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.