LATIN AMERICA The Brazilian Crucible

The Brazilian Crucible

On August 20, 1987, the world debt crisis quietly marked its fifth anniversary. Neither the media nor the people involved in the crisis looked back and took stock of what has--and has not-- been accomplished during those years.

The Multinational Monitor recently visited South America to assess the situation in three of the most desperate debtor countries and to learn what experts in Brazil, Argentina and Peru think about the past, present and future of Latin America's debt, which currently stands at $400 billion.

BRASILIA, Brazil--There are two sides to Brazil: one giant, powerful and prosperous and one poor, bitter and hungry. One face of Brazil is that of a modern and rapidly growing industrial nation, while the other reveals an impoverished, debt-ridden country that teeters on the edge of anarchy.

If the two sides of Brazil have not managed, thus far, to co- exist, then at least they have managed to avoid coming into direct and open conflict. Only a few poor people beg for money or sleep with their belongings on the white beaches of Rio. But the beaches and luxury apartments of wealthy suburbs like Leblon lie only five minutes' drive from favelas (slums) such as Rosinha. The rule of law does not extend to Rosinha, where drug warlords, many of whom are better armed than the federal police, maintain order. And in places like Rosinha, there is no labor law protection, sewage system, medical care or hope.

A healthy economy is the only force that can help the inhabitants of Rosinha escape their plight, and the health of Brazil's economy is tied, to a large extent, to its $118 billion debt. In Brazil, which has Latin America's largest debt and its strongest economy, the question is simple: how can the government find a way simultaneously to fulfil its obligations to its creditors and attend to the needs of its growing population? During the regime of President Jose Sarney, which is not yet 3 years old, three finance ministers and four presidents of the Central Bank have failed to devise any comprehensive solution to the debt problem. Brazil's suspension of interest payments on the $67 billion of the debt that is held by commercial banks, which began on February 20, 1987, is proof of that.

Brazil needs rapid and sustained economic expansion for political and economic reasons. Because of Brazil's rapidly growing population, its economy must create 1.6 million jobs every year just to absorb the new entrants into the labor force. As a result, the economy must grow at an annual rate of 7-8 percent just to keep per capita income levels from shrinking. In addition, 25 percent of Brazilian workers operate on the fringes of the economy and lack rights in the workplace. To help these people, the economy should create an additional 200,000-300,000 jobs to help bring them into the mainstream workforce.

Can the economy grow at this rate even when 2 percent of Brazil's GNP goes to service the debt? For the past nine months, Brazil has not paid interest to the banks. Paolo Lyra, the former head of Brazil's central bank, is guardedly optimistic that the country will find a way out of its current difficulties. "Brazil invested the money it borrowed, and people have consistently maintained their domestic savings ratio." As a result, Lyra says, "you can make a commercial proposition to pay the debt."

Professor Dionisio Carneiro of the University of Rio has a bleaker view of the future. Carneiro, an expert on Brazil's debt, is becoming increasingly concerned about the negative effects of the debt on Brazilian society and politics. "Two years ago, I would have said that Brazil could service its debt," says Carneiro. "There still is a satisfactory growth pattern of 6 percent, and with good policies Brazil could still service its debt. There is no solvency problem yet. But the political environment needed for fine-tuning of internal and foreign policies is not here yet. It's economically possible to pay the debt, but the government lacks the structures to do so."

But every dollar that goes to service the debt is a dollar that could have been devoted to projects in Brazil that would create jobs for an increasingly embattled working class. According to Latin American Weekly Report, between March, 1986 and August, 1987, the purchasing power of workers fell by 44.6 percent. "There is a gross disparity between the rich and the poor," warns Carneiro. "If it goes on, it will disturb the political equilibrium. If you could keep the income disparity from growing worse, then you could service the debt, but the gap is getting wider."

Celso Brant, who recently helped to found the National Mobilization Party, was more blunt about social tensions in Brazil. Speaking at a conference in Rio on the debt problem in May of 1987, he said that the debt "is not an economic problem but a political one...it is a problem of political incompetence. The Brazilian political elites aren't in touch with the reality of what's going on in Brazil."

The economic and political future of Brazil depends on the ability of the government to confront its serious internal problems and address the debt problem squarely. The political machinery to accomplish this task will not be in place until Brazil's 559-member Constitutional Assembly crafts a new constitution. The constitution will also be important in the debt crisis because it will determine the economic and investment climate for the country. But there is a great deal of controversy and debate about the constitution, especially about distribution of power between the executive branch and the legislature and about how much control the government should have in the economy. Thus, an agreement is still months away. In the mean time, Brazil's government will continue to confront the country's growing economic problems with inadequate, short-term measures.

Justin Castillo is a freelance writer based in Washington, D.C.