[OPE-L:5704] Real under attack

Fri, 7 Nov 1997 17:38:40 -0500 (EST)

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Dear all,

Still on the subject of the Real plan in Brazil-

(A) Alejandro raises the issue of the regional impact of a crisis in Brazil.
This is true. If Brazil devalues, Argentina's stabilisation plan goes under;
there is no question about that. Argentina is heavily dependent on trade with
Brazil, and the Cardoso government has more than once bailed out Menem, that
gentleman. So the US and international agencies would quickly intervene. The
impact would be, in my opinion, to accelerate the trend towards fiscal
balance on the basis of a reduced an uneven tax burden, privatisation,
deregulation, etc. A programme designed to protect the rich and beat down the
poor, even more than the current stabilisation plan.

(B) Paul C. has asked what alternative policies may be adopted in that

I find it very difficult to identify a set of alternative policies; perhaps
other list members can help shed light on this issue. What seems to be true
is that:

1- The attempt to maintain a strong currency as the means to increase
national competitivity is extremely costly, and results tend to appear only
very late, if at all. The clearest example is the 'Franc fort' policy being
followed since the early 1980s. Consistent industrial policies are a much
more persuasive alternative.

2- The attempt to maintain a strong currency as the means to reduce inflation
is also very costly, especially when accompanied by context of current and
capital account liberalisation. If liberalisation is inevitable (which is a
political issue, after all, and depends on the balance of class forces within
the country and abroad), it is clearly better to do it slowly and in an
organised manner, with sufficient domestic planning and careful monitoring of
structural imbalances. As far as capital account liberalisation is concerned,
the Chilean route (where short-term capital inflows are discouraged through
compulsory deposits in the central bank) is probably the best alternative.

3- The only remaining arguments for maintaining a strong currency is to
cheapen imports and break inflationary memory. These are two separate issues.
Imports may cheapen the cost of industrial inputs and dilute the
concentration of many sectors in the Brazilian economy; but this cannot be
taken too far, otherwise whole sectors may be wasted (such as textiles and
toys, that have been devastated in Brazil). Inflationary memory and
widespread indexation are a more delicate problem, but the devaluation of the
currency should not be seen as the cause of inflation; it is essentially a
response to other problems.

In this sense, if the left wants an electorally viable economic programme, I
think it should include:

a) industrial policy, credit lines for sectoral development, etc,
b) reduction in interest rates and faster devaluation of the currency,
c) increase in taxation, especially of capital gains and large landholdings,
d) massive investment in education and health (this is cheap stuff, we all
know that; it's a matter of political will),
e) firm, sustained, and pre-announced increases in the minimum wage, to raise
it from around US$80/month to much higher levels within 4-5 years (this has
to be done before the next round of executive elections),
f) suspension of additional trade and financial liberalisation, to preserve
the necessary tools for economic policy,
g) suspension of the privatisation programme, at least until a regulatory
framework has been legislated, in order to prevent the transformation of
state-owned monopolies into private ones.

I think this gives the flavour of what I think can be put to the electorate,
and perhaps win some votes. Of course, support for such a social democratic,
reformist programme is problematic for many of us (myself included). It
presumes that the left can take over the state and use its instruments for
positive ends, presumes that more employment (that is, more surplus value) is
good, etc.

I'd like to hear the opinion of other people on this.