Brazil: Foreign domination and deindustrialisation

For the past eight years President Fernando Henrique Cardoso has implemented a neoliberal economic programme which has relied on foreign capital to play the leading role in national economic development. What have been the results of this IMF-imposed programme which was touted as one designed to enhance Brazil’s independence and modernise its economy? Geisa Maria Rocha draws up a balance sheet.


WHAT is the balance sheet of President Fernando Henrique Cardoso’s eight years in office, during which the theorist and critic of dependent development has enjoyed wider powers than any elected ruler of the past half-century? Is Brazil today less dependent than when he entered the Presidential Palace? Has it achieved more development than under his predecessors? The record can be considered from two angles: national and social. Cardoso promised voters that his programme, associating domestic and international capital in a common effort to modernise the nation, would enhance Brazil’s real independence as a major regional power in the global economy, and bring its citizens a greater degree of social progress and justice than they had ever known before. What have been the results?

The basic gamble on which the Plano Real rested - Brazil’s ability, if the right conditions were created, to attract unprecedented amounts of foreign capital - was not a miscalculation. Table 1 shows that foreign direct investment (FDI) expanded dramatically in Brazil, above all between 1996 and 2000, as the country displaced Mexico as the most important magnet for overseas investment in Latin America. What drew this wave of international capital into the country? Privatisation of state enterprises, and mergers and acquisitions, were two key attractions. Between 1996 and April 2002, $30.9 billion of FDI went into the purchase of privatised state companies in the electricity, telecommunications, gas, financial and other sectors - a figure that would be higher if transactions financed with Brazilian resources were included, as the BNDES (National Bank of Economic and Social Development) has financed many foreign acquisitions of privatised state firms at very low interest rates through a presidential decree of 24 May 1997. For its part, the government claims to have received total revenues of nearly $90 billion from its auction of public assets. [1]

But the consequences of this influx have not been those its architects expected. For most overseas investors, responding to the incentives offered them, have not geared their strategies to building new plants, so expanding production and boosting employment, but rather to acquiring existing ones, either by taking over private firms or buying up state enterprises put on the auction block. The evidence suggests, in fact, that the updating of dependent development by its theoretician has led more to the destruction of local capital than its association with international capital.

The extent of the denationalisation of the economy via the privatisation of state enterprises can be gauged from the degree of ownership acquired by foreign capital in these forms. Between 1995 and 1998 FDI accounted for 42.1% of the accumulated value of privatisations. The figures would be even higher, if subsequent sales of their shares by Brazilian partners were included - as, for example, in the case of the state phone company Telebras, where the original foreign stake was 66.7%, but Globo and Bradesco then disposed of their share to Telecom Italia. Where necessary, the Cardoso regime has actively assisted this displacement of domestic capital: in 1999, for instance, the BNDES advanced half the purchase price ($360 million) of the S‹o Paulo energy company CESP-Tiete to the American company AES, cutting out the Brazilian group Votorantim controlled by Ant™nio Ermrio de Moraes, once described by a US scholar as a ‘one-man national bourgeoisie’. At least R$7.5 billion will be returned to both foreign and local companies by the national treasury, over time, in the form of reduced taxation, and the difference between the minimum price and the actual amount paid. [2] Further generous incentives are now being extended by the BNDES to the privatised electricity sector in the wake of the energy crisis, and the government has allowed the companies ‘special’ price increases as compensation for the rationing period, hitting working and middle-class consumers as well as national industry.

Mergers and acquisitions of private firms have been equally central to the restructuring of the Brazilian economy promoted by Cardoso, and have operated as the other mechanism of denationalisation. A recent study shows that between 1995 and 1999 there were 1,233 mergers and acquisitions in which multinational corporations acquired control or participation in Brazilian industries - the devaluation of the national currency, the real, since 1999 making such purchases cheaper. A KPMG survey reveals that 70% of all acquisitions in Brazil during the same period were undertaken by multinationals, to the tune of some $50 billion of FDI inflows. [3] Rapid import liberalisation and sky-high interest rates have been the most important factors in the displacement of local capital, forcing large numbers of Brazilian firms, including major industrial groups, either to close down, ally with or sell out to multinationals.

Foreign acquisitions were particularly intense in such variegated sectors as autoparts, banks, steel, food, drinks, dairy products, hygiene and cleaning, electronics and chemicals. Between 1995 and 2000, many a traditionally powerful Brazilian trust disappeared: Metal Leve of the Mindlin family was bought out by the German firm Mahle, the autoparts concern Cofap by the Italian Magneti Morelli, the steel company Villares by the Spanish Sidenor; while in the banking sector, Excel Economico was picked up by the Banco de Bilbao, Garantia by CrŽdit Suisse, Bamerinduis by HSBC, Real by the Dutch ABN-Amro. Such local brand names as Arisco, Pullman, Lacta, Aymore, Cica or CafŽ Pilao in the food industry have disappeared, annexed respectively by Goldman Sachs, Bunge International, Philip Morris, Danone and Sara Lee; in the electrodomestic, supermarket and clothing sectors, it has been the same story - Arno, Eldorado, Pao de Aucar and Renner falling to the French firms Seb, Carrefour, Casino and J. C. Penney. As Veja, an unflagging supporter of Cardoso’s regime, puts it: ‘The history of capitalism has seen very few transfers of control as intense as this, over a short period of time.’

A select group of Brazilian interests, industrial and financial, have at the same time acquired monopoly positions in association with foreign capital during the course of the privatisation process. An outstanding case is the largest Brazilian private group, Steinbruch, which bought a majority stake in the profitable state mining giant, Vale do Rio Doce, in partnership with overseas capital and financial support from the American NationsBank. Odebrecht and Mariani in petrochemicals, Vicunha in steel, and Bradesco, Itau and Bozanno in the financial sector, are similar representatives of a newly internationalised bourgeoisie that has profited hugely from the privatisation programme. [4] But these are the exceptions that do not outweigh the rule. Displacement of local by foreign capital, rather than association with it, has been the hallmark of the Plano Real.


How far has this denationalisation been compensated by a productive modernisation of the Brazilian economy? The import-intensive service sector offers one answer. In the late 1990s this was the principal magnet for foreign capital - its share of total FDI increasing from 43.4% ($18.4 billion) in 1995 to 76.6% between 1996 and February 2002, or $97.3 billion of the $127 billion invested in Brazil in these years. The typical upshot of the deregulation and privatisation of electricity and telecommunications, and the unleashing of a torrent of acquisitions and mergers, was abandonment of local research and development for intra-company technological imports. The bill for capital goods from abroad jumped from $7.5 billion in 1994 to $14.8 billion in 2001, and for intermediate goods from $15.6 to $27.3 billion for the same years. Since Telebras was privatised in 1998, multinationals have been importing 97% of the components required to upgrade Brazil’s antiquated phone system, as the government, to cajole the new owners, backed down from its initial demand that they utilise at least 35% of national products. The price-tag for electronic components alone - especially chips - reached $5 billion in 2000. As one economist has remarked: ‘While the consumption pattern of information technology in the developed countries was diffused in Brazil in the nineties, there was an undeniable regression in production.’ [5]

The strategy of foreign corporations in Brazil has been perfectly rational; however, it has exposed the error of relying on multinationals to perform the role of leading agents of national development. UN Economic Commission for Latin America and the Caribbean (ECLAC) economist Michael Mortimore’s case study of FDI in Brazil’s service sector shows that the major goal of multinationals is usually to gain access to the national market, not to maximise export, let alone employment, and is achieved primarily by purchasing existing assets, not creating new ones. Assessing attempts by Latin American governments to convert FDI into an engine of growth, he concludes: ‘While the objectives of corporate strategies were for the most part met, the growth and development goals of the host countries were not.’ Rubens Ricupero, Secretary-General of the UN Conference on Trade and Development (UNCTAD), echoes him: ‘The commercial objectives of TNCs [transnational corporations]  and the development objectives of host economies do not necessarily coincide’. [6]

In the case of the automotive and autoparts industries, Ricupero notes that major national enterprises known for their capacity for technological innovation - Metal Leve, Freios Varga, Cofap - suffered immediate degradation after being sold to multinationals. Here the coefficient of import penetration rose from 8% in 1993 to 25% in 1996. The story has been the same in the telecommunications and computer sectors, where multinationals have largely suspended local research and development and transferred engineers from labs to marketing, production, sales and technical assistance. In these conditions, Ricupero comments, ‘It is not surprising that the coefficient of import penetration jumped from 29% in 1993 to 70% in 1996’. Another study has found that between 1994 and 1997, local production of capital goods fell overall by 10%. Denationalisation, in other words, has been accompanied by a real measure of deindustrialisation. [7]

Meanwhile, Brazil’s exports remain concentrated in traditional commodities - agricultural, agroindustrial and mineral - and the country has been unable to increase its share in world-manufacturing exports. A recent UNCTAD study shows that between 1980 and 1997, Brazil’s share in world exports of manufactures remained the same, 0.7%, and, significantly, that its share in world manufacturing value-added (income) fell from 2.9% to 2.7%. Comparatively, while Chile and Mexico were able to increase manufacturing exports during the same period, 0.0 to 0.1% and 0.2 to 2.2%, respectively, Chile’s value-added remained the same, 0.2%, and Mexico’s fell from 1.9 to 1.2%. [8]

With the exception of East Asian countries - Korea, Taiwan and, of course, Japan, which successfully achieved a rapid expansion of technology and skill-intensive exports -none of the developing countries that have rapidly liberalised trade and investment in the past two decades have achieved a significant increase in their share of world-manufacturing income, as their exports continue to be concentrated in resource-based, labour-intensive products. As the same UNCTAD report notes: ‘While the share of developed countries in world-manufacturing exports fell between 1980 and 1997, their share in world-manufacturing income rose significantly. In other words, in relative terms, industrial countries appear to be trading less but earning more in manufacturing activity.’

Most significant of all, despite the huge inflow of foreign capital to the country under Cardoso, the rate of fixed-capital investment in Brazil has been miserable - well below the level of the supposedly disastrous 1980s, when it ran at some 22.1% of GDP. By contrast, as Table 1 indicates, in 1999, when FDI hit an all-time peak of $30 billion, it was no more than 18.9%. There has been nothing accidental about this. The extra-high interest rates needed to attract foreign lenders, so as to cover the current account and keep up the real, depressed domestic investment from the start. In fact, if we compare Brazil with Argentina, Chile and Mexico, the three other Latin American countries where privatisations, mergers and acquisitions went furthest, the rate of investment in 1980 was 27.8% in Brazil, 28.8 in Argentina, 19.8 in Chile and 24.2 in Mexico. Between 1997 and 2000, by contrast, the annual average rate was 20.5% in Brazil, 19.1 in Argentina, 22.3 in Chile and 21.6 in Mexico. In other words, in every country except Chile, there has been a marked decline in rates of investment compared to levels prior to the debt crisis. ECLAC’s comment speaks for itself: ‘The instability of external financing has had a discouraging effect on investment. This is undoubtedly one of the reasons why the investment rate remains below pre-debt-crisis levels. The decline in the investment coefficient compared to the 1970s has been more pronounced in the larger countries, since these also have greatest exposure to private capital flows.’ [9]

The modernisation of the Brazilian economy under the leadership of multinationals has not promoted higher rates of capital accumulation nor greater international competitiveness. The large trade surpluses the country badly needs, even after two rounds of devaluations in 1999 and 2001, are wanting. Will multinationals continue to finance current-account deficits they themselves help to produce, apparently their principal task during Cardoso’s double presidency? The exhaustion of privatisations in Brazil, and the deteriorating economic environment in the North, suggest that this role may be coming to an end. From $30.5 billion in 2000, FDI is expected to fall to perhaps $17 billion this year - hence the urgency of the Stand-by Agreement with the IMF, and accelerated drawing down of its credit-line. But as in the case of Argentina - where FDI cascaded from $22.6 to $3.5 billion in the space of two years - once confidence weakens, foreign capital can abandon any country to its fate virtually  overnight.                                                      


1.   Sociedade Brasileira de Estudos das Empresas Trasnacionais e da Globalizaˆo Econ™mica:; Aloysio Biondi, O Brasil Privatizado, Sao Paulo 1999, p. 36; BNDES:

2.   Peter Evans, ‘Reinventing the Bourgeoisie’, American Journal of Sociology, 88, p. S232; ‘Rescaldo da privatizao’, Folha de Sao Paulo, 14 April 2000.

3.   ‘Este quase tudo a juros no banco’, Veja, 24 May 2000.

4.   Reinaldo Gonalves, Globalizaao e Desnacionalizaao, S‹o Paulo 1999, p. 137. On 5 July 2000, the Financial Times reported that the Anglo-Dutch Corus was to acquire control of CSN, Brazil’s largest integrated steelmaker (privatised in 1993) from the Steinbruch family’s Vicunha group. Benjamin Steinbruch, who gained control of CSN after relinquishing his stake in Vale do Rio Doce in 2001, is negotiating with Corus ‘as a way of internationalising the business’.

5.   Luciano Coutinho, ‘Complexo eletr™nico: retrocesso e desafio’, Folha de S‹o Paulo, 12 November 2000; Biondi, O Brasil Privatizado, pp. 16-7.

6.   ‘Corporate Strategies for FDI in Latin America’, World Development, No. 9, 2000, p. 1612; UNCTAD World Investment Report 2000, Cross-Border Mergers and Acquisitions, Geneva 2000, p. 16.

7.   ‘Uma estratŽgia para o conhecimento’, Folha de Sao Paulo, 6 February 2000; Mariano Laplane and Fernando Sarti, Investimento Direto Estrangeiro nos Anos 90, IPEA TD, No. 629, Rio 1999, p. 9.

8.   UNCTAD, Trade and Development Report, 2002, Geneva 2002, p. 81.

9.   ECLAC: Statistical Yearbook for Latin America and the Caribbean 2001, February 2002, p. 77; Globalization and Development, May 2002, p. 148.

Geisa Maria Rocha, Ph.D. (Political Science), teaches Latin American Political Economy at Rutgers University. The above is extracted from a longer article which was published in New Left Review 16 (July-August 2002) and is reproduced with the kind permission of NLR <>.