The IMF bail-out for Brazil: In whose interests? Sabyasachi Mitra

The recently announced IMF loan to Brazil, worth US$30 billion, holds out the promise of taking the Brazilian economy out of the woods. But even a cursory look at the conditions attached to it makes one realize that the loan, rather than take Brazil out of the woods (into which the IMF itself has led the country), will actually force it deeper into the forest. The strings attached to the IMF bail-out package evoke the fear that it will serve as a stranglehold on the Brazilian economy and an intrusion on the sovereignty of that country, coming as it does in the midst of Brazil’s moves towards democracy.

With the term of the current Brazilian President Fernando Henrique Cardoso (who came to power in 1994) nearing its end, Cardoso’s chosen successor for the presidential election is lagging behind in third place, behind two left-wing challengers – Luiz Inacio da Silva, known as Lula, of the Workers’ Party, and Ciro Gomes of the Popular Socialist Party. The two are heading for a possible second-round run-off in the election due to be held in October 2002. The prospect of a left-wing candidate becoming President of Brazil has sent cold waves down the spines of international finance capitalists, based mostly in the US. The left in Brazil has been threatening to reverse the free-market approach to economics and trade, and strive to improve the lives of the poor who have been left behind in the country’s experimentation with the market economy.


The IMF loan is aimed at preventing such a reversal from getting off the starting-block. Each and every contestant in the forthcoming election has had to sign on the dotted line, promising to continue with the current budget policies, in order for Brazil to avail of the full loan amount that Brazil has been promised. The loan will be delivered over the next fifteen months, with only some US$6 billion in new money being made available by the end of 2002. The major part of the loan (US$24 billion) will be disbursed only after the election, and that too only if the new government meets certain budgetary targets. Loan disbursal is subject to meeting quarterly targets and reviews by the IMF, and at the first instance of a target being missed, the IMF can say that Brazil is not going to get any more money.

The IMF loan requires whoever takes over as President of Brazil on January 1, 2003, to maintain a primary budget surplus of 3.75 per cent through till 2005. Supporters of the rescue package have praised Cardoso for pursuing bold economic reforms and winning the confidence of international donors (read the US) to be sanctioned the mega bail-out amount. The US administration, which was opposed to the loan till the eleventh hour, announced on August 8, 2002 that Brazil deserves the money as it has moved courageously to open its markets, fight inflation and put its fiscal house in order. The loan is expected to rescue the plummeting Brazilian currency, prevent investor flight and diminish chances of the new government defaulting on the public debt of US$250 billion.

Analysts, however, are not that optimistic; neither are the left-wing candidates contesting the presidential election, although they had to reluctantly endorse the loan deal. Guido Mantega, Lula’s chief economic advisor, has said that the deal limits the capacity for social investment. He accused the IMF of trying to confine the Brazilian government ‘in a plaster cast’. Maintenance of the primary budget surplus, coupled with reduced interest rates, will make all efforts to reheat the economy futile, Mantega opined.

Jose Antonio Ocampo, Director of the United Nations’ Economic Commission for Latin America, has said that while the loan might temporarily mitigate the financial panic, the effects will be short-lived and the consequences for economic growth will be limited. The standard advice of the IMF to borrowing countries to enforce ‘fiscal discipline’ inevitably translates into enormous suffering for millions of people, more so as most of these countries rarely have a social safety net. And in countries where a safety net does exist, in however skeletal a form, it becomes the first casualty of the fiscal austerity drive. As Joseph Stiglitz put it: “It’s easy at the top to say cut back on expenditures, but it is hard when you are a politician and the unemployment rate is 18 per cent.”

The current crisis in Brazil, in fact, is to a great extent due to Cardoso’s over-dependence on multinationals and international financial institutions to develop Brazil’s economy. As an ECLAC study of Brazil’s services sector shows, multinationals never act as agents of national development. The major goal of multinationals is to gain access to the national market rather than to maximize exports, not to speak of creating employment. Again, access to local markets is obtained not so much through the creation of new facilities as by purchasing existing assets. Therefore, the host country rarely earns any additional foreign exchange from exports of products made by multinationals.

On the other hand, removal of protectionist barriers, a crucial aspect of liberalization, results in surging imports, leading to an inexorable rise in the trade deficit of these countries. Brazil is no exception. While, in the early 1990s, Brazil was running a trade surplus to the tune of US$10-15 billion a year, by 1997 it was transformed into a deficit of US$8.3 billion. The pegged exchange rate, which Cardoso held on to for long, furthered Brazil’s woes by making Brazilian exports expensive compared to those of its competitors with flexible exchange rate regimes.

Unrealistically over-valued currencies in an open economy sooner or later spark off speculation about imminent devaluation. This in turn leads everyone to converting the domestic currency into US dollars, putting even greater pressure on the former. Often, the national government is forced to suspend conversion or freeze accounts, partially or entirely, to prevent mass withdrawal of domestic deposits from banks by nervous investors who fear that inevitable devaluation will greatly diminish their holdings in real terms and therefore want to convert their holdings into US dollars. The rising demand for US dollars makes the country even more dependent on foreign capital and leads to an unsustainable current account deficit. Even a momentary lapse of investor confidence in the performance of the economy results in capital flight, leaving the country’s economy in the lurch.

Brazil under Cardoso has been a classic case of the above. In a bid to attract more foreign capital, the country raised its interest rates too high, encouraging the entry of short-term speculative funds that are prone to overnight escapades. The crisis worsened in late 2000 when Brazil was hit by a series of international shocks – recession in the global economy, a looming default in Argentina, a domestic energy crisis triggered by investment cuts and a mal-advised privatization programme. Inflow of foreign capital fell sharply and the currency depreciated further. Cardoso raised interest rates again in early 2001 in a bid to prevent the outflow of foreign capital. And he begged the IMF to help Brazil regain the confidence of international financial markets. The IMF agreed, in August 2001, to a new fifteen-month Stand-by Agreement. The deal was worth US$15 billion, with an immediate tranche of US$5 billion to boost foreign reserves. In exchange, Cardoso agreed to raise Brazil’s primary budget surplus from 3 per cent of GDP in 2000 to 3.35 per cent in 2001 and 3.5 per cent in 2002. To be eligible for the recently negotiated US$30 billion loan, the percentage has been raised even further to 3.75, a rate that has to be maintained till 2005.

This, then, is the genesis of the crisis Cardoso has landed Brazil in. Ironic, for Cardoso had initially entered the political arena as a bitter critic of ‘dependent development’, criticizing the association of national with international capital in the periphery of the world system for perpetuating “deep social and economic inequalities, loss of control over the direction of national development, and vulnerability to external financial shocks”. In his former incarnation, he had said that dependent development “occurs because both state and business pursue policies that create markets based on concentration of income and social exclusion of most of the population. . . . The conflicts between the state and big business are not as antagonistic as the contradictions between the dominant classes and the people.”

Even as Brazil has been offered this huge bail-out package by the IMF, neighbouring Argentina, reeling under a much deeper crisis, has received only brickbats. The United States has agreed to back bail-outs for Brazil and Uruguay (another neighbour of Brazil in crisis), but has refused to hold out any such hope to Argentina. In fact, ever since the present Bush administration took office, it has looked sceptically upon bail-out packages for nations in crisis, maintaining that they are ‘a waste of taxpayers’ money’ and that the borrowing nations will not be able to repay their debts in the long run.

Then why this sudden change of heart? Why this sudden concern for Brazil? To believe the Bush administration story that ‘Brazil has been good; Argentina has been bad’ would be naivety at its worst. The real reason is that the IMF loan to Brazil will boost Citigroup and FleetBoston, two American banks (and major funders of the US presidential election campaigns) which stand to lose close to US$20 billion in the event of Brazil defaulting on its debt. These two and a third bank, JP Morgan Chase, have far greater exposure to Brazilian loans than to Argentinean ones. Also, car companies like General Motors have declared their whole-hearted support to “efforts such as this that stabilize the economy”. General Motors has sunk billions into factory facilities in Brazil, and a Brazilian melt-down would turn these into white elephants. With the US Congressional elections slated for November 2002, no government can afford such an eventuality.

So, it turns out that the IMF loan to Brazil is more of a bail-out for US multinational interests in Brazil than a rescue package for the Brazilian economy. American banks have given out about US$25.6 billion in outstanding loans to Brazilian borrowers, with Citigroup’s share being US$9.7 billion. As soon as the IMF loan was announced, the shares of Citigroup and FleetBoston, which many analysts believe have actually gone bust “and are only being kept alive through a ‘wall of money’ being thrown into the US markets”, rose 6 per cent. These banks will now try to recover their money from the Brazilian economy during the temporary reprieve that the IMF loan will provide to Brazil and before Brazil too goes bust like Argentina. As for what has been called the ‘bicycle mechanism’ – the bicycle keeps moving as long as it is being pedalled – under the current economic regime Brazil will need more and more loans to repay its ‘outstanding dues’, and once such pedalling of loans from international financial institutions comes to a halt (which undoubtedly will happen, sooner rather than later, once the multinationals ‘recover’ their money), the Brazilian economy is bound to implode like that of Argentina. Till such time the bail-out, and the agreement to lower the floor of Brazil’s international reserves – from US$15 billion to US$5 billion – mean that Brazil’s central bank has that much more money to use in hapless defence of its besieged currency. This will heighten speculation, and this is what the IMF loan will be used for.

A decade ago Washington had claimed that all that Latin American nations needed to do to ‘experience a great surge of economic growth’ was to open themselves to foreign goods and capital, and privatize their state enterprises. Today, the Argentinean economy is in a shambles; Uruguay and Paraguay are neck-deep in trouble; Mexico and Brazil, regarded as success stories till a few months back, have per capita incomes only shades higher than what they were in 1980. With inequality rising sharply, more people in these countries are worse off today than they were twenty years ago. Once Brazil defaults, it will destroy whatever remains of the Latin American economy.

The sole winners will be the transnational companies which will leave the sinking ship in time, not only with their own assets but also those of their co-passengers (the host countries). The real influence of global capital in international and national policy-making is far greater than is borne out by the misleadingly small share of the hundred biggest transnational companies in world GDP, which  is still small, rose from 3.5 per cent in 1990 to 4.3 per cent a decade later.

Brazil’s fiscal situation has been good, its inflation rate has been low and its balance of payments not too bad. Yet, the possibility of the country being ruled by a left-leaning President has sent the global capital markets into a tizzy and caused a run on the Brazilian currency. The IMF loan ensures that whoever wins the election protects transnational interests in Brazil, irrespective of the consequences of such action on the lives of workers and the poor in Brazil.

Today, worldwide confidence in the IMF prescription is at an all-time low. The enthusiasm for free markets is more tempered than ever before. International financial institutions and the US have lost much of their credibility in the developing world. Brazil needs to take advantage of this growing dissent against the west. The time is ripe for the country to break with the rules of the game set by the international financial system. It should immediately impose capital controls, taking a cue from what Malaysia did in 1998, and call for reorganization of the global financial system. The interests of billions of people across the globe cannot remain hostage to the interests of a few transnational companies. It is time to act now. For even a day later may be too late.