The Multinational Monitor

February 1984 - VOLUME 5 - NUMBER 2

B R A Z I L :   A   N A T I O N   O N   T R I A L

The $100 Billion Question

Can Brazil's New Democratization Survive the IMF?

by Daniel Berman

Since a 1964 military coup ended two decades of democratic rule, Brazil has been led by five successive military presidents, each sanctioned by a nonelected legislature. During this time, the Brazilian people have suffered periods of intense repression, including arrest, torture, disappearance, and murder as well as the suspension of civil and political rights. However, the current president Joao Baptista Figueirado, a retired military officer who has held office since 1979, is spearheading a program of gradually easing military dictatorship and opening up the political process to popular participation, a program known as abertura. With economic conditions in the country rapidly deteriorating, this liberalization process has encountered little resistance from the military, who seem to welcome the chance for safe passage back to the barracks in order to avoid blame or responsibility for the economic crisis.

An important sign that the democratization process is working came in November 1982, when Brazil finally held popular elections for Congress, for the state legislatures, and for governor in all 23 states. Opposition governors won in the biggest and most urbanized states: Sao Paulo, Rio de Janiero, and Minas Gerais; and opposition parties won a majority of the seats in the lower house of Congress, though the government sometimes gets its way through coalition with a small central. party. The amnesty decree permitting political exiles to return and run for office and the peaceful elections and inaugurations of March 1983 constitute the biggest triumphs of President Figueiredo's policy of political abertura.

Since that time, however, everything seems to have gone sour for the President and his shrinking band of supporters, spoiled by an economic crisis with no end in sight. Every action of the executive seems to incite an equal and opposite reaction in the country at large, especially in the economic realm. Even the weather has refused to cooperate: a bumper harvest in the South was washed away by floods in May and July, and in the Northeast a five-year drought has reduced millions to near starvation, forcing them to emigrate to the coastal cities. The rest are kept alive by $15-per-month government makework jobs.

Despite the economic problems the country faces, the President continues to back Planning Minister Antonio Delfim Netto, the rotund prestidigitator who is chiefly responsible for economic policy and who is perhaps the most widely disliked man in Brazil. The President's term still has almost 17 months to run, and it is still uncertain if his successor will be chosen by the Electoral College, where the government Democratic Social Party has a majority, or by popular vote.

The days of glory have run out for Brazil. The country once hailed as the "economic miracle" of the 1970s has had to abandon its ambitions to superpower status and face the inglorious task of designing an economic policy that points the way back to solvency.

The chief goal of economic policy has been to meet the recessive guidelines laid down by the IMF in regard to monetary and fiscal policy in order to reduce inflation and the public deficit, so that Brazil produces a trade surplus and pays off its foreign debt. One of the most controversial instruments used to carry out this policy is the wage cut, which is supposed to break the inflationary cycle by reducing purchasing power and domestic demand and siphoning capital into export industries-in effect, turning the country into a giant export platform.

In the process of carrying out this policy, the government has turned every major social group against it, because everyone is feeling the squeeze. And with the exception of creating a $6 billion trade surplus for 1983-mainly through slashing imports, not boosting exports-the policies simply don't work. Inflation, which Delfim Netto promised to hold to 90 percent in 1983, instead totalled over 200 percent. The government jumps from one stopgap measure to another, seeming only to exacerbate the problems. Since the start of 1983, the country has operated under six different national wage formulas, a method that dealt a rude blow to the abertura process. Only the last was ultimately approved by Congress.

That wage law, decree-law 2065, was rammed through Congress last November, despite widespread criticism of its recessive economic consequences, but only after government party leaders had "closed the question" by making a "yes" vote a matter of official party discipline, whose flouting could have led to expulsion from Congress.

Passage had come on the heels of Congress's rejection of another decree-law, which in turn followed several months of bitter dispute over the most restrictive measure, wage decree-law 2045. This rule would have limited all salary adjustments to 80 percent of the official rise in prices (which is purposely understated). Thus, with inflation at 100 percent every six months, a person earning 100,000 cruzeiros a month (about $100, or three times the minimum wage) would earn only 180,000 cruzeiros six months later, a ten percent cut in pay over that time. At the same inflation rate, the wage earner would have his or her real income reduced to the equivalent of $66 within two years.

Decree-law 2045 was introduced to the nation in July as a national security measure in a somber speech by President Figueiredo calling the national situation the "moral equivalent of war" and requesting each and every citizen to do his bit for the struggle. The plea fell on deaf ears. All major business groups declared their resistance to the decree-law at a forum sponsored by the Gazeta Mercantil, Brazil's major financial newspaper, and the labor movement announced plans for a general strike against the measure, if it was ultimately approved by Congress.

In late October, the President decreed a three month state of emergency in the federal district of Brasilia on the afternoon when the vote was to occur, on the pretext that "outside agitators" were about to take over the city and disrupt the functioning of Congress. Brazilians feared that the state of emergency might be extended to Sao Paulo, the industrial heart of the country, and some commentators speculated that the Brasilia emergency decree might be an attempt by hard-liners to trigger a military "rupture" of the abertura process. But despite the tension, Congress soundly rejected the wage decree, with many members of the government Democratic Social Party (PDS) voting with the opposition.

The final passage of 2065 had the intended effect of convincing the IMF and the international banking community to release $6.5 billion in loans which had been held up by the lack of "national consensus" around the need for more belttightening. By their logic, the country should now have breathing space to reduce inflation, increase exports, and guarantee a sound investment climate, creating the conditions for growth to resume and employment to pick up in a year or two.

But the activist metalworkers union in the heavily industrialized region of Sao Paulo rejected this scenario. By November 11, over 600,000 workers at Ford, Volkswagen, Mercedes, and other shops went on strike against the wage squeeze, and by the 16th, they had won benefits well over those allowable under decree-law 2065, though still falling short of the inflation rate.

Business focused its opposition to 2065 on the provision which provides for an increase in the value-added tax on the sale of goods and services (the main source of revenue for near-bankrupt state governments) from 16 to 18 percent, which a new coalition of commercial, industrial, and agricultural representatives claimed would increase inflation and cut back demand. And the government had to confront a new source of opposition when Helio Beltrao, the widely respected head of the social welfare ministry, resigned, announced his own presidential campaign with a call for direct elections for the presidency, and launched a fusillade against Planning Minister Delfim Netto, predicting that his mismanagement would lead to more inflation and more recession.

The government's firmest constituencies are the military, the foreign banking community, and the U.S. government, who all see Delfim Netto as a symbol of the government's determination to stick with unpopular policies. Delfim is blamed by many Brazilians as the architect of inflation and recession and subservience to foreign-especially Yankee-influences.

The military, as usual, has the physical capacity to carry out a coup d'etat, but most high officers are against such an action in principle, believing it would further blemish their reputation. Members of the armed forces have increasingly succumbed to the sweet material temptations of power, and are frequently charged with corruption. The inglorious fate of the Argentine junta is a persistent reminder to them of the dangers which await the Brazilian military if they continue to stray too far from their traditional role as a moderating power behind the scenes.

Still, a few officers have expressed their concern with corruption in the government and have appeared before Congressional committees of inquiry to testify as to what they knew, and others believe that the Figueiredo administration has gone too far in meeting the demands of foreign creditors. This dissension has gone beyond the grumbling stage and has reached the pages of the newspapers. Since July two generals have been placed under house arrest for criticizing the President and the army in published interviews.

Though the institution of a state of emergency in Brasilia has had a chilling effect on the political climate, opposition keeps poking up its impertinent head when least expected, like an unruly, curious child. A few days after the state of emergency was declared in Brasilia, General Newton Cruz, the hard-line "viceroy" of the capital city, shut down the Brazilian Association of Lawyers (OAB) headquarters and confiscated tapes from one of its "subversive" meetings. Two hours later he was forced to retract his interdiction and publicly admit his mistake, after claiming to have listened to the tapes. The OAB, prominent battler for civil rights and political amnesty, even got away with making the ceremony reopening their building into a prohibited protest meeting, and have in stituted a lawsuit against Newton Cruz.

The problem the opposition faces, now that social and economic demands have come to the fore, is that there is absolutely no slack left in the economy. Growth is at a standstill, inflation is over 200 percent a year, and foreign debt has reached $100 billion. Thus, for example, when decreelaw 2065 restricted rent and mortgage increases to 80 percent of inflation, the National Housing Bank immediately predicted a cash-flow crisis. And the new appointee at the Ministry of Social Welfare claims that the retirement age may have to be raised to 60 or 65, even though the average person dies in his early sixties, meaning most people will pay social security premiums for nothing.

The government's official position is that the $100 billion debt is a result of unforseeable external factors: the successive "oil shocks" and the variable interest rates imposed on Brazil's foreign debt, which skyrocketed because of President Reagan's restrictive monetary policies and his huge borrowing to fund the U.S. arms buildup. Delfim Netto's position is that world economic recovery and a stabilization of Brazil's external finances will stimulate production and create private sector jobs after a year or two.

The opposition, represented by the Brazilian Democratic Movement Party and others, blames the crisis on government waste on multibillion dollar white elephants such as the Carajas mining project and the nuclear energy programs. Opposition figures such as economist Celso Furtado claim that they warned the government three years ago that they should begin renegotiating the foreign debt, when the present crunch was forseeable and when Brazil still had $10 billion in foreign reserves. And they warn that if something is not done to find work and food for the five or 10 million unemployed, in a country without unemployment insurance, the country faces the risk of a "social explosion" of unforeseeable consequences , which will blow away abertura in a trice. Nearly all opposition figures agree that in order to pay for the social programs to prevent that explosion, the country should immediately declare a moratorium on payment of both interest and principal on the foreign debt.

But no matter how the crisis is resolved, something has to be done quickly, and it has to be done by a government with the moral and political legitimacy to demand sacrifices of the people. For this reason the opposition, and even some government party members, are calling for direct election of the president of the republic.

The implications for the U.S. of Brazil's crisis go far beyond the billions of dollars owed to American banks. Despite its economic and political problems, the country has a sophisticated industrial base, with extensive electrical facilities and transportation links. With its increasing manufacturing capacity, the country has the potential to become a major competitor with the U.S. Already Brazilian steel exports to the U.S. have led to protests by American steel companies and unions.

But the real crunch may come, not in U.S. domestic markets, but in the Third World. With much cheaper products, both in light and heavy industry, Brazil could present a formidable challenge in Third World markets to companies from the U.S., Europe, and Japan. Lately, the Brazilian government has been active in courting Third World governments, especially in Africa. Last November, President Figueiredo travelled to strengthen relations with Africa. In Nigeria, a deal was discussed in which Brazil would furnish $2 billion in armaments and training in exchange for oil, and in Mozambique a trade agreement was signed. Figueiredo also visited Algeria.

Politically, U.S. interests could be threatened by a nationalist, populist government that opted for less reliance on western financial institutions. Brazil's size and geographical location-the country borders every South American country but Chile and Ecuador-increases the country's strategic importance to the U.S.

Thus by any measure, Brazil is at a dangerous impasse, and the solutions being proposed by the present administration have gone about as far as they can go. Political abertura by itself is not enough, and with out a reinterpretation in economic and social terms it will become a pretty fiction.

Daniel Berman is a freelance journalist living in Sao Paulo, Brazil. His most recent book, edited with Vincent Navarro, is Health and Work Under Capitalism: An International Perspective.

Brazil At a Glance


Land Area: 3.2 million square miles (world's fifth largest country)

Population: 127 million (sixth highest in world)
Urban - 70%
Rural - 30%

Life expectancy: 63.4 years

Literacy rate: 70%


Employed: 40 million
Unemployed: 4 million
Underemployed: 7 million

Workforce by sector:
Agriculture - 29.9%; mining - 0.7%; manufacturing - 19.3%; construction - 7.2%; services and others - 42.9%
More than 35% of the national income goes to the highest 5% of the population; less than 15% of the national income goes to the lowest 50% of the population.


Main industries: shipbuilding, automobiles, metals, foodstuffs, textiles, chemicals

Major exports: raw materials (soybeans, sugar, iron ore, coffee, cacoa beans, tobacco); semi-finished and manufactured goods (steel products, iron alloys, vehicles, machinery, processed food stuffs, vegetable oils).

Major trading partners: Western Europe, U.S.

U.S. share: exports - 21%; imports - 15%

Major investing countries: U.S., West Germany, Jpapn, Switaerland, United Kingdom, Canada

U.S. Share of Investments: 31.7%

Sources: U.S. Department of Commerce, Brazil Embassy, Inter American Development Bank.

Most figures are for 1982.

IMF Remedies: Economic Nonsense

By Mimi Keck

The International Monetary Fund's cure for Brazil's debt crisis may kill the patient faster than the disease. This is not an assertion by a radical minority, but rather the conclusion of some of Brazil's most prominent economists, businessmen, and technocrats.

Two economists who have expressed that view publicly and in numerous books and articles are Luiz Carlos Bresser Pereira, president of the Bank of Sao Paulo, the state bank in Brazil's richest and most industrialized state, and Edmar Bacha, a professor of economics at Catholic University of Rio de Janeiro who is currently teaching at Columbia University in New York. In the following article, Mimi Keck, a director of the Brazil Labor Information and Resource Center who has translated some of Bacha's recent work, draws on the writings of the two economists to explain why the IMF plan for Brazil is based on faulty economic principles.

The IMF adjustment program for Brazil is profoundly recessionary, bringing with it, as recessions inevitably will, a reduction of imports and therefore a corresponding improvement in the trade balance. The improvement in 1983, amounting to about a $6 billion surplus, was obtained at the cost of a fall in the gross domestic product (which unlike GNP excludes overseas earnings) of around four percent; the $9 billion surplus projected for 1984 is expected to require another four percent drop.

The chosen instruments for reaching these goals are shrinking the money supply and eliminating the public sector deficit. By 1987 or 1988, the IMF intends to see the current account balance at zero, which will mean an $18 billion surplus in the trade balance, assuming $1 billion in direct foreign investment, a $15 billion interest bill on foreign loans, and $4 billon in real service costs.

Many critics of the program justifiably fear the destabilizing political and social impact of stepped up austerity. Rising unemployment, a sharp fall in already desperately low wages, and a lack of unemployment insurance and other safety nets to cushion the blow that have provoked food riots in major cities and fostered a burgeoning crime rate. Many unions that were reluctant to call strikes during the earlier stages of the recession because their members feared losing their jobs have lost that hesitation: layoffs have continued with or without labor militancy, and the unions have very little to lose. Two new national union coordinating bodies are determined to mobilize their members against the IMF and government economic policy.

But equally troubling is the fact that the IMF remedies make no economic sense. A long term recessionary policy in Brazil means the destruction of the industrial base built up over the last few decades. A growing number of major industries, unable to maintain adequate levels of investment, are going under - or falling behind technologically, eliminating the possibility of becoming or remaining competitive on a world scale.

Besides including the deindustrialization of Brazil, the Fund's targets are entirely unrealistic. Given the size of the Brazilian debt and the high interest rates on the world financial markets, Bank of Sao Paulo President Luiz Carlos Bresser Pereira argues that it is impossible to expect that Brazil could run an $18 billion balance of trade surplus in 1988. Together with a stabilization of imports at the low level of $15 billion - which could only happen if unemployment and idle capacity remained at present high levels - this surplus would require a real increase in Brazilian exports of around 8.5 percent a year over the next five years. Given the fact that trade in the world economy is not expected to expand by more than one to two percent per year during this decade, this is clearly an unrealistic expectation.

In a recent book published by the Gazeta Mercantil Forum - a group of Brazil's most prominent and respected businessmen - economist Edmar Bacha analyses the assumptions which lead the IMF to such prescriptions. The IMF is called in when a country has a balance of payments problem. The Fund invariably blames the problem on excessive internal demand, but this is not always the case, Bacha points out. Exports can fall because of overvalued currency, as in Brazil in the 1950s, or because of a fall in external demand due to world recession, as was the case in 1982. While the Fund is correct in assuming that a contraction of internal demand will always produce an improvement in the trade balance, it oversteps its jurisdiction in stipulating that this adjustment be made according to strictly monetarist criteria, a requirement that undermines national choices. For example, Bacha argues, the Fund sets unduly low inflation targets in order to pressure governments to adopt unpopular austerity measures when in fact rising inflation does not constitute grounds for blocking a country's access to the Fund's resources.

The Fund also goes outside its jurisdiction by pursuing what seems to be an essentially ideological goal of practically eliminating the public sector from the country's internal credit market. Such a move, in a country with a public sector the size of Brazil's, has a direct and immediate effect on the private sector. Cutbacks in public marketing channels, for example, reduce sales, overall activity, and employment.

The problem, Bacha reminds us, is not chiefly the IMF, but rather an international economic order in which the rules of the game hold that adjustment must take place exclusively on the side of the debtor, and not on the side of the country with a surplus. In addition, it requires that the adjustment be made too rapidly without enough compensatory financing to ease the process.

Brazilian businesses and bankers are increasingly convinced that the IMF standard formula is unlikely to work. Government economic planners hide behind the IMF to justify unpopular austerity measures. Opposition leaders of all stripes support a renegotiation covering both interest rates and maturity of loans. But they insist that responsibility for such a renegotiation and any resulting hardships must rest with a freely elected government - something Brazil's military guardians are still unwilling to allow.

This article is base on material from "Agora, e Salvar 85," ("Now the Job Is to Save 1985") by Luiz Carlos Bresser Pereira, which appeared in the December 28, 1983 issue of Isto e, a Brazilian News weekly. Material was also drawn from "Prologo Para A Terceira Carta" ("Prologue to a Third Letter") by Edmar Bacha, which was published in the recent book FMI x Brazil ("IMF v. Brazil") published by the Forum Gazeta Mercantil, Sao Paulo, 1983.

Bad Apples

Following a strong lobbying campaign by industry, Brazil's Ministries of Agriculture and Health have postponed for six months a resolution that requires the food industry to print an expiration date on the labels of perishable food products. The resolution had been scheduled to take effect in January 1984.

Independent consumer organizations consider the decision a defeat. At the fourth annual meeting of Brazilian consumers organizations in November 1983, the groups called on the federal government to enact the resolution as planned in January.

Alexandre Daunt, the executivedirector of the Brazilian Food Industries Association, which includes large food multinationals like Nestle and Dannon, claims that the food industry in Brazil is powerless to get cooperation from the supermarkets for proper refrigeration conditions of perishable food, and that this justifies the industry's opposition to mandatory expiration dates.

However, according to consumer activists, the food industry in Brazil does have leverage power against the supermarkets. The President of the Consumers' Association of Rio Grande do Sul state, Renato Motola, claims that Nestle and other corporations have fixed prices on food items and forced supermarkets to comply by threatening to cut off supplies. CADE, Brazil's antitrust federal agency, issued a cease-and-desist order to stop this illegal practice.

It remains to be seen whether Brazilian consumers will be able to persuade their government to comply with the resolution's new starting date, June 30, 1984.

- Renato R. Tucunduva, Jr.

The writer works with the Association of Consumer of San Paulo.

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