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CounterPunch
October
7, 2002
Brazil: the
Party is Nearly Over
by PAUL de ROOIJ
During the late 1960s and early 1970s the Brazilian
military-led government engaged in a major spending spree. Roads
were built everywhere, huge infrastructure projects were initiated,
and a major transformation of the economy took place. At the
same time, international banks, American foremost among them,
fell over each other to lend Brazil the billions to fund this
binge. An American banker is known to have offered a two billion
dollar loan when he was asked for one billion. No problems, "Brazil
is so well managed" ran the common refrain. American policy
makers also liked what was going on. Multinational
corporations entered markets erstwhile closed to them during
the 1950s industrialization and self-sufficiency drive. The left
was also marginalized, because who can argue with success. All
the major players were very pleased. We were witnessing the "Brazilian
miracle."
Politicians love debt. Spend, get all
the accolades, and then let someone else in the future pay the
bills--by that time the memoirs will already have been published.
It is a case of eating your cake and letting someone else pay
for it; it is a generation game. When the bills come due, no
problem, get more debt, and repeat this while the banks are friendly.
The Brazilian technocrats' motto: "push the problems to
the future." (Braz: 'empurar o pacote').
The military were pleased, they were
in power, their interests were protected, and the left was marginalized.
All the incentives were there to retire early and join the board
of the myriad state and quasi-state companies. If the colonel
or general spoke English, even better, now he could join the
board of a multinational corporation.
The bankers never will let such an opportunity
as lending billions to a friendly dictatorship go by. The government
assures them it will guarantee the loans, and its policies will
encourage a favorable "investment climate". The IMF
can always be counted on to remind the friendly gov't of such
commitments. If there are liquidity problems, no worries, roll
over the debt, charge hefty fees for the privilege, make the
subsequent loans more expensive, and revert to business as usual.
Banker gets extra bonus; this is in the industry's jargon is
a "G2G200", which means, "go to Go and collect
200."
The American policy maker also is very
pleased that Brazil has swallowed the hook. Now, the Brazilian
technocrats had to take their policy recommendations seriously.
The technocrats are "urged" not to invest in public
transport or railways, and instead invest in roads. Ford and
GM are happy, more cars and trucks are sold. Exxon is happy,
more oil is sold. The mining companies get favorable terms, and
any foreign company gets favorable treatment.
A few decades tick by, and now, oops,
it is becoming difficult to obtain loans. The gov't receives
multiple IMF visits; it comes to cajole the dead beats. The policy
diktat is for belt tightening and for further opening of the
economy. The politicians now use inflation to tax the general
population and shift the onus of problem onto someone else--politicians
scream: "inflation is the culprit." Conveniently, politicians
pursue the retailers and fine them for causing the problems;
this is always a nice way to divert attention.
The bankers now aren't so friendly anymore.
They also see that their lovely game cannot be played forever.
If the Brazilians can't pay their debts, get politicians to introduce
yet more investor-friendly policies, and again they will roll
over the debt. Yes, Brazil has to pay the hefty fees up front.
The American policy makers aren't too
concerned. To keep the Brazilian politicians from sinking too
quickly in this morass, some moral suasion is applied to the
foreign banks, and perhaps some more concessions can be extracted
from the Brazilians. All those state companies built up during
the 1970s and 1980s--it makes sense to privatize them; a fire
sale will do. A halt was called to dozens of infrastructure projects--their
immense rotting concrete hulks now litter the country. Railway
lines extending for hundreds of kilometers with many tunnels
dug through the mountains lie wasting unfinished.
In 1988, using models with very optimistic
projections showed that the Brazilian debt was not repayable
and the situation was not sustainable. When Anne Krugman, a World
Bank economist, was asked about this at a Univ. of Michigan seminar
she replied that the solution was "growth". Pointing
out that this was unsatisfactory, she retorted that the solution
was "more growth." It is evident that some policy makers
were living in complete denial.
Enter president Cardoso with a promise
to tame inflation. The solution offered: change the currency
pegging it roughly to the dollar, open markets even further,
and engage in the ever popular privatization. The initial success
gave rise to a huge consumer boom, and a rise in imported products.
All of this was made possible by pilling on yet more internal
and external debt. This time the new loans paid mostly for consumer
products--products that won't generate revenue to repay the loans.
Brazil had a temporary reprieve, again to be paid by someone
else, but now the problems can't be avoided anymore.
So, now we are further along, and the
debts of Brazil, Argentina, Uruguay, and most of Latin America
can't be serviced, let alone be repaid. Perhaps with a lot of
effort they can be partially serviced and rolled over. IMF will
throw in a few billion of its own funds, and the domestic policies
will be tightened to enable this farce to continue.
We are on the eve of the 2002 Brazilian
election, which will determine when the wobbly house of cards
will collapse. It is either the "business as usual"
candidate, Serra, who will roll over the debt, give more concessions
to banks, increase taxes, slash expenditures, privatize gov't
businesses (maybe even dish out a chunk of Petrobras, the quasi-state
oil company; its exploration monopoly may be given up), and inevitably
a serious currency devaluation maybe forced upon it. In the local
vernacular, these policies will amount to "urinating in
your pants to keep warm." Even these drastic measures will
only yield a temporary reprieve before something must yield.
The alternative is Lula, the candidate
on the left. His policies will favor improving the conditions
of the majority of the population, and perhaps rectify the lopsided
income distribution of Brazil. Such policies require improving
consumption of the population at large, and investment in public
services. The collision course with the policies needed to play
the "debt roll over game" and this plan are obvious.
One policy requires belt tightening forever, the extraction of
the pound of flesh, whereas the Lula program requires that some
of the crumbs reach the masses.
When and if Lula wins the elections and
the house of cards collapses, then we can only expect to hear
that he was responsible for this. The fact that Lula inherited
a massive problem created during the dictatorship years will
be quickly forgotten. The pundits appearing on CNN will lambaste
his irresponsible policies that caused a general loss of confidence.
The main difference this time is that
the same problems affect too many countries around the globe--the
tough medicine prescription will only create additional deflationary
pressures compounding the already precarious situation. The military
also don't have the stomach to stage a coup and prop up the wobbly
house of cards. We face an entirely different game, and the costs
will be borne not only by the Brazilians, but elsewhere around
the globe as well. Brazil alone has USD$260 bn debt outstanding,
and this excludes the private sector debt for which there are
no government guarantees. This time the fracas will make Enron,
the internet bubble, and the Savings & Loan crisis seem like
child's play. One thing is clear: the party is nearly over.
Paul de Rooij,
an economist living in London, closely follows Brazil.
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