Development conventions: theory and the case of Brazil in the latter half of the twentieth century

Abstract:

For Keynes, convention is a device used to circumvent uncertainty. For French conventionalists (FCs), convention coordinates behavior in “complex market situations.” Brazilian economist Fabio Erber contributed to this debate by formulating a concept of development convention (DC) and thus making this subject particularly interesting to economists and policymakers in developing countries. Because development refers to long-term structural changes, DCs are identified over the long term. Further, multiple DCs can coexist in a given society; however, only one can be hegemonic or dominant at any particular point in time. DCs can be revealed by examining the historical evidence pertaining to that society. Accordingly, this paper analyzes the Brazilian development experience during the latter half of the twentieth century. There has been a struggle for hegemony between two types of DCs in Brazil: the pro-growth state-led DC and the pro-stability free-market DC. From World War II until the 1970s, the former DC was hegemonic, but it has since been replaced by the pro-stability free-market DC. The conservative conduct of monetary policy in Brazil since the 1990s has been built on the hegemony of the stability convention. This perspective has created space for a research program based on political economy and devoted to the study of Brazilian contemporary monetary policy, which helps explain why Brazil has consistently maintained the world’s highest interest rates for so long.

Key words::

• Brazil
• convention
• development
• development convention
• political economy

JEL classifications::

• B59
• O10
• O20

Notes

¹Keynes’s thinking about the role of conventions changed radically during the course of his intellectual history. In the beginning, he considered the concept of intuition—the intellectual capability that enables an unmediated insight into reality—as fundamental. He then “repudiated entirely customary morals, conventions and traditional wisdom” (Davis, 1997, p. 149) as having no meaning whatsoever in the human comprehension of the real.

²These authors justify this assertion, by citing the following passage of Keynes (1936) that addresses conventions regarding the determination of the interest rate by the monetary authority: “[a]ny level of interest which is accepted with sufficient conviction as likely to be durable will be durable” (Keynes, 1936, p. 203). The hypothesis most referred to in the literature is that convention is fragile and short-lived (Keynes, 1937). Sometimes this hypothesis is presented as being all that was hypothesized by Keynes with respect to this subject matter.

³In accordance, Carvalho (2014, p. 238; our translation) states: “Erber came to this concept [of DC] much less via Keynes than via the works of French economists—notably André Orléan—on the topic, but he never lost sight of the possibility of cross-fertilization that such a problem offered to Keynesian theory.” For instance, Lautier and Moreau (2012) and Thury and Freitas (2010) also apply Erber’s concept of DC.

⁴Erber employs the notion of Mode de Régulation [Mode of Regulation]. Boyer and Saillard (2002, p. 41) state, “A mode of regulation establishes a set of procedures and individual and collective behaviour patterns which must simultaneously reproduce social relations through the conjunction of institutional forms which are historically determined.” Agents are involved in a series of institutional arrangements that socialize and restrict both informational and cognitive abilities and adopt situated rationality, which ensures the compatibility of a set of decentralized decisions, without requiring agents to internalize the principles governing the overall dynamic of the system (Aglietta, 1997). The modes of regulation may differ depending on time and location, and they may evolve as a result of the interactions of the institutional forms (Benassy et al., 1979).

⁵Erber (2007) uses the concept of “sociological generation” (Abrams, 1992), which reinforces the sociological character of the concept of convention: “The identity that constitutes a given sociological generation can be understood as a ‘social convention’, a cognitive system that guides social practices and serves as a key element to reduce uncertainty and coordinate economic and political agents” (Erber, 2007, p. 43; our translation).

⁶The FC approach is frequently combined with Keynes’s ideas. See, for instance, Dequech (2003, 2009, 2011).

⁷Erber acknowledges Schumpeter’s (1964) contribution to the formation of Erber’s own view of development.

⁸In the sense proposed by Weber, knowledge is built on the theoretical-rational construction of ideal types as a product of the interpretation of reality. Because reality is infinite and subject to multiple ordinations, it is impossible to describe a given object from all possible viewpoints: “All the analysis of infinite reality which the finite human mind can conduct rests on the tacit assumption that only a finite portion of this reality constitutes the object of scientific investigation” (Weber, 1991, p. 29).

⁹For a comprehensive analysis of developmentalism, see Fonseca (2014).

¹⁰See Sanches-Ancochea (2004).

¹¹By this expression, we mean the low skill level of the labor force, low level of savings, rudimentary financial market, limited entrepreneurial capacity, lack of experience with the formulation of investment projects and their implementation, and so on.

¹²From 1956 to 1979, five economic plans were adopted. By the end of the 1970s, there were approximately eighty public enterprises, including CSN (siderurgic), SIDERBRÁS (siderurgic), CVRD (mining), Álcalis (alkali), PETROBRAS (oil), CHESF (electric power), FURNAS (electric power), ELETROBRÁS (energy), TELEBRÁS (telecommunications), FNM (automobile), EMBRAER (aircraft), and EMBRAPA (agricultural research).

¹³See Bielschowsky (1988) for a thorough analysis of developmentalism.

¹⁴Promoting high growth rates was an instrument of political legitimacy for the autocratic regime, which ruled until 1984.

¹⁵From the 1980s onward, GDP rate of growth averaged approximately 2.5 percent annually.

¹⁶The dynamics of DC are taken as an exogenous phenomenon, and we limit ourselves to describing this phenomenon from a historical perspective. In this regard, Erber proposed that “development conventions arise out of the interplay of internal economic and political forces with the international context, and a crisis of such forces … may prevent the incremental and cumulative process of change of a DC, leading to an attack on its hard core … . Under such circumstances, the hegemonic DC tends to be replaced by a new convention” (Erber 2012, p. 13).

¹⁷For a post Keynesian view on the Washington consensus, see Davidson (2004) and the other papers on the subject in the special issue of the Journal of Post Keynesian Economics (vol. 27, no. 2).

¹⁸Erber (2011, pp. 31–32) also acknowledges the existence of two additional DCs: the neoliberal convention, which despite losing strength after the 1990s crises (Erber, 2012), nonetheless stood out for its critique of the interventionism of President Lula’s governments; and the new-developmentalist convention (Bresser-Pereira, 2012a, 2012b), which was inspired by post Keynesian thought, which opposed the macroeconomic tripod. Despite its shared features with the new-developmentalist DC, the neodevelopmentalist DC diverges from it with respect to a fundamental issue, that is, by accepting the macroeconomic tripod (more details below).

¹⁹Note that during President F.H. Cardoso’s terms, interest rates were also high, and the currency remained overvalued.

²⁰On the power of DC, see Erber (2012).

²¹Boletim Focus is a statistical survey carried out and published monthly by BCB.

²²In Brazil, the basic interest rate goes by the acronym SELIC (Sistema Especial de Liquidação e de Custódia [Special System for Settlement and Custody]), which is the settlement system for most domestic securities of the Brazilian government.

²³Modenesi and Modenesi (2012) list five theses treating the “problem of interest rates in Brazil”: reduced efficacy of the monetary policy, proconservative convention in the monetary policy, multiple interest rate equilibria, fiscalism, and jurisdictional uncertainty.

²⁴The SELIC was set at an annual rate of 7.25 percent during the COPOM meeting of August 2012. The consumer price index (in Portuguese, Índice de Preços ao Consumidor Amplo—IPCA) rose by 5.9 percent in 2012; thus, the inflation target was achieved. Note that the average inflation since inflation targeting was adopted (1999–2012) remained near 6.7 percent annually, whereas the IPCA has remained at 7.4 percent annually, on average, since the Real Plan was launched (1995–2012).

²⁵In Brazil the overnight indexed swap (OIS) is referred to as the Swap-DI.

²⁶The old rule erroneously established a type of lower bound for the SELIC rate at approximately 9 percent annually. As the Selic converged to this level, the earnings from most money market funds became lower than the earnings from savings accounts. A resulting massive migration to savings accounts was feared because this convergence might jeopardize the sale of public bonds.

²⁷In other words, in the negative agenda, the alleged abandonment of inflation targeting predominates; the positive agenda preaches the need to rebuild the macroeconomic tripod.

²⁸Among the demonstrations of astonishment and dissatisfaction, two news articles are striking for their scornful titles: “Cuts in Samba Rhythm” (Olivares, 2011) and “Farewell Taylor rule, Welcome [President] Rousseff Rule” (Schmidt, 2011). Jensen and Ribeiro, in turn, issued a warning: “At some point the government will have to make hard choices. Inflation may come to diverge from the target … . In the best scenario, the tripod will be resumed. In the worst, institutional murders will escalate” (Jensen and Ribeiro, 2012, p. A-29; our translation).

²⁹Despite the deepening of the subprime crisis (which reached its apex in late 2008) and the clear signs of economic slowdown, the BCB kept its monetary policy tightened and, hence, made an additional contribution to the economic slowdown. In fact, a good opportunity was missed to cut the Selic. This situation was one of the most notorious examples of conservatism in the conduct of the monetary policy prior to A. Tombini’s assuming the chairmanship of the BCB.

Additional information

Notes on contributors

André De Melo Modenesi

André de Melo Modenesi is an associate professor at the Institute of Economics, Universidade Federal do Rio de Janeiro (UFRJ) and researcher of the Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq).

Rui Lyrio Modenesi

Rui Lyrio Modenesi was under secretary of economic policy, minister of finance, and chief of department, Brazilian Development Bank (BNDES), and senior researcher, Applied Economic Research Institute (IPEA).