NYT: Brazilians Find a Political Cost for I.M.F. Help

Michael Pollak mpollak at panix.com
Mon Aug 12 10:32:11 PDT 2002


New York Times August 11, 2002

Brazilians Find a Political Cost for I.M.F. Help

By LARRY ROHTER

R IO DE JANEIRO, Aug. 10 Brazil and other Latin American governments

have followed Washington down the free-market path, only to find they

are now losing control over their economies.

The immediate consequences are most visible here in Brazil, which is

in the midst of an important national election. Brazil, Latin

America's largest country, has just engaged a $30 billion lifeline

from the International Monetary Fund, but one that imposes strict

policies on the next government. There is a strong chance that it will

be a left-leaning one that promises to improve the lives of the poor

who were left behind in the economic experimentation.

"Don't try to strangle us," President Fernando Henrique Cardoso, who

leaves office in January, told market speculators who have sent

Brazil's currency plummeting in recent weeks on fears of a government

default. He said the loan gave Brazil vital oxygen, and showed that

the monetary fund played an important role in developing economies.

But to some Brazilians, it is the fund that could do the strangling.

The bailout announced this week is described as the most far-reaching

package since the Clinton administration and the I.M.F. came to the

rescue of Mexico in 1995, a successful intervention that was paid out

almost all at once. But Brazil's comes with unusual strings, and it

thrusts the lending agency into the uncomfortable position of being in

the middle of Brazil's democratic decisions.

That is because $24 billion of the loan would be delivered next year

only if the new government met certain budgetary targets.

"This agreement is an extremely shrewd and subtle piece of political

engineering," said Gilberto Dupas, director of the international

studies program at the University of São Paulo. "No candidate is going

to want to be responsible for a brutal reversal of expectations" that

would come from not receiving financing from the fund.

After eight years of free-market orthodoxy that has produced only

modest growth, Brazil has a strong chance of turning in another

direction. A poll released Thursday shows the government's candidate

slipping and two leftist opposition candidates Luiz Inácio da Silva,

known as Lula, of the Workers' Party and Ciro Gomes of the Popular

Socialist Party with more than 30 percent each. They are possibly

heading for a second-round runoff in October.

With so large an amount of money at stake, both Mr. da Silva and Mr.

Gomes have reluctantly endorsed the loan deal.

The bailout was intended to stanch a sudden crisis of confidence,

manifested by a plummeting currency, investor flight and the prospect

of a new government defaulting on $250 billion in public debt.

Such fears have vastly increased the regional tumult that began with

Argentina's financial crisis late last year. The crisis propelled the

monetary fund to act, with the reluctant backing of the Bush

administration, which had earlier opposed new money for Latin American

countries.

In the extreme circumstances, the I.M.F. promised the $30 billion,

nearly twice the amount that market analysts had expected.

"This is going to contribute to reducing the financial panic that was

threatening to make the crisis worse," José Antonio Ocampo, director

of the United Nations' Economic Commission for Latin America, said of

the monetary fund's package. But he said the effects might be short-

lived, and the "consequences for economic growth are limited."

Brazil's new money is to be doled out over 15 months and requires

whatever government takes power on Jan. 1 to maintain a budget surplus

of 3.75 percent through 2005.

But both of the leading candidates are chafing at what they perceive

as an intrusion on Brazil's sovereignty and on their ability to

fulfill campaign promises. Guido Mantega, Mr. da Silva's chief

economic adviser, complained that the I.M.F. was trying to confine a

Workers' Party government "in a plaster cast."

"This limits the capacity for social investment we plan to make," Mr.

Mantega said. "If we reduce interest rates and the primary surplus is

maintained until 2005, the effort to reheat the economy will be in

vain."

The penalties for noncompliance are equally clear. Brazilians need

only look next door at Argentina, which has been bogged down for

months in futile negotiations to restore its line of credit with the

fund.

"When it comes time for the rest of the money to be dispersed in

Brazil, because they have quarterly targets and reviews, the first

time that Lula misses they can tell him he's not getting any more

money," said Walter Molano, a market analyst with BCP Securities.

"That's what they did to Argentina last year, saying there would be no

waiver, and they will do the same to the next administration in

Brazil."

As goes Brazil, so goes the rest of the continent. The slide of the

currency here, which lost nearly 20 percent of its value last month,

was reflected in similar dips in Colombia and Chile and helped fuel a

banking crisis in Uruguay. That was resolved only when the Bush

administration agreed to an emergency $1.5 billion bridge loan last

weekend.

The standard advice of the fund to clients facing crises has been to

insist on increased austerity, arguing that fiscal discipline is a

necessary precondition to prosperity. But that translates into

enormous suffering for millions of people, strengthens the appeal of

left-wing critics of free-market economies and weakens governments

that have made the changes Washington is urging.

"It's easy at the top to say cut back on expenditures, but it is hard

when you are a politician and the unemployment rate is 18 percent,"

said Joseph E. Stiglitz, winner of the Nobel Prize in Economics in

2001.

Latin America "is not like the United States where you have a social

safety net," he added. "Firing a worker has enormous economic and

social consequences."

From 1980 to 2000, per capita incomes in Latin America grew at only

one-tenth the rate of the previous two decades, when governments

followed more interventionist and protectionist policies.

In a report that came out early this month, the Economic Commission

for Latin America forecast no immediate improvement, saying that Latin

America's economy will actually contract nearly 1 percent this year,

largely because of the implosion of Argentina's economy.

Despite its reluctant approval of bailouts in Brazil and Uruguay this

month, the Bush administration continues to be baffled as to a

long-term solution to that problem.

Asked during a news conference in Argentina this week why Latin

Americans were increasingly rejecting the magic recipe of

privatization, lower tariffs and increased foreign investment,

Treasury Secretary Paul H. O'Neill replied, "I have no idea." When it

was suggested to him that such policies were not yielding the expected

results, he said, "I don't know of another plausible answer, do you?"

Mr. O'Neill appeared to offer free trade as the panacea for the

region's current difficulties, referring repeatedly to Mr. Bush's

approval of trade promotion legislation this week and the

opportunities that offers. But Latin American officials consider that

formula as simplistic as many of Mr. O'Neill's earlier declarations

about the region.

"We're in so extreme a situation here right now that the banks won't

even give us export credits," even when the banks are not at risk, a

senior Argentine official said after Mr. O'Neill's departure.

"If all of our economies fall apart and have to rely on an I.M.F. life

support system to survive," he said, "there's not going to be anyone

around for you to trade with."

Copyright 2002 The New York Times Company



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