“Can Oil Steer Brazil’s Social and Economic Development? An Alternative New Institutionalist Approach,” by Francisco Ebeling

8/10/2019 Can Oil Steer Brazils Social and Economic Development? An Alternative New Institutionalist Approach, by Francis

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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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“Can Oil Steer Brazil’s Social and Economic Development? An Alternative New Institutionalist Approach,” by Francisco Ebeling