[stop-imf] IMF on the Ropes in Brazil

[Robert Weissman]

    IN THESE TIMES

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  IMF on the Ropes in Brazil


    Brazil's decision to cut some ties with the Fund is indicative of
    changing times in Latin America

By Kenneth Rapoza =09April 11, 2005

For the first time in six years, Brazil will not renew its accord with
the International Monetary Fund (IMF). The accord was up for renewal
March 31. However, Finance Minister Antonio Palocci, an international
respected fiscal conservative, announced on March 28 that President Luiz
Inacio =93Lula=94 da Silva=92s wish to end Brazil=92s conflict-laden
relationship with the IMF would be granted.

Since December 1998, Brazil has withdrawn $93 billion from their IMF
credit line. In total, the country owes $24.6 billion by 2009. On
balance, the country=92s economy grew zero percent between 1998 and 2003,
according to the Fund=92s February Latin America report. Essentially, all
the IMF did was keep foreign investors confident that if Brazil couldn=92t
pay its debtors, the Fund was there to bail them out.

Brazil is the IMF=92s biggest debtor, and therefore its most important
client. Argentina is second. (By comparison, China, India and Russia
have no outstanding IMF loans and therefore are not subject to the
Fund=92s tutelage.) Brazil=92s economy grew 5.2 percent in 2004. Record
trade surpluses have helped Brazil accumulate the cash the government
needs to service its debts to foreign and domestic lenders, including
the $846 million it will pay in interest to the IMF this year.

Saying =93goodbye=94 to the Fund makes political sense for Lula, who faces
re-election next year. Lula=92s base considers the IMF the prime policy
apparatus behind economic failures in Brazil and neighboring Argentina.
They=92re not alone in this assessment. Argentina=92s blowout cost Brazil
billions in lost trade revenue, which ultimately translated into job
losses at home. Twelve percent unemployment was the norm in 2004, with
19 percent in Sao Paulo in 2002.

Those are terrible numbers for a country finding it harder and harder to
ignore the needs of the poor and working class. While the IMF asserts
that Brazilian poverty decreased in the mid-=9290s by 10 percent,
according to the World Bank more than one-third of Brazilians=97183
million people=97live in wooden or brick shacks on less than $2 a day.
Socioeconomic realities such as these have discredited the IMF
throughout Latin America, where many consider the Fund the kingpin of a
financier cartel oblivious to development and social needs.

Labor union leaders with close ties to Lula are heralding the finance
minister=92s decision as if it ushers in a new era of social spending and
cuts to the country=92s 19.25 percent interest rate. But industrial groups
are more pessimistic, not because they will miss the IMF, but because
they=92re certain the government will be even more draconian in raising
interest rates to curb inflation=97an old demand of the IMF=97so as to show
investors that they=92re not going to change course.

By severing the previous lending relationship, Lula can tell his
supporters that Brazil can now get by without the IMF and didn=92t have to
go broke to =93cut them loose.=94 But that=92s only half true. The IMF isn=
=92t
going away, and it is Brazil that is inviting them back, though in a
very different capacity. Under a new program that the country helped to
design, Brazil will be allowed greater spending flexibility. This will
allow the government to invest in infrastructure projects long ignored
under IMF budget restraints.

=93It=92s a very important achievement,=94 says Enrique Iglesias, president=
 of
the Inter-American Development Bank. The Bank worked with the Fund and
Brazil to create the pilot program. Chile once did something similar,
but the Fund only allowed for public investment in oil projects that had
a guaranteed investment return. The Brazilian government has chosen
mostly to invest in fixing dilapidated roads, irrigation projects and
chemical and biological research and development labs located in the
Amazon. According to Iglesias, the IMF has no say in what Brazil chooses
to invest in, only that the =93the projects need to eventually be
financially sound and cannot create a burden on public accounts.=94 The
three-year program allows Brazil $1 billion a year to play with. Not
bad, but still significantly less than what they pay in debt service.

The IMF has changed its position in Latin America out of necessity: The
IMF probably needs Latin America more than it needs the IMF. Latin
American leaders are starting to recognize that they can have a voice
within these institutions. As a result, the IMF responded positively to
Brazil=92s decision, as did U.S. Treasury Secretary John T. Snow. Iglesias
calls Argentina=92s recently approved plan to pay just 76 percent of its
debt, =93reasonable.=94 With that in mind, Hugo Ch=E1vez of Venezuela, N=E9=
stor
Kirchner of Argentina and Lula agreed to sign an accord in Uruguay on
March 2 to negotiate their foreign debt as a bloc, rather than
individually.

The IMF knows changes are afoot in Latin America. Former IMF Executive
Director Vijay L. Kelkar wrote in the March issue of the IMF=92s magazine,
/Finance & Development/, =93It is time for the IMF to adapt to present
needs [and] ... promote globalization that would benefit all, not just
one particular region or group of countries. A new debate in favor of
regional monetary arrangements has emerged.=94

Kelkar is aware that competing capitalisms are changing the nature of
the world=92s financial system. Argentina=92s foreign minister, Rafael
Bielsa, put it this way in the Argentine press about his region=92s
pressures to change the Fund: =93There=92s a rebellion on the farm. The IMF
is no longer a corral, and the little animals are beginning to escape.=94

And the perception in Brazil and the region as a whole is that since the
privatization and foreign debt boom of the =9290s, the United States has
abandoned the region. Aside from immigration concerns, Washington has
only to worry about competition from a more unified South America and
what that could mean to the government=92s ultimate goal in the region=97th=
e
Free Trade Area of the Americas (FTAA).

When asked by Univision TV during her Mexico visit on March 9, Secretary
of State Condoleeza Rice said the new tendency to elect left-wing
leaders in Latin America was fine so long as it was done within
democratic structures. Rice=92s chief concern is likely to match that of
leaders like Lula who know that booming stock markets and record trade
surpluses might be enough to send the IMF packing, but are meaningless
unless countries can provide essential services to the poor, reduce
poverty and allow for the growth of a stable middle class.

------------------------------------------------------------------------

*Kenneth Rapoza* is a former staff correspondent for /World Press
Review/ magazine. He now covers international finance and development
policy from Brazil as a freelancer.