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THE JOURNAL OF ENERGY
AND DEVELOPMENT
Francisco Ebeling,
Can Oil Steer Brazils Social and
Economic Development?
An Alternative New Institutionalist Approach,
Volume 39, Number 2
Copyright 2014
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CAN OIL STEER BRAZILS SOCIAL AND ECONOMIC
DEVELOPMENT? AN ALTERNATIVE NEW
INSTITUTIONALIST APPROACH
Francisco Ebeling*
Introduction
PetrobrasBrazils national oil companywas founded in 1953 with thepurpose of importing oil and supplying petroleum products to the domesticmarket because, during the first half of the 20th century, Brazil had yet to make
any significant oil discoveries. In 1973, when oil prices quadrupled due to the
first oil shock, that strategy changed. With the strong backing of the state,
Petrobras started a campaign to search for oil fields in the shallow waters
(around 200 meters deep) in the Campos Basin with initial relative success; it
became one of the leading companies in the world in offshore oil exploration. In
1997, exploration and production was opened up for other companies in the
Brazilian oil and gas sector by means of the realization of bidding rounds under
concession contracts. A decade later, in 2007, Petrobras announced the huge
discoveries of reserves in the so-called pre-salt layer, a petroleum area that is
approximately 200 kilometers from the coastnot far away from the countrys
major cities of Rio de Janeiro and Sao Paulowhere oil wells have an average
*Francisco Ebeling is a trained economist from the Federal University of Rio de Janeiro, Brazil,and holds a masters degree in Public Policies, Strategies and Development (PPED) from the same
university. From 2007 to 2008 he was a Research Assistant at the Energy Economics Group of the
Rio de Janeiro Federal University (GEE-IE-UFRJ), having received a scholarship from the Brazilian
National Agency of Petroleum, Natural Gas and Biofuels (ANP). In 2008 he joined the board of
analysts of the Brazilian Petroleum, Gas and Biofuels Institute (IBP). The authors research interests
include energy development, renewable energy, oil markets and crude oil prices, post Keynesianism,
comparative institutional analysis, governance and political science, economic sociology, and new
institutional economics.
The Journal of Energy and Development, Vol. 39, Nos. 1 and 2
Copyright 2014 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.
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sub-sea depth of 5,000 meters plus another 2,000 meters of water depth. The first
major discovery in the pre-salt layercalled Lulahas proven reserves estimated
between 5 billion and 8 billion barrels, making it one of the largest oil field dis-
coveries in the Western Hemisphere over the past 30 years.
Inspired by the Norwegian experience, in 2010 the Brazilian government ap-proved a new petroleum bill (12.351/2010), according to which Petrobras would
be the sole operator in the not-yet-auctioned pre-salt blocks. Under production-
sharing agreements (PSAs), the government would start to auction the right to
participate in consortia with Petrobras and Pre-Sal Petroleo (PPSA), a newly
created state-owned firm to manage contracts for Brazils large oil and natural gas
fields in the offshore pre-salt region. Furthermore, that bill also created a Social
Fund, which would collect the governments share in the consortia. In 2010, the
government passed a bill (Onerous Cession) in order to capitalize Petrobras,
which will produce 5 billion barrels of oil in fields that belong to the country in
exchange for the equivalent in government bonds.
In October 2013, for the first time the government auctioned a block in ac-
cordance with the new procedures. The Libra field, a large ultra-deepwater oil area
in the Santos Basin, has been tested and is possibly the second-largest discovery
of the 21st century, only behind Kazakhstans giant Kashagan. Libra is expected
to have reserves between 8 billion to 12 billion barrels of recoverable oil. The
winning bid was presented by a consortium composed of Petrobras (40 percent),
Royal Dutch Shell (20 percent), Total (20 percent), the Chinese National OffshoreOil Corporation (10 percent), and the Chinese National Petroleum Corporation (10
percent). They agreed to offer the minimum bid of 41.65 percent of surplus oil for
the federal government, as well as paying a signature bonus of 15 billion reais
(around U.S. $6.8 billion).1
The next decade is expected to be a very productive one for the Brazilian oil
and gas industry. It is anticipated that by 2020 the country will be producing
between 4.5 million and 5.0 million barrels per day (b/d) compared to an average
of 2.1 million in 2013. By 2035 the International Energy Agency projects that
Brazil will produce around 6 million barrels per day of which at least 2.5 millionwill be exported.2 The major part of that additional production will come from the
Santos Basin pre-salt fields such as Lula (Concession Contract), Franco (Onerous
Cession), and Libra (PSA). This could place Brazil among the ranks of the top 10
oil-producing nations. To have an idea of what this means, in 2013 both Russia and
Saudi Arabia produced more than 10 million barrels per day. For Brazil, this in-
crease in oil exploration and production will have significant ramifications. As the
Brazilian government demands oil companies to order local contentwhich may
reach up to 80 percentthis leap will only be possible if major investments are
made. Brazils Development Bank, BNDES, estimates that from 2014 to 2017about 460 billion reais (approximately U.S. $210 billion) will be invested by the
petroleum industry in Brazil. To explore Libra, it is expected that in the next 10 to
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20 years around $100 billion to $200 billion dollars will be disbursed by the
consortium. Major investments also are needed in order to enhance the installed
capacity of the local goods and equipment industry, which will be manufacturing
floating production, storage and offloading units (FPSOs), oil rigs, and the like.
Oil and gas exploration and production (E&P) represents a huge developmentalopportunity for the country. This golden ticket will have to be carefully man-
aged because history shows that many nations have failed to seize the opportu-
nities that arise from the development of their energy and natural resources.
Utilizing an alternative new institutionalist perspective, this paper aims to assess
under which conditions oil and gas E&P may be an opportunity to further Brazils
social and economic development. To accomplish this, in the first section
we provide a review of the literature that relates institutions with the so-called
resource curse. In the second section, a review of a more conventional view of
new institutionalism is presented, which is followed by a discussion of how the
argument can be supported making reference to its alternative approaches. Sub-
sequently, four typical themes of the resource curse literature are analyzedthe
relationship between the exchange rate and the Dutch disease, industrialization
and the diversification of the economy, transparent revenue use in the realm of
education, and politicsall of which are critical in determining whether oil can
promote Brazils social and economic development or not.
Institutions and the Resource Curse
The repeated failure of oil and gas rich nations to develop based upon the
exploitation of their resource endowments motivated the appearance of a body of
literature devoted to analyzing what is referred to as the resource curse. This lit-
erature can be separated into three different waves: economic, political, and
political economic.3 In the first research wave, the focus was primarily on the
Dutch disease, a phenomenon in which growing oil and gas exports lead to the
appreciation of the exchange rate of an oil-exporting country.4
It has been argued thatthis, in turn, leads to a decline in the competitiveness of other industries in the
country, which results in a number of undesirable outcomes including a deterioration
in the terms of trade, limited backward and forward linkages with other economic
sectors, and deindustrialization. In response to the risks posed by the Dutch dis-
ease, economists have proposed corrective actions and countermeasures such as
fiscal austerity, exchange-rate management techniques, diversification of the econ-
omy, and efficient and transparent revenue use as a way to combat the unwanted
economic impacts.
The second wave of works assumes the existence of a political resourcecurse, which is the failure of a rent-seeking political elite that deliberately
chooses not to take those corrective actions.5 However, the political wave lost its
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strength because it failed to deliver a convincing explanation of how the typical
rent-seeking argument is connected to negative outcomes in resource rich nations.6
Last, the political economic trend has emerged consisting of three different
branches. In the first, one tries to understand how natural resource abundance
undermines the possibility of economic growth and long-term developmentalgoals due to the rational and irrational behavior of a nations elite. The second
group associates natural resource abundance with conflicts and civil wars. The last
consists of those studies that cross natural resource abundance with particular
types of political regimes, such as undemocratic rentier states.7
In that sense, possibly with the sole exception of Norway,8 oil endowment tends
to be related negatively with democracy.9 For instance, the first law of petro-
politics states that the oil price and the pace of freedom go in opposite directions
in oil producing and exporting countries.10 As a matter of fact, the extraction of oil
is particularly troublesome when done in societies where the political institutions
and civil society are underdeveloped. Because oil reserves are very often con-
centrated, they sometimes are controlled by elites that use oil wealth to lock in
patterns of domination. One should not confuse government revenues with the
flow of benefits to citizens.11 Very seldom does a citizen of a resource rich country
have the perception that he or she is the rightful owner of the resource.12 In another
vein, what one could call the endowment and enforcement of collective property
rights of oil revenues are a rarity. Rather, massive oil wealth can have significant
negative impacts on the quality of governance in oil-producing countries becauseof its potential to enable authoritarian and centralized patterns of governance.
Nevertheless, the political economic wave is not exempt from criticism. For
instance, the analysis of how negative outcomes are produced in so-called petro-
states can be criticized for being deterministic.13 The example of contemporary
Venezuela, which managed to redistribute its oil wealth, very clearly shows that
there is openness to change. Another possible critique is that authors very seldom
recognize that authoritarian regimes also can be the outcome of the position that
a country occupies in the international system. During the golden age of capi-
talism, the oil wells and pipelines of the Middle East were fundamental to as-sembling the Keynesian economic intermezzo and the forms of democracy in
which it played a central role.14 A possible interpretation is that there is a con-
tradictory relationship between democracy in mature capitalist societies and the
lack of democracy in oil-exporting countries, especially in the Middle East and
Africa. This contradictory relationship between oil and democracywhich results
is poor democratic governance and autocratic political regimes in developing
countriesis the product of at least two mechanisms. First, imperialist geopolitics
repeatedly strived to ensure security of supply in a context in which oil scarcity
increasingly derives from the monopoly of landlord states over the extraction andthe access to reserves.15 This was attained through military interventions or by
spurious alliances. An example is the maintenance of the Saudi regime in times
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when a wave of protests shook the Arab world and managed to depose several
autocratic regimes in states where oil reserves and production are scarce (a notable
exception is Libya, which has significant oil reserves). Similarly, the oil industry
has the characteristics of gold prospecting and then of a gold rush, or of blood
diamonds, and their role in engendering African warlordism.16 The secondmechanism is corporate rent seeking, as not only politicians but also oil companies
seek rents.17 In that sense, oil companies rent-seeking behavior fosters the gov-
ernment officials rent-seeking practices and, thus, tends to undermine democratic
politics.18
Focusing on institutions, in the last decade what one could call a fourth wave
of explanations for the resource curse has gained momentum.19 Natural re-
sources can be a blessing or a curse depending on which institutions a country
possesses.20 If they are producer friendly, the former tends to be the case; if they
are grabber friendly, a country is more likely not to take advantage of its natural
resource endowment. It also has been argued that if a country possesses good
political institutions it may block rent-seeking behavior.21 A study has found that
when institutions endow property rights to private companies and manage to
enforce them, a country is more apt to profit from its oil and gas resources.22
Finally, another study finds that the resource curse is not a given and that the
quality and soundness of institutions matter a great deal to the outcomes.23 Some
examples of policies that are put forth by sound institutions are transparent public
bidding, environmental and social regulation of operations, taxation, auditing, andresponsible revenue spending.
However appealing the thesis that institutions matter in order to avoid the
resource curse might be, in recent years it has been convincingly criticized. For
instance, it has been found that in countries with poor institutions it is very difficult
to institute institutional change in order to develop non-primary production sectors
and to reduce the dependence on resource exports.24 Other research argues that
parsimonious explanations that ignore time and historical context are unlikely to
capture the dynamics of potentially more than one combination of a set of vari-
ables that can induce positive institutional change and that assessments of in-stitutions and development are based more on ideological perspectives than on
scientific knowledge.25 It has been stressed that it is important to factor in the role
of the state in avoiding the resource curse: in nations with strong state in-
stitutions this occurrence is less probable.26 Moreover, it has been argued that
researchers have been too reductionist in positing a deterministic relationship between
natural resource abundance, weak institutions and various negative developmental outcomes,
such as poor economic performance.27
Finally, another article delivers perhaps the most complete criticism of thethesis that institutions matter in the realm of oil.28 According to the author, the
policy recommendation that countries should improve the quality of their
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institutions to prevent or cure the resource curse must be questioned for a number
of reasons. First, there is no single institutional arrangement that leads to good
outcomes. Second, the proxies used to measure what are good institutions are
flawed. Third, cases that have been cited as success stories very frequently have not
performed very well, such as Chile. Fourth, little has been said in that body ofliterature about how institutions actually change. Coming to the studys conclusions,
it proposes a comprehensive analysis of what really makes for the quality of in-
stitutions. First, it compares developmental and predatory states, arguing that in the
former sound institutions tend to prevail. A second comparison is made between
concentrated and diffused natural resource property rights, in which there is not
really a single best institutional arrangement. Third, it opposes social cohesion
and social conflicts, where the latter tend to lead to better institutions. Finally, it
analyzes differences in colonial settlement structures as a source of different
institutions in resource rich countries.
To sum up, in order to argue that a resource rich nation is cursed by institutions
or that better institutions may be the cure for the resource curse, many variables
have to be considered, such as the historical context and the role of the state. In
other words, there is no room for simplistic and deterministic responses. As will be
seen in the next section, the more conventional strand of new institutionalism does
precisely that.
New Institutionalism and Its Critique
New institutionalism appeared in the 1970s as an attempt to bring the in-
stitutions of the state back in into the explanation of political action.29 Since that
founding moment, at least six different new institutionalisms have been de-
veloping along more or less separate paths: rational, historical, sociological, dis-
cursive, radical, and the contemporary institutional political economy. Around the
1990s the so-called institutional turn reached mainstream economic analysis due,
in large part, to the contributions of Oliver Williamson, Douglass North, DaronAcemoglu, and James Robinson.30 When the appeal and legitimacy of the
Washington Consensus started to fade in the mid-1990s, it gave way to Joseph
Stiglitz post-Washington Consensus, which incorporates, among other theories,
new institutional economics (NIE), a combination of rational and historical
institutionalism with a few pinches of neoclassical analysis.31
It has been argued that NIE brought the firm back into the fold, which it calls
symbolic of the non-market, of institutions in general and of organizations in
particular.32 Picking up on Ronald Coases transaction costswhich justify the
existence of firmsNIE develops the thesis that state institutions are needed inorder to take over the production and enforcement of property rights because they
can do that at a lower cost than private groups.33 Thus, at the same time that NIE
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brings the firm back into the analysis, it also encompasses the role of the state. But
the state in NIE is neoclassical, considering that Douglass North delivers a neo-
classical theory of the State.34 In that sense, although NIE admits that the market
cannot be taken for granted and, therefore, is one of the biggest instances of the
necessarily socially created nature of human institutions,35 neoclassical analysisdoes belong to what Imre Lakatos would call its protective belt. NIE preserves
neoclassicals organon (its methodological tools and theoretical concepts), which
includes methodological individualism, the idea of scarcity and competition, the
static equilibrium theory of prices, marginalism, and comparative statics.36
Oliver Williamson,37 who also uses transaction costs as the basic unit of his
analysis, goes one step further away from neoclassical economics by substituting
its instrumental rational assumption with Herbert Simons concept of bounded
rationality, according to which human behavior is intendedly rational but only
limitedly so.38 Thus, Oliver Williamsons important contribution to NIE is
characterized by (i) more realism,39 (ii) a greater willingness to give up the for-
malization and a supposed precision of the proposed theoretical models, and (iii)
more openness to interdisciplinary dialogue.40 Finally, another important contri-
bution to NIE is presented by Daron Acemoglu and James Robinson.41 They build
their work upon Douglass Norths concept of open access order, according to
which the wealthier and more developed a society, is the greater the acceptance of
self-interested individual economic behavior and the more state institutions are
successful in reducing transaction costs and enforcing property rights. In that sense,they argue that developing countries should pursue (liberal) reforms, which are
difficult to pass, mainly due to the rent-seeking behavior of self-serving political
elites.
Nevertheless, there are not a few critical voices against the way NIE portrays
how institutions work. For instance, it has been argued that transaction costs seem
to be a rather slim basis for explaining the existence of institutions.42 Douglass
Norths work has been criticized for its undertheorization,43 that is, for having
placed an exaggerated emphasis on transaction cost reduction and property rights
enforcement as the keys to capitalist economic development. Another studycriticizes NIE for its overemphasis of property rights institutions and argues that
the relationship between property rights and economic development is fraught
with weaknesses as, for instance, the difficulty in adequately measuring property
rights.44 Furthermore, it criticizes the glorification of private property rights to the
detriment of other types, which can also deliver a sound developmental perfor-
mance, and maintains that a stronger protection of property rights is not always
better. It also has been argued that NIE fails to give a proper explanation of how
institutions actually emerge and change without recurring to functionalism, that is,
the belief that institutions are shaped by individual preferences.45
Finally, anotherauthor asserts that Douglass Norths theory of the state does not consider other
ways that it can steer economic development.46 Thus, in NIE state intervention is
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thought of in terms of the getting-the-prices-right approach in which a larger
toolkit of state policies is dismissed.
However, the aforementioned critique of NIE does not deny the fact that
property rights are important in the economy and particularly in the oil industry. In
Brazils petroleum industry, property rights are endowed when an oil companyacquires the right to explore for oil and gas in blocks auctioned under the con-
cession contract or when a company belongs to the winning bid in a PSA. While
the former potentially balances public and private property rights,47 the latter is
a predominantly public form of granting property rights.48 The property right to
explore a block under the concession contract also can be exchanged in what is
referred to as farm ins.49 Since 1997, when the industry was opened to other
companies, property rights have been successfully protected in all three modali-
ties. In other words, the state continuously has provided for contractual stability.
Regardless if property rights are granted and enforced under the concession
contract or under PSAs, without them oil remains in place and, therefore, is of no
use for the country. In that sense, in order to seize upon the opportunity, the en-
dowment and enforcement of property rights is a necessary condition.
Nevertheless, the criticism of more conventional strands of new institutionalism,
such as NIE, is important in order to highlight that bestowing and enforcing property
rights is hardly a sufficient condition for the production of oil to result in de-
velopment, even in the United States.50 In the following four sections, it will be
argued that the government has to do much more than that if it wants to capitalize onthe extraction of oil and gas resources. In Brazil, it will have to manage its exchange
rate, it will need to launch and improve industrial policies in order to diversify its
economy, and it must design better educational policies in order to meet the pop-
ulations demands and the needs of industry. Moreover, the government will have to
mobilize political capital in order to push through its decisions both from above and
from below. All these tasks demand a state equipped with a toolkit of economic,
transformative, distributive, and political capacities, respectively. This takes us far
away from conventional new institutionalism and its somewhat meager prescriptions
of what is required for social and economic development.Of primary importance for this article is the contemporary institutional political
economys principle of holism.51 One of its main implications is that everything
that might be related to a particular institution has to be exhaustively analyzed in
a deductive fashion. Nevertheless, because institutions are complex, obviously
there are limits to this approach. Therefore, this article attempts to be at least
concessive holist, in such a way that in some passages it will be unavoidable not
to make use of theories and of a priori. This means that not a single but a whole
ecology of theoriesa meta-theory52is called upon in order to explain whether
or not Brazil will be able to capture the tremendous opportunities available to thenation from developing its natural resources. In addition to new institutionalism,
this ecology of theories also comprises knowledge from the fields of political
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science, sociology, and economic theory.53 But because new institutionalism is
a methodological temper54 that has affected a large number of fields,55 its in-
teraction with other theories already has become somewhat commonplace. Thus, it
is argued that an interaction with other theories actually gives substance to new
institutionalism. The theories that will be presented in the remainder of this paperare of a more flexible nature and assume that capitalism and its politics are his-
torically specific, permanently prone to crises, and that current institutions are the
product of conflicts and contradictions, which affected past institutional de-
velopment. In the following four sections we will extend the institutional turn
in order to analyze to what extent the opportunities presented by the extraction of
oil can be realized.56
The Exchange Rate and Dutch Disease in Brazil
This section presents a concessive holist appraisal of the relationship between
the exchange rate and the macroeconomic conditions for economic development.
It will be argued that understanding whether an increased oil extraction is perilous
to the exchange rate is not enough to assess the possibility of the Dutch disease
occurring in Brazil. Concessive holism is also important because it shows that
geopolitical and political economic tensions permanently condition the construction
and reconstruction of the institutions that manage the exchange rate. From the pointof view of the resource curse literature, this also means that in this particular issue
the economic, the political economic, and the institutional waves are actually deeply
intertwined.
It has been shown that the Dutch disease is a type of economic risk that may
lead to the resource curse. History has provided us with several cases of oil- and
gas-exporting countries facing this challenge since the 1950s.57 The problem ap-
pears when a nation manages to significantly increase its oil and gas production
and subsequently its exports of the resource.58 Subsequently it starts to receive an
increased inflow of foreign currency, which may lead to the appreciation of theexchange rate. This can deteriorate the competitive edge of other industries in the
country. In the long run, the economy might stagnate and deindustrialize, leading
to greater poverty and a poor socio-economic performance. Until now, Brazils net
exports of oil and gas were not sufficient to lead to the classical symptoms of the
Dutch disease. Actually, there is a risk that the trajectory toward increased oil
and gas output, as a by-product, could devalue the nations currency. Because the
local goods and equipment industry is not competitive, Petrobras and other petro-
leum companies may be forced to import more goods and equipment, which would
lead to higher outflows of foreign currency, thus devaluating the Brazilian real.59
Nevertheless, the appreciation of the exchange rate, a process that has worsened
from 2007 onwards, has been having an impact on the countrys industry, which is
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becoming increasingly less competitive.60 In that sense, it is argued that Brazil al-
ready has started to suffer from a subtle form of the Dutch disease. The next
question is: how has this happened?
To some extent, what in Brazil is perceived as a subtle case of the Dutch
disease is a consequence of what has been happening in the world economy sincethe 1970s. The collapse of the fixed exchange rate system, under the leadership of
the United States, marked the rise of the U.S. financial industry at the global level,
which today is known for its liquidity and capacity to innovate. From the early
1980s onwards, the United States started to attract massive inflows of capital,
which compensated for its growing current account deficits. In turn, mainly Asian
nations started to accumulate massive reserves of foreign currency. The combina-
tion of low wages, undervalued exchange rates, and abundant foreign investments
boosted the competitiveness of Asian states. In that context, the terms of trade began
to lean in favor of manufacturing to the detriment of primary products,61 a trend that
has been enhanced by the so-called currency wars, in which countries like China
competitively devaluate their currencies using their huge foreign currency reserves.
What has concerned Brazil is that those changes in the world economy have only
enhanced a constant threat to the nations competitive edgeas measured by its
international terms of trade and its exchange ratethat in reality dates to at least the
17th century. Being a producer and exporter of primary products such as ore, soya
beans, ethanol, and sugar, among others, the country always has been exposed to
both the up and down turns in the international commodity markets, which havebecome ever more volatile in the past decades.
However, the collapse of the fixed exchange rate system is most known for
having disseminated a worldwide wave of capital accounts liberalization, financial
deregulation, and the movement toward floating exchange rate regimes. This bred
a global market for exchange rates that cannot be characterized by stability, ef-
ficiency and optimality.62 It is rather an institution where agents imperfectly
considered actions create currency prices.63 On the opposite side of the coin of the
excessive mobility of financial capital are national currencies that can be desta-
bilized in a heartbeat.In that context, after having liberalized its capital accounts and adopting
a floating exchange rate regime, in the second half of the 1990s the Brazilian
government established the goal of appreciating its exchange rate in order to
control inflation, an operation that required a constant influx of foreign currency.
To do so, it was necessary to offer very high interest rates in order to attract
extremely mobile speculative capital, thus skyrocketing public debt.64 This created
an entire class of rentiers, the majority of which were banks that unceasingly
demanded high interest rates. In 2014, this group is expected to pocket a bounty
totaling 1 trillion out of 2.38 trillion Brazilian reais out of the public budget(approximately U.S. $480 billion). Furthermore, this liberal hiatus also left behind
a policy prescription that is very difficult to counter, namely, that the only possible
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economic policy is given by the tripod inflation targeting, floating exchange
rates, and primary surplus. Another legacy of that time was a less competitive
industry in the long run. Even though Brazils exchange rate has exceeded 2 reais
per U.S. dollar from 2012 onwards, the past external vulnerability and monetary
policy decisions are still taking their toll on the economy due to the loss of industryscompetitive edge.
Worldwide heterodox policy makers have been discussing how to slow in-
ternational speculative capital movements, calling upon international regimes and
institutions. A possibility would be to charge a Tobin tax on international
speculative capital, which would diminish the risk of abrupt capital movements
destabilizing domestic currencies. Nevertheless, due to power imbalances in the
international system, countries still have to manage their currencies with the po-
litical, technical, human, and foreign currency resources with which they are
endowed. In this sense, they have to rely on their own economic capacities that
stem from strong institutions capable of sovereignly managing the main internal
prices, such as the exchange and interest rates.
In order to avoid the Dutch disease, in addition to managing inflation, the
Brazilian Central Bank also has to assume the mandate of stabilizing the exchange
rate through instruments such as the purchase of foreign-exchange reserves and the
control of foreign capital inflows.65 From the 2000s onwards, due to the commodity
boom that increased the value of Brazilian exports, the country managed to accu-
mulate a substantial level of foreign currency reserves, which empowered thegovernment to try to set its exchange rates at more favorable levels. But the ac-
cumulation of such reserves has a huge social opportunity cost, as its returns are
very low. That social cost also derives from the fact that an undervalued exchange
rate can be inflationary too and, thus, tends to shrink real wages when a certain
threshold is crossed. Perhaps a less costly solution would be to reduce interest rates
in order to avoid, as much as possible, the inflow of destabilizing speculative
capital. Nevertheless, that measure may not always be effective, depending on the
international context, as the international financial system permanently transmits
instability and continuously fuels financial turmoil.What is concerning about the Dutch disease caused by oil and gas de-
velopment is that there is no consensus on whether the greatest future threat will be
posed by exchange rate appreciation due to augmented exports in times of higher
oil prices or by lower oil prices in the context of price volatility. Oil price vola-
tility, which escalated from the 1980s onwards with the financialization of the oil
markets,66 increases the risk of prices falling abruptly. On the one hand, it has been
argued that higher resource pricessuch as oilare not a free lunch and promote
exchange rate appreciation that drives deindustrialization.67 On the other hand,
the risks of the exchange rate appreciation are downplayed because there is notnecessarily a fine tuning between exchange rate valuation/devaluation and the
capitalists decision to produce, whose expectations might be guided by other
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factors, such as demand.68 Falling oil prices would pose a much greater risk as
some oil- and gas-rich nations tend to be fiscally lenient. In that sense, making
reference to the oil boom of the 2000s, it has been shown that higher oil prices tend
to be a major relief for oil-exporting states.69
The possibility of providing a more stable range of oil prices by calling uponinternational oil pricing institutions also is not on the near horizon because
contemporaneous oil governancethe set of rules and organizations that guide how de-
cisions over oil are madeis fragmented and incoherent, consisting mostly of a patchwork
of organizations with mandates focusing on the vested interests of their members.70
In that context, no matter if the greatest threat is posed by lower oil prices or
exchange rate appreciation, they both have to be managed by strong domestic
institutions. A possibly imminent Dutch disease may be countered with policies
aimed at planning the pace of production, sterilizing foreign capital through in-
creased foreign-exchange reserves, and the creation of sovereign funds.71 Sover-
eign fundswhich have to be strengthened when oil prices rise simultaneously
assure a certain profitability of oil revenues and alleviate the appreciation of the
exchange rate since the investment in overseas assets functions as a countervailing
force to inflows of foreign currency. As stated above, Brazils new petroleum bill
has created a sovereign fund in order to ease exchange rate fluctuations. Also
known as the Social Fund, Brazils sovereign fund already faces a paradox. This
happens because returns on investments are actually higher in Brazil (due to highdomestic interest rates) than abroad.72 This does not invalidate the sovereign
funds logic but prevents it from being more profitablea price that necessarily
will be paid by those who will benefit from its future income flow.
To conclude this section, it is important to state that although the domestic
interest rate sometimes might not be effective in controlling the exchange rate and
is an irrelevant parameter for the Social Fund, keeping the rate at low levels is of
fundamental importance for the countrys competitive edge. In that context, it is
important to note that high interest rates are one of the main causes of what FIESP
(the Association of Industries of Sao Paulo State) calls the Custo Brasil73
theadditional cost of doing business in Brazilas higher interest rates make corpo-
rate loans more expensive. As will be seen in the next section, operating oil
companies are at the center of the oil and gas supply chain. In that sense, the price
of goods and equipment that operating oil companies acquire in that supply chain
incorporatelike a snowballthe totality of these additional costs derived from
more expensive corporate loans. In a similar vein, there is a price level that depends
on the money wage and on the money rate of interest, with the latter acting as the
regulator of the ratio of the price level to the money wage.74 Thus, there is a con-
nection between the rate of interest and the level of prices, in which the higher theformer, the higher the latter.Ceteris paribus, the higher prices are, the higher profit
rates will be. In short, a higher interest rate tends to reflect a higher profit rate and,
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with great probability, a less competitive industry. Thus, there is a common policy
nexus in which lower interest rates could alleviate the appreciation of the exchange
rates and also help the industry to recover a part of its competitive edge. The ex-
istence of such a common policy nexus calls upon the need to coordinate the diverse
policy instruments vis-a-vis the different factors that might lead to the Dutchdisease.
Industrialization and Diversification of the Economy and the State
In the previous section it was argued that an overvalued Brazilian real is
making Brazils industry less competitive and, thus, is threatening the countrys
economy. This effect could be worsened in the near future by massive inflows of
foreign currency due to rising oil exports. In the present section, it will be argued
that the oil industry can actually help Brazil to diversify its economy and make it
more competitive, which in the long run would attenuate the dilemmas of fixing
the exchange rate. For that we will follow the collusive model,75 where eco-
nomic development normally stems from those activities with increasing returns
to scale.76 In the collusive model, economic development is described as a process
in which synergies are explored and in which the division of labor and the number
of economic activities a country holds matter. Similarly, it has been suggested that
capitalist development stems from Smithian growth, based on the divisionof labor, and from Schumpeterian growth, which is based on technological
change.77 In that sense, it is argued that the offshore oil industry is an activity with
increasing returns to scale, because offshore oil exploration is a venture that
demands goods and equipment with huge technological contentfloating pro-
duction, storage, and offloading units (FPSOs), oil rigs, and the likeand that also
stimulates the division of labor.
In this process of industrialization and economic diversification, the Brazilian
state will play a key role and this extends to Petrobras. The first comment worth
highlighting here is that, although public and private investment are considered theprinciple drivers of economic development,78 it is the public-sector investment that
stimulates private investment because it reduces the costs to the private-sector en-
trepreneurs (for instance, investment in infrastructure) and because it mitigates the
latters uncertainties concerning future demand. In the oil chain, the operating
company induces exploration and production investments in a vast concentric chain
of goods and equipment supply companies.79 The more remote a company is from
the operator in that chain, the less technologically complex are the goods and
equipment it produces. Ultimately, even raw material suppliers, such as ore, belong
to the oil chain. Thus, Petrobras public investment stimulates private investmentmade by the suppliers of goods and equipment, thereby reducing their uncertainty
concerning future demand. Secondly, it has been argued that there are neither
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political nor technical conditions for other companies to replace Petrobras lead-
ership position.80
In that sense, although all types of new institutionalism see the state and its
institutions as a crucial focus of study,81 it is not necessarily their principal power
center, as it certainly should be in an analysis applied to the Brazilian case. Thistakes us to an institutional approach informed by sociology and history called
statism,82 which probably can be allocated to historical institutionalism. Stat-
ism is critical of what it terms actor-centered institutionalism83 because of the
latters inability to explain the origins of institutions and their resilience to change.
Furthermore, statism does not reduce institutions to less organized forms of
social interactions, such as norms, rules, or conventions, nor to the individual or
to individual actions, such as economic and social transactions.84 It offers
a state-centric explanation of political and economic life as opposed to a
society-centric one.85
Nevertheless, statism is an approach that is also in transition. In a more
moderate version of statism, it is recognized that there are other powerful
organizations and agents that also shape social, political, and economic life; the
state is analyzed in reference to those other actors. More specifically, one attempts
to explain how the state can implement its own goals despite the pressures exerted
by the dominant classes. The states autonomy is derived from its body of em-
ployees (to a great extent immune from rent-seeking practices) and from its taxing
and coercing capacity.
86
In the hybrid perspective of the state,
87
the states capacitystems from three ways of guiding administrative actions (which sometimes con-
tradict): (i) bureaucratic capacity backed by meritocratic criteria, professional
standards, and career plans; (ii) the ability to capture, interpret, and process
market signs in order to efficiently allocate resources; and (iii) the capacity to
allow democratic participation in order to ensure that state objectives are
aligned with popular aspirations. Building on those capacities, a typology of
states is proposed: developmental, intermediary, and predatory versions.
In that sense, a developmental state is the best prepared to implement its own
goals and the predatory state is almost totally captured by a rent-seeking elite.Another study cites as well a transformative and a distributive state capacity.88
In that scheme, Japan is the archetype of a state equipped with transformative
capacities, Sweden with distributive ones, and Germany manages to blend
both. Moreover, in this paper it is considered that economic89 and political90
capacities are of major importance to guarantee that the state can implement its
own goals.
This more modern statist approach also emphasizes that the state must establish
ties with society in order to achieve economic and social development, in what has
been called embedded autonomy91
or governed interdependence.92
South Korea,where the government managed to create strong ties with a burgeoning capitalist
class and, thus, to charge counterparts, is commonly portrayed as a developmental
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state; Brazil is viewed as an intermediary state because those ties existed but were
tenuous; and the former Zaire would be deemed a predatory state. The United
States is a typical example of governed interdependence, where both the state and
the private sector are to some extent strong.
Having the leading role in the economybeing its main power centertheBrazilian government currently faces an impasse regarding its ambition of
implementing a solid industrial policy for the oil and gas industry. With the
exception of support vessels and FPSOs, most of the goods and equipment
produced locally to meet the needs of the oil and gas industry are less compet-
itive than external suppliers. It was with this reality in mind that the government
created the Brasil Maior program in 2011 and is about to launch another
programInovapetrodedicated to steering the countrys and the oil chains
capacity to innovate. Furthermore, government institutions such as FINEP93 and
BNDES, which have the incumbency of financing that chains technological
development, are being both financially and organizationally strengthened.
There appears to be a growing perception that the government should not only
spend to boost demand and stabilize the economy, but should also invest in in-
creasing the nations capacity for innovation.94 In this sense, it has been argued
that government spending should combine the teachings of Keynes and
Schumpeter.95 Thus, to a certain extent, there seems to be a transition in how the
state manages its transformative capacity, with a stricter focus on innovation.
This shift also seems to fit into the aforementioned hybrid perspective of the state,as this new focus on innovation may have reflected the states ability to capture,
interpret, and process market signs in order to efficiently allocate its resources
from demand management to investments in the enhancement of the countrys
technological capacity.
In this sense, creating Schumpeterian institutions96 is of fundamental
importance. Because technological innovation is fraught with uncertainty,
Schumpeterian institutions increasingly appear as systems of innovation,
which are defined as the network of institutions in the public and private sectors
whose activities and interactions initiate, import, modify and diffuse new tech-nologies.97 From this perspective, firms are described as belonging to a broader
network of businesses with whom they cooperate and compete.98 In that frame-
work, great emphasis is being given now to the creation of business clusters. In
a localized cluster there are greater chances that a firm may get in touch with other
innovative companies and early adopters of new technologies.99 The relations
between firms, clients, research institutions, the education system and local
authorities create a region which shares traditions and customs.100 They form the so-
called milieu, a created space that is both a result and a precondition for learning.
Firms that are embedded in the right kind of milieu tend to learn faster and becomemore competitive, and the agglomeration of firms makes up a favorable milieu for
knowledge creation and spillover effects.
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The oil industry has successfully created business clusters in cities such as
Houston, Calgary, Aberdeen, and Stavanger. More recently, Brazilian cities such
as Rio de Janeiro and Santos have shown a similar potential.101 In fact, Rio de
Janeiro already has a certain tradition as a center for technological development in
the industry. Petrobras, which is headquartered in this city, is one of the globalleaders in technology for exploration and production in deep waters. In recent
years, attempts have been made to create an offshore technology business
cluster in Fundao Island, where the Federal University of Rio de Janeiro and
CENPES (Petrobras technology center) are located. The latters expansion was
concluded in October 2010 at a cost of 1.2 billion Brazilian reais (around U.S.
$550 million). In terms of offshore technology, it is perhaps one of the most
modern in the world. Research centers from equipment and service supplierssuch
as Schlumberger, Baker Hughes, and FMC Technologiesalso were established
on the island.102 Since 2012, the Brazilian government has been working on
a strategy of clustering in selected localities, such as Rio Grande or Itabora,
companies that produce similar goods, getting them to cooperate with the uni-
versities and providing them with the necessary investments. With support from
BNDES, $8 billion in investments are planned for the five chosen cities, which
also include Ipatinga, Ipojuca, and Maragogipe.
Ultimately, business clusters tend to belong to the realm of hybrid institutional
arrangements, which appear neither in the pure firm nor in the pure etatiste form.
They normally have the characteristics of the institutional arrangement networks.Although NIE and transaction costs theory provide for the existence of networks of
firms such as business clusters, the state at the head of it seems to be alien to NIE.
The Brazilian experience of oil business clusters creation is innovative because in
these clusters, from the onset, the staterepresented by Petrobras and other state in-
stitutions such as FINEP and BNDESwill play a more central and commanding role.
Through the implementation of business clusters, the Brazilian state chose to steer
the governance of other types of governance, in what is called meta-governance.103
The state also acts as a creative institutional entrepreneur.104 With the state acting
as an institutional entrepreneur, perhaps it will be possible to forge a new type ofembeddedness between the state and firms in those networks.
The launching of an industrial policy aimed at directing the goods and services
industrys competitive edge and its technological capacity does not exhaust the
opportunities to diversify the Brazilian economy presented by oil and gas. In that
sense, a recent study compares two possible paths natural resource-specialized
countries may follow: (a) a natural-resources export-led model with induced
growth, but low productive and export diversification, and (b) a natural-resource
export-led model with induced growth but with structural change toward industrial
sectors related to the trade sector and later to non-trade sectors, leading to exportand productive diversification in general.105 This research finds that only the
second path enables sustainable economic development. In a similar vein, it has
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been argued that within a context of a hyper-segmented market, where natural
resource prices are skyrocketing and there is a burgeoning of the information and
communication technologies paradigm, there is a window of opportunity for
natural resource-endowed Latin American countries such as Brazil.106 Therefore,
these nations could use a a portion of their increased revenues to upgrade thetechnology level of their export mix and to improve the wealth-creating capabilities
of the population and that the region can become highly specialized in custom
materials, sophisticated foods and other natural products, while positioning itself for
the next technological revolution.107 In other words, a country should not adhere to
comparative advantages because what matters is dynamic comparative advantage,
or comparative advantage in the long run, which can be shaped.108 To diversify the
economythus, disobeying the principle of comparative advantagesis important
because in the world scale one countrys exports are anothers imports.109
There are at least three ways the oil industry can contribute further to the na-
tions economic diversification. First is through the application of technologies the
industry develops for its own purposes that can be applied in other fields. There are
many examples, such as robotics, nanotechnology, games, 3D printers, new ma-
terials, and 3D visualization. Second is through the financial support Petrobras and
other oil companies give to research labsdue to the 1 percent mandatory re-
search and development (R&D) investments (on gross sales)which allows them
to pursue other types of research in addition to what is being undertaken on behalf
of the oil industry. Third is through the support oil and gas companies give tobiofuels research. In fact, Petrobras has been a major supporter of the Brazilian
public ethanol and biofuels programs for decades.
Concerning this latter point, there is a possibility of creating a biomass-based
industry.110 This new industry is based on the current biofuels industry and has the
potential to deliver a whole range of more environmentally friendly materials and
fuels. As oil would financially back that rising industry, it would function as
a modern lance of Peleus, the lance that cuts and also heals.111 In other words, with
the economic weight of the oil industry, it would be possible to induce a transition
towards a more environmentally friendly paradigm. In the take-off phase of pro-moting new sustainable technologies, state intervention proves necessary because
capitalists normally are not willing to bear the costs of transition, at least in Brazil.112
The Opportunity Presented to Education at the Crossroads
In resource curse literature it has been argued frequently that a country has to
manage its resources in an accountable and transparent manner. Unfortunately, this
has not been happening in Brazil, because the distribution of royalties and specialparticipations was not related to a significant reduction of inequalities or
the improvement of social indicators, at least in states and municipalities. Oil
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compensations have not positively affected the growth and development of Bra-
zilian municipalities, nor have they promoted intergenerational justice.113 Never-
theless, the municipalities differ considerably both in the use of these resources and
their efficacy.114 At the municipal and state level the problem lies in the fact that
the 1997 petroleum bill possesses no guidelines for the investment made with therevenues received from the petroleum sector.115 This is slightly different at the
federal level, where funds made available have several strings attached.116
In 2013 the government managed to pass a new royalties bill by which 75
percent of oil and gas royalties collected from fields whose production started in
2013 and subsequent years would be allocated to public investments in education
and 50 percent of the returns on capital of the Social Fund (created in 2010) would
be allocated to public investments in health and education. In the following section,
we will discuss what led the government to propose a stricterand possibly more
accountable and transparentapportionment of public oil revenues to education.117
From the 1960s onwards, when Brazil had an educational system comparable
in quality and quantity to states with a similar gross domestic product (GDP), such
as South Korea, the country became stuck in a vicious circle of low investments in
human capital, high inequality, and restricted growth.118 Thus, in terms of the pro-
vision of public education, Brazil chose quantity to the detriment of quality. During
Brazils military dictatorship, from the 1960s to the 1970s, very little was invested in
educationbut this was also the case in other areas of collective welfarein order to
generate a higher rate of capital accumulation.
119
The result of that socially austerepolicy was that in the 1970s Brazil managed to grow at yearly rates that almost
reached 10 percent while, at the same time, social and economic inequalities sky-
rocketed. Additionally, the nation was outpaced by other developing countries such as
South Korea in the realm of innovation and technological development. This negative
pattern continued throughout the 1980s and 1990s. In the 1990s and the first two years
of the 2000s, total expenditures also stagnated.120 Education expenditures at the
fundamental/primary levels (1st to 9th grade) expanded at the cost of stagnation and
even reductions in expenditures at the mid- and higher educational levels and at day
care centers.However, from 2003 onwards, when Lula da Silvas presidential term began,
the state of education in Brazil has improved markedly. The systemic character of
education was recovered and there was a recognition of the interdependencies
between the levels that have to be reflected in the policies the government designs
and implements. In order to match the needs of the diverse policies that were
implemented in that period, total expenditures in all levels of education were
increased. Nevertheless, they are still way below the target of 10 percent of the
gross national product (GNP) that the government had planned to reach in
2020.121
According to the Programme for International Student Assessment(PISA), currently Brazil invests one-third of what is recommended by the Or-
ganization of Economic Cooperation and Development (R$64,000 instead of
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R$200,000) in child education (from 6 to 15 years of age). In that sense, it has
become a top priority for the government to channel public oil and gas revenues
into education.
In the meantime, from 2003 to 2013, Brazils income distribution has wit-
nessed a major shift through income transfer policies and a 75-percent rise in theminimum wage. From 2003 to 2009, around 25 million people entered the middle-
income group (as defined by the government).122 Thus, the last 10 years eco-
nomically empowered poorer segments of the Brazilian society, allowing them
increased access to afford more durable goods. However, the populations general
perception is that the provision of public education still lacks quality. It is clear
that the population wants more than consumption, especially in times when the
cost of living has skyrocketed. The protest wave that shook the country from June
to October 2013 demanded better and cheaper public transportation and confirmed
there is a growing public attitude among citizens that they also have the right to
expect better public services. The incumbent Workers Party knows that the
populations dissatisfaction might have political consequences in the 2014 elec-
tions. In that context, what was at first a major policy priority has now become
a top political one.
In the wake of a new and stricter distribution of public oil revenues, there is
a supposed tension between investing oil revenues in social expenditures versus
physical capital, according to Hartwicks rule.123 That rule argues that future gen-
erations can profit from todays oil extraction if the present generation invests a partof the obtained revenue in physical capital. Nevertheless, Amartya Sens capability
approach124 underlies the growing recognition that economic development stems
from intangible capital, which is knowledge intensive.125 In that sense, education
serves to enable a countrys citizens to participate fully in the social life of an
evolving knowledge society and to compete successfully in the global economy.126
It is also argued that investments in R&D and education are a shortcut that countries,
which are lagging behind today, can take in order to catch up with developed
nations in the medium-term future.127 In a context in which the need to invest in
education appears to be a consensus both for the political left and right, thereseems to be a new tension128 between the different types of social expenditures
that can be made.
This is a critical juncture in which, on the one hand, the oil industry demands
human resources to keep fully operational and at the same time delivers the country
a golden opportunity to enhance its educational system. In this critical juncture,
power relations will be fundamental in defining which path will be traversed. The
term governance in reverse is conceived in order to describe the situation in which
an oil companynormally a national oil companyexerts great and sometimes
undue influence on government policies.129
This is precisely what is happening inBrazil, where Petrobras very clearly influences the governments public policy
agenda. Educational programs such as PRONATEC (technical education) and
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Ciencias sem Fronteiras (whose purpose is to send Brazilian undergraduate and
undergraduate students abroad, especially in the field of engineering) were designed
bearing in mind the needs of Petrobras and of the oil industry as a whole. In fact,
comparative institutional analysis and radical institutionalism provide theoretical
concepts that very closely resemble the definition of governance in reverse.130 Inthe tradition of comparative institutional analysis there is, as well, a dynamic
definition of institutional complementarity,131 in which the presence of an institutional
form in one area leads to the adoption of an institutional form in another.132 In other
words, there is a hierarchical relationship between institutions. Radical institution-
alism uses the term ceremonial encapsulation in order to describe how the capacity
of a given society to create knowledge to solve its critical problems is limited by
patterns of social, political, and economic domination exerted by the rich or the
powerful.133 From this perspective, universities are subordinated to corporate in-
terests, which are able to impose what kind of vocational training and what research
are to be carried out.134
Nevertheless, in a context in which distributionism requires developmentalism,
and vice versa, if each is to be robust,135 that institutional hierarchy and cere-
monial encapsulation, in which the oil industry has a very privileged situation,
seems unsurmountable. In other words, because the states transformative capacity
requires education and professional training as key inputs, its distributive capacity
may be constrained.136 But, on the other hand, it must be stated that what makes up
for a good and just society transcends a more strict and mechanistic version ofdevelopmentalism. A good and just society is not only constructed by more modern
machines and engineers, but also by artists and musicians. It is a society that not only
produces wealth but also has the capacity to reflect. It is more likely to exist when the
limits of the so-called Okonomisierung der Wissensgesellfschaft (Economization
of the Knowledge Society)137 are not pushed too far. That is, it is a society that
permits resources allocated to the production of knowledge to be guided simulta-
neously by the two conflicting principles of resource allocation: (i) market justice,
derived from marginal productivity or merit, and (ii) social justice, derived from to
the collective choices of democratic politics.138
As Brazil is still a very unequalcountry, this means that much must be spent on tackling the pockets of poverty,
under the principle of social justice. Because spending priorities are still open, further
political struggle will be fundamental in order to increase spending, which is allo-
cated according to the principle of social justice.
Political Capacities as Enablers of Development
This final sections purpose is to discuss politics, either as the realm whichenables the capturing of opportunities or which hinders it. In mainstream eco-
nomic and political institutional analysis there is a widespread tendency to portray
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politicians either as rent-seekers or as opportunistic or myopic, in any event ir-
responsible caterers to an economically uneducated electorate.139 This de-
scription of the average politicians behavior also underlies the description of what
constitutes bad political institutions. Notwithstanding, it is important to re-
member that Brazil is neither a developmental nor a predatory state, but ratheran intermediary one.140 Brazils public sector is a variegated ensemble of bu-
reaucracies in which clusters of efficiencysuch as Petrobrasare surrounded
by a sea of less efficient public agencies. In that sense, public officials in in-
termediary states sometimes act independently for the sake of higher state purposes
but sometimes they do not when they seek rent. In a similar vein, the strategic-
relational approachan even combination of agency and structuresfinds that
the state is an ensemble of power centers that offers unequal chances to different
forces within and outside it to act for different political purposes and that state
powers are activated through the agency of political forces in specific conjunc-
tures.141 Another example that illustrates the particularity of politics in Brazil and,
thus, of its political institutions, is given by the passing of the new royalties bill. The
Brazilian states (what in the United States are called states and in Germany lander)
are currently in a tax war. In the past 20 years, Brazils federative pact concentrated
tax revenues at the central level.142 In the 1990s, Brazilian states lost economic
power to the central government due to policy adjustment instruments, macroeco-
nomic stabilization, and the loss of the possibility of making fiscal policy at a state
level. However, at the same time, the states did not lose their political power. Thedisequilibrium between political and economic power triggered the tax war, making
it very difficult to approve the new bill. These examples show it cannot be argued
that politics is the sole arena of rent-seeking public officials and that the countrys
political institutions are a priori bad.
As has been laid forth in the prior sections, a number of state capacities will be
requiredeconomic, transformative, and distributivein order to adjust the ex-
change rate, to direct Brazils industrial development so as to diversify the economy,
and to allocate public oil revenues to education. In the following section, it will be
argued that those tasks have to be mediated by the states political capacity, whichappears in two main forms. Recalling that the state is a variegated ensemble of
bureaucracies, the first capacity is the ability to coordinate different interests at stake
inside the executive branch.143 Second is interlocution,144 which relates to the in-
teraction of the government with all other stakeholders in societysuch as con-
gressmen, capitalists, unions, and tax payers. Therefore, it is argued that a number of
enabling political capacities exist outside the realm of mainstream institutional po-
litical analysis that are not constrained by the limitations posed by orthodox gov-
ernance theory145 on the states political agency.
It has been asserted that in order to stabilize the exchange rate at a favorable level,Brazil has to rely on its own economic capacities, that is, the ability to sovereignly
manage its main internal prices, such as its exchange and interest rates. This is
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a capacity that will have to be mediated by the states political agency. It was seen
that the Dutch disease has at least three origins: a purely financial one, one that
stems from the dependence on the export of commodities, and the one that could
result from augmented oil exports. Under all three scenarios, a policy designed to
lower interest rates would be prudent. Thus, the argument can be made that theinterest rate is not constrained by natural or technical circumstancessuch as
a relative scarcity of capital and labor or the rate of growth of the economic sys-
tem.146 Rather, it is an exogenous policy-determined variable. Going further, interest
rate determination is bounded both by state policy objectives and external con-
straints, where the final outcome depends on the relative strength of the parties
involved. Rentiers, thus, are interested in higher interest rates and organize them-
selves politically in order to achieve that goal. From 2011 onwards, the adminis-
tration of President Dilma Rousseff started to reduce the spread between domestic
and international interest rates.147 Nevertheless, since mid-2013 this attempt was
given up. There is a suspicion that the government has been captured by rentiers
and their associatesmedia firmswho manage to convince the public and,
above all, big retailing companies, that the fiscal situation in Brazil is strongly
negative. What could be construed as a type of blackmail for higher interest rates
functions as a self-fulfilling prophecy because, when it is announced that in-
flation is high, the large retail companies actually raise their prices and a sub-
sequent chain reaction ensues. Thus, the government will have to engage in
a political dispute in order to lower interest rates, a task that will require a her-culean effort. From the start, the government has very unfavorable terms of trade
in its attempt to establish a favorable interlocution with rentiers. Fortunately,
should increased oil and gas exports result in the appreciation of the exchange
rate in the near future, the implementation of a countervailing trend through the
functioning of the social fund is essentially a technical affair, to a great extent
devoid from those political tensions.
There are a number of ways in which the states political capacity has been or
will be fundamental in mediating its transformative capacitythat is, the capacity
to steer the countrys economic development and diversify its industrial base. First,the government will have to coordinate the interests of its own state agencies
concerning the setting of fuel prices. On the one hand, there is the governments
economic branchrepresented by the Central Bank and the Ministry of Economy
which is interested in controlling inflation through the freezing of diesel and gas-
oline prices. There is a wide consensus that this is extremely harmful because it
hurts Petrobras cash flow and, thus, its capacity to invest. On the other hand, there
is Petrobras, which would like to see increases in these prices, as it is struggling to
explore the pre-salt layer. Through its ability to navigate a path among the diverse
interests at stake, the governments mission is to find a compromise between theserival groups, where the most probable outcome will be to negotiate smooth tran-
sitions and adjustments from time to time.
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A second internal political negotiation, which also involves the governments
economic branch and Petrobras, concerns the reduction of the local content
policy targets. In recent years, it has become clear that these targets are set too
high as most domestic suppliers of goods and equipment are still less competitive
than foreign sources. There is a serious risk of increased costs and delays, whichcould threaten the entire pre-salt development headed by Petrobras.148 The
outcome of this negotiation between Petrobras and the governments economic
entities was that the target for the Franco (Onerous Cession) and Libra (PSA)
fields were set at a lower level than the one imposed in the regular concession
contract scheme.
The issue of local content targets also leads to political negotiations with other oil
majors operating or looking to operate in Brazil. There is a definition of politics
according to which politics under capitalism is about the successive subversion
and reorganization of public order and about the de- and reconstruction of nor-
matively institutionalized limits on the egoistic-rational pursuit of interests.149
Typically, major oil companies attempt to blur that boundary, interweaving the re-
construction of the limits to the egoistic-rational pursuit of interests with their rent-
seeking aspirations. Especially in the United States, major oil companies strongly
articulate themselves politically and, in practice, interdict the debate about the public
regulation of their activities with the argument that they create jobs and distribute
wealth. In 1997, when the Brazilian industry was opened to other companies,
mandatory local content targets were left aside, to be reintroduced in 2003. Perhaps itis possible to say that the reintroduction of local content targets was an attempt to
reorganize the public order subverted by capitalism.150 In the years that followed,
private oil companies strongly opposed those targets, thus seeking to deconstruct the
normatively institutionalized limits on the egoistic-rational pursuit of interests.
Nevertheless, today it has become clear that those targets are too bold, and the oil
companies approach has become more constructive. Now they propose that the fines
imposed on those who do not reach the targets should be converted into investments
that increase the installed capacity of the goods and equipment industry. In that
sense, one could interpret that the political negotiations between the government andthe oil industry currently are focused on finding a better way of reconstructing the
limits on the egoistic-rational pursuit of interests and of reorganizing the public
order subverted by capitalism.151
Finally, as was addressed in the previous section, the government is looking to
spend the greatest part of the increasing public oil revenues on education in order
to meet distributive claims and industrys needs. However, everything indicates
that the pace of change in public education will not be as rapid as anticipated. This
is because in Brazil the states ability to design educational policies is not matched
by its ability to implement them.152
In the past decade, a number of good qualityeducational programs have been launched, but the ability to implement them
has been notoriously unsuccessful. Today, the nation is paying the price for the
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political decisions of the past to relegate education to the lowest priority of the
public agenda (1960s to 1980s), to financially weaken the states and munici-
palities (1980s and 1990s), and to dismantle public planning (1990s). Con-
sidering this huge historic deficit, if the state is to deliver public education in
order to address the needs of industry and society as a whole at an acceleratedpace, then the budget for education will have to be increased significantly. The
states oil revenues are a welcome plus but will never be able to match what is
required. Political capacities have to be mobilized in order to reduce the annual
share of the state budget that is transferred to rentiers and in order to raise the taxes
on the wealthy. Those are true stress tests for the governments interlocution
ability.
Concluding Remarks
The goal of this paper was to assess under which conditions oil and gas ex-
traction could be an opportunity to steer Brazils social and economic development.
This was accomplished be utilizing alternative strands of new institutionalism, an
exercise which we relate to the extension of the institutional turn.153 The article
began with a review of the resource curse literature, with a particular emphasis on
its institutional wave. This was followed by an examination of mainstream new
institutionalist analysis and how alternative branches of that school could further
this studys objective. In the subsequent sections, four popular themes of the re-source curse literature were debated: the exchange rate and the Dutch disease,
industrialization and the diversification of the economy, the transparent distribution
of revenues and education, and politics. We believe these issues are critical in order
to assess whether this golden opportunity to convert the development of the na-
tions energy resources into meaningful economic and social advancements can be
realized. The following encapsulates this articles most relevant messages.
1. Conventional new institutional economics (or NIE) theory places a great
emphasis on property rights endowment and enforcement as a crucial preconditionfor capitalist economic development. Not denying their importance, this is hardly
a sufficient condition in order to seize the opportunity presented by the extraction
of oil.
2. Thus far, oil and gas production and exports have not led to the classical
symptoms of the Dutch disease. However, the country has been struck by
a subtle form of Dutch disease due to a combination of high interest rates and
extremely volatile worldwide financial capital, resulting in Brazil increasing its
exports of soya beans, ore, and other raw materials. Through the lens of con-
temporary institutional political economy theory, it can be asserted that a con-cessive holist approach is required in order to explain what brought about this
malaise and what can be done to remedy it.
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3. In order to tackle the Dutch disease, strong domestic institutions are required.
It was argued that geopolitical and political economic tensions permanently con-
dition the construction and reconstruction of the institutions that manage the ex-
change rate. Moreover, the management of the interest rate is a very important policy
instrument.4. Due to its elevated technological content, the oil industry is an activity
with growing returns to scale in which the division of labor is stimulated.
This process of industrialization alleviates the dilemmas of setting the ex-
change rate at a competitive level and stimulates the countrys economic
diversification.
5. Because the state plays the key role in this diversifying trajectory a moderate
Statist154 approach to new institutionalism is required to the detriment of actor-
centered institutionalism.155
6. The states autonomy to implement its goals derives from a number of
state capacities. In this paper it is argued that an economic capacity corre-
sponds to the setting of the exchange rate, that a transformative one relates to
industrialization and the diversification of the economy, and that a distributive
capacity corresponds to educational policies. A political capacity also was
considered.
7. Because most domestic goods and equipment suppliers are less competitive
than foreign ones, the governments attention is now turned to enhancing the
nations ability to innovate through a number of simultaneous initiatives. Thisrelates to the construction of so-called Schumpeterian institutions.156 In order
to address the oil industrys need for innovation, business clusters are being
created.
8. Although business clusters are hybrid institutional arrangements which
explore institutional diversity, contrary to conventional NIE wisdom, state in-
stitutions such as BNDES and Petrobras will have a commanding role.
9. Furthermore, oil can steer the countrys development, thereby contributing to
structural change in related and non-related sectors through a number of avenues,
such as the following cases: the technologies the industry develops can find ap-plications in other fields; the oil industrys financial strength can empower labs
to pursue other types of research in addition to what is being done on behalf of
the industry; and through the industrys support of a burgeoning biomass-based
industry.157
10. In 2012, a new royalties bill was passed, according to which 75 percent of oil
and gas royalties collected from fields whose production commenced in 2013 and
thereafter will be allocated to public investments in education and 50 percent of the
returns to capital will be directed to the Social Fund (created in 2010), which will be
allocated to public investments in health and education. Nevertheless, becausedistributionism requires developmentalism and vice versa, if each is to be ro-
bust,158 there is a tension between what will be spent on education on behalf of
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