Untying the IMF Knot

Last December, IBASE released a unique study entitled Ditadura Economica versus Democracia, or Economic Dictatorship versus Democracy. Focusing on the contradiction between the process of political democratization on the one hand, and the centralized, autocratic decision-making on economic policy on the other, the study offers a comprehensive analysis of the Brazilian government's approach to the debt crisis. But it goes farther than most critiques: the study is driven by a powerful vision of a "possible Brazil," and the authors devote a major section to describing the Brazil that could result from the strategies urged by the authors. In this vision, humanitarian priorities are the goal of economic development and are met without infusions of foreign capital and the instability and resource drains which accompany them.

Following are excerpts and summaries of the study, which was co-written by Marco Antonio de Souza Aguiar, Marcos Arruda, and Parsifal Flores.

Pessimistic reports on Brazil's difficulties in repaying its immense foreign debt have subsided in the international business press since last fall, when a consortium of banks headed by Citibank and Manufacturer's Hanover agreed to a "compromise" repayment schedule in conjunction with Brazil's negotiation with the IMF. Under the terms of the debt rescheduling agreements, however, the postponement of interest payments on past loans made to Brazil by the banks only puts off the day when those payments will fall due.

Is there any guarantee that Brazil-or any other less developed debtor nation in similar circumstances-will be better able to pay up the next time the deadline rolls around? Many economists think not, and back this belief with powerful evidence that less-developed countries are vulnerable to erratic fluctuations in the world prices of the commodities they export-price swings from which developed nations are insulated because their exports are more diversified. More and more analysts are arguing that the cards are stacked against borrowers in the world capital markets and that dependence on international borrowing to fuel economic development is a dead end.

What alternatives to foreign indebtedness does a developing country like Brazil have? Given the ubiquity of multinational banks, few of the options have been explored in any depth, in practice or even theoretically.

Still, a mass call for a drastically different approach to Brazil's debt crisis is stirring throughout the country. One group that has taken bold initiative in designing such an approach has been the Instituto Brasileiro de Analises Sociaise Economicas (IBASE), or the Brazilian Institute for Social and Economic Analysis. This young non-profit research institute run by a small pool of economists and activists is working on several fronts to encourage Brazilians to take the debt crisis into their own hands. In the past year, for example, IBASE has conducted periodic workshops for community and church organizations on problems such as land tenancy and unemployment; collected salary and income distribution data for use by a shipbuilder's union in negotiating a new contract; and produced studies for opposition members of Congress.

In addition to providing these services, IBASE has developed a thoroughgoing critique of the Brazil government's handling of the debt crisis and has drawn up a number of concrete proposals for alternative courses of action. In a recent visit to Washington, D.C., IBASE fellow Marcos Arruda outlined several of these proposals.

The first step toward resolving Brazil's foreign debt problem is to refuse to accept IMF conditions, Arruda declares. "We must state to the IMF that our main priority is to the people of our country, not to control inflation, not to pay the debt, not to cut the government deficit." Such an action would be far more effective if Mexico, Argentina, Venezuela, and all other Latin American debtor nations joined Brazil in stating their rejection of IMF solutions. Though Arruda admits that forming a cartel of debtor nations is not a political reality at this time, he calls on the governments to agree on a set of common terms with which each can approach the IMF and transnational banks.

As a next step, Brazil should declare a two to five year moratorium on paying foreign debts, Arruda insists. Such a step is necessary to give Brazil's economy time to grow enough to meet its present-and future-debt obligations, a difficult feat under the IMF recipe for the country. Thus Arruda argues that a moratorium would actually be in the long-term interest of the banks. As he remarked, "We have to tell the bankers, `Yes, you have to lose today in order not to lose tomorrow or the day after.' "

Arruda also recommends that when debt payments resume, Brazil demand an end to flexible interest rates, which allowed banks to hike the interest on international loans from five percent in 1978 to 21 percent in 1982. Arruda proposes a four to five percent ceiling on interest rates for all international debts.

Brazil should also demand that debt payments be tied to Brazil's export earnings. In 1982, Brazil paid out 117 percent of the value of its exports to service the debt, a situation that left Brazil bereft of foreign exchange for essential imports and in need of additional loans to meet debt payments. Arruda suggests that Brazil pay no more than ten percent of its export earnings to service its debt. "This means that [the size of] debt payments will depend on how fast we pick up again," he explains.

Finally, Arruda recommends that the government move to reverse the downward trend of productive activity and arrest the ballooning internal debt. Under the IMF-encouraged policy of transferring resources from domestic production to production for export, up to 50 percent of some sectors of Brazilian industry are idle, small- and middle-sized companies have been forced to sell out to multinational corporations, and the internal debt has swelled to $25 billion, one-fourth the foreign debt. Like many other economists, Arruda contends that the IMF solutions will ultimately destroy the country's industrial capacity and denationalize industry.

Arruda proposes the adoption of measures that would stimulate investment in domestic production. At the same time, he says, the government should intervene in the financial markets to halt the speculation that is diverting vast amounts of capital away from investment in productive industries. The high level of speculation is primarily due to the government's sale of treasury bonds at high interest rates in order to sweep cash out of circulation. Arruda recommends that government treasury bonds be replaced by bonds not so easily negotiated.

If followed, Arruda and his colleagues at IBASE believe, these steps offer Brazil some hope of finding a way out of the present crisis towards an economic recovery. But IBASE's alternative strategy extends beyond prescriptions for tackling the economic emergency to addressing the fundamental basis of Brazil's model of development. "Any way out of this crisis has to deal with the very roots of this model," declares Arruda. That model, according the IBASE, should be reevaluated with one basic question in mind: What serves the interest of the majority of Brazilian people?

A vision for the future One day, Brazil woke up very different. The farmer had come to live in a transformed world. The 370 million hectares of land appropriated for agriculture and animal-raising began to produce, worked by the 12 million families who before had been landless or without sufficient land for heir survival. They had now become owners of their land, or received decent salaries supplemented by a system of social security. One hundred fifty million hectares of arable land that had long lain uncultivated, enormously expanded the nation's productive capacity. Policies favorable to the small and medium-sized family producers, supplemented by permanent credit, technical and educational assistance to rural families, succeeded in raising production of goods for the internal market to the level of self-sufficiency. As a result, Brazil stopped importing food and the rural population stopped emigrating to the cities. Government programs directed transportation and distribution networks to serve the marketing needs of agricultural products and developed the physical and social infrastructure in the countryside - including the construction of decentralized educational, cultural, and recreational centers under the control of the rural communities themselves. The indigenous people obtained permanent title to the lands they occupied. The right of the Indians to preserve their own culture, language, and form of social organization was recognized. The automobile industry was no longer the dynamic focus of the Brazilian economy. Along with agriculture, the basic consumer goods sectors (clothing and food), public works, mass transit, infrastructure, and capital goods came to dominate economic activity. In these sectors were concentrated the highest rates of investment. Investments were diverted from arms industries to the industries producing socially useful products. With the economy focused on the internal market, it was possible to generate surpluses and establish a policy of exporting industrial and semi-industrial products, and even agricultural goods and raw materials, after the real needs of the population were satisfied. Brazil gave priority to its commercial relations with other Latin American and Third World countries. Thus it not only succeeded in escaping the financial nets of the transnational corporations and banks, but it also stimulated the formation of direct exchange systems or new regional monetary instruments which permitted each country to function outside of the dollar's sphere. Foreign capital began to play a secondary and merely complementary role in the national economy. The financial and foreign trade sectors became effectively controlled by the government, and constitutional reforms incorporated clear and rigorous guidelines on control of the activities on transnational capital in Brazil. Only those companies which accepted the conditions imposed by the new constitution remained in Brazil. The Central Bank and the state and municipal governments, along with local communities themselves, came to share in the responsibility for overseeing the activities of transnational investors - as much in production and finance as in their social and environmental impact. A new constitutional provision permitted the automatic nationalization of a company and appropriation of its technology beginning in the fifth profitable year of the firm's operation in Brazil. This same provision required that every service contract with foreign investors include scientific and technical training of Brazilians, so that they could eventually assume control of the production process. Increasing the value of each person, as an individual and as a member of a social group, came to be a top priority. The right to life and work guaranteed every person the rights of food, shelter, clothing, health, culture, education, recreation, security, and social peace. Associated with these was the right of the people to win and construct their rights themselves. This right to power - also called democracy - was more than a word for the Brazil; it represented a real and multi-dimensioned social relationship. Who would dare to say that the new Brazil outlined above is no more than an impossible dream? Only two types of people: those who, for selfishness or privilege, do not want the Brazil of today to transform itself, and those who have no understanding of the abundance of our resources or confidence in the real and potential qualities of our people. To transform this dream into reality, we need only one thing: the political will. Between today's Brazil and the possible Brazil described here, there is a long road to travel. The ideas presented here were born from the convergence of many proposals which Brazilian society has been formulating for years. Our work has been nothing more than to give form to that which springs from the necessity and the aspirations of the majority. These proposals will have to be repeated until they are no longer proposals, so that they may transform the utopia of our people into reality. Excerpts were translated and adopted by Patricia Perkins, who is currently a graduate economics student at the University of Toronto.