Money, Long Domestic
Peter R. Kingstone
Financial globalization and foreign capital flows have come to occupy great attention in Latin America in the mid— I 990s. In political terms. the increased importance of foreign capital has held out both promises and threats fop Latin American democracy. On the one hand, forelen investment and financialliberalization have held out the possibility of financing new growth and replacing the now exhausted sources of state financing for industry. Similarly, these new inflows of capital have also helped support financially strapped governments, allowing them to maintain key services and political support while substantially cutting overall spending. On the other hand, substantial and sometimes rapidcapital inflows also posed risks — as the Mexican peso crisis and resulting ‘tequila effect’ dramatically revealed. When financial flows reverse their direction, the resulting payments jioblerns can force politically difficult choices over who should bear the costs.
While Mexico has commanded a great deal of attention in the mid—I 990s as a result of the peso crisis, the issues noted above apply tol3razil as well. Brazil liberalized its trade and financial system later and mote slowly than countries like Mexico. Argentina, and Chile. However, this libetalizatitin. beginning in 1990, has attracted greater and greater inflows of lorcign capital. both direct and portfolio investments. This is especially trite since 1994 when then Finance Minister. Fernando Henrique Cardoso. suceesslullvstabilized inflation through the Retil Plan.’
As dramatic as this new visibility of foreign capital in the legion may he.
does not represent a sharp break with the past. Alter all, foreign capital has played a positive and vital role in economic and political development evet since Latin America increasingly integrated into the global eenh1tim’ in the nineteenth century. British capital linancedinfrastructure development and early industrialization in the late nineteenth century and early Iwentieth century. Foreign direct investment was critical for Brazil’s growth in the I 950s through its miracle years of the I 960s and 1971k. International lending financed large scale state led expansion in the I 970s.
At the same time, foreign capital has also had a negative impact. In hid. almost allof Brazil’s regime breakdowns in the twentieth century happened
in conjunction with balance-of-payment crises, In 1930. the ‘Coffee and Milk’ (Caft corn Lc/te) Republic collapsed under the weight of a convertibility and balance-of-payment crisis (Skidmorc and Smith. 1992, p. 164). In 1964, Brazil’s democracy collapsed anew in the context of increasing political polarization, spiralinginflation, and a balance of payments crisis (see Wallerstein, 1980; Sola, 1982; Stepan, 1978). In 1985, the militaiy government gave way to democratic rule in a context of brutally spiraling debt. inflation, and balance-of-payment problems.2
This paper argues that we can understand the broad implications of foreign investment for democracy in Brazil in the I 990s in terms of a pattern of long cyclesof political instability in Brazilian politics. Brazil’s history sug— gcsts a pattern in which foreign capital begins this cycle as an important and useful source of financing. In the beginning of the cycle, foreign capital has provided funds for development and has allowed governments to forestall distributive conflicts by purchasing political support from key domestic groups. Historically, thecycle has ended when capital outflows (for varying reasons) placed increasing pressure on governments to make difficult choices about who should hear the costs of economic adjustments. The resulting distrihutional conflicts undermined successive regimes as critical social groups sought anti-regime solutions to their concerns. Thus, foreign capital became a dangerous source of pressure on a...