Rescuing Brazil, Reversing Recession

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8/12/2019 Rescuing Brazil, Reversing Recession 1/21 Third World Quarterly Rescuing Brazil, Reversing Recession Author(s): Celso Furtado Source: Third World Quarterly, Vol. 6, No. 3 (Jul., 1984), pp. 604-623 Published by: Taylor & Francis, Ltd. Stable URL: . Accessed: 31/08/2011 16:16 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at  . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Taylor & Francis, Ltd. and Third World Quarterly are collaborating with JSTOR to digitize, preserve and extend access to Third World Quarterly.

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Third World Quarterly

Rescuing Brazil, Reversing RecessionAuthor(s): Celso FurtadoSource: Third World Quarterly, Vol. 6, No. 3 (Jul., 1984), pp. 604-623Published by: Taylor & Francis, Ltd.Stable URL: .

Accessed: 31/08/2011 16:16

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of 

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

Taylor & Francis, Ltd. and Third World Quarterly are collaborating with JSTOR to digitize, preserve and

extend access to Third World Quarterly.

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escuing B r a z i l eversing

ecess ion

Complete DisarrayAt least Brazilians are in agreement over one thing: 'Our country is in avery bad condition, without precedent in the history of the republic'. In

Brazil everything depends on the state, and, at present, not only has theshipof state lost its way, but all its controls and guiding instrumentshavebroken down. The crisis is not confined to certain economic matters, noris it merely the result of adverse international conditions. It is theeconomic system as a whole which is drifting. No new investments arebeing made in productive activities and the country's industrialsector iscollapsing; only the speculators are prospering.

Brazil will reach the end of the 1980s with a lower level of industrialemployment than at the end of the 1970s. Millions of people are joining

the army of the under-employed. Our hope of ever overcomingunderdevelopment is receding. Brazil has earned the dubious distinc-tion of having the largest patch of poverty in the Western hemisphere.All this has happened despite the fact that for 30 years Brazil had one ofthe highest economic growth rates in the world and remains a countrywith great potential for development.

Brazil's advantages are real enough: enormous stretches of unoc-cupied land; abundantenergy resources to exploit; one of the ten largestdomestic markets in the world; an impressive installed capacity for the

production of capital goods; and, a potential for technological creativityonly equalled in the Third World by India. All we lack in Brazil is thewill to change the course of history, something which has becomeincreasingly difficult for us through years of authoritarian rule and asituation of external dependence, which has reduced us to a simplecomplementary market for the developed economies. We are nowbeing subjected to an 'adjustment' process, a kind of cosmetic surgerywhich will reshape us more to the taste of the bosses of the presentinternational financial order and increase our dependence.

The question that we, the overwhelming majority of Brazilians, mustask ourselves is: Does Brazil not have a sufficient reserve of patriotismand public concern that can change a course of events that iscondemning millions of people to unemployment and starvation? Can

604 TWQ 6(3) July 1984/ISSN 0143-6597/84. 1.25

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we not find a way of restoring confidence and faith in the future of thecountry?

The reply to that question is unambiguous: it is enough for us to stateemphatically: 'NO' TO RECESSION.

No one in his right mind and with any public spirit can believe thatrecession is the answer to Brazil's problems in the face of the currentinternational economic crisis. Recession is the kind of economic policythat can only be justified in rich countries, which have unemploymentbenefits, ample exchange reserves, and access to foreign loans. We have

none of these advantages.The startingpoint for changing the course of events is to put an end to

the recession and to recreate the conditions needed for the economy tofunction normally, utilising its installed industrial capacity. We mustremember that for about 20 years after World War II the Brazilianeconomy grew well, although the volume of imports remained station-ary. It relied on an expanding domestic market, even though ourcapital goods industry was at that time still very primitive.

It is true that servicing our large foreign debt reduces our capacity to

invest and to import, but this should not stop us working and producing,and directing our own development. Nothing is forcing us to inter-nationalise our economy to such a point that we lose the power to makeour own decisions; it is merely the result of our inferiority complex inthe face of the alleged greater 'rationality' of the international financialmarket.

But what must we do to make effective our opposition to recession sothat we can give back jobs to those out of work? First of all we mustregain control over the instruments of economic policymaking. When

we are told that our most serious problem is inflation, a euphemism isbeing used to avoid saying that the key problem-the cause of ourpresent woes-is the present state of chaos in the economy. Everyoneknows that inflation is no more than a symptom, the outwardmanifestation of the lack of articulation, adjustment, and control in aneconomy. Inflation on the scale we are experiencing is an unequivocalindication of the complete confusion among those in charge ofeconomic policymaking. They are no longer able to enforce monetarypolicies, to control liquidity, to dictate the cost of money, to police the

financial institutions, to define exchange policies and so on. TheBrazilian authorities have relaxed so many controls that they havelargely forfeited their own decisionmaking power. And, the moreineffective they have become, the more attractive the climate becomesfor all kinds of adventurers. 605

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Regaining Freedom of ActionBut what is required to regain control over the economy? In the first

place, we must break away from the guardianship of the InternationalMonetary Fund (IMF) and, secondly, as a sovereign country, decide towhat extent Brazil will honour its foreign financial commitments in thecontext of the international crisis. The two questions are linked, forBrazil did not decide of its own accord to accept the guardianshipof theIMF, but did so because this was a condition set by its foreign creditors,particularly the international private banks, for rescheduling its debt. In

this way the bankers were trying to make sure that the Braziliangovernment would put the interests of its creditors, in both the publicand private sectors, before anything else and that the economy would be'adjusted' so that it was geared to producing dollars at any price.

The IMF in itself is not important, as the resources it provides aremodest. What matters is that this institution has adopted a rigid set of'conditions' which a country must accept if it is to have access to muchlarger sums of foreign financing. In this way, it has been turned into aninstrument through which Third World countries are forced to deepen

the internationalisation of their economies so that they cease to becontrolled domestically and become mere extensions of the inter-national market. It is for this reason that Brazil is being asked todismantle part of its industrial sector, particularly in the capital goodsarea, which is considered 'disproportionately large'. Now, with worldtrade declining or stagnating and with the present situation of excessiveindebtedness, to demand that Brazil open up its economy is to condemnthe country to a recession of indeterminate length.

But it is not enough to rid ourselves of the IMF. If we do not take the

initiative and, as a sovereign country, decide our own policies, ourforeign creditors will soon occupy the space we have left. It is not bychance that they have already set themselves up as privileged auditors inBrazil's financial administration. The 'advising committees' set up bythe international foreign banks have already begun to tell us what weshould or should not do.

We are so drugged by 'disinformation' that we must reestablish some

elementary truths. The financial agreements that private bodies signwith sovereign nations implicitly accept that in certain special condi-

tions the latter can change the form of operation. In return, the privatebanks can be sure that, unlike private debtors, sovereign nations cannotdisappear through liquidation. When both the creditor and the debtorare sovereign states the situation changes, because the relation is not


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only financial, but also political. In other words, the use of forcebecomes possible. In the past, creditors were almost always sovereign

states, as governments used to take on the responsibility of recoveringloans made by their subjects. In the heyday of imperialism, England andFrance took control of countries which could not pay their debts. It wasin this way that both Egypt and Tunisia lost the last traces of sovereigntythat they still had. Even today, a debtor nation, when it can no longermake payments, can still negotiate a moratorium with its creditor whenthe latter too is a sovereign state. There is plenty of room for negotiation

when more than financial interests are involved on both sides. Asovereign state can accept financial losses if it obtains compensation inother areas.

The situation is different when the creditor is a private bank. Privatebankers cannot 'negotiate'. They can only demand fulfilment of theclauses in the contract. How can they accept losses if they do not obtaincompensations in another area? What can be done in this case is tosubstitute a new contract, considered equivalent by the bank, for the oldone. Thus, for example, when a loan is rescheduled, the repayment

period is extended, but, in compensation, larger fees are charged or ahigher rate of interest is negotiated. All this is decided by lawyers,operating within rigid terms of reference, and not by emissariesendowed with full powers.

In these circumstances, then, it is up to the debtor country unilaterallyto declare a moratorium and to inform its private creditors of the newconditions it is offering. In this way, the bank's board of directors willnot be held responsible by its shareholders for the losses, but instead forfailing to make reserve provisions at the appropriate time if this is the

case. The present situation is complex, because the declaration of amoratoriumby Brazil would probably spark off a series of moratoriumsby other countries, which would force the big private internationalbanks, particularlyin the United States, into insolvency. Brazil's leadingcreditor, Citibank, has made loans to Brazil of an amount equivalent to83 per cent of its capital. At the moment Brazil is in a situation of defacto moratorium, through the accumulation of overdue interestpayments, but the banks are determined to prevent Brazil from formallybeing declared in default, as the banks' contracts are interlinked as a

way of protecting each creditor from the others. So, at the moment, thebig banks are buying up Brazilian papers from the smaller banks, whichare more impatient, while at the same time they are working out ways ofrefinancing the debt. It is quite clear that they do not want to lose the


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initiative, as they are preparing for a confrontation with their respectivecentral banks. While this goes on, Brazil remains passive, merelyaccepting further conditions which will further limit its room formanoeuvre in the future.

An agreement recently reached at the Bank for InternationalSettlements (BIS) establishes that the respective central banks will onlyintervene if the creditor banks become insolvent. In other words, thecentral banks will only act as lenders of last resort if the internationalcreditor is on the verge of bankruptcy. We are witnessing a power

struggle between the international private banks and their respectivecentral banks, for the former do not want to be forced into insolvencybefore they are provided with the assistance that they undoubtedlyrequire.

If Brazil were to declare a moratorium, and its example were followedby other debtor countries, the central banks would almost certainlyintervene to prevent a global international financial crisis. The realproblem, therefore, is not whether or not Brazil will declare amoratorium, but what kind of agreement will emerge between the big

private international banks and their respective central banks. It mustnot be forgotten that a decrease in liquidity at this time in the inter-national banking system would be extremely harmful to the processof economic recovery which is beginning in the developed countries.

The only thing which is certain, from our point of view, is that thebanks are going to impose draconian conditions for refinancingBrazilian debt and, at the same time, are going to do all they can to stopBrazil from resorting to its sovereign right to declare a moratorium andto recover its freedom of action. It is important to remember that Brazil,

like most of the other indebted Third World countries, can no longerobtain new lines of credit. It is only able to go on trading with thedeveloped countries because the commercial credits, originally con-ceded to the Brazilians, are now given to foreigners. Apart from this, ithas begun to explore other trading set-ups which can operate outsidethe network of the commercial banks.

What must be stressed, however, is that a country is not 'punished' byits creditor banks if it fails to make its contractual payments. Banks arenot guided by moral principles; they simply carry out business. In the

case of reschedulings, the disbursement of new resources is tied to rigidadjustment schemes, because the banks want to prevent, or conceal,losses. New commercial credits are refused simply because the bankconsiders the operation to have become too risky.


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Retaliation may come from a creditor government and in this case itshould be interpreted as an endeavour to receive compensation inanother area. Since the middle of 1982, Brazil has been unable to obtainnew lines of credit because the international financial community isaware that Brazil is on the verge of insolvency. But it is not only theprivate banks which have refused to renew credit lines or havewithdrawn deposits from foreign agencies of Brazilian banks. Foreigngovernments which had deposited part of their exchange reserves withthe Bank of Brazil and individuals, resident abroad, who had made

long-term deposits, also sought to protect themselves from the obviousrisk of a Brazilian default. To operate an extensive banking networkabroad, a country must have solid currency reserves. The presentshortages suffered by Brazilian banks abroad does not mean that thecountry is being 'punished' by its creditors. It is merely the natural resultof its present state of insolvency.

It is clear that, whatever shape future events take, Brazil will have toreorganise drastically its method of financing its foreign trade. This willgive us an opportunity to strengthen our financial links with other Third

World countries and to restructure our international banking system sothat it serves the long-term interests of the country.

Eliminating the Root of InflationHowever, it is not just a question of regaining our freedom of action andof rebuilding the instruments of economic policymaking. It is even moreimportant to know what to do with these instruments. The root cause ofthe inflation is the decrease in the productivity of the economic system,which in its turn reflects the growing incoherence of our investment

process and our growing incapacity to generate savings internally. Letus try to spell out what this means in simple terms.

The average productivity of investments has traditionally been highin Brazil. To achieve a one per cent increase in domestic product it wasonly necessary to invest two per cent of this same product. If netinvestment reached about ten per cent of domestic product, then growthtended to be about five per cent. Clearly, the relation between the twofactors was not as direct as this for other factors intervened, but thecoefficient of additional productivity did not differ greatly from that of

average productivity.What has been occurring recently is a notable fall in productivity.

Today, we need to invest four to six per cent of domestic product toachieve a one per cent increase in the product. This is in part because


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our model of development has tended to squander a significant part ofour savings, using it to finance the consumption of middle class andupper class groups. But the main reason is the lack of coordination ofpublic investments, and of private investments induced by it. Let us takethe case of excessive government investments in infrastructureprojects,and the consequent private industrial over-expansion of activitiesproducing equipment and intermediate goods for them. In thesecircumstances it is almost inevitable that the productive system becomeschaotic and that, as a result, operational costs increase. Average

productivity in an economy organised in this way is necessarily low. Therecession is only aggravating this structural tendency.

A productive system is not only a heap of investments. It is a set ofarticulated elements, whose coherence results from the subordinationof each one of the disparate parts to the logic of the whole. Thiscoherence can come from the logic of the market-place, or fromplanning. Both these forms of coordination are combined in all moderncapitalist economies. The big companies, which operate in oligopolies,formulate macro-economic hypotheses and, based on them, fix prices,

set profit margins, plan their investments and, when necessary, correcttheir models in response to short-term market information.

What has happened in Brazil is that the government has taken onincreasing entrepreneurial responsibilities without providing itself withthe necessary means to guide and coordinate its investments. It is forthis reason that it finds it so difficult to make them compatible with thecountry's capacity to save and with the activities of the private sector.Worse still, it has tried to discredit the idea of global planning. As aresult, each of these large state enterprises has tried to increase its

decisionmaking power and to function as a separate entity. If you alsotake into consideration the fact that the government has come to rely onthe growth of these companies so that it can obtain the foreign loans thatit requires to balance its foreign accounts each year, then you can beginto envisage the extraordinarily complex network whichhas spawned thepresent chaos. This is the key to understanding the root cause of today'smess.

Let us now see how this lack of coordination produces inflationarypressures. Every investment produces a flow of income-payment to

factors-which, in its turn, promotes other productive activities, whichis the reason why the final flow of income is so much greater than theone produced originally. Most of this flow will be spent on consumergoods. It is thus of fundamental importance that the supply of final


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consumer goods grows parallel with the flow of income. If theinvestment process is incoherent, then it is likely that the flow of incomewill grow more rapidly than the supply of final consumer goods, thusgenerating inflationary pressures. In a market economy, this kind ofsituation should not last, as investments will be channelled to the sectorsproducing the consumer goods, or substitutes for these goods indemand. But, if the cause of the distortion lies in the public sector, thenthe corrective process will only function when the overgrown stateenterprises have run out of resources with which to carry on their

expansion plans. What made the situation worse in Brazil was that thepublic companies went on investing in order that the government wouldbe able to obtain the foreign currency it needed.

When it is a question of investments with no return-into providing abasic infrastructureof public services-then the distortions can becomeeven worse, because the indications of a fall in productivity are moredifficult to detect. To sum up, the expansion of entrepreneurialactivities by the state demands a system of global planning to define thespace to be occupied by state companies. This planning will only be

effective if it is carried out by an authority which can overrule thetechno-bureaucracy. This is a problem which has only been satisfactor-ily resolved in those countries where parliament has the power to definethe order of priorities of public investments.

The root cause of the present galloping inflation is the disorderly formin which the state increased its entrepreneurial activities. Consequentlyonly ignorance or bad faith can make people believe that such a state ofaffairscan be corrected through recession. Recession affects all sectorsof the economy, not only those which are uncoordinated, It reduces

investment in an indiscriminate fashion so it does not correct theimbalance. Inflationary pressures will only be defused when most of theeconomy is at a standstill and severe damage has been inflicted onsociety.

The primarycause of the disequilibriumis not the level of investment,but the lack of articulation in the productive system. The first priority isthus to reorientate investments so that this lack of articulation iscorrected. As the economic system becomes better coordinated,average productivity will increase-which will mean that the supply of

final consumer goods will increase more in line with the flow ofmonetary income.

If it is accepted that our economy is disjointed-and that the high rateof inflation is a fever showing that something is wrong-then it must be


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recognised that the only way to overcome the present crisis is byprogressively curing the underlyingillness. To dismantle the parts of the

system which are still sound-which is what recession is achieving-is amistake that cannot be criticised too strongly. It is very significant that

the IMF mission has forced the government to choose between reducing

the real level of wages or increasing unemployment-both of which

options ensure that the recession continues.But why this emphasis on recession? The official rhetoric would

have us believe that their real objective is to reduce inflationary

pressures. But everyone knows that inflation has got worse with therecession. As financial costs continue to grow-and today for most

companies they are a much heavier outlay than the payroll-the

recession, which is squeezing wages but raising the cost of money, will

end up feeding inflation. Following this medicine, the general upsurge

in the level of prices will only end when the productive system is

seriously damaged.

But, if we accept that the government's main objective is the external

'adjustment', not the internal one, then there exists another explanation

for recessionary policies. For the recession makes sense only if thegovernment's sole aim is to build up an ever larger trade surplus,whatever the cost, so that Brazil can ensure the remittance of profit

from foreign investment and the payment of a significant part of the

interest due on the foreign debt. For, given the unfavourable external

situation, this surplus can only be achieved through cutting back on

imports. Recession is the way in which this can be achieved. So, thanks

to it, the dollar value of Brazil's imports fell by 23 per cent during the

first half of 1983. Moreover, the recession helps to keep exports at a

high level, even if it is at the expense of an increase in the average cost ofproductive activities. This is particularly clear in the case of those

industrial sectors which channel their output to both the foreign and

domestic markets.As domestic demand falls as a result of the recession, the average

costs of production increase, as a result of the formation of idle capacity.From then on, an export policy can be based on low marginalcosts. Theprice of what is offered abroad only reflects the increase in variable

costs, because fixed costs are covered by what is sold on the domestic

market. More precisely: recession increases prices paid by domesticconsumers but reduces the prices at which goods can be offered abroad.In this way, the country's terms of trade deteriorate-foreign currencycosts more in terms of what the country exports-but, in compensation,


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the trade balance grows, and this seems to be the main objective of thepolicies that the government has been following. As foreign demandresponds to a decrease in the price at which goods are supplied and is notaffected by a reduction in domestic income, it becomes possible toreconcile a general decline in productivity-caused by the reces-sion-with an increase in the propensity to export.

It is important to stress that it will not be easy to break the back ofinflation unless we sort out two other problems. One concerns theincompatibility between the present model of growth and an increase in

the rate of savings. It is well known that this model favours theconsumption of durable goods, that is, it leads to greater incomeconcentration without increasing the availability of resources forproductive investment. The greater the concentration in income thelarger the share of consumer durables in overall consumption and thegreater the share of income used in financing consumption. It would be

necessary for the savings of the upper and middle classes to grow more

quicklythan their incomes (a larger than average marginal propensity tosave) for the resources available for financing productive activities not

to decline as a proportion of total income. In other words, the presentmodel demands an increase in the savings coefficient for the level ofproductive investment to be maintained. It is only in this way that itwould be possible to reconcile a relative increase in the consumption ofconsumer durables with a stable rate of economic growth. Now, despitethe creation of various funds (FGTS, PIS, PASEP)' financed bycompulsory savings extracted from the mass of the population, theoverall rate of savings has not risen. This is explained by the very natureof the development model, which is geared to increasing the consump-

tion of the middle classes.When the performance of the Brazilian economy over the last two

decades is observed, it can be seen that the only period in which it was

possible to achieve a high rate of growth, together with a low rate of

inflation, was when average productivity increased, that is, when idleproductive capacity was brought into use-in other words, when real

per capita domestic income grew more rapidly than per capitaproductive capacity. Apart from this period (1967-72), a high rate ofgrowth was only achieved with inflation and/or foreign indebtedness,

both of which are spurious ways of compensating for insufficientsavings. In other words, there is a contradiction between the lifestyle

FGTS: Fundo de Garantia de Tempo de Servico; PIS: Programa de Integracao Social; PASEP:

Programa de Farmacao do Patrimonico do Servidos Publico


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adopted by the middle and upper classes and the internal generation ofsavings, a contradiction which is at the root of both income concentra-tion and foreign indebtedness.

Since a change in the model of development cannot be implementedimmediately and since it is necessary to prevent the creation of furtheridle capacity-and another decline in productivity must be pre-vented-the only solution is to attack the problem on both sides. Therestructuringof the economy should ensure progressive changes in thestyle of development. At the same time the rate of savings should be

rapidly increased, something which is only feasible if the economybegins to grow once again.

The second problem consists of the need to increase the resistance ofthe economy to fluctuations in the country's capacity to import. To alarge extent the present recession stems from the indiscriminatecutbackin imports. This reduction leads to a fall in productivity, which feeds theinflationary process and provokes a decline in growth rates. No onequestions the country's need to make a great effort to increase exports.But world trade prospects force us to be realistic. It is clear that we shall

only be able to increase our imports slowly, particularlyin view of theneed to rebuildour exchange reserves and to service our foreign debt, orat least part of it. It seems to us that the other option-that exportsshould be increased at the expense of growing costs for the Brazilianconsumer-should be rejected. We believe that the sorting out of theexternal problem must be made compatible with a reasonable rate ofgrowth of the domestic market.

Given the present state of the international financial market, ourcapacity to import will depend, more than in the past, on our export

earnings. For this reason, we must build up the economy's resistance toexternal shocks, quite apart from increasing our exchange reserves andfrom introducing new financing schemes, particularly in trade with oursuppliers of oil and other essential products. At this stage it is no longera question of 'substituting imports', but of constructing an economywhich can satisfy the basic needs of the population and at the same timecan stand up to momentary or passing falls in the volume of imports.The Brazilian economy must be ready to take advantage of improve-ments in the world economy and also to adapt in the face of

unfavourable world conditions. To be prepared for the first develop-ment, it must increase its absorption of advanced technology. To dealwith the second, it should steer its investments into sectors with a lowimport coefficient. Idle capacity should be brought down to as low a


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level as possible and the investment profile should be changed in theshort term to achieve greater flexibility.

Financial DisorderWhile a shortage of savings was a fundamental cause of the presentdisequilibrium, it is also true that the exorbitant increase in the cost offinancial operations spread the disorder throughout the economy. Thisaspect must be closely examined.

Brazil has traditionally been a country in which inflation plundered

those who saved but favoured those who invested. As a result of theso-called 'usury law', savers were permanently punished. On the otherhand, the Bank of Brazil, and, from the 1950s, the development banks,supplied investors with loans at negative rates of interest. Moreover, thegovernment regularly resorted to increasing the money supply so as toswell its funds. During this period, the key question in financial policieswas to know how to contain inflationary pressures within certain limits.When these were exceeded, the government put the brake on itsexpenditure, delaying the disbursement of funds, and the Bank of

Brazil raised the compulsory deposit requirement for the commercialbanks. So there was a breathing space and then the process carried on asbefore. Inflation was part of the mechanism for financing the economy,but it had to be used cautiously. The high social cost of this type ofdevelopment was recognised, but the rulingclasses were unable to comeup with a formula which combined stability with a high growth rate. Asfar as they could see, the options were development with a certainamount of inflation, or stability without development.

The idea of providing the country with a financial system that would

encourage savings, put a greater priority on the payment of realinterest rates to savers and allow the government to carry out its

monetary policy through the sale and purchase of public debt bonds,may have been well-intentioned, but it was naive in that it did not paysufficient attention to the peculiarities of our form of dependentcapitalism. The net result is there for all to see today: the rate of savingsdid not increase, but the cost of financial intermediation increasedenormously. Passive interest rates, that is, the cost of money for thebanks, rose greatly, apparently improving the return for savers. But, as

active interest rates also increased, financial costs rose and the relativeprices of the final consumer goods that the savers purchased went upsteeply, wiping out the gains they had made through their savings. It isenough to look at the rapid increase in interest paid in hire-purchase


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deals for consumer durable goods to realise that the apparent gainsgoing to the middle classes through their savings were deceptive. Giventhat the model of development led to an increase in demand forfinancial resources (the purchase of a consumer durable good is aninvestment), the position of those who deal with money and highliquidity assets was strengthened. In these circumstances, the advan-tages going to savers were offset by a considerable increase in the cost ofcapital for the investor. Faced with this complex web of interests, thegovernment was forced to reintroduce negative interest rates to defendmore vulnerable sectors, such as farming.

The difference between the situation today and that in the past is thatnow the resources transferred by the monetary budget to farming (andother privileged sectors) are no longer financed by an expansion in themoney supply. The new method consists in issuing bonds with suffi-ciently attractive real interest rates to compete in the narrow capitalmarket. In this way the government pays real interest rates to obtainresources which it then lends out at negative rates of interest. Thedifference is covered by issuing additional bonds. Even if we ignore thefact that such a system will necessarily lead to disaster, it is important topoint out that it introduced profound structural distortions in theeconomic system. By sucking out a large part of the available credit thegovernment increased considerably the level of active and passiveinterest rates. We have already seen that high passive interest rates donot benefit savers, as they are hurt by the concomitant increase in theconsumer goods they purchase. On the other hand, high active interestrates hurt investors in productive activities. The net result is thestrengthening of financial intermediaries, whose share of overall

income has grown disproportionately throughout this period.So Brazil went from a situation in which financial costs were very

low-most investments were carried out at very low or negative interestrates and the public sector was financed with taxes and inflation- to onein which such costs soared to extraordinaryhigh levels. This was the finalresult of the ingenious reforms introduced by Octavio Gouvea deBulh6es and Roberto de Oliveira Campos, in the wake of thenewly-established authoritarian regime. In a poor country containing anemerging middle class completely geared to the consumption of

consumer durables, the creation of a capital market is not enough toaccelerate savings. In view of the inelasticity in the supply of savings, thefinancial intermediaries resolved the problem by creating quasi-money.As a result, in an extraordinary development, a huge mass of non-


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monetary financial assets was formed in an economy with a low level ofincome. The velocity of the circulation of money became thedetermining factor of the degree of liquidity of the economic system, afactor which depended much more on financial intermediation than onthe monetary authorities. The latter, imprisoned by the need torefinance the public debt, had less and less freedom of action.

As the debt was being refinanced by more debt, the problem ofcredibility became crucial. In this endeavour to postpone the day ofreckoning, the monetary authorities committed an act of extreme

irresponsibility by indexing their bonds against the dollar at a time whenit was gaining strength on the world market. From then on, Brazil, in

effect, lost its own currency, for the basic reference point in alltransactions on the financial market became the bills issued in theUnited States. It is as if the Brazilian government were trying to issuedollars with their circulation restricted to Brazilian territory. As goodmoney always drives out bad, no one will any longer accept cruzeiros astheir measure of value. The decision to 'purge' the domestic price indexmade this situation worse. As the behaviour of the dollar has very little

in common with an economy characterised by enormous structuraltensions, as in the case of Brazil, a new factor of irrationality wasintroduced. By the end of May 1982, the value of this new currencyissued by the Brazilian government was 16 billion dollars.

The increase in public debt has provoked an expansion in the flow ofnon-monetary financial assets and has encouraged the relative growthin financial intermediation. It is interesting to compare the presentprocess with what happened earlier when the state financed part of itsexpenditure directly with the expansion of the money supply. The old

method led to an increase in the level of monetary demand and thus toan increase in the prices of final products and a corresponding fall in thepurchasing power of the population. The present method leads topressure on the capital markets which leads to an increase in interestrates and a rise in the financial costs of those in charge of productiveactivities. As the latter cannot pass on costs and administer prices withany ease, the result is a transfer of real resources from those whoproduce to those who finance. As a result, the present inflation is doingeven more harm than in the past, as it is introducing deformities which

discourage productive investments and reward speculation.

Public Deficit, Subsidies and 'De-indexation'To claim that the present inflation is caused by the public sector deficit is


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grossly to oversimplify the problem. A reduction in the public deficit,obtained through reductions in government expenditure, can coexistwith the maintenance of the present system of refinancing the publicdebt and thus with the swelling of financial intermediation. Thesqueezing of overall demand, which the IMF is demanding, may reduceinflationary pressure, but this is not enough to encourage productiveinvestments in the private sector. It is unlikely that the latter will bestimulated as long as the financial sector remains disproportionatelylarge.

It is important not to forget that the public sector deficit is partly theresult of the recession. It is far more difficult in the public sector than inthe private sector to reduce costs when overall demand falls. If thedepressions of the past no longer occur in the advanced capitalisteconomies, this is due to the relative expansion of the public sector andthe maintenance of the population's purchasing power through unem-

ployment benefits. This deficit disappears of its own accord when thereis an economic recovery. For this reason, it is important not to confusethis deficit with the structural deficit which occurs as the result of

expansion of public sector activities without sufficient financing. In thiscase, the correction of this deficit is more difficult. A reduction in

inadequately financed public activities has a knock-on recessionaryimpact at the level of global demand and leads to a fall in the turnover ofthe public sector itself, provoking another deficit. In other words, thereduction of a public deficit is always more difficult in a recession. Theanswer is to channel investment in new directions) eliminating some,restructuring others and starting yet others, with the objective of

obtaining a faster and more appropriate response in supply.

When they are well conceived and adequately financed, subsidies arean important instrument in economic and/or social policymaking. It isright to say that it would have made more sense to have encouragedfarm production, geared to the domestic market, as it would haveimproved the living conditions of the mass of the population. But thiswas not done, and, if the food intake of the average Brazilian has notdeteriorated over the last two decades, this is because of the increase inwheat consumption, which was only made possible as a result of thesubsidies policy. Indeed, both the small increase in protein consumption

and the fact that the daily intake of calories did not fall during thisperiod were both the result of the increase in wheat consumption. Howcan one label as irrational apolicy which achieved this? Whichresourceshave been better used, those which prevented a deterioration in the


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country's human capital, or those used in the construction of theTransamazonica Highway or in other grandiose projects?

Now let us take the case of sugar, which Brazil exports on a large scaleat much lower prices than those paid by domestic consumers. Whomdoes this 'subsidy' benefit? To illustrate the point, let us take theexample of the French railway system, certainly the most modern andefficient in the world. Its high level of efficiency is achieved through asubsidy of 2.5 billion dollars a year. These subsidies are seen as transfersrequired to achieve the maximum economic rationality and maximum

social usefulness. In the case of oil derivates in Brazil, the policy is not tosubsidise the product, but to charge what is considered the best price inthe circumstances. This reflects more the tax burden that is imposed onthe imported product than the international cost of petroleum. What issubsidised is the locally-produced sugar-cane alcohol used in privatecars and taxis, and it is subsidised by the petrol consumers.

The so-called question of de-indexation should be analysed from thispoint of view. Indexation was created in pursuit of the fantasy that acountry can be bestowed with a money and capital market overnight.

Generally, fixed income bonds are protected against inflationaryerosion by prefixed indexation, that is, by establishing the rate of

indexation in advance. From the moment the government issued bondswhich were totally protected against inflationary erosion (post-fixedindexation), it eliminated an important element of risk and encour-aged the holders of non-monetary financial assets to look for similarprotection elsewhere. Of all the capitalist countries in the world, Brazilbecame the one carrying the least risk.

All over the world the value of fixed income bills rises or falls in

inverse proportion to interest rates, and the real value of the latter alsorises and falls in accordance with the rate of inflation and canoccasionally be negative. But in Brazil the system of indexation haseliminated this flexibility, since it has established a rigid bottom line forthe fall in real interest rates. If this bottom line is six per cent, it meansthat every year economic growth is less than this the share of nationalincome going to rentiers, particularly government creditors, increases.The deeper the recession, the greater the share going to the rentiers,which in Brazil is followed by an increase in the cost of financial

intermediation. If the country's terms of trade deteriorate, that is, ifproductivity falls as a result of the relative increase in the cost ofimports, income distribution is affected by a similarly perverse skewing.To try to resolve this problem by 'purging' the indices used for


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indexation is like trying to square the circle. As always when numericalindices are concerned, you can have as many solutions as you want. The

only objective solution is to index each of the bonds in accordance with

the way the money is to be used: housing bonds fixed to rents; electricity

investments to the price of the kilowatt; and so on. It would also be

possible to set up a special system for small savers in which deposits are

limited to a certain number of minimum wages, and earnings are

exempted from income tax. What does not make sense is to create a

situation in which financial capitalists receive privileged treatment.

The question of protecting the real wages of the mass of thepopulation is something completely different. The minimum legal wage

is not the product of market forces. It is the result of a political decision

and is intended to make sure that workers' wages are not below the level

of subsistence. Once defined, it takes on the role of a reference mark in

the ordering of economic activities. There are no real difficulties in

protecting the real value of the minimum wage, given the simplicity and

stability of the basket of goods which defines its value. As the minimumwage aims to assure subsistence conditions, it should not decline when

growth rates fall or the economy enters a recession. Only wages of ahigher level should fluctuate in accordance with market conditions. This

is what you observe in developed capitalist economies, where the

average wage increases with rises in productivity, and the minimum

wage climbs even more quickly. The tendency in these societies is

towards social homogeneity.But the situation is very different in Brazil. If we examine the

1970-80 period, we see that average productivity increased by 70 per

cent, while the average real wage grew by only fifty per cent and the

minimum wage stagnated. This stagnation in the minimum wage wasresponsible for the relatively slow rate of growth of the average wage,

because wages at the top end of the scale grew even more quickly than

average productivity. All this helped to increase social inequalities in

the country.Over the last three years the recession has led to mass unemployment

for the mass of workers on the minimum wage and cuts in real wages for

those at the middle and top end of the scale. What then is the point of

'purging' the indices used to protect the value of the minimum wage?

Wages at the middle and top end of the scale are fixed by market forces.But the minimum wage is outside this scheme and, if it is squeezed, it

drags down the wages of the vast majority of Brazilians who earn up to

three times the value of the minimum wage. The objective is to carryout


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another wage squeeze similar to the one imposed in the mid-1960s atthe beginning of the present phase of authoritarian rule, a squeeze thatis even more painful because the lowest wages have never recoveredfrom the erosion suffered over the last twenty years. Moreover, it mustbe pointed out that the present prolonged recession means that peoplecannot make up for the decline in real wages by sending anothermember of the family out to work.

What is being achieved by pushing down the purchasing power of themassof the population? It is nonsense to claim that production costs are

being forced upwards by wage increases, as the share of the latter intotal costs has been declining with the increase in financial costs. So theonly objective must be to deepen the recession, adapt the economy to alower level of imports and make it possible for the country to run everincreasing trade surpluses over the next few years so that the demandsof the creditors can be satisfied.

What Can Be Done?'Change the wheels of the train while it is travelling at full speed.' This

old adage describes perfectly the challenge facing those political forceswhich are tryingto rescue Brazil from the crisis it has been brought to bythe techno-authoritarian system. The control instruments have brokendown, but Brazil cannot wait to have them repaired before changingcourse. What is most important of all is that Brazil recovers its freedomof action and takes over full responsibility for its destiny. The synergy ofan economic system depends on the efficacy of its control instruments.The dynamism of the market cannot by itself produce this synergy, forregulatory mechanisms that ensure the coherence of the whole are

equally necessary. At the centre of the system is political control, whichoverrules economic forces.

The agreements that Brazil has signed with the IMF considerablyrestrict the freedom of action of the Brazilian authorities in economicaffairs. Breaking these links is an absolutely essential first step if Brazilis to recover the prerogatives of a sovereign state in its negotiations withits private creditors.The symbiotic relation between the IMF and the bigbanks has created an ambiguous situation which allows private foreigninstitutions to influence the direction of our economic policymaking.

The recovery of our freedom of action should not be seen as adeterioration in our relationship with other countries. It is not aquestion of reneging on commitments undertaken earlier, but ofreconciling the need to satisfy our foreign obligations with the recovery


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of our economy. The increase of our exports cannot be separated fromthe expansion of the domestic economy and, much less, be based on a

local recession.The most intelligent way of approaching negotiations with our

creditors would be on the basis of an agreement on certain generalprinciples with other Third World countries which are facing similar

situations. This would be the quickest way of persuading creditors to

accept a global renegotiation through which a just division of the losses

could be made and the ground prepared for a return to normal

international cooperation. It is clear that the main industrial countriesare unwilling to make the first move in this direction, either because

they lack the political will to do so or because they have failed as yet to

become aware of the true nature of the present crisis. However these

negotiations turn out, debt servicing must not be allowed to stifle our

economy and a great effort must be made to free our trade with otherThird World countries from the traditional forms of financing.

We must be prepared to face a long period of financial abstinence on

the international financial market. This will force us to reconstruct our

own financial system, which is today largely dependent for finance onresources obtained abroad.

The rebuilding of our policy instruments is surely the most urgent

task. The excessive opening up of the financial system has taken away alarge part of the freedom of action of the monetary authorities. As they

are also heavily dependent on the financial market to roll over the

internal public debt, they have been reduced to a state of semi-paralysis.In exchange affairs, they are little better, for they are heavily de-

pendent on obtaining foreign loans and have linked the indexation of

treasury bonds to the dollar. To compound their helplessness, theswelling of the monetary budget has reduced the importance of fiscal


What our objectives should be is clear enough:Regain control over the monetary and financial circuits-whichwill mean that the Central Bank must resume its original functionof efficiently policing the financial intermediaries, of controlling theliquidityof the economic system, and of administering nterest rates;

Provide the public sector with other sources of financing so that it

no longer stifles the private sector-which will require fiscalreforms that effectively increase the rate of savings and ensure a

consolidation of the internal public debt on foundations that can be

supported by the society; and,


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Restore the cruzeiro as the only reference currencyin the economy.Once full control over the policymaking instruments is regained, it

will be possible to direct investments and public expenditure in generalin anew direction. At the moment, investment is at a very low level. Thesituation is reminiscent of one in which a runner is attempting to moveforward, but finds that the track is slipping away under his feet in theopposite direction, and at a much faster pace. The investment efforts arewiped out by the low level of efficiency resulting from the generaliseddisorder. The basic problem is not the level of investments, but the lack

of coordination between them. Some investments ought to be stopped,others restructured over a different time period, others reorganised sothat their functions are changed, and yet others simply enlarged.

What is required is the rebuilding of structures; simple market logic isnot enough, as this would necessarily lead to a greater underutilisationof resources. Only an overall view, worked out in detail, will enablemore efficient ways of using the available resources to be developed. Ifproductivity increases, it will then be possible for the rate of savings toincrease. This second objective can only be successfully realised if the

model of development is changed so that a much smaller proportion oftotal savings goes to non-productive activities. If the rate of savings isnot improved, inflationary pressures will increase and the social cost ofdevelopment will go on rising.

The limitations imposed from abroad combined with the presentanti-social model of development create internal and external dis-equilibria that restrict growth rates. Only a change in the kind ofdevelopment towards less elitist patterns of consumption will enable thecountry to obtain reasonably high growth rates in unfavourable world

conditions.To sum up, what must be done is to recover the country's freedom of

action, to rebuild the instruments of economic policymaking, toredirect investment and to change the development model. The task isextraordinarily complex, but it can be performed with the use of thetechnical skills available in the country. However, it will only happen ifBrazilian society produces the political will that is required to over-come the present inertia. But it must not be said that there is noalternative to recession and impoverishment. Men and women do not

choose the circumstances into which they are born, but they areresponsible for the choices they make in the face of the options they aregiven.