Can Brazil Afford to Be 'Rescued'?

[Robert Weissman <rob@essential.org>]

Can Brazil Afford to Be 'Rescued'?

By Mark Weisbrot

Monday, November 16, 1998; Page A25 

It is said that doctors bury their mistakes, but so can economists. And
sometimes they bury them in mass graves. Such is the case with the brain
trust of the International Monetary Fund, which is now set to operate on its
latest unlucky patient: Brazil.

After racking up disasters in Asia and then Russia, the fund and its allies 
in the Clinton administration have concluded that their only mistake was 
that they did not intervene early enough. So they have put together a $42 
billion "rescue" package for Brazil.

But there is little reason to believe that the IMF's bitter medicine will 
help Brazil any more than it helped Indonesia or Russia. In fact, economists
already are predicting a recession there for next year on the assumption
that Brazil takes the IMF money and the advice that goes with it. That
advice mandates big cuts in government spending, tax increases and
enormously high interest rates -- a deadly mix nearly guaranteed to send
any economy into a tailspin. It is difficult to see how the prospect of
recession -- not to mention the potentially explosive political conflict 
such policies will provoke -- will accomplish the goal of calming nervous
financial markets.

Brazil has the most unequal distribution of income in the world, with the
upper 10 percent taking about half the nation's income, while 43 percent of
the people survive on less than $2 a day. The IMF-engineered economic
contraction therefore will have terrible consequences even if it "succeeds"
on its own terms. People who already are malnourished will get less food,
and some will die. Spending on health care and education also will be cut,
and millions will lose their homes and livelihoods.

Are these drastic measures necessary? Let's start with the federal budget
deficit. It is running at 7 percent of the economy (or GDP). To put this in
perspective, the United States government ran a budget deficit of 6.1
percent of GDP in 1983, with no harm done. One might argue that either
of these deficits is too high over the long run, but there is no urgency 
about cutting them.

It is sometimes feared that budget deficits in this range will cause
accelerating inflation, but this is clearly not the case in Brazil, where
inflation is at 3 percent.

What about the exorbitant interest rates, now running at 42 percent, which
cripple economic activity even more than the budget cuts? The IMF argues
that these are necessary to prevent the Brazilian currency from collapsing.
This is because lenders, because of the risk of currency devaluation, are
unwilling to keep their money in the country at lower rates.

But other solutions are possible. Some economists argue that the country
would be better off with a flexible exchange rate, and they probably are
correct. Defenders of the status quo counter that the Brazilian currency is
highly overvalued, and so if it were allowed to float immediately, it would
first sink like a stone. This would increase inflation (by raising the price 
of imported goods). But Brazil's imports are only about 7 percent of its
economy, which means that the inflationary effects of a devaluation would
be relatively small.

Other measures could help Brazil avoid plunging its economy into
recession. For example, the government could place controls on the buying
and selling of its currency to prevent a currency collapse without having
sky-high interest rates. But the IMF does not allow these or almost any
other kind of "capital controls."

In the wake of the Asian economic crisis, which clearly was brought on by
the liberalization of international capital flows, a number of leading
economists have changed their views and are willing to consider various
forms of capital controls. But the IMF and its allies in the Clinton
administration remain committed to maximizing the freedom of international
investors while protecting them from the risks of bad loans and currency
depreciations. Hence their insistence that Brazil maintain its fixed 
exchange rate, without capital controls, no matter what the cost to 
Brazilians -- or to U.S. taxpayers financing the bailout.

The Brazilian financial crisis, like the Asian "contagion" that set it off, 
is a product of these misplaced priorities that are decided in Washington. 
And that raises the most important question: Shouldn't Brazilians have the 
right to choose their own economic policy? Washington clearly says no: It
announced just before the Brazilian presidential election last month that 
the funds to prevent a currency collapse would be made available only if
President Cardoso were reelected.

So much for democracy. But the battle is far from over, and the Brazilians
will make their voices heard in their Congress, state legislatures and, most
likely, the streets.

The writer is research director at the Preamble Center and a research
associate of the Economic Policy Institute. 

         ) Copyright 1998 The Washington Post Company