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