How the IMF Is Tying Down Brazil’s Hands

Brazilian former president Fernando Henrique CardosoLooking back in the economic history of any country is extremely difficult. But the economic era of the Cardoso administration must be analyzed in order to better understand the current economic conditions that plague Brazil today.

In 1994, Cardoso, still as Finance Minister of President Itamar Franco, initiated a massive economic campaign designed to improve the state-controlled economy.

It began with a new currency called the Real, whose value would be tied to the dollar. Import taxes were reduced. The economic reforms also called for privatization of state owned companies, even the most profitable ones.

Needless to say the initial results of economic growth seemed to make Cardoso popular with many. Hyperinflation ended and the economy improved. But the euphoria would not last.

As Cardoso worked with the Congress to pass a constitutional amendment to run for re-election, the international economy that Brazil slowly became integrated to went through several crisis.

The Cardoso administration gave up some control over the economy in return for stability from the International Monetary Fund for relief in 1998.

By the summer of 1998, 30 billion dollars were drained from Brazil’s currency reserves. As crisis loomed, Cardoso had to run for re-election in 1998. The IMF came to the rescue of the Cardoso’s reelection bid. They offered Brazil a 41.7 billion dollar bailout.

This gave the economy a fake sense of stability to allow for Cardoso’s reelection. Cardoso won and as part of the agreement with the IMF required budget cuts and higher taxes in the order of 22.5 billion dollars. The Brazilian people paid a hefty price for this fictitious sense of economic stability.

This package failed because two months after the details of the agreement were released 20 billion dollars left the country. These bailouts did not even provide Brazil with the investor confidence they claimed to provide! The IMF used the tumultuous second term of the Cardoso administration to make further inroads in having control over the economy.

It is unfortunate to say that the Brazilian domestic economy never recovered. Brazil’s economy up until today stagnates, its internal and external debt is at massive proportions and the current taxation levels are at astronomical proportions.

But beyond just losing the opportunity to expand its domestic economy, Brazil lost something even more important than its economy: its economic sovereignty.

In 1999, during the devaluation of the Brazilian currency. a crisis erupted. The international community predicated economic chaos. Cardoso fired an economics professor Francisco Lopes whose short tenure as central bank president scared investors further.

In order to rebuild investor confidence in the Brazilian economy, Cardoso appointed Arminio Fraga who worked for international speculator, George Soros.

Fraga’s ability to maneuver Brazil away from its crisis made him popular with some and that is why he stayed in office until the end of Cardoso’s administration in 2002.

But he maintained the high interest rates policy that has indebted the domestic economy in the name of fighting inflation, which scares international investors.

Then came the 2002 elections. Throughout most of 2002, the international capital inside of Brazil began to panic. They pulled investment out of Brazil at a rapid pace fearing that the current president Lula would harm their investments.

This capital outflow, was not derailed by unconventional capital controls (used in Malaysia and China) but by raising interests, choking the economy and curtailing inflation. But this traditional economic method once again failed to stop the hemorrhaging of capital.

The economy was near the brink of default when the International Monetary Fund (IMF) stepped in again all over Brazil’s political sovereignty. They demanded that then president Cardoso get the left-wing candidates, who had scared the market to sign an agreement they had formulated would maintain their hold on the Brazilian economy.

They asked that a primary surplus of at least 3.75 percent be maintained. If any candidate did not sign it, they would have likely caused further distress on the fragile economy and likely been attacked for putting his own interests above the ailing economy.

Needless to say, the top four candidates did sign the agreement in behest of the international community. This agreement with future candidates severely curtailed the ability of future administrations to correct the current economic doldrums.

The international capital invested in Brazil was still wary of any administration not deemed as supporting neo-liberalism. Most of the bailout made ready for Brazil, roughly 24 billion dollars was on condition of future economic measures. They waited for Lula’s economic policy to develop.

With the economy suffering from lack of credit, high interests and mounting debt repayments any small misstep by Lula could have led to an extremely large default. So, Lula appointed the ex-president of the Fleet Bank, Henrique Meirelles.

There were plenty of smart competent economists in Brazil, with the required knowledge to run a central bank effectively. But Lula appointed Mr. Meirelles because it was a friendly gesture to the international community.

He needed to regain their confidence, otherwise the dependent economy would end up like the defunct Argentinean economy. Just like Cardoso in 1999, when he fired Francisco Lopes and hired Arminio Fraga, a Wall Street guru.

By having influence over the chosen central bank president, the neo-liberal forces put pressure on Brazil to maintain extremely low inflation. Economic growth did not matter, and neither did the rising tide of debt.

All that mattered was that the battle for low inflation continue. In order to curtail inflation fears, the government’s only move was to raise interest rates to weaken the economy. As it did this, companies failed and workers were laid-off. This weakening of the economy was used to cool off any sudden inflationary pressures.

But as witnessed in 1999, cutting interest rates does not always push up inflation in Brazil. From late 1999 until the end of 2000 interest rates fell throughout this period. Inflation stayed at stable rate while the economy actually made a sustainable recovery.

This was a start but it was not enough to gain the true confidence of the international community. More needed to be done in order to bring back inflows to Brazil. Lula supported Finance Minister Antonio Palocci advice to hike the primary surplus to 4.25 percent of the GDP above the minimum 3.75 percent set by the IMF agreement.

They even moved it up further in 2004, to 4.50 percent in a failed  attempt to cool inflation and thus avoiding further interest rate adjustments by the Central Bank.

This is a lot more than was agreed to by the International Monetary Fund. The more Brazil pays in its primary surplus, the more money is leaving for the international credit agencies, US and mostly European banks and other credit agencies.

Today Brazil’s private and public sector pays nearly 300 billion reais (US$ 111 billion) a year to service its entire debt. The economic situation has not changed as Lula promised during his campaign. The politics behind the economics is still today held in the hands of international community.

The government continues to be hamstrung by the IMF. Since 1998 they have made agreements on the results of their economy. Lula has signed agreements from 2003 until the present with the agency.

Many are hoping that when this agreement expires, in 2005, Brazilians will regain control of their battered economy if Lula refuses to sign a new agreement. Because the current obsession with inflation is just holding back the economy after one successful year of growth.

In 2000, when interest rates fell throughout most of the year the economy grew by 4.4 percent. Then in early 2001, the Central Bank was scared of an overheating economy leading to inflation that it began to raise rates.

At that time, an electricity crisis occurred and growth went back to a stagnant level. A similar situation developed in 2004. Rates fell throughout the end of 2003 and throughout 2004 and this led to economic growth at 5.3 percent.

But once again in late 2004, rates went up because the Central bank policy makers feared the return of inflation causing them to miss their targeted inflation rate.

The economy will grow much slower in 2005 than in 2004. Even the neo-liberal supporting voice, The Economist, supports a minor adjustment to the inflation targeting system to allow for lower interest rates and a little more inflation.

It seems that the IMF and IFIs have some unduly political influence in Brazilian politics. And by using this influence they are able to maintain a favor economic policy tailored to their needs.

One can only hope that with the end of the IMF agreement, Brazilians will be given back their sovereignty over their economic future and control their own destiny.

Daniel Torres is a student of Political Science and Economics at the University of Massachusetts. Comments welcome at


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