| Abstract: |
Brazil, as the rest of Latin America, has experienced three cycles of capital
inflows since the collapse of the Bretton Woods system. The first two ended in
financial crises, and at the time of writing the third one is still unfolding,
although already showing considerable signs of distress. The first started
with the aftermath of the oil-price increase that followed the 1973 ‘Yom
Kippur’ war; consisted mostly of bank lending; and finished with Mexico’s 1982
default (and the 1980s ‘debt-crisis’). The second took place between the 1989
‘Brady bonds’ agreement (which also marked the beginning of neo-liberal
reforms in most of Latin America) and the Argentinian 2001 crisis. This second
cycle saw a sharp increase in portfolio flows and a rise of FDI, and ended up
with four major crises (as well as the 1997 one in East Asia) as
newly-liberalised middle-income countries struggled to deal with the problems
created by the absorption of those sudden surges of inflows — Mexico (1994),
Brazil (1999), and two in Argentina (1995 and 2001). Finally, the third
inflow-cycle began in 2003 as soon as international financial markets felt
reassured by the surprisingly neoliberal orientation of President Lula’s
government; this cycle intensified in 2004 with a (mostly speculative)
commodity price-boom, and actually strengthened after a brief interlude
following the 2008 global financial crash. The main aim of this paper is to
analyse the Brazilian 1999-financial crises during the second inflow-cycle
from the perspective of Keynesian/ Minskyian/ Kindlebergian financial
economics. I will attempt to show that no matter how diversely the above
mentioned countries tried to deal with the inflow absorption problem — and
they did follow different routes, none more unique than Brazil — they
invariably ended up in a major financial crisis. As a result (and despite the
insistence of mainstream analysis and different ‘generation’ models of
financial crises), these crises took place mostly due to factors that were
‘intrinsic’ (‘endogenous’ or ‘inherent’) to middle-income countries that
opened up their capital account indiscriminately to over-liquid and
excessively ‘friendly-regulated’ international financial markets. As such,
these crises were both fully deserved and fairly predictable. Therefore, I
shall argue that the general mechanisms that led to Brazil’s 1999-financial
crisis were in essence endogenous to the workings of an economy facing i) full
financial liberalisation; ii) several surges of inflows, especially
immediately after the Mexican 1994 and the East Asian 1997 crises — and as a
spillover of the respective rescue packages —, following a new ‘bubble thy
neighbour’ speculative-strategy by international financial markets, as ever
more liquid, volatile, politically-reassured, and progressively unregulated
financial markets were anxiously seeking (and allowed to create artificially)
new high-yield investment opportunities via a new sequential
speculative-strategy; and iii) ineffective domestic financial regulation —
especially lack of effective capital controls. I shall also argue that within
this general framework, the specificity of the Brazilian crisis was given by
having been affected by i) several external shocks; ii) by a naïve ideology
directing economic reform; iii) by a exuberant (post-‘second generation’
models)-style monetarism, or ‘macho-monetarism’, that although successful in
achieving initially price-stabilisation, and in avoiding that Brazil became
‘another Mexico’ (in terms of keeping Brazil away from an inflow-led
Kindlebergianmania), it did so at a growing (and mostly unnecessary) cost; iv)
the creation of several major financial fragilities in the banking sector
(private and public) and in State finances — leading the Federal Government to
sleepwalk into a Minskyian ‘Ponzi-finance’; and v) by this ‘Ponzi’ being
turbo-charged by both the Government’s indiscriminate absorption of
nonperforming debt, and by it paying a huge amount (mostly in the form of
subsidies) in order to get the constitutional reform that would allow the
President to run for a second term. |
| Keywords: |
‘Endogenous’ financial crisis, ‘Second generation’ models, Neo-liberal economic reforms, Ideology, Financial liberalisation, Capital controls, Systemic market failures, Latin America, East Asia, Keynes, Minsky and Kindleberger |