The Pandemic Depression
The Global Economy Will Never Be the Same
Brazil's penchant in this century for bursts of reformist zeal followed by relapses into political chaos and authoritarianism has kept alive the wry observation that "it is the country of tomorrow--and always will be." Through the years, the spasms of reform could claim specific accomplishments but never a full turnaround. Thus the potential of South America's largest country, occupying half the continent, remains to be realized. Its resources for greatness are plentiful: 155 million people, a $500 billion gross domestic product, the continent's biggest industrial infrastructure, and a productive agricultural sector. Brazil also has gigantic problems--20 percent of its population living in poverty, income inequality comparable to that of Nigeria and Egypt, deteriorating health care and education systems, a culture inured to an inflationary economy, and skyrocketing crime rates (so high in Rio de Janeiro that the army has been called out to combat crime and disorder).
Foremost, Brazil needs a sustained period of low inflation and steady growth, accompanied by social and infrastructure development. These goals are at the heart of the reformist government headed by Fernando Henrique Cardoso. The new president is a 63-year-old sociologist who served as a senator and finance minister before his effective anti-inflation plan propelled him to a landslide victory in elections last October. In office since January, Cardoso is being called the most honest and best prepared president of Brazil in more than a generation. His cabinet also gets high marks for experience and competence.
Cardoso is a former Marxist intellectual whose thinking has evolved from socialism to his current approach, which couples liberal, market-based economics with strong antipoverty measures. He has a natural cordiality and quiet inner confidence that complement his belief that coalition-forging and negotiated solutions can surmount Brazil's fragmented politics. Given the dominance in Brazil's National Congress of regional bosses and advocates of a state-centered economy, Cardoso's pace of reform is a deliberate one.
In recent months, delays and compromises have weakened the president's strong public support, some of which was based on unrealistic expectations. Cardoso's ability to sustain broad-based backing may determine whether Brazil turns the corner for good this time. Political paralysis and renewed inflation have left previous reform efforts to founder amid disillusionment. Too often, military coups followed.
Because Brazil represents half the population and GDP of South America, its fate is profoundly consequential to other Latin American nations. A permanent turn to democracy and liberal economics would alter the geopolitics and better the economic prospects of the entire hemisphere. In April at the Presidential Palace in Brasília, Cardoso discussed the role of Brazil and the process of reform.
LEADER OF THE PACK
JH: In this century Brazil has experienced several periods of military government, the last time for 21 years until 1985. How strong is democracy now? Can it withstand some political disappointments and economic setbacks?
FHC: Of all the changes--the turn toward liberal economics, the more positive attitude about the United States--the most important change in Brazil and Latin America is the implantation of freedom and democracy. Real democracy is not just formal and institutional but societal, and that is what has developed in Brazil. We have a dynamic civil society. There is an enormous number of new organizations in Brazilian life, and they all speak up and criticize, most of all the press. Government acts are always under the close scrutiny of the press, which may sometimes irritate, but that is fine. Scrutiny is good because it is impossible for Brazilian leaders to do what other leaders in the region occasionally did--disguise the real situation.
As for the military, you know I was in exile during several of the years they ruled. That is the past. Today the military is playing a constructive role in open-mindedly discussing national objectives.
JH: The traditional left in Latin American politics, one based on socialist thinking, is dormant if not dead. How will its constituency be politically represented?
FHC: Leftist politicians were virtually excluded from the political life of Latin America under authoritarian rule. It was easy then to identify the left with the desire for change. The left was an important voice in the broader movement for the restoration of the rule of law. This situation has changed, even though some of the ideas of the left remain. If the goal of a socialist regime is forgotten, the notion of a strong state as the main instrument of development is still alive. Perhaps this is what explains why the left is now a major force among public civil servants and has developed corporate interests in several areas of the state.
So, paradoxically, its line of action has conservative elements that manifest themselves more clearly in an attitude of open reaction against any reform leading to the reduction of the size of the state or its presence in the economy. The left does not take into account that those reforms are needed and supported by the vast majority of the Brazilian people.
JH: Looking outward, what is your assessment of the condition of Latin America, particularly your Southern Cone neighbors, wh0 are central to your trade strategy?
FHC: After the painful "lost decade" of the 1980s, during which per capita income remained stagnant in the region, I believe that, as a whole, South America has been doing well in the 1990s. It is today in good shape. Economic reforms were undertaken in practically all countries that integrated their economies more deeply into the global markets, stabilized their currencies, and ultimately laid the ground for sustained growth.
Economic performance and progress in advancing reform have been different among countries in the region. Mercosur [common market] members--Argentina, Brazil, Paraguay, and Uruguay--are experiencing, as a group, probably the highest growth rates in the region. Trade flows among them have expanded as commitments on tariff reductions are gradually implemented. Progress in other countries is also noteworthy. To give you only two examples, Chile and Colombia have posted strong and steady growth rates for a number of years.
As for the crisis surrounding Mexico's devaluation of the peso, I think its adverse impact on the region will be overcome. In fact, its impact has been largely indirect, insofar as it has temporarily reduced capital inflows into Latin America. Even countries in which the impact was more direct, in which the reduction of capital inflows could have had a destabilizing effect, are demonstrating the political will necessary to address the challenge in a decisive manner. It is always important to differentiate the real economic situation, which is good almost everywhere in the region, from the financial movements, which have to do more with investors' psychology and swings in public confidence. Countries in the region have had to adapt to this new circumstance of lower capital inflows from abroad while going ahead with their stabilization efforts and reform processes.
JH: Despite its strategic size and resources, Brazil has been viewed as a relatively passive leader within its region. Is that changing? Is Brazil prepared to be more assertive?
FHC: Certainly regarding economic integration efforts, there is no doubt. My first presidential visits were to Argentina and Chile, and I am traveling to Bolivia, Colombia, and Venezuela. Brazil has excellent relations with its neighbors. We view them as partners with whom we resolve issues and set directions through negotiations. The diplomatic way is a Brazilian heritage and will remain at the heart of our role on the continent. However, I will employ diplomacy vigorously and with urgency when necessary. That is why I acted directly to help resolve the recent border conflict between Ecuador and Peru. Maintaining Latin America as a peace zone gives the continent an enormous advantage. The key equation goes as follows: Brazil is a country of great regional importance but without hegemonic aspirations.
JH: Has the crisis of investor confidence surrounding the devaluation of the Mexican peso adversely affected the prospects of the Mercosur common market among Brazil, Argentina, Uruguay, and Paraguay?
FHC: No, no. We continue to move forward. Inter-nation trade within Mercosur has multiplied by five in four years, reaching $10 billion. And commerce between Brazil and Chile has increased enormously, to about $1.5 billion. Soon Chile will have associate status in Mercosur, and I am looking forward to Chilean capitalists participating in Brazilian privatization.
JH: Would you then rather not see Chile join NAFTA, the North American Free Trade Agreement?
FHC: Chile is a complementary economy to the United States. It can integrate both northward through NAFTA and regionally through Mercosur. I would welcome that.
JH: And how does Brazil view NAFTA?
FHC: Brazil is a global trader, and it is important for us to keep this profile. Maintaining important trade flows with different regions of the world is less risky than relying on a single trading partner. Brazil is thus a country interested in strengthening the world trade system.
We see integration schemes as playing an important role in expanding world trade flows even further. They complement rather than substitute for international rules such as those of the World Trade Organization. While Mercosur is our first priority as far as economic integration is concerned, hemispheric integration is a long-term goal set at the Miami Summit of the Americas in December 1994. For hemispheric integration to happen, NAFTA and Mercosur--which are the largest trade agreements in the hemisphere--must be brought together. This is a challenge we will be faced with in the coming years. I am sure we will be successful.
JH: How long before there is a hemispheric free trade arrangement?
FHC: Ten years or more, as agreed upon in Miami. After what happened in Mexico, the expected time frame may have to change.
AN UNENCUMBERED PARTNERSHIP
JH: Do you think that having different priorities and timetables concerning trade arrangements in the hemisphere eventually will put Brazil in conflict with the United States?
FHC: Maybe in competition, but not in conflict. In the emerging global economy, we are not in business in opposition to NAFTA or to eventual integration into a hemispheric free trade association. In fact, the United States can be an ally if protectionism were to crop up in Europe or elsewhere. Thus it is not enough for Brazil to look at European and Asian countries. That is why I applaud the decisions taken at the hemispheric summit in Miami. I am convinced that in the future we will have to amplify our system of trade in the whole hemisphere. Brazil is not afraid. It is competitive in terms of agriculture, in terms of industry.
JH: On a broader scale, some analysts are predicting that if Brazil successfully modernizes its economics and politics, thereby increasing its strength and confidence, old and new tensions with the United States will flare up.
FHC: We are now in a completely new stage in our relations with the United States. For instance, in the past a Brazilian president going north to meet with the U.S. president would be blamed by the Brazilian people. Suspicion and resentment of the United States were common here and throughout Latin America. Now my visiting an American president is politically popular all over the country. The two countries may have differences in one case or another but they don't add up to major problems.
JH: Let us take two cases which are the sources of some friction: stronger intellectual property rights, which America wants from Brazil, and more access to technology, which Brazil wants from America.
FHC: I made an enormous effort to get an intellectual property rights bill passed by the Congress when I was foreign minister and then when I was finance minister. As the new president, I am still trying to get a vote. Patent protection is linked to getting freer transmission of technology from foreign companies. We need such outside investment because domestically we are behind in what should be put into science and technology and relevant training.
As for the U.S. government, it remains sensitive, overly so in my opinion, to giving access in such areas as missile technology. We have no interest in such technology because of its war-fighting capabilities but rather because this is the vanguard of science and technology. It is a legitimate interest of Brazil that should not be a cause for concern. Brazil has already made it clear that it is willing to participate in the existing international regimes, such as the Missile Technology Control Regime, limiting this kind of technology to peaceful purposes alone. This is an area in which cooperation between Brazil and the United States would be natural and fruitful for both countries.
JH: So you see a relationship that is cordial, marked by differences but not great problems, and that still maintains a certain distance from U.S. policy?
FHC: It is right for Brazil to play a more active role internationally. So we don't want to discuss with America just Brazil, the United States, or South America. We want to discuss also what is happening in the Middle East, Africa, and Europe. We believe a change is due in the United Nations Security Council. Brazil is ready for the responsibilities of a permanent member seat, and we have confidence that other countries believe Brazil is ready to play this role.
JH: As a large, interracial society that includes among its challenges those of social equity, do you see a special role for Brazil as a champion of the interests of southern states versus northern ones around the globe?
FHC: I think that the end of the Cold War has deeply changed for the better the atmosphere in international relations. There is a relatively broad convergence of values in the international community. Countries both in the North and in the South have come to regard democracy and the protection of human rights, as well as a free-market economy, as the best way to ensure development for their citizens. Contrary to the widespread perception of the 1960s and 1970s, I do not see the interests of the North and South as conflicting or as preventing cooperation. I see rather a commonality of interests based on the values that won the Cold War. Brazil's priority in foreign policy is precisely to advance those values, to strengthen the positive elements in the international scene that have emerged with the end of the ideological confrontation. Let us not replace the East-West tensions with a North-South conflict without justification. There are, obviously, differences between North and South, and, recognizing such differences, Brazil has been acting as a consensus builder in many international conferences, such as those on the environment [Rio de Janeiro, 1992] and human rights [Vienna, 1993].
JH: A recent commentary observed that the United States to this day devotes more attention to small countries in the Caribbean and Central America than to Brazil. Has the United States increased its high-level attention to Brazil as much as, for example, Great Britain has?
FHC: It is beginning to, and I hope that my visit to the United States has accelerated the process. I am confident that what I call an unencumbered partnership is possible, one that unites Brazil and the United States in pursuit of a more open international system that focuses on development and makes people its central concern.
COPING WITH POVERTY
JH: Concerning development and people, is there an inherent contradiction between the strict measures required to achieve your macroeconomic goal of economic stabilization and the chronic social problem of widespread poverty? Among developing countries, Brazil has one of the higher standard-of-living disparities between rich and poor, and the gap is growing.
FHC: To cope with the poverty problem, we need more precise statistics that help us understand the number of poor, where they are located, and why they are poor. Then remedies can be efficiently targeted. Addressing the subject broadly, we know the first need is more employment. That requires investment, particularly since industrial employment isn't absorbing population [growth], here or elsewhere in the world. Even in agriculture, which in Brazil is characterized by big farms under the capitalist umbrella, we need agrarian reform, not only in the land tenure system but also in modernizing production techniques such as expanded irrigation programs. They, however, require more sophisticated labor, and that means training poor people.
So we must expand primary education by shifting government expenditures that now go predominantly to higher education. Along with funds from the federal government to municipalities and states, which have the constitutional responsibility for primary education, we need to transmit incentives, rules, and goals. We are organizing a television system to train teachers, seeking support from private foundations, and searching out techniques in the United States and Canada.
Second, we are focusing on health services, specifically on lowering infant mortality through educating parents in child care, and on improving sanitation, sewage, and water treatment. We have targeted the 500 poorest municipalities for pilot programs of coordinated efforts on educational, nutritional, and infrastructure problems. This is the Comunidade Solidaria program.
All of this will take some time. So, to my mind, it is important to place immediate and sustained attention on expanding economic growth and on containing inflation--which is the cruelest tax on the poor. This approach automatically produces some favorable results in alleviating poverty. Then, second, the kind of social programs I have described are necessary because we cannot expect the market to solve the problem of poverty. The market solves problems for people already integrated into the economic order.
JH: Brazil's population is approximately 55 percent Caucasian and 35 percent mixed blood, with smaller minorities of African, Japanese, and Chinese descent. Brazil has thought of itself as less race-conscious than other mixed societies. How do you define the issue of race in the context of contemporary conditions--the growth of civil society, the introduction of market economics, the enduring poverty problem?
FHC: Few countries have truly multiracial societies. Brazil is one of them. Though race relations may not have been so conflicting an issue in Brazil as in other countries, this does not mean we are less conscious of the question. There is no purely racial violence in Brazil. But slavery left its marks in the shaping of our society and has caused descendants of slaves to be among the poorer segments of the Brazilian people. This situation is being redressed.
Race relations is a subject that is becoming more important on the international agenda to the extent that xenophobia is on the rise in some countries, particularly in Europe. This is intolerable, and it shows that countries with more ethnically homogeneous societies are having enormous difficulties coping with the inflow of people with different racial backgrounds. Multiracial societies such as Brazil's and America's do not witness outbursts of racial violence directed against foreigners. They have a history of dealing with race relations, though in different ways. They are thus better prepared to absorb into their populations persons of various ethnic origins. I also think that racial diversity is a driving force of economic progress. By providing for social mobility among and within each community, multiracial societies may create wealth out of ethnic variety.
JH: At this point, do you have to race the clock to make structural reforms to sustain the low-inflation success of your monetary policy? Or can you follow a more deliberate pace, attempting some reforms, holding off on others, and accepting significant compromises along the way?
FHC: Political choices have to be faced, and that has resulted in focusing initially on the economic reforms. Changes in the international situation also require adjustments. Since becoming president, I have had to address the potential consequences of the Mexican devaluation crisis. I think we responded successfully with rules to keep exports expanding. They were at record levels in the first three months of 1995.
JH: Among the post-Mexico measures, you allowed a downward adjustment of the new Brazilian currency, the real, in relation to the dollar. Do you think it likely that additional adjustments will be necessary?
FHC: No. I believe the real can be kept within the current band for some time.
JH: In the post-Mexican environment, is it time for some controls on speculative capital, say, a prohibition on withdrawal of capital before six months have elapsed?
FHC: Not yet. Brazil is in a very sound position, with more than $30 billion in reserves. We have to pay some attention, but capital controls are not our idea. Despite this year's events, such as Mexico, direct investment is increasing. The automobile industry is investing heavily in Brazil. Every week, I see people announcing they are investing more.
Our current challenge is one of affluence, of controlling an expanding economy. Brazil had records in January, February, and March in terms of production and consumption. So we have to raise the interest rate to control consumption.
JH: On the import side, you raised tariffs on 109 consumer durables, up to 70 percent on autos and home appliances. How long will they last?
FHC: Imports were expanding too quickly, giving us a balance-of-trade problem and draining reserves. Trade went from a surplus in 1994 to a growing deficit in the first three months of 1995. The tariffs could come down in less than a year. It depends on the needs of the stabilization program. We have to look at the exchange rate, imports, exports, the interest rate, the monetary basis. In the first three months of this year, inflation was at or below 1.5 percent, compared to 50 percent monthly before the introduction of the new currency.
JH: Observers of the current Brazilian Congress note the buildup of united opposition, the tensions among your coalition partners, and the lack of popular mobilization. They doubt that the Congress will agree to sufficient constitutional change to allow the federal government to recentralize control over funds it now must dispense to the states with little accountability for how they are spent. Isn't the achievement of this goal critical to your ability to control inflation over the next several years?
FHC: One of the problems created by the 1988 constitution is that, while providing for a great transfer of resources from the federal to the state and municipal levels, it has not transferred likewise the duties and responsibilities that are financed by those resources. As a result, the federal government is overburdened with tasks for which previously existing resources are now in the hands of state or municipal authorities.
Finding a satisfactory solution to the problem is central to balancing the budget on a sustained basis and hence to the preservation of the ongoing stabilization program. I am dealing with it in two ways. First, wherever it is possible, I am transferring responsibilities to the other levels of government [states and municipalities]. Second, I am discussing with congressmen and representatives of the two other spheres of government a constitutional amendment that will eventually allow for a balance of tasks and resources across the three levels of government in Brazil. All political forces are aware of the importance of the questions. They are taking a positive attitude in our talks.
JH: Some foreign investors are complaining that your program to privatize state-controlled businesses is not proceeding swiftly enough.
FHC: The previous government, in which I was finance minister, stopped the privatization program during its final months when I was campaigning for the presidency. Procedurally it takes six months to restart the program. That was done in January, and results are coming, for example, in privatization of electricity distribution systems. Just this week, the minister of planning, who is in charge of the privatization program, announced that we are about to sell 17 companies of the federal government this year. He also has disclosed the federal government's intention to sell the big electric power generating companies. Also, I have signed a decree allowing foreign capital to buy failing banks controlled by different states in Brazil. This is an important first-time event.
JH: In key areas like oil, natural gas, and telecommunications, what besides minority foreign investment in state monopolies will be allowed?
FHC: The government's idea is not limited to partnerships. For example, take telecommunications. I propose selling some telecommunications companies and opening the market for new technologies. The implication that foreign investment will be limited to minority holdings is coming from the minister of communications. Please remember, he is not the owner of the privatization program.
These changes require amendments to the constitution, a very difficult step. How the Congress decides will set the model for privatization.
JH: Is privatization one of the areas where you have sufficient support in the Congress to get the lion's share of what you want?
FHC: Our overall program requires five or six amendments to the constitution. There will be different hearings, different commission deliberations, and two votes in the House and two in the Senate. It is an enormous effort and will take three, four, or five months. We expect House and commission approval of the measures opening up [natural] gas and telecommunications and giving foreign companies equal status with Brazilian firms. And, to my surprise, the political parties asked me to send the bill proposing competition in oil exploration, transportation, and refining. One of the amendments, opening sea and coastal navigation, is much more difficult because of rules protecting labor.
JH: The Congress, on which a lot rides, is hard to predict given what you call "unorganized majority support" for your administration. There are so many political parties, many of them only factions, given to clientism and greatly influenced by local and regional bosses.
FHC: You are right. Brazilian parties are not like European parties. They are not ideologically oriented, although they believe otherwise. Brazilian parties are interest-oriented. Every organization in Brazilian society has a representative in Congress. Legislators represent good interests--I am not criticizing them--but fragmented ones. So it is very difficult to understand how the Congress will vote, especially if one takes into account that we have a new Congress in Brazil, of which around 70 percent are new members.
Yes, we have too many parties, and there is a lack of values to expand the internal cohesion of parties. Electoral changes are needed, which will require still further constitutional transformation. It is a political matter, and I prefer not to do it. Rather, I am asking the Congress to initiate those reforms.
JH: Can you therefore have confidence of sufficient strength to achieve your legislative aims?
FHC: A new government and a new Congress have to assess each other, what power each has, what pressures each will resist. You know, it is a power game, but basically oriented by what the national interests are. At this stage, I am confident about measures to open the economy. I have much more difficulty in another area: reforming our expensive state social security system. We need common rules for retirement benefits in place of special rules that give some categories of pensioners earlier retirement and more money than others. In Brazil, there is a culture that it is good to be retired. But with life expectancy increasing, we have to extend the period of work. It is very difficult, but we cannot afford retirement payments that stretch over 30 years and more. And we must place restrictions on pension funds created by state companies.
To some extent, the controversy and resistance surrounding social security reform is good because it attracts attention and leaves room for the economic reforms.
JH: Without the right social security reforms, can you produce the necessary incentives to increase domestic savings, which in real terms are about the same as they were in 1960? Aren't greater savings a key to sustained economic growth, even more so than exports?
FHC: Indeed, a higher domestic savings rate is key to increasing investment and therefore to promoting growth on a sustained basis. Chile's success story, for example, is to a large extent the result of a substantial increase in savings, now around 25 percent of GDP, made possible by a private social security system that is doing very well.
In the past few years the investment rate in Brazil--which depends on the level of savings--was below 15 percent, too little for the country's needs. With the stabilization brought about by the real, it has increased to around 17 percent. We are looking at ways of providing for greater stimulus for savers, including private social security schemes.
JH: Stabilizing an economy that historically has suffered from chronic inflation is immensely difficult. When can sound judgments be made about your efforts?
FHC: I believe you should take the long view. Judge us by the accomplishments of four years, not four months.