Stagnation of the Brazilian Economy and Peripheral Financialization

This paper argues that peripheral financialization is tied to opening the developing economies’ capital and financial accounts. In the case of the Brazilian economy, the long-term result of economic integration in a hierarchical international monetary and financial system is the increasing decoupling of financial investments on one hand and domestic capital formation. This implies that the economy is stagnant, and the manufacturing sector reduced its weight in total value added. Consequently, the Brazilian economy lost complexity and specialized in commodity exports. We analyze the evolution of the Brazilian economy since the 2000s through the financial balances of the economy’s institutional sectors. We showed that the Brazilian economy was in an expansionary phase in the 2000s due to the excellent performance of the External sector. Policy space could be widened, and real interest rates, although very high, steadily declined. However, exchange rate misalignment and its overvaluation trend are a by-product of the financial integration of a peripheral economy, which largely explains Brazilian deindustrialization. The international financial crisis interrupted the expansive phase, and the 2010s was a period of economic reversion. We conclude that the reduced policy space due to financial integration, the greater vulnerability to external shocks, and the regression in the productive structure seem to head the economy to another lost decade.