[OPE-L:5713] Real under attack

Thu, 13 Nov 1997 16:49:07 -0500 (EST)

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In a recent message, Duncan raises several important questions. I don't have
answers to all of them, but hope this message will contribute to the debate.

1- How the recipients of credit would be chosen, and can the choice be
insulated from the pressures of the rich:

The choice should be based on the priorities determined by the targets of
industrial policy. In this sense, there is some degree of openess and
political control over the funds. This does not mean that the process is
immune from pressures from the rich, because whatever is done with the money,
most of it will become capital in the hands of the rich. What we can hope to
do is favour one lot rather than the other, hoping for better results in
terms of income distribution, exports, technological development, growth
prospects, etc.

2- Faster devaluation and the possibility of inflation:

There is a fine line here. The Real appreciated considerably during 1994,
because of the high domestic interest rates, and has not lost all it gained
since then (it's overvalued by around 20% against its mid-1994 levels).
Domestic inflation is still 2-3 times higher than in the US, and devaluation
is only starting to reflect this. The effect has been substantial gains by
financial interests, with a severe industrial crisis in many different
sectors (which will only get worse with the demand restrictions recently
imposed by the government). I hope there is some space to devalue without
igniting widespread indexation against the exchange rate, but no-one will
know until it's done.

3- Higher taxes and capital flight:

This is a serious problem. But there is one aspect of the fiscal crisis that
is worse than the possibility of capital flight; it's the political inability
of the government to tax the rich. Presumably the victory of a left
presidential canditate would mean that there would be support for such
measures, and they may become more palatable. Yet the rich may still take
their money out of the country. If we want to avoid the worst excesses, a set
of measures including non-punitive taxation (relative to other countries),
some control over international financial operations, and taxation of capital
outflows may help. There is not much else that can be done, but it's got to
be tried: it's time to broaden the tax base upwards. The truth is that the
rich have never paid taxes in Brazil.

4- The funding of health and education and their provision:

Both health and education need a lot more resources, and resources need to be
better spent. This will have to be provided through taxation; there is no
alternative if we want to preserve universal access. Some cities have adopted
forms of health provision based on the Cuban model, and it's a tremendous
success: low cost preventive medicine works (it works better if people have a
bit of money to buy food and take care of themselves; but that's another
story). This is one side of the problem. The other side is how they should be
provided. I don't know what is the ideal split between central and local
government funding, and the system probably could do with more
decentralisation. This is an interesting suggestion.

5- The impact of the minimum wage on unemployment:

I don't know of any studies, but am sure they exist. Maybe our friends in
Brazil can help.

6- Suspension of trade and financial liberalisation:

The record of state-owned monopolies in Brazil is mixed. When they were
funded properly, some large companies such as the oil monopoly and the
telecoms company provided a decent if not brilliant service. However, they
were used as policy tools during the debt crisis - forced to get indebted
abroad to help close the BP, and so on, and their funds were cut to help
reduce the government deficit. Performance deteriorated as a result. On top
of this, the Brazilian state is increasingly rotten from the inside because
of corruption. A return to the situation in the 1970s is not an option. But
neither is the sale of these companies to the highest bidder, in exchange for
what is known in Brazil as 'rotten money' (virtually valueless bonds and
government papers), or dollars to close the BP. This does not guarantee
performance in the long-run. As I said in a previous message, I'm not against
privatisation in principle, but there must be clear performance guidelines
and mechanisms for regulation and control.

The partial reversion of trade and financial liberalisation will not
necessarily lead to a return to ISI. If coupled with a sensible industrial
policy, they may help industry stand on its own feet. No idealism here - but
Brazil (and other Third World countries) cannot hope to prosper by following
IMF/WB advice rather than First World practice. Free trade and finance are
bad for their long-term prospects.

To conclude: the left in Brazil works under very tight constraints. If it
were to elect the president, it would be extremely difficult to draw a
consistent set of policies that would lead to better income distribution,
higher employment, a sustainable fiscal situation, low inflation and a
sustainable BP. Maybe it cannot be done. Sorry about the negative tone. I
hope other people will come up with a more upbeat message.