By Walden Bello*
On January 13 -- after losing more than $40 billion in foreign reserves trying to offset currency pressures caused by capital flight and in spite of the IMF’s $41.5 billion ‘support package’ -- Brazil finally abandoned its fixed exchange rate and allowed the real to float. Since then the currency has devalued by more than 30 per cent marking the end of President Cardoso’s Real Plan – an economic package of fixed exchange and high interest rates designed to bring down inflation, attract foreign investment and spur economic growth. Brazil has the world’s eighth largest economy: what happens next is important not only for Brazilians, but for Asia and the global economy.
Economics professor Cristovam Buarque is the former governor of Brasilia, a leader of the centre-left Workers Party and a potential candidate in the next presidential election. He is visiting Southeast Asia to learn more about Asia’s economic crisis and to promote his ideas to exchange debt for education scholarships. In Bangkok, Professor Buarque spoke to Walden Bello about Brazil’s economic and political turmoils.
WB: Do you think the floating of the real was the right policy for Brazil to take?
CB: There was no other alternative, and it was a terrible one. It’s like someone on top of a burning building, faced with the choice of whether or not to jump or not. I think that the problem in Brazil now is what will happen to the monetary stability. In many other countries, like those in Southeast Asia, devaluation provokes inflation because of the higher prices of imported goods. The problem in Brazil doesn’t come from our economic structure, since we are not that dependent on imports. It’s the psychology of hyper-inflation. We don’t know how much this inflation will be. It’s this fear that when it begins, we could lose control. Will we stop at the seven, eight, or ten per cent? We don’t know. But on the other hand, if we had kept the real at the fixed rate, our foreign reserves would have been run down, and this would have created tremendous problems.
WB. So would it have been better to build in a mechanism like gradual depreciation of the real over time, as people like Jeffrey Sachs have claimed?
CB. Yes, but not only that. Since at the beginning, in July 1994, they overvalued the real. In fact, it was about 50 per cent overvalued. That was a mistake. There should have been a gradual process of devaluation since then.
WB: It is said that the motivation for fixing the value of the real was not only fear of inflation but to attract foreign investment to come into Brazil.
CB: I don’t know if this was the motivation. But what it did do was to attract speculative investment. The money that came in was more for speculative investment. What attracts this money to come in or forces it to flee is confidence in the value of the real…But if the intention was to attract this type of investment, then it was misguided, since the impact of this speculative capital was not good for Brazil. We need real investments, not this type. And I have to say that with an economy the size of Brazil, with 160 million people and over 18 hundred billion dollars of GDP the investment that we need must come from inside the country. There is no way that we will be able to raise the money from the outside to keep the economy going. Suppose we say that we need 20 per cent of GDP to invest. This would come to over $160 billion. There is no savings in the world available to fill this need. We need to increase out internal savings. We need to finance development with our own means. Foreign investment, when it is not for speculation, goes for the production of the goods that will benefit only the elite of the country, goods like high quality automobiles. You need production for mass consumption. I proposed the idea of growth from the base. Foreign investment is part of a strategy of growth from the top.
WB: A lot of President [Fernando Henrique] Cardoso’s popularity and legitimacy rested on the real plan? What will happen now? Are things irreversible?
CB: The problem with Cardoso is that his leadership isn’t inspiring because it lacks a larger vision. I said to him during the start of his term that you have to have such a vision, and here are some of its elements: First, deal with land problem, push land reform. Then deal with the social issue by focusing on bettering health and education. Third propose the reform of the international system. Push for a new international system, for a new United Nations, instead of trying to make Brazil a partner of the First World. Will he do this? I am in the opposition, but initially I had a lot of trust in him. Now I have lost confidence. His popularity will never again be the same.
WB: What happened to Cardoso. He was a man of the left, the man who helped create dependency theory. Why has he run out of ideas?
CB: I think that Cardoso was one of those who was disappointed in socialism, who was taken by surprise by the fall of the Berlin Wall. Because of this, he was seduced by new ideas. And he thought that the new path was to bring Brazil into the First World. That was wrong. I think that the left committed mistakes, and it was important to recognise them, but what went wrong was not the principles of the left. What we need to do is to keep our principles but to adapt our objectives
WB: In retrospect, would it have been better had the Workers’ Party candidate won the recent elections? Did your party have a program to deal with the crisis
CB: I have to say it would be a lot better had we won. But at the same time, I must say that we needed to provide confidence and hope, and here we lacked clear ideas or clear propositions. That’s why I advised our candidate Lula that, should he win, he should not change the finance minister and the head of the Central Bank for a hundred days. This would give us time to take the pulse of the situation and organise the change.
WB: In the short term, what should be policy of the government? Should it ask your party to become part of the government?
CB: I am against incorporating people from our party into the government. Discuss with us, yes. I am in favour of a dialogue. I think the government needs to convince merchants, the supermarket owners, the industrialists and other well organised groups that they should all make an effort, that they should not speculate, that they should not raise prices higher than necessary. They are interested in the success of Cardoso. From an economic point of view, there’s nothing more the government can do. They’ve already enacted the necessary reforms, like the slashing of social security benefits.
WB: Are in you favour of social security reform?
CB: My party voted against any change. Personally, I can understand the need for reform though. We have a lot of privilege in the social security system. We have a lot of people who are poor in it and a lot of people with a very high wage. We have people who are being retired under 50. For instance, the men in the university have to work only 30 years and the women 25 years. And when they retire, they will make more money!
WB: Should Brazil now break with the IMF?
CB: I think we should not cut completely. We have to be pragmatic. We should propose changes, like making employment and social welfare central in the IMF package. But we cannot accept just any conditions. Besides, the IMF’s support is not as decisive for us as it was for Russia.
WB: If the situation in Brazil deteriorates further, do you think the situation in the rest of Latin America will also worsen?
CB: No doubt about that. Part of this is greater integration among us. In Argentina, 30 per cent of their production comes to Brazil. If they don’t devalue, they will have unemployment problems bigger than they have now.
* Dr Walden Bello is co-director of Focus on the Global South, a policy analysis and research organisation associated with the Chulalongkorn University Social Research Institute. He is also the author of a new book A Siamese Tragedy: Development and Disintegration in Modern Thailand, to be released in February.