Brazil: what kind of future?


Albert Fishlow (*)

Summary: Brazil is rapidly approaching its presidential election. There are key decisions that lie ahead, some more immediate and some in the farther future. Certain of these have been in the forefront, like the issues of macroeconomic policy; others have been more in the background, like the question of coping with globalization. Still others, like the underlying political structure of the next government, await determination. This paper focuses on these fundamental questions: future macroeconomic decisions; external trade agreements; and political execution of needed reforms. Perhaps as a consequence, it concludes with a conventional, but still absent, list of requirements. Brazil requires greater domestic savings, greater participation in world trade and better education if it is to advance to higher and continuing economic growth and better income distribution.

Keywords: Brazil: domestic economic policy, external economic options, political issues.

Introduction

Much of South America -and clearly Brazil- are at a decisive turning point. These countries have been following, not completely, but substantially, the rules of the new capitalist model that have gone into effect within little more than a decade. It is not that results have been absent. A great deal has been achieved: inflation rates are lower than they have been in the last 50 years; exports have expanded, although less regularly and substantially than had been hoped; extensive privatization has meant much greater provision, and efficiency, in telecommunications, energy, steel, and other sectors; and the state, while smaller, has become a more effective instrument..

But these consequences have not generally led on to the two missing, and principal, objectives of public policy. Economic growth has been minimal over the last decade, and income distribution, already the worst in the world, has not improved beyond the important gain associated with the end of rampant inflation. Indeed, in some recent cases in the region, notably Argentina, deterioration has been pronounced. In the much freer political climate that has emerged, these deficiencies have moved to the center of the stage. And the electoral response may come to provoke profound changes in policy over the next years.

There are two strikingly different hypotheses about this record of economic performance over the last decades.

One is that this process of dramatic change over the recent past has come very close to success, and in a surprisingly short period. After all, in many cases one is talking about a decade or so. In Chile, where changes extend over thirty years, results have been much more positive. Up to now, for the others, restraints have been imposed on the former style of doing business, but still lacking additional reforms are necessary if further advance is to be attained. These are particularly needed in the labor and financial markets, where advances have been more limited. Continuing reforms are essential, but significant further progress is then guaranteed.

The other view is that such neo-capitalist innovation, and increased dependence uponforeign provision of capital, has been the wrong move at the wrong time. Relying on the magic of the market is equivalent for Latin American countries to "Waiting for Godot." It will never happen. Better to undo inflation targeting and commitment to price stability, and to reassert tariff protection and state leadership as the means to re-establish the growth that has been absent for the last two decades. A more intellectual assessment emphasizes class structure as the key ingredient that explains lack of success: "Latin America has been characterized by the emergence of a dominant class and a middle sector concerned more with stability than with growth, and their power has not been effectively counterbalanced by an amalgamation of lower-class groups..." 1

We take up this central question of economic policy in somewhat modified, and hence more empirical form, in Part I. And we focus on the Brazilian case specifically. There, two other central issues impel attention.

One of these is the Free Trade Agreement of the Americas, and more generally, Brazil’s strategy of international economic engagement. When it comes to FTAA, Brazil’s position has been cautious, if not entirely contrary. Implicitly, there is the presumption of greater gain by the United States than the new regional trade partners. Whatever the results achieved by Mexico in the North American Free Trade Agreement, future benefits will be inevitably lesser - or even negative - because the US has become more protectionist. Evidence provided by the recently imposed tariffs on steel and subsidies inherent in the new farm bill adds practical and immediate support to this position. It strengthens the view favoring a modified return to the apparently successful import substitution strategies of the past.

Yet it pays to analyze this subject more deeply. I do so in Part II. For the countries of Mercosul, the previously agreed path of continuing integration into a common market has come under increasing pressure. First Brazilian devaluation, and now Argentine decline, have created great difficulty. Can Mercosul be a stimulus to Brazilian growth in the future? Also relevant are the continuing negotiations of Mercosul with the European Union, now designed to terminate before the conclusion of the FTAA talks. Finally, there is the simultaneity of discussions at the World Trade Organization, and the question of whether regional agreement potentially distracts -and detracts- from broader multilateral negotiation.

A last focus is political. In many countries of the region, established party structures have crumbled in recent years. In others, that process looks about to occur. In Brazil, new structures of party association have taken shape around the national election this time. The first impulse of post-military emergence of civil society was to restructure parties in their former way. But that soon became inadequate in the context of rapid alteration in economic policy. More recently, additional issues of drugs, corruption, and urban safety have emerged on top of slow economic advance. Inevitably, the whole question of the role of the International Monetary Fund has become equally central. I briefly comment on some of the political issues in Part III.
A final set of observations in Part IV concludes.

I. Domestic Economic Policy

Brazil grew at a rate of more than 6 percent between 1950 and 1980. Import substitution dominated that process in the decade of the 1950s; the 1960s slowed, followed by the rapid expansion between 1968-73; the rest of the 1970s saw slower expansion, fueled by debt-led growth, and powered by a newer wave of import substituting industrial activity in the intermediate and capital goods sectors.2

What undid the process was not the inefficiency of reliance on high levels of protection - the nominal rates frequently calculated were much exaggerated because of internal competition within the large national market. What ultimately created the problem was inadequate tax collection. As expenditures progressively rose -and subsidies were abundantly and increasingly employed- internal fiscal deficits expanded. These were financed by a combination of external resources, i.e., foreign debt, and the domestic inflation tax. The state rapidly expanded, not least, as a way of gaining access to the external financial market. That process led to debt-led debt.

The lost decade of the 1980s must really be divided. Its first part, through 1984, saw the negative impact of rising external interest rates and a reluctance by foreign banks to lend more, followed by the reality of a major halt in supply of credit after the initial 1982 Mexican default. Its second half saw the replacement of military rule by civil politics, a new Constitution, the disappointing failure of the Cruzado Plan in 1986, and Brazilian inability to pay its external obligations a single year later. That, in turn, meant 8 years of further trials and tribulations, never succeeding and producing clear cycles in economic activity before the introduction of the real in 1994.

By that time two things had become abundantly clear. First, at the heart of the inflationary problem was the public sector deficit. Note, it did not take much of a deficit to set off high rates of price increase because the willingness to finance the shortage was quite limited. That is the difference between Japan with its 10 percent primary deficit and Brazil with its 3+ percent surplus. Second, in order to discipline domestic prices, increased imports were necessary to play a fundamental role. Their potential competition was adequate to impede domestic prices from automatic upward adjustment.

Both of these characteristics stood at the center of the Real Plan in 1994. An initial internal surplus was insisted upon, and in conjunction with the significant resources obtained from extensive privatization over subsequent years -something like a $100 billion- enabled the government to lower inflation definitively despite major external shocks like the Asian crisis in 1997 and the events in Russia in 1998. But that initial discipline was not continuously applied, as it was also not in Mexico in 1994 and Argentina from the mid-1990s on. That meant increasing indebtedness and susceptibility to a disequilibrating process of ever higher interest rates, lower domestic growth and rising indebtedness.

That process is what led to the devaluation in early 1999 and the definitive, if belated, switch in anchor of the domestic price level from the foreign exchange rate to monetary and fiscal policy. That transformation meant another surge in interest rates, but their eventual reduction as inflation did not soar -as many had predicted- and Brazil successfully implemented its IMF approved effort to generate primary surpluses through increased taxes. The rebound in 2000 -Brazil expanded in that year by more than 4 percent- as fiscal discipline continued seemed to signal that continuing economic growth was not only possible, but probable.

That change in exchange rate policy also meant greater discipline in the external accounts. Brazil had required a large increase in imports in 1994 and 1995 to discipline the internal market as growth surged. That altered the balance of trade from a surplus to a deficit. Brazil also began to attract increasing quantities of foreign investment. That was a consequence both of the program of privatization as well as the increasing allure of the Brazilian market once again. This meant a rising deficit on current account that quickly rose above four percent and put additional pressure on interest rates to assure sufficient capital inflows. Despite this, the very large accumulated reserves began to shrink, resulting finally in the move to the IMF subsequent to the Russian crisis in August 1998. What was unusual about this decision was the extent to which it was openly undertaken in the final month of the election of 1998. Previously, and characteristically, Brazilian leaders, private and military, had regularly postponed such realities until after electoral contests had been held.

That devaluation in 1999 reflected itself, albeit more slowly than had been hoped, into increasing exports and control of the external deficit. Rising foreign direct investment was a direct result as well, aided by the simultaneous boom within the United States, itself experiencing a higher rate of growth and of productivity advance. This was the age of the “New Economy” and there was increasing belief that recession and stock market decline were matters of a distant past. As a new millennium dawned with computers still functioning around the globe, it seemed that the best still lay ahead.

Alas, reality intervened, and sooner than later. Brazil’s improved performance in 2000 began to run into serious difficulty in 2001. Three factors proved to be principal.

One was a slowdown in US performance that had already led the NBER to classify the economy in recession in the final quarter of 2000. The US had been outperforming the rest of the developed world, leading to appreciation of the dollar. Suddenly it did so no longer. That translated to lower global performance, and had an impact both upon world trade and foreign capital flows. This was well before September 11 occurred, with its further and immediate diminution in US growth.

Second was a domestic energy problem that suddenly burst into view. Brazil is dependent upon water for generating more than 90% of its energy. But years of diminished rainfall had reduced the available flow, leading inevitably to the imposition of national rationing as well as sudden efforts to enhance supply. Those new rules, as well as higher prices of petroleum, and the uncertainty of whether the next rainfall season would more than compensate, clearly had a negative and immediate impact on economic performance.

A third factor was the progressive and rapid meltdown of the Argentine economy during the year. Expansion of Mercosul had translated into something like 10% of Brazilian exports being directed to Argentina, lower than the peak of 17% in 1998. Slowdown there, as had continually been the case since 1999, stymied the automobile sector and other parts of the manufacturing sector that had directed their product northward. More relevant, however, was the effect on financial markets. As the return of Domingo Cavallo did not translate into rapid recovery -as he had boldly assured- the interest rate premium on Argentina began to rise, and Brazil’s premium remained highly correlated, at least until October, 2001. That meant the impossibility of using continuing domestic interest rate reductions to stimulate domestic activity;. Indeed, despite flagging growth, it was necessary to elevate rates early in the year and inhibit the barely begun recovery of 2000.

This combination of events inevitably proved to be unfortunate. Expansion fell off to 1.5 percent in 2001, while at the same time inflation exceeded the target initially established by the Central Bank by more than the 2 percent margin. Unemployment rose as well, and the final collapse of Argentina at year’s end added to woes. About the only solace one could take was the substantial strengthening of the exchange rate to 2.32 reais to the dollar at the end of December, which finally brought lesser concern about the rising ratio of net debt to GDP. Earlier, with exchange rates much weaker, and dollar guaranteed internal debt rising, that issue had temporarily surfaced as a major concern.

In mid-2002, as the economy has seemingly paused in its recovery from the poor performance a year ago, the debt-GDP ratio has again emerged as the central economic, and in a presidential election year, political, issue. Country risk has doubled, soaring beyond 1700 points. The rating agencies, all still smarting from their failures to react accurately to the Asian and Russian crises, have serially begun to downgrade Brazilian debt. Even the unexpected fifth victory of Brazil in the World Cup has been insufficient to bolster confidence. The Central Bank has been unable to continue to move interest rates down - earlier in the year, it had reduced the SELIC level twice by 25 points to 18.5%- as the real has soared to record levels close to 3.

And so, the two alternative hypotheses cited earlier now clearly surface in much more specific form. And because of the simultaneity of the electoral process, the Brazilian public has much larger scope to influence which will prevail.

One view -strongly held by the government and increasingly supported by its presidential candidate, Jose Serra- is that the continuation of credible economic policy will ultimately carry the day. Arminio Fraga, currently President of the Central Bank, has now clearly been indicated as Serra’s choice to continue in the event of a PSDB-PMDB victory. Fraga, in turn, has said that Brazilian real interest rates will fall from above their current 10% level to 5% within the next thirty months. In the interim, to sustain current policy, additional funds have been obtained once more from the IMF; the current primary surplus target has been increased to 3.75% of GDP; the Central Bank has now committed itself again to regular market intervention to strengthen the currency; reserve requirements have been increased for savings accounts; and even the IMF and US Treasury, after some initial hedging, have begun to reassure nervous investors that they stand in support of Brazil.

The other opinion, in its mildest form, is that rescheduling of the debt by the end of next year is a virtual certainty. And that is independent of who gets elected. That is what financial analysts - and the rating agencies - have been increasingly saying. Prices of the C-bond have consequently fallen to default-like levels. Cast more domestically and politically, it is clearly what the opposition candidate Ciro Gomes is explicitly advocating, and - despite Lula’s recent forthright assertion in favor of meeting all present government contractual commitments - what almost certainly would occur if the PT were to win. Given the recent shifting of internal debt claims to earlier maturities concentrated at the beginning of 2003, virtually any pause in future dollar inflows would almost assure that.

If the PT were to try to meet even the most modest hopes and passions of its supporters, there is little probability, or possibility, it would be able to continue current macroeconomic policy completely unchanged. That is the reason why the PT platform has been so delayed in coming forth. Changes would almost certainly involve greater immediate expenditures to help the poor and the unemployed, of which they are many, and so smaller federal surpluses; the end of inflation targeting and the acceptance of higher inflation rates; looser monetary policy, and lower interest rates; greater assistance and subsidies to national industry; and an acceptance of higher tariff rates. The inevitable consequence would be rapid depreciation in the exchange rate, making it impossible to service the debt.

Virtually all of the investment banks and rating agencies have produced their own calculations -not to mention the Central Bank- and consequent conclusions on one or the other side. For Standard & Poors, defending its reduction of grade for Brazil, the predicted results for the end of 2002 are already grim: an exchange rate of 3 reais to the dollar will mean a further increase of the debt ratio from a current 60% (higher than the official 56%) to something like 70%. At such a level, it will be virtually impossible to imagine simply carrying on. For one thing, interest rates -short of intervention- would have to remain extremely high. That would virtually compel a new government to seek relief.

For others, and that includes the majority of the investment banks, the situation comes out more positively. Their position hinges on the following key points. First, public debt growth since 1996 has been basically driven by recognition of hidden “skeletons” as well as by restructuring of the banking system, the devaluation -and real depreciation- occurring after 1999, and the substantial increases in the real interest rate in 1997 through the end of 1999. Second, the debt, unlike that of many other countries, is substantially internal, rather than external. Obligations abroad, which grew rapidly in the 1970’s and 1980’s, now represent in net terms less than a fifth of total debt. Of course, an additional -and growing- part of the domestic debt is indexed to the exchange rate. Together, then, dollar linked debt comes to about half the total outstanding of something like $250 billion. And third, and most crucial, under reasonable assumptions, and continuing fiscal discipline, the debt to GDP ratio tends to converge to a future declining path. This outcome tends to provide a more optimistic context.
First off, let us reproduce the simplest equation for the evolution of the debt to GDP ratio:

d = (1 + i)/(1 + g) d + ps + we / (1 + g) d
-1
-1

where d is the ratio of the debt to GDP; i is the rate of interest; g is the rate of growth; ps is the ratio of the primary surplus to GDP; w is the proportion of debt subject to correction according to the exchange rate; and e is the percentage change in the exchange rate. This formulation simplifies by imposing a weighted average of internal and external interest rates. It also is already in real terms, thereby ignoring the low rates of inflation. It therefore already implies changes in the nominal rate accompanying domestic inflation.

Then the change in the debt ratio is seen to be the result of four basic factors: the interest rate, which enters as a positive factor; the growth rate of nominal GDP, which enters as a negative factor; the size of the primary surplus as a percentage of GDP which must offset the difference between the i and g; and the extent of real devaluation weighted by the proportion of the internal debt so specified plus the share of the external debt.

Table 1 presents some illustrative calculations. Part A. makes abundantly clear that lower nominal rates of interest, higher rates of product growth and continued fiscal discipline can avert any need to reschedule, even with declines in the primary surplus. It is evident that Brazil cannot be expected long to continue its policy of compensating for a high external rate of interest by generating a fiscal surplus. Brazil is currently paying very high interest rates. A surplus should be continued, but turned to real investment and higher growth rather than to service the debt. Part B. of the table reveals an even happier side of the story that results from reduced interest rates that permit accelerating expansion and yet a decline in the debt ratio. That decline in turn enables fiscal policy to be less rigorous. Part C. illustrates a growing disequilibrium of continuing high interest rates, modest growth, declining fiscal surpluses and deterioration in the exchange rate.

A.
A Stabilizing Debt-Income Ratio

D/Y
i
g
D/Y-1
PS/Y
e
2002
.56
.11
.01
.53
3.75
.03
2003
.56
.10
.03
.56
3.50
.00
2004
.56
.09
.04
.56
3.00
.00
2005
.55
.08
.04
.56
3.00
.00

B.
An Improving Debt-Income Ratio

D/Y
i
g
D/Y-1
PS/Y
e
2002
.56
.11
.01
.53
3.75
.03
2003
.54
.09
.03
.56
3.75
-.01
2004
.52
.07
.04
.54
3.50
.00
2005
.50
.05
.05
.52
2.00
.00

C.
A Deteriorating Debt-Income Ratio

D/Y
i
g
D/Y-1
PS/Y
e
2002
.56
.11
.01
.53
3.75
.03
2003
.60
.11
.02
.56
2.50
.05
2004
.65
.11
.03
.60
2.00
.08
2005
.71
.11
.04
.65
0.00
.08

There are not dramatic differences among the assumptions underlying the various panels of Table 1. Yet the outcomes differ quite dramatically. Current policy is designed only to buy additional time until one of these alternatives begins to take shape Increasingly, with the difficulties of placing longer term debt, the market is re-defining the decision period to coincide with the election. The real decisions come post-October, and rapidly. Any new government, of whatever party, will not have much time to prove itself. That is why politics now trumps economics as the decisive element in the Brazilian future.

II. External Economic Options

President Fox of Mexico has recently visited Brazil and there, with President Cardoso, approved lower tariffs, reduced from an average of 8% to 1.1%, on an extensive list of 800 products. This first agreement between the two countries is designed to enhance bilateral commerce between the two countries, which to date remains quite modest. Yet, interestingly, the potentially most important product, automobiles, was left for a next day trip to Buenos Aires, where Mercosul was meeting. Ironically, that contentious matter remained unsolved and awaits further discussions between Brazil and Argentina.
That circumstance nicely illustrates the Brazilian problem. In contrast to the rapid expansion of trade enjoyed by Mexico subsequent to the approval of the North American Free Trade Agreement, where it has doubled the percentage participation of exports in GDP from 15% to more than 30%, Mercosul has become a source of decline. In place of the $100 billion in exports that were projected for Brazil five years ago, the total for 2002 will fall well short of $60 billion. In focusing upon expansion of Mercosul, and emphasizing the potential virtues of a growing South American market, as it did by holding the first meeting of leaders from that region in Brasilia, Brazil has tended to minimize the alternative of closer association with the United States. Even before the recent Farm Bill and the increased US protection extended to the steel sector have come to the fore -and rightly earned generalized condemnation- Brazil had reacted coolly to the possibility of negotiation of a Free Trade Area of the Americas. In Quebec, President Cardoso made plain his doubts, even after Brazil had managed to secure a five year period of further negotiation rather than the three years advocated by several other countries.

Such reluctance is not simply an irrational response. Brazil in the period from 1950 to 1980 managed one of the highest growth rates in the developing world, while retaining high levels of protection. It utilized import substitution and the internal market as the engine, rather than exports to the rapidly expanding world market as did the rising Asian countries. Thereafter, in the midst of stagnation in the 1980s and reform in the 1990s, while exports managed to advance more rapidly than they had in earlier decades, the share of trade was just too small to serve as a dynamic force.

It is too easy to be simply critical of the United States, and of Europe and Japan as well, about agricultural exports. There is no question but that severe restraint exists. There is also little doubt but that the Doha Round will eventually see a more convincing and continuous opening than characterized the results of the Uruguay Round. Brazil, and its Cairns allies, are likely to achieve real gains. Large sums are involved.

But such a market, over the longer term, is not where the great advances in international trade have occurred. Demand for agricultural products, even internationally, have grown more slowly than income. Other countries have also entered the market: look at the rise of Vietnam in the production of coffee. Over the last several decades, when international commerce has expanded at twice the rate of national product, it has been manufactures and services that have exhibited much greater dynamism, not sales of primary products.

These are the areas where Brazil’s comparative advantage will have to come to the fore. Embraer is a classic case of a former state firm that has successfully evolved into an international supplier of commercial aircraft. It is also a case where Brazilian appeal to the World Trade Organization has led to victory in contest with Canada and Bombardier. Some will argue that what this instance reveals is the importance of state subsidies and support. But that story of evolution from national provider to international competitor also involved implicit understanding of the gains from trade and comparative advantage: the firm is not only the single largest provider of foreign exchange in Brazil, but also one of the principal importers. These less expensive inputs enable the firm’s output to be on the technological frontier.

Industrial policy, such as was successfully employed in the case of Embraer, can however be exaggerated in effectiveness. There are equally many elaborate failures, both within the already developed countries, as well as the developing. The inability for so many years to develop a national computer sector in Brazil, despite subsidies and extensive protection, is certainly one of them. Much of European experience is equally negative.

Yet Brazil has a significant advantage. It is a late-comer, and thus need not, and should not, emphasize research and development at the margin, but rather the greater capacity to follow and to imitate. Private incentive to innovate is at the heart of success. To be sure, some initial public grants can be justified to assure the full transmission of information. But the bulk of Brazilian expenditure is better directed to massive improvement in the educational system, assuring that the quantity gains of the last years are sustained, and focusing upon deficiencies in quality. Much has been written on this subject. There is little need here to reiterate the importance of lesser public expenditure on higher education -where outlays per capita exceed those in the United Kingdom- and more on primary and secondary -where outlays per capita are of the order of one-tenth.
There is much scope for Brazilian external economic policy as serious attention returns to the FTAA, the EU and WTO. But the one direction especially favored by Itamaraty in recent years, extending Mercosul to a generalized free trade area in South America, is less attractive than it once was. In its initial years, trade growth was quite strong among the four countries committed in 1994 to a common market. This exchange soon peaked, and over the last five, expansion has waned. Negative growth in Argentina and Uruguay, and slower advance in Brazil did not help. More fundamentally, the major industry that gave initial force to Mercosul, the automobile industry, has been rendered virtually inoperable across country boundaries as a result of Brazilian devaluation in 1999. The current Argentine crisis has worsened matters even more.

Two directions for modifying Mercosul have been emphasized.

One consists of trying to move ahead to common macroeconomic policies and rules as soon as possible to establish certainty. With sure knowledge, investments might be undertaken to exploit national comparative advantage. This is the line that has apparently been followed. It has not seen great success. For neither Argentina nor Brazil, and to a lesser extent for Uruguay, do domestic objectives yield in the least to the economic interests of their neighbors. If it took Europe some 50 years to achieve its economic union, with American foreign aid and the constant threat of the Soviet Union -and much greater commercial interrelation- the prospects for short-term progress among the countries of Mercosul seem limited.

The second approach is to alter its form to a free trade union rather than a common market. This allows countries to impose individual levels of protection on third parties, while adhering to free trade internally. Much less intense cooperation is therefore required. This had increasingly become the position favored by Argentina, particularly as Cavallo pursued his efforts at restoring import substitution in his last months in power. But within Brazil, too, the current range of presidential candidates seem almost all to favor such a stand. Such a free trade union would simply ratify what one observes to be the actual policy of the members. External trade outside the union over the next several years is much more likely to be a dynamic source of demand.

That still leaves an elaborate set of stages in which Brazil can, and should, actively pursue freer exchange. In an ideal world, such negotiation would exclusively occur at the World Trade Organization. A single forum clearly affords a non-discriminatory basis for concessions. But the reality is different. Only under the pressure of potential advances occurring at diverse regional levels does it seem possible to arrive at an acceptable multilateral solution. The Doha Round, in turn, has already established important advances.

Three of special interest to Brazil can be briefly noted. First, there was recognition of the generalized problem of trade in agricultural products, where, ironically, the United States was a leading element among the three large industrial countries. Second, intellectual property rights -one of the major changes of the Uruguay Round, were recognized to have clear limits when they conflicted with national policies is such areas as health. AIDS was a specific example: why should countries pay such high prices for drugs when there were cheaper, but equal, alternatives. Already, prices have started to reflect the new standard. Third, national safeguards policies, like those of the United States, that had been grandfathered under previous international trade agreements, would be open for discussion. The limits on steel imports by the United States may, in fact, speed the consideration of the legitimacy of such exceptions.

A successful conclusion to the Doha Round will likely wait upon the competition from the variety of regional agreements that are being simultaneously pursued. That was certainly the experience in the Uruguay Round. This means that the discussions surrounding FTAA, as well as the pursuit of closer ties of Mercosul with the European Union, will continue to retain significance.. Indeed, from a Brazilian perspective, these alternative regional discussions provide an element of direct rivalry that cannot hurt. Note the recent decision of Chile to sign an agreement with the EU even as negotiations with the US have continued to lag. That circumstance can be expected to stimulate US efforts to achieve concurrence.

Brazil and the United States will co-chair the final set of negotiations for the FTAA. Clearly, for these even to be possible, the US Congress must pass the Trade Promotion Act that has, barely, continued to advance. Its first formulation, as amended both in the House and Senate, has been distasteful. This provision for “fast-track” approval had failed during the two Clinton terms. Now, even in the midst of potential success, the form of the legislation has succeeded in persuading much of the world that the United States does not value international trade. Brazil has been among the close, and disturbed, observers. A final bill has yet to emerge from the House and Senate conference committee. I suspect, and hope, that it will provide the needed scope for the United States to focus appropriately upon not only the regional negotiations, but the Doha Round as well.

Waiting in the wings is the European Union, whose discussions with Mercosul have moved ahead in the industrial area, but have badly lagged in the key agricultural area. The recent EU treaties with both Mexico and Chile illustrate the increasing importance of Spain as a major player within EU discussions of Latin America. Spain has eclipsed the US as a provider of capital to South America in recent years, including the flows to Brazil.

Its interests extend throughout the capital intensive sectors of energy, telecommunications, and finance especially. The large Spanish losses realized in Argentina, and currently reflected in Brazil, will not cause that interest to wane. It is of advantage to Brazil.

But all these negotiations, however complex and absorbing, and even fruitful, are not enough. Brazil must turn its attention definitively to international trade. If the United States could separate its concerns with international commerce from the State Department, Brazil surely can manage the same. Itamaraty, despite continuing advances in recent years, does not have the personnel nor structure to enable it to cover the variety of negotiations that are a practical necessity for any large country. Brazil, under the old structure, has been a smaller participant in world trade than it should be. Since 1950, as other countries have exploited freer trade, Brazil’s participation within world commerce has fallen. That process, if reversed, can add an important element of dynamism to the immediate future.

III. Politics

In Brazil as well as the international media, virtually all attention is now focused on the forthcoming presidential election in October. Inevitably that means close attention to the last set of polls, despite the fact that only roughly half the respondents are yet able to identify the current candidates. Even the surprising Brazilian victory in the World Cup during the month of July seemed to distract little attention from the forthcoming vote. The apparent possibility of victory for the Partido dos Trabalhadores in the choice of a successor to Fernando Henrique Cardoso has galvanized attention.

That is not the subject I wish to focus on, however. Much other, and more recent, commentary is available on that subject. I wish to turn attention instead to the more important, but less discussed, problem of post-election governance. Here there are two central questions. Will current party structure alter, as has rapidly occurred throughout Latin America, and with what consequences? Will such change enable Brazil, finally, to implement the next stage of necessary reforms to permit the more rapid growth and development that all have been awaiting for the last two decades?

Even a casual look at countries in the region persuades that the historic evolution of political parties has recently radically altered. The victory of the PAN in national elections in Mexico ended a continuous period of more than 70 years of PRI command. In Colombia, the traditional division between Liberals and Conservatives has fractured with the election of Alvaro Uribe. In Venezuela, the long time alternation between the left and the right has given way to Hugo Chavez and a new, independent force. In Argentina, the long time power of the Peronists and Radicales seems about to come to an end as a result of the economic crisis. In Bolivia, new strength has been recently exhibited in their national election by populist forces. And in Peru, after the resignation of Fujimori, the new government of Alejandro Toledo has been attaining new lows of popular support on a regular basis.

One element driving these diverse developments has clearly been increasing popular dissatisfaction with the slow pace of economic change. There has been no miracle of rapid expansion in Latin America that has occurred as a consequence of profound structural reform. One has finally embraced the market, but the consequence has been partial success at best. All that one sees is reduced inflation rates everywhere, and those important advances for the lower income group are once-for-all improvements rather than a source of repetitive redistribution. With economic growth limited, and much greater freedom of expression, NGOs have rapidly grown in number and importance everywhere.

Brazil is not absent from these pressures. A direct consequence has been the increasing national consolidation of political parties. That has been obviously helped along by the decision of the Electoral Court requiring state coalitions equivalent to national alliances. The successful attempt by the PT to incorporate the support of the much more conservative PL has had clear consequences in some states already. Despite a devolution of greater responsibility to states and localities, this has come with much stronger fiscal limitations. The old mechanism of state deficits financed by state banks in turn financed by the Central Bank has come to an end.

In turn, the division of responsibility among the branches of government has come into question. Congressional power has not been forceful and innovative. In Brazil, over recent years, the medida provisória has been the principal means of achieving necessary legislation. Over the Cardoso administration there have been more than 6000 actions, some reflecting continuity of the measures. Congress has acted slowly, until, and unless, the economic necessity of doing so has dominated, and even then, special favors from the executive have been a frequent incentive. In Brazil, moreover, Congress has not been exactly representative. All states have three senators independently of population. And a formula exists for representation in the Camera that leads to substantial excess weight for the Northeast relative to the Southeast. That is one of the reasons the PFL has continued to remain a party of considerable importance.

Confronting such a circumstance is hardly easy. In the United States it took action by the Supreme Court to require intra-state equality between rural and urban House representation. Presidential systems have their limitation. Legislation can take a long time. Brazil is no special case; the US itself establishes the general rule: only when legislation confronts an emergency can action proceed quickly: accounting reform and a new structure for domestic security quickly come to mind.

Political reform in Brazil has substantially stayed off the agenda, in part because the last several years have required continuing actions in the economic realm. But any serious effort to confront the future will require major changes. It is already in process, as we have seen, in the evolving relationship of national and state party structures. What inevitably will come next is a reduction in the number of individual parties. Such a step, little discussed at present, could provide a better basis for co-participation of the executive and legislature over the years of the future.

This then brings me to my second point. What about the post-election agenda, independently of who may win? It is clear that the winning candidate will not have a direct majority within the next Congress. So the regrouping discussed above is absolutely critical. Otherwise nothing will occur, especially now that the Congress has limited the application of medidas provisórias. Much of the difficulty occurs because of the need to have a minimum of 60 percent of the Congress in order to amend the Constitution of 1988, and that on a dual vote. Such discipline has not easily been achieved.

Interestingly, there is broad agreement about what has to be done over the next years, however differently the candidates and their supporters would prefer to portray their positions. Three broad areas can be specified.

First comes a need for reform of the revenue structure of the government. Mounting requirements for resources to assure fiscal surpluses have created a system that provides adequate receipts inefficiently. Something on the order of 40% of tax collection now consists of taxes on top of other taxes. This was something initially limited by the creation of the state value added system back in the 1960s. But needs for more revenues have continuously occurred, and it has been easier to acquire these by imposing new levies. It is time to stop, and to correct the system.

Equally, expenditures, despite the fiscal surplus, still require attention. In particular, social security reform has not yet been extended to the public sector. Growing deficits in the system will handicap future policy. Change almost occurred during the last government but ultimately failed.

Second, a more effective and more adequate system of social expenditure will have to be established. Brazil has done much over the past decade in increasing the public resources allocated to education. But more can, and will have to, be done. Although there is presently a clear correlation between family income and university attendance, large sums of public money are allocated to universities. Some of these resources are better directed to private and secondary schools, while private tuition payments, and financial assistance, begin to occur at the tertiary level. There is no question but that a large part of present inequality owes itself to the unskilled labor that has received limited and poor quality education. It will take time for the effects of current expenditure to alter this situation. There will always be continuing demands for other, and supposedly more urgent, expenditures. These pressures will have to be rejected. Otherwise, the continuity of high levels of inequality is assured, as it has been for generations.

Education is not the only priority. Precisely because of greater flexibility progressively achieved in the labor market, more resources will have to be applied to deal with those unemployed and under-employed. The state can no longer perform the function of simply expanding its direct employment as productivity increases in the rest of the economy and jobs diminish. Microenterprises can serve such a purpose, and in an efficient way. The basic point is that social policy -and state action- not only can be, but has to be, consistent with private initiative if long-term development is to occur.

Third, new forms of interaction between national, state and local levels of government will have to emerge. Much has occurred in recent years that is favorable. But much remains to be done to establish a truly effective and efficient federal system. Brasilia cannot and should not solve all problems, but it can make known the variety of ways in which different states and localities have chosen to budget their resources, to implement programs like Bolsa-Escola, and more generally to cope with the ultimate responsibilities of governance.

Substantial agreement about ends does not guarantee the implementation of the needed means. An ability to see the future in terms of years rather than days and months will prove essential when the new Congress and new executive come to office. Inevitably the immediate pressures will detract from efforts to establish these sorts of needed changes.. How well Brazil’s new leadership succeeds will be determined by its ability to resolve the pressing immediate macroeconomic problems while equally looking ahead.

IV. Conclusion

This essay has examined aspects of Brazil’s current macroeconomic, international and political opportunities. I conclude optimistically. The changes over the past decade have been dramatic and positive. It is easier to criticize the particular and ignore the general, particularly at election time.

Virtually everyone can agree that Brazil requires faster growth and a more equal income distribution. Differences inevitably emerge on how to achieve them. But those differences today are very much smaller than they were a decade ago. To appreciate the extent of the change, just refer back to the presidential campaign of 1988.

To achieve higher growth will require a greater degree of national savings. That is the secret of Asian success, and closer to home, the source of Chilean continued expansion over the last 15 years. There is no other way to avoid excessive reliance on foreign investment and inevitable, and unwanted, volatility imparted by international markets.

More rapid and continuing growth will also require a higher rate of growth of exports. Brazil will have to increase its level of exports from little more than 11% of gross national product to more than 15% over the next years. No miracle is required, nor a dependence on export-led development. Export-adequate expansion is what is needed. Ever larger earnings of foreign exchange will be consistent with increasing need for imports. Foreign investment will still be needed to achieve a continuing inflow of technological progress. Note that Brazil will still have a lesser degree of international opening than the United States.
That requirement for expanded trade is the reason for giving special attention to the variety of international trade agreements that will be under discussion -and hopefully- resolution in the next years. Those arrangements promise an opportunity for faster trade growth. Whether they do or not will depend as much, if not more, on the sophistication of international economic diplomacy, both abroad as well as in Brazil.

Politics is now center stage in Brazil. It will remain there even after the electoral process concludes in October. President Fernando Henrique Cardoso has had a very impressive 8 years of service to the country. His successor, jointly with the new Congress, will have no lesser responsibility. Continuing reforms will be needed. It will be a great tragedy if, for whatever reason, they do not occur.

___________________________________________________________________________________________________________
1 Philip Oxhorn and Pamela K. Starr, eds., Markets and Democracy in Latin America: Conflict or Convergence?, Boulder: Lynne Rienner, 2000, pp. 26-27.
2 I have dealt extensively with the earlier part of the post-war period in two earlier essays: “Some Reflections on Post-1964 Economic Policy” in Alfred Stepan, ed., Authoritarian Brazil, New Haven: Yale University Press, 1972 and “Tale of Two Presidents” in Alfred Stepan, ed., Democratizing Brazil: Problems of Transition and Consolidation, Oxford: Oxford University Press, 1988. For some later observations see “Is the Real Plan for Real,” in Susan Kaufman Purcell and Riordan Roett, eds., Brazil Under Cardoso, Boulder: Lynne Rienner, 1997.

Voltar