"Times are going to get tough around here . . . you're going to have more strikes this year . . . more student demos," U.S. Ambassador to Brazil Langhorne A. Motley predicted in Sao Paulo last month as he considered the impact of the debt crisis on its economy.
At the time, Motley said he did not believe that high unemployment and the deepening recession would lead to "massive social disorder." As a Brazilian put it during a recent visit by this reporter, "the capacity of people for accepting unemployment is incredible."
But this week's riots in Sao Paulo, capital of Brazil's most populous and important state, have shown just how harsh the consequences for developing nations can be when foreign banks stop wanting to lend them the money they have relied on in the past to keep growing.
Brazil's third year of recession is the result of tight money, government spending cuts and tax increases designed to woo back the overseas bankers who took flight last summer. The austere government policies were approved by the International Monetary Fund as part of a financial rescue package in which the IMF lent Brazil some of the money it needed and pushed commercial bankers to lend it more money and stretch out its debt.
Many government critics in Brazil believe, however, that the IMF medicine is too severe and cannot cure the nation's debt crisis. "This debt problem is not just a Brazilian problem," said Sao Paulo industrialist Luis Eulalaio Bueno Vidigal. Other Latin American nations with debts that they can scarcely manage include Mexico, Argentina, Peru, Chile and Venezuela. In addition, many of Eastern Europe's "socialist countries . . . are broke," Vidigal said. Even some Western European nations are finding it difficult to keep paying their way.
The Brazilian debt crisis was triggered by the sudden halt in foreign lending after Mexico came close to bankruptcy. But the groundwork for trouble was laid in the previous years of borrowing.
Brazil, along with many other nations, borrowed from eager commercial bankers in the United States and elsewhere to keep on growing after the oil price rise of 1973. When the second oil crisis hit in 1979, followed by a huge rise in U.S. interest rates and a deep world recession, the nation was forced to continue borrowing simply to pay the rising interest costs.
Some Brazilians argue that it does not make sense to try to solve Brazil's crisis through purely national solutions--or pushing exports while squeezing the economy in order to cut imports. These policies will hold down Brazilian growth and, if duplicated in all debtor nations, will depress the world economy, they argue.
But why should the United States and others pay for the mistakes of the banks and Third World countries?
There are two different answers given by Brazilians to this.
One is that their problems are not just of their own making. "It was an error" to borrow so much, said Sao Paulo economist Paul Singer, adding that "if Brazil was the only one now in trouble , you could blame it more." The fact that others are in trouble, too, suggests that there is more at fault than domestic Brazilian policy.
The second answer is that the United States and other industrialized nations would be hurt by a banking collapse--triggered by Third World debt problems--or by an economic collapse in the debtor nations. It is, therefore, in these nations' interests to help solve the crisis.
"Our economic problems are worsened by those overseas," said Sen. Christopher Dodd (D-Conn.), a member of the Senate Banking and Foreign Relations committees. Dodd said there are now "many people in the United States who understand that their jobs depend on developing countries." Administration economists have estimated that the payments crises in Mexico and other U.S. trading partners will lop 1 percent or more off U.S. growth this year by cutting exports to the cash-starved nations.
Brazil's experience shows how difficult it is to isolate responsibility for what has gone wrong and to design economic policies to put it right.
"If the financial crises in Mexico and Argentina had not happened, then probably Brazil's would not have, either. But with the two first ones, Brazil's crisis was probably inevitable," one U.S. Treasury official in Washington said. After Mexico's near brush with bankruptcy last August, the flow of money into Brazil that had been "ample . . . was abruptly stopped by the financial crisis that erupted," the International Monetary Fund reported. But while the Mexican crisis certainly triggered Brazil's, "that's not to say that Brazil was somehow innocent," the Treasury official added.
Many trace the root of Brazil's problems to the oil price rise in 1973. Instead of slowing the economy and cutting back on oil consumption to adjust to higher prices, the idea was that "Brazil had a grand future and should get on with it" by borrowing from overseas, economist Persio Arida said. Investments were "conceived to attract money from the international system in order to finance consumption" of oil, Adroaldo Moura Silva complained.
But at the time, officials in the industrialized nations and the IMF encouraged banks to lend money and countries to borrow it. They feared that, unless commercial banks recycled money from the newly rich oil exporters to consuming nations (which could no longer afford to buy so much from overseas), there would be a sharp and disruptive slowdown in the world economy.
Many of Brazil's investments--in dams, mineral exploitation, road building--will pay off eventually, Brazilian analysts say. But in the short term, as a New York banker pointed out, they do not provide needed foreign exchange that could be used to repay debts.
By 1980, foreign bankers were already nervous about Brazil's growing debt load. A "scare" nearly pushed the nation into applying for an IMF loan in the fall of 1980, two years before it finally did so, Treasury sources said. But Brazil averted trouble by tightening economic policy, and agreeing to pay more for the money it wanted to borrow.
Critics of the military government think that new borrowing made the present crisis even worse. "Opposition economists were arguing for renegotiation of the debt from the beginning of the 1980s," said Joao Sayad, an economist who is the new finance minister for the state of Sao Paulo. "Some bottlenecks were developing," he said, which meant that "Brazil would not be able to continue on its growth path." By trying to go on growing, "our domestic and foreign debts are so huge now we end up in the hands of domestic and international banks," complained business school Prof. Ernesto Lozardo.
Brazilian officials stress that they are looking to the United States and other rich nations to pull the world along. "If by a miracle the world could increase international trade," that would make it far easier for Brazil and others to raise their exports, as they must if they are to stop their reliance on foreign capital, Planning Minister Antonio Delfim Netto said. "This is the real point. . .and this is what the U.S., if recovery comes, can provide."
At present, you could "cut export prices in half and there's no buyer," according to Sao Paulo businessman Joseph O'Neill, former president of Ford Brazil. "The reason we are not exporting. . .is that markets are closed," economist Edmar Bacha of Rio de Janeiro's Catholic University said. Until world recovery opens them up again, Brazil will be hard pressed to raise its overseas sales, he added.
Brazil, along with most developing nations, is still heavily dependent on exports of commodities, such as coffee, sugar and soybeans, which, in turn, are very sensitive to demand in the industrialized world. Raw materials, which accounted for about 40 percent of Brazil's total exports last year, have plunged in price in the past three years. The result: smaller foreign exchange earnings for Brazil and other commodity producers.
On top of this, Brazil has suffered from its success in building up manufacturing industry and developing new overseas markets--in Eastern Europe and Africa, for example. "Our manufacturing exports are hit by recession, because we export most. . .to the Third World," Bacha said.
As it tries to make up for this by pushing exports to the United States and other developed nations, it will find itself in direct competition with other big borrowers, such as Mexico, which have also promised creditors that they will boost exports and shrink imports. Brazil's February devaluation of 23 percent against the dollar is "going to help" it to sell exports, a foreign analyst in Brazil said. But he added that an official of one of the big three U.S. automakers had told him that Mexico's devaluation had made its products even cheaper.
Government officials say that, despite this competition, the expected U.S. recovery should be enough to save Brazil and cure the world recession. "The same three factors that worked against the economic situation in the world will work in the reverse" in coming months, Finance Minister Ernane Galveas said, citing the recent decline in oil prices, lower U.S. interest rates and an improving U.S. economy.
Many other Brazilians, who doubt that the U.S. locomotive is strong enough to pull the whole world, say a new mechanism is needed to relieve debtor nations of the short-term debts that they cannot now afford to pay and to provide them with enough money to go on growing.
"Unless there is a general explicit or implicit agreement on how to finance the recovery of the world economy, I don't believe it will be a lasting recovery," Sayad said. The "best thing for Brazil would be a continued flow of funds from commercial banks . But now it's out of the question," economist Arida said, adding, the "only way to fill the gap is to get a new international order."