Brazil’s Next President May Be A Free Market Populist
November 1 1989 by Clare Bower
Brazil is the most industrialized country in the developing world, with a population estimated at around 150 million. It is also the world’s biggest debtor-current external debt is about $112.5 billion-and it is facing problems in paying debt interest of over $10 billion annually coupled with the threat of hyperinflation and deep structural problems in its economy. In the last year, Brazil‘s Amazon rain forest has consistently made headlines over international concern for the environment, and the nationalistic reactions of Brazilian politicians have done little to ease the fears of the industrialized nations.
Although Brazil is anxious to avoid a moratorium on debt repayments, in July this year the government decided to delay payments to foreign creditors in order to build up foreign reserves, which currently stand at about $5.5 billion. The finance ministry stated that companies removed $2 billion of capital in the first half of 1989, which exceeds the, figure for all of 1988. The International Monetary Fund’s dissatisfaction with Brazil‘s inability to control inflation (now about 30 percent per month) and its huge public spending deficit has made an agreement with them unattainable; consequently, no new money is available to Brazil from commercial banks, foreign governments or international financial institutions.
Brazil‘s capital flow problems are made worse by uncertainty surrounding the imminent presidential elections, which will take place on November 15. The presidency of pose Sarney, who took over by default from a military government five years ago when President-elect Neves died before taking office, has left the country in urgent need of restructuring Brazil is broke, both morally and financially, and must be redesigned and rebuilt. It cannot go on much longer without a more favorable reordering of its foreign debt, without halting inflation and without clearing out some of the corruption that pervades all levels of its society.
The man tipped by many for this task is Fernando Collor de Mello. He currently holds nearly 45 percent in polls of voters who have made up their mind, which is more than all the other candidates put together. At only 39, he was virtually unheard of eight months ago as governor of the tiny northeastern state of Alagoas. His youth, clean good looks and easy manner have charmed Brazil-with its largely ill-educated and impoverished electorate-which requires any successful politician to be a populist. Color, with his slogan “Vamos construir um Brazil novo” (Let’s build a new Brazil), is the current embodiment of right-wing populism and the only candidate to date to inspire hope among the masses.
Once a playboy of the Rio de Janeiro nightclubs, Collor was born into the wealthy business classes and a family with political experience on both sides. But beneath the dazzle, Collor lacks firsthand experience of federal politics and an established power base, which could lead to difficulties in the event of his winning. His campaign is being financed by old school chums who are now wealthy CEOs, but he may not have the support to tackle Congress. He also needs to develop his political ideas, which still seem rather fuzzy and jargon heavy, interspersed with the occasional novel idea. However, he seems to have convinced other countries of his ability to win: On a recent trip to Europe, he held meetings with Britain‘s Margaret Thatcher, Germany‘s Chancellor Helmut Kohl, Prime Minister Michel Roccard of France, and King Juan Carlos of Spain.
But what of the politics Color would pursue? In a recent interview, CE sought his views on some of the main issues he would face.
Brazil owes its Western creditors over S112.5 billon. Some Brazilian politicians have called for a moratorium on interest payments at least until the country has had time to sort itself out. How do you envisage tackling the debt problem? How do you feel about debt conversion, and if in favor, what form would you have it take?
The external debt is one of our major problems and must be dealt with in a sovereign and realistic manner. We don’t support confrontation, but a negotiated solution. Debt conversion will be welcomed provided that it is linked to a sound program of development and industrial policy. We have a proposal for external debt which supposes the decentralization of negotiation, case by case, linked to vigorous programs of debt conversion and privatization. We are studying various forms of debt reduction based on existing market possibilities as well.
You saw Mrs. Thatcher in London recently. She gave no ground on debt. How will you avoid confrontation with your creditors or is it in fact unavoidable?
We don’t want confrontation. But we have to make a compromise between the recuperation of economic growth and taking care of our social problems. We believe that it is now possible to pursue a negotiated solution.
Collor’s ideas of debt are indeed among his most original. At the core of his proposal is revoking government sovereign guarantees on Brazil‘s debt, which would force foreign creditors to negotiate on a case-by-case basis and thus submit the entire debt to an audit that would weed out “irresponsible” debts. Under this scheme, each state-owned company would become responsible for the debt it originally incurred.
Color has said repeatedly that he does not want to fight with the IMF or confront any external creditor, although his ideas were received coolly by Thatcher and his statement then seemed to recognize that confrontation is inevitable: “The bankers won’t like it a bit-the renegotiation will be tough. We need to split the creditors down the middle and they’re only united because they deal with us in a bloc.” Further, Color sees his own plans as only the beginning ofa renegotiation of debt across all Latin America, which would certainly cause big waves.
He has since put these ideas into more concrete terms: repayment over 40 years at 4 percent with a 20-year grace period.
In his book, The Other Path, the Peruvian economist Hernando de Soto writes that the only way that South American countries can resolve their chronic economic problems is by allowing free market forces to prevail. Could this apply to Brazil and how closely does it equate with your own policies?
I believe in free market forces. But Brazil has many social problems which the market alone cannot solve. We have poverty and misery, 40 million Brazilians without access to wealth, education, housing, etc. The only way to deal with this is through state action. The free market should be preserved for the productive sector.
You discussed privatization with Mrs. Thatcher recently. Could the British experience be repeated in Brazil? What are your own plans for privatization? In which sectors would you concentrate?
The British experience is very interesting and we might have a lot to learn from that country. However, I know that we cannot repeat it in Brazil unless we adapt it to our own specific needs.
First, we intend to reprivatize some enterprises that previous governments took from the private sector in order to avoid bankruptcy. Second, we want to privatize state companies in sectors like steel, transport and energy by transferring their assets through market channels to private control. The concept that most interests us is that of BOT (build, operate and transfer); that is, the privatization of future investments in infrastructure via concession schemes. In broad terms, Collor’s economic proposals can be seen as having been influenced both by de Soto‘s work and by the success of Thatcherism in Britain. He opposes state subsidies and favors privatization, having stated in his manifesto, Nothing which can be done more effectively by the private sector will be done by the state.” He wants a political democratization ofBrazil, to be followed by democratization of the economy. However, although he is in favor of deregulation and market forces, it may be going too far to see him as following the de Soto path. His answer reflects his concern for the votes of the poor, to whom he must offer immediate and visible benefits if he is to succeed. His manifesto (like those of all other candidates) is filled with promises of more food, housing wages and health care.
FOREIGN INVESTMENT AND TRADE
There has been little new foreign investment in Brazil in recent years. The multinationals are worried by what is going on here. How do you intend to reassure them? Is their presence welcome?
Foreign investment is most welcome and the first step to attract it is to restore confidence in Brazil as a whole: its government and its policymakers. We intend to set clear rules which will provide the necessary confidence to all investors, both domestic and external.
What will be your policy on import liberalization?
Brazil has restricted its imports basically due to hard currency availability. It is part of our plan that, together with other measures to restructure our balance of payments, we shall recover our capacity to import at least to our 1980 level. In 1989, imports are estimated at $13 billion, whereas they were $20 billion in 1980.
U.S.-Brazil relations are in poor shape, mainly in the trade field. What would you do to get them into good repair?
We think that the U.S. and Brazil have a lot to explore to their mutual benefit. The U.S. is our biggest trading partner and our major external investor. We do envision this relationship expanding and, of course, we think that if we solve our problems of revenue flow, our imports from the U.S. could be a lot bigger than the existing figures.
Color sensibly recognizes the need for foreign investment to meet the lack of internal savings and to finance the recovery of economic growth. He believes that Brazil need not fear for its sovereignty in accepting external resources as long as his government sets out clearly defined and consistent rules. He does not appear to have any novel ideas about how to attract this needed investment.
On environmental matters, you seem to favor the principle of the polluter pays. Can you enlarge on your ideas?
We promise a balanced and nonpredatory development with environmental control to protect the world’s ecology and a proposal for an international pollution tax for those who damage nature. I will not allow toxic waste from other countries to be brought to Brazil.The focus of Color’s ecological proposal involves establishing a global tax on polluting nations, with a toy on annual emissions of toxic gases. The money would then be administered by a UN agency to regenerate degraded environments and to protect ecosystems. His comments on toxic waste reflect the Third World‘s current concern that it is being used as a dumping ground for the waste of the industrialized nations. Color has nothing to say on the Amazon specifically, and to do so would probably damage his chances in the election, which at this time seems firmly in his hands.