Stabilization plan fails these economies implied by such an evolution would be accompanied by such an extensive process of marginalization that it seems impossible that it could be sustained for very long.
But this forest of de-industrialization should not keep us from seeing the trees of strong economic growth in Brazil. The explanation for the
THE CRUZADO plan was adopted in February 1986 to stabilize country s vibrant industrialization and its overcoming of the crisis of the early 1960s, which was an exception in Latin America, has paradoxically to be sought in the reasons that elsewhere have brought on de-industrialization.
wreck of this scheme has aroused considerable international attention (see, for example, The Economist of March 14). Its political effects have been highlighted by renewed military intimidation against
Brazilian working people.
The following article explains, among other things, the paradoxical combination of strength and weakness in the Brazilian economy indicated by the fact that, despite its massive load of debt, it achieved a growth rate of 10 per cent in 1986.
PIERRE SALAMA
The failure of the plan was revealed by the so-called corrective economic measures adopted after the
November 1986 elections, those announced by President Sarney
The prices of 500 basic few weeks, the price of milk went up by 110%. In 1987, the economic experts are expecting once again an inflation rate well over 100%, and the banks are already providing for a 750% rate of repayment on deposits. During entire period when wages and frozen, the interest rate prices were on savings was below real inflation.
As a result of this gap, Brazilians, especially the middle classes, massively liquidated their savings.
turn, had a dual effect: on the one hand it inflated demand and increased imports, threatening surplus. On the other, it sent invest-
But, most of all, the Cruzado plan to disregard, with supreme self-confidence, a foreign debt that has reached 109,000 million dollars.
At the turn of the year, Brazil got a rescheduling of 4,100 millions owing,
3,000 million represented in arrears.
presented a confident face, like the
International Monetary Fund, which has taken a favorable view successive "readjustments"
18
For several years, most of the Latin American economies have been going through a distinct de-industriali-
(1). It seems that what is involved is something deeper going than a mere passing crisis of accumula tion. The decline in the relative weight of industry in the total wealth created is clear, apparently long lasting, and matched by a relative increase in the weight of the primary sector.
For this reason, it is possible to argue, with all due caution, that the financial crisis these countries are now experiencing could recenter their economies around the primary sector. In that way, we could go back to a classical international division of labor. Contradictions in Brazil's economy
However, if such a process destructuring and restructuring of the productive apparatus were definitely to take form, it would raise problems. It does not possible that such a regression could take place without provoking clashes that could deflect the process.
of industrialization, the social formation in these countries has become more complex. Urbanization has assumed considerable dimenhave been unable to achieve industrialization of sufficient scale, diversifi. cation and elasticity to enable them at the same time to make a colossal transfer of resources to the foreign banks and to promote strong industrial
Brazil has a very large trade surplus, the third largest in the world after Japan and Germany. In 1984, it was 13,400 million dollars. In 1985, it was 12,500 million dollars. And in 1986, it is expected to be 13,000 million This surplus has enabled Brazil in large part to finance the service on its debt.
Despite the extent of the transfers to the foreign banks, the debt is supposed to have dropped only by 193 million dollars in the first quarter of 1986 and remains at an extremely high overall level, amounting to 106,000 million dollars or 350% of the value of exports of goods and services. The latter figure for example, with 537% for Argentina.
The payment of interest alone, as a percentage of exports of goods and services, is supposed to have dropped slightly, falling from 38% in 1985 to 29% in 1986, owing to a strong upturn in exports and the recent drop in real interest rates on the international financial market. (3) Such a drain on the economy should
1. Fajnzylberg, "Caracteristiques de l'industrialisation Amerique Latine, 'Problemes d'Amerique Latine', No. 77, 1985.
2. 'World Financial Market' (WFM), September 1986. The latest prediction was revised downward recently. It is estimated that the strong rise of domestic demand will reduce this surplus, which nonetheless supposed to amount to 10,000 million dollars.
3. WEM, September 1986. The minister of finance is known to want to limit the service on the debt to 2.5% of GNP, which in the present conditions seems difficult without an averall rene. gotiation of the debt. International Viewpoint 20 April 1987
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BRAZIL
bring on a considerable depressive
If you take the case of France, studies have shown that the rise in the price of oil brought about a "transfer" to the oil-producing coun that could be calculated 2% of the Gross National Product (GNP). This increase is supposed to have resulted in a 3.5% decline in GNP and a 5.5% drop in real income.
Of course the payment of interest principal on does not have exactly the same significance. In origin, it is an indebtedness brought on essentially by investment saving and feeding growth. But for several years the autonomy of this debt from the productive structure has been developing to such an extent that is is assuming a significance similar to the in France by the rise in the oil price.
depressive pressure have had a reverse multiplier effect. It has been for many countries, inasmuch as the net transfer can be estimated at between 6% and 8% of GNP, or three times more than the drain that oil importing countries have suffered. And to this it would also necessary to add the additional that Brazil has had to make through its importing of oil. And nonetheless economic growth has remained strong.
Production increased by 12% in the first quarter of 1986 over the first quarter of 1985. (6) This increase is so strong that it becomes very diffidetermine to what extent economics and to what extent politics are responsible for the present shortages of final and intermediary procreate a climate of discontent and lack of confidence in an economic policy that sought to be original and, thus, under the cover of relative price adjustments, to return to a more orthodox policy, freeing prices from wage levels? Or were the shortages brought on by an overly buoyant demand, propelled by the liquidation of savings and the recovery of buying power that started some months before the beginning of the Cruzado plan, as well by the evening the distribution of incomes and the rise in employment resulting from the speedup in growth? (8) Probably both played a role. The elections at the end of November strengthened the hands of the advocates of continued democratizaand of implementing unThe Cruzado Il plan International Viewpoint 20 April 1987 adopted on November 21, 1986, aimed at providing an answer by raising the prices of certain public services and of consumer durables, as well as fuels, in order to curb demand and relieve the pressure of domestic debt on the budget. Strong growth creates its own problems
This strong growth is problematical, produced contrary effects elsewhere. This is what I will try to explain.
Over the last 30 years, Brazil has managed to build up a rather complete industrial fabric, extending from the consumer goods sector to the producers goods and the intermediate products sector. Import substitution going up the chain of production, and the impetus and dynamism given to the consumer durables sector both by an industrial policy favoring the intermediate products-producing sector, and by the policy of redistributing income favoring 25% to 30% of the population to the detriment of the rest, have created a relatively complete industrial fabric, in which "gaps" are the exception. President Jose Sarney (DR)
The evolution of this fabric toward growing complexity, giving major derived demand for imports of more sophisticated products, met through a growing opening of the economy to world trade, has led to big debts. Internationalization through trade, however, is neither greater nor less thans the tends to mask real processes of import substitution for certain strategic profinancial internationalization, on the other hand, is much great-
The debt has increased considerably, but the national financial markets have been relatively protected from foreign interests. (9)
The systems of accumulation that followed the coups d'etat of 1964 and 1967 have one point in common: They excluded the great majority of the population from the fruits of the and were thus characterized by growing income inequalities. (10) accumulation was put in place that original, because, on the one hand, it was based on the growth of the so-called average curves of income distribution; because of the parallel growth of the sector producing consumer durables, which were described at the time as luxury consumer goods. essentially controlled by multinational contrasted with the lethargy and diversity of the so-called "workers" consumer goods sector resulted from the steep drop in buying power suffered by working people not belonging to the middle strata. The latter sector was essentially controlled by Brazilian firms.
Both these sectors were coupled with a producers goods and in particular an intermediary products sector controlled by the state. This interaction, a harmonious one from an economic point of view, was propelled by a drop in wage costs and the establishment of a "felicitous" balance between the overall, final and intermediate profiles and between supply and demand. This worked so well that the valorization of capital was at least in the consumer durables sector, as long as features persisted. Thus, this sector
A.F. Fonteneau and P.A. Muet, 'La Gauche face a la crise, Presses de la FNSP, 1986, p. 38.
Brazil, up until 1979-1980, when the debt itself began to pile up more debt. On the growing autonomy of the debt from the productive structure, see article "Dettes dollarisation, " 'Problemes d'Amerique Latine' December 1985. It should be noted that for many countries, the origin of indebtedness either monetary and exchange policy inspired by the precepts of the "Chicago Boys" (e.g. Argentina, Chile), and not an industrial effort; or a policy of arming (e.g. Peru).
6. Instituto Brazileiro de geografia e economia (IBGE)
On the shortage of milk and meat, which, for example, marked the entire preelectoral period in Brazil, see Joao Machado, "Austerity follows November elections, in 'International Viewpoint, No. 112, January 26, 1987.
8. Slipping over a 12 month period, production increased by 14.3% in June, 12.2% in July and 9.2% in August. In the month of August, auto production dropped by 4.5% from the July level, and food products by 7.7%. Source: IBGE.
9. Monica Baer, 'A internacionalizacao financeira do Brasil,' Ed. Vozes, 1986.
10. See the special issue No. 16-17, 1974, of 'Critiques de l'economie politiques', published by Maspero, Paris.
19
pulled along the others, first the producers goods sector and then the consumer goods sector.
Beginning in 1975, approximately, the main features characterizing the of accumulation underwent modification. The dynamism of accumulation depended less than before thrust of consumer durables production, although the middle layers continued to grow. (11)
sector, the infrastructural sector and in the intermediate goods producing sector became cumbering. Brazil then experienced a revival of import substitution, despite a phase of an increasing openess of its economy, which enabled it to consoliindustrial plant and to build a certain elasticity into it. (12)
end of the 1970s, the blame for the indebtedness can be placed on the systems of accumulation and the oil shocks. There is no doubt that the rapid growth of both the consumer durables sector and the middle strata led to massive imports of producers goods and intermediary products mainly, but also durable
Exports did not grow fast enough with respect to imports, and the deficit was covered by incurring fordebt.
The eign growing weight assumed subsequently by the producers goods and energy sectors was reflected by more consistent investment which could not be covered entirely by local saving, both public and private, because of the insufficient of the financial market. The size latter factor was the result of too low a level of taxation of the highest incomes and of an economic policy that deliberately favored foreign financing.
VENEZUELA
GUYANA
SURINAME
COLOMBIA
FR. GUIANA
S Don Vistao
Belem
Manaus y
AMAZONAS
HIGHWAY
Porto Vetto
BRAZIL
MATO
GROSSO (
PENDONIA®
Brasilia
› Cuiabe
BOLIVIA
Belo
Horizonte
MATTO GROSSO
• Campo Grande
DO SUL "
• Maracaju
PARAGUAY
Sao Paulo 9
Rio de Janeiro
ARGENTINA
Atlantic Ocean
Miles 800
20
However, the blame for the debt cannot be put exclusively on domestic factors. The oil crises were to give rise to very large deficits in the trade
4,700 million in 1974, 3,500 million in 1975 and 2,200 million in 1976. The return to equilibrium would be precarious, despite the effort put into import substitution, and the trade deficit was to reappear. In 1978, it was 1,000 million dollars; in 1979, 2,700; and in 1980, Debt begins to feed itself
The deficit began to grow considerably after 1980 because of the massive outflows of capital brought on by the rise in real interest rates on international markets and the ensuing growth of the debt charges. The oil crises were compounded by the financial crises, whose effects are measurable. In order to measure them, all you have to do is subtract the value of oil imports and the payment of interest on the debt from the inflow of foreign currency derived from export and from the net loans of foreign banks to Brazil. The resulting figures show a considerable drop. They went from 9,780 million dollars in 1979 to 10,480 million in 1980, 9,400 millions in 1981, 5,090 in 1982 and 5,820 in 1983. (14)
Capacity for importing commodi ties other than oil was cut in half by the oil crises, the soaring of real interest rates and the "spreads." The debt then tended to feed itself. New loans were more and more for servicing the debt. This shows how much it
Venezuela Colombia
Ecuador
Peru
Bolivia Brazil Paraguay
Chile Argentina
* Uruguay was becoming detached from the productive system and how much, on the other hand, action aimed only at the productive system was losing its effectiveness.
The decisive factors in the growing indebtedness lay outside the country, in the modes of operating of the international financial markets and in the reorientation of capital flow to the United States. Austerity policies lost because their effectiveness they operated on productive systems less responsible than before for the debt. According to the adherents of ortho. dox adjustment policies, such as those advocated by the IMF, austerity policies should, therefore, be more severe. The relative loss of effectiveness of such measures should be compensated for by greater severity.
The orthodox adjustment policies are not a remedy. By sticking to them, even if they have occasionally deviated, the Latin American governments have worsened the economic situation of their countries. In the case of Brazil, such austerity policies precipitated a crisis. (15) At the same time, they reduced the country's sovereignty in three essential areas -money, the budget and food supply. The continuation and the aggravation of this process then comes into conflict with the growth of a new political sovereignty obtained through the "democratization." This contradiction was overcome by the imposition of an austerity policy termed to be unorthodox.
The European and American journals habitually present only one aspect
G Mathias and P Salama, 'L'Etat Sarie 1983 see heurs et malheurs des couches moyennes," in 'Tiers Monde', No. 100, 1985.
The extent of the internal demand dustry progressed as follows: 40.2% (1970); (1981) and 180.6% (1982).| import substitution was particuthe extent of internal demand covered by from 14.4% to 115.9%. But there was also basic chemicals and transport. strategies d'industrialisation appliquees be published in the 'Revue Canadienne d'etudes du developpement'. a recessao e al desemprego, Furtado. "Nao See for example C Activity', No. 2, 1984, p. 350.
75. terms (adjusted for indeclined by 1.56% in 1981, and then dropped sharply in 1983 (-3.16%). After that, it rose. Source: IBGE. International Viewpoint 20 April 1987
BRAZIL'S ECONOMY of the foreign debt - the bank reports. This is only one facet of the question. The indebtedness is reflected in a process of dollarization of the economy, so that the society's inner mechanisms of reproduction are profoundly
INDICATOR UNIT altered.
billion dollars 23.0
Dollarization can be defined in the following way. Dollarization in the strict sense represents substitution of currencies, that is, legal or illegal capital flight. The national currency then loses its function as a reserve of
GNP
Annual growth
Per capita dollars
Structure of GNP
110.1
209.3(a)
6.6(b)
4.4 (c)
8.3
220
1,030
1,579 (a)
15.9 value. Dollarization in the broad sense represents a relative loss of other
51.5 functions of the currency - its use as an accounting unit and means of billion dollars 4.9(d)
circulation. In a growing number of markets, the national currency is used
42(g)
and less as an accounting unit.
less
When this process spreads, the currency in question can lose its function
26.0 as a means of circulation. A pseudo-
54(d)
dollar, that is, certificates indexed
13.2(d)
to the rate of exchange for the dollar,
32.8(d)
then serves as the accounting unit.
When the national currency loses its ole as an intermediary in exchange he dollar replaces it in this functior
Agriculture %
% 100
Industry
%
Services
Foreign debt
Inflation rate
1%
Active milion population
Agriculture %
Industry
Services
% ublic spendin ducatio
% GNP
1.1
Defence
% GNP
2.5
Energy production
10.5 11.0(e) 32.5 39.4 31.0(e) 50.0 58.0(e) 23.5 107.3 42(h) 248.5 30:3 48.8(1)
30(f) 25 24(f) 38.7 46(f)
3.2(e) 2.7 (a)
12.10 "Pseudodollars" undermine Brazil's monetary sovereignty
29.7
Argentina was experiencing a deepgoing dollarization in the period preceding adoption of the Austral plan. (16) It suffered from capital flight, and the role of the dollar was increasing in domestic transactions. In Brazil, dollarization in the strict sense was weak, but it grew from 1983 to 1985. (17) The growth of dollarization in the broad sense has been greater, but. limited overall to the local currency losing its role as an accounting unit to certiftcates indexed to the general price level and the rate of exchange for the dollar - the
The issuing of these certificates made it possible to curb capital flight to a perceptible extent. It is identified with the dollar, and therefore called a "pseudodollar." It serves more and more as an accounting unit, thereby undermining the country's monetary sovereignty. Nonetheless, this process has not reached the situation that existed in Israel when the latter's minister of finance proposed in 1984 that the dollar be considered the country's national currency, which would have meant surrendering the political severeignty of the Israeli state. In Brazil, the process was stopped earlier than it was in Israel by the imposition of the Cruzado plan, which organized a general de-indexation.
The issuing of these indexed
International Viewpoint 20 April 1987 tCE(i) Energy consumption tCE (a) 4. (b) 1960-1973. (c) 1973-1983. (d) 1970. (e) 1983. certificates had an unavowed objec
The government encouraged public enterprises to borrow massively abroad for two reasons. First of all the financial conditions that they could get were better than it itself have obtained at the time. Secondly, the search for a greater legitimacy and a desire to control
"abertura," the political opening. called for renouncing a policy aimed at increasing resources through taxation. The yield of these loans was deposited in the state's coffers and served to finance in part the imports of public enterprises, to increase the country's official reserves, and thus to present a healthier and therefore more presentable appearance on the international financial markets for the sake mainly of financing the service on the debt. (18)
Such external financing did not, however, fail to have consequences. While it made it possible to solve the immediate problems, in the longer term it accentuated them in two the issuing of units indexed to the exchange rate of the dollar
24.5 50.3(e)
71.2 85.7
(f) 1981. (g) 1960-1970. (h) 1974-1978. (i) ton Coal Equivalent. made the charges on the foreign debt dependent on fluctuations in the real exchange rate for the cruzeiro against the dollar (19)
After the buoyant years at the end of the 1970s, the exchange rates of the Latin American currencies, including Brazil's, were to experience a different sort of trend. They were to go from a phase of being overvalued to one of being undervalued. The devaluations were to be higher
16. The name of the austerity plan adopted in Argentina on June 15, 1985.
17. Capital flight amounted to 7,000 million dollars from 1983 to 1985, as opposed to only 3,000 million dollars between 1976 and 1986. Source: 'World Financial Market' April-May 1986.
The exchange and monetary policy offered incentives: exchange rates that were slightly overvalued but less so than in other countries; interest rates sometimes higher than those in force on the international financial markets. The industrial policy also offered incentives: big industrial pro. jects requiring financing beyond local capacities for saving. In total, the public enterprises borrowed more than did the multinational corporations.
19. The cruzeiro was replaced by the cruzado, which gave its name to the plan, at 1,000 cruzeiros to the cruzado.
21
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1965 1975 1985
in the sense that their production requires the use of machines, special fertilizers and mixed feeds. (22) They enter into competition with the products of the developed capitalist countries, and the "barriers to entry" will be all the higher because the latter use and abuse dumping to get rid of their surpluses. Since the underdeveloped countries cannot follow suit, they import. In Brazil, these effects have been limited. But while less prominent than elsewhere, this process dependence
This growing food dependence on the new products and on the way of producing them has been accompanied by an insufficient availability of the older products of the
There are two reasons for First, credit is mainly extended for export products. Secondly, in the absence of a genuine agrarian reform, archaic agrarian structures, dominant in the regions producing for the domnot favorable to
With the outbreak of the financial
Riots in Sao Paolo followed announcement of austerity plan (DR) than the price differential between the United States and Brazil.
The proces of undervaluation was weaker than elsewhere, and stopped in 1985. But in the meantime, it had considerable effects on the trend of charges on the debt. Since a large part debt had been through the operation of indexation, the weight of this debt in the budget was to go on increasing. (20) At the same time, the IMF tinuation of this exchange policy and cutting the budget deficit.
Reduction of the deficit in conjunction with the increase charges on the foreign debt led to a large drop in other spending. Operational and investment spending were caught in a vice by two countervailing movements. Since it was difficult to reduce operational expenditure too much because of the problems of gaining legitimacy that such a policy entailed for a government beginning democratization, the
" it was investment spend. suffered the reduced outlets and precipitated the reduction of the deficit led to a drastic drop in certain public spending as a result of the dollarization of the internal debt. Budgetary sovereignty was thus reduced more than the IMF's recommendations in numerical terms would indicate. The reduction of monetary and budgetary sovereignty was compounded by a relative loss of sovereignty in food supply.
Like most underdeveloped coun tries, Brazil has suffered a depend22 ence in food supplies, even though it had a certain success with its agridomestic market -beans, maize, manioc and potatoes -have shown very weak rates of growth, sometimes falling even below demographic growth. On the other hand, the products destined for export -soya beans, shown. a high Increasing food dependence dependence in food several causes, some of which are classical, while others are less so. There has been a spread of consumer norms from developed capitalist coun tries and a tendency toward a certain homogenization, occuring all the more as urbanization and incomes have zation has taken on very great dimensions, and the raising of the incomes of the population has been demand for certain agricultural products thus became very great. Parallel to this, production for export increased strongly. But production for the domestic market did not rise substantially, and did not adjust fast enough to the change in tastes. When it did adjust, it generated imports of components.
These new products can be considered to be high technology products, crisis, imports were exports stimulated. Food dependence was to be transformed into food shortages in the cities. The prices of agricultural products for the domestic market grew faster than the general price level, while effective demand fell because of the drop in wages and the growth of unemployment with an absence of unemployment benefits. Inadequate supply, despite the drop in effective demand, thus fuelled a rise in agricul-
The differential between agricultural prices and the general price index, to which wages were tied, had a particularly depressive effect on the buying power of the worst off, because they spend a larger proportion of their incomes on food products. and thus it accentuated social differunderstandable why there could be a of looting of supermarkets and school cafeterias reduction of monetary and budgetary sovereignty was compounded by a relative loss of food-
The country's sovereignty was undermined in three areas, some more than others. The
20. Until recently, the way that the budget accounting was presented made this evaluation difficult.
21. See the remarkable book by Homen de Melle, 'O problema alimentar no Brasil, Par e Terra 1983; J.P. Bertrand's article "Bresil: modernisation agricole et restructuration alimentaire dans la crise internationale," "Tiers Monde, No. 104, 1985; and the study by A. Marzio Buainain and H. Meirelles de Souza Filho, "A trajetoria recente de agriculture; da recessao recuperacao, in •Politica economica da Nova Republica', Paz e Terra, 1986. International Viewpoint 20 April 1987
logical consequence of such a process is the reduction of political sovereignty. The loss of sovereignty in those areas should go hand in hand with a greater readiness to adopt policies in accordance with the IMF's "recommendations" and with other wishes of the governments of the big industrial mother countries, the Center.
These three losses of sovereignty -monetary, budgetary and food - undeniably condition decisions. But political sovereignty draws from other sources. It is well known that the political systems of the periphery, far from being mere instruments of the Center, enjoy a twofold relative autonomy, that is, both from the political systems of the Center and from their own social formations. (23)
the for a broader legitimacy, and reinforced the weight of the local social formation in defining social thereby increased political sovereignty. Conversely, foreign indebtedness and its translation into relative losses of the three sovereignties diminished political sovereignty. Real political sovereignty was the result of these forces counteracting each other.
With democratization, the weight exercized by • the social formation increased. This was felt first of all in defining industrial policy - the role of computers in Brazil, etc. Secondly, it was felt in the working out of budgetary and monetary policies, without which it would be impossible to say how long that influence could persist.
International Viewpoint 20 April 1987
The orthodox as we have seen. The depressive effect that they provoked is far from being one, and they do not readjust the factors of production for greater efficiency. Quite to the contrary, they accentuate dollarization, accelerate the inflation that they are supposed to reduce, persistently mag nify the loss of buying power, increase unemployment and promote further growth of the informal sector, making it into a sector for those struggling to survive. This indicates how much such policies are a source of discontent and loss of legitimacy, a perilous situation for governments that are, in fact, seeking to increase their legitimpolicy" defined by the "New Republic" was presented as an original response to the hyperinflation that was develop-
(24) Curiously, adduced for this policy ignored the external influence, the foreign debt. The objectives of the austerity policy maintain growth and to bring about greater social justice. In that austerity policy that precipitated the crisis and increased inequalities in the vain hope of halting the rise in prices and re-establishing the grand balances. But the objectives set by this unorthodox austerity policy were of a purely domestic character, as it the influence of the outside in the development of the hyperinflationist spiral were not there.
The immediate success of the plan both politically and economically, led people to forget that its final success depended on the way that the problem of dollarization was solved. Of course, the freezing of all prices, including wages, and the general de-indexation seemed to eliminate dollarization, because the certificates were no longer indexed to the rate of exchange for the dollar and to the general price level. The problem seemed to have been solved by the problem!
But that did not eliminate potential dollarization. Indexation tied to the general price level and the dollar could become necessary again if the fundamental problems running through the Brazilian economy were not solved in a lasting way. But these problems are incomprehensible if you leave out the debt and its We have seen that the crisis' originality came precisely from its interlocking with the world economy and from the responses that the successive governments have made to external constraint. "Unorthodox" attempt at a solution
The debt that was apparently ignored in the working out of the austerity plans was a "silent partner." Its negative effects could reappear Unlike Argentina, with its Austral plan or Mexico, which is perpetually rescheduling its payments, the elasticity of Brazil's industrial plant and the influence of a more egalitarian distribution of incomes can enable it to put off the day of reckoning and limit the negative effects of interest payments on growth.
However, while references role of the debt in aggravating the virtually absent, the foundations of this austerity policy and the first measures that taken were unorthodox. (25) 22. The intensive production of meat is diverting larger and larger quantities of vegetable products (cereals, oil cake from direct consumption. Cf. J.P. Bertrand, op. cit.
23. I developed this point of view at length in Salama and Tissi, 'L'industrialisation dans le sous-developpement. Editions Maspero, 1982; and especially in 'L'Etat surdeveloppe'.
24. "The New Republic" is the name given to the regime that succeeded the military dictatorship, which can be dated from the election of Tancredo Neves to the presidency on January 15, 1985. International Viewpoint', No. 71, March 11, 1985.
25. On these unorthodox austerity policies, see the special issue of "Tiers Monde' devoted to the adjustment policies, and especially the articles by CartierBresson, M. Ikonocoff, J. Sabala and P. Salama.
23
The Argentine and Brazilian economists deepened the analysis of the mechanisms of inflation developed a few decades ago by the so-called structuralist school in Latin America.
According to them, inflation can be broken down into two blocs. (26) The first is linked to the structural analyses and refers above all to difficulties arising from demand. The second, so-called inertial infla tion is rooted in the mechanism of indexation extended to all prices. Inflation perpetuates itself and rein. forces the "inflationist culture" by an almost automatic operation of re-
By separating inflation into two blocs, without analyzing what interrelations they might have, they did not go deep enough in their hyperinflation. And they proposed a remedy which, being a psychological shock, ineffective, accompanying structural measures were not taken. The immediate remedy for hyperinflation flowed from the analysis made of inertial inflation.
Elimination of indexation and freezing all prices was supposed to be enough to do the trick. By an administrative measure, by elimination indexation, inertial inflation would be "erased." Freeing prices was not considered effective. This distrust of the rules of the market was the basis of the unorthodoxy of the austerity plan.
Freezing prices is a delicate measure to apply when inflation has reached 300%. It is necessary to establish a conversion table for purchases made on credit in order to reduce the cost of payments falling due, because the latter were calculated on the basis of the previous inflation. But while this operation is delicate, this is not the principal difficulty.
Cost-of-living increases were not made daily. They were made half yearly. You cannot freeze the last wage received, because it might have been adjusted on the eve of the application of the plan or immediately afterward. In the two cases, is obviously totally different. You can understand why the social discussion was to be centered on defining the average wage to be readjusted, on the percentage of the increase, on the conditions of re-indexation -partial or total starting at what level of inflation - on the advisability of unemployment benefits,
The solutions found departed from the orthodox austerity policies and were better than those offered in the Austral plan. But they remained unsatisfactory. The average wage went up by 8%, the minimal wage 15%, cost-of-living increases began at 24
20% inflation but were limited to 60%. A very restrictive system of unemployment benefits was set up. The wage spread narrowed. The wage increases fitted into a trend that had begun some months before, but they made it possible only to regain the
The treatment of the public deficit, policy and wage policy in the Cruzado plan were more un. orthodox than the measures provided for in the Austral plan. But measures taken one by one are neither orthodox nor unorthodox in themselves. It is the principle governing them that is. The wager implicit in the Cruzado plan was that supply would follow The problem of increasing supply
In the plan, the crisis and inflation were explained as the results of an not be further restrained. In this you structuralist influence, and, in certain aspects, a Keynesian conception, which given the dominance of monetarism in general seemed
It is in this sense that the accompanying measures taken in July 1986 have to be understood. The forced saving instituted was designed, in the absence of a sufficient level of saving, to finance investment programs and thus to revive supply.
Supply was to become the dominant problem. A growing inelasticity of production in relation to a demand swollen by the liquidation of savings, increase in employment and the partial recovery of buying power, along with the appearance of bottlenecks paralyzing the processing chain of products and scarcities of certain food products, were to become
But before such problems showed up, the February 1986 Cruzado plan consolidated the thrust of industrial growth. This duel aspect - success and limitations cannot be understood if you do not take account of the plasticity of the industrial plant gained through the industrial policies
The fluctuations shown by industry and the adaptive capacities of industrial plant are indeed astonishing. industry dropped from 11.3% in 1981 to 0.3% in 1982; to 5.9% in 1983; and then rose to 6% in 1984 and 8.3%
The producers goods industry exbroader fluctuations. dropped 17.9% in 1981 to 13.4% in 1982, by 19.1% in 1983; and rose
12.8% in 1984 and 12.3% in 1985. Consumer durables experienced more
The plasticity of the industrial plant was also astounding. The share of exports accounted for the pro cessing industry went from an index of 100 in 1980 to one of 168.4 in 1984 and 163.3 in 1985. The ratio between this index and the production index of the processing industry went from 100 in 1980 to 191 in 1984 and 173.1 in 1985. (28) The relative decline that we see in 1985 revealed that the driving force of growth shifted from export of industrial products toward expansion of the domestic market, fueled by wage increases. (29)
This new orientation was consolidated with the Cruzado plan. Domestic outlets increased considerably. Industrial production grew strongly in the first half of 1986 by comparison with the first half of 1985, but not enough with respect to the growth of demand. The domestic market competed with export and threatened prospects for a trade surplus Exports of metal products dropped by 14.7%
"diversion" caused by the surge of domestic outlets. Imports other than oil increased by 27.3%, producers goods by 52%. A drop of 53.8% in the value of oil imports reduced this negative effect.
The Cruzado plan thus accentua ted the upturn, but it also revealed the fragility of the productive plant. Facing a demand swollen above all by the liquidation of savings and employment, productive plant could have adjusted, but the massive cuts in investment at the start of the 1980s kept pro. ductive capacities from being large
Supply became more inthe productive plant showed its fragility. In other words,
26. For a brielf presentation of the analyses of Bresser Perreira, Lopes, Frankel, et Tiere Bonde". see B. Jetin's article in the issue cited
27. The processing industry includes producers goods industries, as well as inter. mediate products and the durable and nondurable consumer goods industries.
28. Source: FGV, FUNCEX and IBGE in W. Suzigan: "A industria brasileira en 1985-1986: desempleo politica, in the issue cited above of 'Politica economica.
Brazilian industrial products became competitive and benefited from the upturn in the United States. Wages dropped during the crisis, and productivity increased (1980-100, 1985-116) as a result of a sub stantial drop in employment (1980-100. 1984-78.1 and 1985-82.5) and the growth of investments in modernization starting
1984. Wage costs diminished. These positive effects (in terms of competitive. ness) were compounded by trend in the exchange rate starting in 1983 The two effects reinforced each other. The index expressing this combination shows a deterioration from 1981 to 1982, and clear improvement subsequently (1980-100; 1983-112.6; 1984-132 and 1985-130) Source: Suzigan, op. cit. International Viewpoint 20 April 1987
the growing complexity of the industrial plant in the 1970s and the crisis at the start of the 1980s explain both its adaptive capacities and their limits. Inflationist pressures accentuated.
Doubt about the final success of the plan led to speculative behavior, was reflected both by the liquidation of savings and by the growing gap between the official and parallel exchange The second Cruzado plan of November 1986 has to be understood in this context. The substantial rise in the prices of public services and certain durable goods is akin to forced saving, achieved by other avenues than inflation. How to pay for the debt
This may be seen simply as a consequence of the need to limit demand, but it can also be understood as the concomitant of raising savings in order to finance service on the foreign debt. These two explanations are not counterposed. The appearance of demand in excess of supply capacities in no way diminishes the need to find savings to finance the service on the debt. The external constraint omitted from the presentation of the reasons for the plan and its objectives reappeared in force. The payment of the service on the debt had a depressive effect that could not be long compensated for by an increase in demand and a considerable plasticity of the industrial plant.
The massive withdrawal of re sources to meet the service on the debt has been accomplished in two ways - through a reduction of imports and an increase in exports. The first has flowed either from a drop in revenues or a voluntary restriction, whose short-term effects are inflationary - repercussions of increased protection and undervaluing - or even paralyzing, owing to lack of inputs. The second way involves an orientation of stimulating production for export. This increase of exports gives rise to wage payments and purchases of local intermediate products, which, once incorporated into finished goods, will be exported. When the foreign currency obtained is converted into the local currency, demand increases.
But supply cannot keep up, because a part of it has been removed precisely by these exports, and imports have been contracted. Inflation grows, provoking a growth of forced saving. Protective measures (indexing) make it possible to limit its extent, and then they reproduce the inertial
International Viewpoint 20 April 1987 inflation whose original cause lies in the massive withdrawal of resources.
When the income from an export is not transferred entirely into an increase in the local currency, the growth of the monetary mass is, of the inflationary process remains essentially intact be cause the act of production always involves two sorts of advances • the wage earners to the the capitalists themselves. The latter pay after their workers have done the work, but before they can collect the yield of its sale. The payments of wage directly or indirectly (the processing chain of products), accompanied by a diversion of supply to increase the trade surplus, fuels the process of force saving.
This increase in savings creates a depressive effect through the classical Keynesian operation. (30) The reducanticipated demand leads to drastic declines in investment and to an increased conversion of assets into financial placements. enterprises buy pseudodollars whose rate of return increases in step with the undervaluation of the currency. downward spiral
We have seen how extensive it can be.
The withdrawal of resources to pay accomplished through inflation
Demand is limited owing to a shortfall in supply, which is oriented rather to export. and the increase in employment were to increase consumption. narrowing of the wage differential and the liquidation of savings accompanying the Cruzado plan the same effect. One might think, then,
Poverty is rife in Brazil (DR) that the increase of saving owing to transfers abroad and the reduction of saving for the reasons I have just described could be mutually compensating. That possibility depends on the extent of the plasticity of the industrial plant and on its scale.
In 1985, and continuing until October 1986, the industrial plant seemed to have sufficient elasticity for the increase in demand to provoke an increase in production and for the depressive effect to be not only cancelled out but for growth to take on momentum. The reduction of excess capacity operated more and more as an obstacle, making it less and less efficient to generate an upturn through demand in the short and medium term, which in turn made necessary to increase supply. The reappeared with a ven-
Forced saving once again became necessary, as long as the interminable and onerous payment of the service the foreign debt is not put in question. The dollarization that was erased is threatening to start up again.
It will not be possible to continue industrialization by contracting demand, with the unavowed aim financing the debt. The old scenarios of industrialization, which remain quite timely for a lot of Latin Ameri can countries, threaten to remerge.
30. This increase in saving is probably higher than would have been necessary to finance investment in the past without resorting to loans, because it is the result of repayment of the principal and the interest. although the de facto moratorium on the principal qualifies this assessment, which was made by Miret and Tonteneau in their work cited above.
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