform capable of effectively confronting inequality in Brazil, starting with a tax on dividends and financial income.
In recent years, the damaging consequences of financialization have been highlighted by Brazilian social movements. Last September, the Homeless Workers’ Movement occupied the São Paulo Stock Exchange, protesting the concentration of wealth amid rising hunger and poverty. Will they be listened to? That remains to be seen. However, the positions of Fundação Perseu Abramo, the Workers’ Party think tank, indicate that credit will still play a large role in their blueprint for society. The PT may once again attempt to combine anti-poverty programmes, at one end, with more credit at the other, to compensate for insufficient wages and social policies. As such, the Workers’ Party suggests that the progressive values brought to the fore by the pandemic are not in contradiction with the continuous expansion of financial markets, products and logics. If financial expropriation remains the engine for developing this peripheral capitalist economy, its already intolerable levels of inequality may be set to worsen.
Read on: Mario Sergio Conti, ‘Pandemonium in Brazil’, NLR 122.