Courtesy Reuters

Brazil's New Capitalism

NO TURNING BACK

In the past decade, Brazil has entered the first stages of a modern capitalist reorganization. Its economic transition has been gradual, but the country has avoided crippling setbacks. For many observers, Brazil seems finally to be pulling itself out of two frustrating decades of economic stagnation and political turmoil.

Not all observers accept these changes with unalloyed enthusiasm, however. The political left abhors what it portrays as an alienating, neoliberal destruction of Brazil's national development by international finance capitalism. But regardless of their preferences, everyone agrees that change is finally happening. As economic historian Ricardo Bielchowsky put it, Brazil's new economic model is radically different from its predecessor. In the new economy, investors have the freedom to make their own investment choices based on market changes. Of course, whether investors will use their new freedom to allocate resources effectively remains uncertain.

What makes Brazil's economic transition historic is that today's reforms break with an economic model that dominated the country for nearly 50 years. From 1940 to 1989, Brazil staked its hopes on a form of nationalist mercantilism that operated through state controls of commerce and credit. Centrally directed state enterprises provided infrastructure and services, while highly protected and subsidized industries and agriculture made up a dependent private sector. In 1974, Eugenio Gudin, a champion of economic liberalism, described this unique economic system as capitalist in principle but with more state control than in any other noncommunist country.

The old model fostered industrial development based on the country's large internal market. And it produced some significant strategic advances in oil, energy, and agriculture. Economic growth averaged more than six percent a year over three decades.

But Brazil's robust growth came to a halt in 1980 when its economy was buffeted by extravagant bouts of inflation. To make matters worse, a mountain of unpayable foreign debt, endemic corruption, and a chronic waste of capital all undermined fiscal discipline. When Brazil's access to foreign loans dried up during the debt crisis of the 1980s, its

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