The recently announced IMF loan to Brazil,
worth US$30 billion, holds out the promise of taking the Brazilian economy
out of the woods. But even a cursory look at the conditions attached to
it makes one realize that the loan, rather than take Brazil out of the
woods (into which the IMF itself has led the country), will actually force
it deeper into the forest. The strings attached to the IMF bail-out package
evoke the fear that it will serve as a stranglehold on the Brazilian economy
and an intrusion on the sovereignty of that country, coming as it does
in the midst of Brazil's moves towards democracy.
With the term of the current Brazilian President Fernando Henrique Cardoso
(who came to power in 1994) nearing its end, Cardoso's chosen successor
for the presidential election is lagging behind in third place, behind
two left-wing challengers – Luiz Inacio da Silva, known as Lula,
of the Workers' Party, and Ciro Gomes of the Popular Socialist Party.
The two are heading for a possible second-round run-off in the election
due to be held in October 2002. The prospect of a left-wing candidate
becoming President of Brazil has sent cold waves down the spines of international
finance capitalists, based mostly in the US. The left in Brazil has been
threatening to reverse the free-market approach to economics and trade,
and strive to improve the lives of the poor who have been left behind
in the country's experimentation with the market economy.
The IMF loan is aimed at preventing such a reversal from getting off the
starting-block. Each and every contestant in the forthcoming election
has had to sign on the dotted line, promising to continue with the current
budget policies, in order for Brazil to avail of the full loan amount
that Brazil has been promised. The loan will be delivered over the next
fifteen months, with only some US$6 billion in new money being made available
by the end of 2002. The major part of the loan (US$24 billion) will be
disbursed only after the election, and that too only if the new government
meets certain budgetary targets. Loan disbursal is subject to meeting
quarterly targets and reviews by the IMF, and at the first instance of
a target being missed, the IMF can say that Brazil is not going to get
any more money.
The IMF loan requires whoever takes over as President of Brazil on January
1, 2003, to maintain a primary budget surplus of 3.75 per cent through
till 2005. Supporters of the rescue package have praised Cardoso for pursuing
bold economic reforms and winning the confidence of international donors
(read the US) to be sanctioned the mega bail-out amount. The US administration,
which was opposed to the loan till the eleventh hour, announced on August
8, 2002 that Brazil deserves the money as it has moved courageously to
open its markets, fight inflation and put its fiscal house in order. The
loan is expected to rescue the plummeting Brazilian currency, prevent
investor flight and diminish chances of the new government defaulting
on the public debt of US$250 billion.
Analysts, however, are not that optimistic; neither are the left-wing
candidates contesting the presidential election, although they had to
reluctantly endorse the loan deal. Guido Mantega, Lula's chief economic
advisor, has said that the deal limits the capacity for social investment.
He accused the IMF of trying to confine the Brazilian government ‘in
a plaster cast'. Maintenance of the primary budget surplus, coupled with
reduced interest rates, will make all efforts to reheat the economy futile,
Mantega opined.
Jose Antonio Ocampo, Director of the United Nations' Economic Commission
for Latin America, has said that while the loan might temporarily mitigate
the financial panic, the effects will be short-lived and the consequences
for economic growth will be limited. The standard advice of the IMF to
borrowing countries to enforce ‘fiscal discipline' inevitably translates
into enormous suffering for millions of people, more so as most of these
countries rarely have a social safety net. And in countries where a safety
net does exist, in however skeletal a form, it becomes the first casualty
of the fiscal austerity drive. As Joseph Stiglitz put it: "It's easy
at the top to say cut back on expenditures, but it is hard when you are
a politician and the unemployment rate is 18 per cent."
The current crisis in Brazil, in fact, is to a great extent due to Cardoso's
over-dependence on multinationals and international financial institutions
to develop Brazil's economy. As an ECLAC study of Brazil's services sector
shows, multinationals never act as agents of national development. The
major goal of multinationals is to gain access to the national market
rather than to maximize exports, not to speak of creating employment.
Again, access to local markets is obtained not so much through the creation
of new facilities as by purchasing existing assets. Therefore, the host
country rarely earns any additional foreign exchange from exports of products
made by multinationals.
On the other hand, removal of protectionist barriers, a crucial aspect
of liberalization, results in surging imports, leading to an inexorable
rise in the trade deficit of these countries. Brazil is no exception.
While, in the early 1990s, Brazil was running a trade surplus to the tune
of US$10-15 billion a year, by 1997 it was transformed into a deficit
of US$8.3 billion. The pegged exchange rate, which Cardoso held on to
for long, furthered Brazil's woes by making Brazilian exports expensive
compared to those of its competitors with flexible exchange rate regimes.
Unrealistically over-valued currencies in an open economy sooner or later
spark off speculation about imminent devaluation. This in turn leads everyone
to converting the domestic currency into US dollars, putting even greater
pressure on the former. Often, the national government is forced to suspend
conversion or freeze accounts, partially or entirely, to prevent mass
withdrawal of domestic deposits from banks by nervous investors who fear
that inevitable devaluation will greatly diminish their holdings in real
terms and therefore want to convert their holdings into US dollars. The
rising demand for US dollars makes the country even more dependent on
foreign capital and leads to an unsustainable current account deficit.
Even a momentary lapse of investor confidence in the performance of the
economy results in capital flight, leaving the country's economy in the
lurch.
Brazil under Cardoso has been a classic case of the above. In a bid to
attract more foreign capital, the country raised its interest rates too
high, encouraging the entry of short-term speculative funds that are prone
to overnight escapades. The crisis worsened in late 2000 when Brazil was
hit by a series of international shocks – recession in the global
economy, a looming default in Argentina, a domestic energy crisis triggered
by investment cuts and a mal-advised privatization programme. Inflow of
foreign capital fell sharply and the currency depreciated further. Cardoso
raised interest rates again in early 2001 in a bid to prevent the outflow
of foreign capital. And he begged the IMF to help Brazil regain the confidence
of international financial markets. The IMF agreed, in August 2001, to
a new fifteen-month Stand-by Agreement. The deal was worth US$15 billion,
with an immediate tranche of US$5 billion to boost foreign reserves. In
exchange, Cardoso agreed to raise Brazil's primary budget surplus from
3 per cent of GDP in 2000 to 3.35 per cent in 2001 and 3.5 per cent in
2002. To be eligible for the recently negotiated US$30 billion loan, the
percentage has been raised even further to 3.75, a rate that has to be
maintained till 2005.
This, then, is the genesis of the crisis Cardoso has landed Brazil in.
Ironic, for Cardoso had initially entered the political arena as a bitter
critic of ‘dependent development', criticizing the association of
national with international capital in the periphery of the world system
for perpetuating "deep social and economic inequalities, loss of
control over the direction of national development, and vulnerability
to external financial shocks". In his former incarnation, he had
said that dependent development "occurs because both state and business
pursue policies that create markets based on concentration of income and
social exclusion of most of the population. . . . The conflicts between
the state and big business are not as antagonistic as the contradictions
between the dominant classes and the people."
Even as Brazil has been offered this huge bail-out package by the IMF,
neighbouring Argentina, reeling under a much deeper crisis, has received
only brickbats. The United States has agreed to back bail-outs for Brazil
and Uruguay (another neighbour of Brazil in crisis), but has refused to
hold out any such hope to Argentina. In fact, ever since the present Bush
administration took office, it has looked sceptically upon bail-out packages
for nations in crisis, maintaining that they are ‘a waste of taxpayers'
money' and that the borrowing nations will not be able to repay their
debts in the long run.
Then why this sudden change of heart? Why this sudden concern for Brazil?
To believe the Bush administration story that ‘Brazil has been good;
Argentina has been bad' would be naivety at its worst. The real reason
is that the IMF loan to Brazil will boost Citigroup and FleetBoston, two
American banks (and major funders of the US presidential election campaigns)
which stand to lose close to US$20 billion in the event of Brazil defaulting
on its debt. These two and a third bank, JP Morgan Chase, have far greater
exposure to Brazilian loans than to Argentinean ones. Also, car companies
like General Motors have declared their whole-hearted support to "efforts
such as this that stabilize the economy". General Motors has sunk
billions into factory facilities in Brazil, and a Brazilian melt-down
would turn these into white elephants. With the US Congressional elections
slated for November 2002, no government can afford such an eventuality.
So, it turns out that the IMF loan to Brazil is more of a bail-out for
US multinational interests in Brazil than a rescue package for the Brazilian
economy. American banks have given out about US$25.6 billion in outstanding
loans to Brazilian borrowers, with Citigroup's share being US$9.7 billion.
As soon as the IMF loan was announced, the shares of Citigroup and FleetBoston,
which many analysts believe have actually gone bust "and are only
being kept alive through a ‘wall of money' being thrown into the
US markets", rose 6 per cent. These banks will now try to recover
their money from the Brazilian economy during the temporary reprieve that
the IMF loan will provide to Brazil and before Brazil too goes bust like
Argentina. As for what has been called the ‘bicycle mechanism' –
the bicycle keeps moving as long as it is being pedalled – under
the current economic regime Brazil will need more and more loans to repay
its ‘outstanding dues', and once such pedalling of loans from international
financial institutions comes to a halt (which undoubtedly will happen,
sooner rather than later, once the multinationals ‘recover' their
money), the Brazilian economy is bound to implode like that of Argentina.
Till such time the bail-out, and the agreement to lower the floor of Brazil's
international reserves – from US$15 billion to US$5 billion –
mean that Brazil's central bank has that much more money to use in hapless
defence of its besieged currency. This will heighten speculation, and
this is what the IMF loan will be used for.
A decade ago Washington had claimed that all that Latin American nations
needed to do to ‘experience a great surge of economic growth' was
to open themselves to foreign goods and capital, and privatize their state
enterprises. Today, the Argentinean economy is in a shambles; Uruguay
and Paraguay are neck-deep in trouble; Mexico and Brazil, regarded as
success stories till a few months back, have per capita incomes only shades
higher than what they were in 1980. With inequality rising sharply, more
people in these countries are worse off today than they were twenty years
ago. Once Brazil defaults, it will destroy whatever remains of the Latin
American economy.
The sole winners will be the transnational companies which will leave
the sinking ship in time, not only with their own assets but also those
of their co-passengers (the host countries). The real influence of global
capital in international and national policy-making is far greater than
is borne out by the misleadingly small share of the hundred biggest transnational
companies in world GDP, which is still small, rose from 3.5 per
cent in 1990 to 4.3 per cent a decade later.
Brazil's fiscal situation has been good, its inflation rate has been low
and its balance of payments not too bad. Yet, the possibility of the country
being ruled by a left-leaning President has sent the global capital markets
into a tizzy and caused a run on the Brazilian currency. The IMF loan
ensures that whoever wins the election protects transnational interests
in Brazil, irrespective of the consequences of such action on the lives
of workers and the poor in Brazil.
Today, worldwide confidence in the IMF prescription is at an all-time
low. The enthusiasm for free markets is more tempered than ever before.
International financial institutions and the US have lost much of their
credibility in the developing world. Brazil needs to take advantage of
this growing dissent against the west. The time is ripe for the country
to break with the rules of the game set by the international financial
system. It should immediately impose capital controls, taking a cue from
what Malaysia did in 1998, and call for reorganization of the global financial
system. The interests of billions of people across the globe cannot remain
hostage to the interests of a few transnational companies. It is time
to act now. For even a day later may be too late.