Re: Brazil and the IMF

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Matias,

I think I did not make myself clear.  The Brazilian trade deficit is the direct and
inescapable result of an emphasis on a policy of export as the engine of
development.  I did not mean to suggest that Brazil should not encourage more exports
to remove the trade deficit, but rather, under dollar hedgemny and reliance on FDI to
finance export production, Brazil had no chance of achieving a trade surplus without
first destroying its economy and give back all its had gained in the past half a
century.  Even for China, foreign trade has produced only a meaningless current
account surplus, but a real deficit in national wealth.  China of course has the
advantage of an extremely low cash wage regime because of an autarkic socialist
economy imposed by 5 decades of US embargo, as compared to all other exporting Third
World economies.  China is actually eating the lunch of the likes of Brazilian
exporters, causing global deflation with its market power.  But China is heading
toward the direction of Brazil, when the time will come when its low wage and state
shirking of social responsibilities such as pension and health care obligations, not
to mention education can no longer to masked under the guise of reform to market
economy.

I agree with your three additional factors.
I would like to read your paper if you would kindly send it.

Henry

Matias Vernengo wrote:

> Henry:
>
> Although you are absolutely correct about the initial (1994-99) appreciation of
> the currency, you are completely off the mark regarding the "misguided emphasis
> on exports."  For two reasons, I should add.  First, there was no emphasis on
> export promotion in the first Cardoso period (1994-98).  In fact, Brazil moved
> from trade surpluses of 6 per cent of GDP to deficits of 3 per cent (add always
> an additional deficit in invisibles to get a bigger deficit in the current
> account). This was caused both by a surge on imports (given trade liberalization)
> and lack of exports.   Second, a better export performance would have implied a
> lower trade deficit, and hence less accumulation on foreign debt.  Foreign debt
> (as much as domestic debt) exploded during the Cardoso years, from slightly above
> 20 per cent to more than 50.  An emphasis on exports would not have been
> misguided, quite the opposite.   Instead of your number one (emphasis on
> exports)  let me throw some problems that should be mentioned, and that are more
> relevant in my view regarding the current predicament of the Brazilian economy.
>
> (1) Excessive reliance on trade liberalization
> (2) Same for the capital account
> (3) Incredibly high interest rates (with emphasis on this one)
>
> Unilateral trade liberalization meant that Brazilian average tariffs on American
> goods are lower than American tariffs on Brazilian goods.  Even if you believe in
> Ricardian comparative advantage, this was an exaggeration, that generated
> persistent trade deficits (which lead to accumulation of foreign debt) and
> unemployment (by the way, compare with the slow process of liberalization in
> China). Capital account liberalization was pushed hoping to attract FDI to boost
> growth.  FDI came, but almost half was brownfield investment into privatized
> sectors.  Also, the trade deficits implied an increasing need of hot capital
> flows which led to the third problem, namely: high interest rates.  High interest
> rates, in turn, led to an increasing burden of debt servicing, aggravating the
> fiscal deficits.  High interest rates, and the agreements with the IMF (which
> demanded primary fiscal surpluses) led to lower effective demand.  Needless to
> say unemployment has become the great problem and the biggest elector of Lula.
>
> Some of this issues are in a paper I wrote for the project on "External
> Liberalization, Income Distribution, and Social Policy," directed by Lance
> Taylor, called "Belindia Goes to Washington: Brazil After the Reforms," and will
> be available soon at the Center for Economic Policy Analysis website
> (http://www.newschool.edu/cepa/).  I can send it to you if you are interested.
>
> All the best,
>
> Matias
>
> "Henry C.K. Liu" wrote:
>
> > The real fundamental problem with Brazil was two fold: 1) A misguided
> > emphasis on export and 2) a misguided monetary policy of fixed exchange
> > rates.
> >
> > Both of these policy errors trapped Brazil into being a victim of dollar
> > hegemony.
> >
> > No version of debt resolution can save Brazil, however humane or ingenious.
> >
> > Brazil needs to adopt the State Theory of Money and free up sovereign credit
> > for the revitalization and development of its domestic economy.  This can
> > only be done with exchange control.  Tell the IMF to go home and impose
> > strict control on imports payable in foreign currencies.  Require all
> > Brazilian exports to be payable in Brazilian real.
> >
> > See:
> > http://www.atimes.com/atimes/China/DG23Ad04.html
> >
> > see:
> > Crippling debt and bankrupt solutions
> > By Henry C K Liu
> > http://www.atimes.com/atimes/Global_Economy/DI28Dj01.html
> >
> > In Brazil, the government was forced to allow a short two-day period of 9
> > percent devaluation of its peg before it threw in the towel on January 15,
> > 1999, and suspended foreign-exchange control and abandoned the peg to allow
> > the Brazilian real to free-float. Seven years earlier, in 1992, even the
> > mighty British Treasury had to throw in the towel in its failed defense of
> > the pound sterling against the onslaught of the bet against the currency
> > staying in the Exchange Rate Mechanism from George Soros's hedge fund.
> >
> > During the first two days of the Brazilian crisis, the government tried to do
> > a stock purchase, copying Hong Kong's example of "market incursion" in August
> > 1998. But it was a non-starter. Hong Kong had to use US$18 billion in two
> > days to foil the manipulation of its stock and futures markets on August 29,
> > 1998. Brazil had only US$30 billion reserve left by January 14, 1999,
> > compared with Hong Kong's US$100 billion, and the Brazilian market was bigger
> > than Hong Kong's. So the government decided that it was futile even to try,
> > after some faked moves failed to spook unimpressed speculators.
> >
> > For many years, IMF experts had touted the myth of the indispensability of
> > fixed exchange rates for small economies heavily dependent on external trade,
> > such as Hong Kong, or large free-trade economies facing high inflation, such
> > as Brazil, in the context of an international finance architecture set up by
> > the Bretton Woods regime. The inertia of the status quo and the lack of hard
> > data on the uncertain effects of de-pegging had permitted this myth to assume
> > the characteristics of indisputable truth, even though the Bretton Woods
> > fixed-exchange-rate regime had been abandoned since 1991 and deregulation of
> > global financial markets had totally changed the rules of the international
> > finance game.
> >
> > Brazil pegged its currency to the US dollar as a way of fighting chronic and
> > severe inflation. When the Real Plan was introduced in 1994, inflation was
> > 3,000 percent annually.
> >
> > The overvalued Brazilian currency peg inflicted much pain on the economy,
> > first in the export sector and subsequently spreading throughout the entire
> > economy. Both industry and labor had wanted for a long time a lower-valued
> > currency (the real) to relieve Brazil from a high (70 percent) interest rate
> > and to revive an export sector saddled with heavy foreign debt, even if the
> > pre-devaluation low inflation of 3 percent was expected to rise as a result.
> >
> > The crisis in Brazil was triggered by a moratorium on state debt payments
> > imposed by the large and wealthy state of Minas Gerais on January 12, 1999.
> > On January 13, Brazil devalued the real by 9 percent, having seen its foreign
> > reserves drop by more than half in the previous five months to US$31 billion.
> > A drain of $1.8 billion from the Brazilian central bank was recorded the
> > following day. At that rate, Brazil only had 15 days to go before it would
> > run out of reserves.
> >
> > On the morning of January 15, to stop the financial hemorrhage, Brazil lifted
> > exchange-rate control entirely and allowed the real to float freely in the
> > foreign-exchange markets without central-bank intervention. Within minutes,
> > the real fell to 1.60 to the dollar from its previous 1.32, but by day's end
> > settled around 1.43. By the end of the trading day on January 15, Brazil had
> > managed to halt the flight of the dollar, with the real down 10.4 percent for
> > the day and 18 percent from the pegged rate, even though the market had
> > estimated the real to be overvalued by 30 percent.
> >
> > In the long run, a gradual float to the estimated market value was considered
> > reasonable. But the overvalued currency was allowed to linger too long and
> > did too much structural damage to the economy, which continued on a downward
> > slide. The real is now trading around 3.6 to a dollar.
> >
> > Still, with a free-floating currency, Brazil's short-term interest rate fell
> > from 71.65 percent to 36.11 percent in one day and the stock market jumped 34
> > percent on January 15, 1999 from its previous low, with lifting effects
> > worldwide on other markets. The Dow Jones Industrial Average (DJIA) rose
> > 219.62 points, or 2.4 percent, to 9,340.55 on that day. US Treasuries dropped
> > sharply, reversing the flight to quality, pushing yield on 30-year bonds up
> > to 5.12 percent from 5.05 percent. By 7pm on January 15, only $173 million
> > had left Brazil's foreign-reserves coffer.
> >
> > In 1999, Brazil had to face a budget deficit and a $270 billion foreign debt.
> > But its self-imposed penalty of an overvalued peg was removed, gaining
> > improved conditions for export and stimulative effects for domestic demand.
> > However, IMF conditionalities forced Brazil to adopt austerity budgetary
> > measures and privatization that prevented domestic economic development.
> >
> > With Brazil's currency free-floating, it was obvious that Argentina's
> > currency board regime could not hold. Argentina tried dollarization briefly,
> > but the combined penalty of high interest rates, asset deflation, reduced
> > exports, trade deficits and high unemployment finally pushed the country off
> > the cliff in 2001, defaulting on its $95 billion sovereign debt. Argentina is
> > living proof of the myth of dollarization as the path to economic security.
> > http://www.atimes.com/atimes/China/DJ16Ad04.html
> >
> > "James K. Galbraith" wrote:
> >
> > > PKT friends --
> > >
> > > I have just published an essay on Brazil, the IMF, and larger monetary
> > > issues through the Levy Institute;  it is available at
> > > http://www.levy.org/docs/pn/02-2.html for those who may have an interest.
> > >
> > > With regards.
> > >
> > > James Galbraith
> > >
> > > *****
> > > Professor James K. Galbraith
> > > Lloyd M. Bentsen, Jr. Chair in Government/Business Relations
> > > LBJ School of Public Affairs
> > > The University of Texas at Austin
> > > Austin TX 78713-8925
> > >
> > > See the UTIP web-site at http://utip.gov.utexas.edu
> > > See the ECAAR web-site at http://www.ecaar.org
> > > See the Levy web-site at http://www.levy.org