Still Time?

Brazil, a country until recently mostly identifiable with Rio's spectacular Carnaval and Brasília's other not-so-spectacular Carnaval of corruption and 3,000% annual hyperinflation, had managed in the second part of our decade to gain its financial footing. In 1994, then Finance Minister Fernando Henrique Cardoso introduced the Real Plan, and within months, both inflation and unemployment decreased as if by miracle.

Although not perfect by any means, the Brazilian economy had been managing since 1994. Inflation and unemployment were down and for the first time the less fortunate could buy home appliances and other "luxuries" on credit. Taking advantage of its locus on the American continent, its recent stellar financial performance, its abundant natural resources, the political will of President Cardoso and the serendipity of its circumstances, Brazil was able to secure a $42 billion line from the International Monetary Fund (IMF).

As of early this year, the only painful remnant of the old days was a consistently high level of current account deficit as a percentage of Gross Domestic Product (GDP). It was such a high deficit that made Brazil a suspect by association when Russia defaulted on its debt. It was obvious then that the infamous Asia contagion rather than be contained in one part of the world, it was getting closer to Wall Street. Currency speculators assumed that Brazil would be the next pawn to topple in the domino effect of the world equity markets. As a result, $20 billion hemorrhaged out of Brazil's foreign currency coffers.

Brazil has come a long way from a dictatorship to a developing country. Especially during this decade, the Cardoso government had made as much progress as financially feasible. However, from a certain point on, political and financial progress has to be accompanied by social betterment. Brazil, a country where 1% of the population holds 45% of all land and 2% of the population makes more than 50% of the GDP, is desperately in need for social fairness.

So far, President Cardoso has been miserably unsuccessful at attacking "organized" interests of certain interest groups. In an attempt to maintain social peace, he has masterfully kept his balance on a political tightrope. However, now that Brazil is under the mandates of the IMF, President Cardoso has a perfect alibi to re-allocate political resources (a fancy name for "pork").

Cardoso should fully exploit the serendipity of present circumstances to pass an agenda that goes beyond the financial requirements of the Real Plan and IMF guidelines. He should use the opportunity to drive the knife as deep as needed and lay the foundations of Brazil as a modern country. Instead of tiptoeing on previously arranged political menageries, he could build a legacy as the founder of the new country by modernizing the public sector, allocating land to peasants and privatizing most of the public sector.

Brazilian civil servants retire at the tender age of 40 and live happily thereafter on social security checks. At an age when most employees have just climbed the learning curve of their profession and are ready for maximum productivity, Brazilian servants are heading for the exits. In the past, serious efforts to curtail such benefits for public servants and especially to increase the retirement age have been met with strong opposition, to say the least.

Most recently, the Lower House of the Congress (Chamber of Deputies) proposed a 59% increase in their salaries. Although their salaries are fair by American standards (around $120,000 per annum), Brazil sports an emaciated $4,000 per capita GDP (US' GDP is $26,000). The current turmoil could give an excellent excuse for President Cardoso to severely oppose this piece of legislation when it comes to due in February.

Present circumstances offer an opportunity for a more equal distribution of land. This is a fair piece of legislation for landless peasants who slave away in plantations. The Landless Party has strongly come with this agenda. Ownership of land will motivate poor farmers the same way that has motivated similarly in Mao's China when productivity reached abysmally low levels. More than 50% of the land is concentrated in the hands of 2% of the population.

Brazil should also grasp the opportunity, and other creditor countries should strongly encourage this policy, to utilize "nature-for-debt" swap. In the past, creditors have partially forgiven Brazil's debts every time the latter implemented environmentally friendlier legislation for one of the richest ecosystems of our planet, the Amazonian jungle. Now Brazil can use an increased initiative to go ahead with even friendlier policies of the Amazon that would show up in the balance sheet. Vice President Gore definitely could be a supporter of such an approach in partial exchange for the $5 billion IMF package that was paid directly from the US.

The latest economic data from Brazil show a significant deterioration of its financial house. The foreign reserves are in the lowest level since 1994, the economy is shrinking for the first time in many years and the trade deficits keep increasing while the debt has ballooned to more than $240 billion. However, Brazil has probably the last opportunity to be given the benefit of the doubt and come up with political and social reforms that had to be done some time ago and most importantly will place the country on the right track for sustainable long-term growth.

Basil M. Karatzas is graduating in May 1999 with an MBA degree in international Business from Rice University, in Houston, TX. Basil also serves as President for Platinum Holdings International, an international management and capital consulting firm, and can be reached at karatzas@rice.edu  

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