The financial crisis so sorely afflicting Asia and Russia has had extremely serious repercussions on all the so-called emerging countries. This has also been the case for Latin American countries, especially Brazil, Argentina, Chile, Mexico and Venezuela.
The first Asian crisis of 1997 had already driven Brazil to introduce protective measures in order to minimise the impact of international economic turbulence (such as raising the MERCOSUR Common external tariff). This did not prevent a slow down in Brazilian economic growth, already being felt in the first half of this year.
The much deeper crisis of 1998, and especially the collapse of the Russian economy and the plunging rouble spun markets into a panic. It led to widespread lack of confidence in emerging countries, causing a flight of short-term invested capital from all their financial markets, which in recent years had produced remarkable returns.
In reality more than withdrawing investments, there was generally a reluctance to renew them in emerging markets when bonds had expired. Once profits had been made, the capital was not re-invested in emerging markets but in countries considered to be more stable (Europe and the Us). To this background, in August and September there was a widespread coriviction that after Russia, Brazil would also suffer a collapse of its stock exchange and currency, with the even more serious consequence that Brazil would have dragged the whole Latin American economy down with it: Argentina, although less deep in debt than razil thanks to its healthier public finances, is bound to its neighbour through the intense trade links in MERCOSUR; Chile is another major MERCOSUR partner; Venezuela is equally important for Brazil and also beset by considerable specific problems due to its over-dependence on oil prices. The whole of the NAFTA block was considered to be at risk, especially because of the large credits the Us banks had with Brazil.
Moreover, although alarming, this analysis did confirm a now established fact: Brazil had become the leader of the whole Latin American economy. Thanks to having opened up its traditionally protected closed economy, this enormous country which alone accounts for half of the Latin American GDP, population and surface area, had established lasting relations with its neighbours. It had acquired the specific weight in terms of continental leadership which its traditional isolationism had always prevented.
The opening up process brusquely begun under President Collor, was still limited by hyperinflation. This problem was then solved with the Real Plan devised by Minister Cardoso under the presidency of Itamar Franco. The success of the plan led to the consecration of current President Fernando Henrique Cardoso. It paved the way to a faster opening up of the market and the modernisation of the economic structures of Brazil on a more solid and balanced basis. The new situation of financial stability brought a return of foreign capital and gave great impetus to privatisation. Moreover, the rapid success of MERCOSUR completed the opening-up process, breaking the consoli- dated tradition whereby attempts at economic integration in the Southern Cone and Latin America in general had always been doomed to failure.
But in this framework of very positive trends making Brazil a leading player on the international scene in the 1990s, there was a weak point: the over-dependence on shortterm capital, by definition speculative and therefore unstable. The need for external finances due to the large current-account deficit caused by the cost of opening up the markets, aggravated by the low levels of domestic saving and a high public deficit (8 per cent of the GDP in late 1998), making the country extremely vulnerable in the саse of financial turbulence, like that due to the present crisis. Thus, for example, while reserves peaked at 71 billion dollars in March 1998, by November they were down to 47 million, when the emergency plan worked out with the International Monetary Fund was launched. Huge reserves were burned up to defend against a run on the real, considered an indispensable part of Cardoso’s policy. In an attempt to stem the flight of capital, the Central Bank raised the basic interest rates in September to 49.75 per cent. Although recently the highest rate was reduced to around 40 per cent, considering that the inflation rate is no higher than 4 per cent, it is clear that the real cost of money in Brazil is incredibly high, thus heavily penalising industry.
In the middle of this financial crisis, on 5 October 1998, elections were held for the presidency, congress, part of the senate, and for twenty-seven governorships and their respective state congresses.
As had been widely predicted, President Fernando Henrique Cardoso was re-elected at the first round with 53.06 per cent of the total votes (35.9 million). The left-wing candidate, Ignacio Lula da Silva had already been defeated by Cardoso four years earlier and by Collor eight years earlier. This time, however, he did enjoy some persona! success, with an improved result (31.81 per cent of the votes) compared to 1994 and he won the support of most people opposed to the current economic model. At the same time the results show that the alternatives proposed by the Brazilian left (defence of the public sector, and a return to a more closed economy through the introduction of protective measures) had no future in the eyes of Brazilian public opinion, convinced by the need for modernisation implemented under Cardoso. The electorate was thus willing to grant the president a second term of office, despite the prospect of having to put up with the sacrifices that willbe required over the next two years as part of the drive to financial recovery.
A cursory glance at the electoral results
suggests that Cardoso can rely on a comfortable majority giving him a free hand to continue with his programmes: the coalition government is made up of six parties (the Partido da Frente Liberal, PFL; the Partido da Social Democracia Brasileira, PSDB; the Partido do Movimiento Democratico Brasileiro, PMDB; the Partido Progressista Brasileiro, PPB; the Partido Trabalhista Brasileiro, PтB; and the Partido Social Democrático, PsD) and can count on 381 of the 513 seats in Congress and 68 of the total 81 senators. But the overall picture is much more complex.
Firstly such a mixed bag of a coalition bringing together liberal, social democratic and nationalist parties is obviously subject to internal strife. This is only overcome thanks to the constant efforts by the government group leaders in congress and the senate, often through compromise and votes for favours diluting the legislative proposals. The government has also suffered the loss of two key figures: Luis Eduardo Magalhaes (PLF), son of the president of the Senate and an able group leader of the congress government in the previous legislation, and Lucio Motta (PSDB), right-arm man of Cardoso and minister of communications. Both men died prematurely, leaving a gap which will be difficult to fill.
Moreover, members of parliament are rather fickle when it comes to following the group leaders and party line. During the previous term of office several dozen members of congress changed parties without losing their seats. This is symptomatic of the confusion in the Brazilian congress and how difficult it is to keep the majority on the road in such conditions.
Another fundamental factor in Brazilian politics are the twenty-seven governors. They are crucial for the success of government policies. On one hand, they can strongly influence the deputies and senators in their state, irrespective of political colour, and on the other, the 1988 constitution devolved to state or local level the control over fifty per cent percent of public spending. Clearly in this situation the governors have a good deal of room for manoeuvre and austerity policies which are not supported by the periphery have little chance of success. As regards the state elections, Cardoso’s PSDB will govern seven states from 1999 (previously it held six). But in fact the party has lost important states like Minas Gerais, where the former president Franco Itamar was elected. Apparently he is bent on adopting a critical attitude to the government and aims to head the group of governors oppоsed to continuing with the current economic policy. In the key state for the Brazilian economy of Sao Paulo, Mario Covas from the president’s party was elected with a left of centre majority, including Lula’s Pr. Given that Covas is also supported by the FIESP, the potentially protectionist Business Confederation of San Paolo, then it can by no means be taken for granted that the San Paolo government will give full backing to the reforms. The opposition won the day in two key states: Rio de Janeiro (Anthony Garotinho, PDT) and Rio Grande do Sul (Olívio Dutra, Pт).
All of these factors suggest that the coali-tion government due to rule Brazil over the next four years is anything but solid, despite the numerical appearances.
It must be added that the 1988 Brazilian constitution drafted at the end of a twenty year military regime is very detailed and strong on legal guarantees. Laws normally included in ordinary legislation were given the status of constitutional laws. Thus a threshold of three-fifths of the votes must be reached in congress before approving reforms.
In his second term of office, Cardoso will set about introducing very wide ranging reforms mainly concerning taxes, the pension system and politics. Success with these reforms will decree the lasting consolidation of Brazil as a world leader able to exploit its immense economic and human potential. Failure to modernise would have very serious repercussions in the context of the global economy.
We have already mention the economic fragility due to an over-dependence on speculative capital. Last summer there were talks on the possibility of international intervention led by the IMF to save Brazil from the rapid spread of the Russian-Asian crisis to Latin America. This idea was being shaped at a particularly tricky moment: short of funds, the IMF was under fire from various quarters for its ineffectiveness in Russia and Asia, raising doubts as to the appropriateness of new action. Moreover, Brazil was in the middle of an electoral campaign which made it difficult to take a stance in favour of the emergency plan (Latin American public opinion has always shown a certain mistrust towards the Bretton Woods financial organisations, seen as the Trojan horse of Us foreign policy).
In actual fact the government began to negotiate the plan before the elections and only announced it after being successful.
The agreement on economic and financial programme between Brazil and the IMF was then finally announced on 13 November 1998: the programme can count on funding of 41.5 billion dollars (IMF- 18 billion, World Bank and Interamerican Bank – 4.5 billion each, and the industrialised countries 14.5 billion, of which 7.6 billion from the Eu and 5 billion from the Usa).
These funds have been made available to counter any flight of short-term capital, but at higher interest rates than current market levels in order to encourage Brazil to make use as soon as possible of the international capital markets.
Initially included in the programme, private banks are not involved, but should support it through continuing or newcredit for Brazil. The financial package is enormously significant not only because of the size of funds made available, but more importantly for the message to the markets: the large industrialised countries and big international financial institutions have placed their trust in Brazil and its current leadership, after positively assessing the considerable strides forward over recent years and the current reforms.
In this sense we share the notion that when there is a major international financial crisis all countries should not be indiscriminately bundled together. The situation in the emerging Latin American countries is not at all comparable to the situation in Asian countries and even less so to that in Russia. Compared to the institutional and political crisis in Asia and the collapse in Russia, we must view the positive evolution of the process of opening up and modernisation pursued by the emerging countries of Latin America. They did not deserve to be punished for the weaknesses of others. The ‘bad pupils’ of the 1980s have been transformed into good students of the 1990s and must be protected.
Brazil is one of the best examples and the international public authorities have recognised this fact.
The funds in the IMF package are linked to the completion of a definite reform programme. Firstly, Brazil is committed to reducing its public deficit from the current 8 per cent of the GDP to 3 per cent by 2001. This will require an enormous effort over the next two tax years (as the Euro countries know full well).
The government intends to pursue a restrictive fiscal policy without lowering the exchange rate (this measure, although suggested by many analysts, would have negative effects on the public deficit because of the high degree of indexing on the dollar by short-term bonds), without limiting the withdrawal of capital and without debt forgiveness.
The catastrophic state of the public finances is the outcome of years of lax administration. The negative effects, however, were masked by hyperinflation which concealed the perverse effects due to a chronic imbalance of the public finances.
Thus, for example, the pension system was extraordinarily generous with the more well-off sections of the population, allowing them to combine pensions at a relatively young age (53) with no need to stop working and only levying limited contributions. At the same time the state was unable to assist the needier classes and had to drastically cut spending on education and health (public hospitals and schools have deteriorated greatly over the last few decades and Brazil has a illiteracy rate totally out of keeping with its overall develoрment). The result of this situation was a pensions deficit of over 50 billion dollars in 1998. In the public sector alone, the deficitwas around 22 billion dollars compared to an revenue from contributions of 2.5 billion.
Reforming the pension system is thus a top priority for the Cardoso government, which already tackled this issue along with many other problems in its first term of office. Revising this absurd system and rebalancing the public finances are indispensable conditions for completing the reforms. But Congress may be very reluctant to approve them, given the extent of privileges guaranteed at present.
On 28 October 1998 the government announced a tough fiscal package. In an already difficult context (a predicted zero growth in GDP for 1999), its objective is to cut 1999 budget spending by around 11 billion dollars. We will not discuss the details of these measures drastically reducing the pension system and re-organising indirect taxation (the introduction of VAr) to increase overall revenue. We must stress one point, however: eighty per cent of the spending in the annual budget law cannot be reduced, because it is guaranteed constitutionally or decided at decentralised level. Thus the state governments – some spend more than ninety per cent of their resources in wages – must collaborate with the central government’s austerity plan. But only a constitutional reform can introduce the structural changes required.
What conclusions can we draw about the near future for Brazil?
The country has made enormous progress in the 1990s: a more open economy, financial stabilisation, the strong impulse to regional integration through MERCOSUR, and the modernisation of the country on a more balanced basis compared to the past are all factors giving Brazil a renewed international credibility in line with its ambitions.
The achievements of this new approach are clear to all. Despite its problems, Brazil is viewed as the most credible international partner (see the IMF package) and it has taken up the role of Continental leader in the economic field thanks to the fastdeveloping MERCOSUR. Now the fulcrum of Latin American economic integration, MERCOSUR is the key to opening up the subcontinent (see, for example, the talks with NAFTA and the European Union). Brazil has also assumed a leading role of political responsibility as evidenced recently in the solution to the Peru-Ecuador dispute. It is thus the logical South American candidate for a place as a permanent member on the UN Security Council.
Whereas another emerging Latin American country like Venezuela has chosen not to look reality in the face by opting for the populist solution of Chavez, and the illusions of the past (oil dependency) without taking into account modern global economic trends and the need to introduce a serious process of modernisation, Brazil re-elected Cardoso with his long-sighted strategic choices on the road towards a probably irreversible process.
But Cardoso’s second term of office must complete this process by defeating the parasitic tendencies still widespread in the political world and the classes linked in various ways to the state gravy train, now an unsustainable burden for the new Brazil. In this sense once the necessary tax and pension reforms have been completed, the circle must be closed by a political reform to reorganise the current imbalances. Having completed these reforms, the Brazil of the 21st century can confidently begin the decisive battle to eliminate social shortcomings which are not compatible with its international status. At that point in the near future education, health and social development will be the main priorities.