Adjustment for whom? Celso Furtado, the 1964 coup, and the 2014 presidential elections.

Celso Furtado is probably the best-known Brazilian economist.

His books have gone through several editions, have been translated into numerous languages, and are still being rediscovered today, ten years after his death, by university students and interested citizens. As he is also a reference point for those who fight for development with greater national autonomy and social justice, it is not surprising that Furtado is periodically targeted by neoliberal economists.

Furtado demonstrated that economic policy is not a realm where technique dominates politics, but rather one where political choices that concentrate income and power are frequently presented as technical and neutral.

In 2006, Eduardo Gianetti shared a panel at a symposium at PUC-SP (Pontifical Catholic University of São Paulo) about the 50th anniversary of the Plano de Metas (Goals Plan) with me and Francisco de Oliveira, when we were forced to listen to him claim that Celso Furtado never wrote a single line about the importance of education for development. After hearing responses based on more attentive readings of Furtado, I am unaware if Gianetti ever wrote anything on the subject. However, such lines abound in the work of Samuel Pessoa, an economist at FGV (Getúlio Vargas Foundation) linked to the PSDB (Brazilian Social Democracy Party), and now Alexandre Rands, a professor and businessman in the telemarketing sector, coordinator of Marina Silva's economic program.

Regarding Furtado, Pessoa has stated that "at no point in his 50-year productive life did he believe there was any connection between lack of education and underdevelopment" (Época, 10/09/2012). Pessoa believes that, with sufficient levels of education, the country's productive specialization is irrelevant to its growth potential.

Rands, in turn, directly calls Furtado into the electoral campaign: "In Marina's view, institutional reforms are important, but even more important is the boost to education... In Dilma's view, development is driven by demand (consumption). It's impressive because, even with full employment, they still maintain this, along with the structuralist view of privileging one sector or another with discretionary policies... It's a highly inflationary economic model, based on Celso Furtado." (O Globo, 09/14/2014).

Both assertions are extremely impoverished characterizations of the richness of Furtado's thought. It is difficult to claim that their authors read Furtado attentively, as I will show in this first article, regarding the relationship between consumption, inflation, and development. As is known, Furtado's work has had an international influence, broadening the themes related to economic development in at least two directions.

First, Furtado demonstrated the non-existence of universal laws that describe and explain the development trajectory of different economies.

Fascinated by the natural sciences, liberal economists lived and still live in search of simple, universal, and ahistorical explanations for economic development, understood as increased productivity and wealth of nations. Namely, free competition (local and international), prices free from state intervention or monopolistic collusion, and a state that guarantees contracts and only provides the few externalities that the market does not adequately supply (such as education, infrastructure, and, at least after 2008, financial regulation...).

Any country could follow the path of developed countries if it repeated the same liberal formula that they supposedly followed, even if it did not also copy their science and technology-intensive branches and maintained specialization in branches with lower added value.

Development and underdevelopment

Furtado rejected this easy formula and incorporated time and space into the equation of development. Expanding on the ideas of his boss at the Economic Commission for Latin America (ECLAC), the Argentinian Raul Prebisch, he proposed thinking of development and underdevelopment as poles of the same system: the Center-Periphery system, a direct heir of the old colonial system.

Developed countries, starting with early industrialization, were the centers for creating increasingly complex technologies, issuing strong currencies, and controlling high value-added financial, productive, and commercial services.

From their origins, underdeveloped countries were subordinate peripheries that specialized in lower value-added sectors, particularly primary commodities demanded by the former colonial metropolises that transformed into industrialized developed countries.

Furtado demonstrated that underdeveloped countries were not simply lagging behind developed countries: they were integrated into a system that favored rich countries.

Compared to industry, commodity-producing sectors had less dynamic long-term demand, lower barriers to entry for new competitors, and more restricted horizons for technological progress. This limited technological horizon resulted not only from the precarious state of the science, education, and technology systems in poor countries and the lack of surplus resources to finance their transformation, but also from the physical limitations of the cultivated or extracted natural resource, which do not prevent but restrict the possible addition of value before its industrial transformation.

The less integrated an industry is into domestic industrial transformation and the more limited it is to international trade, the lower the value added and the less stimulus primary production provides to the overall economy. Especially in former colonies of exploitation, excessive specialization in commodities limits the incentives for export expansion in other sectors, preserving the country's internal heterogeneity (between sectors, regions, and populations) and its enormous pockets of poverty. This is exacerbated, but not exclusive to, mineral and banana enclaves.

The diversified industry of developed countries, in turn, stimulates both primary production and the service sector, as noted by Walpole, Prime Minister and strategist of British industrialization in the 18th century, and Jefferson or List, strategists of American and German industrialization in the 19th century. It also creates innovations for itself and other sectors, such as machinery and agricultural pesticides, probes for mineral extraction, or computers. Biotechnology, for a current example, is highly intensive in industrial technologies: its laboratories are unimaginable in a rural society.

Contrary to the linear narratives of liberalism, Furtado demonstrated that underdeveloped countries were not simply lagging behind developed countries: they occupied an integrated position within a system favorable to developed countries. It was in the interest of these developed countries to spread the liberal myth of harmony between countries that controlled such asymmetrical sectors and technologies: agriculture and mineral extraction on the one hand, and manufacturing and services on the other.
A developing country was therefore not merely backward, but doomed to reproduce its relative poverty and internal heterogeneity if it passively accepted liberal myths and failed to free itself from the structural constraints imposed by its peripheral position, diversifying its economy beyond a primary-exporting condition.

Growth and development

Furtado's second notable contribution was to clearly distinguish between economic growth and development, in two ways.

Initially, Furtado argued that, although any underdeveloped country could grow for some time without modifying its economic structure, growth would only be sustained if structural changes were carried out in a planned manner, since they would not result spontaneously from the decisions of agents guided by the incentives of relative prices in a free market.

Starting with Prebisch, Furtado engaged in dialogue with pioneers of development economics, such as Rosenstein-Rodan, Ragnar Nurske, and Arthur Lewis, to show that the main constraint on the growth of underdeveloped countries—their poorly diversified and low-productivity economic structure—is expressed in the balance of payments. In the form of a crisis, this constraint manifests itself whenever they are unable to pay for imports of higher added value and external financial and productive services, with exports of lower added value and unstable prices.

When this happens, the standard liberal recipe, still imposed today by the International Monetary Fund, is that of recessionary adjustment with currency devaluation, regardless of who it hurts.

Setting aside for now which social groups are affected by the pains and gains, Furtado argued that the recessionary adjustment may have short-term results, but it does not guarantee that the restriction will not return as soon as the country starts growing again.

To increase growth potential, therefore, a diversification of the productive structure is necessary, which, in the long term, increases exports and replaces imports.

Contrary to what liberal narratives convey, the so-called import substitution industrialization was not initiated by the collusion of statist planners and predatory rent-seeking businessmen, starting in the 1930s for some underdeveloped countries, and after the Second World War for others. Rather, it resulted from the spontaneous response of market agents to the change in relative prices caused by currency crises.

With each currency crisis, however, simple import substitution increased the demand for imported production goods and services whose subsequent replacement was more difficult.

In fact, the new import agenda tended to focus on goods and services whose domestic supply was hampered by technological, financing, and market scale requirements that deterred both national and foreign companies, some due to incapacity, others due to profitability and risk calculations.

Since the free market did not spontaneously resolve the situation, it was not enough for the State to offer externalities, such as infrastructure or education, without indirectly influencing the allocation of private resources through taxes and subsidies, or even directly allocating resources through public companies and banks.

Furtada warned that the indiscriminate opening up of the market, advocated today by neoliberals, would sanction superfluous imports, burdening scarce reserves that should support the production of essential goods.

Furtado understood that there was no lasting solution to the restrictions on growth other than directing investments to specific sectors and overcoming supply bottlenecks with state support.

Does this mean stimulating demand and consumption indiscriminately, as the orthodox economists suggest?

On the contrary, Furtado argued that indiscriminate trade liberalization – advocated by neoliberals like Pessoa and Rands – would waste scarce foreign exchange reserves on imports of superfluous consumer goods or goods necessary for the production of superfluous consumer goods. Therefore, it was necessary to inhibit both their importation and their local production.

Why?

Precisely to channel scarce resources into investments that expand the local production capacity of essential goods. What would be essential to overcome underdevelopment? Inputs and capital goods that fuel growth potential, as well as basic consumer goods and social infrastructure to reduce inequalities in access to consumption and skills among citizens.

The political choice in the allocation of social surplus.

This leads us to the second way of distinguishing between growth and development.

Throughout his work, Furtado broadened the meaning of development to encompass not only changes in the economic structure and political institutions that would expand the potential for economic growth, but also changes that would point towards socioeconomic homogeneity and social justice.

Furtado was not opposed to accelerated economic growth, but neither did he advocate any particular style of growth. His ideal was a society with less concentration of property and income, one that would eliminate extreme poverty and rationally overcome the imbalances and bottlenecks inherent in the development process.

How can we direct investments toward overcoming bottlenecks while simultaneously avoiding restricting the purchasing power of the disadvantaged?

Furtado did not merely pose the question abstractly, but in the context of a struggle against a conservative political system and a foreign power that boycotted the Three-Year Plan in 1963.

The Triennial took place within a context of cyclical slowdown brought about by the maturation of investments from the Goals Plan of the JK government (1956-1961), which had internalized new branches of electrical, mechanical and transport equipment, and expanded branches of basic inputs and energy and transport infrastructure, placing the Brazilian economy at a higher stage of incorporation of technical progress.

How can scarce resources be allocated to overcoming national bottlenecks while simultaneously not restricting the purchasing power of the disadvantaged? This question led Furtado to political struggle.

The slowdown was accompanied by balance of payments constraints, as a consequence of declining coffee prices, the incompressibility of essential imports, and the increase in remittances of interest, profits, and dividends, due to accumulated external liabilities against subsidiaries and foreign banks.

Currency devaluation also had a strong inflationary impact, both by making imports more expensive and by inducing higher profit margins for companies that were externally indebted or interested in remitting profits in hard currency.

Yesterday, as today, liberal orthodoxy disregarded cost pressures and explained inflation by excess monetary demand, primarily blaming banks and public deficits for the excess and proposing cuts in credit and spending (preferably to tax increases).

Furtado did not deny that the public deficit could, in specific circumstances, be a cause of inflation, but he argued that the existence of supply bottlenecks was generally more important than the level of aggregate demand in explaining inflation. This was all the more true in that context of economic slowdown.

The general problem is that the process of productive diversification in a peripheral economy is heterogeneous and unbalanced: supply in certain sectors is not easily expanded because of the existence of financial and technological barriers, so that, for a certain level of aggregate demand, different sectors would have different degrees of idle capacity.

In other words, a policy of containing aggregate demand to combat inflationary pressure, which was localized only in certain sectors where there was a supply bottleneck (industrial or agricultural), would leave the economy as a whole growing far below its potential. This meant that demand controls could only buy time for reforms that would allow for the proper planning of development.

In contrast to the across-the-board austerity measures advocated by neoliberals, Furtado saw the planning of public and private investments as the only effective solution to the bottlenecks that generate inflation.

For a lasting solution, it would be preferable to direct the allocation of public and private investments to overcome supply bottlenecks, and to influence the expensive consumption patterns of foreign exchange reserves through the tax and subsidy system.

In general, tax revenue should increase, with the greatest possible distributive fairness, to finance investment needs required for development and price stability.

In other words, development planning would be the only structural remedy against inflation. In the short term, however, without a preliminary tax reform and without renegotiating the payment terms of the external debt, the imbalances could not even begin to be addressed.

The biggest obstacle to the Three-Year Plan was the political inability to allocate the surplus to investments as proposed by Furtado, an educator incapable of educating our elites.

The National Congress, controlled by conservative parties, vetoed even the monetary correction of taxes, not to mention increasing the progressivity of taxation. The wealthiest were unwilling to moderate their differentiated consumption to finance investment planning and public infrastructure.

The US government refused to reschedule the foreign debt, precisely to destabilize the government of João Goulart (1961-1964), in which it was successful.

The economists who supported the military dictatorship, in turn, argued that the root of the problems was the abuse of wage demands exceeding labor productivity, politically determined relative prices, and the irresponsibly demanded overburdening of public services, which pressured profits and reduced investment.

Conservative vetoes on tax reform, rising profit margins, cyclical slowdown, or currency crisis?

No, the ultimate culprit for the crisis would be a political system in which decisions were influenced by democratic pressures and by a government that was "irresponsible" regarding the laws of economics.

The agenda of the 64 coup: a 35% cut in the purchasing power of the minimum wage; steep tariffs; segmentation of the city; government for the few. Conceição showed that a model of accelerated and exclusionary growth was being born there.

From this diagnosis, another choice for the allocation of the surplus was deduced: forcibly reducing the base wage (the real minimum wage fell by 35% between February 1964 and March 1967), deregulating prices to increase profits, and creating a compulsory savings fund formed from the payroll to subsidize the construction of suburbs that segmented the bourgeoisie and middle classes on one side, and the population lacking adequate housing and public services on the other. Large landholdings increased and received subsidies for technical modernization, while rural exodus swelled the unhealthy peripheries of large cities and lowered the wages of unskilled workers.

Furtado initially considered that the worsening concentration of income and property would lead to stagnation.

His greatest disciple, Maria da Conceição Tavares, demonstrated that the concentration of income encouraged the construction, automotive, and durable goods industries, generating an exclusionary and accelerated growth style, but almost the opposite of Furtado's development, a style that was not "technically" necessary, since it was the result of a choice imposed by the dictatorship.

Liberal myths

The dictatorship, however, did not only bequeath us an urban and service infrastructure tailored for a minority: it also left behind an external debt that bankrupted the Brazilian state, produced hyperinflation, and exacerbated income inequality in the 1980s.

To roll over the external debt, the dictatorship also bequeathed us an internal public debt that, in the 1990s, neoliberals claimed could be paid off by selling public assets, only to leave us without the assets but with a debt several times larger.

It is evident that, once the economy were to return to growth after the fiscal, financial, and exchange rate crises caused by the "miracles" of the dictatorship and the "growth hiccups" of the neoliberals, as it has been doing since 2004, the social infrastructure built for minorities would be pressured by demand, exposing its bottlenecks.

This does not mean that investment has grown at a lower rate than consumption since 2004, much less that this occurred because savings were "strangled" by the expansion of consumption.

The myth was used in 1964 to justify the military dictatorship's income policy: its economists argued that base wages needed to fall for profits to increase and, with them, investment. During the "Miracle," however, the consumption of durable goods and residential investment (financed by credit in addition to current savings) anticipated and induced private productive investment. Profits and wages of the middle class were directed more towards buying houses, cars, and appliances than towards expanding production capacity.

The myth of the economists from the dictatorship era: wage suppression is virtuous because it increases profits, generating greater private investment, which in turn accelerates growth. Does that sound familiar, 50 years later?

Historical experience matters little to the neoliberal heirs of the antisocial impulses of the dictatorship, who today repeat the convenient myths of 1964.

The repetition of the myth is also unfounded: during the expansion cycle with reduced income inequality of the last decade, "in the period between 2005 and 2013, investment grew by 89% in real terms, a period in which consumption grew by 61%".

Even in the automotive industry, which is subject to demand-sustaining incentives that are the target of criticism, investments are growing well ahead of demand and are likely to lead to cyclical excess capacity, which will probably induce companies to export in order to defend profitability.

It is undeniable that social infrastructure still needs to grow, since it was built for minorities who today experience competition from thousands of citizens who have started to earn enough income to migrate from bus stations to airports, from the SUS (underfunded by the end of the CPMF tax) to private health plans, or from public transport to the dream cherished since the exclusionary modernization of the dictatorship: the individual vehicle.

Adjustment for whom?

What type of adjustment between supply and demand is proposed by those inspired by Furtado or by his critics?

In my view, Furtado's vision is one of socially inclusive development that is not merely synonymous with growth, but rather incorporates the increasing demand for social rights and public goods as a lever for investment, moving towards a mass consumer society with greater socioeconomic homogeneity and social justice. It thus rejects the orthodox myth that wage growth cannot, by stimulating investment, lead to increased profits. Nor does it passively accept the liberal myth that a country's productive specialization is irrelevant to its growth potential and job creation.

This horizon demands intervention from a democratic and republican State to allocate surpluses from the wealthiest and extraordinary resources generated not by "miracles," but by technological innovations – such as the pre-salt oil reserves – to finance the construction of public infrastructure; reduce taxes for the poorest, as well as inequalities in access to consumption (including housing) and skills (not just education) among citizens; eliminate extreme poverty; and influence the expansion of investment in productive capacity, whether to induce innovations that will generate new productive chains and, at the same time, new bottlenecks, or to rationally overcome the imbalances and bottlenecks inherent in the development process, without blind faith in the free market.

The standard neoliberal recipe continues to be recessionary adjustment, with trade liberalization and currency devaluation, regardless of who it hurts; hence the need to protect an independent Central Bank.

It is clear that it will hurt less those who hold public debt, owners of surpluses that would yield higher interest: an independent Central Bank "... would have raised interest rates sooner. It would not have reduced the reserve requirement," informs the polemicist who is the coordinator of Marina Silva's economic program.

Today, neoliberals already set the country's growth potential at 1,5%. Any rate above that will have to be drastically reduced with massive doses of unemployment as a condition, presumably, to keep inflation on target.

The neoliberal critique is that incentives for investment (tax breaks, subsidized interest rates, government purchases) and demand (increases in real wages and social spending, job protection, and tax exemptions) have an inflationary impact: in a situation of "full employment... it is a highly inflationary economic model," according to the same coordinator.

Neoliberalism is also opposed to selective incentives for investment to overcome specific supply bottlenecks. Thus, without any consideration of cost shocks independent of the level of activity, it is proposed that an independent central bank be able to generate the level of unemployment necessary to, presumably, ensure price stability.

Neoliberals are also opposed to compensatory reductions in some administered prices or tax costs to supplement and limit the austerity that, they argue, an independent central bank should promote.

Therefore, the entire economy would have to operate below its capacity if only a few sectors suffered supply bottlenecks or cost shocks. They advocate, for example, raising electricity and oil prices, meaning that there should be no compensatory price management even during agricultural shocks and currency devaluation, arguing that interest rate hikes and cuts in public spending should "compensate" for the impact of the shocks on their own.

Given the proposed "tariff hike," it is not surprising that the coordinator of Marina Silva's economic program claims it is necessary to raise the center of the inflation target to 6,5% in the first year of her government, before the Independent Central Bank's effort to reduce it to 3% by the end of the government's term.

It is clear that a very heated economy can have more supply bottlenecks that put pressure on costs and prices, but today neoliberals are already saying that the potential (maximum) growth of the economy has fallen to something between 1,0% and 1,5% per year!

In summary, beyond that, we would have inflationary pressure that would need to be contained by increasing unemployment.

"Looking at high inflation, low unemployment, and a large and high current account deficit, it does indeed seem that the country's potential GDP has fallen considerably and should not be far from 1% to 1,5%... The fact is that 2015 will be a year of adjustment, and we will be starting from a stagnant economy... Fiscal adjustment is essential. We have to find a recurring percentage point of revenue... Brazil has been subsidizing consumption, with tax breaks on basic goods and electricity tariffs, by about 1 percentage point of GDP. It is not possible to maintain this policy and the investment grade. These are measures that take 1,7 points off inflation, but not without cost, and it is not possible to sustain the fiscal impact indefinitely." (Valor Econômico, 01/09/2014).

This is according to Mário Mesquita, a partner at Banco Brasil Plural and a polemicist who, like others, believes that old ideals need to be refreshed "in the sunlight."

We appreciate the advice, but the fact that neoliberals maintain their long-standing fixation on criticizing Celso Furtado and his heirs is, for them, probably one of the greatest compliments they can receive.