Friday, June 12, 2009
When the ‘magic moment’ turned to nightmare for BRAZIL...
When the ‘magic moment’ turned to nightmare....
President Lula fancied his country’s economy was ‘decoupled’ from the rest of the world’s. But when the economic crisis reached Brazil this March, it came on a tidal wave. Half a million people are now in poverty or extreme poverty
In May 2008 the US economy had begun its decline, but in Brazil things still looked fine. President Luiz Inácio Lula da Silva reckoned that his country was experiencing a “magic moment” (1): after a 5.67% rise in GDP in 2007, government morale was high. What was going on elsewhere didn’t matter; growth would continue “at its present rate for the next 15 to 20 years” (2).
By October 2008 the international financial system was collapsing. But Brazil still wasn’t worried. “Up there [in the US] the crisis is a veritable tsunami. If it arrives here it will only be a little wave, not even big enough to surf on,” the president said reassuringly in a speech on 4 October. A few months later, Luciano Coutinho, head of Brazil’s national development bank (BNDES), added: “Decoupling has, yes, taken place,” (3), alluding to the theory that the growth of countries on the periphery of the world capitalist system had become independent of the shocks felt at its centre.
Then came March 2009. When the wave did arrive, it brought a storm with it. The Bradesco bank’s estimates of GDP growth plummeted from more than 4% in June 2008 to 2.5% in December – and then to -0.3% this April. The rating agency Morgan Stanley has even predicted a 1.5% contraction in the Brazilian economy, which would be its biggest setback since 1948 (4).
In the last quarter of 2008, Brazil’s industrial output dropped by 19%. Eight hundred thousand workers lost their jobs between October and January (nearly 1% of the workforce), and that doesn’t even begin to take account of job losses in the informal economy, which employs around 40% of Brazilian workers. Half a million Brazilians have found themselves back in poverty or extreme poverty. The “magical moment” has turned into a nightmare from which Brazil will not emerge, according to its president in a speech on 6 April, until “we ask God for the crisis to disappear from Europe, the US and Japan”. More soberly, the Financial Times concluded on 11 March that Brazil’s economic results meant an end to the debate about its immunity from global contagion. The myth of decoupling was over.
None of this is surprising, though, given how much has been done in the past 15 years to increase the country’s dependence on foreign capital. One of the most significant developments has been the acceleration of foreign access to Brazil’s financial markets. This is all the more remarkable as it was made possible by sociologist-turned-president Fernando Henrique Cardoso, whose work aimed to “build a path to socialism” (5) and the former trade unionist, President Lula.
Something Marx never imagined
In the late 1960s, Cardoso, who studied at the EHESS (Ecole des hautes études en sciences sociales) in Paris, rejected the idea that a country on the periphery could develop by means of foreign capital without increasing its dependence: “The system of domination reappears as an ‘internal’ force through the social practices of local groups and classes which try to promote foreign interests” (6). Twenty years later, first as finance minister (1993-4) and then president (1995-2002), he discovered that the world had changed. He told Mais! magazine in 1996: “We have something that Marx never imagined… Capital has very quickly become internationalised and today it has become abundant. Some countries are able to derive profit from this situation. Brazil is one of them”.
Influenced by what he considered the successful economic stabilisation of Mexico and Argentina achieved through neoliberal policies, Cardoso made opening up Brazil to foreign capital the centrepiece of his own plans. The aim was no longer to promote autonomous development by substituting local production for imports. It was to facilitate imports so that they reinvigorated competition and gave a spur to productivity. Cardoso set about changing Brazil in order to woo investors. Tariff barriers came down, exchange controls were freed up and the constitution revised to enable an ambitious programme of privatisations to go through.
Imports leapt by 52.7% between the first and second half of 1994. As a result, many Brazilian businesses closed or had to go into partnership with foreign companies, which accounted for 70% of Brazilian mergers and acquisitions between 1995 and 1999. Somewhat amazed by the brazenness of this denationalisation programme, the staunchly pro-liberalisation Veja magazine observed that “the history of capitalism has rarely seen the transfer of control on such a scale in such a short period” (7).
In 2000 Rubens Ricupero, secretary general of the United Nations Conference on Trade and Development, assessed the effects of economies opening up to foreign capital: “The commercial objectives of the multinationals and the objectives of the host economies do not necessarily coincide” (8). “Not necessarily” is something of an understatement.
Under Cardoso, Brazil deindustrialised and the official unemployment rate almost doubled to reach 9%. Meanwhile headline GDP didn’t get above 1%. Opening up his country’s borders and relaxing exchange controls came at a price: Brazil’s balance of payments (value of exports minus the value of imports) fell from $10.5bn in 1994 to -$3.5bn just one year later. It had been in the black since 1980 but it was to remain in the red until 2000.
Brazil became a dependent nation since, as Cardoso himself put it, “to overcome our deficits we need a constant influx of foreign capital” (9). Efforts to attract that capital redoubled in spite of its harmful effect on the economy. And yet deficits weren’t brought under control.
Investors in Brazil are like investors everywhere: they want as significant a return on their investment as possible and they want to be able to repatriate those profits. Where foreign investment is insufficient to staunch the outflow of capital, foreign debt goes up; in Brazil’s case it rose from $150bn in 1994 to $250bn in 2002.
In a manner reminiscent of the US financier Bernie Madoff, who recently showed that the old pyramid fraud was alive and well, Brazil came up with a “Ponzi scheme”, by which yesterday’s debts are paid off today with borrowing which fuels tomorrow’s debts. The difference was that while Madoff only swindled the rich, the Brazilian government got a whole nation to cough up, in particular through stratospheric interest rates and a raft of austerity measures.
Perhaps this is unsurprising; when an economy is organised for the benefit of speculators, they tend to get preferential treatment. Brazil’s many high net-worth individuals quickly cottoned on to the fact that, with the interest rate so high, buying up debt securities was an enticing prospect. Many businesses have given up on productive investment. Development Cardoso-style became a synonym for financial development. Domestic debt rose by 900% during his presidency, while investment stagnated and became more and more dependent on foreign money, especially in the field of technology.
Cardoso was not the first to want to modernise Brazil, but he had the greatest impact. In 1998, The Economist reported approvingly that Cardoso had achieved in a little less than four years nearly as much as Margaret Thatcher had done in 12. His main opponent in Brazil, Lula da Silva, was less impressed; to him Cardoso was the “executioner of the Brazilian economy”.
Idol of investors
The election of Lula da Silva, a former “red” trade unionist, to the presidency in 2002 caused alarm. “Foreign investors had always wondered how Brazil would behave under a president from the left,” remembers Emilio Odebrecht, heir to the eponymous industrial empire. Lula had, after all, insisted during the 1998 presidential campaign (which he lost): “If it comes to paying interest or filling the stomachs of the people, I’m on the side of the people” (10). In the end though, according to Odebrecht, Silva’s election was “the best thing that could have happened to this country” (11). To the surprise of activists in his own party, once he was president, Lula soon became the idol of the investors and the financial markets.
At the time of his election, the Brazilian economy was dependent on a further loan from the IMF. As the Wall Street Journal explained on 14 August 2002, “The IMF loan is structured to induce the leftwing presidential frontrunners, Luis Inácio Lula da Silva and Ciro Gomes, to continue the conservative economic policies of the outgoing president, Fernando Henrique Cardoso.”
Was Lula already convinced that it was “impossible to govern without the support of the oligarchs” (12)? Perhaps. It’s certainly the case that he readily accepted governing on their behalf. Javier Santiso, an economist at the OECD, was delighted: “The transfer of power between Cardoso and Lula was a lesson in political elegance” (13). Those voters who had been hoping for a break with the past were doubtless less impressed by this display of refinement.
In his speeches, Lula continued to defend the idea of economic sovereignty. (What did it matter that it was precisely due to his country’s economic dependence that it was able to take such advantage of a favourable international economic situation?) If capital was pouring in, it showed Brazil was “becoming its own boss”.
But you can’t change a system and at the same time keep milking it. Brazilian exports grew at an average annual rate of 20% in 2003-6, temporarily resolving the balance of payments problem. But those exports were stimulated by a new wave of direct foreign investments, which went from $10bn in 2003 (about 2% of GDP) to the record level of $45bn in 2008 (or 3.5% of GDP). In other words, these exports came at the cost of even deeper penetration of the Brazilian economy by foreign capital.
You need to govern for all and not just for the poor, was Lula’s advice to his Bolivian counterpart Evo Morales on 16 January this year. It’s a recommendation he has taken to heart himself. And if the whiff of prosperity that the country has enjoyed has brought some relief for the working classes – thanks to social programmes that are mainly based on handouts – it has transformed into a veritable avalanche of opulence for the speculators.
In 2007, for example, the inflow of foreign currency linked to the export boom inflated the value of the Brazilian real by around 20% relative to the dollar, while at the same time domestic debt securities enjoyed an annual interest rate of 13%. Foreign investors (or Brazilians who had borrowed dollars abroad at relatively low interest rates) therefore benefited from a return on investment of more than 30% at the end of the year. It’s hardly surprising that internal debt reached 160bn reais in January 2009 (over $680bn) or three times the country’s currency reserves, which the president boasts of as a sign of Brazil’s economic independence. In this arena all that has been achieved is further lining the pockets of the 20,000 Brazilian families who hold 80% of debt securities. Servicing those debts eats up 30% of the federal budget. Less than 5% of that budget meanwhile goes on health and 2.5% on education.
When Lula accepted the status quo on coming to power, he also accepted its vulnerability. As Cardoso himself admitted: “If billions of dollars can enter Brazil, then they can also leave it” (14). In fact, in times of crisis, the periphery goes from a situation of dependence with regard to the centre to a state of total subjugation in view of its need of liquidity. And if currency movements can’t be depended upon to deliver in terms of development, then massive outflows can be relied on to weaken a country’s economy. Therein lies the paradox of dependence: you lose when the dollars come in and you lose again when they go out.
Balance of payments sieve
In the space of a few months, the collapse of the international financial system transformed the Brazilian balance of payments into a sieve through which money poured. Take the commercial balance: it has been declining since 2006 – the value of the real has meant that imports have been growing at a faster rate than exports – and this January it recorded its first deficit in 93 months. There’s no real sign of recovery in sight since the IMF predicts an 11% fall in world trade in 2009. In conditions such as these, it becomes more difficult for Brazil to import the equipment on which its own output depends.
Repatriation of profits and dividends abroad rose to nearly $34bn in 2008 (nearly 3% of GDP), an increase of 50% over the previous year, and of 500% compared to 2003. The current account balance also recorded its biggest deficit in 10 years in 2008: $28.3bn or 2.5% of GDP.
Today, Brazil stresses that it has international reserves of around $200bn to reassure investors worried about the risk of a balance of payments crisis. It was negative in the last quarter of 2008 for the first time since the end of 2005, but with a deficit that was seven times greater, at $21bn, or 1.85% of annual GDP. For the moment, Brazil believes it has a significant room for manoeuvre; its intervention rate was close to 11% this March. However, according to the economist Paulo Henrique Costa Mattos, current liabilities could reach $600bn (15).
With the majority of the world’s countries rushing to get themselves deeper into debt, there’s strong competition on the government bond market; rates will go up and the weight of debts will further press down on the balance of payments and on the shoulders of Brazilians.
There’s nothing new about the phenomenon of dependence. In 1969, the Chilean foreign minister Gabriel Valdés told President Nixon: “Private investment has meant and does mean for Latin America that the sums taken out of our continent are several times higher than those that are invested… In one word, we know that Latin America gives more than it receives.”
In the past, some governments (not only those on the left) defended autonomous development programmes based on import substitution. Such projects were criticised by those who thought that, as they would be run by national bourgeoisies, they were doomed to failure. For those critics there was only one course: social revolution. The sociologist Cardoso was one of them. So, too, was the unionist Lula da Silva.
If Silva had truly wanted to decouple the Brazilian economy when he came to power, he should perhaps have opted for something other than embracing his predecessor’s economic programme. By failing to do so, he exemplified the transformation of a party of the Latin American left, which the OECD economist Javier Santiso described approvingly in these terms: “Expressions such as ‘class struggle’, ‘planned economy’ and ‘strategies of import substitutions’ have been replaced by others such as ‘democratic consensus’, ‘institutional consolidation’, ‘economic deregulation’ and ‘openness to the free market’.”
And so that is Lula da Silva’s box of tricks for tackling Brazil’s current economic difficulties. The US is asked for more trade, and the Brazilians are asked to tighten their belts. And God is asked for a return to the economics of the centre.
What about the foreign investors and the creditors at home? Nothing or very little is being demanded of them. When asked recently about who bore responsibility for the present crisis, the Brazil’s president replied: “We didn’t create the problem but we are part of the solution” (16). One has to wonder....