Brazil, before 1990, was a closed economy, shaped by the ‘economic fashion’ of the time, based on import substitution. This model required active government involvement, favouring certain imported products over others using tariffs, and supporting specific sectors of the economy by subsidising them. This model favoured industry, and money collected from people and borrowed funds were used to boost this chosen sector of the economy. This strategy certainly didn’t help family farmers, evident from the shift between 1940, when 67% of workers were in the agricultural sector, and 1970, when this figure had dropped to 40%. This economic strategy, not helped by external factors such as the oil shock that put even more strain on the economy, resulted in high inflation, an artificially high exchange rate and an unsustainable level of debt.
High inflation verging on hyperinflation is not disastrous for the rich, who can protect themselves against the loss of purchasing power using simple financial instruments (such as indexed financial assets, purchasing foreign currency, buying real-estate and other real assets or simply placing cash in high-interest baring deposits). Low-income groups however, with no or with precarious access to banking services, are the most affected as their incomes lose value over time. Their salary in March can buy fewer products than the same salary back in January. Imagine how they feel come the last quarter of the year. This makes them negotiate salary rises for the next year, which in itself feeds the inflationary cycle.
Come 1990, Brazil’s Collor administration (1990-1993) takes an economic policy U-turn that has shaped economic policy ever since, and adopts the next fashionable ideology of the time. Brazil decides to ‘go global’. This latest trend in development theories is branded ‘the Washington consensus’.
This ideology strives to create free markets, free of government intervention, free of any influence beyond those created by the market. The prescription is for business to be freed from any government-laid obstacles and allowed to spread like liquid to reach every corner of the neo-liberal world and beyond. You could call it the ‘Heineken’ economic theory: The neo-liberal model that will bring business to areas other economic models couldn’t reach.
One might ask him or herself: But what is government intervention? Is it not the result of the system of governance? And this system of governance, if it were a just system, would it not represent the will of the people? The neo-liberal model of development therefore requires that the rules of a free-market override rules that might be imposed by the people through democracy. This is why the neo-liberal model of development, co-driven by the IMF, has been strongly accused of undermining the sovereignty of states.
Brazil opens the trendiest recipe book, the Jamie Oliver of economic cookbooks, and finds the three pillars of the Washington consensus: Market liberalisation, privatisation and fiscal austerity. It decides to start with the first two. By 1994 the new Cardoso administration finds itself facing the eternal economic pain in the ass-symmetry between rich and poor: High inflation verging on hyperinflation.
Drastic action is needed, and the new Cardoso government steps up for the occasion. They pick up the recipe book and turn to inflationary cuisine: ‘Reduce inflation by flooding the country with cheap imports, and keep your currency strong to prevent an equal amount of exports. Fill the trade deficit with foreign investment that you must attract with high interest rates’.
The first step taken to cook-up this nouvelle cuisine is to get rid of the old, rotten ingredients: The old currency is replaced by the Real and set at parity with the Dollar with a little leeway to sway either way. Although domestic prices rise overnight (my taxi driver remembers the sudden price-jump), unions don’t complain about this one-off compromise, anxious to see the back of inflation. Known as the Plano Real, this strategy reduces inflation from 50% to 1.5% within one year.
There is absolutely no doubt that putting a lid on inflation has a tremendous effect on the poor. Now a small salary retains its buying power throughout the year. With banks looking to replace their lost profits from the profitable games they used to play with inflation, they turned to offering people credit. This also helps the poor gain access to durable goods. Now people could finally start buying TV’s and funky trainers. But this gain turns out to be a one-off gain that camouflages other serious side-effects of this new inflationary strategy. Far from being tailor-made to solve people’s social problems, inflation control is a pre-requisite of markets, a condition necessary for the success of a neo-liberal economy. Any social gains are purely coincidental, and certainly do not tackle any of the roots of poverty: “Unequal access to wealth and education”[1]. Social Watch Brazil analysed the impact of these measures, and concluded that although the positive impact on the poor from reduced inflation should not be underestimated, “these benefits have already dried up and one third of the former poor have already fallen back to their previous condition”. Income inequality in the end of the 1990s is about the same as it was in the 1970s[2].
With the ingredients in place and inflation under control, the neo-liberal party begins. With low tariffs, high interest rates, a strong Real (up from parity to 0.8 to the USD) and loads of cash floating around the financial markets, short-term foreign speculative cash flows into the economy filling Brazil’s trade deficit as planned. (Brazil’s first trade deficit after years of surplus).
Before things start getting a little barmy and everything is still going as planned, signs of discontent begin to surface: As one would expect with high interest rates, as well as losing market share to cheap imports, local businesses feel a noose tighten around their necks. They are faced with three options: To kick the chair and declare bankruptcy, taking employees down with them, to sell to foreign buyers, or to invest to better compete with foreign imports. Despite the macro-economic climate, some companies are able to invest in making their operations more efficient, allowing them to survive. However, to use the words of the Social Watch report, “The two first possibilities materialised in large scale”. As a result unemployment soars, and millions of workers are forced into the informal labour market, walking the streets collecting tin cans for one dollar per kilo, picking up cardboard boxed for recycling, selling ‘asai, asai’ on the beach or competing with thousands of other punters selling football t-shirts in the busy streets. It’s a sorry sight you come across every time you set foot on the tarmac. Those with salaries can buy as many kilos of beans in January as they do in July, but those who lost their jobs face the prospect of deep ‘structural’ unemployment.
The party doesn’t last long however, and is ruined by the sudden departure of the guest of honour: Short term speculative capital. Mexico had cooked up a feast from exactly the same cookbook as Brazil, and its party had been cut short with its guest of honour doing a runner. Short-term speculative capital in Brazil catches the bug, which turns out to be contagious, and follows suit.
But the whole plan is balanced perfectly by precisely those foreign investments. Brazil must absolutely attract them back. It sees only one-way: To increase interest rates to levels that seem more like comedy than serious monetary policy. This does the trick though, and foreign money comes flowing back with a big smirk on its face. Now that’s more like it! Ha Ha Ha Ha Ha! it says, as it finds itself a warm and comfortable spot to chill, for a little while.
With the first pillar of the Washington consensus in place, Brazil turns the page to the next crucial recipe for success: Privatisation. The cooking had started way back in 1990, but the heat intensifies. By 1995 the entire steel industry is transferred to private hands together with petrochemical companies, then it’s the turn of some public service firms such as urban electricity, later telecommunications are sold, followed by more electricity concessions and finally the banking sector goes private in 2002. Half the buyers are Brazilians and the other half are foreign, mainly American, Spanish, Portuguese and Italian investors. By 2003 the whole thing has gone for a total of R$105.3 billion.
It seemed like a good idea at the time. People were told proceeds would be used for crucial social spending, such as health and education, and the private sector would run businesses more efficiently and pay employees more. Things often do not turn out as planned, and this was one of those times. From an economical perspective results were mixed. From a social perspective the plan was a complete failure. Foreign companies chose to fly in their own technicians and engineers for a huge salary, and pay the remaining Brazilian employees (those who were not sacked) even less. Employment in the public sector is reduced by 43.9% with over half a million jobs lost between 1989 and 1999.
No cash is spent on social projects.
The money raised is used to pay interest on its debt (high interest as per the strategy, so not a surprise), which has increased by 330% from R$ 153 billion in 1994 to R$ 661 billion in 2001, as well as by the sterilisation of money supply increases, in other words accumulating reserves to fill the gap when foreign capital leaves the country. I was on a trading floor in 1997 when investors began shorting currencies of emerging markets. Believe me, the last thing to cross the mind of a single trader was the effect the mouse clicking and frantic adrenalin-pumped shouting was having on the lives of millions of poor people and workers in those countries. It’s a game they were playing with somebody else’s money, free from emotional ties to either investors (just a coincidental convergence of interests) or millions of people across developing countries.
The sigh of relief after the Mexican crisis is followed by a relative period of stability. But it proves to be, again, the calm before the storm. But this always happens in countries all over the world. When will they learn? I don’t know. Come 1998, Asia suffers from the same damaging out-flow of short-term speculative capital. This time the contagion effect proves that we really are becoming a truly globalised world, and the Asian crisis triggers off capital flight in Latin American economies on the other side of the planet. Brazil is no exception. Having been through this before, Brazil is getting pretty good at dealing with the crisis. Unlike before, when interest rates were taken through the roof, this time Brazil announces serious public spending cutbacks. Not in the least worried about the implication of this on an already poor country, investors pour their money back into the usual easy-to-get-out-of assets, such as bonds, shares or simply Reals.
Other countries, on the other hand, when faced with the effective blackmail of speculative capital have done the Jim Carrey imaginary jazz move with the middle finger pointed at Washington, and adopted a completely different strategy to dealing with capital flight. Instead of allowing them to leave and later welcoming them back with even warmer hospitality after having ruined the party, Malaysia for example, during the Asian crisis, said “listen, if you wanna party, you are welcome to join in, but nobody leaves before the sun shines and the birds are whistling. The sign on the door said ‘No lightweights!’” Fair enough thought the investors, this might be a tad unorthodox, but at least we can party without the risk of having our festivities cut short by some unexpected bearer of bad news. This strategy, although demonised by the Washington consensus for the, God forbid, government intervention it involves, proved to be very successful. Although there was a slow period when news of other parties cut short began to circulate, things picked up again and all was forgotten much sooner than the disasters that followed those who had yielded to the neo-liberal model.
Brazil is determined to take the neo-liberal route to global market integration. This strategy helps Brazil buy a little time, but the period of stability turns out to be short lived. Russia now experiences a run on its short-term capital, causing havoc in the markets. As you would expect now that it has happened so many times since Brazil adopted this neo-liberal model of ‘development’, hot money leaves Brazil leaving behind a huge financial gap to fill. “No problem. We’ve dealt with this before, we can do it again”. Brazil pumps up its interest rates. But this time the traders are convinced that they can beat the Brazilian central bank at their favourite game. They bet that Brazil would try really hard to maintain its policy of gradual and controlled exchange rate adjustments put in place since the Mexican crisis (i.e. defending the Real from fast and furious devaluation), and fail. They were right.
On the verge of national bankruptcy, Brazil puts its neo-liberal tale between its legs and hops over to the IMF, where it desperately decides to play its last card. It hopes to borrow loads of dosh to fill the deficit, and gain some brownie points from the traders who had just broken its back. By accepting to take IMF cash with the IMF’s usual conditions, known as the adjustment program, it would send a message out to the markets that it was a good little neo-liberal who puts its investor’s well being well ahead of its own people.
There is no middle ground with the markets; you are either with them or against them.
It turns out that in this case, even bending over to IMF conditions isn’t enough to attract capital back to Brazil, and capital flight continues, threatening Brazilian solvency. Brazil loses control of its exchange rate and lets go, leaving it to blow with the economic winds. In theory this should act as a disincentive to investors thinking about taking money out of the country, as it would devalue the currency and consequently devalue their assets in Brazil. That’s just in theory though. In practice you get a race to divest and get the hell out before everyone else does. In the money game putting yourself ahead of your friends and neighbours makes it impossible to think in a win-win game theory way. Even if concerted action would make everyone better off, you know it’s not gonna happen cause there are no mechanisms in place, either legal or cultural, for this kind of thinking. Each one for him or herself, and everybody knows it. Or at least every capitalist with money to make or protect knows it. Believe me, with the threat of losing any savings I might have to currency devaluation, I wouldn’t hesitate to sell, and protect my self-interests. It’s a systematic problem, not one that can change with the good will of people with money.
A systematic solution to this roller-coaster tearing economies and societies to bits at every loop has been proposed and is supported by millions of people and civil society organisations all over the world. The suggestion is to tax capital flows out of an economy. The tax is called the Tobin tax. This would slow down the sudden rush out of an economy on the back of a red line on a Reuters screen, and make investors think twice before they run. It would also encourage a different kind of investment. In contrast to short-term speculative investments in shares, bonds and the local currency, it is believed that longer-term investments would be attracted to the country. The stability and reduced risk from reducing the ease of speculative cash to come in and out of your economy should even encourage these long-term investments. I am certainly more likely to open a tea-café in Brazil if it were free of the constant threat of financial crisis. In fact the Tobin tax should even drive interest rates down, as it becomes unnecessary to beg speculative capital back into a ravaged economy every few years. This decrease in interest rates should encourage other people to open small businesses and therefore create more clients for my tea-café.
These benefits from financial stability are complemented by another advantage from the Tobin tax: A source of tax revenues for governments, which they could spend on social priorities such as education and health.
[1] Social Watch – Brazil, (How far Brazil has gotten in fulfilling Copenhagen commitments)by Celia Lessa Kerswtenetzky and Fernando J. De Carvalho - Ibase
[2] Social Watch – Brazil, (How far Brazil has gotten in fulfilling Copenhagen commitments)by Celia Lessa Kerswtenetzky and Fernando J. De Carvalho - Ibase
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