The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
Brazil is not much in the news these days. Of course, no news is good news to a Reagan Administration beleaguered by internal dissension in the formulation of foreign policy and problems elsewhere in the world that are less tractable than campaign slogans suggested. It seems to confirm the prevailing view in Washington that the U.S.-Brazil relationship is back on course again after the trying Carter years when human-rights concerns and resistance to nuclear proliferation seemed to cause it to go awry.
But, on second thought, Brazil's disappearance from the news may be part of what is wrong with present strategy. Brazil, after all, is the principal military power in South America and sits astride the sea lanes of the South Atlantic that carry petroleum from the Persian Gulf and strategic minerals from Africa. Its technological sophistication has made possible increasing exports of arms-expected to have amounted to more than one billion dollars in 1981. It is the eighth largest market economy in the world and tenth overall, with a gross product of around $220 billion. Brazil has rapidly increased its integration into international markets in the last decade: since 1973 its exports have quadrupled and its debt increased by a factor of about five. Equally to the point, Brazil is undergoing far-reaching internal changes. The economic miracle and authoritarian stability are no more.
Brazil has experienced its worst economic downturn since the Great Depression, with a negative growth rate of almost four percent last year, and a larger decline in industrial production. The recession has been imposed deliberately with the primary objective of shoring up a vulnerable balance of payments that remained in deficit in 1981 on current account by some ten billion dollars, despite about a doubling of exports between 1978 and 1981. Since 1973, despite world recession and ever-larger oil imports, Brazil had managed through reliance on external finance to sustain a growth rate of almost seven percent. Now its economic prospects, at least in the near term, are distinctly more clouded.
At the same time, a transition from authoritarian rule has gained speed. Even the change in election rules last November has not rescinded the direct elections for governor planned for November 1982. That will provide the first opportunity for a popular vote for that office since 1965. A new congress will be chosen at the same time under a multiparty system that has only recently supplanted the formerly mandated two-party structure. While no one imagines that an opposition candidate could gain the indirectly elected presidency in 1984, talk of a possible civilian successor has wide circulation.
These internal circumstances make more curious still Washington's total preoccupation with the Caribbean Basin as the focus of Latin American policy, and reemphasis of a narrow anti-Soviet allegiance as its ideological basis. Just when Brazil is deeply immersed in reacting to its economic difficulties, which necessarily influence its nascent more participatory political process, the United States is largely ignoring and even aggravating them both in order to get on with its national security agenda. In doing so, the Reagan Administration is fundamentally misreading the history of the postwar U.S.-Brazil relationship.1
The pre-Carter years were never quite so harmonious and the relationship quite so beautiful as Roger Fontaine, now on the National Security Council staff, once postulated. Very early on, after the war, Brazil discovered that the United States, promises to the contrary, was not about to commit significant public resources to an ambitious Brazilian project of development. The foreign economic help received came largely from the private sector, and Brazil's successful industrialization through import substitution averted the virulent nationalism that might otherwise have flourished. The limited U.S. financial support allocated to Latin American anti-communist regimes was felt more positively in Brazilian military circles. The armed forces reaped the gains of modern equipment and advanced training, and maintained close ties with their U.S. counterparts.
When the military intervened in 1964, there was a brief interval in which the dominant Brazilian economic development objectives and the preeminent U.S. security concerns were almost fully congruent. The new military government was fully anti-communist, and had justified its revolution on those grounds. Washington's response was immediate and financially generous. Even as the regime hardened into a more long-lasting authoritarianism, there was continuing support. Brazilian foreign policy reciprocated. It took as its priority "to defend the security of the continent against aggression and subversion, whether external or internal." Rhetoric had its counterpart in action. Brazil sent troops to the Dominican Republic in 1965 and embraced the concept of a permanent inter-American defense force.
That golden age did not last out the decade. As Brazil accelerated its economic growth and became integrated into the international economy after 1967, the alliance progressively eroded. Brazil gained access to private capital in quantities that far exceeded the availability of public loans. The United States was dispensable. Moreover, a new economic capability promised to underwrite a more assertive and independent Brazilian international role. The generals who came to power after 1967 were neither committed constitutionalists nor cosmopolitan internationalists. In place of junior partnership they visualized grandeza. While Brazilian foreign policy would continue staunchly anticommunist, it no longer need ratify U.S. positions.
Brazil refused to adhere to the Nuclear Nonproliferation Treaty, and even backed away from unconditional support of a hemispheric nuclear-free zone. Brazil asserted sovereignty over a 200-mile offshore coastal limit, and claimed extensive economic rights there. Its active search for economic association with the newly liberated African states outweighed loyalties to Portugal and other former colonial powers. Even the commercial possibilities of Eastern Europe were explored.
The 1973 oil crisis was the decisive turning point. It exposed a Brazilian vulnerability-Brazil was the largest oil importer in the Third World-that was at odds with the perceptions of emergent power. In its time of troubles, Brazil found little consolation in its relationship with the United States. The help that was forthcoming came from international financial markets. Indeed, the United States became an active antagonist in 1974 and 1975 in three respects: nuclear fuel, trade and human rights.
The U.S. decision in July 1974 no longer to guarantee processing of fuel for nuclear reactors then under construction by Westinghouse was a hard blow to a country seeking to expand its nuclear capacity as a substitute for high-priced oil. That the decision applied universally, because of limited U.S. capacity and potential domestic demands, did not help. On the contrary, it drove home the absence of a special relationship and the reality of continuing dependence.
During 1974 the United States also found Brazil at fault in a countervailing duty action brought by American shoe manufacturers. To compensate for export subsidies, Washington imposed a customs surcharge. The decision placed at risk the entire subsidy system-an important component in Brazil's new drive to export manufactured products. Brazil filed a formal diplomatic note of protest.
Finally, as human rights violations acquired wider public notice in 1975-evoking a determined effort in Brasília to regain control over local military authorities-the United States was drawn increasingly into an adversary position. Congressional interest pushed the State Department into a more active stance than it wished, but still less than the U.S. Embassy in Brasília counseled. Inevitably, the Brazilian military government was sensitive to external voices joining the rising internal criticism.
This more complex setting for the U.S.-Brazil relationship exposed new divisions in Brazil's own foreign policy. The Foreign Ministry was more independent and ideological in defining and defending Brazil's interests: it carried the day on energy policy and was a strong proponent of the nuclear agreement signed with West Germany in May 1975. The Finance Ministry was more accommodating and pragmatic: it held sway on economic matters and was more concerned with minimizing the level of countervailing duties than with the principles of a New International Economic Order.
As the relationship was buffeted by these obvious tensions, both the United States and Brazil sought to obscure the realities. The United States wishfully elevated Brazil to a new moderate Third World leadership role it no longer could or wanted to play in its weakened economic circumstances; Brazil's strategy was much more flexible and self-serving. Brazil pressed for an explicit "special relationship" in an effort to extract the utmost in its bilateral dealings with the United States, although appreciative that there was precious little to gain. Indeed, one of Foreign Minister Antônio Silveira's objectives was ratification of the more independent and flexible policy he was already following. The professions of a century-old friendship and recognition of Brazil's status as an emergent power in the 1976 memorandum of understanding concluded during then Secretary of State Henry Kissinger's visit were no longer to the point. It was Silveira, after all, who had warned only a few months before: "During the cold war, a rigid alignment with the leader of the Western bloc was required of the nations of the developing world that share the basic values of the West. An emergent power, with a wide range of interests in many fields, cannot allow rigid alignments, rooted in the past, to limit her action on the world stage."
The new Carter foreign policy initiatives magnified the latent tensions in the relationship. By giving priority to a global solution of issues like nuclear proliferation and to universal rules in international trade and other economic matters, the United States stripped the "special relationship" of even its limited function. At the same time, the Carter Administration's emphasis on an industrial-country cooperative economic recovery strategy pointedly excluded Brazil: emergent powers need not apply. A more aggressive human rights policy downgraded both the traditional economic and security bases of modern U.S.-Brazil relations, and directly threatened the military's role.
Quite apart from early tactical errors of the Carter team, there were thus accumulating substantive differences that finally cracked the facade of amicability. Neither a ceremonial presidential visit in 1978, nor the diplomatic success of a negotiated phaseout of export subsidies in exchange for exemption from countervailing duties, ever served to put the official relationship back together again.
Now another Administration has pledged to try. But its guiding principle of restoration of the status quo ante promises to be inadequate. Not only does it resurrect U.S. security concerns of the cold war at the expense of traditional Brazilian economic development objectives, it is also seemingly blind to the profound internal transition Brazil is undergoing. A policy for the 1980s cannot ignore the Brazil of the 1980s.
Brazil now faces a set of interlinked economic problems whose full gravity has finally become apparent. Part of the present difficulties can be traced to the quadrupling of oil prices at the end of 1973 and beginning of 1974 and, again, to the 1979 price shock and subsequent high international interest rates. But they are not the only factor. Internal distortions also derive from the "miracle" years: a lagging domestic agricultural supply; a rising and competitive participation of the public sector in investment; an inability to sustain individual profit margins through limited wage gains that, while positive, still were smaller than productivity increases and did not make significant inroads upon income inequality; and a very high elasticity of import demand that was financed by increasing reliance on foreign debt. In a favorable external market of cheap oil and cheap money, these problems were more easily confronted. After 1974, petroleum was no longer cheap. And after 1978, neither was money.
Brazil initially compensated for much greater oil costs by borrowing under relatively favorable terms in international capital markets. That, in conjunction with restrictive import limitations, helped to sustain a relatively high growth rate even as the world economy slowed. But this performance was achieved at the expense of increased external vulnerability as debt and attendant repayment obligations mounted. It had its counterpart in an increased internal vulnerability as larger public subsidies to the private sector and mounting state investment were financed by higher inflation.
The alternative of slower economic growth to restore balance was faced only sporadically. In both 1975 and 1977 industrial growth was checked by credit limitations imposed to cool inflationary pressures. Restrictive policies were soon abandoned. For one thing, no consensus existed on the need to go slow; many wanted to believe, and did, that the Brazilian economy (and grandeza) were only temporarily impeded. For another, God is Brazilian: the coffee frost contributed to export recovery in 1976 and improved terms of trade; massive capital flows were available in 1978. In both cases, the pressure to reduce growth because of external constraints was lessened. But in the last analysis, temporarily slow growth was also not an effective policy. It had a modest effect on inflation in the short run, and did little to influence the balance of payments. Stop-go was not an adequate substitute for a more fundamental realignment of the economy.
When Finance Minister Mário Henrique Simonsen once more advocated credit and fiscal restrictions in 1979 to remedy accelerating inflation and deteriorating external balances buffeted by a new oil price shock and rising interest rates, he was dismissed. Instead the government opted for the more optimistic prognosis of the architect of the economic miracle, Antonio Delfim Netto. Rapid economic growth could produce more for domestic and foreign markets, thus lowering inflation and putting the balance of payments into equilibrium. His unorthodox policies of cheap credit and firm government controls on exchange rates and internal price indexing to lower inflation produced no new miracle. In the new setting of domestic excess demand and of very large international indebtedness, economic growth was sustained but at the expense of a doubled inflation rate and a foreign-exchange liquidity crisis. As a consequence, Delfim, a convert to orthodoxy since late 1980, has opted for a severe recession. A continuing decline in industrial production occurred throughout 1981, and unemployment has mounted to a tangible concern, particularly in São Paulo and other industrialized centers.
Two central questions now dominate economic debate in Brazil. Will this short-term orthodox strategy of fiscal and monetary restriction prove more adequate, or enduring, than in the past? And what implications will the present crisis have for the style of Brazilian development for the rest of the decade?
Those who defend the government's current policies explain them as the only responsible option, and one that will work. As the President of the Central Bank, Carlos Langoni, put it at the annual World Bank/International Monetary Fund meetings in September 1981:
The fundamental problem is the combination, after 1978, of the new petroleum shock with the financial shock represented by the sharp increase in external interest rates in real terms. . . .
In that context the deceleration of the rhythm of growth, especially of the industrial sector, is inevitable and its intensity and duration will be conditioned to the capacity to overcome the external disequilibriums. . . .
Already the reversal of the trend toward deficits and increasing inflation is apparent, as well as deceleration of the pace of expansion of the foreign debt. . . .
The essential requirement is continuity and persistence.
Even many critics of the government's policies now accept the virtual inevitability of a slower growth of some kind. They are quick, however, to lay the blame on past mismanagement. The frequent, exaggerated and unfulfilled claims made by Delfim after taking office, and not the deficits in the balance of payments alone, contributed to a serious undermining of Brazilian creditworthiness in international capital markets by the end of 1980. Those markets play a crucial role because current account deficits of $10 to $15 billion must be financed annually, in addition to rollover of past debt. Despite a doubling of exports in three years, mounting debt service and oil imports together accounted for more than 100 percent of foreign exchange earnings last year. Loans are essential.
Credit markets have thus become harsh and decisive arbiters of the inadequacy of domestic policy. Spreads on Euromarket loans widened to about two and one-quarter percent in late 1980, up from about one percent at the end of 1979, and have only recently begun to recede. That did not tell the whole story. More financing was not in fact available at any price, and this reality forced Delfim to adopt a more conventional economic approach. This, then, is a recession fashioned in direct response to international creditors. And, as Business Week headlined in its October 26, 1981, issue: "Brazil's money pinch pleases the bankers."
The seeming evenhandedness of Wall Street to Reagan heterodoxy and to Brazilian illiquidity is little solace to those in Brazil preoccupied with the social tensions and economic costs inherent in a steep decline. Above all, it is not as clear to critics as to government technocrats that the recession will have established the basis for effective recovery.
There is evidence of short-term improvement at the end of 1981. Exports show a $1.2-billion surplus over imports, primarily because non-oil imports have gone down by more than 15 percent and exports have shown a record third year of growth. Nonetheless, the current-account deficit, because of rising interest rates, did not register an equivalent gain. Inflation has begun to decelerate from its three-digit rate and ended the year at 95 percent. Spreads in international markets have perhaps peaked, and Citibank's Walter Wriston optimistically predicted in a visit to Brasília last fall that the bankers will soon be on their way back. More than even these results, however, what counts in the new circumstances of international vulnerability is the commitment to orthodox policies. Already there are apprehensions that more rapid monetary expansion in recent months signals too expansive a policy, and that the 1981 gains will be sacrificed to election-year necessities. The autonomy of domestic policy remains partial.
It is not a situation that favors a constructive opposition. While it is easy to point out the high costs of current policies, and their modest benefits, the external vulnerability is real. It is even greater than official statistics on the debt reveal, since short-term loans and other devices have been used to avoid accounting for probably another six billion dollars in indebtedness over the last two years. This reality explains the central role that opposition leaders have accorded to renegotiation of the debt as the solution. In so advocating, they rely upon the preference of the international banking community, influenced by governments, for a major restructuring rather than a formal default that could shock the whole world financial credit structure. It is a doubtful approach. At best, the immediate burden might lessen, but at the price of foregoing the additional net capital inflow necessary to service past debt and finance imports. Renegotiations rarely give adequate room for maneuver, especially when private debt dominates.
I have proposed another, related way out of the present constraints. It is a large, medium-term International Monetary Fund loan at less than the current market rate to finance a continuing adjustment to new oil prices, interest rates and trade realities. The logic of such a proposal has three components. First, it satisfies creditors by following established procedures rather than appealing to extraordinary rescheduling. Second, it improves the mix of private and public loans, and lowers average interest costs. Third, the Fund's requirement of a formal stabilization plan would have the advantage of forcing a short- and medium-term strategy where there is none today. Current measures have already produced a recession much more severe than intended, to some extent because an excess of zeal was required to persuade skeptical creditors of Brazil's sincerity.
While it may seem superfluous to pursue such an option now, after the recession has struck, this may be the right time-before a surge of new private loans and an exaggerated recovery that may prove temporary on account of new foreign exchange shortages to which Brazil will remain vulnerable for a number of years. Even with rapid export growth, imports will sooner than later keep pace, and projections indicate no sizable surplus or relief from the debt burden even by 1984. There is no deus ex machina of petroleum to rely upon, as in Mexico; and even there, as we have seen, it has not averted a major devaluation and restructuring of domestic policy. Particularly if the U.S. recession is prolonged, what Brazil gains in possibly more moderate interest rates will be partially cancelled out by the adverse impact on exports.
The government rejects both debt renegotiation and an approach to the International Monetary Fund, claiming that either would drive private lenders away and thereby reduce the vital import capacity on which Brazil continues to depend. In so doing, the government not only seeks to establish its own monopoly on good sense as an election approaches, but also to avoid the implicit confession of mismanagement associated with an appeal for outside help. The recession then becomes a badge of honor as the only sound response to circumstances beyond Brazil's control, and the government can defend its refusal to wreck the economy for the sake of winning elections.
These views on short-term economic policy correspond to perhaps even more fundamental differences in long-term perspective. The government is optimistic that rapid economic growth can be regained and that it is the best-and only-way to improve the well-being of the poor. The opposition, on the other hand, calls for structural reforms, attacks trickle-down as inadequate, and advocates a new development strategy that is more distribution-oriented.
Despite these continuing differences whose origins trace back to the 1950s, the current economic crisis has enforced a convergence that should not go unnoticed. On the one hand, the former faith of government supporters in international economic integration has profoundly lessened. On the other, the opposition increasingly recognizes the importance of a continuing export orientation as a necessary condition for greater autonomy.
This convergence adds up to a Brazilian foreign policy that is likely to be even more independent, and driven by economic objectives, than in recent years-whether the government maintains its present dominance or the opposition gains. When Assistant Secretary of State for Inter-American Affairs Thomas Enders, Federal Reserve Chairman Paul Volcker and Vice President George Bush recently visited Brazil in successive months last fall, it was Delfim Netto, and not just the political opposition, who lectured them about high U.S. interest rates. It was the same Delfim Netto who unilaterally terminated the arrangement to phase out export subsidies and reestablished them, "temporarily," earlier in the year. And it is the current government that has run an advertisement in Business Week stating: "Foreign policy has been deliberately shifted during recent years to a more independent line, aimed at diversifying Brazil's trade pattern. . . . Capitalizing on its 'non-aligned' image, Brazil has been particularly successful in breaking into the highly competitive world of arms sales."
While the state of the international economy will be a decisive factor in Brazil's performance, Brazil will be less inclined than ever to take on larger obligations within it. Rather, Brazil-needing oil, external capital and markets-will pursue a pragmatic and narrowly self-serving strategy that precludes a large role in North-South negotiations, or other multilateral avenues. Brazil sees itself less as a responsible emergent power and more as a victim in search of justifiable self-help.
Since 1974 Brazilian military leadership has sought to devise and implement an extrication strategy consistent with political stability. President Ernesto Geisel's "decompression" policy between 1974 and 1979 was conceived and managed by General Golbery do Couto e Silva, the éminence grise since 1964 of the military faction committed to a conservative, limited and managed democratization. Distensão, aptly named, a controlled "relaxation," was a response to the tensions inherited from the preceding Medici presidency. The successes of the economic miracle and of the eradication of guerrilla opposition had encouraged visions of a permanent, centralized, technocratic regime whose considerable authority would be subject only to the modest counterweight of civil society organized into formal and impotent political parties. This possibility conflicted with the constitutional ideal that had continued to find expression within important circles of the military. Golbery's delicate objective was to retain the substance of the post-1964 accomplishments and the scope for executive authority, while introducing more open procedures.
Decompression, however, was forced increasingly to contend with new and independent forms of civil response. The Church, initially a pillar of support for the regime in 1964, became converted to more vocal opposition to repression and human rights violations as they became more frequent after 1968. Intellectuals, and particularly lawyers, became more bold during the Geisel presidency and insisted that, in the absence of subversive opposition to the regime, censorship could be lifted and legal processes restored. Entrepreneurs joined in criticism of the arbitrariness of the government in executing economic policy: estaticização, state intervention, became the rallying cry of a conservative opposition based in São Paulo that found the technocracy overbearing and too powerful. Workers reacted to accelerating inflation by demanding larger wage gains and the right to organize. New labor leaders of a post-1964 generation emerged; the most prominent was Luis Inácio Silva, popularly known as Lula. He led the successful, albeit illegal, strike of the metallurgical workers' union in 1978.
Decompression thus became simultaneously a strategy against the military hard-liners and the perceived civil political opposition that might otherwise obtain a leading role. Tactics responded to the particular enemy that seemed most threatening at one or another time. Increased repression after the electoral defeat of the government in 1974 was followed in 1975 by dismissal of the commander of the Second Army, based in São Paulo, where violations had been the most open and defiant. The elections of 1978, conversely, were permitted to take place only under new rules that modified the political process by favoring the government. Earlier, in April 1977, dictatorial powers were invoked to close the congress in order to decree the new conditions. Authoritarianism-the continuing right to reformulate the rules-was exploited in the service of an eventual return to the rule of law. Indeed, Brazil's sharp response to the Carter Administration's nuclear nonproliferation and human rights policies was an integral part of this pattern of domestic political management.
Geisel, despite signs of restlessness in the military as civil society reasserted itself, persevered in his program of reform, even at the cost of dismissal of his War Minister. His personally chosen successor, President João Figueiredo, was selected because of his commitment to it. General Golbery was retained as chief civilian (sic) adviser to oversee the continuation of a process that had subtly transformed itself into abertura, a genuine opening to broader participation. The character of the regime has decisively changed. In recognition of the central importance of legal norms, Institutional Act No. 5, the basis for extraordinary powers decreed in December 1968, was repealed and the right of habeas corpus reestablished; judicial authority was accepted as an increasingly independent counterweight to the executive. In the second place, the rights to know and to criticize were conceded. The government abolished formal censorship of the press, if not of more popular media, and resigned itself to manifestations of popular dissent. Finally, it broadened the prospects for a civilian political process in which eventually new parties, and former popular leaders, including those banned from Brazil after 1964, might compete for real power.
Abertura has proved surprisingly resilient. The political opening has thus far survived the May 1, 1981, bomb explosion at Riocentro in which elements of the armed forces seemed clearly implicated, requiring a government cover-up. It has persisted after Golbery's unexpected forced resignation in August 1981 which initially provoked anticipations of a harder, military-imposed line. It has continued despite the heart attack of President Figueiredo in September 1981 and his absence from office until November. Indeed, the temporary succession of his civilian Vice President Aureliano Chaves, in accordance with constitutional procedures, was in marked contrast to the response in 1969 when President Costa e Silva suffered a stroke. Then a military junta assumed power and dispensed with a civilian vice president. Finally, abertura still continues despite the government's November package of rules that changed voting procedures to require party-line balloting in an attempt to build upon the strong edge in local organization which the government party enjoys. Polls continue to show the likelihood of opposition control of key states, including São Paulo, Rio de Janeiro, Pernambuco, Rio Grande do Sul, and perhaps others.
This transition is all the more notable in view of the persistent suggestion of incompatibility between economic crisis and direct elections. That incompatibility is assumed to exist because of the difficulty of conducting austere economic policies in a climate of broader popular mobilization and social unrest; because of the consequences of political uncertainty on the massive supply of foreign capital still required to equilibrate the balance of payments; and, not least, because of the increased likelihood that the opposition parties will inflict a major defeat on supporters of the government. Golbery's master plan was to have elections, but not to lose them. Democratic procedures were required to legitimize conservative values that the military regime no longer could guarantee, not to transfer power to a suspect opposition. The November package was an effort to do just that, making clear that the capacity to change the rules is one of the rules of the transition. What also motivated this decision was a distrust of the government's own party, and of enhanced congressional and gubernatorial authority. That comes much closer to doubting the premises of abertura.
While economic circumstances may yet be invoked to rationalize a more explicit intervention by elements in the military wary of ceding power, their contribution is more complicated. To some degree, the demise of the economic miracle, and with it the myth of technocratic omniscience, have accelerated the demands of civil society for direct participation. That broader popular involvement has progressively transformed the political opening from a paternal dispensation to a semiautonomous process whose interruption cannot be expected to receive unified support from the elites. The once presumed invincible alliance of interests among the state, foreign investors, and domestic producers is in disarray.
Moreover, the economic crisis has not unleashed either popular agitation or an irresponsible political response. The protest in Salvador in late August 1981, against the rise in transit fares, which degenerated into stoning and burning of buses, has not been generalized. It is more comparable with similar occasional incidents involving suburban trains serving Rio and São Paulo than as a manifestation of public disorder or leftist subversion. Opposition political speeches have not encouraged demonstrations or challenges to authority, any more than they have proposed radical policy alternatives. Rather, there has been an attempt to define a common ground with more progressive industrial leaders in alleviating the harshness of restrictive economic measures. At a practical level, wage settlements have been negotiated within limits defined by the present legislation without signs of increasing strike activity. In this sense adverse economic conditions may favor the transition by reducing the attraction for class-defined coalitions to form to dispute for an apparently large surplus.
Nor is it obvious the government will lose through elections as badly as some fear. The rule changes of November, and other new ones as necessary, afford a powerful lever. But, in addition, the very magnitude of the economic decline in 1981, and a continuing stability in the balance of payments-aided by declining real oil prices-are permitting more expansive policies in 1982 without discouraging new loans-at least not yet. Delfim's present orthodoxy is a temporary faith, imposed by necessity rather than by conviction. Even should the elections go badly, a recomposition of deputies could be counted on to provide a needed congressional majority for President Figueiredo. The effort to fuse the leading opposition parties has encountered resistance from within, and not merely from the government.
The political opening, and its precariousness, have direct implications for U.S. policies toward Brazil. For one thing, it forces a decision on how supportive of the transition we want to be, not only in our official contacts with Brazil, but in conversations with our own private sector. For another, it introduces a new Brazilian domestic sensitivity to any outside advocacy or enforcement of economic orthodoxy: in this election year that is tantamount to clear support for government policies and could introduce an anti-Americanism into opposition rhetoric that has thus far been largely absent. The criticism of multinational enterprises and their policies that has increased in recent months has nonetheless so far remained restrained in tone and substance. In the heat of a campaign, with foreign neutrality a potential issue, there could be reversion to more overt anti-American sentiment. Finally, the opening introduces the prospect of the influence of public opinion on Brazilian foreign policy that has largely been absent since 1964. Even when that policy has refused to follow U.S. leadership in recent years, the decisions were not rooted in the domestic politics of nationalism. They served the self-defined objectives of the regime and were even at times criticized by conservative supporters of the government. Now, new, and perhaps more hostile, voices may be raised.
Present U.S. policy toward Brazil is informed more by the principles underlying our foreign policy as a whole than by these far-reaching changes in Brazil. The most relevant of those principles include the following. First, the dominant concern of the United States is its strategic capability vis-à-vis the Soviet Union. Second, North-South issues have their solution in free trade and free flows of capital, both of which are to be exclusively determined by market forces. Third, political stability in Latin America not only contributes to faster economic growth by attracting private resources but is also necessary in order to deflect a new potential wave of Soviet- and Cuban-inspired subversion. Fourth, diplomacy is to concentrate on matters of bilateral concern, with only nominal support for multilateral procedures and even less for the substance of global issues like nuclear proliferation, the law of the sea, and the international economy.
From these axioms the specific corollaries of the Reagan Administration's policy toward Brazil can be deduced. Brazil is important to the United States not because its economic development requirements and size pose an opportunity and a need to devise rules to ease the potential tensions of interaction with the already industrialized countries; nor because its political opening is a general model to be encouraged for the Southern Cone of Latin America; nor because it is a central and potentially influential actor in a series of multilateral questions still outstanding, including those of North-South relations. Brazil is important, rather, as a potential ally against Cuba and the Soviet Union, as a bulwark of stability in a seemingly less tranquil Latin America, and as a developing country committed to a large role for the private sector and thus affording new opportunities for U.S. exports and investment.
Not surprisingly, principal priority has been attached to enlisting Brazil more actively in the East-West struggle. Assistant Secretary Enders, in the major speech of his visit to Brazil in August 1981, stressed four elements that tied the two countries together. One was concern for the destiny of other countries in the hemisphere, i.e., foreign intervention in the Caribbean Basin. Another was a common interest in preserving the security of the South Atlantic, i.e., the Soviet and Cuban involvement in Africa. The third was preoccupation with the Soviet invasion of Afghanistan and Soviet pressure on Poland. The fourth, the common challenge to promote world prosperity, was the single deviation from a conceptual framework designed in cold war terms. Vice President Bush's visit similarly emphasized a more energetic anti-Cuba, anti-Soviet collaboration.
The Pentagon would dearly hope to go even further. For it, an explicit South Atlantic Treaty Organization bringing together Brazil, Argentina and South Africa, and greater military cooperation, remain central objectives. The State Department is hard pressed to limit the pitch to just more active Brazilian diplomatic engagement.
The specific benefits Washington offers to Brazil are a closer, revitalized, bilateral special relationship. Frictions dating from the Carter years are to be eliminated. Most significant, the United States has pledged to again become a reliable supplier of nuclear material, still impermissable under current U.S. law which requires more rigorous inspection standards than Brazil accepts. In the interim, Washington has permitted Brazil to purchase fuel from Urenco (a consortium of German, Dutch and British companies) for its Angra I reactor without being subject to the multimillion-dollar fine provided in the original Westinghouse contract. Human rights, of course, no longer disturb the relationship, and had not done so even before the Reagan Administration's demonstrated downgrading of their priority. Publicly, the Administration expresses support for abertura, while privately being sensitive to the needs of the regime to retain control of the process. In the area of trade policy, the Administration did accept the new export subsidies imposed in 1981, in violation of the 1978 agreement to phase them out. In the end, only five products were required to pay compensating countervailing duties.
While these problems have been solved through bilateral efforts, the Reagan Administration has succeeded in creating new and more serious ones. Most important in practical terms is the adverse consequence of high interest rates. Since 1978 these rates have not only increased in nominal terms, but relative to inflation. Reaganomics, a mix of tight monetary policy, tax cuts and military spending increases, is necessarily a high real interest-rate policy. Because of the size of the Brazilian debt, a one-percentage point change in interest rates produces a $400- to $500-million effect on Brazil's balance of payments. That is about the impact of a two-dollar change in the price of oil per barrel. With one significant difference: instead of being able to cut back its use of higher priced money, Brazil is required to borrow even more to offset the larger deficit. This is by now an old story to U.S. officials: all our allies are upset. But one might have expected more sympathy for the plight of a Brazil experiencing a serious recession because of its international payments problems. Instead, Paul Volcker, during his trip in September 1981, apparently stressed the need for greater Brazilian discipline.
What the United States has offered to Brazil through its endorsement of free trade, and hence market access vital to its development prospects, it now threatens to take back by insisting on Brazil's graduation from special preferential benefits that its developing-country status has so far bestowed. In 1981 three Brazilian export categories were removed from the list of products eligible for tariff-free import under the generalized system of preferences. This executive decision-along with removal of 25 other categories primarily affecting Hong Kong, Taiwan and South Korea-was justified as necessary to forestall congressional action depriving these newly industrializing countries of preferences altogether. This bilateral determination affects Brazilian exports only marginally, but is a worrisome omen. In addition, Brazil has been singled out, along with European exporters, in the current steel complaint before the International Trade Commission. Potentially even more serious is a strong U.S. move to deprive Brazil (and other middle-income countries) of access to concessional loans from the World Bank on grounds of its increased per capita income. It could hardly come at a more unpropitious time.
The content of this policy cannot carry the burden of the revitalization of the relationship the Administration says it seeks. Brazil does not share the fundamental East-West perspective on global problems the United States now seeks to impose. Brazilian suspicion of détente because it feared the great powers together might seek to freeze power-as in the Nuclear Nonproliferation Treaty-does not translate into an automatic and virulent anti-Sovietism. The commercial mission to Moscow last year and failure to participate in the grain embargo showed otherwise. Brazil's continuing break in diplomatic relations with Cuba does not mean it will exert itself to remove Cuban troops from Angola, or to involve itself in Central America or the Caribbean, as the United States would like. Indeed, a Brazilian high-level commercial mission from the private sector pointedly visited Cuba in January to examine the possibility of resuming trade-even while Secretary of State Haig was railing against Cuban intervention as a proxy for the Soviet Union. Brazil's ties with Angola and black Africa are well established and assist growing exports. There is minimal concern for the safety of the South Atlantic, and no interest at all in a military treaty to defend the area.
Anti-Sovietism could work in 1964 in the flush of a military revolution to rid Brazil of a subversive threat, and because there was a large direct economic payoff in the form of development assistance. Neither factor is relevant now. Even the hard-line military preoccupied with the transition from authoritarianism perceive the threat as internal, not external. And they also understand that there is no longer any economic advantage to be gained. If the present regime has already abandoned such a line, how much less attractive will it be to popularly elected governments that are likely to be more authentically nationalist?
This lack of a common conceptual framework can only reinforce persistent Brazilian doubts about the help it is likely to get from the United States for the economic development objectives that remain foremost among its priorities. Indeed, at the moment, the United States looks more like an enemy than a friend.
Brazil will resist graduation by all means possible, especially now at this time of economic troubles. It will continue to insist that the magnitude of Brazilian poverty in the Northeast makes the average per capita income criterion spurious. Its significant private debt is already a form of graduation. By participating in the recycling of petrodollars, it has already shared more than proportionally in putting into equilibrium a world economy reeling from oil-price shocks.
Brazil will use policy interventions like subsidies to pursue its export goals and its continuing domestic import substitution. Unlike Chile, Brazil is not a convert to free enterprise. That very state involvement could provoke new and more serious tensions with Washington if a Reagan Administration were to begin to object to the elaborate and increasingly trade-related rules governing foreign investment in Brazil. The theme is not new: exports and imports are influenced not merely by direct subsidies and barriers, but also indirectly by performance requirements imposed on foreign subsidiaries. For this very reason, some in the United States have called for mechanisms within the General Agreement on Tariffs and Trade to govern foreign investment. Protectionist business and labor leaders here have already called for unilateral action against unfair trade. The issue is a delicate one, because it imposes further limits on national autonomy just when nationalist sentiments can be expected to increase.
The most salient deficiency of the present policy is to close off the only means of constructively taking on Brazil's economic development priority. Brazil no longer expects bilateral official assistance from the United States; or special trade preferences beyond those offered to developing countries as a whole; or favorable arrangements for the transfer of private technology. But instead of looking to the multilateral institutions to help substitute for its own limitations in dealing with larger developing countries, the United States stands in active opposition. The limited capacity of the multilateral banks forces Brazil back upon the mercy of a more expensive and shorter-term commercial market that will continue to constrain its domestic options. Insistence upon a cautious and ideological International Monetary Fund limits its capacity to ease the difficult adjustment burden faced by many developing countries in a less buoyant international economy. It discourages Brazil even from serious consideration of the option of going to the Fund. U.S. reluctance to accede to a World Bank energy facility, because it limits the role and bargaining strength of private oil companies, means less oil exploration in the developing countries that most need it. Such a U.S. posture weakening the multilateral institutions' capacity to respond to new conditions adds up to a substantial and direct cost for Brazil.
In its zeal to reconstruct and revitalize the special bilateral relationship through a shared perception of the security threat, the Reagan Administration thus misrepresents present reality. First, there is no such shared perception, nor is there likely to be, whether we successfully promote closer relationships with the Brazilian military or not. Economic development remains the prime Brazilian objective, and there we are insensitive and even in active opposition. Second, our policy is completely unresponsive to the significant changes now under way in Brazil, and their implications for this relationship. Third, Brazilian enthusiasm for closer bilateral relations was, and is, quite limited. Brazil has had a steady dose of lowered expectations throughout most of the postwar period. Symbolic visits are no longer an adequate substitute for substance, as President Figueiredo's scheduled May trip to Washington will merely underline.
In the last analysis, the Administration ignores the importance of the international economy, and the impact of the United States upon it, at its peril. As long as domestic imperatives dominate so exclusively, Washington cannot expect allies to accept the indirect, but costly, consequences happily. Brazil is an unwitting and unwilling participant in the ongoing experiment in supply-side economics. U.S. lack of interest in multilateral economic coordination and cooperation will turn out to detract from our bilateral relations with Brazil. In a Brazilian environment of disillusion with international integration, what is now largely rhetoric in North-South forums may eventually be transformed into reality.
In 1973, after a visit to Brazil, Secretary of State William P. Rogers commented, "We don't have any problems, really, at the moment, at all between Brazil and the United States." In short order, he was proven wrong. In 1982 Reagan Administration officials are similarly congratulating themselves. That interpretation may not hold up any better under the continuing strains of the international economy and of Brazilian economic and political transition. If it does, it will be despite, rather than because of, current U.S. policy directions.
1 For a fuller discussion, see my earlier "Flying Down to Rio: Perspectives on U.S.-Brazil Relations," Foreign Affairs, Winter 1978/79.