The "hot money" crisis to the South
Pereira, Anthony W
The Mexican devaluation and subsequent crisis of December-January, 1994-1995 put all Latin American governments on alert. The "tequila effect," as the Mexican debacle was known, was the result...
...The room for maneuver of the Brazilian government, indebted at home and abroad, does seem to be terribly limited...
...The "real economy" of employment, wages, and aggregate demand becomes secondary...
...In Russia, a recent poll showed that the majority of people would prefer a return to life as it was under Brezhnev to the present situation of shock treatment and "gangster capitalism...
...In the end, the strike was unsuccessful...
...Whereas Mexico is part of the North American Free Trade Agreement (NAFTA), Brazil is integrated within MERCOSUR, a free-trade zone encompassing Argentina, Brazil, Uruguay, and Paraguay...
...The government's plan for a large reduction in the public sector has alarmed the unions, worried about job losses and wage "flexibility" under privatized companies...
...What is at issue is not the need for economic and administrative reform but the manner in which such reforms are implemented...
...The opposition to the present Brazilian government has not articulated a clear programmatic alternative...
...But if the results of these policies have torn at the social fabric in Argentina—a wealthier country with a more egalitarian distribution of income and higher levels of education and health—they could be catastrophic in Brazil...
...The conclusion to be drawn from this data is that capital is made at home...
...In the first six months of 1995, accumulated inflation was about 10 percent...
...On the other hand, the government has maintained an inflation index for capital...
...This compares to 50 percent per month inflation in June 1994...
...Even in Mexico, whose leaders claim that the economy has stabilized, the real crisis is not over...
...Argentina is a useful example...
...Increasingly, exploitation and capital accumulation is a multinational or transnational process, involving global markets and players...
...In the past, Brazilian indexation provided daily inflation adjustments for capital and monthly or trimesteral adjustments to labor...
...Argentina and Brazil, for example, are competing fiercely for new investment in the automobile sector...
...Workers returned to work, and on June 20 the constitutional amendment ending the oil monopoly was passed by the lower house of Congress...
...The crisis of social disintegration, rising inequality, and governmental illegitimacy in Latin America is unlikely to diminish without global and regional initiatives to prevent the increasing concentration of wealth and restrain the tendency for social "dumping"—for governments to compete for investment by offering the lowest stan50 • DISSENT Politics Abroad dards in wages, job security, taxes, the environment, and restrictions on capital...
...A study of gross fixed investment in 1970-1992 in relation to Gross Domestic Product in countries of the Organization for Economic Cooperation and Development (OECD) finds an almost perfect correlation between the domestic rate of savings and investment...
...Many imaginative and practical proposals exist outside the realm of conventional neoliberal economic prescriptions...
...That does not mean, however, that no alternative is possible...
...This will be a fault line of future conflict between the government and its opposition within the unions...
...The privatization of state firms and the efforts to trim federal and especially state budgets are part of these objectives...
...In newly industrializing countries such as Mexico and Brazil, tighter integration within global networks of finance and trade has spelled even greater hardships...
...Shortages of cooking gas and petrol were blamed on the strikers...
...The IMF recently issued a report with a surprisingly sympathetic analysis of the use of capital controls by developing countries to shield themselves from volatility in financial markets...
...Brazil's adoption of neoliberal policies came later and was more gradual than that of Argentina...
...and in the United Kingdom it is 17 percent and 19 percent...
...A large part of the population has been excluded from the benefits of neoliberal economic growth...
...The signs are not auspicious...
...The pace of privatization has accelerated in recent years...
...Macroeconomic policy is geared to foreign capital markets...
...These problems are part of a global crisis of the democratic nation-state and the liberal ideology of economic development in a world where people are simultaneously pulled closer together and farther apart by transnational forces...
...The recent experiences of LatinAmerican governments make it clear that the Mexican crisis is symptomatic of deeper problems in the region...
...And the World Bank's latest World Development Report extols the role of trade unions in enhancing economic productivity, as well as increasing equality and reducing discrimination in the workplace...
...Unfortunately, it seems as if most governments are pursuing such investment at the expense of almost all other goals...
...Another fault lire concerns the government's privatization program...
...It is deeper than mere exchange rate disequilibria, and relates to the changing nature of global capitalism...
...Japan, at the top of the hit, saves on average 34 percent of its GDP and invests 32 percent internally...
...The policy seems unsustainable, and the parallel with Mexico is striking...
...the eradication of our enormous social wounds...
...In May-June 1995, 48,000 workers at Petrobras, the state oil monopoly, went on strike to pressure the government into dispensing back pay awards and to protest the government's plan to end the oil monopoly and allow private firms into the sector...
...In Brazil, only the Communist party (PC do B) is against any scaling down of the publicsector...
...In Brazil, the Real Plan has been in effect for a year and a half...
...The Taxa Referencial is a financial market index that guarantees that the face value of a bond or term deposit will be adjusted to neutralize inflation...
...The president has created a Solidarity Program, modeled on the social assistance program created during the Salinas de Gortari administration (1988-1994) in Mexico, but in the absence of structural reforms, it is unclear what such a program might be able to achieve...
...Foreign capital can be crucial in making up the difference between domestic savings and investment, and signaling the achievement of a good "investment climate," but in absolute terms it is marginal...
...Mexico's link to the global economy runs, to a greater extent than for most developing countries, through the United States...
...Economic crises are also increasingly global, as the Mexican devaluation showed...
...Will it be as disastrous as Mexico's...
...Included on his list is the Companhia Vale do Rio Doce, one of the five largest mining companies in the world, and a firm that made a profit of $645 million in 1994...
...Few among the opposition in Latin America dispute the need for some reform of an inefficient state sector...
...Since increasing economic integration means that trade plays a bigger role in economies than ever before, a Keynesian pact between sectors of domestic labor and capital is less feasible...
...But this desperate competition for investment obscures the fundamental reality that most investment capital in all countries is generated from domestic savings...
...Recent World Bank data shows Brazil to have the most unequal distribution of income in the world, with the top 10 percent of income-earners enjoying 51.3 percent of all income and the bottom 60 percent with only 15.9 percent...
...President Cardoso once replied to a complaint that high interest rates were stifling productive investment by saying that "a government that has to pay money borrowed from abroad can't lower interest rates from one day to the next...
...This ensures that holders of the government's $70 billion internal debt will remain satisfied...
...As a way to stop this vicious circle and return the economy to low inflation, the government recently abolished the automatic use of the wage index that had been used in collective bargaining, suggesting that wages should only be increased on the basis of demonstrated gains in productivity...
...Similar alliances of unions and opposition parties are behind disputes over state monopolies and privatization in Ecuador and Bolivia...
...While $3.5 bilWINTER • 1996 • 49 Politics Abroad lion worth of state enterprises were privatized under President Collor de Melo (1990-1992), $5.1 billion worth were privatized under President Franco (1992-1994...
...q WINTER • 1996 • 51...
...Another example of the government's approach is the way it handled the problem of indexation...
...Even the International Monetary Fund and World Bank recognize the need to pull back from the brink of a radical freemarket approach to global economics...
...In the advanced countries, insecurity for workers has increased: jobs, wages—and in the United States, health insurance and pensions—have all became provisional, subject to removal due to corporate downsizing or the relocation of production abroad...
...Its basic features are close to Mexico's economic policies before the crash: a de facto fixed (and high) exchange rate is used to hold down inflation...
...With such an ally, they argue, a genuinely social-democratic bargain of higher taxes for the wealthy, greater spending on education, health and housing for the poor, and a leaner, more efficient state will never be enacted...
...Last year, the economy grew by 7.4 percent...
...The answers to these questions vary...
...The oil monopoly was established in the 1950s after an intensive nationalist campaign against transnational oil companies...
...But public-sector employees, accused of "corporatism" and the defense of undeserved privilege, are reacting to the ways in which these privatizations and cutbacks are usually carried out, without retraining or redeployment of personnel, or any other program that might mitigate the effects of mass firings in a society without the social safety nets of the advanced capitalist countries...
...The neoliberal wave further reinforces and legitimizes these moves...
...Some observers see the Cardoso government as social-democratic in principle but governing under severe constraints, lacking both a domestic majority and favorable international climate, struggling against forms of social inequality with a long history and deep roots...
...The Workers party and its sometime ally, the Democratic Workers party, supported the strike, although some top leaders of these parties tried to distance themselves from the strikers...
...It also wants to keep wage agreements as much as possible out of what it calls "pro-union" labor courts...
...Changes in global capitalism have led to the rewriting of social contracts in many countries and an alarming loss of legitimacy on the part of many governments...
...Yet unemployment has doubled in one year to 18.6 percent—the highest rate in the country's history...
...The other countries have similar correlations...
...Welfare bureaucracies have been stripped and state firms privatized as governments seek to balance their budgets and thereby capture as much foreign capital, much of it short-term and speculative, as they can...
...In the United States, where economic deterioration has not been associated with a change of regime, public anger with incumbent politicians has escalated as real wages decline and economic insecurity grows...
...The key phrase here is "mature, responsible, and non-demagogic": what do these terms mean...
...Despite signs that overall growth will be around 5 percent for 1995, the economy also seems headed for a recession in the last half of the year...
...In five days, $2 billion in foreign investment left the country...
...It is important not to overestimate the ideological element in these policy changes...
...However, the decline of inflation exposes to greater scrutiny the tremendous social inequality that torments Brazilian society...
...President Cardoso labeled the strikers "corporatist," and on May 24 sent in troops to keep order at refineries and guarantee the safety of strikebreakers...
...As elsewhere in Latin America, the Brazilian government is trying to increase revenues and cut current expenditures...
...Its economic reforms have been hailed as a success in international financial and business circles...
...Others see the government as essentially neoliberal, enacting reforms necessary to preserve financial equilibrium and attract foreign investment but unwilling to tackle questions of redistribution in a major way...
...Some of these initiatives have been discussed in this journal (see Ian Robinson, "Globalization and Democracy," Dissent, Summer 1995...
...Failure to discuss these seriously, and implement the best of them, could bring problems that make the Mexican devaluation of 1994 look trifling in comparison...
...They point to the plausibility of the government's claim that its privatizations and plans to thin the ranks of public-sector employees are in the general interest—since many state-owned enterprises and government bureaucracies have served small, well-organized constituencies rather than the public at large...
...For the past thirty years, Brazil has had a system of automatic adjustments to wages, rents, and interest that builds inflation into calculations...
...In March 1995, a small devaluation of the Brazilian currency, the real, forced the Central Bank to spend $7 billion in foreign reserves in an attempt to avoid a Mexicanstyle slide in currency values...
...exchange and interest rates, trade balances, and budget deficits are adjusted mainly to suit the whims of investors...
...the United States, on the bottom, saves 18 percent and invests 19 percent...
...Is there a danger that the Brazilian government will be so "responsible" that it is unable to address social problems...
...Eventually, there will have to be a devaluation...
...There are few controls on imports, so much of the foreign reserves have been spent for consumer goods for the middle and upper classes WINTER • 1996 • 47 Politics Abroad rather than capital goods that would contribute to future production...
...In recent years the stock market has zoomed while the average real wage has declined...
...In the words of current Minister of Finance Pedro Malan, "low inflation and growth, of a permanent character, will permit Brazil to have the effective conditions to treat in a mature, responsible, and nondemagogic manner that which really matters and which will define what we will or will not be in the future as a nation...
...Yet a similar dependence on foreign markets and capital characterizes countries such as Brazil...
...But given its political support base and the array of interests it faces in Congress, it seems unlikely that the Cardoso administration would fully endorse such a policy package...
...The government is also trying to limit wage bargaining to the company level, avoiding sectoral agreements and weakening union influence...
...The low rate of savings—due in part to extremely inegalitarian income distribution—is one of those causes, and it is only exacerbated by dependence on "hot money," speculative, short-term investment...
...There is no question that Brazilians greeted the lowering of inflation with enormous relief...
...Internationally, class war is also practiced, although it no longer takes the nationalist form that led critics to decry imperialism in the 1960s and 1970s...
...The trade surplus, once one of the largest in the world, has become a deficit that may be as high as $3 billion for 1995...
...President Cardoso tried to defuse the situation by promising that Petrobras would remain publicly owned...
...Publicsector unions form a disproportionate share of the membership of the CUT (Central Unica dos Trabalhadores), the largest and most militant trade union, politically close to the Workers party...
...The "tequila effect," as the Mexican debacle was known, was the result of problems facing the whole region, despite avowals by government ministers in Brasilia and Buenos Aires that "we are not Mexico...
...As global capital has expanded relentlessly into the former communist world and also into countries that had previously offered some degree of protection to national capital, the rules of economic life have changed...
...Finance capital dominates manufacturing capital...
...For an analysis of that devaluation and the subsequent bailout by the Clinton administration, see Jeff Faux, "Mexico and Vietnam," Dissent, Spring 1995...
...Now, the government would like to abolish automatic costofliving adjustments for labor entirely—with inflation still running at around 20 percent a year...
...Massive privatizations have dramatically shrunk the state sector...
...Therefore, Latin American governments' scramble for foreign investment is unlikely to get at the root causes of development problems...
...The Real Plan has thus been implemented with considerable technical skill...
...A tremendous amount of time and anxiety was expended trying to avoid the worst ef48 • DISSENT Politics Abroad fects of inflation...
...The trend here is toward a "Brazilianization" of society: social apartheid and greater inequality, a decline of the public sector, the rise of heavily fortified and isolated communities of the rich...
...They fault President Cardoso for making an electoral alliance with the Liberal Front party (PFL), an offshoot of the ruling party during the years of military dictatorship (1964-1985) that is dominated by landlords from the clientelistic and impoverished northeast...
...The success of the plan is the main explanation for the election to the presidency of the former Minister of Finance, Fernando Henrique Cardoso, in October of 1994...
...Within both zones, integration has intensified competition and certain forms of conflict...
...President Cardoso could privatize more than his predecessors...
...President Cardoso's father, an Army general, was a leader of the campaign...
...This has led organized labor to accuse the government of trying to end inflation by ratcheting down wages...
...Some observers have talked about an "open market social democracy," involving a commitment to equity-led growth, peak-level negotiations between unions and employers, industrial policy, and redistribution through tax and interest rate policy...
...In the first 12 months of the Real Plan, July 1994 to the end of June 1995, accumulated inflation in Brazil was 35.3 percent...
Vol. 43 • January 1996 • No. 1
