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1 THE BRASLIA CONSENSUS: A NEW MODEL FOR LATIN AMERICAN DEVELOPMENT? By ZACHARY ASHER COHEN A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS UNIVERSITY OF FLORIDA 2011
2 2011 Zachary Asher Cohen
3 For my family, thank you all the support you have given me in my academic endeavors and travels.
4 ACKNOWLEDGMENTS I thank my friends Brian Moorman, Elena Val, Ana Luiza Gonalves Ferreira, Chelsea Braden and Paul Deis for our numerous conversations concerning international politics, economics and development policy from which I started to form the ba sis for this model. I would also like to thank all of my colleagues in the Political Section at the United States Embassy in Braslia, with whom I had the pleasure of working and where our worked helped me discover the nexus of the model which I present i n this thesis. I would also like to thank my adviser, Terry McCoy, for the guidance and direction that he has given me during my time at the University of Florida. Finally, I would like to thank Terry Miller for all of the help and advice he has given m e over the years.
5 TABLE OF CONTENTS page AC KNOWLEDGMENTS ................................ ................................ ................................ ... 4 LIST OF TABLES ................................ ................................ ................................ ............. 8 LIST OF FIGURES ................................ ................................ ................................ ........... 9 LIST OF ABBREVIATIONS ................................ ................................ ............................ 11 ABSTRACT ................................ ................................ ................................ .................... 15 CHAPTER 1 BRAZIL, O PAS DO FUTURO OR RECYCLING ITS PAST? ................................ 16 1.1. The Consensus ................................ ................................ ................................ 18 1.2. Has Brazil Seen Real Gains? ................................ ................................ .......... 20 1.3. Brazil as a Global Player ................................ ................................ .................. 23 1.4. Methodology ................................ ................................ ................................ .... 24 2 T HE SARNEY, COLLOR AND FRANCO ADMINISITRATIONS ............................. 26 2.1. Stagflation and Hyperinflation to the Real Plan ................................ ............... 26 2.2. The Sarney Administration and the Return to Democracy (1986 1990) .......... 26 2.2.1. Economic Policy The Battle with Inflation ................................ ............. 29 22.214.171.124. The Cruzado Plan ................................ ................................ ......... 30 126.96.36.199. The Collapse of the Cruzado Plan. ................................ ............... 33 2.2.2. Handling the Debt Crisis ................................ ................................ ......... 35 188.8.131.52. Brazil's foreign debt ................................ ................................ ...... 36 184.108.40.206. The Brazilian Proposal to Resolve the Debt Crisis ....................... 38 2.2.3. The End of the Sarney Admin istration ................................ .................... 40 2.3. Collor The Washington Consensus Comes to Brazil (1990 1992) ................ 42 2.3.1. The Collor Plan ................................ ................................ ....................... 44 2.3.2. Brazil's Competitive Insertion' into the Global Economy ....................... 47 2.4. Itamar Franco and the End of Inflation (1992 1994) ................................ ........ 51 2.4.1. The Real Plan ................................ ................................ ......................... 52 2.4.2. Franco's Hands off Foreign Policy ................................ ......................... 57 220.127.116.11. United Nations ................................ ................................ .............. 58 18.104.22.168. GATT ................................ ................................ ............................ 59 22.214.171.124. Regional and extra regional integration ................................ ........ 59 2.5. The Continuity of the First Three Civilian Presidents ................................ ....... 62 3 THE FERNANDO HENRIQUE CARDOSO ADM INISTRATION (1995 2002) ......... 67 3.1. Cardoso's Move to Planalto ................................ ................................ ............. 67
6 3.2. Reverberations of the Real Plan ................................ ................................ ...... 68 3.2.1. Asian Financial Crisis ................................ ................................ ............. 71 3.2.2. The 1998 Crisis Foundation for the 21 st Century. ................................ 73 3.3. Regional Integration ................................ ................................ ......................... 76 3.3. 1 Mercado Comum do Sul ................................ ................................ ......... 77 3.3.2. Initiative for the Integration of Regional Infrastructure in South America ................................ ................................ ................................ .. 79 3.4. Concluding Remarks ................................ ................................ ........................ 82 4 THE LULA ADMINISTRATION (2003 2010) ................................ ........................... 86 4.1. Economic Continuity versus Social Justice? ................................ .................... 86 4.2. The Partido dos Trabalhadores' "Decent Brazil" ................................ .............. 89 4.2.1. Lula's Tightrope Walk with Macroeconomics ................................ ......... 90 4.2.2. Social Justice ................................ ................................ .......................... 93 4.3. Brazil The Soft Power Power ................................ ................................ ........ 98 4.3.1. Regional Integration ................................ ................................ ............. 102 4.3.2. Extra regional Integration ................................ ................................ ..... 104 126.96.36.199. South South Diplomacy ................................ .............................. 104 188.8.131.52. Universalism ................................ ................................ ............... 108 184.108.40.206. Global Governance ................................ ................................ ..... 110 4.4. Lula's The Impetus for Equitable Change ................................ ................... 112 5 THE CURRENT BRAZIL CO MPARED TO THE BRAZILIAN MIRACLE ............... 115 5.1. Overview ................................ ................................ ................................ ........ 115 5.2. The Brazilian Miracle' ................................ ................................ .................... 115 5.2.1. Export Promotion ................................ ................................ .................. 116 5.2.2. The Aftermath of the Brazilian Miracle' ................................ ................ 118 5.3. Brazil's "Second Chance" ................................ ................................ .............. 121 5.3.1. Sarney and the Cruzado Plan (1985 1990). ................................ ......... 121 5.3.2. The Collor Administration (1990 1992). ................................ ................ 124 5.3.3. Franco Hyperinflation to the Real Plan (1992 1994). ........................ 126 5.3.4. The Cardoso The Crawling Peg to Floating Currency (1995 2002) .. 127 5.3.5. The Lula Admi nistation Inflation Targeting (2003 2010) .................... 129 5.4. Is the Current Period Different? ................................ ................................ ..... 131 6 BRAZIL A NEW MODEL FOR LATIN AMERICA? ................................ .............. 133 6.1. Brazil's Path to Success ................................ ................................ ................ 133 6.2. Economic Policy. ................................ ................................ ............................ 134 6.2.1. The Sarney Administration (1985 1990). ................................ .............. 134 6.2.2. The Collor Administration (1990 1992). ................................ ................ 135 6.2.3. The Franco Administration (1992 1994) ................................ ............... 136 6.2.4. The Car doso Administration (1995 2002) ................................ ............ 137 6.2.5. The Lula Administration (2003 2010) ................................ ................... 138 6.2.6. Dilma and Beyond (2010 ?) ................................ ................................ ... 142
7 6.3. Foreign Policy. ................................ ................................ ............................... 142 6.4. Applicability of the Bras lia Consensus to Other Latin American Countries ... 146 APPENDIX A TH E NEO STRUCTURALIST APPROACH TO INFLATION ................................ 149 B PUBLIC ENTITIES OF THE FEDERAL GOVERNMENT DISSOLVED BY THE COLLOR PLAN ................................ ................................ ................................ ...... 151 C CRUZADO PLAN, COLLOR PLAN AND WASHINGTON CONSENSUS ............. 152 D FOREIGN MINISTERS OF THE "NEW REPUBLIC" ................................ ............. 154 E IMPORTANT REGIONAL AND INTERNATIONAL AGREEMENTs ...................... 155 F INTEGRATION OF REGIONAL INFRASTRUCTURE IN SOUTH AMERICA ....... 157 LIST OF REFERENCES ................................ ................................ .............................. 169 BIOGRAPHICAL SKETCH ................................ ................................ ........................... 181
8 LIST OF TABLES Table page 2 1 The Debt Crisis and Stagflation The Brazilian Experience ............................... 28 2 2 1939 1966 Changes in Economic Sector's Share of GDP ............................... 50 3 1 Monthly Exchange Rate Real to US dollar ................................ .......................... 7 0 3 2 Mercosul Trade Flows ................................ ................................ ......................... 79 3 3 Manufactured Exports to Brazil as a Percentage of Total Exports ...................... 79 4 1 Economic Performance Under FHC and Lula (US$ millions) .............................. 92 4 2 Social Indicators Under Lula ................................ ................................ ................ 94 5 1 The Military as an Economic Steward ................................ ............................... 120 5 2 Brazil's Economic Path to Stability ................................ ................................ .... 132 E 1 International Agreement to which Brazil is a Signatory Country ........................ 155 F 1 Lis t of Major Infrastructure Obstacles to IIRSA ................................ ................. 157
9 LIST OF FIGURES Figure page 1 1 The Brasilia Consensus ................................ ................................ ....................... 18 1 2 Economic Performance Under Neo liberalism ................................ .................... 22 1 3 Social Classe s ................................ ................................ ................................ ..... 22 1 4 Population Living in Poverty ................................ ................................ ................ 23 2 1 The Cruzado Plan From Implementation to Collapse ................................ ....... 35 2 2 The Collor Plan's Impact on Inflati on ................................ ................................ ... 43 2 3 Hyperinflation to Stability, measured by the monthly IGP DI Index. .................... 52 2 4 The Success of the Real Plan ................................ ................................ ............. 56 3 1 International Markets View of Brazil's Risk ................................ .......................... 72 4 1 International Markets View of Brazil's Risk ................................ .......................... 90 4 2 Effects of Bolsa Familia on Povery ................................ ................................ ...... 96 4 3 Comparing Latin American Development ................................ ............................ 97 4 4 US Dollar:Brazilian Real Exchange Rate ................................ .......................... 113 5 1 Brazil's Economic Miracle ................................ ................................ ................ 118 5 2 Brazil External Accounts ................................ ................................ .................... 122 5 3 Hyperinflation to Stability, measured by the monthly IGP DI Index ................... 124 5 4 Real GDP growth since the Return to Democracy ................................ ............ 131 6 1 International Markets View of Brazil's Risk ................................ ........................ 139 6 2 US Dollar:Brazilian Real Exchange Rate ................................ .......................... 139 F 1 Integration and Development Hubs ................................ ................................ ... 158 F 2 Amazon Hub ................................ ................................ ................................ ...... 159 F 3 Andean Hub ................................ ................................ ................................ ....... 160 F 4 Capricorn Hub ................................ ................................ ................................ .... 161
10 F 5 Guianese Shield Hub ................................ ................................ ......................... 162 F 6 Paraguay Paran Waterway Hub ................................ ................................ ...... 163 F 7 La Plata River Basin ................................ ................................ .......................... 164 F 8 Central Interoceanic Hub ................................ ................................ ................... 165 F 9 Mercosul Chile Hub ................................ ................................ ........................... 166 F 10 Peru Brazil Bolivia Hub ................................ ................................ ..................... 167 F 11 Southern Hub ................................ ................................ ................................ .... 168
11 LIST OF ABBREVIATION S ABACC Agncia Brasileiro Argentina de Contabilidade e Controle de Materiais Nucleares. Brazilian Argentine Agency for Accounting and Control of Nuclear Materials. ABC Agncia Brasileira de Cooperao Brazilian Agency for Cooperation. BCB Banco Central do Brasil Brazilian Central Bank Bil Billion BNDE Banco Nacional de Desenvolvimento Economico National Development Bank, founded in 1952. Its objective is to support the agricultural and industrial sectors, infrastructure, and the s ervices industry by offering financing to micro, small and medium sized businesses. Additionally, BNDE implements social investment programs that focus on education, health, family agriculture, basic sanitation and urban transportation. Now known as BNDE S BNDES See BNDE. BRIC Acronym that stands for Brazil, Russia, India and China. The term was coined in 2001 by Goldman Sachs. Also referred to as BRICS in which the "S" stands for South Africa or South K orea. BRL Brazilian Real national monetary unit of Brazil. Denoted by the symbol R$. CAN Comunidad Andina. Andean Community. Trade bloc of the Andean nations. Member nations are Bolivia, Colombia, Ecuador and Peru. Associat e nations are Argentina, Brazil, Chile, Paraguay and Uruguay. CEBRI Centro Brasileiro de Relaes Internacionais. Brazilian Center of International Relations. Brazilian think tank that focuses on Brazilian foreign policy. CEPAL Centro Economico para Ame rica Latina Economic Commission for Latin America and the Caribbean (ECLAC). Established by the Economic and Social Council of the United Nations in 1948. Cetelem Part of PNB Paribas. CMN Conselho Monetrio Nacional. National Monetary Counsel. Functions similar to the Board of Governors of the US Federal Reserve.
12 Cr$ Symbol for the cruzado currency. Cz$ Symbol for the cruzeiro currency. EIDs Eixos de Integrao e Desenvolvimento. Integration and development hubs. The new geographical economic concept used by IIRSA for developing infrastructure projects. FDI Foreign Direct Investment FGV Fundacao Getulio Vargas. Brazilian university and think tank. FHC Fernando Henrique Cardoso. President from 1995 2003 and M ini ster of Finance from 1992 1994. FP Foreign Policy magazine FTAA Free Trade Agreement of the Americas. GATT General Agreement of Tariffs and Trade. GDP Gross Domestic Product. IADB Inter American Development Bank. IAEA International Atomic Energy Agency IBGE Instituto Brasileiro de Geografia e Estatsticas. Brazilian Institute of Geography and Statistics. IBOPE A Brazilian multinational firm that specializes in marketing research. IGP DI ndice Geral de Preos Disponibilidade Interna. General Pr ice Index. IIRSA Iniciativa para a Integrao da Infra Estrutura Regional Sul Americana. Integration of Regional Infrastructure in South America. IMF International Monetary Fund. IPCA ndice de Preos ao Consumidor. Consumer Price Index. IPEA Instituto de Pesquisa Economica Aplicada Institute of Applied Economic Research. IPRIS Portuguese Institute of International Relations and Security ISA Import Substitution Agriculture.
13 ISI Import substitution Industrialization. Itamaraty Ministrio de Relaes Exte riores. Ministry of Foreign Affairs. Lula Luis Ignacio Lula da Silva. P resident of Brazil from 2003 2010. Also, one of the founder s of the Partido dos Trabalhadores (Workers' Party) Mercosul Mercado Comum do Sul. Common Market of the South. Trade bl ock whose members are Argentina, Brazil, Paraguay and Uruguay. Associate member countries are Bolivia, Chile and Venezuela MFA of PRC Ministry of Foreign Relations of the People's Republic of China Mil Million MoM Month on month MRE Ministrio de Relaes Exteriores. Ministry of Foreign Affairs. Also, referred to as Itamaraty. NAFTA North Atlantic Free Trade Association. The trade block whose members are Canada, Mexico and the United States. NPT Non proliferation treaty. OAS Organization of American States P5+1 The five permanent members of the UN Security Council (France, Germany, Russia, the United Kingdom and the United States) plus China. PAC Programa de Acelerao do Crecimento Program for Growth Acceleration. Nationa l investment program in infrastructure projects. PICE Programa de Integrao e Cooperao Econmica. Program for Integration and Economic Cooperation. PMBD Partido do Movimento Brasileiro Democratico. Brazilian Democratic Movement Party. PND Programa N acional de Desenvolvimento National Development Program. PROMINP Programa de Mobilizao da Indstria Nacional de Petrleo e Gs Natural Program to Mobilize the National Petroleum and Natural Gas Industries.
14 PSIs Processos Sectoriais de Integrao. S ectorial integration processes. Part of the IIRSA initiative whose goal is to identif y and remove regulatory and institutional barriers that would hinder the sustainable growth of the EIDs and inhibit advances in productivity PT Partido dos Trabalhadores. Workers' Party. PUC Pontifcia Universidade Catlica do Rio de Janeiro. The Pontificate Catholic University of Rio de Janeiro. RIO 92 The 1992 United Nations Rio Declaration on Environment and Development SELIC SELIC stands for the Special System for Set tlement and Custody. It is the central depository for all securities issued by the National Treasury and the Central Bank. When the Brazilian payments system was restructure in 2002, SELIC was reformed to bring it inline with international standards for securities settlement systems. From then on it provided immediate, simultaneously and final transfer of securities, and via a direct link with the Central Bank Money Transfer System, or STR, to bank reserves (DVP 1). The most important of SELIC's function s, from a monetary policy perspective, is its use in the auction systems that are used for public offerings of the National Treasury and the Centeral Bank's open market operations. SOE State owned enterprise. Also, referred to as a SOC or state owned corp oration UN United Nations. UNASUR Union of South American Nations The organization that replaced IIRSA in 2008. UNSC United Nations Security Council. Under the UN Charter the Security Council is charged with the responsibility for the maintenance of i nternational peace and security. URV Unidade real de valor. Real unit of valor. The price indexing method that was implemented as part of the Real Plan. US United States. USD United States d ollar. Also denoted as US$ US$ mil US dollar millions. YoY Year on year
15 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts T HE B RASLIA C ONSENSUS : A N EW M ODEL FOR L ATIN A MERICAN D EVELOPMENT ? By Zachary Asher Cohen December 2011 Chair : Terry McCoy Major: Latin American Studies Brazil's political and economic model, consisting of three parts (macroeconomic stability, liberal social programs and soft, yet aggressive, foreign policy) provides a new paradigm fo r Latin American development and modernization. Brazil has selectively incorporated aspects of the "Washington Consensus", but has added a Latin American twist populist social policies. It has created a stable path for development that plays to its nat ural and man made strengths by first creating and establishing macroeconomic stability, following it with the institutionalization of social programs and finalizing the process by using a soft, yet increasingly aggressive, foreign policy that expands its m arket presence. The question remains, does this provide a new model for Latin American development, or will it become another in a long line of failed policies?
16 CHAPTER 1 B RAZIL O PA S DO FUTURO OR RECYCLING ITS PAST? On August 21, 1940 Austrian philosopher, historian and playwright Stephan Zweig arrived in Brazil. A Jewish refugee from the catastrophe of war wracked Europe, he was optimistic about his adopted home. The world's financial systems were failing; the 1930' s had been marked by economic collapse. In both Europe and Asia governments had run amok with militarism and incomprehensible policies of aggressive warfare and genocide. The world was in chaos, yet this Viennese intellectual found at least temporary hop e in the largest country of Latin America. i It is in the title of his 1941 work Brazil, the land of the future! that we find the origins of the present day slo gan "Brasil, o pais do future." Zweig saw the country as a vast land that was devoid of wars, a characteristic that blessed the countr y with enormous economic potential. ii Was he right? Forced from homeland by historical accident this unhappy itinerant European intellectual seemed to have identified the traits that that could and possibly would support extensive development in Brazil. Zweig, despairing over the state of the world in 1941, succumbed to his suicidal urge and now it was up to Brazil's politicians, starting with Getulio Vargas in the 1940s, to adopt Zweig's optimistic view of their country and then act to fulfill its econo mic, political and social potential. Over the course of the 20th century, Brazil's economic history is replete with diverse economic policy packages that have either failed to produce continued economic growth or have managed to achieve growth only over a short period of time or restricted to targeted segments of the economy. For most of the 20th century, it appeared that Brazil was endanger of proving all too true another Brazilian adage, Brazil a country of the future where the future never arrives.' iii However, the past 25
17 years, since the return to civilian rule and democracy under President Jos Sarney, have marked a new era for Brazilian policy in which there have been some failures but many successes, and it is probable that Brazil has actually dev eloped a new paradigm for Latin American development. Brazil's economy has shown marked improvement, particularly over the past decade. It seems to have truly overcome the problems that have plagued it dur ing most of the 20th century. I f this is finally a new age for Brazil, what is different today about this latent giant that w as not so in previous decades? A key component of Brazil's success during this period stems from its willingness to learn from its policy failures, and its willingness to ado pt ne w and flexible approaches. It would be an oversimplification to credit the first civilian president, Jos Sarney, and his successors with a comprehensive and overarching policy framework They did however share the common goal of creating and maintaining economic stability that would enable Brazil to be competitive in the global economy. They were flexible in the policy approaches and adopted pragmatic solutions in order to address specific economic and social obst acles, all the while attempting to capitalize on changes in the global economy. Each administration experienced varying degrees of success, but there is no doubt that Brazil has moved from the status of a developing country to that of a global player. O ver the past 25 years Brazil has concentrated on and made changes to three facets of its policy that have contributed greatl y to its success. First, it addressed economic stability; second, pursued a pragmatic approach to foreign relations; and, third, it established a more equitable social policy. These three factors, working in
18 concert, have created a synthesis, which is at present unique to Brazil, as contrasted to other Latin American countries. Brazil's success suggests a model for others nations in the region to emulate. I call model, which has three parts, the Brasilia Consensus and it is illustrated in Figure 1 1 below. 1 Figure 1 1 The Brasilia Consensus 1. 1. The Consensus In July 2010, the Brazilian think tank, CEBRI, 2 hosted a conference in Brasilia entitled "Leadership and Responsibility in the New International Agenda of Brazil." I t was privileged to be in attendance as an intern and representative for the Unit ed States Embassy in Brasilia. T he substance of the conference concerned the Brazil's new econo mic and foreign policy agenda. Peter Hakim of the Inter American Dialogue presented a paper entitled "Rising Brazil: The Choices of a New Global Power" and Pedro de Motta of the Centro de Estudos de Integracao pr esented "A Polltica Externa 1 While Brazil is not the only country to use social programs or foreign policy to improve or further economic development; other countries such as Mexico, Chile, Argentina and Venezuela also have implemented social programs that the poor, however, Brazil's programs seek to move people out of poverty in the middle class where they become part of the formal economy 2 CEBRI is the abbreviation for Centro Brasil eiro de Relaes Internacionais or the Brazilian Center of International Relations. CEBRI was founded in 1998 by a group of entrepreneurs, diplomats and s cholars to be a multi disciplinary entity that focuses the study of Brazil's foreign policy and international relations. Economic Stability Inflation Targeting Autonomous Central Bank Orthodox Economic Policies Privatization of SOEs Social Policy Poverty Reduction Integration of poor into formal economy Education Foreign Policy Open new markets for Brazilian product Improve infrastructure Garner support for Brazilian initiatives in multilateral forums
19 Brasileira s ob Lula." There was a panel entitled "Challenges for the Next Presidency" and participants in this panel were Marco Aurelio, special aide to the president for international affairs, Ambassador Sergio Amaral, partner at Finberg Associates, and Sergio Leo, colmunist at Valor Economico. As is common to conference panels, the discussion that ensued after the presentation of papers shed more light on the subject than the actual papers. Thinking again, it was the discuss ions and debate after the formal presentations when it became evident to me that no single aforementioned element of Brazilian policy could, on its own, ex plain Brazil's current success. A further review of current literature revealed that there is a tende ncy to be limited in scope and to analyze one policy arena as if it acted in isolation, rather than working in conjunction with other policy spheres. For example, there is a wealth of literature on social programs and their effects on reducing levels of p overty as well as contributing to increasing the size of the Brazilian middle class, i.e. the economic or social aspects of Brazilian policy making. 3 However, there is an absence of research that investigates how social programs, e.g. public education, aff ect the economic development of Brazil, or inversely how Brazilian economic policies strengthen the ability of social programs to accomplish their mission. While these avenues of investigation are important to understand specific policy attributes, these highly focused inquiries are insufficient in and of themselves to completely explain the phenomena, which we are witnessing in Brazil's economic, 3 This is something has been claimed by members of PT, their supporters as well as those within the Lula administration. Ms. Rousseff also made this claim during the presidential debates in August 2010, but this has not claim has not been substantiated with quantitative proof that shows Bolsa Familia as the sole cause in producing this effect. This paper takes the position that these social policies, enacted under the FHC and Lula administrations, were not solely responsible for increasing the size of the middle class; however, they worked in conjunction with overall improving economic conditions resulting in poverty reduction and a larger middle clas s
20 social and foreign policy development. In fact, these different policy spheres work concurrently (economic an d social), bolstering each other and resulting in a sustainable path to pursue development. Additionally, the incorporation of a soft yet aggressive foreign policy as a means of taking advantage of opportunities that present themselves in the global econo my through the establishment of new relationships and the strengthening and continuation of older ones, both economically and politically that differentiates Brazil from its Latin American brethren as well as other newly industrialized countries, the so ca lled NICs. When looking at this tripartite model, several questions become apparent: First, h ave successive civilian administrations be en able to make real mid and long term gains that have substantively improved Brazil's economic and political position ov er time ? Second, what differentiates this current period starting in 1985 from that of the Brazilian Miracle' (1968 1973)? And finall y, what differentiates it from the policies of the other BRICs. 4 In t his thesis I will focus on the first two questions and leave the last question to future research. 1 2. Has Brazil Seen Real Gains? Out of the carnage of the Great Depression and World War II rose the idea of gross domestic product, or GDP: the ultimate measure of a country's overall welfare, a window i nto an economy's soul, the statistic to end all statistics. Its use spread rapidly, becoming the defining indicator of the last century. But in today's globalized world, it's increasingly apparent that this Nobel winning metric is too narrow for these troubled economic times. Elizabeth Dickinson 4 Jim O'Neil, head of Goldman Sachs Economic Research Group, in his 2001 paper "Building Better Global Economic BRICs", coined the term BRICs. In the paper O'Neil argues that four countries (Brazil, Russia, India and China) GDP in a US$ on a PPP basis accounted for 23.3% of world GDP, and their share of world GDP would grow over the next decade raising issues over the impact that the BRICs' fiscal and monetary policy could affect the global economy. The term BRIC caught on after the 2003 paper by Dominic Wilson and Roopa Purushothaman entitled "Dreaming With BRICs: The Path to 2050." In this paper, Wilson and Purushothaman predicted that the BRICs' economies would be large than the G6 economies, in US dollar terms, in less than 40 y ears if things go right for the four countries. See "Building Better Global Economic BRICs" and "Dreaming With BRICs: The Path to 2050" available at www2.goldmansachs.com/ideas/brics/index.html
21 While Brazil has embarked upon a new age of policies that seek to resolve questions of macroeconomic instability and social inequities that inhibit growth, it sti ll remains to be seen if this course has demonstrated tangible results. This issue will be examined upon in a later chapter, but first it is helpful to demonstrate that these policies have in fact had a positive effect on Brazil's long term growth. Below Figure 1 2 shows Brazil's real gross domestic product (GDP) over the past 25 years and contrasts it to the income per capita in reais. We see that per capita income has steadily risen since the return to civilian rule in 1985. Additionally, it is appar ent that the economic reforms enacted during the late 1980s and early to mid 1990s enhanced economic development that resulted in a 3.03% increase in real GDP growth since the return to civilian rule. 5 Solely by analyzing socio economic indicators we see t hat Brazil's middle class has grown to more than 50% of the population, per capita income has increased by approximately 29 percent and while income disparity has diminished as well during this period Additionally, during the past 25 years the percentage of the Brazilian population living in poverty dropped by approximately 20 percent, and those living in extreme poverty decreased by approximately 60 percent period (see Figure s 1 3 and 1 4 ). Furthermore, inequality has also decreased from approximately 6 0 percent to 52.8 percent during this period. 5 A breakdown of real GDP growth rates during the 1985 period show that the first decade of civilian rule (1985 1994), Brazil experienced an increase of 2.82% in the growth rate of real GDP. This is compared to 2.54% and 4.2% respectively for the periods of 1995 2004 and 2005 2010. Brazil's nominal GDP, i n current US dollar terms, has increased by more than seven fo ld.
22 Figure 1 2 Economic Performance Under Neo liberalism ( Source s: IBGE and IPEA ) Figure 1 3 Social Classes 6 ( Source s : IBOPE and Cetelem ) 6 Explanation of the Brazilian social classes classifications: A and B are the upper classes, C is the middle class and D and E are the lower classes. The monthly income ranges for each social class are as follows: Class A R$8,295 +, Class B R$ 2,656 R$8,294.99, Class C R$ 962 R$2,655.99, Class D R$680 R$961.99 and Class E below R$679.99. Annually the income ranges are: Class A R$99,540 +, Class B R$31,872 R$99,539.99, Class C R$ 11,544 R$31,871.99, Class D R$8,160 R$11,543.99 and Class E R$8159.99 and below. 6000 7500 9000 10500 12000 13500 15000 16500 18000 -4.50 -3.50 -2.50 -1.50 -0.50 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50 8.50 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Income Per Capita, in Constant R$ Percent Change, YoY Real GDP Growth GDP Per Capita 20% 15% 26% 22% 32% 34% 49% 53% 46% 51% 26% 25% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2002 2005 2007 2010 Percentage of Total Populatio, % Class A + B Class C Class D + E
23 Figure 1 4 Population Living in Poverty ( Source: IPEA ) 1. 3. Brazil a s a Global Player Brazil's emergence as a global power, particularly in the past five years, has surprised many in the international community. Brazil's ambitions to become part of the inner circle of nations who dictate policy 7 have become clear as it has taken a lead role in the G 20 of developing nations at many conferences and it has joined efforts with other emerging countries to reform multilateral institutions. Brazil's role in the global economy and international foreign policy arena is no t surprising given the country's geographic size, abundance of natural resources and large population. Additionally, it has begun to exert its power in both multilateral institutions and as a tool for opening new markets to Brazilian products. Brazil has pursued what it refers to as South South foreign policy initiatives; these focus on closer 7 Brazilian policymakers see this group as the so called P5+1, or the five countries that have permanent seats on the UN Security Council plus one, Germany, as the central group that dictates world policies 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Percentage of Population Population Living in Poverty Population Living in Extreme Poverty
24 ties with the developing world, particularly Latin America and Africa. 8 They stress research and development, education and business initiatives. Through these ti es, Brazil has opened markets to its agricultural, manufacturing and technology products across the globe A lot of attention has been focused on Brazil as part of the BRIC nations and its agreement, along with Turkey, to sell enriched uranium to Iran, bu t the real thrust of Brazil's foreign policy has been opening global markets. The tangible proof of this is in the number of Consulates that it has opened over the past decade and many have trade bureaus attached with them. 1. 4. Methodology In this thesis, I will use a qualitative methodology for analyzing and answering the research question have recent Brazilian policies endeavors enabled Brazil to deliver real mid and long term gains that are suitable for emulation by other Latin American countries to improve their situation? The rationale for a qualitative rather than a quantitative analysis is the unwieldiness that a mathematically m odel for this framework poses. The three tenets of the consensus are, in some instances, composed of sub components, which can be observed and quantitati vely measured. To contrive a mathematical model would be to ignore the basic premise of the argument that it is the three tenets working together that produce the desired effect; therefore, the researcher i s left with little choice but to look historically at the policies, and then turn to the data to evaluate their effect and to deduce whether or not th e policies were causative. The variables for economic success are endless. 8 In a discussion wit h former US Ambassador Frank McNeil on Brazilian foreign policy during the 60th Annual Latin American Studies Conference at the University of Florida he told me that Brazilian diplomats have expressly told American diplomats that Africa is "theirs" a nd for the US to keep its "hands off."
25 It is not necessary to determ ine that there were "prescient" decisions made by Brazilian policymakers over the past quarter century, but only to demonstrate that the paths taken by recent presidents particularly Preside nts Carlos Henrique Cardoso and Luis Ignacio Lula da Silva hav e resulted in something novel and, more importantly, successful. The relationship of these three facets of the Consensus may appear to be tenuous and casual, but as we shall see that is not the case. T he organization of this thesis is as follows, it will answer the following research question in chapters 2 through 5: Have successive civilian administrations be en able to make real mid and long term gains that have substantively improved Brazil's economic and political position over time ? Furthermore, what differentiates this current period starting in 1985 from that of the Brazilian Miracle' (1968 1973)? To this end, Chapters 2 through 4 are divided by presidential administrations: Ch apter 2 analyzes the administrations of President Sarney (1985 1990), President Collor (1990 1992) a nd President Franco (1992 1994); Chapter 3 analyzes the presidency of Fernan do Henrique Cardoso (1995 2002); and, Chapter 4 focuses on the presidency of Lui z Ignacio Lula da Silva (2003 2010). Finally, Chapter 5 seeks to answer the second half of the research question by comparing the current economic policies of Brazil to those of the Brazilian Miracle' (1968 1973). This thesis conclude s with Chapter 6, in which it will address the following question : will emulating Brazil allow other Latin American countries to improve their situation or is this a purely Brazilian solution?
26 CHAPTER 2 T HE SARNEY, COLLOR AND FRANCO ADMINISITRATIONS 2.1. Stagflation and H yperinflation to the Real Plan In this Chapter, the economic and foreign policy agendas of the Sarney, Collor and Franco administrations will be analyzed. The purpose for reviewing policies of the first three presidents of the post military period is to give a lens through which we can view building of economic policy continuity from one administration to another. By reviewing these previous policies successes and failures, it allows for a more detailed analysis of how Brazil has adapted its policies to keep pace with a more interconnected global economy and has managed to transform its economy to become more dynamic and competitive. Additionally it recognizes the endogenous nature of economic policy from one administration to the next providing both co ntinuity with previous policies and a capacity to learn from previous policy failures and successes when formulating new policies. 2.2. The Sarney Administration and t he Return to Democracy (1986 1990) In March 1985, Tancredo Neves was elected president by the electoral college with Jose Sarney as his vice president. Neves, a politician from the state of Minas Gerais, had been active in both state and national politics. He was seen as an elder statesman who was best suited to lead the nation as it tran sitioned back to democracy. His sudden death in April shocked the nation, and his vice president assumed the mantle of leadership in the midst of what is often referred to as Latin America's "lost decade." Sarney was not a particularly popular or experie nced politician, and the economic, political and social state of the nation, inherited from the military, was quite precarious. i Lincoln Gordon (2001) commented on this period saying that "For Brazil,
27 the years 1985 to 1992 show elements of Greek tragedy in both politics and economics an alternation of [extreme] euphoria and [utter] despair." ii When Jose Sarney assumed the presidency after the death of Tancredo Neves in 1985, he came into the presidency amidst turbulent economic conditions. One of the m ost salient issues confronting the Sarney administration was how to reduce the country's massive foreign debt, which, at the time, stood at $95 billion. To compound the administration's problems the debt moratorium declared by Mexico in the summer of 198 2 prompted lending by private international banks to grind to a virtual halt in addition to a freeze on bilateral aid to the region. In order f or the government to receive assistance from the IMF, the Brazilian government w as expected to accept a set of c onditions that had would have to be met for a tranche of loans to be disbursed. The conditions that the IMF wanted Brazil to meet were typically measures that politically were quite unpopular. At the end of the last military appointed president's administration, General Joo Figueiredo (1979 1985), negotiations had begun with the IMF for a loan package, however, the government and the IMF failed to reach an agreement on a set of mutually accept able set of conditions to be met. At the onset of his administration, Sarney was concerned with whether or not the government could service the nation's external debt, inherited from the military, and if by servicing the debt it would sacrifice future economic growth and place at risk the administration's ability to address pent up social demands. The country was still afloat, due to the $11.995 billion in reserves that the Figueirdo administration was able to accumulate in 1984, enabling Brazil to mee t its debt obligations. The government was still struggling to maintain the solvency of the country and control inflation. The
28 country's short term debt had been alleviated by the improvements in the trade balance; however, the nation's long term debt re mained a precarious situation and cause of worry. Due to the difficulties that policymakers had in resolving the country's long term debt, inflatio n rose from 215.26 % to reach 242.23 % in 1984 and 1985 respectively iii Table 2 1. The Debt Crisis and Stag flation The Brazilian Experience Year Real GDP Growth (YoY, %) Annual Inflation (IPCA, %) Total Reserves (US$ mi) Balance of Trade (US$ mi) Total Debt Stocks (DOD, US$ mil) Short term Debt Stocks (DOD, US$ m il) Long term Debt Stoc ks (DOD, US$ mil) 1980 9.11 99.25 6913.00 20132.40 71526.93 13539.52 57987.41 1981 4.39 95.62 7507.00 23293.04 81454.46 15352.39 66102.07 1982 0.58 104.79 3994.00 20175.07 93932.34 17483.44 75898.70 1983 3.41 164.01 4563.00 21899.31 98524.82 14262.18 81618.34 1984 5.27 215.26 11995.00 27005.34 103861.50 11017.77 88658.36 1985 7.95 242.23 11608.00 25639.01 103609.98 9380.40 89610.28 1986 7.49 79.66 6760.00 22348.60 109033.66 9429.37 95103.12 1987 3.53 363.41 7458.00 26223.93 119842.32 13373.14 102492.84 1988 0.06 980.21 9140.00 33789.37 117409.81 10492.18 103584.58 1989 3.16 1972.91 9679.00 34382.62 114356.34 18013.71 93920.16 1990 4.35 1620.97 9973.00 31413.76 119731.56 23715.15 94195.86 Sources: BCB, FGV, IBGE and World Development Indicators Finance Minister Francisco Dornelles believed that an orthodox policy package would be able to bring under control the nation's rampant inflation. However, Dornelles faced a dilemma of whether or not the nation should negotiate with the IMF for a loan given that the current account surplus was estimated to be equivalent to Brazil's outstanding interest on its foreign debt refer to Table 2 1 Additionally, forecasts for Brazil's economic gr owth in 1985 were positive, meaning that the country wa s in a relatively good position to negotiate with its creditors and forego pursuing the help of the IMF and the austere economic that such help would entail. Given the choice between negotiations with private banks and creditors (who held approximately $3 5 billion of Brazilian debt ) and going to the IMF to seek a loan, Dornelles and Sarney chose the
29 former. The administration was able to reach an agreement with the country's private creditors that rolled over the principal due in 1985 and 1986 and renewin g trade credits on debt that would fall due between 1985 and 1989 iv 2.2.1. Economic Policy The Battle with Inflation In addition to the country's foreign debt obligations, inflation still remained a salient issue for policymakers to resolve. The "lost decade," as it became known, was referred to as a period of "inflation and economic drift" by Warner Baer (2008) v Lincoln Gordon (2001) further describes the state of Brazil's economy by stating that the annual rate of inflation in the 1970s avera ged 34 percent, during the 1980s this had increased to 428 percent and between 1990 and 1994 the average annual rate of inflation had reach approximately 1,400 percent over the five year period. vi This phenomenon of rampant inflation and slowing economic g rowth that characterized Brazil's economic condition was referred to as "estagflao," or stagflation, an apt description of what was occurring in the country. vii Finance Minister Francisco Dornelles believed that the only way the government would be able t o effectively counter and control inflation in the economy was through the implementation of an orthodox policy package. In his opinion, the excessive level of public expenditures was the main factor causing inflation, and he believed that a 10 percent cu t in the national budget in addition to freezing loans and government contracts to be the solution. The ultimate goal of Dornelles' plan was to enable the country to maintain a balanced budget and to avert from using short term debt to fix budgetary short falls. His emphasis on fiscial and monetary discipline was demonstrated in the lack of control by all branches of government to limit their spending in order to meet the social demands of their constituents. In order to meet all of these
30 and other immed iate obligations the government began to print money, increasing to the inflationary pressure in the economy. viii The appointment by Sarney of a conservative minister of finance, Francisco Dornelles, signified that fiscal austerity would be part of the new g overnment's economic policy package, however, when Dornelles stepped down in August 1985 due to political opposition his economic program, the expectation of an orthodox policy solution that incorporated fiscal and monetary austerity, went with him as well Sarney proceeded to name Dilson Funaro, the then head of the Banco Nacional de Desenvolvimento Econmico e Social (BNDES), as Dornelles replacement. Funaro, a former state secretary of finance for So Paulo, saw himself as a growth oriented Keynesian a nd disagreed with the recessive policies of his predecessor instead he favored growth like the planning minister Joao Sayad. Funaro brought a group of young economists from Brazilian universities, and entrusted them with finding a solution to the country' s historic problem with inflation (see Appendix A) ix 220.127.116.11. The Cruzado Plan The government was unable to comprehend what was occurring in the economy. On the one hand, inflation was 235.11 percent in 1985, yet the economy grew at an outstanding 7.95 percent. 1 Due to Brazil's international reserve position and positive trade balance in 1985, the government had avoided adopting an orthodox adjustment that would have been part of the IMF's loan conditions program and instead the government opted to implement a h eterodox adjustment to the economy. The Sarney administration chose to implement a policy package similar to one that had been tried in 1 The IGP DI for 1985 was 235.11 percent, the IPCA for 1985 was 242.23 percent. According to the W orld Bank, IDB, FGV and IBGE the Brazilian economy grew at a pace of 7.95 percent, however, Roett cites a growth rate of 8.3 percent.
31 Argentina in 1985. The Argentine's implemented the Austral Plan in 1985 and the plan failed to bring inflation under c ontrol; however, the Brazilians believed that with better planning and implementation they would succeed where the Argentines failed. x On February 28, 1896 President Sarney announced the Cruzado Plan in a national radio and television broadcast to the Br azilian nation in which he called upon Brazilians to join with him in "war of life and death" against inflation and in which he announced the elements of the plan, which are listed in Appendix C The basic tenants of the program included monetary reform t hat consisted of a replacing the cruzeiro with a new currency that would be exchange at a rate of 1,000 cruzeiros ( Cr$ ) to 1 cruzado (Cz$) in addition to abolishing price indexation. Other measures of the plan included price freezes for one year on mortga ges and rents as well as an indefinite price freeze on all other goods and services and foreign exchange rates. A wage readjustment that set real wages at an average of the previous six months plus an additional 8 percent was implemented and followed by a wage freeze. After the wage readjustment a sliding scale was introduced in which wages would automatically be readjusted when inflation reached 20 percent. Additionally, an unemployment benefit was established whose requirements were that workers had to demonstrate a minimum employment record as well as contribute to the national social security system. The plan was immensely popular, and for the first time in decades the government was able to bring inflation under control. xi The Cruzado plan was clea rly a departure for the administration from the orthodox view of inflation that had previously held sway under finance minister Dornelles to the adoption of the neostructuralist view detailed in Francisco Lopes'
32 writings as well as the other economists fro m PUC. xii However, the inevitable success of the Cruzado Plan was contingent upon the extent to which the inflationary process in the Brazilian economy was attributable to "inertial" inflation. However, if inflation were created by excess aggregate demand or insufficient aggregate supply in the long run, the Cruzado Plan would be unable to control inflation. xiii In addition to the Cruzado Plan, the administration had taken steps to address the assumed causes of fiscal and monetary imbalances. These measures included: Joining the Tesouro Nacional (National Treasury) budget with the "monetary budget," composed mainly of programs subsidized by the monetary authorities, in an attempt to control expenditures A freeze on the Banco do Brasil's "movement account" th rough which the commercial bank accessed the central bank's discount facility The creation of the Treasury Secretariat within the Finance Ministry to centralize the government's control over expenditures The passage a law in December 1985 that increased ta xes on financial transactions, changed the number of times that businesses must file income tax returns as well as increase the personal income tax and A reduction in the maximum time for consumer credit in addition to a general tightening of credit regu lations. xiv The Cruzado Plan was an immediate success reducing inflation from 12.72 to 4.77 percent in its first month. The success of the plan was an economic and political victory for the administration and the ruling Partido do Movimento Democrtico Bra sileiro ( PMDB Brazil i an Democratic Movement Party) xv In addition to the reduction in inflation, economic output grew by 8.3 percent, industrial production was higher in the first three quarters of 1986 compared to the previous year and consumer durables grew at an amazing pace. The first few months under the plan seemed as if Brazil had finally overcome its problem with inflation. The country's external accounts
33 continued the trend of the previous four years, but declining somewhat from the $12.5 billion registered in 1985 to $8.3 billion for 1986. xvi 2.2.1 .2. The Collapse of the Cruzado Plan. Sarney's economic team knew that the price freezes could only be used over a short period of time so that shortages were not created due to the absence of a price mechanism to allocate resources in the economy. Thi s consequence of the price freezes had been anticipated by the economists that developed the Cruzado Plan and they knew that the longer the price freezes lasted the more severe that market distortions would become. This created an internal debate within the administration concerning how long the keep the price freezes in place. The popularity of the price freezes had made Sarney and his party, the PMDB (Partido do Movimento Democratico Brasileiro), immensely popular, and as politicians popularity increas ed, political motivations surmounted economic insight. The possibility of future victories led politicians to ignore sound economic advice from the administration's economists concerning the mid and long term effects of the price freezes. Sarney and othe r politicians believed that if they could maintain the price freezes until the elections in 1986, that they would be able to preserve their political support. With prices frozen, consumers went on a shopping spree leading and within weeks of the implement ation of the price freezes excess demand began to appear in the economy. It was not long before shortages of goods b egan to appear in the economy. In July 1986, Sarney began to implement measures aimed at boosting investment and curbing consumption. The "cruzadinho," 2 or little Cruzado as it became known, 2 Baer (2008) refers to it as the Cruzado II. Fausto (2004) stated that Brazilians referred to it as the cruzadinho
34 implemented taxes on goods that were popular amongst the middle class who were the main consumers of goods such as cars loans, alcohol, gasoline, plane tickets and US dollars. At the same time a debate amongst economists over when to repeal the price freezes was beginning. Many economists were worried that if the price freezes were repealed prematurely that reintroducing expectations of inflation would be reintroduced in addition to recreating the condi tions of inertial inflation. xvii The Cruzado Plan's inevitable failure were due to several policy failures which caused economic distortions, but namely caused by the continuation of the price freezes which created excess aggregate demand within the economy 3 When price distortions reappeared the government repealed the price freezes before reestablishing fiscal discipline resulting in the inflation rate's rapidly increase by the end of 1986 which continued on into 1987. In December 1986 inflation had in creased by more than 10 fold from its level in April according to both the IPCA and IGP DI inflation indices. By May of 1987 inflation was at the same level that it was before the Cruzado Plan and still increasing. To compound the problem, by June short term interest rates reached 2,000 percent and the international reserve position of the central bank was so depleted that the government had to declare a unilateral moratorium on February 20, 1987 of interest payments to foreign banks (see Figure 3 1). F unaro's announcement, according to Gordon (2001), was taken as a surprise by the financial world. The finance minister apparently anticipated that the moratorium might help Brazil negotiate reductions to its 3 Bulmer Thomas also notes that the Cruzado Plan lacked any policy put into place a tight fiscal policy. Baer, when discussing the various aspects that contributed to the Cruzado Plan, addresses the public sector's deficit and finds that while the plan itself did not contain tax increases or budget cuts amongst its measures, the government had already undertaken tax reform in December 1985. Other steps taken were improvements in monitoring of the budget and consolidation of the budget.
35 external debt with its foreign creditors. Howe ver, Funaro's bet failed to come to fruition and Brazil resumed payments on its external debt later in the year. xviii Figure 2 1. The Cruzado Plan From Implementation to Collapse ( Source s : BCB, FGV, IBGE and IPEAdata ) 2.2.2. Handling the Debt Crisis In order to break with the military's foreign policy and start forging a new path for the "New Republic," as the return to civilian rule is called, Sarney signed several international conventions on human rights within the first few months of his administration. Among those were the Pact of San Jose (the Organization of American States Convention on Human Rights), the United Nations human rights pacts and the UN Convention Against Torture (See Appendix E for a list of important i nternational agreements). By becoming a signatory nation to these three international treaties on human rights, the Sarney administration demonstrated the importance that social 0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 400.00 -4000 -2000 0 2000 4000 6000 8000 10000 12000 14000 Inflation Rate, % US$ millions Total Reserves (US$ millions, Left Axis) Current Account (US$ millions, Left Axis) Trade Balance (FOB, US$ millions, Left Axis) Inflation (IPCA, %, Right Axis)
36 demands had on the process of political and institutional transformation that were occurring within Brazil. The Sarney government joined the Contadora Support Group (originally composed of Mexico, Venezuela, Panama and Colombia) along with Argentina, Peru and Uruguay. The Contadora Support Group sought the resolution of the ongo ing conflicts in Central America in addition to solutions to problems that threatened regional peace and security. xix The Contadora Support Group morphed into the Rio Group in 1986 that arose as a Latin American alternative to the Organization of American S tates. 4 The Rio Group's objectives were to increase regional integration through political cooperation, formulate a common positions to international issues of interest to member states, present solutions to the problems facing the region, improve inter A merican relations, and to increase cooperation amongst member states on economic, social and scientific development. xx The Rio Group provided another area in which Brazilian diplomats could use as a means to pursue their regional integration project, and, like the Program for Integ ration and Economic Cooperation (PICE) the Rio Group was a precursor to the later creation of the Mercosul common market. xxi 2 .2. 2. 1 Brazil's foreign debt The nations of Latin America met in the Colombian city of Cartagena in 1 984 where they agreed that they should persuade the governments of the developed nations to share the responsibility for the region's debt, by helping to provide solutions to as well as sharing in payment of existing debt. Then Secretary of the United Sta tes Treasury, 4 Member states include Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.The Rio Group, like the PICE before it, did not have a secretariat or permanent governing body to address disputes. The lack of a governing body in bo th the PICE and Rio Group is what led to the creation of a parliament for Mercosul. See Coalition for ICC.
37 James Baker, proposed the first plan to solve the external debt problems of developing countries at the annual IMF and World Bank meeting in September of 1985. His proposal called for multilateral credit agencies, creditor nations and privat e banks to provide new loans to developing nations so that these nations could generate economic growth and resume servicing their debts. Under the plan, private banks were expected to provide the majority of the new loans to developing nations; however, due to existing over exposure to debt to these countries, they did not intend to loan new funds to states already unable to service their debt. The result of the Baker Plan was that Latin American nations threatened to suspend interest payments on their debt. In February 1986, Brazilian Minister of Finance Funaro announced the Cruzado Plan to combat the country's rampant inflation, which s tood at 242.23% for the previous year according IBGE's (Institution Brasileiro de Geografia e Estatistica) IPCA index. The Cruzado Plan had impressive results shortly after its implementation; however, by the beginning of winter, it became apparent that t he plan had failed to rein in inflation in the economy. By July 1986, President Sarney announced the Cruzado II Plan, but due to the inability of the first Cruzado Plan to control inflation, skepticism about the ability of the Cruzado II led to the plans failure by the end of the year as monthly inflation once again began to reach double digit rates (see Figure 2 1) The inability of the Sarney administration to control inflation in the Brazilian economy forced the administration to restart negotiations w ith the Paris Club 5 in January 1987 concerning rescheduling the 5 The Paris Club is an informal group of official creditors that was founded in 1956 when Argentina expressed a need to meet its sovereign creditors in order to prevent a default. France offered to host a three day conference from May 14 16th, 1956 in Paris in order to discuss Argentina's sovereign debt situation. Today, the Paris Club continues as an informal group of creditors that finds coordinated and sustainable solutions to debtor countries that are experiencing difficulties in repaying their debt. The Paris Club provides "debt treatments" to debtor nations through rescheduling (de bt relief through postponement of payments) or through concessional rescheduling (reduction of debt service
38 nation's debt without committing it to an IMF program or monitoring by the IMF. The Paris Club agreed to reschedule US$4 billion in payments that were scheduled would have fallen due in Janua ry 1987. With short term interest rates reaching 2,000 percent and the international reserve position of the central bank being exhausted, the government declared a debt moratorium on February 20, 1987. xxii Due to the failure of the Cruzado Plans and the m ounting political pressure due to the debt moratorium, Funaro was replaced by Bresser Pereira. Pereira and his staff prepared an economic plan that had two basic objectives: 1 ) a growth rate of 6 percent for 1987, and 2 ) a trade surplus equivalent to 50% of the interest due to external creditors. He believed at the time that the economy could grow at nearly 6 percent over the course of 1987 and the government would be able to negotiate its external debt via conventional means, i.e. the IMF. By July 1987, it became clear to Pereira that this economic plan would not be able to resolve the country's debt problems. It became apparent to the finance minister that in order to gain sufficient bargaining position with its creditors, Brazil would have to both cre ate a trade surplus equivalent to 60% of the interest due to its creditors and, at the same time, reduce internal consumption in order to increase government savings necessary to service the nation's debt. xxiii 18.104.22.168. The Brazilian Proposal to Resolve the D ebt Crisis At the US Congressional Summit on the "Economic Agenda for the Nineties" on September 4th, 1988 in Vienna, Austria, Minister of Finance Bresser Pereira proposed an alternative to the finance and adjustment approach to resolve debtor countries in ability to service their debt. His proposal was "a partial and negotiated securitization 5 obligations during a specified time period or as of an agreed upon date, referred to as flow treatment and stock treatment, respectively). See Club de Paris' website for more information, http://www.clubdeparis.org
39 of the [then] present debt into new bonds, either with the same face value but fixed rates of interest below market rates, or with a discounted value and interest at market rates." This proposal was met with a negative reaction both by banks and by the US government. 6 After this proposal, Bresser Pereira flew to Washington to meet with Treasury Secretary Baker to propose a negotiated debt securitization as a conditio n for Brazil lifting its debt moratorium. Secretary Baker did not accept Brazil's terms for lifting the moratorium. xxiv Bresser Pereira was committed to finding a negotiated solution to the debt moratorium with its creditors, thus, as an act of good faith the Brazilian government signed an interim agreement to extend negotiations until the end of January 1988. Continued pressure by private banks for Brazil to continue debt and interest payments and to accept IMF conditions resulted in the Brazilian governm ent and international banks reaching an agreement whereby the IMF would provide consultancy' services to Brazil. In private talks with President Sarney, both Bresser and Sarney agreed that, if a definitive agreement could not be reached by the end of Jan uary 1988, Brazil should negotiate with banks individually and would only resume payments to individual banks after new debt terms had been agreed to E xisting debt issues would have to be converted to new bonds either with the same face value and at fixe d interest rates below market rates or new bonds were issued with a discounted face value at prevailing market interest rates. Negotiations with governments and multilateral agencies (i.e. IMF, I A DB, World Bank, Paris Club) would continue as well; however these entities 6 In 1988 James Robinson III, then chairman of American Express, and Arjun Sengupta, representative or India to the Board of th e IMF, both wrote proposals of securitization of debt similar to Bresser P ereira's. See Robinson III, James D. "A Comprehensive Agenda for an Institute of International Debt and Development." The AMEX Bank Review Mar. 1988, no. 13.; and Sengupta, Ar jun. "A Proposal for a Debt Adjustment Facility." The World Economy Jun. 1988, Vol. 11, No. 2. 165 186.
40 would be pressured to create an international debt facility like that which Bresser Pereira had outlined in the speech that he delivered in Vienna. In December 1987, with the failure of the Bresser Plan to control inflation and in the fac e of growing domestic opposition, Bresser Pereira stepped down as minister of finance and was replaced by Malson da Nobrega. Nobrega was able to negotiate an agreement with the private banks by which they would issue a new loan to Brazil of US$5.8 billio n to refinance the interest on the nation's outstanding debt. Short term lending would be restored, and US$6.1 billion in medium and long term debt would be rescheduled. An IMF mission arrived in Brazil in May 1988 to work on both a new loan agreement an d a letter of intent as well as to conclude the negotiations between Brazil and private banks. The IMF agreed to provide financing of US$1.5 billion in exchange for a letter of intent being signed with the IMF in July 1988. In September, the private bank s approved a deal for rescheduling US$62 billion of Brazilian debt and to provide the country with new loans worth US$5.2 billion. 2.2.3. The End of the Sarney Administration The euphoria of the Cruzado plan soon wore off and was followed by an atmosphe re of deception by the government and lack of confidence on the part of the Brazilian people in the ability of the government to steer the economy. The waning years of the Sarney administration was marked by hyperinflation, the Constituent Assembly, econo mic stagnation and three additional stabilization plans (Bresser Plan, Summer Plan and Rice and Beans Plan). The end of the Sarney administration, said that the administration had attempted to implement a few, "less spectacular" economic plans in an attem pt to resolve the country's problem with inflation and reign in the federal deficit. xxv
41 Policymakers, both in Congress and in the administration, paid lip service to the importance of limiting the federal budget deficit as an important means of achieving economic stabilization. Verbal promises to implement measures to control the budget wer e made, however, few were ever actually implemented. Continual deficits in the federal budget contributed to worsening inflationary conditions in addition to augmenting the government's domestic debt. Increasing government debt began to erode investors' view of the government's ability to guarantee its debt resulting in rising interest rates to account for the perceived risk of default. Falling investor confidence in government issued debt resulted in new debt being issued at shorter and shorter maturiti es. xxvi In May 1987, Luiz Carlos Pereira took over the post of finance minister from Funaro in the wake of the debt moratorium. Pereira, an economist who later served as the president of the State Bank of So Paulo, introduced the Plan for Economic Stabili zation, better known as the Bresser Plan, his second month in office. The Bresser Plan was similar to the Cruzado Plan in that it made use of price and wage freezes, implemented price and wage freezes for a period of 90 days allowing for readjustments of prices. The adjustments and freezes also applied to the public sector and the exchange rate in an attempt to avoid two of the major pitfalls of the Cruzado Plan, overvalued currency and deficits caused by state owned enterprises. Pereira additionally und erstood the role that restraining the public deficit plays in combating inflation; furthermore, he sought to reduce the federal deficit to 2 percent of GDP by year's end. The Bresser Plan's final measure was to keep interest rates above inflation in order to prevent the excessive levels of consumption that took place under the Cruzado Plan and played a role in its eventual collapse. xxvii
42 The Bresser Plan, like the Cruzado Plan before it, was unable to control inflation for a sustained period of time. By Oct ober of 1987 inflation reached 11 percent and continued to rise throughout November and December. The plan failed because of its inability to restrain government expenditures, which were due to increases in salaries for public sector employees, transfers of resources to state and municipal governments and grow subsides to state owned enterprises. The failure of the Bresser Plan led Pereira to resign in December. He was succeeded by Mailson da Nobrega, who would serve as finance minister for the rest of t he Sarney administration. Nobrega, like his two predecessors, implemented the Summer Plan and the Rice and Beans plan in order to control the budget deficit and inflation. The Brazilian historian Boris Fausto (2004) noted that these plans were such resou nding failures that they do not play a significant role in Brazilian history. xxviii 2.3. Fernando Collor The Washington Consensus Comes to Brazil (1990 1992) The end of the 1980s was marked both by hyperinflation and the fir st direct presidential election i n Brazil since 1960. The election was held in October 1989 and Brazilians voted overwhelmingly against the ruling Partido do Movimento Democrtico Brasileiro ( PMDB Brazil ian Democratic Movement Party), which was held responsible for economic mismanageme nt and the failures of the Sarney administration. Fernando Collor de Mello, a relatively unknown politician from Alagoas, a small state in the northeast, won the election campaigning on a platform of fighting corruption and modernizing the national econom y. Collor's opponent in the election was Luiz In cio Lula da Silva, in his first of four successive campaigns for the presidency. Fernando Collor was the first duly elected civilian president of the post military era, he also suffered the misfortune of h aving been the first president to be impeached and
43 removed from office. This transition of power was a watershed event in the maturation of a nascent Brazilian democracy. Remarkably it was during this period of time that significant changes to Brazil's economic and foreign policy began to take place that were later adopted and molded by subsequent administrations. When the Collor administration came into office in March 1990 the monthly inflation rate was higher than 80 percent, according to both the I PCA and IGP DI indices. 7 Collor announced during his inauguration three economic policy goals: first, to "kill inflation with a silver bullet;" second, to open the economy to foreign investment and trade; and third, to privatize state owned enterprises in competitive sectors of the economy. xxix Collor failed to achieve the first goal, but the other two would greatly change the Brazilian economy and impact its future (see Figure 2 2) Figure 2 2. The Collor Plan's Impact on Inflation (Source: FGV) 7 IPCA is the Consumer Price Index. IGP DI is the general price index. Both indexes are calculated by the Fundao Getulio Vargas. The IPCA index tracks price changes in the cities of So Paulo, Rio de Janeiro, Belo Horizonte, Salvador, Recife, Porto Alegre e Braslia. The IGP DI is the mean of three other price indexes (the Consumer Price Index, the Producer Price Index and the Construction Price Index). For more information about the IPCA and IGP DI indexes see the Fundao Getulio Vargas' webpage for Price Indicators http://portalibre.fgv.br/main.jsp?lumChannelId=402880811D8E34B9011D92AF56810C57 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 Jan-90 Mar-90 May-90 Jul-90 Sep-90 Nov-90 Jan-91 Mar-91 May-91 Jul-91 Sep-91 Nov-91 Jan-92 Mar-92 May-92 Jul-92 Sep-92 Nov-92 Percentage Change, MoM IGP-DI (monthly change, %)
44 2.3.1. The Collor Plan After taking up residence in the Palcio da Alvorada, President Collor quickly implemented the Collor Plan that he announced during his inauguration (see Appendix C ). The Collor Plan was a series of economic policies designed to liberaliz e the economy through reduction of tariffs, abolition of export subsidies and tax incentives as well as through the privatization of the numerous state owned enterprises. 8 The goal of these policies was to increase foreign direct investment in the economy and increase efficiency by opening it to foreign competition. xxx The Collor Plan and later the Real Plan enacted economic policies that were similar to what many other Latin American countries had done in the late 1980s and early 1990s, that is introducing economic policies influenced by the "Washington Consensus." The term "Washington Consensus refers to economic policies that embodied three crucial principles: macroeconomic discipline, a market economy and liberalization of the economy (see Appendix C ) xxxi A later constitutional amendment in 1995 would eliminate the different legal statuses of foreign and domestic firms This amendment allowed for foreign capital to enter sectors that had previously been reserved only for the government. Further legal and economic reforms since 1990 have increased FDI flow s into diverse segments of the Brazilian economy xxxii It was during the early 1990s that the privatization of state owned enterprises (SOEs) began under the administration of president Collor and was continued under the Franco and Cardoso administrations that succeeded the Collor presidency. 8 The Collor Plan was embodied in provisional measures 151 152, 154 155, 157 158, 160 162, 164 165 and 167 169 as well as in Decree Laws No. 99.181, 99.182 and 99.183. For a list of the public entities that were dissolved see Appendix B
45 C ollor Plan II Due to the failure of the Cruzado Plan to end the inflationary cycle, the administration implemented a second stabilization plan called the C ollor II This plan, like the C ollor Plan before it, used shock treatment as a means to combat inflation in the economy. Yet again, price and wage freezes were used to contain inflation and instill pric e stability in the economy. Collor II eliminated the use of various price indexation measures as well as implement limited financial reform, whose main objective wa s to control the amount of liquidity in the economy rather than make needed structural adjustments. xxxiii Policymakers' pursuit of fiscal austerity took the form of attempts at improving management of cash flows and reducing expenditures of state owned enterpr ises. Some i nitiatives sought to reduce government expenditures by entirely blocked the budgets of some government ministries as well as the majority of funds set aside in the budget for investments. Additionally, a committee was created to oversee state owned enterprises and was tasked reducing real expenditures of all SOEs by 10 percent by the end of 1991. To further reduce government spending the government decreased transfers of tax receipts to states and municipalities to the minimum amount institute d in the 1988 Constitution. xxxiv These measures did have a temporary impact on prices, reducing the monthly inflation rate (IGP DI) from approximatey 72 percent in February of 1991 to 9 percent in May of 1991 before climbing again to 12.98 percent by the end of July De spite the reduction in inflation that the Collor II was able to accomplish, Collor replaced the team of economists that devised the stabilization plan in May of 1991 replacing them with a new team lead by the new Finance Minister M arcilio Marques Moreira. Under new
46 economic leadership, the administration focused its efforts on managing the money supply and government cash flows. In order to control cash flows, the administration's economists primary initiative s were to keep publi c wage increases below the rate of inflation and by reducing public investments in the economy. Notwithstanding the administration's efforts to significantly reduce government expenditures (reduced by 63.8 percent), the administration only created a prima ry budget surplus equivalent to 1 percent of GDP. Additionally, the operational deficit for the 1991 fiscal year reached 1.75 percent of GDP, mainly due to the decrease in government revenues by 65 percent. 9 In addition to the measures taken to constric t the money supply and improve oversight of government cash flows, the new economic team removed the price freezes that Collor II had put in place and made preparations to unfreeze the remaining financial assets that were blocked under the plan, amounting to 6 percent of GDP. Despite the efforts of the administration's economists to implement fiscal austerity measures they were unable to constrain monetary expansion in the economy. The release of blocked assets injected excess liquidity in to the economy, resulting in the expansion of the monetary supply by 8.5 percent in the second quarter of 1991 and its further increase to 13.5 percent during the third quarter. This increase in the money supply combined with the government's lack of implementation of w ell designed anti inflation initiatives triggered an outburst of anticipation of future inflation. Riding the tide of increase expectations of inflation and an expansion in the monetary supply, monthly inflation rose from 15.5 percent in August 1991 to 25 .9 percent two months later. xxxv 9 Government revenues declined during this period due to the de indexation of taxes, disputes over the receipt of other taxes and a reduction of tax liabilities for companies in order to compensate them for overpayments in previous years.
47 2.3.2. Brazil's C ompetitive I nsertion' into the Global Economy In his 1989 presidential election campaign, Collor stated his desire to modernize the nation; he called for its competitive insertion' into the global economy. Collor realized that internal reforms were necessary precursors to international success. xxxvi According t o Hirst and Pinheiro (1995), Collor's foreign policy agenda was based on three principles: 1 ) to bring Brazil's international agenda up to date with new themes and practices, 2 ) to create a positive dialogue with the United States and 3 ) to change the international perception of Brazil as a third world country. xxxvii According to Marcos Azambuja (1991) the changes that were made by Collor to Brazil's foreign policy agenda transpired with the sole objective of inserting Brazil into a well placed position to be able to compete with developed nations in the new economic order that arose after the dismantling of the Berlin Wall. Brazil policymakers came to the r ealization that they could no longer remain on the sideline, particularly on issues of relevance to their economic growth. xxxviii Collor adopted a new approach regarding environmental policy, specifically his administration modified the military's position tha t environmental concerns came second to defense. This laid the groundwork for future international treaties concerning environmental protection and conservation, such as the Rio Declaration on Environment and Development (RIO 92). Additionally, in accord ance with developing international norms, the government became more receptive to signing and adhering to non proliferation treaties, as well as to limit the military's role in dictating nuclear policy. In the second arena, Collor sought to initiate negot iations with the United States concerning intellectual property rights. To appease the United States, the Collor administration also sought to modify of Brazilian legislation governing intellectual
48 property. In the last arena, Itamarty sought to establis h an international dialogue to discuss the new opportunities created by the end of the Cold War. He sought to ameliorate the negative effects of perceived North South divisions that existed after the end of the Second World War. 10 Policymakers determined that the new standard for the country's foreign policy would be to meet the international challenges that would arise due to the process of implementing internal economic reforms. T he two policy spheres work in concert for the good of Brazil. With this aim, Collor developed a foreign policy agenda that would improve the country's ability to compete internationally in the global economy by seeking more access to international markets, credit and advanced technology. xxxix After an initial dynamic phase in whi ch the government abandon ed the statist model implemented under the military through the rapid implementation of liberalizing policies, political problems that the administration faced brought the progress of further opening the economy to a halt. The abi lity of Collor and his administration to implement the comprehensive set of economic reforms designed to open the economy through liberalization of investments, privatization of state enterprises, renegotiation of the external debt and reduction of trade b arriers was constrained by the political crisis that was triggered when during his first year in office he froze bank accounts in an effort to combat hyperinflation. The administration's inability to negotiate with Brazilian 10 During the Collor administration Brazil: negotiated and signed the Treaty of Asuncion with Argentina, Paraguay and Uruguay that created the Mercosul Common Market; created the Brazilian Argentine Agency for the Accountability and Control of Nuclear Materials (ABACC) and the Quadripartite Agreement for Nuclear Safeguards with Argentina, ABACC and the International Atomic Energy Agency (IAEA); put forth a proposal to revise the 1967 Treaty of Tlatelolco in a joint initiative with Argentina and Chile that would open a path for all three nations to ratify the treaty; hosted and demonstrated its leadership at the United Nations' Conference on the Environment and Development (Eco 92 or Rio 92); and passed legislation particularly/specifically rel ated to the control and export of sensitive technologies and arms. NOTE: Brazil was the third largest export of arms in the 1980s. See Stepan, Alfred. Rethinking Military Politics: Brazil and the Southern Cone Princeton: Princeton University Press 1988.
49 economic and political elites regarding economic reforms, combined with an emerging ethical scandal concerning the president's actions to resolve the economic crisis, spurred questions concerning the legitimacy of his presidency. Within two years of his election, Collor was impeached and removed as president. The political crisis compounded the nation's problem by reversing the new image and expectations that the international community had of Brazil as a country making a stable transition from authoritarianism to democracy. Itamarat y and the Brazilian diplomatic corps tried to keep the nation's foreign policy agenda independent from the emerging domestic political crisis; however, despite their efforts it was not possible, especially with the industrialized countries of Western Europ e and the United States. Brazil's image also suffered in the international business community due to the ineffective stance that the Collor administration took with the nation's creditors in negotiations regarding the external debt, in addition to domesti c resistance, particularly from Congress, to the administration's policies of liberalization and dismantling the statist political economic model. xl Mercado Comum do Sul During the import substitution industrialization (ISI) economy policy period, Brazil was able to undergo a substantial shift in its economy from a largely agrarian economy in the 1930s to an industrialized economy in the mid 1960s unlike many of the other nations in Latin America (see Table 2 2 ). The ISI policies were able to establish a manufacturing sector that, in the right regulatory and economic environment, would be able to compete in the global economy. However, as Celso Amorim pointed out, the country could not continue to grow if it m aintained the ISI policies. In his point of view, Brazil needed to increase investments in science and
50 technology, research and development and education that would allow the country to be able to compete in the global economy. xli Table 2 2 1939 1966 C hanges in Economic Sector's Share of GDP 11 1939 1947 1953 1957 1960 1966 Agriculture 25.8 27.6 26.1 22.8 22.6 19.1 Industry 19.4 19.8 23.7 24.4 25.2 27.2 Other sectors 54.8 52.6 50.2 52.8 52.2 53.7 Total 100 100 100 100 100 100 Source s : Fundao Getulio Vargas, Centro de Contas Nacionais and Conjuntura Econmica. Brazilian diplomats saw economic liberalization and regional integration as a means, if guided properly, to bring both economic and political benefits to Brazil. It was throu gh this desire to intensify regional integration that the Mercado Comum do Sul ( Mercosul Common Market of the South) was created. Participation in Mercosul was viewed as a way for the Brazilian economy to become more productive, efficient and competitiv e before fully joining the global economy. This would be accomplished through two things: 1 ) the increased competition amongst firms of the trade bloc and 2 ) by implementing a common external tariff of 35 percent for Mercosul that would provide some insu lation from global competition. These measures were viewed as "training wheels" for the Brazilian economy to allow it to adjust over a period of time to increase competition while allowing for firms to develop and acquire the necessary skills, personnel a nd technical capabilities to be competitive in the global economy. In his interview with Alexandra de Melo e Silva (2003), Celso Amorim stated that Itamaraty was emphatic that the economic liberalization process happened jointly with the implementation of a common external tariff for Mercosul. xlii 11 From Baer's The Brazilian Economy 66. I was unable to get access to data from FGV, IBGE or the Central bank that went back further than 1969. Some of this times series information has been discontinued according to their website.
51 2.4. Itamar Franco and the End of Inflation (1992 1994) Following the impeachment and resignation of Collor in October 1992, his vice president, Itamar Franco, assumed the presidency marking the first impeachment and peaceful transfer of power of the presidency in accordance with Constitutional law. Franco assumed the presidency during a prolonged economic crisis in which it was clear that the economy was contracting due to an inability of the government to rein i n inflation. During his first month in office, inflation stood at 24.22% per month rising to more than 30% within six months the beginning of Franco's presidency (see Figure 2 3 ). Franco's initial inept position as political and economic leader of Brazil further contributed to inability of economic policymakers to create and effective solution to control inflation. The infighting of his economic team led him to change finance ministers three times during his first six months as president. Franco appoint ed his fourth and final finance minister, Fernando Henrique Cardoso (FHC), in May 1993 with inflation running at approximately 238% for the year. xliii Due to the problematic political and economic situation that the administration faced, little attention was given to the foreign policy agenda; rather the Franco government elected to delegate foreign policy to "renowned actors from outside or from within the diplomatic corps." The foreign policy agenda was constrained by the deteriorating macroeconomic situat ion the country was in, as well as the nation's failure to implement a successful macroeconomic stabilization and reform plan. Policymakers were apprehensive that this perception of failure would result in the industrialized countries directing their reso urces to the political and economic reconstruction of Eastern Europe to the detriment of Brazil and the global "South." However, after the first few months in office, the Franco administration began to emphasize the importance
52 of building the country's international image. The administration made a conscientious decision to both maintain the previous policy initiatives of the Sarney and Collor governments, to insert the nation in the global market and the international community while at the same time recognizing that it was a developing country. xliv Figure 2 3. Hyperinflation to Stability, measu red by the monthly IGP DI Index (Source: FGV) 2. 4 .1. The Real Plan After being appointed as finance minister, Cardoso brought with him a group of talented economist s whose research centered on economic policies that could counter Brazil's inflationary cycle. 12 FHC met these economists during his tenure as a professor of s ociology at Universidade de So Paulo. Cardoso's background as a sociologist did not give him the knowledge or expertise concerning macroeconomic policy or economic policy tools to control inflation. Cardoso and his "brain trust" came up with a new 12 Cardoso's brain trust of economists hail from the economics departments of the Universidade de So Paulo and the Pontfica Universidade Catlica in Rio de Janeiro. -10.00 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 Jan-86 Nov-86 Sep-87 Jul-88 May-89 Mar-90 Jan-91 Nov-91 Sep-92 Jul-93 May-94 Mar-95 Jan-96 Nov-96 Sep-97 Jul-98 May-99 Mar-00 Jan-01 Nov-01 Monthly Price Increases, % Sarney (Black) Collor ( Red) Franco (Blue) Cardoso (Green)
53 strat egy during his first few months as finance minister to subdue the inflationary cycle in Brazil's economy without implementing a shock treatment as previous plans had done. xlv The plan that came out of his first few months in the Ministerio de Fazenda (Minis try of Finance) became known as the Real Plan or Plano Real in Portuguese. Before implementing the Real Plan, Cardoso quickly announced an austerity plan, the "immediate action plan." The plan's main objective was to reduce government spending by $6 bill ion, which accounted for 9 percent of all federal spending and 2.5 percent of total spending for federal, state and local governments. Additionally, the plan sought to increase tax revenues by improving tax collection and resolving the dispute between the federal government and the states over tax revenue (created by the 1988 Constitution) and debt. The federal government had underwritten $36 billion in loans to the states that owed an additional $2 billion in arrears to the federal government FHC annou nced to state governments that until their outstanding debt and arrears to the federal government had been repaid the Ministerio de Fazenda would no longer give loan guarantees to the states. 13 In mid 1993, the Ministerio de Fazenda launched a campaign to fight tax evasion that had increase d during the previous decade. It is estimated that tax evasion had cost the government an estimated $40 to $60 billion per year in revenue. xlvi The Real Plan combined orthodox and heterodox monetary and fiscal policy elem ents in order to confront the nation's persistent inflation problem. The premise of the plan, the elimination of inertial inflation in the economy in order to end the cycle of indexed price increases that were adjusted to account for past inflation, was h eterodox 13 If the states did not repay their debts to Brasilia they would be required to alloca te 9 percent of their annual revenues to repayment of their outstanding debt.
54 in essence. xlvii In December 1993, FHC announced his new economic stabilization program whose design was supposed to avoid the pitfalls t hat previous programs had faced, which was the sudden elimination of inflation through the use of price freezes which only had a temporary impact on inflation. T he Real Plan was first presented to congress as a proposal to be discussed and implemented gradually. The program had three facets: 14 1) a fiscal adjustment; 2) the creation and implementation of a new i ndexing system for prices and 3) the adoption of a new currency. xlviii The fiscal adjustment that Cardoso and his brain trust proposed would consist of three separate measures: 1) a tax increase of 5 percent across the board; 2 ) the creation of a social emerg ency fund that would help make temporary fiscal adjustments; and 3) a reduction of $7 billion in spending on state owned companies, government employees and government investments. xlix As a result of the social emergency fund's design to function as a stop g ap measure, the federal government pursued efforts to amend the Constitution to transfer health, education, social services, housing, sanitation and irrigation responsibilities to state and municipal governments in order to reduce the fiscal burden on the national coffers. Additionally, these Constitutional amendments would resolve the dispute over federal tax receipts that had emerged after the ratification of the 1988 Constitution by decreasing the amount of federal tax receipts that the government had t o be transfer to states. l The new indexing system was initiated at the end of February 1994 and would use a new indexer called the unit of real value (URV unidade real de valor). Lincoln 14 Persio Arida and Andre Resende first proposed a stabilization plan that would introduce an indexed currency in the 1985 work entitled "Inertial Inflation and Monet ary Reform." (available at http://www.econ.puc rio.br/pdf/td85.pdf ) Both Arida and Resende were among the group of economist t hat advised Cardoso during the first few months of his adminis tration when the Real Plan was formulated.
55 Gordon (2001) called the URV "the most ingenious innovation" of the Real Plan. li The URV was initially pegged to the U.S. dollar at a one to one ratio and the URV's quotation in cruzieros would rise or fall with inflation daily. From March to July of 1994 wages, prices, contracts and taxes were calculated in both cruz eiros and URVs with monthly adjustments made for increased living costs. By July 1994 a significant proportion of prices and transactions were being quoted in URVs. At this time the government chose to introduce a new currency, the real whose value woul d be equivalent to the URV and exchangeable at a fixed ration to the old currency, the cruzeiro On July 1 st 1994 the third phase of the Real Plan was initiated, the introduction of the new Brazilian currency the real which was introduced at an exchange rate of one US dollar ($) to one real (R$) to 2,750 cruzeiros (Cr$). After the introduction of the real, there was an initial increase in prices as some supermarkets and business owners sought to take advantage of consumer s confusion regarding relative prices in reais and cruzeiros To counter this up tick in prices and confusion, the government used a public campaign to inform the public to keep purchases at a minimum to force a price retrenchment throughout the economy. As confidence in the purchasing power of the real increased, consumers' were ab le to wait for complete price to retrench ment throughout the economy The government's public relations campaign paid off as prices began to decline and weekly inflation rates began to fall soon after the adoption of the real lii In addition to introducing the real the third phase of the Real Plan also included several additional monetary policy measures to ensure the smooth transition to the real and price retrenchment. These m easures included limiting the monetary base from July
56 1994 to March 1995 to R$9.5 billion, changing the structure of the National Monetary Council (CMN Conselho Monetrio Nacional ), the creation of a fund for the amortization of the national debt, a 90 d ay suspension of short term loans for exports and 100% reserve requirement on all new deposits. liii Additionally, the Banco Central kept interest rates at high levels in order counter an increase in consumption that and speculative stockpiling. In order to prevent large capital inflows that the high interest rates might attract, the monetary authorities instituted a "crawling peg" 15 where there was a fixed exchange rate of one real to one US dollar as they permitted the purchase price of the real to fluctuate according to market forces. liv Figure 2 4 The Success of the Real Pl an (Source s : FGV and Banco Central do Brasil Boletim) 15 Reuter's Financial Glossary defines a crawling peg as "A system which permits a gradual increase or decrease in the value at which a currency's exchange rate is fixed or pegged to another currency or to a basket of currencies. This allows the exchange rate to adjust to changes in a country's economy, such as changes in inflation or growth rates ." 0.00 0.50 1.00 1.50 2.00 0 10 20 30 40 50 Oct-92 Feb-93 Jun-93 Oct-93 Feb-94 Jun-94 Oct-94 Feb-95 Jun-95 Oct-95 Feb-96 Jun-96 Oct-96 Feb-97 Jun-97 Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99 Oct-99 Exchange Rate, R$ to US$ Moontly Price Increase, % IGP-DI (%, MoM) SELIC (%, MoM) Exchange Rate (R$:US$, End of Period)
57 Gordon (2001) notes, the various monetary measures taken to create a smooth transition to the real combined with the high interest rates were meant to reduce inflationary pressures. These measures resulted in the creation of an attractive environment for foreign capital precipitating large capital inflows. In order to maintain price stability after t he conversion of the economy to the real the government needed to implement orthodox monetary and fiscal policies that required fiscal discipline by state and local governments (see Figure 2 4). lv 2. 4 .2. Franco's Hands off Foreign Policy When Itamar Fra nco assumed the presidency in late 1992, he assumed the presidency at a time in which Brazil was in pandemonium. The nation was in the midst of a prolonged macroeconomic crisis (inflation and the external debt); the domestic political situation was in tur moil due to the impeachment of president Collor, and, to add insult to injury, the country's international image had deteriorated as the impeachment symbolized a country unable to control any of its affairs. The Franco administration would spend the all o f 1993 trying to overcome the political legacy left by the previous administration while simultaneously searching for a solution to the country's persistent economic degeneration. The chronic economic instability had resulted in a charged political atmosp here, which often brought the president to loggerheads with Congress. It was within this context of parallel policy initiatives that Itamaraty was tasked with implementing several decisions concerning the best approach for the new government's insertion i nto the international community via its diplomatic agenda. The administration decided to pursue regional and extra regional integration initiatives, human rights policy, to reaffirm commitments made in accordance with non proliferation treaties (NPTs) und er the Sarney administration. It also sought to reduce tensions that had arisen
58 between Brazil and the US during the 1980s and to take an active role in multilateral political forums (i.e. GATT/WTO, UN, IMF, etc.). Brazil continued to open its economy tha t began under Collor and to reaffirm changes made by the Collor administration to the Uruguay Round of the GATT negotiations. lvi 2 4 .2.1. United Nations The administration used the UN to pursue its international insertion goals: then Foreign Minister Celso Amorim, in his address at the opening session of the 48th General Assembly of the UN (September 1993) defended human rights, promoted collaboration on disarmament of weapons of mass destruction and emphasized the necessity for the composition of the UN Se curity Council (UNSC) to be changed so that it reflects the changes that have occurred in the world since the end of the Cold War. The Brazilian delegation at the UN proposed an Agenda for Development. The basis for the proposal was the idea that the int ernational agenda should be centered on the issues of democracy, development and disarmament each of whose constituent parts concern questions of human rights, the environment and international security. The proposed agenda envisioned committing the UN as a force to ameliorate conditions of underdevelopment and poverty in developing countries. Additionally, Brazilian diplomats sought to secure a place in the global discourse on issues such as human rights, environmental conservation and protection, drug trafficking and terrorism. lvii Part of the Franco administration's plan for the international insertion of the country included focusing on the debate concerning the expansion and democratization of the UN and its various institutions. Additionally, Brazil participated in three peacekeeping operations in El Salvador, Angola and Central America to further improve its bid for the UNSC. lviii
59 2 4 .2.2. GATT In the Uruguay Round of GATT negotiations, the Franco administration opted to follow the strategy that Collo r had pursued that of an ardent supporter of the inception of the World Trade Organization. Under Mello Brazil had been opposed to the inclusion of new issues in the Uruguay Round of the GATT negotiations, because of fears that these new issues, such as social dumping, 16 would take attention away from more important issues such as market access as well as agriculture and textile subsidies. As a result of the economic and financial turmoil that riveted Brazil during the 1980s, the country's negotiating po sition during the Uruguay Round was weak, and it accepted the Draft Final Act, even though it overlooked a large number of issues that were important to Brazil. lix 2 4 .2.3. Regional and extra regional integration After the US, Canada and Mexico had negotiated the North America Free Trade Agreement, commonly known as NAFTA, Itamaraty saw the signing of NAFTA as a signal that Mexico could supplant Brazil as the U.S.'s main representative and ally in the region. In response to this perception of Mexico M inist rio de R ela es E xteriores (MRE Ministry of Foreign Affairs) also referred to as Itamaraty, began to how it viewed of the political and economic geography of South American and the hemisphere and begin to reformulate the way in which it approa ched both South America and the Latin American region. as a whole. lx This reconceptualization led to a shift in Ministry's 16 The Eurofound defines social dumping as the practice of exporting goods from a country whose labor laws and regulations are weakly or poorly enforced. This results in artificially lowering the labor costs of the exporter to levels that are lower that its competitors in countries where labor laws and regulations are enforced, thus creating an unfair advantage for the exporter. Social dumping results in differences in direct and indirect labor costs, which may give particular indust ries a significant comparative advantage if they are located in particular countries. However, this practice has potentially negative consequences on the labor standards and social impact in these countries where this practice occurs. See "Social dumping" on http://www.eurofound.europa.eu
60 attention from the region of Latin America to focus on the continent of South America. 17 Th e shift in geographical focus from the regi on of Latin America to the continent of South America was a repudiation of the 1970s third world ideology and viewed the continent of South America as a platform for international insertion. This view was reflected in former secretary general of MRE, Robe rto Abdenur's suggestion that Brazil's foreign policy should reflect the reality of the nation's place in the South American continent, region of Latin America and the hemisphere. lxi This view that Abdenur expressed is based upon a speech that then foreign minister Celso Lafer gave to the Chamber of Deputies in August of 1992. Lafer told the Chamber that the country should pursue regional integ ration projects in South America, since it is the geography of Brazil determines in many respects its policy agend a ( il faut faire la politique de sa gographie ). lxii In 1993, the Clinton administration announced the Summit of the Americas to be held the following year in Miami, Florida. At the Summit, the Clinton administration requested that presidents from all the nations of the Americas come together and begin negotiations on a free trade agreement of the Americas (FTAA), 18 with the aim of 17 Former F oreign M inister Luiz F. Lampreia, in an interview with Burges, said explained this change in Itamaraty's conceptualiz ation to a perception of South America as an entity that can be very clearly described in terms of its geography, of its membership, of its, let us say, belonging as a group of countries. It is virtually [an island] if you see the Panama Canal as a cut in the Isthmus South America is practically an island and therefore conforms to a very logical and very clear geographical entity which should be the basis for our functioning.' See Burges (2010). 18 According to Feinberg (1997), the S ummit would place "the most profound themes in hemispheric affairs" on center stage, which differentiated it from typical diplomatic exchanges and hemispheric conferences that usually focused on addressing immediate and narrowly defined issues. The Summit would address five questions that are central, not only to hemispheric relations, but also to economic and development policy in the Americas. Feinberg (1997) lists these issues in the following questions: "1 ) What is the definition of democracy? 2 ) What is the legitimate scope for collective action in defense of democratic institutions? 3 ) How far and how fast should the hemisphere integrate its economies? 4 ) What are the social priorities, and what is the role of government in poverty alleviation and e nvironmental protection? 5 ) Should all nations be held to the same duties and obligations [under
61 repairing damages that the U.S. Congressional debate over NAFTA had caused to US policy in the region. A ddition lly, the U.S. hoped to curtail the emergence of Mercosul, and by extension reduce Brazil's influence as a major player in the integration of Latin America. lxiii Brazilian officials were apprehensive of the Summit from the outset, due to their concern that the ec onomy was confronting dual economic shocks rapid economic liberalization and a tenuous macroeconomic environment caused by rampant inflation. lxiv Itamaraty saw that further economic liberalization along the lines that the US proposed in FTAA might place an added strain on the already fragile economic situation. Analyses conducted by MRE on the effects of another round of liberalization on the Brazilian economy demonstrated to Brazilian diplomats the need for a period of phased adjustments in order to imple ment FTAA, which, in 1993, was similar to other countries in the region. lxv Due to the dual economic shocks that the economy was still confronting as well as the belief amongst Brazilian diplomats that the implementation of the economic liberalization measu res contained in the FTAA would be detrimental to Brazil and other countries in Latin America, Itamaraty adopted a phased in approach rather than the US proposal concerning how best to implement a free trade agreement for the hemisphere. The position that MRE advocated was a preliminary freeze of all tariffs at current levels before implementing a phased reduction to the levels called for under FTAA. Itamaraty's hope was that negotiations between existing regional trade blocs (Andean Community, Caribbean Common Market, Mercosul and NAFTA) would encourage the 18 FTAA], or should the h emisphere differentiate among its members by size or wealth?" See Chapter 6 Hemispheric Diplomacy in Summitry in the Americas: A Progress Report
62 constituent blocs to link themselves to each other, effectively providing an intermediate step on the way to implementing a hemispheric trade bloc. lxvi 2.5. The Continuity of the First Three Civilian Pr esidents Under the first three presidents after the military regime we see that the continuity pursued by the successive administrations. Furthermore, we see that each president learned from the successes and failures of his predecessor's economic policy and adapted his economic policy to address the failures of previous policies, while replicating the successes. During the Sarney administration, the president had to confront a stagnating economy, high inflation and the debt crisis. Under Collor, the p roblem of hyperinflation, opening of the economy and joining the post Cold War global economy were the central economy issues facing the administration. Franco's administration had to handle the aftermath of Collor's impeachment while at the same time cre ating a solution to bout of hyperinflation that the country was experiencing at the time The Sarney Administration (1985 1990). The first civilian presidential administr ation after the military regime came into power in th e midst of the debt crisis and to ok control of an economy suffering from the combined maladies of economic stagnation and inflation. In order to manage the two simultaneous crises, President Sarney delegated negotiations with the country's creditors to the Foreign Affairs Ministry and hi s Finance Minister, while he and his economic team confronted the country's affliction with stagflation. The economic plans that came out of the administration w ere unable to address inflation that was unchecked in the economy that was fueled by inertial inflation The most notable of the plans, the Cruzado Plan, was initially successful at reducing inflation through the implementation of price freezes and a fixed
63 exchange rate ; however the administration's resistance to repealing the price freezes produ ced excess demand that resulted in the reemergence of inflationary pressures in the economy. The failure of the Cruzado Plan was the first in a series of failed attempts by the administration to control inflation and generate economic growth. While the d ebt negotiations were successful, the administration's economic policies gave rise to the deterioration of the economy from being afflicted by stagflation when the administration came into office to hyperinflation by the time that it left. The Collor Administration (1990 1992) Collor took the mantle of the presidency after winning first presidential elections since 1960. He vowed in his inaugural address to "kill inflation with a silver bullet," yet his presidency ended with the failure of the Collo r Plan and his impeachment over allegations of corruption. lxvii While the Collor Plan failed to control inflation, it was, however, successful at beginning the process of opening the economy. During this period the first wave of privatizations of state owned enterprises (SOEs) began, and was continued under the next thre e presidential administrations. The Collor Plan, like the Cruzado Plan before it, implemented prices freezes, instituted a new currency, fixed the exchange rate to the US dollar and froze all liquid assets in the economy for a period of eighteen months. The plan failed to reduce monthly inflation rates below 9 percent, and by the end of 1990 the plan had failed to control inflation. D uring the Collor administration, Brazilian foreign polic y began to follow international norms on a number of issues ranging from human rights, nuclear proliferation to the environment. Collor laid the foundation of Brazil's environmental policy that would lat er play an integral role in the U.N. Convention on B iological
64 Diversity ( RIO 92 ) and has become a fixture of domestic politics since the Rio Summit During his second year in office, Collor signed the Agreement between Argentina and Brazil for the Exclusively Pea ceful Use of Nuclear Energy and then procee ded to sign the Quadripartite Agreement between Argentina, Brazil the ABACC and the IAEA. Additionally, during 1991 he signed the Treaty of Asuncin that established the Mercosul common market, which would greatly affect Brazilian foreign policy initiati ves and policy under the four successive presidents that subsequently followed his administration. Collor's presidency also marked a change in Brazil's foreign policy that has been continued by the four presidents that posterior to his administration. To ward the end of his administration and in the midst of the impeachment process, Brazil hosted the UN Conference on Environment and Development (UNCED), 19 demonstrating to the world that Brazil sought greater inclusion in the international decision making pr ocess. lxviii This shift in Brazilian foreign policy led to the ideas of Brazil's status as a global trader and the beginning of the concept of using Mercosul as the means for competitive insertion into the global marketplace. According to Celso Lafer, the id ea of Brazil as a global trader is meant to convey the idea that Brazil is a country with "general interests" all over the world, and in order to pursue those interests it needed to "build internation al partnerships." lxix Both of these ideas have become not only become facets of Brazil's foreign policy agenda since the U NCED but have been expanded upon by the five subsequent presidential administrations to form much of the basis of the current foreign 19 Also known as the Rio Summit.
65 policy agenda of the current presidential administration (Ms. Dilma Rousseff, 2010 2014) and the Lula administration (2003 2010) The Franco Administration (1992 1994). After the impeachment of Collor in October 1992, the presidency passed to Collor's Vice President Itamar Franco. It marked the first peacefu l transfer of power and in accordance with Constitutional law. This peaceful and lawful transfer of power impacted the view of Brazil by the international community as a country that has successfully moved from an authoritarian military regime to a democr atic system of governance. Franco assumed the presidency in the midst of a worsening economic crisis that, due to the inability of the Collor Plan to resolve problem presented by hyperinflation, would be main focus of the administration. Franco chose to focus all of his attention on devising a solution to control inflation in the economy, and delegated the foreign policy agenda to "renowned actors from outside or from within the diplomatic corps." lxx Franco was determined to finally end the problem that i nflation posed to the nation. In his first six months in office he had appointed three ministers of finance and dismissed them, until appointing Fernando Henrique Cardoso, a sociologist and professor at the University of Sao Paulo, as minister of finance. His choice of Cardoso was viewed at the time with some doubt, due to Cardoso's lack of formal training and experience in creating macroeconomic policy. However, Cardoso proved to be a wise choice. Cardoso brought a group of economists from the Universi ty of Sao Paulo and the Pontific Catholic University in Rio de Janeiro with him to Brasilia with the express goal of devising a solution to inflation. Cardoso and his "brain trust were able to finally devise a solution to the nation's perpetual battle with inflation. The Real Plan was able
66 to reduce inflation and maintain price stability long after its initial implementation, and became the basis for economic policy in the Cardoso administration that followed Franco. The shift that occurred in Brazil's foreign policy agenda post RIO 92 w as continued under the Franco administration. Brazil became a more involved in the United Nations initiatives, particularly on issues of human ri ghts and nuclear disarmament. After the signing of NAFTA in 1992, Itamarty began to re align the focus of Brazil's foreign policy to center on South America, rather than the region of Latin America as a whole. This re alignment would focus on Mercosul as the main engine for South American initiatives. Additionally, the Free Trade Agreement for the Americas, or FTAA, began to be negotiated at the 1993 Summit of the Americas in Miami that, if enacted, would link the hemisphere from the Artic Circle to Tier ra del Fuego in a hemispheric trade bloc. The position taken by the Franco administration was that FTAA should function in a similar way as Mercosul, that is to say by providing a period of time to allow all countries to adjust to an additional phase of e conomic readjustments and liberalization.
67 CHAPTER 3 THE FERNANDO HENRIQUE CARDOSO ADMINISTRATION (1995 2002 ) 3.1. Car d os o's Move to Planalto Fernando Henrique Cardoso (FHC) rode the success of the real plan that he implemented (as Franco's of finance of minister ministro da fazenda) all the way to Planalto. As president his foreign policy agenda was influenced by the dependency theory, 1 which he helped to develop in the 1960s and 1970s. This is evidenced by the two broad goals of his fore ign policy agenda as president, 1) democratic consolidation and 2) national development both tenants of the dependency theory framework. i In his first address to a joint session of the Brazilian Congress on January 1st, 1995, then President Cardoso laid out the general policy agenda that he sought to accomplish during his presidency. He alluded to the four central themes in his address that his administration would focus on: C ontinued liberalization of the Brazilian economy that would take into account the social costs that such and economic shift would entail; O pening the economy even more to international competition and further integrati on into the world economy; H uman rights, protection of minors and the environment (i.e. environmental conservation and protection); C ounteract international organized crime syndicates and drug trafficking. 1 Dependency theory is based on the Prebisch Singer thesis that was developed in 1950 by Ral Prebisch and Hans Singer in The Economic Development of Latin America and I ts Principal Problems (Prebisch) and "The Distribution of Gains between Investing and Borrowing Countries," in American Economic Review (Singer) For more information on the origins of dependency theory s ee "The Origins and Interpretations of th e Prebisch Singer Thesis" (Toye, John and Richard Toye, 2003). Their theory argued that by s pecializing in "primary commodities, combined with a relatively slow rate of technical progress in the primary sector and an adverse trend in the commodity terms of trade, had caused developing economies to lag behind the industrialized world. Prebisch concluded that, since prices do not keep pace with productivity, industrialization is the only means by which the Latin A merican countries may fu lly obtain the advantages of technical progress.'" See "Prebish Singer Redux" (Cuddington, John T., Rodney Ludema and Shamila A. Jayasuriya, 2002).
68 FHC went further by also outlining specific fore ign policy objectives that his administr ation would strive to achieve: I ncrease the external support base for Brazil in order to bolster and foster internal economic stability as the economy underwent changes, with a goal of promoting sustainable developm ent that was "socially equitable;" I ncrease access to international markets by improving the productivity and competitiveness of the Brazilian economy; T ake a more active role in multilateral and regional economic and political forums; R eform of the UN and its institutions; I ncrease the amount of assistance given to Brazilians residing in other countries. ii The general themes that Cardoso highlighted in his address to the Brazilian Congress were much the same as those of his predecessors in that he bel ieved that Brazil would be able to dictate its own future through pursuing a more active role in international forums and global politics. 3.2. Reverberations of the Real Plan The Real Plan had other significant effects on the econom y beside that of en ding the nearly two decade puzzle that inflation posed for economic policymak ers. Economic growth, which had reached 4.3 percent for the first 6 months of 1994, rose to 5.1 percent for the last two quarters of the year. iii The implementation of the Real Pl an also affect ed investment, consumption and wages. Investment in the economy increased as opportunities created by rapid economic growth and pent up demand led to increase d domestic consumption caused by the increased purchasing power of
69 classes C and D 2 as they no longer suffer reductions to their salaries from hyperinflation. iv While the Real Plan reduced inflation and resulted in large economic gains throughout the economy, it failed to address another issue that was a problem for Brazil in the past, balance of payments crises. After the plan had been completed and the economy had been entirely converted to the real policymakers maintained price stability by relying on a high rate of exchange to the US dollar (see Table 3 1). In order for the high e xchange rate to work as a price stabilization method, the Brazilian economy had to open its capital markets through privatization of state owned enterprises and reductions in tariff rates. Privatization and reductions in tariff rates began under president Collor and continued under presidents Franco and Cardoso. The high real exchange rate resulted in an increased demand for imports, however, was not matched by an increased demand for exports leading to a balance of payments crisis. The greater purchasing power that the fiscal and monetary policy had given Brazilians combined with tariff levels dropping by approximately 50% from 1986 to 1995 meant that imported goods were cheaper than they had been for more than a generation. Tariff rates had not been at these levels since 1957. v Given that Brazil had a trade surplus since 1981, the reduction in the trade balance was not necessarily a sign of an impending balance of payments crisis. vi 2 Explanation of the Brazilian social classes classifications: A an d B are the upper classes, C is the middle class and D and E are the lower classes. The monthly income ranges for each social class are as follows: Class A R$8,295 +, Class B R$2,656 R$8,294.99, Class C R$ 962 R$2,655.99, Class D R$680 R$961.99 and Class E below R$679.99. Annually the income ranges are: Class A R$99,540+, Class B R$31,872 R$99,539.99, Class C R$ 11,544 R$31,871.99, Class D R$8,160 R$11,543.99 and Class E R$8159.99 and below.
70 While the use of the exchange rate to control inflation was an effecti ve mechanism in the short term, over the long term if the control that the Banco Central was able to exert over inflation were to become a stable and permanent fixture of the Brazilian economy another, more fundamental, fiscal adjustment would be needed. Such an adjustment require d changes to the 1988 Constitution. These changes to the Constitution were both politically unpopular initiatives and difficult to accomplish in the short term because they required the ratification of Constitution al amendments The inability of the administration to make the necessary fiscal adjustments because it was constrained, both constitutionally and politically, meant that the existing policy that maintain ed t he overvalued exchanged rate would remain a central feature of the administration's fiscal policy Th is failure to make the necessary fiscal adjustments resulted in the need to maintain the policy in order to reduce the large public sector deficit as well as to attract the large amounts of foreign capital needed to support the exchange rate. vii Table 3 1. Monthly Exchange Rate Real to US dollar 1994 1995 1996 1997 1998 1999 January 0.1668 0.8400 0.9776 1.0453 1.1229 1.9824 February 0.2317 0.8495 0.9832 1.0507 1.1296 2.0640 March 0.3321 0.8940 0.9872 1.0585 1.1366 1.7212 April 0.4735 0.9110 0.9917 1.0630 1.1435 1.6599 May 0.6819 0.9040 0.9976 1.0709 1.1497 1.7232 June 0.9500 0.9200 1.0036 1.0761 1.1561 1.7687 July 0.9380 0.9340 1.0104 1.0826 1.1626 1.7884 August 0.8870 0.9490 1.0161 1.0908 1.1761 1.9151 September 0.8510 0.9520 1.0207 1.0956 1.1848 1.9215 October 0.8440 0.9609 1.0268 1.1023 1.1924 1.9522 November 0.8430 0.9656 1.0324 1.1090 1.2004 1.9219 December 0.8440 0.9715 1.0386 1.1156 1.2079 1.7882 Source: Banco Central do Brasil Boletim
71 3.2 1. Asian Financial Crisis 3 The Real Plan's success was almost arrested because of the Peso Crisis that erupted in Mexico in 1994. To counter the speculative pressure on the real Brazilian monetary and fiscal authorities reacted in concert by both devaluing the real and increasing interest rates. The real was devalued 8.3% from February to June 1995, while the Banco Central raised the benchmark interest rate (TR taxa refential) from 1.8 percent to 3.5 percent. viii With the resolution of the Peso Crisis in Mexico by the end of 1995, speculative pressure on the re al subsided and the policy of maintaining a high exchange rate to the dollar persisted until the end of 1998 when Brazil would again come under speculative attack after contagion from Asia and Russia reached Rio. ix Interestingly though, Brazil's risk decrease steadily until the end of November 1997 in the midst of the Asian Crisis when Korea the Bank of Korea abandoned its e ffort to prop up the value of the won ( ) permitting it to depreciate against the US dollar below an exchange rate of 1,000 won ( ) per dollar (See Figure 3 1). The Asian crisis would exacerbate the problems that the Real Plan had failed to address More specifically three attributes of the Real Plan (the exchange rate policy, lack of fiscal reform and inability to stimulate the real economy) began to show the fallacies that maintaining the Real Plan would compound unless fiscal adjustments were made. x Due to the crawling peg that the plan instituted for the real it acted as "de facto" stabilization anchor for the economy due to the lack of fiscal reforms. xi The country's fiscal situation had been steadily deteriorating since 1993 because of the slow pa ce that reform s to fiscal policy and increased ease of the government to borrow, both 3 For a timeline of events t hat unfolded during the Asian, Russian and Brazilian Crisis see "Timeline of the panic" in P BS's series The Crash, accessible at http://www.pbs.org/wgbh/pages/frontline /shows/crash/etc/cron.html
72 domestically and abroad, as a result of the initial success of the Real Plan. Public sector debt continued to increase between 1993 and 1998 as a result of the compounding effect of high short term interest rates, and the need for the government to borrow in order to cover the expanding public deficit. The government had created a vicious cycle where it had to continue to borrow at higher and higher interest rates to maintain the high exchange rate and finance its deficit. This in turn exacerbated the country's fiscal situation that translated into lower investor confidence. xii Figure 3 1 International Markets View of Brazil's Risk 4 (Source: JP Morgan Emerging Markets Research) 4 The JP Morgan EMBI+ is an index based on the premium on emerging market bonds. It shows the financial gains earned per day for a basket of selected countries' bonds. These returns are measured in base points, which are equivalent to a tenth of 1 percent (0.001). The base points for a given day s how the different rates of return for emerging market bonds and that of US Treasury bonds. For more information on how this is calculated see http://www.msci.com/products/indices/country_and_regional/em/
73 3.2.2. The 1998 Crisis Foundation for the 21 st Century After weathering the Asian financial crisis, Brazilian policymakers believed that wh en Russia defaulted on its external debt and devalued the ruble in August 1998 that Brazil would have a similar experience to that which happened during the Asian Crisis. xiii The "Electronic Herd" 5 however, did not distinguish a difference between the econo mic situations of Brazil and Russia despite significant differences between the two countries that mer ited the use of a different metric of analysis. The Brazilian economy was far more diversified than Russia's, additionally the Brazilian government was able to collect tax receipts and the country's banking system had recently undergone reform between 1994 and the end of 1997. xiv However, the experience during the Asian Crisis shielded policymakers from undergo ing much needed fiscal reforms. 6 It was ultimately this overconfidence that led to Brazil's financial crisis in 1998 and 1999. The burdensome fiscal situation dete riorated even further as the country's reserve position decrease from $74.65 billion in April 1998 to $36.13 billion by January 1999, a 51 percent decrease. xv As the country's international reserves decrease by more than 50 percent, the short horn cattle' members of the "Electronic Herd" began to remove their investments from the country xvi In order to stem the flow of capital flight created as more investors withdrew their fund s from the country the Central Bank increased interest rates from 25.49% in Au gust 1998 to 40.18% the following month. xvii The 5 Thomas Friedman coined the term "Electronic Herd" in The Lexus and the Olive Tree: Understanding Globalization (2000). He defines the "Electronic Herd" as the "anonymous stock, bond and currency traders and multinational investors, connected by screens and networks (p. 113)." He divides the herd into two groups that he calls the short they can also withd raw their investments from a country with surprising speed. 6 For a chronology of economic reforms taken between the adoption of the real and the end of the crisis in 1999 see Table 7.5 (e). "A Chronology of Key Economic Reforms and Events, 1994 19 99" in Baer's T he Brazilian Economy: Growth and Development (2008, p. 139).
74 problem was exacerbated by the cycle of issuing short term bonds that were tie d to rising SELIC rates in order to cover the budget deficit. 7 The issuing of new short term bonds further increased the interest payments by adding onto the deficit Thereby creating feedback into the financial system where higher interest rates were needed in order to entice foreign investors to not withdraw their money from Brazil. xviii In a desperate attempt to quell the internatio nal communit y' s fears, the Cardoso government tried pressing Congress to pass constitutional amendments that would reduce the financial burden placed on the federal government by increasing taxes to fund retirement pensions as well as to increase a tax on financial transactions. xix As Brazil's situation deteriorated when central bankers in the major industrial countries along with their colleagues at the IMF and World Bank feared that the collapse of Brazil could trigger a ripple effect that would spread throughout world economies. This fear led to a $41.5 billion loan p ackage funded by the IMF, World Bank, Bank for International Settlements and the US government in the advent of a speculative attack on the real This loan package all owed the Brazilian government immediately to draw the first tranche of $9 billion inste ad of needing to wait for the IMF's customary disbursement of funds in tranches. If needed the Brazilian government could draw on other funds if the first tranche of $9 billion was not sufficient to combat speculation, and 7 SELIC stands for the Special System for Settlement and Custody. It is the central depository for all securities issued by the National Treasury and the Central Bank. When the Brazilian payments system was restructure in 2002, SELIC was reformed to bring it inline with international standards for securities settlement systems. From then on it provided immediate, simultaneously and final transfer of securities, and via a direct link with the Central Bank Money Transfer System, or STR, to bank reserves (DVP 1). The most important of SELIC's functions, from a monetary policy perspective, is its use in the auction systems that are used for public offering s of the National Treasury and the Centeral Bank's open market operations. For more information on SELIC see the Brazilian Central Bank's website, http://www.bcb.gov.br
75 within a twelve month period th ey could have received up to $37 billion if they complied with the conditions of the loan package. xx After the 1998 election, Cardoso was only able to get approximately 60 percent of the government's proposed fiscal reforms and adjustments of the loan prog ram through Congress. In December of 1998 the administration tried to push its pension reform plan through the national assembly; however, the reform plan was defeated and the administration lost the political capital in Congress needed to push through ad ditional reforms. To compound the Cadroso administration's problems, some of the newly elected state governors from opposition parties led by none other than the former president and Cardoso's predecessor, Itamar Franco. The rebel governors demanded a mo ratorium on the debt that the states owed to the federal government. The defeat of the administration's reforms in Congress combined with the governor's rebellion triggered another round of capital outflows as concerns grew regarding the government's comm itment to fiscal reform. As capital outflows reached $200 million per day, it became clear that the ability of the government to continue using high interest rates as a means of enticing investors to retain investments in Brazil had failed. By the midd le of January 1999 the government allowed the r eal to float, and over the next two months the real fell by 40 percent (see Table 3 1). xxi The maxi devaluation of the real in early 1999 signaled the end of the Real Plan and threatened to derail the Mercosul common market as Brazilian goods began to flood Argentina. The Brazilian Crisis of 1998 1999 impressed upon the members of the common market that in order for Mercosul to survive they would need to coordinate their economic and exchange rate policies. xxii F inally, the maxi
76 devaluation of the real had the additional result of making the Central Bank realign its focus to center on inflation and economic stimulation through the use of interest rates, rather than using interest rates to prop up a the value of th e currency. 3.3 Regional Integration Previously under Franco and then under F ernan do H enrique C ardoso (FHC) the Brazilian foreign policy had become one of advancing more regional integration amongst the countries of South America. Itamaraty began to take a more comprehensive view of Brazil's domestic and foreign economic policy that had grown to incorporate issues of financing for development, construction of infrastructure and value added trade flows between countries. Previous approaches to integra tion, such as hastily government led integration projects, were replaced with an approach that sought the to use domestic pressures as a sustainable basis for pursuing the development of South America as an active and functioning economic environment. It is through this dependency theory based perspective that the project of South American integration centered on Mercosul, increased interconnectivity of transportation and energy networks between Mercosul member states and the later creation of the Iniciati va para a Integrao da Infra estrutura Regional Sul Americana (IIRSA Initiative for the Integration of Regional Infrastructure in South America). xxiii Abdenur remarked that this shift in Brazilian foreign policy to focus on so called soft issues' 8 meant t hat "the relative importance of each country [came] to be measured less by its military or strategic influence and more by its economic, commercial, scientific or cultural projection." xxiv 8 See Keohane, Robert O. and Judith E. Goldstein. Ideas and Foreign Po licy: Beliefs, Institutions and Political Change Ithaca: Cornell University Press, 1985.
77 3.3. 1 Mercado Comum do Sul When Cardoso assume the Brazilian preside ncy in January of 1995, all tariffs that were to be reduced to zero amongst Mercado Comum do Sul (Mercosul) members in the Treaty of Asuncin over the "transition period" had been adjusted. xxv The Treaty allowed for a period of three years, 9 December of 199 1 to December 1994, in order to facilitate the transition of member countries to the common market. This transition period was also designed so that all countries could both phase out tariffs on intrabloc trade and reduce tariffs on non member goods to th e agreed upon common external tariff level. After December 31st, 1994, this common level, known as the common external tariff (CET), 10 could be set between 0 and 20% on products from non member countries. xxvi After 1995, Brazil had become the major export des tination for Argentine goods, as well as goods from Uruguay and Paraguay. xxvii Trade between countries had flourished under the CET barrier as national industries sought to take advantage of the trade barrier to expand trade within Mercosul. Trade within Mer cosul continued to grow until the 1999 devaluation of the Brazilian real 11 due to the spread of contagion from the Asian financial crisis in 1997 and the Russian financial crisis the following year. xxviii 9 See Chapter 1, Article 3 of the Treaty of Asuncin. 10 The Treaty of Asuncin also had an additional measure that allowed for mem ber states to exclude "sensitive" goods from following the CET tariff reduction transition period demonstrates an apprehensiveness concerning the flow of such goods within the bloc. The Treaty defines these sensitive" items as those which member states' economies are most dependent upon. Sensitive items w ere subject to national tariff rates, even amongst member nations, during the transition period. The t ariffs on the sensitive goods were to be pha sed down to zero by the year 2000 for intrabloc trade in these goods. These sensitive goods were capital goods, telecommunications equipment and c omputers. See Treaty of Asuncin (1991) and Hashimi, M. Anaam. "The Role of Mercosul in Regional I ntegration." Managerial Finance 2000, Vol. 26, No. 1, 41 52. 11 For more information on the Asian financial crises and the contagion that rippled through emerging markets see Blustein, Paul. The Chastening New York: Public Affairs, 2002.
78 However, prior to the maxi devaluation of the real, within Mercosul there were issues concerning trade disputes, demands for improved regional linkages of financial and labor markets. There was a desire for more extensive exchanges in science and techno logy amongst the members as well as a call for the creation of a regional infrastructure system in order to service the growing trade flows and investment in the region. xxix As trade flows increased within the bloc so did the number of trade disputes, and a lack of a mechanism within the governing body of Mercosul to address trade disputes led to the signing of the Protocol of Olivos which created the Permanent Review Tribunal to resolve trade disputes in 2002. While the Brazilian market was used to anchor t he Mercosul market with its large domestic market, Brazilian exporters did not focus on increasing exports within the trade bloc. Within the Ministry of Development, Industry and Foreign Trade (MDIC Ministrio do Desenvolvimento, Indstria e Comrcio Ex terior) officials in the Foreign Trade Secretariat (SECEX Secretaria de Comrcio Exterior) sought to preserve the image of Brazil as a "global trader" 12 by retaining access to diverse international markets and pursuing entrance into new markets as a means to protect against the contagion of economic shocks that spread throughout Latin America after the Mexican Peso crisis in 1994. xxx This is evidenced by the percentage of Brazil's total exports whose destination was trade bloc members compared to the countr y's total exports (see Table s 3 2 and 3 3). These trade flows support the conclusion that Mercosul was an effective use of regional integration as a method for improving and expanding value 12 See Ba rbosa, Rubens Antnio and Lus Fernando Panelli Csar. "O Brasil como Global Trader.'" in Fonseca Jnior, Gelson and Segio Henrique Nabuco de Castro (eds.). Temas de Poltica Externa Brasileira II, Vol. 1. So Paulo: Editora Paz e Terra, 1994.
79 added industry throughout the trade bloc. In all but two countri es, Paraguay and Bolivia, national economies experienced increased amounts of manufactured exports. 13 Table 3 2. Mercosul Trade Flows Year Total Exports US$ (FOB) Mercosul Exports US$ (FOB) % Mercos ul Exports of Total Exports Non Manufactured Exports to M ercosul US$ (FOB) % of Non Manufact ure of Mercosul Exports Manufactured Exports to Mercosul US$ (FOB) % of Manufactu red Mercosul Exports of Total Exports 1994 43,545,148,862 5,921,475,981 13.60 358,308,391 6.05 5,550,729,552 93.74 1995 46,506,282,414 6,153,768,222 13.23 409,845,653 6.66 5,724,601,637 93.03 1996 47,746,728,158 7,305,281,948 15.30 508,431,479 6.96 6,774,483,765 92.73 1997 52,982,725,829 9,045,110,950 17.07 551,232,998 6.09 8,468,112,492 93.62 1998 51,139,861,545 8,878,233,843 17.36 584,046,503 6.58 8,274,021,579 93.19 1999 48,012,789,947 6,778,178,415 14.12 435,256,785 6.42 6,312,125,088 93.12 2000 55,118,919,865 7,739,599,181 14.04 453,047,718 5.85 7,264,577,740 93.86 2001 58,286,593,021 6,374,455,028 10.94 439,159,515 6.89 5,915,651,653 92.80 Source: MDIC Table 3 3. Manufactured Exports to Brazil as a Percentage of Total Exports Year Argentina Paraguay Uruguay Bolivia Chile 1994 39.9 12.2 36.4 12.9 24.1 1995 46.1 6.0 36.8 19.7 24.9 1996 44.1 10.1 33.6 24.9 26.8 1997 52.4 9.1 37.1 23.0 30.2 1998 55.2 10.4 34.6 13.3 29.6 1999 48.8 9.1 38.6 16.1 29.6 2000 46.2 10.6 38.8 6.1 28.3 2001 52.2 6.7 39.0 4.9 29.3 Source: IADB/INTAL 3 3 2 Initiative for the Integration of Regional Infrastructure in South America The principles underlying what would eventually become the Initiative for the Integration of Regional Infrastructure in South America (IIRSA Iniciativa para a Integrao da Infra Estrutura Regional Sul Americana) grew out of the 1998 peace settlement between Ecuador and Peru that resolved the 44 year old conflict. During the 13 According to de Souza, Bolivia and Paraguay missed out on the economic benefits of inter bloc trading.
80 arbitration process that led to the 1998 peace settlement, Itamaraty had placed emphasis on cultivating bilateral relationships through the use of increased infrastructure linkages. Bra zilian diplomats saw that the increased interaction that infrastructure and societal linkages would fostered was the most effective means of reducing tensions within South America. The various infrastructure hubs that IIRSA created were formulated with th e intension of resolving historical conflicts. An example of this can be seen in the three bioceanic hubs (Capricorn, Central Inter oceanic and Mercosul Chile hubs) which necessitate close cooperation of Bolivia and Chile. xxxi At the meeting of South Americ an Presidents in Braslia in late August and early September of 2000, the twelve presidents of South America saw that while their countries are rich in resources and have diversified agribusiness matrices that have great economic potential, they also span vast territorial distances with key production areas located far from population centers that create natural barriers to trade. The presidents of South American nations saw that Mercosul was a successful platform for larger South American integration proj ects, and hoped to use it as launching point for insertion into the post Cold War global economy. This did not differ greatly from the view that Brazilian diplomats took of the benefits that Mercosul would create for the Brazilian economy in the early 199 0s. xxxii The South American heads of state identified two crucial aspects of achieving both more regional integration and easing their nations' integration in the global economy: 1 ) improving general infrastructure throughout South America to reduce logistica l and transportation obstacles, and 2 ) the development of infrastructure designed for the explicit purpose of regional integration. The presidents saw
81 infrastructure as the main component for regional integration, basing their view on the theory that, by creating synergies from the development of energy, transportation and communications infrastructure, new economic opportunities can be created. They believed that distant markets could be linked to each other and geographical barriers that once stood as i mpediments to integration could be overcome. This theory sees infrastructure not only as a physical means of integrating the region, but also a method by which to facilitate trade and investment amongst countries and improve logistical delivery systems. W ith this in mind the IIRSA was created. xxxiii As a result of the Presidential Summit, the transportation, energy and communications ministers of South America met to prepare a plan of action for IIRSA under the mandate that had been established in the Braslia Communiqu. The plan of action that they created was based on a new geographical economic concept for territorial development called EIDs or integration and development hubs ( see Appendix F for an explanation of the various hubs) To further strengthen the integration and development hubs, sectorial integration processes (PSIs Processos Sectoriais de Integrao) was created with the goal to identify and remove regulatory and institutional barriers that would hinder the sustainable growth of the EIDs an d inhibit advances in productivity (see Appendix F for a list of major infrastructure obstacles) 14 The objective of IIRSA was to promote open regionalism in the South American continent through the 14 The main criteria that IIRSA uses for analyzing and determining EIDS are: the geographical coverage of and EID in terms of countries and regions in South America, existing trade and financial flows, the potential for future commercial flows, and social and environment sustainability. PSIs on the other hand look at the different institutional an d regulatory frameworks of South American countries and attempts to harmonize regulation and institutional policies in order to be conducive to the development and construction of integration infrastructure. IIRSA has identified seven specific r egulatory areas which PSIs will focus on: regional vehicles for funding for physical infrastructure projects, energy integration, facilitation of border crossings, information and communications technologies, air transportation operating sys tems, maritime transportation operating systems and multimodal transportation operating systems.
82 use of EIDs that pursue sustainable economic development, improve living standards, conserve natural resources and promote a political institutional atmosphere that allows for public private partnerships to strengthen the linkages between countries outside of the public sphere. xxxiv The EIDs a dditionally helped spr ead economic development into Brazil's interior that previous development policies ignored. xxxv 3.4. Concluding Remarks Cardoso rode the success of the Real Plan all the way to Planalto. During his administration the maintenance of the Real Plan created price stability and the lowest levels of inflation since the early 1980s. In his first speech before a joint session of Congress on January 1 st 1995, Cardoso announced that his economic agenda would follow in the footsteps of Franco and Col lor administrations' that proceed him through that continuation of liberalization of the economic, opening the economy to foreign competition and further integrating the Brazil into the global economy. In terms of his foreign policy agenda, we see a Cardo so like Franco before hi m, followed the paradigm laid out by Collor of maintaining Brazil's status of a "global trader" and using Mercosul as a means for greater integration of the Brazilian economy in to the post Cold War global economy. Economic Agenda In order to accomplish this economic agenda his administration would need to continue to maintain inflation at low levels and price stability in the economy. The policy that Cardoso chose to use to accomplish this was through continuing to maintain the R eal Plan. For the real to continue to be used as a policy to maintain price stability, the administration had to maintain a high exchange rate to the dollar that was accomplished through the use of a crawling peg. Additionally, to maintain the high exchange rate the central ban k had to keep interest rates at high
83 levels to attract foreign capital to offset the decrease in foreign exchange earned by the export sector, due to the current account deficit that the policy had created. This policy was able to survive the 1994 Tequila crisis and the 1997 Asian financial crisis through the preservation of high interest rates. However, the collapse of the Russian ruble and the default by the Kremlin on Russia's debt in mid 1998 began to increase doubts over real It was not long before the "Electronic Herd" began a speculative attack on the real The Cardoso administration believed that they would be able to weather this crisis as they had done the Asian financial crisis before it without the need to change their fiscal policy by under taking needed structural reforms to the economy. Even the IMF's insistence the that Brazilian Central Bank (BCB) would have to stop defending the real with foreign currency reserves, and needed to let the real float did not shake the administration's dete rmination to maintain the Real Plan. xxxvi In an attempt to put an end to doubts over Brazil's economy, Cardoso attempted pass Constitutional amendments through Congress that would reduce the financial burden placed on the federal government. The fear that Br azil's efforts would not be sufficient enough to avoid a financial collapse that had the potential to trigger a domino effect on a global scale led the IMF, World Bank, Bank for International Settlement and the US government extending a $41.5 billion loan packa ge to the Brazilian government to defend the real against a speculative attack. After Cardoso won re election in 1998, he tr ied to pass a reform package that was part of the conditions of the loan that had been extended to Brazil. However, Cardoso' s inability to get all of the reforms passed, combined with a domestic political crisis signaled the end to the fight to maintain the value of the real In mid January of 1999, the Brazilian government finally allowed the
84 real to float, and the Central Ba nk to shift its objective to use interest rates at the main tool for controlling inflation in the economy. Foreign Policy Agenda. During this administration's two terms it oversaw the continuation and expansion of the paradigm shift that had occurred du ring the Collor administration with regards to foreign policy. Under Cardoso we see an expansion of the role the Mercosul in Brazilian foreign policy. It no longer is just a way for policymakers to slowly open the country and ease the economy into a more open and competitive environment, but also the primary regional integration mechanism pursued by the administration. During Cardoso' s two terms as president Mercosul expanded to include Chile and Bolivia as associate members. The successful resolution o f the 44 year old conflict between Ecuador and Peru in 1998 led by the Brazilian government resulted in the basis for the 2000 IIRSA initiative proposed by President Cardoso at the 2000 meeting of South American Presidents in Bras lia. Mercosul provided a new captive market for Brazilian products and opened the Brazilian market to the country's South American neighbors. The trade bloc allowed for member countries to undergo a period of economic restructuring through shifting production fro m agriculture t o manufacturing, with the notable exceptions of Paraguay and Bolivia. The common market did create an effective means of economic integration of the economies of the Southern Cone that the later creation of IIRSA would enhance. IIRSA was seen by the Cardoso administration as a means for improving Brazilian access to overseas markets by reducing infrastructure barriers to t rade. IIRSA's goal of creating sustainable economic development for the continent through integration of infrastructure and harmon ization of regulatory and institutional procedures concerning
85 cross border trade flows marked the adoption of an expanded view of development policy by Brazilian policymakers. Much like Mercosul was envisioned as "training wheels" for the Brazilian econom y, IIRSA was designed to effectively combine foreign policy initiatives and domestic economic policy to develop the vast economic potential of Brazil's interior.
86 CHAPTER 4 THE LULA ADMINISTRATION (2003 2010) 4.1. Economic Continuity versus S ocial Justice? Brazil used to be all promise. Now it is beginning to deliver John Prideaux In October 2002, Luiz Incio Lula da Silva, commonly known as Lula, won the presidency on his fourth attempt running as the candidate for the Worker's Party (PT). Under his stewardship, the government maintained continuity with the previous administration's economic policies navigated the international economic and financial environment that ensued after the 2001 collapse of Argentina's currency board and s ubseque nt default in early 2002. His administration additionally pursued structural reforms to the economy and was able to combine economic and social policies to pursue economic development goals that targeted all segments of Brazilian society. Further credit to the nation' s economic policy comes from Brazil being one of the last countries to feel the effects of the global financial crisis after the collapse of Lehman Brothers in mid September 2008, as well as it being one of the first countries to emerge from the global recession in 2009. i Lula differentiates his economic policy agenda from that of his predecessors by recognizing that social development is a crucial component of economic growth rather than a residual product generated by it ii Hi s presidency is marked by the success of the Bolsa Familia program and other social programs that the Ministry of Social Development 1 implemented (MDS Ministrio do Desenvolviment Social e Combate 1 The Ministrio do Desenvolviment Social e Combate Fome (MDS Ministry of Social Development and Fight Against Hunger) was created in January 200 4 to implement the Bolsa Familia and other social programs. It combined the Extraordinary Ministry of Food and Nutrition Security (EMFNS), Ministry of Social Assistance (MSA) and Executive Secretariat of the Interministerial Manager Council of Bolsa Famlia. For more information see http://www.mds.gov.br
87 Fome ) that have endeared him to millions of Brazilians and to many l eaders around the world iii Under Lula, Brazil pursued a more active foreign policy agenda, even while advantageously using its historic neutrality to help with its implementation of South South foreign policy initiatives and call for reforming global governance mechanisms by augmenting the nation's ability to garner support from developing and least developed countries. According to Mnica Herz, Lula and his administration worked "not thinking in terms of months and years, but in terms of destiny." 2 In contrast, his predecessor, FHC, operated on a much more immediate and short term perspective in his policy that was both a product of and constrained by the domestic and international environment of his time. iv Lula, on the other hand, began his preside ncy under both an improving internal macroeconomic environment and a changing global environment due to the aftermath of the September 11 th attacks. Lula's pre sidency may have begun under a very pessimistic cloud, particularly in the view of international investors however, b y the end of his two term presidency, he has not only had Lula quieted his critics but has also shown that Brazil had changed a great deal substantially since 1985 His left of center policies complemented the macroeconomic conservat ism of the FHC administration as well as that of his finance minister and head of the central bank Additionally, h i s administration's astute use of foreign policy has created new economic opportunities as well as improve d the nation's global trading prof ile through opening new markets to Brazilian products. 2 Mnica Herz notes that Lula and other Brazilian policymakers did not think in terms of manifest destiny as much as assuming a long term perspective when analyzing policy initiatives and weighing which of them will allow the nation to reach its goals.
88 Brazil's has changed substantially, both internally and externally, under the stewardship of President Lula and the officials of his administration during the eight years that they have occupied the Palacio do Planalto. This period has been referred to by Foreign Minister Celso Amorim as Brazil's [great] leap forward.' v The change that Brazil has undergone led political commentator Fareed Zakaria to say: Twenty years ago, Brazil was struggling to cast of f a long legacy of dictatorship, hyperinflation and debt. Today it is a stable democracy with impressive fiscal management, a roaring economy and a widely popula r president. Its foreign policy reflects this confidence and a desire to break free of its old constraints. vi During Lula 's administration Brazil has emerged as a regional hemispheric and international power, both politically and economically. vii Lula's center left government has further opened the economy to foreign in vestment to such an ext ent that international investors and multinational companies are pouring investment into Brazil In 20 10, Brazil attracted a total of $48 4 b illio n in international investment, surpass ing the amount that flowed into Brazil during the privatization of the SOEs in the 1990s In 2008 the amount of foreign reserves that Brazil held reached $1.85 trillio n, which is more than 15 times the foreign reserves that it held in 2006. viii In 2007, the Brazilian government implemented the Programa de Acelerao do Crescimento (Program for Accelerated Growth), also known as PAC, that invest ed R$ 1.2 t rillio n, (USD 548 b illio n) between 2007 and 2010 in industrial and infrastructure projects. Additionally, the use of counter cyclical policies in 2008, such as reducing interest rates and injecting money into the economy to provide liquidity while th e world economy was contracting, was the first time that Brazil use d such policies during an economic crisis.
89 4.2 The Partido dos Trabalhadores "De cent Brazil" 3 In October 2002, Lula's party, Partido dos Trabalhadores (PT Workers' Party), issued a detailed plan for the direction that Lula administration and the PT would take if Lula won the elections. In this document the PT focused on how the only way for Brazil to main tain sustainable growth was to address the social questions of poverty and inequality, which have characterized the country. In the document, the PT addresses the previous administrations fa ilures to provide sustainable economic growth for the country as a result of fiscal mismanagement, using the exchange rate as a fiscal policy tool, inflation and lack of political will to enact the necessary structural reforms needed to create a macroeconomic environment that promotes growth. ix Lula and his party under stood that these reforms were foreseeably going to take a considerable amount of time to implement. x However, this document provides the basis of the Lula administration's two main goals: the adoption of a macroeconomic policy that is orthodox enough to s atisfy the global financial community and the pursuit of social policies that will achieve greater socioeconomic equality. xi The document outlined six economic policy goals to be implemented during the Lula administration as a means of accomplishing the t wo aforementioned goals. These six goals were : the maintenance of price stability, provisions for long term financing, increased government investment in research and development, investment in infrastructure, reform of the tax system to promote efficiency and education of the workforce. Alongside t hese economic policy goals, the document also proposed government programs to tackle poverty and socioeconomic. T he PT focused their 3 This was Lula's slogan during the 2002 elections. The entire slogan is "Quero um Brasil decente, quero Lula president," which translates to "I want a descent Brazil, I want Lula as president." See "Lula oficializa candidatura e ataca preconceito contra aliana" accessible at http://noticias.uol.com.br
90 social development policy on two programs in particular : a minimum wage guarantee and a program to tackle hunger called F ome Zero. xii 4.2.1. Lula's Tightrope Walk with Macroeconomics Figure 4 1 International Markets View of Brazil's Risk 4 (Source: JP Morgan Emerging Markets Research) The global financial community was quite apprehensive about Lula's electoral victory in the 2002 October elections. There was a feeling in the investment community that Lula would declare a moratorium on the national debt, reverse the privatization of sta te owned enterprises, not follow the fiscal policies established under the Cardoso administration or undermine the investor friendly environment that had flourished under the previous administration. xiii In the mo nths running up to the election investors 4 The J P Morgan EMBI+ is an index based on the premium on emerging market bonds. It shows the financial gains earned per day for a basket of selected countries' bonds. These returns are measured in base points, which are equivalent to a tenth of 1 perce nt (0.001). The base points for a given day show the different rates of return for emerging market bonds and that of US Treasury bonds. For more information on how this is calculated see http://www.msci.com/products/indices/country_and_regional/em/
91 co ncerns that Lula would enact these types of policies led to a widening of the gap between the interest rates on Brazilian sovereign bonds and US. Investors were more concerned about the election of Lula and the impact he would have on Brazil than they were about the possible collapse of Argentina's currency board and debt moratorium treasuries (see Figure 4 1) Lula's ambitious goal to combine economic dynamism with social justice as a means to correct the economic s hortcomings of his predecessors cam e up against the economic realities confronting the country. It quickly became evident upon setting up residence in the Pal cio de Planalto that in order to create and sustain economic growth his administration would need to remove the structural restrain ts on the economy as a means to break with the stop go' growth that is more characteristic of Brazil's historical economic growth. Shortly after taking office, Lula and his cabinet had to purusade international investors and multilateral institutions tha t his administration would be able to do this by pursuing orthodox fiscal and monetary policies, even though that these policies had failed to produce growth when followed by previous administrations. xiv An example of the administration's commitment to orth odox fiscal and monetary policy was through presidential reassurances that it would comply with the IMF's terms and create a primary surplus in 2003 equivalent to 4.25 percent of GDP. The government was so determined to pursue a tight fiscal policy that i t surpassed this target in October 2004 when the surplus reached 4.7 percent of GDP. xv The Lula administration, unlike its predecessors in the 1990s and 1980s, was able to control inf lation during the entire eight year period the administration was in power While the administration was able to successfully control inflation, it was unable to avoid
92 the effects of exchange rate fluctuations on prices. During the second half of 2002 international investors, concerned by what a victory by Lula and the PT migh t mean, began to put downward pressure on the real (see Figure 4 4) Another result of Lula's use of orthodox fiscal and monetary policy was that the country's balance of payments position improved as a result of a surge in exports driven by demand for co mmodities in other emerging markets such as China and India. xvi Additionally, foreign direct investment in Brazil during Lula's second term increased to more than all privatization of state owned enterprises earned the country during the 1990s. Table 4 1. Economic Performance Under FHC and Lula (US$ millions) Year Balance of Payments Trade Balance Current Account FDI International Reserves 1995 $12,918.90 $3,465.62 $18,383.71 $4,405.12 $41,677.92 1996 $8,666.10 $5,599.04 $23,502.08 $10,791.69 $58,197.25 1997 $7,907.16 $6,752.89 $30,452.26 $18,992.93 $57,801.42 1998 $7,970.21 $6,574.50 $33,415.90 $28,855.61 $59,195.25 1999 $7,822.04 $1,198.87 $25,334.78 $28,578.43 $40,051.42 2000 $2,261.65 $697.75 $24,224.53 $32,779.24 $32,387.25 2001 $3,306.60 $2,650.47 $23,214.53 $22,457.35 $362,783.25 2002 $302.09 $13,121.30 $7,636.63 $16,590.20 $36,753.67 2003 $8,495.65 $24,793.92 $4,177.29 $10,143.53 $46,532.92 2004 $2,244.03 $33,640.54 $11,679.24 $18,145.88 $50,826.33 2005 $4,319.46 $44,702.88 $13,984.66 $15,066.29 $58,523.08 2006 $30,569.12 $46,456.63 $13,642.60 $18,822.21 $67,965.00 2007 $87,484.25 $40,031.63 $1,550.73 $34,584.90 $142,688.92 2008 $2,969.07 $24,835.75 $28,192.02 $45,058.16 $1,847,124.33 2009 $46,650.99 $25,289.81 $24,302.26 $25,948.58 $215,259.58 2010 $49,100.50 $20,220.97 $47,364.73 $48,437.74 $260,765.08 Source s : Banco Central do Brasil and FGV
93 4.2 2. Social Justice As was mentioned earlier, the typical economic management approach of "macroeconomic firefighting" could not offer a lasting solution to Brazil's persisting economic problems. In contrast with t he transformation of the Asian Dragons (South Korea, Taiwan, Singapore and Hong Kong) and their continued development highlighted the problems with the economic policies used in Brazil, and made the case for the need for a change where the marriage of economic and social policy can engineer and sustain high rates of growth and allow the increased prosperity that economic growth brings to be distributed more evenly. xvii Two areas where this marriage of economic and social policy can be seen are in policies focused on reduction of poverty levels and a minimum wage guarantee. Through reducing poverty levels and creating minimum wage guarantees, Lula and the PT sought to in crease the number of Brazilians able to participate in society and provide for their families. Social indicators, which measure changes in socioeconomic data, have a long lag time between when a reform is implemented and when it has an impact on social in dicators. Thus, economist s and policymakers would not expect to see any improvements in the short term after structural reforms have been adopted. xviii This expectation tha t social indicators improve over the mid to long term is why what the improvement tha t occurred in Brazil during Lula's presidency has caught the attention of the international community The orthodox fiscal and monetary policies that the Lula administration pursued to assure international investors did not have positive short term impact s on wages and unemployment levels in the country (see Table 4 2). Once the administration established its "orthodox credentials" with the international investment community, it began to pursue its own economic agenda and set of reforms. xix The
94 importance that the Lula administration placed on social spending as part of its "alternative model for development" can be seen in the amount that was allocated for economic infrastructure compared to conditional cash transfer programs, 5 3 percent and 21 percent res pectively. xx Table 4 2 Social I ndicators Under Lula Year Percentage of Population in Extreme Poverty Level of Poverty Gini Coefficient Average Monthly Salary (R$) GDP per Capita (US$) Unemployment Rate 2001 15.28 35.17 0.596 571.31 3,133.62 10.0 2002 13.99 34.40 0.589 571.62 2,814.94 9.9 2003 15.20 35.79 0.583 538.21 3,043.28 10.5 2004 13.20 33.70 0.572 550.84 3,610.07 9.7 2005 11.49 30.82 0.569 583.96 4,741.03 10.2 2006 9.44 26.75 0.563 638.29 5,787.24 9.2 2007 8.65 24.24 0.556 655.83 7,184.84 8.9 2008 7.57 22.59 0.548 689.61 8,532.12 7.8 2009 7.28 21.42 0.543 705.72 8,121.50 9.1 Sources: IMF, IBGE, IPEA and FGV After taking office in 2003, Lula established the Ministry of Social Development and Fight against Hunger (MDS Ministrio de Desenvolvimento Social e Combate Fome) to reduc e poverty and inequality promot e human capital development by improving schooli ng and health status of children and to reduc e the incidence of malnutrition among the poor segments of the population xxi One program in particular, Bolsa Familia, has been given credit for moving millions of Brazilians out of poverty and 5 The World Bank defines conditional cash transfer programs as programs that provide cash payments to poor households that meet certain requirements, generally linked t o children's health care and education. See The World Bank's webpage "Conditional Cash Transfers" available at http://www.worldbank.org
95 into the middle c lass as well as gained international acclaim. xxii The Bolsa Familia program combined four programs under the Cardoso administration into one: 1) Bolsa Escola, an income grant for primary education; 2) Fome Zero and 3) Bolsa Alimentao, income grants related to nutrition and reduction of hunger ; and 4) Vale Gs, a subsidy for poor households to buy cooking gas. xxiii Bolsa Familia program grew out of the Fome Zero (Zero Hunger) initiative of the Carodoso administration. In 2004, Law 10.836 was passed formalizing the Bolsa Familia program that was created by Executive Order 132 in October 2003. The program has two types of benefits: 1) basic benefits given to extremely impoverished families, and 2) variable benefits impoverished families with children between age s 0 and 12 or adolescents up to the age of 17. xxiv The benefits that are given to families through Bolsa Familia are conditional cash transfers of small amounts of money if families meet the requirements of education, healthcare and social assistance for their families. The conditions focus particularly on children by requiring that children get regular medical check ups and are enrolled in school. xxv In 2003, 3.6 million families received benefits from the Bolsa Familia program, and those in extreme pover ty received R$50 per month and R$15 per child for up to three children. xxvi By August 2010, the Bolsa Familia program had expanded to cover 12.7 million families or approximately 25 percent of the Brazilian population (see Figure 4 2) Due to the conditions that recipients must meet in order to receive benefits, the Bolsa familia program has affect ed other social policy areas (public health, education, child labor, malnutrition and domestic consumption) in addition to reducing poverty xxvii
96 Figure 4 2. Effects of Bolsa Familia on Povery 6 (Source: IPEA) The program surprisingly has had a very large impact for the amount that the government spends on the program approximately 0.5 percent of GDP is allocated for the Bolsa Familia progra m. The program has helped 20 million Brazilians move out of poverty and join the formal labor market since the program was initiated in 2003, according to a recent article in the Economist xxviii During the eight years that Bolsa Familia has existed Brazil's Gini coefficient, a measure of income inequality, has dropped from 0.596 to 0.543 (see Figure Several studies point out that the Bolsa Familia has had a greater impact on rural poverty and made particularly large gains in the Northeastern region of the c ountry, while in urban areas Bolsa Familia recipients may actually receive less than they would have under the previous scheme of social programs. Some critics claim that Bolsa Familia fails to reach the targeted segments of the Brazilian populace and tha t it creates dependence upon the monthly stipends 6 NOTE: No data exists for the percentage of the population living in p overty and extreme poverty for the years of 1991, 1994 and 2000. 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Percentage of the Population Population Living in Poverty Population Living in Extreme Poverty
97 reducing incentives to enter the labor market. xxix A study by the United Nation's International Poverty Center found that these claims are in fact false, if anything the Bolsa Familia program has actually pro vided more incentives for joining the work force. xxx Two studies published in 2010 upheld the findings of the International Poverty Center on the effects of Bolsa Familia on the labor market as well as how well the program targets the right segments of the populace. xxxi Figure 4 3 Comparing Latin American Development ( Source: The Economist ) Additional measures taken by the Lula administration outside of Bolsa Familia have additionally helped complement the gains that were created by the Bolsa Familia program. In the national assembly, Lula and his ruling coalition pushed for legislation to increase the minimum wage and were able to garner enough support to get this legislation passed. However, this legislation also ha d negative consequences. The
98 pen sion benefits, which included government run pension pro grams for civil servants and those for private sector workers, were tied pension benefits to the minimum wage. Thus, mandatory increases to the minimum wage had two effects, one positive and the othe r negative. The minimum wage increases help support the transition of Brazilians from the lower classes (classes D and E) to the middle class (class C), and additionally augmented their consumption by increasing their disposable income. xxxii However, these w age increases had the additional affect of increas ing the amount that pension beneficiaries were to receive placing more stress on the government's budget because of the number of beneficiaries under the civil servant pension plan, whose funding largely co mes from the government. Government mandated increases to the minimum wage and the Bolsa Familia program have helped place Brazil along side other middle income countries in Latin America, such as Venezuela and Costa Rica (see Figure 4 3 ). 4.3. Brazil The Soft Power Power It is possible for the international image of a country to change considerably especially, if big changes are happening or [are] about to happen, and that, is the key to Brazil Ernesto Magalhes Under Lula, Brazil finally made i ts entrance on the global stage and is no longer a rule taker but rule maker. xxxiii Internally, Lula continued the macroeconomic policies 7 instituted under F ernando H enrique C ardoso (FHC) and created a macroeconomic environment that fostered economic growth that the country has not experienced since the Brazilian Miracle of the late 1960s. xxxiv Simultaneously, the implementation of various social programs that targeted the poor segments of Br azilian society (Classes D 7 Policies such as maintaining the independence of the Central Bank and allowing it to continue to pursue the inflation targeting regime created by the Plano Real, reducing national debt loads and maintaining sizable foreign currency reserves.
99 and E) 8 has resulted in the expansion of the country's middle class from 44.19% of the population in 2002 to 55.05% of the population by 2010. This expansion of the middle class created a strong internal demand for Brazilian goo ds as larger numbers of Brazilians moved out of poverty and into the middle class. This increase in the size of the middle class has been the main engine of Brazil's economic growth over the past decade and contributed to the country's international image as an a shrewd macroeconomic manager. xxxv Externally, a shift in Brazil's foreign policy agenda took place due to the appointments of Marco Aurlio Garcia as the president's foreign policy adviser and Celso Amorim as the foreign minister. xxxvi After their appo intments, there was a wider incorporation of South South policy initiatives in the foreign policy agenda in addition to a re prioritization of policy initiatives within this new policy framework to plac a greater emphasis on South America and integration o f the South American continent xxxvii Th is shift in f oreign policy objectives between the FHC administration to Lula's is seen in the increased number of South South initiatives pursued under Lula and continued by Mrs. Rousseff's administration. The South So uth initiatives pursued by the Lula administration range from the creation of the Commerical G 20 in the WTO to agricultural development projects in the African savannah. Under the Lula, there was a concerted effort to obtain more voting rights in interna tional political and economic organizations. The appeal made by Brazil for more voting rights in multilateral 8 Explanation of the Brazilian social classes classifications: A and B are the upper classes, C is the m iddle class and D and E are the lower classes. The monthly income ranges for each social class are as follows: Class A R$8,295 +, Class B R$2,656 R$8,294.99, Class C R$ 962 R$2,655.99, Class D R$680 R$961.99 and Class E below R$679.99. Annually the income ranges are: Class A R$99,540 Class B R$31,872 R$99,539.99, Class C R$ 11,544 R$31,871.99, Class D R$8,160 R$11,543.99 and Class E R$8159.99 and below.
100 organizations gained more traction in 2007 after the U.S. housing market collapse d trigger ing a banking crisis in the US that later evolved into the global financial crisis. xxxviii When commenting on th e new path that Brazilian foreign policy has pursued during the Lula administration Antonio Patriota (former Brazilian Ambassador to the United States and now current Foreign Minister) said that Brazil' s new foreign policy agenda has created "[new] opportunities for dialogue, for learning more and interacting more with the rest of the world, it has also had very beneficial economic and trade effects, more so than if we had insisted solely on the economic and trade agenda." xxxix Lula's foreign policy agenda focused on four issues : 1 ) South America, 2 ) solidarity, 3 ) global governance and 4 ) universalism. South America was Lula's top priority, and he sought to pursue more regional integration initiatives by building on Mercosul and IIRSA in an attempt to unify the South American continent. Solidarity was exercised by paying particular attent ion to the different needs of least developed countries and other developing countries across the world, in particular those nations affected by natural disasters, armed conflict and with high levels of poverty. Global governance focused on reforming the Bretton Woods financial institutions (World Bank & IMF), United Nations and its institutions (UN Security Council) and the WTO to become organization that representative of the current state of the world. Finally, universalism refers to the countries with which Brazil maintains and establishes diplomatic relations. Former Foreign Minister Celso Amorim states the principle of universalism as Brazil establishing a "dialogue with countries of all regions, creeds, colours and backgrounds. No country can affo rd to relate only with those with whom she agrees or with whom the affinities are self evident." xl
101 Vigevani and Cepaluni see Lula's foreign policy agenda, particularly during his first term and more broadly in his second term, as centering on four economic principles, which differ from the more ideological tenets that Lula's Foreign Minister proposed. These four principles are: 1 ) to diminish unilateral actions and attempt to pursue more multilateral consensus in the international community; 2 ) strengthen B razil's current bilateral and multilateral relations in order to improve the country's negotiating position in political and economic discussions and negotiations in international organizations; 3 ) to bolster current economic, financial, technological and cultural exchanges with countries so as to reap their potential benefit; and, 4 ) avoid bilateral and multilateral agreements that could endanger future economic development. xli This economic vision of Lula's foreign policy agenda that Vigevani and Cepaluni present highlights the continuity with FHC in addition to pointing out the larger role that Brazil sought in international and regional economic and political forums. In practice, however, Lula's foreign policy is a fusion of both the economic aspects of V igevani and Cepaluni view of his agenda and the more ideological agenda presented by Amorim. We can see this fusion of both the economic and ideological aspects in how Brazil has pursued: R elationships with other important emerging countries such as Chin a, India, Russia and South Africa; A more active role in international forums and negotiations such as in the Doha Round of the WTO; M aintaining friendly diplomatic relations and deepening economic ties with developed nations particularly the US and EU; S trengthening relationships with Portuguese speaking nations in Africa as well as establishing diplomatic relations with other African nations;
102 C ontinued its campaign for reform of the UN and its institutions and the pursuit of a permanent seat on the U NSC; D efending civil liberties and allowing for greater balance between the State and civil society in Brazilian democracy; and, A more active role in international organizations that discuss international governance. xlii 4. 3 .1. Regional Integration The idea, originating in the FHC administration, that South America and not Latin America, should be the central theme of the nation's foreign policy agenda continued in the Lula administration. Under Lula, the project of South American integration took p recedence over projects in other regions of the world. xliii The integration of South America was such a crucial part of Lula's foreign policy that Celso Amorim commented that "South American integration is Brazilian foreign policy's top priority (emphasis add ed)." xliv This is contradictory in nature due to the nation's membership in a number of regional institutions that have wholly different regional demarcations from Mercosul, the Amazon region, South America, Latin America to the Americas as a whole. xlv Mercosu l. Brazil's integration project of the South American continent began in 1994 with the creation of Mercosul. 9 Mercosul was originally envisioned by Brazilian policymakers as training wheels for Brazilian companies to improve their competitiveness and eff iciency before joining the global marketplace. However, with the passage Protocol of Ushuaia in 1998, often referred to as the democratic clause, the trade bloc gained a political slant by reproving of any successful or attempted coup d'tat of a democrat ically elected government of any of its member states. xlvi With the 9 Mercosul replaced the PICE ag reement in 1991 when then Treaty of Asuncion was signed between Argentina and Brazil. The Treaty of Ouro Preto in 1994 officially created the Mercosul common market and added Paraguay and Uruguay as member states.
103 later addition of Chile and Bolivia as associate members in 1996, the Mercosul common market appeared to a viable means for Brazil to pursue its integration project of South America. The max i devaluation of the Brazilian real in 1999 followed two years later by the collapse of the Argentine currency board in December 2001 sent Mercosul into chaos. As international markets reacted with renewed skepticism about the ability of Latin American go vernments to be effective economic managers, Argentina had to confront both a political crisis and the government's default on the bulk of its debt in early January of 2002. In the aftermath of Argentina's collapse, doubts about the ability of Mercosul an d whether increase regional economic integration would be able to improve Brazil's economy and economic institutions to the point where it would be able to minimize or avoid economic crises such as the one that had afflicted Argentina. xlvii Additionally, these two crises started trade disputes amongst the Mercosul members leading Alberto Dumont, Argentina's secretary of industry, to complain that Mercosul unfairly benefited Brazil and that Brazilian trade policy was contributing to the dismantling of indus try in other member countries. xlviii Negotiations with the Andean Community (CAN Comunidad Andeana) for a free trade agreement after Argentina's economic meltdown showed that the governments of the Mercosul member countries had the will to deepen economic int egration of the South American continent. xlix The combination of the free trade agreement with CAN and the infrastructure projects developed under IIRSA placed South America on a path toward a South American trade bloc. The nations of South America appeared to be addressing the infrastructure, political and economic issues that the countries of
104 Western Europe had to confront when creating the European Union. Brazil's regional integration project is to not only be viable, but well on its way to becoming a re ality. 4. 3 .2. Extra regional Integration "Brazil can be the Mac to the United States' PC" Julia Sweig Under Lula, Brazil has pursued a more "pro active" foreign policy within South America, Africa and the Middle East the result of the shift in foreign policy from FHC placing greater importance on establishing ties with the developing world (South South diplomacy). This more pro active agenda has le d to Brazil's increased involvement in both regional and global forums on issues such as global governanc e, the environment, energy and biofuels, energy efficiency, health, food security and agricultural trade policy. l Brazil's extra regional foreign policy agenda has followed three of the four tenets that former Foreign Minister Amorim laid out solidarity universality and global governance. Perhaps the former Foreign Minister's list should have an addendum to include South South initiatives, which have become a hallmark in the international press of Brazil's new foreign policy agenda. li Some of Brazil's extra regional policies have brought it in direct conflict with the United States, European Union and the UN Security Council. The most notable example of this is the Brazil Iran Turkey agreement for enrichment of Iranian uranium for use in Iran's nuclear reactors. lii 4. 3 .2.1. South South Diplomacy 10 The South South diplomatic strategy is an approach that incorporates two Brazilian foreign policy interests greater participation in global affairs and economic development. This approach comes from a desire to show and exercise unity with other 10 I use South South Diplomacy instea d of Amorim's term "solidarity."
105 developing and least developed nations in the global South, while at the same time contributing to Brazil's greater involvement in global affairs and policymaking. Brazil offers cooperation to countries in the forms o f cooperation in science and technology, trade, investment, generic pharmaceuticals and agricultural programs that, according to Amorim, improves Brazil's "position in trade, finance and climate negotiations." liii Additionally, by using South South diplomacy Brazil has been able to build coalitions amongst the developing nations as a way to improve negotiating positions in the WTO Doha negotiations, Financial G20 forum, strengthen its demand for reform of the UN and Bretton Woods institutions to make them re flect the current state of the world. Brazil uses a diverse number of channels through which it implements South South initiatives ranging from the IBSA forum to the Agncia Brasileira de Cooperao. The IBSA (India, Brazil and South Africa) forum was cr eated out of desire increase cooperation and coordination amongst countries of the South. liv The foreign ministers of the three countries have met yearly since 2004; additionally, there have been four Summits of Heads of State and Government Summits since 2 008. lv At these annual meetings and summits, the foreign ministers and heads of state discuss the four areas of IBSA activities: political coordination, sectorial cooperation (performed by 16 working groups), IBSA Fund for Alleviation of Poverty and Hunger and the involvement of actors beyond other than the executive branch (legislative branch, judicial branch, civil society, academia and the private sector). Political coordination of IBSA members is based on devising a common position on wide range of gl obal issues. Sectorial coordination occurs in working groups that have been created with the objective of increasing mutual
106 knowledge and exploring common areas of interest. 11 The IBSA Fund identifies and provides funding for realistic and replicable projects that focus on reduction of poverty and hunger in interested developing and least developed countries, and are implemented through the use of South South mechanisms. lvi The IBSA Fund's projects have focused on strategies for social development and a gricultural capacity using programs that the three member nations have successfully implemented as flagship programs that can be integrated and applied to other nations. lvii The Agncia Brasileira de Cooperao, or ABC, is the main Brazilian mechanism throug h which many of the South South initiatives are run, in addition to the IBSA Fund. lviii The Agncia Brasileira de Cooperao coordinates programs through EMBRAPA (Empresa Brasileira de Pesquisa Agropecuria Brazilian State Institution for Agricultural Resea rch) and SENAI (Servio Nacional de Aprendizagem Industrial National Service for Industrial Training) in Africa in numerous areas such as: construction of a factory to produce medications to treat HIV/AIDS, malaria and fecal coliform diseases sharing ag ricultural technology and techniques with countries to improve their productivity 12 spreading ethanol production technology and the construction of potable water supplies. lix 11 IBSA has created 16 working groups each focusing on one of the following issues: public administration; tax collection and administration; agriculture; human settlements; science and technology (includes Antarc tic research); trade and investment; culture; defense; information technology; social development; education; energy; environment and climate change; health; transportation; and tourism. See IBSA's website, http://ibsa trilateral.org 12 EMBRAPA, in conjunction with ABC, has implemented projects in the Cotton 4 (Mali, Benin, Burkina Faso and Chad) as well as other programs in the African savannah based on technology and technique that EMBRAPA developed for the Brazilian cerrados. In the Cotton 4 nations, EMBRAPA and the ABC seek "to introduce and adapt more productive types of cotton in order to stren gthen the cotton production" in this region which is the lar gest cotton producing region of Africa. In the African savannah, techniques and technology that EMBRAPA has developed for use in the Brazilian cerrados, an environment similar to the savannahs, that has improved the produ ctivity of this region. S ee E MBRAPA's and ABC 's websites for more information concerning these projects.
107 South South initiatives are not limited to just Africa, Brazil has projects through ABC and the IBSA Fund in L atin America and Asia as well. The model that Brazil has implemented through the ABC is one based on strengthening the institutions of partner countries, which the ABC and Ministry of Foreign Affairs believe are necessary struct ural conditions in order for the effective transfer, implementation and integration of technology and techniques to developing countries. The ABC, through participating Brazilian government agencies, universities and private partners seeks to share the be st practices for the areas that a particular country demands without seeking to create potential or actual business opportunities for Brazilian companies or for the ABC to profit from these technology transfers. lx According to The Economist, Brazil is rapid ly becoming one of the world's largest aid donors reaching levels of aid similar to that provided by Canada and Sweden. Brazilian aid assistance, unlike aid from historical donor countries, comes without conditions or in exchange for access to raw mater ials like Chinese aid. According to Minister of Strategic Affairs Samuel Pinheiro Guimares Neto, Brazil believes that it can reduce future problems to world security and peace if it tackles poverty now. lxi The Brazilian model for providing aid is based on the success of its social programs, such as Bolsa Familia, and the ability of the country's tropical research to resolve agricu ltural problems within Brazil. While an official measure of Brazil's aggregate development assistance does not exist, a 2010 IP EA ABC study puts Brazil's 2009 international development assistance at $362.21 million. 13 Other estimates have put Brazil's annual 13 The IPEA ABC study defines international development assistance as humanitarian aid, student scholarships to foreign exchange students and contributions to intern ational organizations and regional banks (UN, IMF, World Bank, Inter American Development Bank, African Development Fund, etc.)
108 aggregate expenditure at $1 billion and even as high as $4 billion. lxii Regardless of the exact amount, Brazil's use of South South initiatives help it compete with China and India for soft power influence in developing countries, improve its ability to garner support for its initiatives in multilateral forums and deepen the nation's economic insertion in the global economy. lxiii 4. 3 .2.2. Universalism During President Lula's administration Brazil experienced a large expansion of the country's diplomatic relations by opening 80 new embassies and consulates 14 through out the world. lxiv The expansion in the physical infrastructure of Brazil 's foreign policy has helped it pursue economic as well as political ties with the countries where the embassies and consulates were opened. lxv The largest concentration of these new diplomatic posts were created in Africa as a means of strengthening Brazil 's relations with the continent as well as extending its influence to compete with Chinese and Indian initiatives. These expansions are also linked to view that Brazil's policymakers have of the nation's foreign policy agenda, and how it can be used to im prove the country's economy in addition to its international image. Brazil's central foreign policymakers (Lula, Amorim and Aurelio) see the country as the ideal interlocutor, because it is able to open a "dialogue with countries of all regions, creeds, c olours and backgrounds." lxvi This belief led Lula to pursue diplomatic, economic and development relationships with numerous dictatorial and authoritarian 14 In 2002, Brazil had 150 consulates and embassies around the world. By the end of the Lula administration this number had climbed to 230 different diplomatic posts. Under Lula, 52 embassies, 22 consulates, 6 missions to international organizations and one diplomatic office had been opened. According to Amorim, 23 were located in Africa 15 in South America, 13 in Asia and 6 in the Middle E ast.
109 regimes in Africa, the Middle East and Asia. 15 This aspect of the administration's foreign policy is perhaps the one that has garnered it the most criticism both externally and internally as information about the amount of aid provided by the Brazilian government to dictators in Africa a s well as the administration's relationship with autocratic regimes in the Middle East. Internal critics argued that Brazil should resolve its domestic problems stemming from poverty and the trouble public education system rather than provide aid to regimes that oppre ss their people. lxvii While Lula, Aurelio and Amorim might see Brazil as an able interlocutor with Iran and in the Israeli Palestinian peace talks, there are serious questions about the country's ability to be an effective negotiator as well as its ability to influence these negotiations to accomplish the desired goal. In an interview with Veja former ambassador Rubens Barbosa said that "there was a failure in the Brazilian government's evaluation of its capacity to influence [events]" in regards to Iran's nu clear program and the Israeli Palestinian peace talks. lxviii In contrast to ambassador Barbosa, former Foreign Minister Amorim, president Lula and Marco Aurelio believe that condemnation by the UN, NATO or other multilateral organizations does little to improv e the situation in countries under the rule of autocratic or dictatorial regimes. Rather they believe that change can only be affected in these countries through engaging in dialogue with current regimes is the best path toward improving the lives of the people living in these countries. lxix However, under the Lula administration Brazil's stance on human rights and human rights violations in the UN changed greatly from that of previous administrations as the Lula administration voted against sanctions and se veral 15 I am referring to relations with the following countries: Cuba, Equatorial Guinea, Iran, Kazakhstan, Libya, North Korea, Syria, Venezuela, and Zimbabwe.
110 initiatives targeting regimes that, at the time, it had friendly relations with. Some of the administration's critics believe that it is possible to establish economic and trade ties with these countries; however, that is not to say that Brazil shou ld not be critical of the way that these countries treat their citizenry or conduct their affairs. lxx 4. 3 .2.3. Global Governance The project of reforming the international institutions has been one that Brazil can be traced back to the Sarney presidency. Under Lula, Brazil's project gain more traction as the country's macroeconomic policies proved to be adept enough to weather the 1999 maxi devaulation of its currency and the 2001 collapse of Argentina. Additionally, as the BRIC countries sought to exert more influence on the global stage in light of changing US foreign policy goals, Brazil's project gained momentum amongst other developing countries as well as the least developed countries particularly in the wake of the formation of the Commercial G 20 in the Doha Round of WTO negotiations led by Brazil. Under previous presidents the main focal point of reforming the mechanisms of international governance was reform of the UN and its institutions, especially the UN Security Council, to be more inclusiv e and representative of the post Cold War global economic and political realities. The Lula administration not only sought reform of the UN and the UNSC, but the WTO and Bretton Woods Institutions to reflect the rise of developing countries and their grea ter clout in regional, hemispheric and global political and economic affairs. At the onset of the 2007 collapse of the housing market in the United States that would spark the global financial meltdown that led to a global recession and malaise of world f inancial markets the call for reforming global financial institutions has been particularly resolute. The call for reforming economic institutions, in addition to political
111 ones, has resounded quiet strongly with the BRIC nations as well as other developi ng countries. The global financial crisis began in 2007 has placed pressure on developing countries as demand for their exports in rich countries has shrunk, and these countries are being forced to develop their domestic markets and boost internal spendin g which has been a problem in the past. Previous external shocks that have forced emerging markets to rely upon domestic consumption has fueled excessive credit, inflation and raised the risks of private and public overspending all of which have been tr iggers of past economic and financial crises in emerging markets. Due to the economic crises that have faced Brazil since the end of the "Brazilian Miracle 16 Brazilian banks and companies "have had to be particularly nimble" due to the frequent economic meltdowns and hyperinflation of the late 1980s and early 1990s. The Banco Central do Brasil under the Cardoso and Lula administrations implemented a series of reforms to the Brazilian financial system during that has improved the ability of regulators to assess the solvency of banks as well as make it more difficult for fund managers to successfully implement a Ponzi scheme like the one run by Bernard Madoff. These reforms included the banks settlement system, banks reporting all off balance sheet vehicle s, complete disclosure to the Brazilian Securities and Exchange Commission by all fund managers of the daily net asset value of their funds and high reserve requirements. lxxi All of these reforms strengthened Brazil's case for reforming global financial and economic institutions including the G7 largest economies and 16 The crises in chronological order are: oil shocks in 1973 & 1979, Mexico's default in 1982, 1986 Cruzado Plan, 1990 Collor Plan, 1994 tequila crisis, 1997 Asia crisis, Russia's default on its debt 1998, LTCM crisis in 1999, dotcom crash in 2000, 2001 2002 collapse of Argentina's currency board and defa ult, and 2007 global financial crisis.
112 Bretton Woods institutions as its economy quickly rebounded from the global financial crisis and without experiencing bank failures or large companies sinking into insolvency. In the UN, Brazil' s proposal for reforming the UN and its institutions is due in part to its Cold War mentality and the gross ineffectiveness of the UN to resolve world conflicts. Brazil's proposal for reforming the UN Security Council is that it should be based on counter balancing the veto power of the P5+1 through the addition of countries that play larger roles in different regions of the world, i.e. Latin America, Asia, the Middle East and Africa. The Brazilians envision this as a means of transforming the UN into a mo re effective international body to prevent future conflicts and keeping the peace. lxxii The view that the UN and the UNSC should be reformed is a view share by governments around the world as well as political commentators in the US and Europe. lxxiii 4.4. Lula's The Impetus for Equitable Change In 2002, the former union leader won the presidential elections on his forth attempt defeating Jos Serra from Cardoso's PMDB party In the months prior to his election, international investors were apprehensive that th e election of Lula would lead to a situation in Brazil that mirrored that of Chavez in Venezuela. This increase apprehensiveness resulted in a large the real depreciating by 40 percent since the beginning of 2002 and increased the cost of external financi ng for the country (see Figures 4 1 and 4 4 ). In a speech on October 28 th 2002, then president elect Lula pledged to continue the economic policies of the Carodoso administration. In previous speeches Lula had been critical of the Cardoso administration 's free market policy, the conditions that the IMF attached to loans to Brazil and his opposition to the push for
113 hemispheric trade bloc, known as the Free Trade Agreement of the Americas or FTAA. In this speech, Lula announced: We are going to confront t he actual vulnerability of the Brazilian economy, a crucial factor in the financial turbulence of the last months, in a safe way. As we said during our campaign, we arte going to honor all the contracts set up by the government, and we will not take our e yes off controlling inflation. The tough challenge that Brazil faces will need austerity in the use of public money, and also a hard fight against inflation (sic.) lxxiv This speech was able to quell international investors, developed governments and multilate ral economic institutions. lxxv Figure 4 4 US Dollar:Brazilian Real Exchange Rate (Source: Banco Central do Brasil) His administration's performance once in office is one that few could see in 2002. Under Lula's stewardship Br azil's economy went from being the 9 th largest economy in the world to the 5 th The rise of Brazil's economy in combination with that of China's appears to prove that the prediction of Dominic Wilson and Roopa Purushothaman, that USD:BRL Exchange Rate
114 Brazil, Russia, India and China's economies will be more than half the size of the United States, Japan Germany, France, Britain, and Italy by the year 2025. lxxvi Once Lula and his cabinet had settled in at the Pal cio do Planalto in Bras lia, they set to work on convincing international markets of the administration's commitment to maintain the orthodox fisc al and monetary policy that was implemented under the previous administration. The administration sought to do this, in part, by complying with the conditions the IMF had stipulated in 1998 for loans to Brazil during the speculative attacks on the real The IMF required that the Brazilian government create a primary surplus in 2003 equivalent to 4.25 percent of national GDP. The administration was so resolved to pursue an orthodox fiscal policy that it not only met the IMF's target of a primary surplus o f 4.25 percent of GDP, but surpassed it reaching a surplus of 4.7 percent of GDP. lxxvii
115 CHAPTER 5 THE CURRENT BRAZIL COMPARED TO THE BRAZILIAN MIRACLE 5.1. Overview In this chapter, I seek to answer the question "what is different about Brazil now than during previous policy periods?" To do this I have chosen to compare the current period of economic growth to that of the Brazilian Miracle' in the late 1960s and early 1970s in which Brazil experienced successive years of impressive economic g rowth. This chapter will begin with a description Brazilian Miracle,' the policies that resulted in this period of extraordinary growth and the aftermath of these policies. It proceeds to analyze the most recent period of economic growth under the Lula a dministration, and discusses th e policies that have led to this period of growth and postulates potential problems in the future that these problems have failed to address. The chapter will conclude with a comparison of the two periods to show tha t the re cent period of economic expansion, while similar to the Brazilian Miracle has had a more far reaching impact on the entire economy as opposed to being concentrated in the export and manufacturing sector s as seen during the Brazilian Miracle 5.2. The Brazilian Miracle' After the military seized power of the country in a bloodless coup from President Goulart, (1960 1964) in 1964, 1 the regime believed that economic growth after ISI could only be achieved in a more open economy. The proponents of th e economic strategy of export promotion were of the belief that the Brazilian domestic market was not large enough to support large firms in all industrial sectors. Additionally, the policy 1 For a more detailed discussion of the event leading up to the military coup, the military coup that overthrew Goulart and the Goulart regime see Faust o (2 004) 436 462; Gordon (2008) 50 71; Stepan, Alfred. The Military in Politics: Brazil and the Southern Cone (1971); Stepan, Alfred. Rethinking Military Politics: Brazil and the Southern Cone (1988).
116 maintained high levels of protection for national industries thro ugh re taining trade barriers that limited foreign competition. It was not entirely a new stratagem that could wholly be distinguish e d from the import substitution policies (ISI) of the previous two decades, but a revision of ISI policies whereby domestic firms were motivated to take advantage of increased world demand for commodities and a protected domestic market. i 5.2.1. Export P romotion E xport promotion was only one part of Brazil's new economic policy that began after the military coup in 1964 that installed General Humberto Castello Branco as president. Castello and his supporters had the goal of reforming the capitalist economic system of Brazil and furthering the modernization and industrialization of the country. In order to accomplish t hese two goals, General Castello Branco 's supporters known as castelistas, believed that order must be re established in Brazil's economc and financ ial system in the wake of the chaos that had marked the last few month of Goulart's regime was crucial. Additional ly, the castelistas sought to reform the state bureaucracy and to exert control over the working classes in the Brazilian hinterlands as well as in the cities ii The castelistas implemented economic policies during two distinct phase after the coup in order to accomplish their two goals. The years immediately following the coup, from 1964 1967, was the first phase of the military's economic pol icy package. During this phase, policies focused on structural reforms in the financial markets and economic stabilization. The second phase of the military's economic package is what has become known as the Brazilian economic miracle, which was achiev ed by an export led growth policy package that sought to take advantage of increased world demand for raw
117 materials. However, in the aftermath of the first oil shock Brazil adopted a new set of economic policies that sought to pursue high economic growth rates at the expense of more foreign indebtedness. iii Phase I Stabilization This first phase combined short term policies designed to rein in inflation by reducing budget deficits, installing limits for monetary expansion implementing realistic exchange rates and put ting into place wage restraints. iv While these structural reforms did have in the short term an inflationary impact, they did systematically rid some sectors of budget deficits, which in turn reduced these s ectors' need for government subsidies. These were policies embodied in the Programa de Ao Econmica do Governo (Government Program for Economic Action), the lei de greve (law of industrial action), Estatuto da Terra (Land Statute) and a campaign to prom ote exports of the country's raw materials, agrarian products and manufactures. v Phase II "Economic Miracle." In order to accomplish an opening of the economy, the government undertook a series of measures to both encourage and diversify exports through the abolit i o n of trade barriers the export sector faced the simplification of the bureaucratic process for exporters and through the adopti on of an exchange rate policy that worked in concert with the export promotion policies. In addition to encouragin g exports, the regime relaxed policies on foreign capital to encourage the inflow of loan capital and direct investment in the economy. vi These policies did lead to what is referred to as the Brazilian Economic Miracle' between 1968 and 1973, where by Braz il experienced high growth rates averaging 11.2 percent over the six years and saw GDP per capita increase 207 percent during the same period.
118 Compare this with the period of 1960 to 1967 in which Brazil average growth rate was 5.1 percent and GDP per cap ita increase 134.3 percent (See Figure 5 1 ). Figure 5 1 Brazil's Economic Miracle' (Sou rce: IBGE and IPEA ) 5.2.2. The Aftermath of the Brazilian Miracle' In the 1970s, Brazil shifted its economic policy to what Bulmer Thomas calls debt led growth. In addition, it further diversified the export sector through import substitution investments in the industr ial and manufacturing sectors. By the early 1980s, the excessive debt burden due to the debt led growth policies of the 1970s caused the governmen t to restrict imports once again (see Table 5 1 ). The basis of the debt led growth model has its origins in the late 1960s and early 1970s, which saw a large influx of foreign capital as a consequence of the cruzeiro 's devaluation at a rate that was less than the rate of domestic inflation, making it easy for Brazilian firms to borrow from abroad at attractive terms. vii The result of these policies was a trade surplus, which was necessary to service the country's foreign debt as capital inflows als o decline d during this period. In 1973, after the first oil shock, policymakers' saw the country's dependence on imported energy renewed as a threat to the nation's economic growth 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 $0.0 $100.0 $200.0 $300.0 $400.0 $500.0 $600.0 $700.0 $800.0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 Percentage Change, YoY US$ GDP per capita (left axis) GDP Growth (%, YoY right axis)
119 and security, reviving interest in import substitution policies as a means of reduc ing the country's reliance on imported energy. It was out of this renewed interest in import substitution policies that the Brazilian ethanol industry was born. viii Beginning in the late 1960s, the amount of Brazil's foreign debt was increasing very fast. T his was sustainable until the second oil crisis hit in 1979 and nominal interest rates on the foreign loans were l ess than the nominal growth rate of exports causing an increasing debt load. Additionally, the commodities boom of the 1970s caused an incr ease in export revenues, improving Brazil's current account as well as its balance of payments. The increased revenues from the windfall of the commodities boom allowed Brazil to borrow internationally in order to service interest payments on loans from i nternational institutions 2 and banks without increasing its debt export ratio to an unsustainable level. ix In 1975, then presiding Ernesto Geisel implemented the Plano Nacional de Desenvolvimento II ( PND II Nation Development Plan II ) which, according to Baer, had two goals: 1) import substitution of capital goods and basic industrial imputs (such as steel, aluminum, petrochemicals, and fertilizers), and 2) expansion of existing infrastructure to include hydro and nuclear power generation, ethanol product ion, transportation, and communications. x The PND II divided the investment for these projects between state enterprises and the private sector while the Banco Nacional de Desenvolvimento Econmico (BNDE) provided any necessary financial support for these projects. The PND II was designed to provide a strong countercyclical economic stimulus policy to maintain strong growth in order to counteract the effects of the first oil 2 Note the table that appear on pages 408 409 i n Baer are constructed from Conjuntura Econmica from the Banco Central do Brasil. In 1970 exports were $2.739 billion dollars and increase to $ 20.133 billion in 1980, signaling a decade of continuous export growth.
120 shock, while at the same time utilizing import substitution policies to further d iversify the economy and increase exports. In order to help finance these large scale projects Brazil started looking to banks in the United States and Western Europe, which were awash with petrodollars. However, Brazil was unable to continue both paying higher oil prices and importing goods that were needed for its industrial expansion. xi Table 5 1 The Military as an Economic Steward Phase Year Real GDP Growth (YoY, %) Inflation (IGP D I) Gross Debt (US$ millions) Exports (US$ millions) Imports (US$ millions) Balance of Trade (US$ millions) Goulart Regime 1960 9.40 32.30 2372.00 1268.77 1292.80 24.03 1961 8.60 49.90 2835.00 1402.97 1291.83 111.14 1962 6.60 50.40 3005.00 1214.19 1303.90 89.72 1963 0.60 82.10 3089.00 1406.48 1294.00 112.48 Stabilization and reform 1964 3.40 93.30 3160.00 1429.79 1086.40 343.39 1965 3.05 28.30 3927.00 1595.48 940.60 654.88 1966 4.15 37.40 4545.00 1741.44 1303.40 438.04 1967 4.92 22.50 3283.00 1654.04 1441.27 212.77 "Economic Miracle" 1968 11.43 25.00 3780.00 1881.34 1855.10 26.24 1969 9.74 21.80 4403.30 2311.17 1993.24 317.93 1970 8.77 19.30 5295.60 2738.92 2506.90 232.02 1971 11.30 20.20 6621.60 2903.86 3247.39 343.54 1972 12.05 17.50 9521.00 3991.22 4232.35 241.13 1973 13.98 15.50 12571.50 6199.20 6192.24 6.96 Adjustment to external shock 1974 9.04 34.55 17165.70 7951.00 12641.32 4690.32 1975 5.21 29.35 21173.40 8669.94 12210.34 3540.40 1976 9.79 46.26 25985.40 10128.30 12382.98 2254.68 1977 4.61 38.78 32037.20 12120.18 12023.41 96.76 1978 3.23 40.81 43510.70 12658.94 13683.15 1024.20 1979 6.77 77.25 49904.20 15244.38 18083.86 2839.48 1980 9.11 110.24 53847.50 20132.40 22955.17 2822.77 Debt crisis and stagflation 1981 4.39 95.20 61410.80 23293.04 22090.58 1202.46 1982 0.58 99.72 70197.50 20175.07 19395.00 780.07 1983 3.41 210.99 81319.20 21899.31 15428.93 6470.39 1984 5.27 223.81 93093.00 27005.34 13915.82 13089.52 1985 7.95 235.11 95856.70 25639.01 13153.49 12485.52 Source s : BCB, IBGE, IDB, IMF, IPEA and World Bank
121 5.3. Brazil's Second Chance Brazil's so called "second chance" began in 1985 with the transition to a democracy after 25 years of authoritarianism under the military. In the 25 years since the return to civilian rule, Brazil has consolidated its democracy, created macroeconomic stab ility and become a nation to which many other in the region and around the world look toward. This period has been marked by many firsts (drafting of a new Constitution, direct presidential elections since 1960, impeachment of a president and the peaceful transfer of power) as well as persistent challenges (inflation, balance of payments and debt). Brazil overcome the obstacles that have confronted the economy not only during a period of internal political and economic change, but also one of external pol itical and economic change due to the collapse of the Soviet Union and rise of the information age. xii During this period, Brazil has undergone significant structural changes to its economy from opening the economy to using interest rates to control inflati on. This "second chance," as Gordon (2001) calls it, began with the return to civilian government in 1985 with the appointment of Tancredo Neves to the presidency by the military. xiii While Brazil's "second chance" has been a peri od of stop go' growth, it has undoubtedly been a period in which economic restructuring has created a stable macroeconomic environment that has allowed the country to not only take advantage of internal economic changes (the growth of the middle class), but also one in which it ha s been able to take advantage of increased demand and prices for its agricultural and raw goods. 5.3.1. Sarney and the Cruzado Plan (1985 1990) Brazil's "second change" began with the creation of t he "New Republic" in 1985. The "New Republic" began in t he midst of an economic crisis in which inflation rates were
122 rising, the economy was stagnating and the country was unable to service its substantial foreign debt obligations To compound the situation, the recession that the second oil crisis, caused by the 1979 Iranian Revolution, triggered led to a decrease in world demand for commodities, and world interest rates abruptly began to rise in response to tighter monetary policy in the United States. The world recession combined with higher world interest rates meant that not only was procuring new loans was more expensive for Brazil, but it was also unable to service its existing foreign debt obligations due to the fact that the majority of the country's debt obligations had been acquired with flexible int erest rates xiv By August 1982 when Mexico declared a debt moratorium a ripple effect surged through international markets, and financiers of Latin America's debt started to constrict access to new capital. This put Brazil in a more precarious situation in which it faced an inelastic supply of international financing (see Figure 5 2) xv Figure 5 2. Brazil External Accounts (Sources: BCB, FGV and IPEA) 32.15 37.95 52.19 55.80 71.53 81.45 93.93 98.52 103.86 103.61 30 40 50 60 70 80 90 100 110 -18 -13 -8 -3 2 7 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Billions of US$ Billions of US$ Current Account (Left Axis) International Reserves (Left Axis) External Debt (Right Axis)
123 When Sarney assumed the presidency after the death of Tancredo Neves in 1985, he had to balance the debt crisis and stagflation created by the combination of the debt led growth model and the world recession. xvi In February 1986, the Sarney administration announced its economic stabilization plan (Cruzado Plan ) that main focus wa s monetary reform, the implementation of price freezes to control rising inflation and some fiscal reform measures The plan 's approach to controlling inflation was predicated on the neostructuralist view of inflation, which held that inertial inflation was the main cause of inflation, not by excess aggregate demand or insufficiency of aggregate supply. xvii The plan's adoption of a new currency, the cruzado combined with the price freezes and fiscal reform measures resulted in the immedi ate reduction of monthly inflation levels from 12.72% to 4.77% in the first month while industrial production and economic output grew at an amazing pace. The plan appeared to have rectified the economy and cured it of its affliction with stagflation. The price freezes that were the main method through which the Cruzado plan contained inflation and maintained price stability, could not be permanently maintained without creating shortages due to the absence of a pricing mechanism to allocate resources in the economy. It was not long before shortages began to appear in the economy, and aggregate demand began to surpass supply causing inflationary pressures to re emerge in the economy. The failure of the government to establish fiscal discipline before re pealing the price freezes resulted in inflation rates rapidly increasing by the end of April 1986. xviii The lack of structural reforms in the economy and the creation of both a pricing mechanism and permanent policy to combat inflation meant that the plan wa s doomed to fail. xix The subsequent stabilization plans (Bresser
124 Plan, Summer Plan and Rice and Beans Plan) that the administration tried to implement before the end of its mandate in 1990 all failed to overcome the same fallacies that the afflicted the Cru zado Plan, and like the Cruzado Plan, all of them failed in a similar fashion (see Figure 5 3) xx Figure 5 3. Hyperinflation to Stability, measured by the monthly IGP DI Index. (Source: FGV) 5.3.2. The Collor Administration (1990 1992) In the first public elections held in Brazil since 1960, a young politician from the North East was elected president. In his inaugural speech Collor announced his economic stabilization plan to end they cycle of hyperinflation and create price stability. The Collor Plan, as it became k nown, combined both an economic stabilization policy package with economic liberalization policies (see Appendix C) The immediate result of the Collor Plan a drastic reduction in the country's liquidity, as the ratio of the money -10.00 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 Jan-86 Nov-86 Sep-87 Jul-88 May-89 Mar-90 Jan-91 Nov-91 Sep-92 Jul-93 May-94 Mar-95 Jan-96 Nov-96 Sep-97 Jul-98 May-99 Mar-00 Jan-01 Nov-01 Monthly Price Increases, % Sarney (Black) Collor ( Red) Franco (Blue) Cardoso (Green)
125 supply (M 4 ) 3 to GDP fell from 30 percent to 9 percent. This dramatic reduction in the money supply led inflation to quickly fall to single digit levels ; however, it also had the additional effect of decreas ing liquidity thereby creat ing a n economic contraction. The plan's external component included measures such as the reduction of tariffs, floating the new currency and privatization of state owned enterprises. The mainte nance of the price freezes began to create distortions in the economy as supply was unable to keep up with consumer demand resulting in shortages. xxi Collor II Due to the failure of the Co llor Plan to end the inflationary cycle, the administration implemented the second Co llor Plan, or Collor II Collor II included limited financial reform measures and initiatives to confront the problem of inertial inflation. The second Collor Plan like its predecessor, relied on price and wage freezes in orde r to attack inertial inflation in the economy, as well as the additional measure of eliminating various forms of price indexation The financial reforms of C o llor II primarily included measures such as improved management of cash flows and reducing SOEs e xpenditures. These measures had a short term impact on prices, reducing inflation from 21 percent in February of 1991 to 6 percent in May of 1991. Collor replaced the team of economists that created the C ollor Plan in May of 1991 and replaced them with a new team lead by Marcilio Marques Moreira. Under the new economic leadership, the administration focused on managing the money supply and federal cash flows. Additionally, the new team removed the price freezes that the Collor Pan had put in place and made preparations to unfreeze the remaining financial assets that had been 3 Definition of M4: M4, or broad money aggregate, is equivalent to M1 (all paper money in circulation and demand deposits) + M2 (special paid deposits, savings accounts and securities issued by depository institutions) + M3 (shares of fixed income funds and repurchasi ng agreements registered in SELIC) + bonds of high liquidity See Banco Central do Brasil's "Gloss rio Completo."
126 blocked under the plan, amounting to 6 percent of GDP. By releasing the block financial asset, liquidity in the economy rapidly expanded creating inflationary pressures that the administration was unable to eliminate. xxii 5.3.3. Franco Hyperinflation to the Real Plan (1992 1994) After the impeachment of Collor in October 1992, the presidency passed to the Vice President Itamar Franco. When Franco assumed the presidency inflation stood at 24.22 percent for the month of November, and by May 1993 inflation reached more than 30 percent. During his first six months in office, Franco had appointed three different finance ministers before appointing his forth and fi nal finance minister, Fernando Henrique Cardoso (FHC) in May 1993. FHC brought with him to the Minist rio de Fazenda (Ministry of Finance) a group of economists from the Universidade de S o Paulo and the Pont fica Universidade Cat lica in Rio de Janeiro. Cardoso along with this group of economist designed a new economic stabilization plan that became known as the Real Plan after the new currency that it introduced. Before implementing the Real Plan, Cardoso and his team of economists executed an austeri ty plan called the "immediate action plan." The goal of the austerity plan w as to reduce government expenditures by $6 billion, or the equivalent of 9 percent of federal spending. Additional measures of the plan were aimed at increasing tax receipts thro ugh improving tax collection, as well as resolving the dispute that had arisen between the federal government and states concerning the transfer of tax revenues due to requirements that the 1988 Constitution stipulated The Real Plan, in order to overcome the difficulties that eventually caused the Cruzado and Collor Plans to fail, would be implemented gradually and include a fiscal adjustment in addition to the creation and execution of a new indexation system and,
127 finally, the adoption of a new currency FHC and his economic team saw the use of both orthodox and heterodox monetary and fiscal policy were the means through which they would be able to eliminate the inertial inflation in the economy. The novel feature of the Real Plan was the abolition of p rice indexation measures and the introduction of a new indexation mechanism called the unit of real value (URV). The URV was initially pegged to the U.S. dollar at a one to one ratio and the URV's quotation in cruzieros would rise or fall with inflation daily. By July 1994 a significant proportion of prices and transactions were being quoted in URVs. At this time the government chose to introduce a new currency, the real whose value would be equivalent to the URV and exchangeable at a fixed ration to the old currency, the cruzeiro On July 1 st 1994 the third phase of the Real Plan was initiated, the introduction of the new Brazilian currency the real which was introduced at an exchange rate of one US dollar ($) to o ne real (R$) to 2,750 cruzeiros (Cr$). xxiii 5.3.4. The Cardoso The Crawling Peg to Floating Currency (1995 2002) The success of the Real Plan help ed Fernando Henrique Cardoso win the 1994 presidential election. During his administration, the maint en ance o f the Real Plan's crawling peg with the dollar was the key inflation targeting policy as well as the nation's fiscal policy. In order to maintain the crawling peg's overvalued exchange rate to the US dollar, the Central Bank kept interest rates at high le vels to control the expansion of the monetary supply, as well as to create an attractive investment environment for foreign capital. The high interest rates also had the added effect of creating a banking crisis in Brazil during 1994 and1995 Additionall y, in order for the government to maintain the high exchange rate the central bank had to keep interest rates at high
128 levels to attract foreign capital to offset the decrease in foreign exchange earned by the export sector, due to the current account defic it that the policy had created. xxiv The administration did not pursue needed fiscal reforms to maintain the crawling peg's exchange rate. Some of these reforms would require changes to the 1988 Constitution, in order to reduce constitutionally mandated fede ral expenditures and divisions of tax receipts with the states. These measures were not only unpopular with the Brazilian public but with the political elites as well. As Mexico's "Tequila Crisis" came and went in 1994 and problems in Asian economies be gan to arise, Brazilian policymakers maintained their steadfast support of the crawling peg. As the Asian Crisis erupted in 1997 in Thailand, officials at the IMF, World Bank and US Treasury Department began to look to other troubled nations in Southeast Asia as well as other emerging markets, fearful that contagion from Asia could spread throughout oth er emerging markets. In the fall of 199 7 as crisis reached South Korea and a global financial crisis emerged. In Brazil, policymakers believed that by mai ntaining high interest rates they could withstand the external shocks that these crises created. However, in 1998 as the Russian ruble came under speculative attack and the Russia's default on its sovereign debt in mid 1998 began to increase pressure on th e real For the real to continue to be used as a policy to maintain price stability, the administration had to maintain a high exchange rate to the dollar that was accomplished through the use of a crawling peg. Additionally, to maintain the high exchan ge rate the central bank had to keep interest rates at high levels to attract foreign capital to offset the decrease in foreign exchange earned by the export sector, due to the current
129 account deficit that the policy had created. This policy was able to s urvive the 1994 Tequila crisis and the 1997 Asian financial crisis through the preservation of high interest rates. However, the collapse of the Russian ruble and the default by the Kremlin on Russia's debt in mid 1998 began to increase doubts over real It was not long before the "Electronic Herd" began a speculative attack on the real The Cardoso administration believed that they would be able to weather this crisis as they had done the Asian financial crisis before it without the need to change their fiscal policy by undertaking needed structural reforms to the economy. Even the IMF's insistence the that Brazilian Central Bank (BCB) would have to stop defending the real with foreign currency reserves, and needed to let the real float did not shake th e administration's determination to maintain the Real Plan. xxv 5.3.5. The Lula Administation Inflation Targeting (2003 2010) In 2002, Luis Ignacio Lula da Silva was elected as president of Brazil on his third attempt to contest the presidential elections since the end of the military regime. The months running up to the 2002 elections international investors were apprehensive w hat a win by Lula and his Worker's Party would mean for the nation's economic policy. This increase apprehensiveness resulted in a large the real depreciating by 40 percent since the beginning of 2002 and increased the cost of external financing for the c ountry. In speeches during his campaign Lula had been critical of the Cardoso administration's free market policy, the conditions that the IMF attached to loans to Brazil and his opposition to the push for hemispheric trade bloc, known as the Free Trade A greement of the Americas or FTAA. To subdue the worries that international markets had about him and his economic policy, then president elect Lula gave on October 28 th 2002
130 sought to address these questions about Lula's economic policy agenda. xxvi Lula a nnounced that : We are going to confront the actual vulnerability of the Brazilian economy, a crucial factor in the financial turbulence of the last months, in a safe way. As we said during our campaign, we arte going to honor all the contracts set up by t he government, and we will not take our eyes off controlling inflation. The tough challenge that Brazil faces will need austerity in the use of public money, and also a hard fight against inflation (sic.) xxvii Once Lula and his cabinet had settled in at the Pal cio do Planalto in Bras lia, they set to work on convincing international markets of the administration's commitment to maintain the orthodox fiscal and monetary policy that was implemented under the previous administration. The administration sought to do this, in part, by complying with the conditions the IMF had stipulated in 1998 for loans to Brazil during the speculative attacks on the real The IMF required that the Brazilian government create a primary surplus in 2003 equivalent to 4.25 percent of national gross domestic product (GDP). The administration was so resolved to pursue an orthodox fiscal policy that it not only met the IMF's target of a primary surplus of 4.25 percent of GDP but it surpassed the target, reaching a surplus of 4.7 perc ent of GDP. xxviii The administration also was successful in controlling inflation through the use of interest rates that were set by the Conselho Monetrio Nacional, or National Monetary Counsel. The Conselho Monetrio Nacional was able to control inflation during both the administration's terms in office, a feat that none of the previous administrations was able to accomplish. Another result of Lula's use of orthodox fiscal and monetary policy was that the country's balance of payments position improved as a result of a surge in exports driven by demand for commodities in other emerging markets such as China and India. xxix Additionally, foreign direct investment in Brazil during Lula's second term
131 increased to more than all privatization of state owned enterpr ises earned the country during the 1990s. 5.4. Is the Current Period Different? The current period has been characterized by a patter of stop go' economic growth that contrast to the seven year period of the Brazilian Miracle' (see Figures 5 1 and 5 4) Both the Brazilian Miracle' and the current period of growth were proceeded by a period of economic restructuring, but for the current period the process of restructuring took more than twice as long as that which preceded the Brazilian Miracle.' Ano ther difference between these two periods is the reliance upon the export sector, i.e. external demand, rather than the internal domestic market to drive growth. Figure 5 4. Real GDP growth since the Return to Democracy ( Source: Banco Central do Brasil) The Brazilian Miracle was predicated upon high trade barriers to create a captive market, a reduction of restrictions on the export sector and the monopolistic power that state owned enterprises had in the Brazilian market. The current period has been one of economic opening and liberalization, as well as one where the export sector played a 0 2,000 4,000 6,000 8,000 10,000 12,000 -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% US$ Percntage change, YoY GDP per capita (US$ right axis) Real GDP Growth, (YoY, %)
132 smaller role in economic growth (see Table 5 2). Improving economic conditions, particularly after the implementation of the Real Plan, helped to fuel domestic consum ption as wages began to rise and supply began to catch up with internal demand. Table 5 2. Brazil's Economic Path to Stability Administration Year Real G D P Growth (YoY, %) Inflation (IGP DI, YoY %) Debt (US$ billions) Exports (FOB, US$ mil) Imports (FOB, US$ mil) Trade Balance (net, US$ mil) Sarney 1985 7.95 235.11 89.61 25639.01 13153.491 12485.52 1986 7.99 65.03 95.10 22348.60 14044.304 8304.30 1987 3.60 415.83 102.49 26223.93 15050.827 11173.10 1988 0.10 1037.56 103.58 33789.37 14605.254 19184.11 1989 3.28 1782.89 93.92 34382.62 18263.433 16119.19 1990 4.30 1476.71 94.20 31413.76 20661.362 10752.39 Collor 1991 1.51 480.23 93.25 31620.44 21040.471 10579.97 1992 0.47 1157.83 104.13 35792.99 20554.091 15238.89 Franco 1993 4.67 2708.17 112.44 38554.77 25256.001 13298.77 1994 5.33 1093.89 120.03 43545.16 33078.690 10466.47 Cardoso 1995 4.42 14.78 129.09 46506.28 49971.898 3465.62 1996 2.15 9.34 148.29 47746.73 53345.768 5599.04 1997 3.37 7.48 163.57 52994.34 59747.227 6752.89 1998 0.04 1.70 206.75 51139.86 57714.364 6574.50 1999 0.25 19.98 206.05 48011.45 49210.313 1198.87 2000 4.31 9.81 208.81 55085.59 55783.342 697.75 2001 1.31 10.40 192.43 58222.64 55572.176 2650.47 2002 2.66 26.41 186.79 60361.79 47240.488 13121.30 Lula 2003 1.15 7.67 182.08 73084.14 48290.216 24793.92 2004 5.71 12.14 169.49 96475.24 62834.698 33640.54 2005 3.16 1.22 163.53 118308.39 73605.509 44702.88 2006 3.96 3.79 173.13 137807.47 91350.841 46456.63 2007 6.09 7.89 193.36 160649.07 120617.446 40031.63 2008 5.14 9.10 225.49 197942.44 173106.691 24835.75 2009 0.01 1.43 237.14 152994.74 127704.937 25289.81 2010 7.49 11.30 -201915.29 181694.300 20220.97 Source s : BCB, FGV, IBGE, IMF, IPEA, and World Bank
133 CHAPTER 6 BRAZIL A NEW MODEL FOR LATIN AMERICA? It is clear that in the last two decades Brazil has played a key role in politics, diplomacy and economics, and now, in the security and defense spheres of South America. Clvis B rigago e Rafaela Seabra 6.1. Brazil's Path to Success The transformation that Brazil has undergone since the return to civilian rule was a turbulent rollercoaster ride f ull of successes and failures. Since the Sarney administration, Brazilian policyma kers have shared a singular goal the competitive insertion of Brazil into the global economy. Brazil's policy makers have achieved this goal. The country appears to be living up to the potential that Zweig saw 70 years ago. The country was able to achi eve this goal as a result of policymakers being willing to learn from the failures and successes of their predecessors and even had the fortitude to implement policies that were not supported by multilateral economic institutions (IMF, World Bank, WTO, et c.). B razilian policymakers have overtime gained an understand ing of the various faults and distortions that different economic policies create and have through their constant adjustments, been able design a cohesive macroeconomic policy framework that accounts for fiscal and monetary in addition to being able to adjust to the domestic and global economic environment. These internal changes to the nation's economic policy were supported by the Minis try of Foreign Affairs through efforts of diplomats to work in concert with economic policymakers to pursue a foreign policy agenda that sought help manage the internal changes as they occurred and to open new markets for the nation's products. Perhaps t he most important tool for Brazil has been its foreign policy and the work of diplomats at the Ministry of Foreign Affairs. They have worked to pursue policies as well as economic, technological and political relationships with a diverse
134 group of countrie s. Due to their pursuit of regional integration the Brazilian economy and firms were able to ease their way into the global economy with an intermediate stage that served as training wheels for the much more competitive and efficient way in which the glob al economy functions. These efforts enlarged the sphere of Brazilian influence and expertise, economically, politically and via its development initiatives. The "soft power" that Brazil practices has increased the nation's influence in multilateral foru ms that once dictated the types of economic policies the government could implement. 6.2 Economic Policy Brazil's economic policy during this period has had to confront both external and internal economic and financial shocks. Each successive administra tion has attempted to confront these shocks through heterodox and orthodox economic policies with varying degrees of success. The two most salient macroeconomic problems that each administration has sought to resolve are those of inflation and external de bt. While the problem that the nation's external debt posed to its economy was one that was confronted by the Sarney administration, and with each subsequent presidential administration the external debt question became less of a priority as creating pric e stability became the most salient issue. Each administration has approached the nation's economic policy ready to adopt flexible approaches that sought to build on previous policy successes, while attempting to address areas where previous policies have failed. 6.2.1. The Sarney Administration (1985 1990) The first civilian presidential administration after the military regime came into power in the midst of the debt crisis and took control of an economy suffering from the
135 combined maladies of economic stagnation and inflation. In order to manage the two simultaneous crises, President Sarney delegated negotiations with the country's creditors to the Foreign Affairs Ministry and his Finance Minister, while he and his economic team confronted the country 's affliction with stagflation. The economic plans that came out of the administration were unable to address inflation that was unchecked in the economy that was fueled by inertial inflation. The most notable of the plans, the Cruzado Plan, was initiall y successful at reducing inflation through the implementation of price freezes and a fixed exchange rate; however, the administration's resistance to repealing the price freezes produced excess demand that resulted in the reemergence of inflationary pressu res in the economy. The failure of the Cruzado Plan was the first in a series of failed attempts by the administration to control inflation and generate economic growth. While the debt negotiations were successful, the administration's economic policies gave rise to the deterioration of the economy from being afflicted by stagflation when the administration came into office to hyperinflation by the time that it left. 6.2.2. The Collor Administration (1990 1992) Collor took the mantle of the presidency after winning first presidential elections since 1960. He vowed in his inaugural address to "kill inflation with a silver bullet," yet his presidency ended with the failure of the Collor Plan and his impeachment over allegations of corruption. i While th e Collor Plan failed to control inflation, it was, however, successful at beginning the process of opening the economy. During this period the first wave of privatizations of state owned enterprises (SOEs) began, and was continued under the next three pre sidential administrations. The Collor Plan, like the Cruzado Plan before it, implemented prices freezes, instituted a new currency, fixed
136 the exchange rate to the US dollar and froze all liquid assets in the economy for a period of eighteen months. The p lan failed to reduce monthly inflation rates below 9 percent, and by the end of 1990 the plan had failed to control inflation. 6.2.3. The Franco Administration (1992 1994) After the impeachment of Collor in October 1992, the presidency passed to Collor' s Vice President Itamar Franco. It marked the first peaceful transfer of power and in accordance with Constitutional law. This peaceful and lawful transfer of power impacted the view of Brazil by the international community as a country that has successf ully moved from an authoritarian military regime to a democratic system of governance. Franco assumed the presidency in the midst of a worsening economic crisis that, due to the inability of the Collor Plan to resolve problem presented by hyperinflation, would be main focus of the administration. Franco chose to focus all of his attention on devising a solution to control inflation in the economy, and delegated the foreign policy agenda to "renowned actors from outside or from within the diplomatic corps. ii Franco was determined to finally end the problem that inflation posed to the nation. In his first six months in office he had appointed three ministers of finance and dismissed them, until appointing Fernando Henrique Cardoso, a sociologist and profe ssor at the University of Sao Paulo, as minister of finance. His choice of Cardoso was viewed at the time with some doubt, due to Cardoso's lack of formal training and experience in creating macroeconomic policy. However, Cardoso proved to be a wise choi ce. Cardoso brought a group of economists from the University of Sao Paulo and the Pontific Catholic University in Rio de Janeiro with him to Brasilia with the express goal of devising a solution to inflation. Cardoso and his "brain trust" were able to f inally
137 devise a solution to the nation's perpetual battle with inflation. The Real Plan was able to reduce inflation and maintain price stability long after its initial implementation, and became the basis for economic policy in the Cardoso administration that followed Franco. 6.2.4. The Cardoso Administration (1995 2002) Fernando Henrique Cardoso was able to use the success of the Real Plan that he implemented as Itamar Franco's finance minister to propel him to win the presidency in 1995. Cardoso chose to maintain the Real Plan as the main policy initiative to control inflation and sustain the macroeconomic stability that the Real Plan had created during the Franco administration. In order for the administration to perpetuate the inflation fightin g measures of the Real Plan required that the the administration had to maintain a high exchange rate to the dollar that was accomplished through the use of a crawling peg. Additionally, to maintain the high exchange rate the central bank had to keep interest rates at high levels to attract foreign c apital to offset the decrease in foreign exchange earned by the export sector, due to the current account deficit that the policy had created. This policy was able to survive the 1994 Tequila crisis and the 1997 Asian financial crisis through the preserva tion of high interest rates. However, the collapse of the Russian ruble and the default by the Kremlin on Russia's debt in mid 1998 began to increase doubts over real It was not long before the "Electronic Herd" began a speculative attack on the real The Cardoso administration believed that they would be able to weather this crisis as they had done the Asian financial crisis before it without the need to change their fiscal policy by undertaking needed structural reforms to the economy. Even the IMF's insistence the that Brazilian Central Bank (BCB) would have
138 to stop defending the real with foreign currency reserves, and needed to let the real float did not shake the administration's determination to maintain the Real Plan. iii In an attempt to put an end to doubts over Brazil's economy, Cardoso attempted pass Constitutional amendments through Congress that would reduce the financial burden placed on the federal government. The fear that Brazil's efforts would not be sufficient enough to avoid a financ ial collapse that had the potential to trigger a domino effect on a global scale, led the IMF, World Bank, Bank for International Settlement and the US government extending a $41.5 billion loan package to the Brazilian government to defend the real against a speculative attack. After Cardoso won re election in 1998, he tried to pass a reform package that was part of the conditions of the loan that had been extended to Brazil. However, Cardoso's inability to get all of the reforms passed, combined with a d omestic political crisis signaled the end to the fight to maintain the value of the real In mid January of 1999, the Brazilian government finally allowed the real to float, and the Central Bank to shift its objective to use interest rates at the main too l for controlling inflation in the economy. 6.2.5. The Lula Administration (2003 2010) In 2002, Luis Ignacio Lula da Silva was elected as president of Brazil on his third attempt to contest the presidential elections since the end of the military regime. As mentioned in Chapter 4, in the months running up to the 2002 elections international investors were apprehensive what a win by Lula and his Worker's Party would mean for the nation' s economic policy. This increase apprehensiveness resulted in a large the real depreciating by 40 percent since the beginning of 2002 and increased the cost of external financing for the country ( s ee Figure s 6 1 and 6 2)
139 Figure 6 1 International Markets View of Brazil's Risk ( Source: JP Morgan Emerging Markets Research ) Figure 6 2. US Dollar:Brazilian Real Exchange Rate (Source: Banco Central do Brasil) In a speech on October 28 th 2002, then president elect Lula pledged to continue the economic policies of the Carodoso admi nistration. In previous speeches Lula had USD:BRL Exchange Rate
140 been critical of the Cardoso administration's free market policy, the conditions that the IMF attached to loans to Brazil and his opposition to the push for hemispheric trade bloc, known as the Free Trade Agreemen t of the Americas or FTAA. In this speech, Lula announced: We are going to confront the actual vulnerability of the Brazilian economy, a crucial factor in the financial turbulence of the last months, in a safe way. As we said during our campaign, we arte going to honor all the contracts set up by the government, and we will not take our eyes off controlling inflation. The tough challenge that Brazil faces will need austerity in the use of public money, and also a hard fight against inflation (sic.) iv This speech was able to quell international investors, developed governments and multilateral economic institutions. v Once Lula and his cabinet had settled in at the Pal cio do Planalto in Bras lia, they set to work on convincing international markets of the administration's commitment to maintain the orthodox fiscal and monetary policy that was implemented under the previous administration. The administration sought to do this, in part, by complying with the conditions the IMF had stipulated in 1998 for loan s to Brazil during the speculative attacks on the real The IMF required that the Brazilian government create a primary surplus in 2003 equivalent to 4.25 percent of national gross domestic product (GDP) The administration was so resolved to pursue an orthodox fiscal policy that it not only met the IMF's target of a primary surplus of 4.25 percent of GDP but it surpassed the target, reaching a surplus of 4.7 percent of GDP. vi The administration also was successful in controlling inflation through the us e of interest rates that were set by the Conselho Monetrio Nacional, or National Monetary Counsel. The Conselho Monetrio Nacional was able to control inflation during both the administration's terms in office, a feat that none of the previous administra tions was able to accomplish Another result of
141 Lula's use of orthodox fiscal and monetary policy was that the country's balance of payments position improved as a result of a surge in exports driven by demand for commodities in other emerging markets suc h as China and India. vii Additionally, foreign direct investment in Brazil during Lula's second term increased to more than all privatization of state owned enterprises earned the country during the 1990s. The administration, while successful at controllin g inflation, was unable to avoid the effects that exchange rate fluctuations would have on domestic prices. Yet, the administration sought to take advantage of the trend of high commodities prices through reducing export restrictions and increasing suppor t of the Minist rio do Desenvolvimento, Ind stria e Com rcio Exterior (MDIC Ministry of Development, Industry and Foreign Trade), particularly the Foreign Trade Secretariat (SECEX) The administration opened 52 embassies and 22 consulates around the wor ld with Trade Promotion Offices (SECOM Sector de Promo o Comercial). The SECOMs' mission was to actively aid Brazilian firms find markets for their products and aid them export their products to these markets. The Lula administration also sought to address the country's social problems, and the success that his administration has had at addressing these problems has caught the attention of countries around the world. In 2002, when Lula won the presidency 34.4 p ercent of the population, or 60.2 million people, was living in poverty. In 2003, Lula created the Ministry of Social Development and Fight against Hunger (MDS Ministrio de Desenvolvimento Social e Combate Fome) to reduc e poverty and inequality prom ot e human capital development by improving schooling and health status of children and to reduc e the incidence of malnutrition among the poor segments
142 of the population viii One of the programs implemented by the MDS, Bolsa Familia, has been credited for lifting millions of Brazilians out of poverty and into the middle class. ix B olsa Familia combined four programs that were created by the Cardoso administration into one. 1 The Bolsa Familia 6.2.6. Dilma and Beyond (2010 ?) Brazil still has many reforms to undertake and problems to resolve, particularly on the microeconomic level. x The current President, Dilma Rousseff, is addressing many of the issues that Lula did not get to such as corruption, communications and t ransportation infrastructure as well as investing in research and development. However, Brazil may for once have something to teach the developed nations that dictated what type of policies it could or could not implement. Brazil only briefly suffered an economic slowdown and quickly resumed c onsecutive periods of economic growth, due to the resilience that the experience of hyperinflation and the banking crisis that followed the implementation of the Real Plan in 1995. xi All of this caused the chairman of the US Federal Reserve Board, Ben Bern ake to comment that it might be time for the "US to heed emerging economies." xii 6.3. Foreign Policy Brazilian foreign policy having moved from a neutral position to a more central leadership role in international forums has also served as an additional too l for policy makers to support domestic economic policy decisions. This can be concretely seen in the development and use of Mercosul; the internal restructuring of the Ministerio de Relacoes Exteriores (hereafter referred to as Itamaraty) to reflect the importance of 1 The four programs that were combined to create Bolsa Familia were: 1) Bolsa Escola, an income grant for primary education; 2) Fome Z ero and 3) Bolsa Alimentao, income grants related to nutrition and reduction of hunger ; and 4) Vale Gs, a subsidy for poor households to buy cooking gas.
143 such issues as the environment, regiona l integration and foreign trade and economic development. Simultaneously, the Brazilian government has increase the number of embassies, consulates and trade promotion offices opened across the world a s a means of both preparing Brazilian companies to compete in the new globalized economy and to support the economic changes occurring within the country. Former foreign minister Celso Lafer explains that this change in the nation's foreign policy began b y embodying the "simple and well known teaching: il faut faire la politique de sa gographie" (a country's politics must reflect its geography) before seeking global insertion. xiii Brazil has distinguished itself from other countries in Latin America by not only pursuing active engagement on the global level in international and multilateral for ums asserting itself as one of the most outspoken emerging market countries on a number of issues, but also by becoming one of the central actors in the Latin American regional integration projects. xiv Since the return to civilian rule, Brazil has emerged as a leader both in South America and the region via its pursuit of a foreign policy that is based upon balancing the competing interests of different nations i n order to create joint solutions to problems experienced by all nations. xv According to Hal Brands, "few countries have experienced as remarkable an improvement in their international stature over the past decade as [has] Brazil." xvi The country has incr eased its participation in United Nations peacekeeping missions; has promoted forums for developing nations such as IBSA (India, Brazil and South Africa) and BRIC (Brazil, Russia, China and India); forged economic, technological and military partnerships w ith Russia, China and France; 2 2 See Appendix D for a list of treaties with Russia, China and France in these areas. Perhaps the most striking military and economic agreement is that with China, which is not only Brazil's largest trading
144 campaigned to secure a permanent seat on the UN Security Council (UNSC); 3 developed further economic, infrastructure and political integration amongst South American nations; pursued a leadership role in multilateral institut ions such as the World Bank, IMF, WTO and G 20; and supported the creation of new regional institutions such as the Union of South American Nations (UNASUR), 4 the South American Defense Council (CSD) and the Initiative for the Integration of Region Infrast ructure in South America (IIRSA). xvii In the wake of the "lost decade" of the 1980s, as Latin American countries implemented structural reforms that promoted opening the economy, financial liberalization and privatization during the late 1980s and 1990s, Br azil, like many other countries in the region began to lay the foundations for regional integration projects that partner, overtaking the US in 2009, but al so seems contrary to the country's position on human rights, use of soft power and multilateral diplomatic negotiations. The agreement for Brazil to train Chinese naval aviators and sailors in aircraft carrier operations is enabling China, not onl y to further project its military power abroad, but will increase tensions in the Asia Pacific, more specifically in the South China Sea, where tensions are already running high due to disputes between China, Vietnam and the Phil i p pines (all of whom Brazil has economic and diplomatic ties). However, it is not just the Vietnamese, Filipinos and Taiwanese that are worried about what a Chinese aircraft carrier will mean for the balance of power in the Asia Pacific region. The Indian, Austr alian and Japanese governments are also worried about the implications that a Chinese aircraft carrier and eventual carrier fleet, according to US Defense Department projections (see the Department of Defense's Annual Report to Congress: Milita ry and Security Developments Involving the People's Republic of China 2010), by 2015. According to Denmark, Erickson and Collins, China sees an aircraft carrier as a symbol of China's rising power and even as a right accorded to it due to its statu s as a permanent member of the UNSC China is the only permanent member of the UNSC that does not have an aircraft carrier (see "Should We Be Afraid of China's New Aircraft Carrier?" in Foreign Policy). The Beijing Brazil Naval Axis, the 2008 agreement between Brasilia and Beijing for the Marinha do Brasil (Brazilian Navy) to train 50 Chinese naval officers in aircraft carrier operations, may have unintended future implications for Brazilian foreign policy, as it pictures itself as the champion of soft power. NOTE: The European Commission declared itself as Brazil's largest trading partner in 2009. However, according to the Ministrio do Desenvolvimento, Indstria e Comrcio Exterior Brazil's largest trading partner in US$ terms (f.o.b.) is China followed by the US. 3 According to Puntigliano, the institutionalization of development policies by international organizations (e.g. the UN, OAS, CEPAL, IMF, IDB and World Bank) led to the re alization by Brazilian policymakers that had to search for another way in which it could exert its influence, due to the fact the Brazil was not a military power or be able to use its economic ties to assert itself in global affairs. 4 According to Carlos Tautz, Brazil was "one of the driving forces" behind the creation of UNASUR. See "The Big Challenges of Regional Integration" from the Inter Press Service (www.ipsnews.n et).
145 are in existence today. The first step, taken during the Sarney administration, was the Programa de Integrao e Cooperao Econmica (PICE Program of Economic Cooperation and Intergration), that then Argentine president Alfosn proposed as bilateral economic integration agreement between Brazil and Argentina that later came to include Uruguay. 5 This renewed interest in regional integration established a policy framework that sought to reduce traditional trade barriers that had been installed during the ISI (import industrialization substitution) policy period under the military regimes in order to promote more open and competitive economies for both countries in the post Cold War era. xviii Brazil's South American integration project began with the Economic Integration and Cooperation Program agreement in 19 86 which laid the foundation of the Mercosul agreement that followed in 1991. xix In Celso Amorim's (foreign minister during the Lula administration) opinion, what differentiates Brazil's foreign policy as an emerging power is it s unique characteristic which is very useful in international negotiations: to be able to put itself in someone else's shoes, which is essential if you are looking for a solution." Peter Hakim modifies Amorim's argument by saying that "what distinguishes Brazil's foreign policy is the extraordinarily wide political and ideological spectrum of nations with which it maintains warm, active relations." xx Although Celso Amorim, Marco Aurelio and Lula portray Brazil's ability to "put itself in someone else's shoes" as the key to Brazilian foreign policy, Defense Minister Nelson Jobim expressed what is perhaps a more val id 5 The PICE agreement is not the first regional integration agreement t hat was attempted in South America or the Latin American region. Kubitschek's OPA was the first attempt at a regional integration agreement during the 20th century; however Simon Bolivar's attempt to unite Latin America was the first post indepen dence attempt at integration. Under the direction of CEPAL, Latin American nations formed the LAFTA (Latin American Free Trade Association) in 1960, which 20 years later was succeeded by ALDAI (Latin American Association for Integration).
146 assessment of the nation' s ambitions and policy goals in an interview with Agncia Brasil in 2010 De fense M inister Jobim told Agncia Brasil "[now] is the moment in which it is necessary to be audacious in order to advance! there is no longer any possi bility to demand that Brazil [in its foreign policy] take positions that are contrary to the interests of the country." Peter Hakim echoed the defense minister by asserting that "now is the time to realize the [international] status of Brazil". xxi 6.4. App licability of the Bras lia Consensus to Other Latin American Countries The potential that Zweig saw in Brazil in 1941 was due to the country's vast land size, abundance of natural resources and the fact that it was at peace with all of the ten countries th at it borders. It took Brazil the majority of the 20 th century to create a macroeconomic policy agenda that could maintain economic stability a s well as to open its economy Brazil's ascent since 1985 is the result of Brazilian policymakers willingness to learn from previous policy failur es and their flexi ble approach to policy formation so that they can adapt policies to both the internal and external circumstances However, Brazil rise was not solely due to the emergence of a cohesive macroeconomic p olicy agenda that created and sustained economic stability, the nation's economic policy was closely linked by the foreign policy agenda, one of whose central objectives have been to support the internal economic agenda. This has been done through the pur suit of regional integration projects (Mercosul, IIRSA, FTAA, etc.), becoming more involved in multilateral forums and establishing close relationships with other developing countries, especially in Africa. Other countries in Latin America may not be able to replicate Brazil's size or natural resource wealth, but that is not to say that they cannot diversify their economy and implement policies to enlarge the domestic market. In order for the Brazilian model
147 to work in other countries in the region, count ries must be willing to undergo a period of economic restructuring that will move away from the extraction and/or production of commodities. Some countries, such as Peru, Uruguay and Panama have also been able to implement macroeconomic policies that have not only created economic stability, but have been able to maintain economic growth. This period will have to shift economic policy and investment from the particular sectors in order to develop other sectors of the economy. Due to the recent commodity boom during the past decade (2000 2010) driven by strong demand from other emerging countries, particularly from India and China, has led to an export boom in many Latin American countries, and undergoing significant structural reforms to the economy are p olitically and publically unpopular measures. Brazil like other countries in the region, started off producing raw materials like many other developing nations around the world, and it still produces commodities to export to countries around the world. A s the second chapter showed, Brazil underwent several economic policy periods in which the goal was move away from a largely agrarian economy that produced commodities for export to a an industrialized economy that was able to produce most products for dom estic consumption in Brazil. In the mid 1950s the industrial sector overtook the agricultural sector of the Brazilian economy as the largest contributor to the national gross domestic product. During the recent commodity boom, Brazil's growth was fueled not by the large demand for commodities by India or China, but by domestic demand for Brazilian goods and services. The transformation that the Brazilian economy underwent during the Lula administration is
148 very impressive due to the short time it took th e Brazilian middle class to grow to include more than 50 percent of the population. The socio economic transformation that has occur r ed in Brazil during that past decade has caught the attention of countries both within Latin America and around the world The transformation that has occurred in Brazil has helped the country further develop its domestic market and reduce the importance of the export sector to economic growth. Since the program has created a dual benefit, poverty reduction and a larger cons umer class, other countries in the region have begun to implement programs modeled on Bolsa Familia.
149 APPENDIX A TH E NEO STRUCTURALIST APPROACH TO INFLATION Two camps arose that began to debate the inflationary process in Brazil, its causes and remedies to control inflation. Baer calls the two schools of thought the "orthodox" and "neostructuralists." The orthodox view was championed by economists of the Fundao Getulio Vargas who adopted a classical view of inflation, which see inflation as the result of exorbitant increases in the money supply. 6 In the March 1985 edition of Conjuntura Econmica that the FGV economists stated that inflation was the resut of "excess of liquidity [in the economy] caused by the lack of control of the government budget a nd the accumulation of international reserves F urthermore, "without monetary profligacy, the economy would have grown slightly less, but its basis for sustained growth growth of productivity and reversal of inflation would have guaranteed a more se cure future after 1985." xxii The "neostructuralists," on the other hand, were a group of economists, associated with the Pontifica Universidade Catlica (PUC) in Rio de Janeiro, who criticized the assertion that the restriction of economic activities and re ducing the national deficit would result in a decrease in the rate of inflation in an economy. They argued instead that inflation stems from the monopolist power that firms, unions and the state are able to wield in various sectors of the economy. xxiii In or der to bolster their argument, the neostructuralists analyzed the 1981 1983 recession to identify causes of inflation in Brazil and remedies to resolve the persistent 6 Abel, B ernake and Croushore (2008) state that inflation can be calculated using the following equation: where is the change in the nominal money supply, is the income elasticity of money demand, is the percentage change in real income for one year to t he next and is the increase in the real demand for money. According to this equation, inflation is caused by the growth rate of the nominal money supply subtracted from the growth rate of real money that is the result of an increase in the re al GDP growth of the economy.
150 problem of inflation. Amongst the causes that they identified were the two oil shocks of the 1970s, an increase in world interest rates in the early 1980s, two maxi devalutions of the cruzeiro in 1979 and 1983, a series of natural disasters in Brazil that affected crop production and the 1979 wage law. During the recession of 1981 1983, indus trialized countries used the economic contraction as a means to fight inflation; while in Brazil, the country suffered much higher social costs during this period as well as having much change in the rate of inflation. The PUC group of economists asked wh at made Brazil different? According to their research, the fact that Brazil's economy was indexed meant that inflation had an additional component, called "inertial inflation," which was built into expectations of future inflation. "Inertial inflation" c auses, in effect, a self fulfilling prophecy since it never declines over time, and becomes the basis of inflation for the future time periods. The only solution in the eyes of the neostructuralists was the deindexation of the economy. In order for the d issolution of the inflation index to be cogent, the government had to use "shock therapy" on the economy, whose measures included a monetary correction as well as the establishment of a new currency to substitute the cruzeiro. xxiv
151 APPENDIX B PUBLIC ENTITIE S OF THE FEDERAL GOVERNMENT DISSOLVED BY THE COLLOR PLAN Provisional Measure 151 signed on March 15, 1990 by incoming president Collor, dissolved the following entities of the federal government: Superintendncia do Desenvolvimento da regio Centro Oeste (Sudeco) Superintendncia do Desenvolvimento da regio Sul (Sudesul) Departamento Nacional de Obras e Saneamento (DNOS) Instituto do Acar e do lcool (IAA) Instituto Brasileiro do Caf (IBC) Fundao Nacional de Artes (Funarte) Fundao Nacional de Artes Cnicas (Fundacen) Fundao do Cinema Brasileiro (FCB) Fundao Cultural Palmares (FCP) Fundao Nacional Pr Memria (Pr Memria) Fundao Nacional Pr Leitura (Pr Leitura) Fundao Nacional para Educao de Jovens e Adultos (Educar_ Fundao Museu do Caf Empresa de Portos do Brasil S.A. (Portobrs) Empresa Brasileira de Transportes Urbanos (EBTU) Empresa Brasileira de Assistncia Tcnica e Extenso Rural (Embrater) Companhia Auxiliar de Empresas Elctricas Brasileiras (CAEEB) Banco Nacional de Crdit o Cooperativo S.A. (BNCC) Petrobrs Comrcio Internacional S.A. (Interbrs) Petrobrs Minerao S.A. (Petrominas) Siderurgia Brasileira S.A. (Siderbrs) Distribuidora de Filmes S.A. (Embrafilme) Comapnhia Brasileira de Projetos Industriais (Cobrapi) Compan hia Brasileira de Infra Estrutura Fazendria (Infaz)
152 APPENDIX C CRUZADO PLAN, COLLOR PLAN AND WASHINGTON CONSENSUS Cruzado Plan (Source: Conjuntura Econmica ): Creation of a new currency, the cruzado The "extinction" of the cruzado, with an initial parity of Cr$ 1,000: Cz$ 1. The cruzeiro, Cr$, ceases to be legal tender after one year from the passing of Decree Law 2283 Automatic conversion of all notes, coins and deposits denominated in cruzeiros in the banking system to cruzados Abolition of gener ali z ed monetary corrections, i.e. price indexation Creation of a sliding scale for wages A price freeze on goods, tariffs and services Creation of an interbank market Creation of unemployment benefits for workers Guarantee of all income and savings deposits Strengthening of the national currency against other currencies Collor Plan (Source: Conjuntura Econmica ) : 80% of all deposits, transa c tions and savings accounts that excee d ed Cr$50,00 would be frozen for a period of 18 months. During this tim e these accounts would earn interest at a rate equivalent to the prevailing inflation rate plus an additional 6 percent a year. A new currency, the cruzado novo, was established to replace the cruzado. Cruzados (Cr$) could be exchanged for cruzado novos (NC$) at a rate of Cr$1.00: NC$1.00 A on e time tax on financial transac tions (IOF) was excised on all financial assets, gold and stock transactions as well as withdraws from savings accounts Price and wage freezes with subsequent ad justments based on expected inf l a tion Eliminations of various types of fiscal incentives Immediate indexation of taxes Measures to reduce tax evasion Increase the price of public services Liberalization of the exchange rate Disbandment of various go vernment agencies and an announce ment to lay off 360,000 public sector employees Measures to institute privatization of state owned companies
153 Tenets of the Washington Consensus (Source: Peterson Institute for International Economics): Fiscal Dis cipline. This was in the contex t of a region where almost all th e countries had run large deficit s that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad. Reordering Public Expenditure Priorities. This suggested swit ching expenditure in a a pro poor way, from things like indiscriminate subsidies to basic health and education. Tax Reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates. Liberalizing Interest Rates, i .e. financial liberalization A Competitive Exchange Rate. Trade Liberalization. Liberalization of Inward Foreign Direct Investment. Comprehensive capital account liberalization was not included as it did not command a consensus in Washington Privatizatio n. Since the early 1990s it has been realized that what is important is how privatization is undertaken. The process can be very corrupt and provide a means through which to transfer assets to a privileged elite for a fraction of their actual market value. If done properly it can be beneficial. Deregulation. Reducing trade barriers but not nullifying safety or environmental regulations. Property Rights. Primar ily about provi ding the informal sector with the ability to gain property rights.
154 APPENDIX D FOREIGN MINISTERS OF THE "NEW REPUBLIC" President Foreign Relations Ministers Jos Sarney (1985 1990) Olavo Setbal (Mar. 1985 Mar. 1986) Roberto de Abreu Sodr (Mar. 1986 Jan. 1990) Fernando Collor de Mello (1990 1992) Jos Francisco Rezek (Jan. 1990 Apr. 1992) Celso Lafer (Apr. Oct. 1992) Itamar Franco (1992 1994) Fernando Henrique Cardoso (Oct. 1992 May 1993) Celso Amorim (May 1993 Dec. 1994) Fernando Henrique Cardoso (1995 2002) Luiz Felipe Lampria (Jan. 1995 Jan. 2001) Cepso Loafer (Jan. 2001 Dec. 2002) Dilma Rousseff (2011 2014) Antonio Patriota (Jan. 2011 Present) Source: MRE
155 APPENDIX E IMPORTANT REGIONAL A ND INTERNATIONAL AGR EEMENTS Table E 1. International Agreement to which Brazil is a Signatory Country Name Established/Signatory Tripartite Agreement 1979 Use of Parana River for the generation of hydroelectric power Latin American Integration Association (ALDAI) 1980 Treaty of Montevideo, established ALDAI as the successor to the Latin American Free Trade Association (LAFTA) U.N. Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment 1984 Inter American Convention to Prevent and Punish Torture 1985 Economic Integration and Cooperation Program (PICE) 1986 Brazil Argentina Common Market Treaty 1988 Global System of Trade Preferences among Developing Countries (GSTP) 1989 International Labor Organization Indigenous and Tribal Peoples Convention (Convention 169) 1989 U.N. Convention on the Ri ghts of Children 1989 Agreement of Economic and Technological Cooperation (Brazil China) 1990 Treaty of Asuncion 1991 Established the Common Market of the South Agreement between Argentina and Brazil for the Exclusively Peaceful Use of Nuclear Energy 1991 Quadripartit e Agreement between Argentina, Brazil, ABACC and the IAEA 1991 U.N. Convention on Biological Diversity (RIO 92) 1992 Vienna Declaration and Program of Action 1993 World Conference on Human Rights Treaty for the Prohibition of Nuclear W eapons in Latin America and the Caribbean (Treaty of Tlatelolco) 1994 Inter American Convention Against the International Trafficking of Minors 1994 Treaty of Ouro Preto 1994 Amended the Treaty of Asuncion to establish and institutional structure and allowed associate members Agreement of Trade Related Aspects of Intellectual Property Rights (TRIPS) 1994 Mercosul Bolivia Mercosul Chile 1996 Granted associate member status Agreement for Economic, Technical and Technological Cooperation (Brazil Russia ) 1997
156 Table E 1. Continued Name Established/Signatory Protocol of Ushuaia (Mercosul) 1998 Initiative for the Regional Integration of Infrastructure in South America (IIRSA) 2000 U.N. Convention on the Rights of the Child on the involvement of children in armed conflict 2000 Optional Protocol to Convention on the Rights of the Children U.N. Convention on the Rights of the Child on the sale of children, child prostitution and child pornography 2000 Optional Protocol to Convention on the Rights o f the Children Declaration of the Federative Republic of Brazil and the Russian Federation on Combating Terrorism 2001 Mercosul Andean Community Trade Agreement 2002 Treaty of Olivos 2002 Established a system for addressing disputes between members of Mercosul Mercosul Peru 2003 Granted associate member status Mercosul India Trade Agreement 2004 Mercosul Parliament (Act 02/2004) 2005 Common Market of the South Council Mercosul Colombia Mercosul Venezuela 2006 Granted associate member status Agreement between the Government of the Federative Republic of Brazil and the Government of the Republic of France in relation to Cooperation in Defense and the Statute of Forces 2006 Declaration of Margarita (Constitutive Treaty of UNASUR) 2007 Establis hed the Union of South American Nations (UNASUR) Agreement between the Governments of the Federative Republic of Brazil and the Russian Federation on Technical Military Cooperation 2008 Agreement in the Area of Submarines (Brazil France) 2008 Strategic Partnership between the Federative Republic of Brazil and the Republic if France 2008 Bilateral partnership in international governance, defense, economic, space, sustainable development and education Beijing Brazil Naval Axis 2009 Brazil to train Chinese officers in naval aviation on Brazilian aircraft carrier Sao Paulo Joint Action Plan between the Government of the Federative Republic of Brazil and the Government of the People's Republic of China 2010 2014 2009 Bilateral partnership in various areas in cluding political, economic, agricultural, space cooperation and others Sources: FP, IPRIS, MFA of PRC, MRE, OAS, UN and UNASUR N ote : This is the name that Foreign Policy gave the agreement between the governments of Brazil and China for Brazil to train officers of the People's Liberation Army Navy (PLAN) in naval aviation. See "The Stories You Missed in 2009" from the Special 2009 volume.
157 APPENDIX F INTEGRATION OF REG IONAL INFRASTRUCTURE IN SOUTH AMERICA Table F 1. List of Major Infrastructure Obstacles to IIRSA Type of Infrastructure Problems facing each type of infrastructure Roads Insufficient capacity in some road stretches and congested urban cross roads Crossing of different types of natural barriers (the Andes, big rivers, etc.) Physical problems at border crossings Road Safety Lack of common standards and geometries Poor condition of roadways, signs and hard shoulders due to discontinuous maintenance Delays in solving specific road interruptions caused by natural disasters Railway Network Limitations for the operation of big trains Differences in rail guages and loading gauges Lack of multimodal connections Low speed allowed Low and discontinued investment in this transportation modality Airports Problems regarding insufficient capacity at some terminals Lack of equipment to guarantee operational reliability and safety Ports & Navigable Waterways Correction of critical passages and navigation aides to ensure navigability Lack of multimodal connections Road Transportation Cargo reservation policies forcing cargo transfers Much delay and high costs at border crossings Tax asymmetries Differences in permit requirements Railway Transportation Delays at border crossings Difficulties in the interchange of rolling stock Irregular service Air Transportation Market entry restrictions for specific imports Differences in permit requirements River & Maritime Transportation Cargo reservation policies Drafts leading to an inefficient use of vessels Unbalances in terms of traffic directions Lack of impl e mentation of intermodal transportation to ensure connectivity of waterways Safety rules leading to excessive costs Delays and difficulties in the implementation of river transportation agreements Border Crossings Insufficient infrastructure with accessibility problems Lack of coordination regardin working hours and requirements Blocked accessibility due to a growing number of informal activities, which sometimes pose obstacles to legal trade Long delays and extra costs in the multiple operations at border crossings Delays in ICT investments Information & Communication Technologies Insufficient sectoral infrastructure Limited access to ICTs in rural areas Regulatory differences among countries Energy Deficient energy generation capacity Excessive concentration in specific energy supply sources Deficient energy transportation infrastructure in exporting and importing countries Different pricing of energy resources Source: Project Portfolio IIRSA 2010
158 Figure F 1. Integration and Development Hubs ( Source: IIRSA ) The integration and development hubs are divided into two groups: I reflects existing regional integration arrangements, highly dense population centers, currently have regional trade patterns and institutional apparatus for continued integration, i.e. the Andean Hub and the Mercosul Chile Hub; and II the other that included eight other "emerging" hubs where the is a potential for regional growth based on the private sector in these areas, given that certain infrastructure obstacles are overcome.
159 Figure F 2. Amazon Hub (Source: IIRSA) The Amazon Hub links the countries of Peru, Ecuador, Colombia and Brazil through intermodal transportation connections. This hub is designed with the intention of augmenting the number of connections in the interior of the continent, especially linking the Manaus Industrial Pole to the Pacific Basin. Additionally, it fosters linkages between the different ecosystems of the region the coast, Andes Mountains and Amazon rainforest and river basin within the Hub. IIRSA sees the Hub as a potential mechanism for creating and sustaining development of trade, industrial sector and tourism within the Amazon region. The Hub was created by delineating a region that included the multimodal transportation systems that interconnect t he vast region
160 including ports on the Pacific and Altantic Oceans such as the ports of Buenaventura, Colombia, Esmeraldas, Ecuador, Paita, Peru, Macap, Brazil and Belm, Brazil as well as the in land port of Manaus, Brazil located in the heart of the Amaz on rainforest. Figure F 3. Andean Hub (Source: IIRSA) The Andean Hub links the countries of the northern part of the Andeans mountain range Bolivia, Colombia, Ecuador, Peru and Venezuela. This Hub includes two important north south highways, the Pan American Highway and the Marginal Highway of the Jungle, that run on either side of the Andes. The Pan American
161 Highway runs along the costal side of the Andes mountains, beginning its South American leg in Turbo, Colombia and passing through Ecuador and Peru continuing South to Valaprasio., Chile before crossing over the Andes and continuing on to Buenos Aires, Argentina. The Marginal Highway of the Jungle runs alongside the Andes starting in the plains of Venezuela, crosses the rainforest in Colombia, E cuador and Peru before crossing into Bolivia at the Desaguadero Border Crossing and continuing along Bolivina Route 1 (connects Villazn La Quiaca) to the Argentinian border. Both of these north south corridors connect with the Guianese Shield, Amazon, Per u Brazil Bolivia and Central Interoceanic Hubs and their multimodal transportation connections that link to the interior of the continent, the Caribbean and the Atlantic Ocean. Figure F 4. Capricorn Hub (Source: IIRSA)
162 The Capricorn Hub is located in the area of the Tropic of Capricorn, lying approximately between 20¡S and 30¡S, with important ports on both the Atlantic and Pacific Oceans. The Hub is meant to integrate infrastructure of Argentina, Bolivia, Brazil, Chile and Paraguay due to the limited in frastructure that currently exists linking the five countries. Within this hub that are four regions which have been demarcated: the Atlantic Costal Region (comprise of the states of Rio Grande do Sul, Santa Catarina and Paran, southwestern Mato Grosso an d the meso region of the state of Mato Grosso do Sul), the Northeastern Region (comprised of the northeastern provinces of Argentina and the eastern region of Paraguay), the Northwestern Region (comprising of the northwestern provinces of Argentina, the we stern region of Paraguay and the Bolivian departments of Santa Cruz, Tarija and Potos), and the Pacific Costal Region (comprising of northern Chile). Figure F 5. Guianese Shield Hub (Source: IIRSA)
163 The Guianese Shield encompasses the northern arc of B razil (the states of Amap, Roraima, Amazonas and Par), Guayana, Suriname and the eastern region of Venezuela (the states of Anzotegui, Bolvar, Delta Amacuro, the Capital District, Nueva Esparta, Gurico, Miranda, Monagas, Sucre and Vargas). This Hub i s envisioned as connecting the Brazilian Amazon to the Caribbean with the hope that the area of influence of the Guianese Shield Hub will allow for the economic development of various industrial sectors due to the creation of the necessary infrastructure f or these sectors to flourish. Figure F 6. Paraguay Paran Waterway Hub (Source: IIRSA) The Paraguay Paran Waterway Hub included the areas of Argentina, Bolivia, Brazil, Paraguay and Uruguay, particularly the areas that around the Paraguay, Paran, Urug uay and Tiet rivers which make up the main rivers of the La Plata River basin.
164 This hub will also provide critical links to the ocean for the landlocked countries of Bolivia and Paraguay. The first three rivers (Paraguay, Paran and Uruguay) all flow nor th to south and form the borders of Brazil and Bolivia, Brazil and Paraguay, Paraguay and Argentina, Argentina and Brazil, and Uruguay and Brazil; while the Tiet river flows east to west from the Paran river across the state of So Paulo ending in a lake created by the Jupa dam. For a better geographical reference of the four rivers see Map 7 below. Within the Paraguay Paran Waterway Hub and its area of influence railway networks, highways and other modes of transport link it with the Central Interocean ic, Capricorn, and MERCOSUR Chile Hubs. Figure F 7. La Plata River Basin (Source: Wikipedia)
165 Figure F 8. Central Interoceanic Hub (Source: IIRSA) The Central Interoceanic Hub encompasses the transportation infrastructure in Bolivia, Brazil, Chile, Paraguay and Peru that links the Pacific and Atlantic oceans and whose improvement would significantly reduce transportations costs of goods traveling fro m these countries to ports on either of the oceans. The area that falls under the Central Interoceanic Hub's influence runs approximately from 12¡S to 22¡S. The territory that falls under the Hub's influence are the follows: the Bolivian departments of B eni, La Paz, Oruro, Potos, Tarija, Cochabamba, Chuquisaca, and Santa Cruz; the Brazilian states of Mato Grosso, Mato Grosso do Sul, Rio de Janeiro, So Paulo, and Paran; the regions of Tarapac, Arica and Parinacota, and the province of El Loa in the reg ion of Antofagasta in Chile; Paraguay; and the Peruvian departmentes of Arequipa, Moquegua, Puno and Tacna.
166 Figure F 9. Mercosul Chile Hub (Source: IIRSA) The Mercosul Chile Hub includes the main economic centers and key ports of Argentina, Brazil, Chil e, Paraguay and Uruguay. The area of influence of the Hub encompasses Chile's Metropolitan Region and Regions IV, V, VI, and VII (Coquimbo, Valparaso, Libertador General Bernardo O'Higgins, and Maule, respectively); the Argentine provinces of Mendoza, Sa n Juan, La Rioja, San Luis, Crdoba, La Pampa, Santa Fe, Salta, Buenos Aires, Entre Ros, Corrientes, and Misiones; the Brazilian states of Rio Grande do Sul, Santa Catarina, Paran, So Paulo, and Minas Gerais; Paraguay's Eastern Region, and the entire Ur uguayan territory.
167 Figure F 10 Peru Brazil Bolivia Hub (Source: IIRSA) The Peru Brazil Bolivia Hub links southern Peru, the Amazonia states of Acre and Rondnia in Brazil and Bolivia. The area will develop infrastructure projects to link the hinterland states of Acre and Rondnia, areas of Peru east of the Andes and the Ande an regions of Bolivia to the Pacific Ocean. The Bolivian departments of Beni, La Paz and Pando, the Brazilian states of Acre and Rondnia and the Peruvian departments of Apurimac, Arequipa, Cusco, Madre de Dios, Moquegua, Puno and Tacna comprise this Hub.
168 Figure F 1 1 Southern Hub (Source: IIRSA) The Southern Hub covers the territory that joins the Atlantic and Pacific coasts of Argentina and Chile between 37S and 43 S, approximately, and includes the important ports of Baha Blanca and San Antonio Este in Argentina and the ports of Concepcin and Puerto Mont in Chile.
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181 BIOGRAPHICAL SKETCH Zachary Cohen attended the University of Georgia in 2003 and graduated in 2008 with degrees in e conomics and Latin American and Caribbean s tudies. While at the University of Georgia he participated on a Fund for the Improvement of Post Second Education exchange program to the Universidade Federal de Viosa in Viosa, Minas Gerias, Brazil. At the University of Georgia he participated in the Brazilian Student Association, UGA Cycling Club, UGA Rock Climbing Wall and Portuguese Round Tab le. After graduating from the University of Georgia he pursued his Associate in Risk Management Certification. In January 2009, he began working as an intern at the Consulate General of Brazil in Atlanta Georgia. In August 2009, he began his graduate s tudies at the University of Florida in the Latin American Studies program specializing in the Latin American Business Environment. While at the University of Florida he participated on a study tour to Argentina and was selected by the United States Depart ment of State to work as an intern in the political section of the U.S. Embassy in Braslia.
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186 Lampreia, Luiz Felipe "A poltica externa do governo FHC: continuidade e renovao, Revista Brasileiro de Poltica Internacional 1998 Vol. 42, No. 2, 5 17. xxiv Abdenur, Roberto "A poltica externa brasileira e o sentimento de excluso'" in Fonseca Jr., Gelsonn and Srgio Henrique Nabuco Castro, eds. Temas de poltica externa brasileira II, vol. 1 So Paulo: Paz e Terra, 1994, 3 xxv Vigevani and Cepaluni "Brazilian Foreign Policy in the Cardoso Era in Brazilian Foreign Policy in Changing Times 53 80. xxvi Mercosul "Treaty of Asuncion Mercosul 1991 http://www.mercosur.int/ (accessed Aug. 1, 2011). xxvii Inter American Development Bank and the Institute for the Integration of Latin A merica and the Caribbean "DataIntal Inter American Development Bank http:// www.iadb.org/intal (accessed Aug. 1, 2011). xxviii Devlin, Robert, Antoni Estevadeordal, Paolo Giordano, Josefina Monteagudo and Rul Saez "Macroeconomic Stabiliy, Trade and Integration Integration and Trade Buenos Aires: Institute for the Integration o f Latin America and the Caribbean, January April 2001, Vol. 5, No. 13 35 96.; and Gruben, William C. and John H. Welch "Banking and Currency Crisis and Recovery: Brazil's Turnaround of 1999." in Economic and Financial Review (Dallas: Federal Reserve Ba nk of Dallas) Fourth Quarter 2001 12 23. xxix Braslia Communique. The Declaration of the Presidents of South America, Braslia, September 1, 2000. International Declarations, Comunidad Andina http://www.comunidadandina.org/ (accessed Aug. 1, 2011) ; and Devlin, et. al. "Macroeconomic Stabiliy, Trade and Integration Integration and Trade 35 96. xxx Burges, "The Economic Dimension," in Brazilian Foreign Policy after the Cold War 92 124. xxxi Burges, Sean, "The Security Dimension," in Brazilian Foreign Policy after the Cold War 125 157. xxxii Braslia Communique The Declaration of the Presidents of South America, Braslia, September 1, 2000. xxxiii Initiative for the Integration of Regional Infrastr ucture in South America "Indicative Territorial Planning: Project Portfolio IIRSA 2010 IIRSA http://iirsa.org (accessed Aug. 1, 2011). xxxiv Ibid. xxxv B rgamo, Luis Ricardo et al., "Veja Especial Cidades M dias," Veja September 2010, 77 113. xxxvi Blustein "Stumbling Out in The Chastening 337 370. i Brandimarte, Walter "Brazil Olympics cherry on cake' for stocks," Reuters, http://www.reut ers.com/article/newsOne/idUKTRE5916HI20091002 (accessed Oct. 2, 2009).; Smith, Geri "Brazil's Coming Reboud," Business Week, http://www.reuters.com/article/newsOne/idUKTRE5916H I20091002 (accessed Oct. 2, 2009).; and Economist Intelligence Unit ViewsWire "Late in, First out," Economist Intelligence Unit, http://www.economist.com/agenda/dis playstory.cfm?story_id=14442343 (accessed Oct. 1, 2009). ii Partido dos Trabalhadores "Programa de Governo 2002 Coligao Lula Presidente Resolues de Encontros e Congressos & Programas de Governo Partido dos Trabalhadores http://www.fpabramo.org.br (accessed Jun. 10, 2011). iii Baer The Brazilian Economy 163 168. iv Herz, Mnica "Panel II The Challenges of Mondernization: The Domestic Debate on the Future of Brazilian Foreign Policy New Directions in Brazilian Foreign Policy Conference Woodrow Wilson International Center for Scholars, Brazil Institute Washington, DC Sept. 28, 2007. v Amorim, Celso "Brazilian Foreign Policy under President Lula (2003 2010): an overview Revista Brasileiro de Poltica Internacional Braslia: Insituto Brasileiro de Relaes Internacionais 2010, Vol. 43, No. Special Edition 214 240. vi Zakaria, Fareed "Step up to the Plate: Rising Powers need to act like powers, Sep. 25, 2010 Newsweek http://www.thedailybeast.com/newsweek (accessed Sep. 3, 2011). vii Purushothaman, Roopa and Dominic Wilson, "Dreaming with BRICs: The Path to 2050," (working paper, Global Economics Papers, Go ldman Sachs Economic Research, Goldman Sachs, New York, 2003), available at: http://www2.goldmansachs.com/ideas/brics/brics dream.html (accessed Sept. 1, 2009). viii Ministry of Financ e, "Elevao dos investimentos: Higher investments," in Brazil: Sustainable Economy April 2008, No. 2, 24 25.
187 ix Partido dos Trabalhadores "Programa de Governo 2002 Coligao Lula Presidente Resolues de Encontros e Congressos & Programas de Governo Partido dos Trabalhadores http://www.fpabramo.org.br (accessed Jun 10, 2011). x Ibid xi Baer The Brazilian Economy 163 168. xii Partido dos Trabalhadores "Programa de Governo 2002 Coligao Lula Presidente xiii Economist "Spreading risk Is Brazil about to cause the next emerging market eruption? The Economist http://www.economist.com/node/1205374 (accessed Jun. 15, 2011) ; Economist "South America's dominoes, The Economist http://www.economist.com/node/1265006 (accessed Jun. 15, 2011). xiv Amann, Edmund, "Brazil's Economy Under Lula: The dawn of a new era? World Economics Oct. Dec. 2005, Vol. 6, No. 4. 149 169.; and Pinheiro, Armando Castelar "Brazil 2015: A Reform Agenda Seminar at the Inter American Development Bank, Washington. Oct. 4, 2005. xv Baer The Brazilian Economy 163 168. xvi Amann, Edmund "Brazil's Economy Under Lula : The dawn of a new era? World Economics Oct. Dec. 2005, Vol. 6, No. 4, 149 169. xvii Ibid. xviii Baer, The Brazilian Economy, 163 168. xix Amann, "Brazil's Economy Under Lula: The dawn of a new era? 149 169. xx Haddad, Mnica A., "A Spatial Analysis of Bolsa Familia: Is Allocation Targeting the Needy? In Brazil under Lula: Economy, Politics and Society under the Worker President ed. Joseph L. Love and Werner Baer (New York: Palgrave Macmillan, 2009) 187 205.; and Partido dos Trabalhadores "Programa de Governo 2002 Coligao Lula Presidente." xxi Haddad, Mnica A. "A Spatial Analysis of Bolsa Familia: Is Allocation Targeting the Needy? 187 205.; and World Bank, "Second Bolsa Familia ," World Bank Project Overview, http://www.worldbank.org (accessed Sep. 10, 2011). xxii Prideaux, John, "A better today," Nov. 14, 2009, The Economist 16. xxiii Osrio, Rafael Guerreiro, Rafael Perez Ribas and Fabio Veras Soares, "Evaluating the Impact of Brazil's Bolsa Famlia: Cash Transfer Programmes in Comparative Perspective," IPCevaluationnote Dec. 2007, No. 1, http://www.undp povertycentre.org (accessed Sep. 10, 2011). xxiv Osrio, Rafael Guerreiro, Fernando Gaiger Silveira, Sergei Soares and Pedro Herculano G. Ferreira de Souza, "Os Impactos dos Benefcio do Programa Bolsa Famlia sobre a Desigualdade e a Pobreza," in Bolsa Familia 2003 2010: avaos e desafios, Vol. 2 ed Jorge Abraho de Castro and Lcia Modesto (Braslia: Instituto de Pesquisa Econmica Aplicada, 2010) 27 52. xxv Economist. "How to get children out of jobs and into school," Jul. 29, 2010, The Economist http://www.economist.com/node/16690887 (accessed Sep. 10, 2011). xxvi Ministrio do Desenvolvimento Social e Combate Fome, "Sumrio Executivo: Availao de Impacto do Progama Bolsa Famlia," Ministrio do Desenvol vimento Social e Combate Fome, http://www.mds.gov.br (accessed Sep. 5, 2011). xxvii Economist "How to get children out of jobs a nd into school," Jul. 29, 2010, The Economist http://www.economist.com/ node/16690887 (accessed Sep. 5, 2011) ; Economist, "Lula's Legacy," Sep. 30, 2010, The Economist http://www.economist.com/node/17147828 (accessed Sep. 5, 2011).; and "Ministrio do Desenvolvimento Social e Combate Fome, "Sumrio Executivo: Availao de Impacto do Progama Bolsa Famlia http://www.mds.gov.br (accessed Sep. 5, 2011) xxviii Economist "How to get children out of jobs and into school," Jul. 29, 2010, The Economist http://www.economist.com/node/16690887 (accessed Sep. 5, 2011). ; and Economist, "Lula's Legacy," Sep. 30, 2010 The Economist http ://www.economist.com/node/17147828 (accessed Sep. 5, 2011) xxix Ibid. ; Layton, Matthew L., "Quem se Beneficia do Bolsa Famlia?" Perspectivas a partir do Barmetro das Amricas, 2010, No 47., htt p://www.vanderbilt.edu/lapop/insights.php (a ccessed Sep. 10, 2011). xxx Osrio, Rafael Guerreiro, Rafael Perez Ribas and Fabio Veras Soares, "Evaluating the Impact of Brazil's Bolsa Famlia: Cash Transfer Programmes in Comparative Perspective,"
188 IPCevaluationnote Dec. 2007, No. 1, http://www.undp povertycentre.org (accessed Sep. 15, 2011). xxxi Barros, Ricardo Paes de, Mirela de Carvalho, Samuel Franco and Rosane Mendoa, "A Focalizao do Program a Bolsa Famlia em Perspective Comparada," in Bolsa Familia 2003 2010: avaos e desafios, Vol. 2, ed. Jorge Abraho de Castro and Lcia Modesto (Braslia: Instituto de Pesquisa Econmica Aplicada, 2010) 110 123.; and Teixeira, Clarissa Gondim, "Anlisa d a Heterogenidade do Programa Bolsa Famlia na Oferta de Trabalho dos Homens e das Mulheres," in Bolsa Familia 2003 2010: avaos e desafios, Vol. 2 ed. Jorge Abraho de Castro and Lcia Modesto (Braslia: Instituto de Pesquisa Econmica Aplicada, 2010) 8 8 109. xxxii Nicacio, Adriana, "A Classe C vai ao Paraso," Aug. 25, 2010, Isto 48 52.; Agostini, Renata and Carolina Meyer, "A Classe C Cai na Rede," Oct. 20, 2010, Exame 35 45.; and Segalla, Amauri and Luiza Villmama, "A Gerao do Bem Estar," Aug. 25 2010, Isto 42 47. xxxiii McCoy, Terry L ., "Brazil's Politica l Economy and Strategic Culture, Paper presented at Brazil Strategic Culture Workshop of the Applied Research Center of Florida International University, Miami, FL, Oct. 2009. xxxiv Sweig, Julia E "A New Global Player: Brazil's Far Flug Agenda Foreign Affairs November/December 2010. xxxv Centro de Polticas Sociais "A Nova Classe Mdia Centro de Polticas Sociais Instituto Brasileiro de Economia, Fundal Getulio Vargas Rio de Janeiro: FGV/IBRE, 2008.; and Folha de So Paulo "Classe C a nica que continua a crescer, aponta FGV, Folha de So Paulo www1.folha.uol.com.br/poder/935502 classe c e a unica que continua a crescer aponta fgv.shtml (accessed Jul. 5, 2011). xxxvi Burges "Continuity and Change during the first Lula Presidency in Brazilian Foreign Policy after the Cold War 158 184. xxxvii Ibid.; Herz, Mnica "Panel II The Chal lenges of Mondernization: The Domestic Debate on the Future of Brazilian Foreign Policy New Directions in Brazilian Foreign Policy Conference. W ashington, DC Sept. 28, 2007.; Sweig, Julia E., "A New Global Player: Brazil's Far Flug Agenda Foreign Affairs November/December 2010.; and Vigevani & Cepaluni, "Lula's Foreign Policy and th e Quest for Autonomy through Diversification in Brazilian Foreign Policy in Changing Times 81 100. xxxviii Almeida, Pedro Roberto de, "Uma poltica externa engajad a: a diplomacia do governo Lula, Revista Brasileiro de Poltica Internacional Braslia: Insi tuto Brasileiro de Relaes Internacionais 2004, Vol. 24, No. 1 162 184.; Almeida, Pedro Roberto de "Polticas deIntegrao Regional no Governo Lula Programa de Estudios: Intergracin Regional, Working Paper No. 11, Buenos Aires: Centro Argentino de Estudios Internacionales, Dec. 12. 2005.; and Vigevani & Cepaluni "Lula's Foreign Policy and the Quest for Autonomy through Diversification 81 100. xxxix Patriota, Amb. Antonio Aguilar, "Panel I Projection of Brazil's Global Interests New Directions in Braz ilian Foreign Policy Conference, Woodrow Wilson International Center for Scholars, Brazil Institute, Washington, DC, Sep. 28, 2007. xl Amorim, Celso "Brazilian Foreign Policy under President Lula (2003 2010): an overview Revista Brasileiro de Poltica Internacional Braslia: Insituto Brasil eiro de Relaes Internacionais, 2010, Vol. 43, No. Special Edition 214 240.; and Vigevani & Cepaluni "Lula's Foreign Policy and the Quest for A utonomy through Diversification, 87. xli Vigevani & Cepaluni "Lula's Foreign Policy and the Quest for Autonomy through Diversification 87. xlii Ibid. xliii Couto, Leandro Freitas "Poltica externa brasileira para a Amrica do Sul: As diferenas entre Cardoso e Lula Civitas Revista de Cincias Sociais Po rto Alegre: Editora Universitria da Pontifcia Universidad e Catlica do Rio Grande do Sul, Jan Abr. 2010, Vol. 10, No. 1 23 44. xliv Amorim, Celso "Brazilian Foreign Policy under President Lula (2003 2010): an overview Revista Brasileiro de Poltica Internacional 214 240. xlv Herz, Mnica. "Panel II The Challenges of Mondernization: The Domestic Debate on the Future of Brazilian Foreign Policy, New Directions in Braz ilian Foreign Policy Conference, Washington, DC. Sept. 28, 2007. xlvi Mercosul, "Protocolo de Ushuaia sobre Compromisso Democrti co no Mercosul, Bolvia e Chile, Mercosul. http://www.mercosul.gov.br/tratados e protocolos/protocolo de ushuaia 1/ (accessed
189 Sept. 5, 2011). xlvii Burges "Leadership in Brazilian Foreign Policy ," 43 63.; and Burges "The Economic Dimension, in Brazilian Foreign Policy after the Cold War 92 124. xlviii Segurana e Sade do Trabalho "Clipping Negociaes Internacionas, Quinta feira, 24 de Fevereiro de 2005 Segurana e Sade do Trabalho http://www.sesi.org.br/portal/main.jsp (accessed Sept. 5, 2011). xlix Burges "Leadership in Brazilian Foreign Policy 43 63 l BBC News "Viewpoint: Brazil's Increasing International Presence BBC http://www.bbc.co.uk/news/10146223 (accessed Sept. 5, 2011).; and Agncia Brasileira de Cooperao "Projetos Cooperao Sul Sul Agncia Brasileira de Cooperao. http://www.abc.gov.br/projetos/cooperacaoPrestada.a sp (accessed Sep. 5, 2011) li Economist "Speak softly and carry a blank cheque The Economist http://www.economist.com/node/16592455 (accessed Sept. 15, 2011) ; Wired Brazil to Help Africa Beat AIDS, Wired http://www.wired.com/techbiz/media/news/2003/03/58274 (accessed Sep. 15, 2011).; Glasser, Susan, "The Soft Power Power, Foreign Policy Dec. 2010. http://www.foreignpolicy.com/articles/2010/11/29/the_soft_power_power (accessed Jan. 10, 2011).; and Lustig, Robert "Brazil emerges as a leading exponent of soft power ,' BBC Mar. 2010. http://news.bbc.co.uk/2/hi/americas/8580560.stm (accessed Nov. 15, 2010). lii Barrionuevo, Alexi and Ginger Thompson "Brazil's Iran Diplomacy Worries U.S. Officials The New York Times http://www.nytimes.com/2010/05/15/world/americas/15lula.html (accessed May 17, 2010).; BBC News, "Nuclear fuel declaration by Iran, Turkey and Brazil BBC http://news.bbc.co.uk/2/hi/middle_east/8686728.stm (acc essed May 17, 2010).; Economist, "An Iranian banana skin, The Economist http://www.economist.com/node/16377307 (accessed Jul. 18, 2010).; Reuters "Factbox Text of lett er on Iran on nuclear fuel swap, Reuters http://in.reuters.com/article/201 0/05/24/idINIndia 48751920100524 (accessed May 25, 2010).; and Sweig, Julia E "A New Global Player ," Foreign Affairs http://www.foreignaffairs.com/articles/668 68/julia e sweig/a new global player (accessed Nov. 15, 2010); liii Amorim "Brazil's Fore ign Policy under President Lula, Brasileiro de Poltica Internacional 2010, Vol. 43, No. Special Edition 214 240. liv Burges "Continuity and Change d uring the firs t Lula Presidency, in Brazilian Foreign Policy after the Cold War 158 184 lv IBSA "The India Bra zil South Africa Dialogue Forum," IBSA, http://www.ibsa trilateral.org (accessed Sep. 15, 2011). lvi IBSA "IBSA Fund, IBSA http://ibsa trilateral.org (accessed Sep. 15, 2011) lvii IBSA "Social Development Strategies A paper from the India Brazil South Africa Dialogue Forum IBSA http://ibsa trilateral.org/ (acce ssed Sep. 16, 2011).; and IBSA, "Future of Agricultural Co operation in India, Brazil and South Africa (IBSA) ," IBSA, http://ibsa trilateral.org (accessed Sep. 16, 2011). lviii Ibid lix Amorim. "Brazil's Foreign Poli cy under President Lula." Brasileiro de Poltica Internacional 2010, Vol. 43, No. Special Edition. pp. 214 240.; EMBRAPA, "Transferncia de Tecnologia e Desenvolvimento Social Empresa Brasileira de Pesquisa Agropecuria. http://www.embrapa.br/kw_storage/keyword.2007 06 04.5707907136 (accessed Sep. 2011). ; Martins, Luciano "O future que brota a Angola, Odebrecht Informa Online, http://www.odebrechtonline.com.br/materias/00501 00600/549/ (accessed Sep. 15, 2011).; and Wired, Brazil to Help Africa Beat AIDS, Wired http://www.wired.com/techbiz/media/news/2003/03/58274 (accessed Sep. 15, 2011).; lx Agncia Brasileira de Cooperao. "Projetos Cooperao Sul Sul." Agncia Brasileira de Cooperao. http://www.abc.gov.br/projetos/cooperacaoPrestada.asp (accessed Sep. 15, 2011); a nd EMBRAPA, "Transferncia de Tecnologia e Desenvolvimento Social Empresa Brasileira de Pesquisa Agropecuria http://www.embrapa.br/kw_storage/keyword.2007 06 04.5707907136 (accessed Sep. 15, 2011). lxi Econ omist, "Speak softly and carry a blank cheque, The Economist http://www.economist.com/node/16592455 (accessed Sep. 15, 2011).
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