Desenvolvimento: Politics and Economy in Brazil 9781685854225

Citation preview

Desenvolvimento

Critical Perspectives on Latin America’s Economy and Society

Series Editor James Dietz, California State University–Fullerton

Editorial Board Victor Bulmer-Thomas, Institute for Latin American Studies, University of London Gary Gereffi, Department of Sociology, Duke University Osvaldo Sunkel, CEPAL, Santiago, Chile

Janet Tanski, Department of Economics, New Mexico State University

Desenvolvimento

Politics and Economy in

Brazil Wilber Albert Chaffee

b o u l d e r l o n d o n

Published in the United States of America in 1998 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com

and in the United Kingdom by Lynne Rienner Publishers, Inc. Gray’s Inn House, 127 Clerkenwell Road, London EC1 5DB www.eurospanbookstore.com/rienner

© 1998 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data Chaffee, Wilber A. Desenvolvimento : politics and economy in Brazil / by Wilber Albert Chaffee. p. cm. — (Critical perspectives on Latin America’s economy and society) Includes bibliographical references (p. ) and index. ISBN 1-55587-747-8 (alk. paper). 1. Brazil—Economic conditions—1964–1985. 2. Brazil—Economic conditions—1985– 3. Brazil—Economic policy. 4. Brazil—Politics and government—1964–1985. 5. Brazil—Politics and government—1985– 6. Economic stabilization—Brazil. I. Title. II. Series. HC187.C445 1997 338.981—dc21 97-21301 CIP

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

∞

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984. 5 4 3 2 1

For Graham and Lyman

Contents

ix xi

List of Tables and Figures Preface 1 Introduction

1

Part 1 Political Macroeconomy 2 The Inflation Tax

3 Jobs, Quasi Jobs, and the Cost of Unemployment

4 The Distribution of Wealth and Income

5 Politics, Parties, Politicians, and Profits

11

37

53

77

6 The Economics of Political Support

101

7 Growth, Legitimacy, and Inflation

115

Part 2 Regime Change and Economics 8 New Republic, Old Politics: The Bossa Nova of José Sarney

9 Neoliberalism: Fernando Collor and Itamar Franco

Part 3 Conclusion

10 The Future: Real Reform or Regression?

List of Acronyms Bibliography Index About the Book

vii

143

161 187

205 209 221 231

Tables and Figures

2.1 2.2 3.1 3.2 3.3 4.1 4.2

4.3 4.4

4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 5.1 5.2 5.3 5.4 6.1

6.2

Tables

Inflation in Latin America Seigniorage and Inflation Possession of Documents Distribution of Salaries Among Work Card Holders Uniminas Steel Company Comparative Wealth Ratios Geographical Distribution of Workers Earning One Minimum Wage or Less Internal Urban Income Distribution Distribution of Income of the Economically Active Population Concentration of Wealth Life Expectancy at Birth Average Minimum Salaries per Month, 1940–1958 Cost of Primary Education in the States Investment Return on Education Cost of Education per Capita Wealth and Rate of Illiteracy by Geographic Region Urban Poverty Gini Indexes Entrepreneurs Party Preference and Rejection Distribution by State of Deputy Seats, 1993 Trust in Institutions Congressional Delegations and Votes for Presidential Candidates Political Support and Economic Conditions ix

14 29 43 43 45 54

54 55

55 58 59 61 68 69 70 70 72 72 85 89 93 94

106 109

x 7.1 7.2 7.3 7.4 8.1 9.1

1.1 2.1 3.1 3.2 3.3 3.4 3.5 3.6 4.1

4.2 6.1 6.2 6.3 6.4 6.5 7.1 7.2

Tables & Figures

Economic Growth in Three Nations Government Deficits as a Percentage of GDP The Wage Squeeze Wage Readjustment and Economic Growth Prices of New and Used Automobiles Popular Support for Candidates Figures

The Political Economic System Annual Inflation, 1945–1993 Comparative Unemployment Figures Varieties of Unemployment, São Paulo Phillips Curve for Contemporary Brazil Unemployment and Inflation Participation of Women in the São Paulo Workforce Rate of Overtime Employment, São Paulo Gross Domestic Product per Capita and the Real Minimum Wage, 1940–1991 Real Minimum Wage, São Paulo Index of Support for Geisel Index of Support for Figueiredo Index of Support for Sarney Index of Support for Collor Actual Index of Support and Predicted Support Gross Domestic Product, 1900–1991 Real Minimum Wage and Gross Domestic Product per Capita

117 125 126 127 149 179

4 12 39 40 41 42 47 48

57 60 103 104 105 107 110 118 122

Preface

The idea for this book grew out of a personal desire to better understand the connection between economics and politics, plus an appreciation for Brazil and Brazilians that has lasted over many years and many trips to the country. The book, which is about theory, examines political-economic behavior in Brazil in light of the basic assumption that politicians make choices to maximize their wealth and that they receive support from citizens who want policies they believe will maximize their own wealth or standard of living. An auxiliary assumption is that politicians change their discount rate depending on how long- or short-term their tenure—and therefore profit—is likely to be. An earlier attempt to define the political-economic relationship resulted in my book The Economics of Violence in Latin America: A Theory of Political Competition. The Economics of Violence applied microeconomic reasoning to the political realities of Latin America and started with the assumption that politicians, like business owners, seek to maximize the value of their investment. This assumption grew out of the belief that politics is the economics of public goods, building on the work of Anthony Downs, Paul Samuelson, and James Buchanan. An extensive literature on the economic determinants of political support has developed in the United States and in Western Europe. During trips to Brazil, I wanted to see if the same forces could be found in one of the less industrialized countries; this resulted in a preliminary study of the effect of inflation on public support for the Brazilian government during the period of transition to democracy in the 1980s. Initially I tried to find the basis for consensus in Brazil on macroeconomic policies, but the evidence drove me back to the concept that individual self-interest is the dominant motivation in politics and, more specifically, in macroeconomic decisionmaking. xi

xii

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Wanting to extend the scope of the study and better develop the politics of macroeconomics, I found a model in Douglas A. Hibbs, Jr.’s American Political Economy: Macroeconomics and Electoral Politics in the United States. Hibbs diagrams a model of the “political-economic system of the demand for and supply of macroeconomic outcomes.”1 While my own study is very different from Hibbs’s, much of its inspiration came from his book. As regards editorial matters, I should note that I have adopted two practices to conform to Brazilian usage. One is that in Brazil people are often called by either their first name, nickname, or middle name rather than their family name, so you have “Itamar” or “Jango” instead of President Franco or President Goulart. The Brazilians also make creative use of acronyms, so that a member of the Partido do Movimento Democrático Brasiliero (or PMDB) is known as a pemedebista, and a public opinion poll is an ibope, taken from the initials of the best-known polling company. A list of acronyms appears at the end of the book, with English translations as appropriate. Translations into English of quotations and other material originally in Portuguese are my own unless otherwise credited. Given the ongoing nature of the subject matter, I had to make an arbitrary decision concerning where in the history of Brazilian political economy to conclude the study. The end of the Itamar Franco government seemed a logical place, as it represented both the end of the first popularly elected government since the 1960s and the beginning of a new stabilization effort, the Real Plan. A number of the issues I have developed have been addressed by the new government of Fernando Henrique Cardoso, but their outcome is still undetermined. * * * Time and money for this study came from a year-long sabbatical provided by Saint Mary’s College of California during the 1992–1993 academic year and from the Faculty Development Fund. I am also indebted to colleagues at Saint Mary’s in the Department of Economics who at various times lent a sympathetic ear, instruction, and material to the problems of a political scientist who often wandered lost in the jungle of macroeconomics. In particular, I want to thank Stan Wingate and Asbjorn Moseidjord, who spent considerable time assisting me in the regression used in the chapter on support; my departmental colleagues Steve Woolpert, David Alvarez, Steven Sloane, and Patrizia Longo, who helped me locate material and filled in for me while I was away from Saint Mary’s; Woody Weaver in the Department of Mathematics, who provided assistance and advice; and

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xiii

Karen Keys, who keeps our computer network running smoothly. The Brazilian consul in San Francisco, João Almino, and his office arranged for my visa; I also found the consul to be a widely published political scientist with a great interest in my project. Terry Vogt of Arbi International and Cynthia Elliot of Schenker International, by supplying material that came to their offices, helped keep me informed about events in Brazil after I returned to the States. I also owe much to my friends in Brazil. Nair Monteiro and Celso Vargas supported me with places to stay on various trips and advice on how to go about my work; they sometimes even arranged interviews or suggested persons I should see. Behind these friendships is the sister of one of my students, Fayette Wimberley, a historian of nineteenth-century Brazil, who first introduced me to her friends in Rio de Janeiro. She continued to help by delivering material for me on one of her research trips to Brazil. While I was in Rio, the Instituto Universitário de Pesquisas de Rio de Janeiro, better known as IUPERJ, generously provided me with academic affiliation during my sabbatical. In particular, I want to thank Cesar Guimarães, a professor there; Renato Raul Boschi, director at the time; Florita, who managed the director’s office; and Bia, who maintains possibly the best social science library in South America. The Fundação Getúlio Vargas in Rio de Janeiro was a valuable resource. Eugenio Decourt, who directed the data center for the Fundação, along with Luiz Fernando Cysneiros and other members of the center, gave me every assistance in using their data bank, which provided otherwise unobtainable material. Marcos Ferreira de Souza, then head of national accounts, introduced me to the data bank and taught me how to use it. Violeta Maria Monteiro, also of the Fundação, supplied needed material and advice on seeing people and became a warm friend. Professor Sergio Ribeiro da Costa Werlang, then of their postgraduate School of Economics, generously answered a number of questions about the economy. I also benefited greatly from the use of the school’s excellent library. The library of the Instituto de Pesquisa Econômica Aplicada (IPEA) and its head librarian, Lieny do Amaral Ferreira, were particularly helpful. André Urani of the IPEA research staff not only supplied me with material but also included me in their weekly seminars on current socioeconomic research. Rosane Silva Pinto de Mendonça, in addition to her own research, organized and contributed to these seminars. I also thank André for providing information, encouraging pursuit of the framework I had developed, giving suggestions, questioning some of my assertions, and correcting some of my errors. The trade union’s economic research institute, the Departamento Intersindical de Estatística e Estudos SócioEconômicos (DIEESE), in both São Paulo and Rio de Janeiro, provided much material they had collected

xiv

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over the years; Maurício Soares opened their data bank to me, and José Silverstre de Olivera arranged a major printout from their archives. I also benefited from conversations with Celia Bertone, Eduardo Scaletsky, and Suzanne Sochaczewski, who offered helpful suggestions and opinions. Aurea in the DIEESE library in São Paulo helpfully dug out copies of some of their studies and had them duplicated for me. Clarice Pechman and Rodolfo Grandi, whom I met when we found we were doing similar studies on inflation and political support, provided much advice on exchange rates and the politics of the parallel money market in Brazil. Jorge Vianna Monteiro of the Economics Department of the Catholic Pontifical University of Rio de Janeiro (PUC), who has done the best work to date on the political economy of Brazil, has been of invaluable help and support. I also enjoyed the help of Reinaldo Castro Souza of the Department of Electrical Engineering at PUC and of one of his graduate students, Paulo Werneck, both working on statistical studies of politics. In addition to the data I used from the Instituto Brasileiro de Geografia e Estatística (IBGE), Sônia Rocha of their research staff gave me valuable information on her own and others’ work on poverty in the northeast. Maria Cecilia Márcia Langel at the Instituto Brasileiro de Análises Sociais e Econômicas (IBASE) helped me set up my computer link to the outside world and supplied considerable advice when things did not work out as scheduled with the electronic networks. As will be seen, I depended greatly on public opinion data collected by professional polling agencies. These agencies, which normally sell their data, provided me with results from their archives without charge. In particular, I would like to thank Orjan Olsen of the Companhia Brasiliera de Pesquisa e Análise, who first provided material and gave me introductions to others in the profession. Carlos Matheus of the Instituto Gallup gave me both poll results and his own long-term perspective, the result of years of surveying public attitudes. Márcia Cavallari Nunes of the Instituto Brasileiro de Opinião Pública e Estatística (IBOPE), a fellow political scientist who shares many of my interests, not only supplied material I requested but also suggested other polls relevant to my study and had them delivered to me in Rio. Others in São Paulo I would like to thank are Ottaviano de Fiori de Cropani of the Catholic Pontifical University and his wife, who during the course of a marvelous evening provided considerable insight into the political life of the country. I also have enjoyed the friendship of some of the university’s alumni staff; in particular, Ciao César C. Cardoso shared helpful information on Brazilian education based on his experience. María Carmen Souza, a member of the Brazilian senate staff for more than twenty years, gave me considerable insight into some the changes taking place following the adoption of the 1988 constitution.

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xv

In Rio, many personal friends made our stay there more than just a time to work. Luís and Evelyn Puig, who have been our friends for more than thirty years, provided both material and background from their experience. While hunting election data at the Tribunal Eleitoral Regional, I was introduced to Sergio Gallo, whose real passion is philosophy and poetry, both a bit foreign to me; but we became warm friends, and Sergio took me along to a Sabadoyle, a weekly gathering of writers and intellectuals in Ipanema. We shared pleasant trips and meals with Raúl and Rachel Andrade. Raúl also introduced me to some of the research staff at the Banco Nacional de Desenvolvimento Econômico e Social (BNDES). At various times, his advice and observations helped me better understand the economic and political processes of Brazil. He also kept me supplied with updated material after I had returned to the United States. Anna Carolina Regner of the Federal University of Rio Grande do Sul became a great friend and source of encouragement during her stay at Saint Mary’s as a Fulbright scholar. Heraldo and Eliana Mattos helped my wife and me set up our apartment and were always available when problems arose. Esther Kuperman warmly encouraged me in my work and shared her own experiences in the world of Rio’s politics. Lucilla Vasques provided muchneeded help with my Portuguese. I also want to thank the residents of the Bairro São Jorge (located in the center of the Gloria district of Rio de Janeiro) and our friends there, who accepted our sometimes baffling presence among them with warmth. My wife’s family in São Paulo were also most helpful: Noberto and Lucia Ferraz generously opened their apartment to me on visits, transported household furnishings for us, and described decisions of price changes made by industry. Osvaldo Fontanelli gave us a key to his apartment in São Paulo, which we used for several weeks while I was collecting data there, and warmly welcomed us one weekend to his banana plantation in the south of the state. I owe a major intellectual debt to Norman Frohlich and Joe A. Oppenheimer, who first introduced me to modern political economy and who did much to develop the concept of political entrepreneurship. I believe that their work opened up a significant new theoretical dimension to the understanding of politics and the development of political theory that is still not adequately appreciated. I also benefited greatly from inclusion in Philippe Schmitter’s Brazilian Working Group seminar at Stanford, which afforded a marvelous forum for bouncing around ideas. James Dietz, professor of economics at California State University, Fullerton, and editor of the series in which this book is included, went through the manuscript more than once, editing and helping shape the drafts into their present form. I also owe a great deal to the anonymous reader who first evaluated the manuscript, whose recommendations in-

xvi

Preface

cluded many important corrections that saved me embarrassment, as well as important suggestions on restructuring. Special thanks go to Roy Allen of our Department of Economics. He read through my entire manuscript, made major recommendations on restructuring it, and spent considerable time with me on the data analysis. I have also enjoyed the camaraderie of my brother, Lyman, professor of Latin American politics at Dominguez Hills State University, who managed my affairs at home while I was in Brazil. My wife, Diva, who is Brazilian, tried to improve my Portuguese and did improve my disposition. There is no way I can express my appreciation for the help and joy she provided. Finally, I would emphatically reiterate the normal caveats about being responsible for errors and for the conclusions of the analysis. I know that many of the people who helped me would not agree with some of what is written here, but still they gave their ideas and data without prejudging my views or conclusions. Note

1. Douglas A. Hibbs, Jr., The American Political Economy (Cambridge, Mass.: Harvard University Press, 1987), p. 5.

1 Introduction

There is a basic conflict between the interests of a nation’s citizenry and the interests of its politicians: politicians seek to maximize the personal profit they can obtain by supplying the demands for public goods; the citizenry wants to maximize the value of the public goods they receive in exchange for their taxes and other contributions to the government, which often requires restricting profit for politicians. Legislating to reduce politicians’ profit increases the value of goods supplied, but legislation is made by the politicians. High profit levels increase the number of persons seeking to enter politics; however, voters in a democracy can support candidates that promise profit-reduction legislation. The motivation of profit maximization subject to constraints is taken from microeconomic theory as the basic assumption in theory building. It has been developed in political science in the literature on rent seeking.1 Brazilian politics of the last quarter century demonstrates this conflict of interests: politicians have sought to maximize their own personal utility in terms of profit, prestige, or power—subject to the constraints they face— while popular demand for social expenditures has been expanding. Brazil, as a case study, allows expansion of theory in understanding political economic links involved in a period of neoliberalism and democratization. Politics, like economics, has its micro- and macromotivations. Considerable political theory has appeared based on the microeconomic assumptions of rationality. Politicians enter politics at least partly for personal gain. But politicians are further motivated by the results of the macropolitics of policy, as policies determine the well-being of the polity; this results in changing levels of political support, which in a democracy effects voting. Politicians who consider only their own profits will soon cease to be in office; they must present themselves to the public as servants of the people. Democratic politics is the politics of vote seeking—either in the long run or the short run. Furthermore, politicians, just as any 1

2

Introduction

other individuals, have mixed motives, including altruistic and patriotic ones—they would like to do good, be respected, and have their place in history as well as enjoy personal gain. On occasion, a politician will take a moral stand, even at the cost of career. Politics and economics apply similar frameworks of analysis. Politics involves the creation and supply of public goods to meet the requirements of social order and enjoyment. Hobbes claimed that because order was the primary social requirement, a sovereign must supply protection of social relations—a public good. The sovereign, in return for supplying a public good, expects reward. A combination of changes in the complexity of modern society, including increased urbanization, and the promotion of new goods by politicians seeking to expand areas of profit have made the supply of public goods and the size of government a gigantic enterprise encompassing major portions of the gross domestic product (GDP) of nations: law and order, roads, public health, education, sewage and water systems, transport, energy, legal protection, monetary systems, irrigation, social security, medical care and housing, research, and promotion of industry and exports. But public goods go beyond these easily identified governmental services, extending to macroeconomic decisions of the government in such areas as the growth of the economy; the expansion and contraction of the money supply; the setting of interest and exchange rates, taxes, and the minimum wage; the provision of jobs; the method of financing fiscal deficits (or in rare cases, allocating fiscal surpluses); and transfer payments. Some of the preceding require legislation, but some do not, giving the executive flexibility without legislative debate, restraint, or delay. The money supply, for example, is not normally a subject of legislative action, even if it is the subject of considerable political pressure, usually for its expansion. With the regulation of the money supply and interest rates, governments try to influence the growth of the economy, and with it jobs; or they try to dampen an overheated economy and inflation, which results in the loss of jobs, business failures, and bankruptcies. Alterations in the minimum wage can change the quality of life for a nation’s population—transferring wealth from one economic group in the society to another—as can transfer payments, including subsidies for food, transportation, education, and housing. Inflation, a frequently used yet often insidious tax on future income, allows a government to supply goods at a lower present cost. The sale of government securities or international borrowing can have the same result, often without the inflation. And for the politician with a limited term of office, these actions leave an administration full of accomplishments, while it falls to successor governments to pay the inflationary bill or retire the loans through unpopular but often necessary policies such as increased taxes, often seen as a public “bad.”

Introduction

3

Informed by economists and economic theory, political administrations make macroeconomic decisions regarding costs and probability of success. But politicians also consider the policies in the light of their ability to remain in office, regain office, or at least retain political influence and profit. The Brazilian equivalent of the Nixon administration’s “How will it play in Peoria” might be “Will this be popular with the paulistas [citizens of São Paulo]?” Few politicians implement politically unpopular policies just before an election, and some politicians will not do so at any time. Popular support is important to governments, and an expanding, lowinflation economy is difficult to beat as an election strategy in democracies and can even bring popular support to a dictator. The problem, though, is that an expanding, noninflationary policy is hard to maintain; economists have not yet perfected the fine-tuning of an economy to maintain this balance. An otherwise well-running economy can be disrupted by international economic shocks or domestic reverses in production or the marketing of important products, and uncontrolled economies have cycles of growth and depression. Economic policies affect different groups in the society in different ways. The 1993 port reform legislation in Brazil was opposed by longshoremen who feared the loss of jobs and by labor allies, but it was supported by businesses interested in lowering their export costs. Politicians weigh the projected effect that economic decisions will make in terms of political support and profit. Political constituents, like business customers, are prioritized. Macroeconomic decisions are inevitably political decisions. There is a particular need to expand our understanding of macropolitics, that is, the aggregate politics of politicians involved with the decisions about public goods. This is particularly true of the politics of the macroeconomy, since many public goods, by their nature, are macroeconomic goods: employment, economic growth, a high or improving standard of living, economic stability. Similarly, economics affects politics just as politics affects economics. Some variables are hard to categorize as either economic or political; they are both. Many other variables that cannot be categorized as exclusively political or economic still have externalities that impinge strongly outside their category: inflation, popularity of politicians and policies, governmental expenditures and taxes, distribution of wealth, birth rates, infant mortality. Links between economic well-being and political support have, over recent years, been well established empirically. Hibbs has diagrammed a set of relationships between political support and changes in macroeconomic performance (Figure 1.1).2 Political support for a government is in part, and often in large part, determined by the degree of popular satisfaction with the condition of the macroeconomy. Politicians respond to demands by effecting policies that hopefully will increase support, usually in the short run. The economy is also affected by

4

Introduction

Figure 1.1 The Political Economic System

Source: Reprinted by permission of the publisher from The American Political Economy by Douglas A. Hibbs, Jr., Cambridge, Mass.: Harvard University Press, Copyright ©1987 by President and Fellows of Harvard College.

external changes in the international environment, including international interest rates, trade flows, recessions, and exchange rates. Hibbs’s model of political-economic relationships appears as a circle with various inputs, both endogenous and exogenous. However, limitations of the two-dimensional page can give a misleading picture as to the political-economic reality, which is three-dimensional; political-economic relationships take place in a time dimension, so the true model is a spiral, with economics at time t affecting politics at t+1, which in turn results in economic policies at t+2, changing in the economy at t+3, which affects politics at t+4, and so on. The economy has its own loops, such that the economy at t affects the economy at t+1, and politics has its inner loops also. Choosing a particular economic policy may create conflicts in the delivery of public goods, such as when fighting inflation brings unemployment, a fall in GDP and GDP per capita, and even public disorder. Full employment may result in inflation. Opportunity costs are particularly troublesome in a country with slim resources. Should schools or infrastructure have a higher priority in spending decisions? Should government investment be in areas of poverty or in developed areas where the return on investment is higher, bringing a greater gross domestic product? Policy

Introduction

5

is politics; in English, a distinction is made between politics and policy, but in Portuguese only a single word, política, is used. It is these choices in Brazil that are the subject of this book. Macroeconomics is a pure public good (or public bad): it affects everyone in a nation, some for the better and some for the worse. Fiscal decisions are political decisions, and in Brazil most economists believe that fiscal reform is a necessary prerequisite to controlling inflation. The fiscal deficit, which has been the subject of many International Monetary Fund (IMF) agreements and stabilization attempts, has been a critical issue during most of the last fifty years. Fiscal reform became harder over the last two decades as Brazil’s external debt limited the resources available to the federal government. Interest payments on the debt have reduced funds for economic development and for social programs, motivating the government to spend more than it receives in taxes in order to maintain important programs. Also, the 1988 constitution stripped funds from the federal budget and allocated them to the states and municipal governments without also moving programs with them from Brasília to the state capitals. Because of weaknesses in party structure, elected presidents without control of party blocs in the congress have needed to spend federal funds to “buy votes.” President José Sarney (1985–1990), as did Presidents Figueiredo (1979–1985) and Geisel (1974–1979) before him, made macroeconomic decisions to gain popular legitimacy and the power to pass programs through congress. President Fernando Collor de Mello (1990–1992), facing the failure of the Collor Plan and increased congressional resistance to proposed legislation, bought support from then senator Sarney’s bloc in the senate by again allocating funds for the north-south railway that would connect the center of Brazil to Sarney’s home state of Maranhão. Collor similarly accommodated the desires of then Bahian governor Antônio Carlos Magalhães and Rio governor Leonel Brizola, as leaders of the Partido da Frente Liberal (PFL) and the Partido Democrático Trabalhista (PDT), to gain support of the bancadas (delegations) they control in the Câmara dos Deputados (chamber of deputies, the lower house of congress). Brazil, the largest of the Latin American nations and currently the ninth national economy in the world by total GDP, has followed several macropolitical strategies in the last half century. Central to Brazilian pride and ambition has been the drive for economic growth; economic expansion has become an issue of nationalism and government legitimacy. In that pursuit, inflation has been a frequent and persistent problem, accelerating over the last forty years, reaching a level of 50 percent a month in June 1994. A critical question for all governments, and particularly for Brazil, has been how to both promote economic growth and control inflation. The drive for industrial and economic development during the government of Juscelino Kubitschek (1956–1961) brought inflation, which, along with

6

Introduction

national security fears, resulted in a coup and military governments from 1964 to 1985. The inability of the military to maintain economic growth and control growing inflation rates forced them to allow a return to civilian rule and democratic elections in the 1980s. Along with inflation, the great inequalities of wealth, education, and standard of living are a Brazilian reality: inequalities are rooted in class, race, and regional differences. Today poverty is becoming increasingly urbanized; dualistic societies in the metropolitan areas are the result of internal migration from the drought-prone, less developed northeast to the cities, especially those in the richer south-center of the nation. An Overview

Part 1 of this book considers key political macroeconomic issues in Brazil and develops the following testable hypothesis: Variations in inflation and economic growth in Brazil lead to changes in support for the governmental regime. Correcting for other political-economic conditions, such as the unique political capital and views of the various presidents, this hypothesis is statistically defended. Correlations between economic conditions and political popularity are thus identified. Chapter 2, which begins Part 1, deals with the most persistent of Brazil’s macroeconomic problems, inflation, which has ranged from around 20 percent a year in the 1960s to over 30 percent a month at various times during the 1990s. Unemployment, partly the result of government policies to combat inflation, and its costs are discussed in Chapter 3. The various measures of unemployment are examined, as is the informal economy as a partial answer to recession and job loss; the possible existence of a relationship between inflation and employment—the so-called Phillips curve; and a measure of lost production. Chapter 4 considers the economics of Brazil’s inequalities—which are in part the result of policies to deal with inflation and to gain support of specific groups—and the consequence of the misallocation of funding priorities. But the inequalities are also the result of the history, geography, and culture that originally produced them, continue to reproduce them, and tend to make the problems virtually intractable. Political support from the citizenry has been important, both in military-run governments and (even more so) in the popularly elected civilian ones. Chapters 5 and 6 analyze political institutions and support, looking at them in the context of the results of politicians seeking to maximize their personal profit. Inflation is a consequence both of the political structure of Brazil, with its lack of party institutionalization, and of the normal pursuit of a political career within the Brazilian culture. Support of

Introduction

7

the citizenry for the government is shown statistically to be linked to macroeconomic conditions. Part 2 affirms the basic hypothesis of Part 1, with detailed case studies of Brazil’s political-economic regimes. From the militarization of the 1960s through the October 1994 elections, crises of recession and inflation have provoked economic and political change. Whether neomercantilist, neoliberal, dependency theory, or bureaucratic-authoritarian in nature, Brazil’s political-economic choices have been heavily influenced by these key economic variables in the context of general macroeconomic success or failure. At times, income and wealth distribution, dependency on foreign trade and finance, and other political-economic threats and opportunities have also dictated politics. Chapter 7 provides the background to the problems that have determined the major issues of economic and political stabilization of the “New Republic.” A nationalist strategy of growth based on import substitution and the attempts of politicians to fulfill that strategy formed a common fabric in Brazil’s premilitary and military governments. Chapter 8 details the desires of the first postmilitary government, that of president José Sarney, to gain legitimacy by stabilizing the economy and restructuring politics through a new constitution. Chapter 9 examines the political economy of the divided presidential term of Fernando Collor de Mello and his successor, Itamar Franco (1992–1995), as Brazil changed its relation to the world economy, restructuring the domestic economy to gain stabilization and political support. The final chapter suggests steps needed to stabilize Brazilian politics, in particular the institutionalization and control of political profit. These include both fiscal and political reform. Chapter 10 also draws together elements from the preceeding chapters to give a political picture of the world’s ninth largest economy. Notes

1. Empirical reality does not always fit the assumption, as personal motivations are mixed and profit can be expressed in currency other than financial. However, in Latin America, financial motivations often are the basis of politics and result in explanations close to empirical reality. 2. Douglas A. Hibbs, Jr., and Heino Fassbinder, eds., Contemporary Political Economy: Studies on the Interdependence of Politics and Economics (Amsterdam: North-Holland, 1981), p. 4; Douglas A. Hibbs, Jr. The American Political Economy (Cambridge, Mass.: Harvard University Press, 1987), p. 4.

Part 1 Political Macroeconomy

2 The Inflation Tax

A government can live for a long time . . . by printing paper money. . . . What is raised by printing notes is just as much taken from the public as is a beer duty or an income tax. What a government spends the public pays for. There is no such thing as an uncovered deficit. J. M. Keynes

Brazil’s modern history exhibits a continuous and persistent record of inflation, with the rate never falling below 10 percent annually since World War II, and rising dramatically in recent years. Brazil’s first currency, the real, was replaced with the milreis at a rate of a thousand reais to the milreis. In 1942, the cruzeiro was introduced to replace the milreis, again at a thousand-to-one value; and another new currency in 1967, the novo cruzeiro, removed three zeros from the old cruzeiro (another thousand-toone transformation). In February 1986, the same lopping off of three zeros brought the cruzado, later replaced with the novo cruzado in January 1989. The currency returned to the name cruzeiro in March 1990 (one cruzeiro equaling 1,000 novo cruzados), creating a confusing situation as three different currencies—cruzado, novo cruzado, and cruzeiro—were in circulation at the same time. Again, in August 1993, the currency lost three zeros, with the new currency called the cruzeiro real. This was replaced in mid1994 by the dollarized real.1 Recent inflation in Brazil falls into five eras. Figure 2.1 shows annual inflation rates from 1945 to 1993. From 1982 to 1985, annual inflation doubled from 100 percent to 200 percent. The Cruzado Plan reduced inflation during 1986, only to see it strongly accelerate from 1987 to 1989 following the failure of the plan and subsequent attempts at stabilization. Then in 1990, with the beginning of the Collor administration, inflation dropped; but it began to climb again at the end of 1991, reaching a high level in 1992 and 1993. 11

Political Macroeconomy

12

Figure 2.1 Annual Inflation, 1945–1993 3000 2500

Percentage

2000 1500 1000 500 0 1945

1950

1955

1960

1965

Year

1970

1975

1980

1985

1990

Inflation has been the result of political decisions, decisions to increase the supply of money beyond that necessary to maintain normal commerce. “Accelerations in money and prices are not thrust upon society by a capricious or self-serving government, but rather represent the vote-maximizing response of government to the political pressure exerted by potential beneficiaries of inflation.”2 Inflation in Brazil bought support for the governments of Kubitschek (1956–1961), Geisel (1974–1979), and Figueiredo (1979–1985); and the political costs of controlling that inflation prevented subsequent governments from taking the painful measures necessary for stabilization. Policies that engender inflation impose a tax on some members of society in order to obtain a short-term advantage elsewhere. It allows the purchase of political support, including votes, and at the same time makes resources available to the government without raising taxes or getting legislative approval. The same result can be obtained by borrowing, but borrowing requires interest payments and may mean inflation in the future as a means to extract resources to service the loan. Inflation tax or loans can be a wise strategy if they are directed into efficient capital investment to increase production, employment, and the tax base, which in turn will increase revenues to the state. Unfortunately, government expenditure by

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inflation or loans often has been directed into subsidies, nonefficient productive facilities, or personal consumption. At times it goes into the pockets of politicians and their supporters. The money recorded as extorted from businesses and the estatais (state-owned industry) during the presidency of Fernando Collor (1990–1992) was estimated at U.S.$13 million; other estimates were considerably higher.3 Since the 1950s, Brazil has suffered a level of inflation that would bring strong governmental reaction in most of the industrialized world, with the value of the currency sometimes losing more than a percentage point per day. At times, Brazilian inflation has approached hyperinflation levels, once reaching 80 percent a month (at the end of the Sarney administration). Other times, inflation has been accompanied by increases in the gross national product and the gross national product per capita that exceeded the rate of inflation. Inflation does not necessarily mean a reduction in the standard of living, and inflation can accompany a rise in purchasing power if wage increases outpace price increases. During the “Brazilian Miracle” (1968–1974), for example, wages, savings, and rent were indexed to inflation, and employment rose. The Castello Branco government (April 1964–March 1967) brought inflation down from the levels of the Quadros-Goulart period (February 1961–March 1964). During the Costa e Silva and Médici governments, annual inflation remained around 20 percent, only to rise to 40 percent in the Geisel presidency following the first petroleum shock. Inflation grew to 100 percent in the first part of the Figueiredo administration after the second petroleum shock in 1979 and because of the reduction from twelve to six months in the interval between wage adjustments. The maxidevaluation of the exchange rate in February 1983 took inflation to 200 percent. By the 1990s, annual inflation had risen to well over 1,000 percent. By the end of 1992, most other Latin American nations had working stabilization plans that had reduced annual levels of inflation to two-digit levels. As Table 2.1 shows, not only was inflation by the early 1990s being controlled, the majority of the countries were able to reduce it by 1992, Brazil being the outstanding exception. Theories of Inflation

Orthodox theories of inflation, going back to eighteenth- and nineteenth-century economists, have centered on the relationship between prices and costs in the supply and demand of goods. Generally divided between cost-push and demand-pull explanations, both see price rises coming from a disequilibrium between the power to purchase and the supply of products. Cost-push inflation occurs when profits or wages rise faster than productivity. Increasing

14 Table 2.1 Country

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela

Political Macroeconomy Inflation in Latin America

12 months prior to October 1992 17.9 11.4 1,157.4 13.1 26.3 18.9 65.8 17.0 9.3 15.2 15.5 14.0 2.0 16.2 57.2 63.3 33.4

January–December 1991

Source: Latin American Weekly Report, November 26, 1992, p. 11.

84.0 14.5 480.2 18.7 26.8 25.3 49.0 14.5 10.0 34.0 18.8 674.0 1.6 11.8 139.2 81.5 31.0

productivity, or reducing either profits or wages to a rate that matches increases in productivity, returns an economy to equilibrium. Demand-pull inflation results from too much spending power in the hands of consumers, business, and government relative to the supply of goods. The economists of the United Nations Economic Commission for Latin America (ECLA) developed an alternative explanation for inflation in developing countries based on the relationship between the structure of industrially developed and less developed countries. Inflation was seen as structural and due to problems unique to the Third World, including urbanization, oligopolies, increasing costs of domestic agricultural production, and particularly the increase in the prices of imported industrial goods as compared to the decreasing value of exported primary products (that is, due to declining terms of trade resulting from the international division of labor). An intense debate throughout Latin America during the 1950s and 1960s emerged between monetarists who held to the orthodox views of economic growth and theories of inflation, and structuralists who believed that orthodox economic policies condemned the less developed countries to a permanent subordinate position in the world order with increasing poverty and a decreasing standard of living. Inflation fighting often has been seen as ineffectual and detrimental to the economy. Brazilian economic and political authorities believed inflation stabilization would result in recession, increased unemployment, and lower incomes. Even if the costs of stabilization were to be borne, ECLA

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doctrine held that monetary policy, the monetarist tool, was powerless against the extremely powerful structural factors in Latin America, such as existing land tenure relations and the international division of labor, causing inflation. A low to moderate level of inflation was believed to contribute to economic development, as it provided a forced savings mechanism to finance the growth rate.4 Writing in 1970, Luiz Carlos Bresser Pereira, who later became finance minister, also linked inflation to development demands: While inflation remained at reasonable levels, that is when its limit was approximately 20 percent, there is no doubt that this constituted a factor more positive than negative in the process of economic development of the nation. Certainly it would have been preferable that all the development would occur without inflation, and theoretically this is possible. For Brazil, however, a country passing through a rapid process of industrialization, inflationary development was practically the only solution. Either we would have had this type of development or stagnation. This is because inflation constitutes an escape valve for the development of the nation, a means in which it is possible to finance the increase in expenses and governmental investments. . . . Contrary to what the monetarists believe, however, inflation, at least a moderate inflation, is an inherent process in the development of underdeveloped nations. In Brazil it constitutes a form of indirect taxation, which permits the resolution of the problem of the increasing responsibility of the state in relation to the economy.5

Inflation in Brazil became a public issue during the Kubitschek government with large federal deficit spending for the construction of Brasília, the building of roads and railroads, the development of the automobile and chemical industries, and the expansion of steel production. When the military took over the government, they adopted orthodox recessionary policies to reduce inflation. They then stimulated the economy, cut the cost of labor by squeezing wages while expanding credit, increased foreign sales, borrowed heavily from both international and corporate banks with easy loans made possible in the 1970s through deposits of petrodollars by producers, and created the Brazilian Miracle. But when loans dried up in 1982, inflation rose again, with projects under way. The fiscal deficit rose due to the lack of new funds and increased interest payments. At the same time, a drop in export sales resulted from recession in the United States. Indexation, Brazil’s first answer to inflation, made it possible to live with inflation without trying seriously to cure it.6 The post-1964 governments found that inflation created distortions in negative real interest rates that discouraged savings, and savings were believed necessary for investment and growth. Indexing corrected such losses due to inflation, and it also maintained positive real interest rates for government bonds, again

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making it possible to sell them to the public and cover federal deficits. Indexation also came to include the establishment of a moving peg for automatically devaluing the exchange rates in an effort to maintain the trade balance. Saving accounts, rents, and wages also were indexed, so that the cost of living could be partially protected from inflationary losses. Manipulation of indexes, however, permitted the government to transfer funds from one favored group to another. This was accomplished by various formulas of inflation correction that overcompensated savings accounts and undercorrected the minimum wage, resulting in income gains for middleclass savers at the expense of lower-class wage earners. In the 1980s, when inflation seemed to be endemic and impervious to orthodox stabilization plans, Brazilian economists developed the concept of inertial inflation. This concept explained inflationary persistence on continuing price and wage increases due to the indexing of the economy.7 With indexing, everyone planned for price increases and increased their prices to compensate for expected inflation: inflation fed on inflation. In the second half of 1984, Brazilian economists put forward two proposals to stop inertial inflation: Pérsio Árida and André Lara Resende’s idea of a new, indexed currency; and Francisco Lopes’s concept of a heterodox shock.8 This later developed into the Cruzado Plan of José Sarney’s administration (1985–1990). With the end of the Cold War and the collapse of socialist economies in Eastern Europe, a wave of neoliberalism in the 1980s placed the blame for inflation on centrally controlled economies in general. Budget balancing and the elimination of subsidies became the new truth, including the privatization of state-controlled companies. By the time of the 1993 stabilization program of Finance Minister Fernando Henrique Cardoso, fiscal reform became a priority, because his economists believed “that Brazilian inflation no longer is determined by inertia, but by expectations,” which accelerated inflation beyond what inertia would lead one to expect.9 Stabilization Plans

Orthodox stabilization plans to reduce inflation emphasize controlling the money supply, raising interest rates, and reducing expenditures, all of which lead to loss of employment, less investment, and lower production. Reducing domestic fiscal deficits, with the goal of balancing the federal budget, also contributes to the economy going into recession. This strategy is expected to slowly reduce inflation as purchasing power is reduced. Heterodox stabilization plans, on the other hand, attempt to control inflation by freezing prices and incomes (in Brazil, this included the elimination of indexation), while easing credit helps increase production to soak up

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excess funds. Price freezes are temporary and must be lifted to prevent the overheating of demand as a new equilibrium of supply and demand is established. There is no doubt that inflation in Brazil has been accompanied by a rapid expansion in the supply of money. What is not agreed on is whether inflation is followed by the expansion (the structuralist view), or whether the expansion is followed by inflation (the monetarist view). The monetarists in Brazil, who are strongly represented in the faculty of the postgraduate school of economics at the Fundaçao Getúlio Vargas (FGV) in Rio de Janeiro and who follow monetarists like Milton Friedman in the United States, took the position that control of the money supply would control inflation: “One should . . . aim at a low and constant rate of monetary growth, in order to halt inflation.”10 A neostructuralist group of economists, centered in the universities of São Paulo, Campinas, and Rio’s Pontifical University, believed that inflation was the result of indexation and the expectation of future inflation. Their analysis pointed to inertial inflation as the problem: “Wage policy determines the inertial rate of inflation.”11 They believed that the money supply was a dependent variable, increasing as the general level of prices increases, permissive of inflation but not its root cause. Both groups have had opportunities to try stopping inflation; orthodox stabilization plans were implemented by economic ministers Roberto Campos (April 1964–March 1967), Mário Henrique Simonsen (March 1974–March 1979), Francisco Dornelles (March 1985–September 1985), and Marcílio Marques Moreira (May 1991–September 1992).12 Campos succeeded in lowering inflation during the Castello Branco administration. The plans of the next two did not have sufficient time to be honestly evaluated, did not lower inflation, and were superseded by the political need of growth to give legitimacy to the administrations they served. The Marcílio plan threw the country into recession and did not reduce inflation; but it resulted in an agreement with the IMF and foreign creditors over the external debt at the end of the Collor administration. The heterodox economists also had their chances with the Cruzado (February 1986–November 1986), Bresser (June 1987–December 1987), Verão (January 1989–June 1989), and Collor (March 1990–May 1991) Plans, each of which temporarily slowed inflation but ended with its acceleration. With the exception of the orthodox Campos Plan, no stabilization program successfully controlled the fiscal deficit. In every case, the perceived need by the government for political support, either from the public in general or from particularly important interests, ultimately aborted the stabilization policies. In the cases of the last two military governments and the Sarney administration, economic growth was seen as vital for legitimacy, and stabilization meant recession. In both the Sarney

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and Collor administrations, proposed corrective legislation was either gutted or vetoed by the legislature. Two of the major political parties, the Partido dos Trabalhadores (PT) and the PDT, have opposed stabilization and privatization. State and municipal governments pressure the legislature to maintain revenue sharing that obviates fiscal reform. The economic history of the last decade has been a history of failed economic stabilization attempts and increasing debate among economists as to a strategy that can both bring inflation under control and return the country to economic growth. Inflation, originally a rationale for the 1964 coup, came to be associated with the military governments and the need for economic and political change. With the return to civilian rule in 1985, governments began ten years of stabilization attempts. Three of the plans are of particular interest, as they represent serious attempts to end inflation while stimulating growth through heterodox strategies: the Cruzado Plan, the Bresser Plan, and the Collor Plan. A fourth plan, during the era of Marcílio in the second half of the Collor government, was a serious orthodox stabilization effort invoking recession. Then, when Collor was impeached and Vice-President Itamar Franco assumed the government, a new strategy was begun under Finance Minister Fernando Henrique Cardoso in 1993.13 The first postmilitary government, that of José Sarney with a cabinet selected by Tancredo Neves, initiated an orthodox stabilization plan in April 1985. Created by Finance Minister Francisco Dornelles, the plan was based on a freezing of public prices and those of some private oligopolistic sectors, covering about 40 percent of the GNP (gross national product). This was combined with a strictly monetarist policy at the level of the Central Bank. Monthly inflation initially fell from 12 to 7 percent during three months but returned to previous levels as prices corrected themselves by September. The Cruzado Plan

The most ambitious and controversial stabilization effort was the Cruzado Plan, introduced at the end of February 1986. Imposed by decree law by President Sarney and not requiring congressional approval, it was the first attempt at a heterodox program based on freezing prices and ending indexation. 14 The plan, which met with enormous popular support and reduced inflation, holding it in check for over eight months, eventually lost to populism and excess demand. The Central Bank had fixed low nominal interest rates during the first month of the plan, strengthening the expectations of maintaining a low level of inflation, but the attempt by the Central Bank to follow with a restrictive monetary policy with higher interest rates to reduce demand foundered when faced with strong political opposition. An unexpected result

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of the plan was the withdrawal of an estimated 27 percent of savings funds between March and July for speculation and spending, because deindexation was viewed as a loss in purchasing power by investors.15 The supply of money, which had dropped 6.3 percent in January 1986, increased 12.9 percent in February, 76.9 percent in March, and 20.4 percent in April. Inflation had been 14 percent per month before the plan but had fallen and stayed close to zero due to the freeze; when the freeze ended in December 1986, inflation exploded as pent-up demand fueled by monetary expansion pushed prices upward. The Cruzado Plan has been the most controversial of any stabilization attempt. Years later, one of its authors, Edmar Bacha, later architect of the Programa de Ação Imediata (Program of Immediate Action) under Finance Minister Fernando Henrique Cardoso, said of the plan: “We threw away the winning ticket.”16 Similarly, Finance Minister Luiz Carlos Bresser Pereira described the plan as “highly successful initially, very well thought out and developed by a group of first-class economists. . . . This plan was afterward badly administered for a number of motives . . . and completely destroyed.”17 Senator and economist José Serra of the Partido da Social Democracia Brasileira (PSDB) also believed that the Cruzado Plan was the best chance to control Brazil’s economy, but that it lost out by wrong handling at the end of the price freeze.18 Maria da Conceição Tavares, of the Federal University of Rio de Janeiro and leading PMDB economist, said that “Sarney could have made the Cruzado Plan, which went well for six months. But it was he himself that would not allow the economic team to revise the plan in time.”19 Such evaluations are not universal. Another former finance minister, Mário Henrique Simonsen, strongly criticized the Cruzado Plan, saying it dealt only with inertial inflation, ignoring other causes of inflation.20 Economist Eliana Cardoso says that the plan was faulty in its conception.21 Probably the best evaluation of the problems of the Cruzado Plan comes from Lourdes Sola, who points out that the designers of the plan based it on the need to have the support of labor, ignoring the element of demand and thereby undercutting the original concepts of Árida and Resende.22 Two attempts were made to rescue the Cruzado Plan. In July 1986, the cruzadinho (little cruzado) imposed a few modest taxes that absorbed some demand but fell far short of the strong measures necessary to cool the now overheated economy. Then, a week after the November 1986 election, the Cruzado Plan II raised prices of public utilities and imposed new taxes; but inflation could not be restrained.

The Bresser Plan

In mid-1987, Luiz Carlos Bresser Pereira was chosen finance minister to replace Dílson Funaro, who resigned. Selected by a weakened President

20

Political Macroeconomy

Sarney, Bresser was chosen from a list of candidates acceptable to the PMDB, which held a majority in both the senate and the chamber of deputies. In Bresser’s own evaluation, the economy was in a serious crisis. He quickly emplaced a heterodox emergency plan based on a brief freezing of prices and fiscal austerity. Recognizing that one fault of the Cruzado Plan was in allowing demand to overheat the economy when the freeze was maintained too long, the new plan limited the freeze to three months. On a longer-range basis, he relied on a revision of an analysis he had earlier written as a professor at the Fundação Getúlio Vargas in São Paulo. The so-called Bresser Plan (June 1987) did not disindex the economy or impose monetary reform; and, as expected, inflation returned, though it increased only slowly. Bresser began a gradual correction of public prices and planned a tax reform at the end of 1987 that would prepare for a definitive freezing at the beginning of 1988; for lack of political support, the plan never was completed, and Bresser resigned at the end of the year.23 Maílson

Bresser was replaced by his secretary-general, Maílson da Nóbrega, who had worked with his predecessor through all the politics of the stabilization attempts, knew of the political limitations he faced in administering the economy, and was aware of the weaknesses of President Sarney. Maílson began modestly, with his arroz com feijão (rice with beans) policy (January 1988), an orthodox economic program based principally on trying minimal fiscal reform and on obtaining a conventional agreement on the external debt. Inflation, however, rose through small steps, with some retreats, from 14 percent per month in December 1987 to 30 percent by the end of 1988. This higher level of inflation called for stronger measures, and in January 1989, Maílson imposed the Verão Plan (Summer Plan), a heterodox plan based on the freezing of prices, disindexation, and monetary reform. The latter introduced the novo cruzado to replace the devalued and unwieldy old currency. Maílson also imposed extraordinarily high real interest rates (16 percent monthly in the first month). He proposed operação desmonte (operation disengagement), which would stop federal bailouts of state and municipal expenditures. An additional attempt at fiscal reform would have privatized some of the estatais. However, the new 1988 constitution came into force, eliminating the presidential power to make decree laws and requiring congressional approval of fiscal legislation. Both of Maílson’s proposals were rejected by congress; the stabilization plan was stillborn, and by June 1989 it had fallen apart, ending as only a temporary freezing of prices. The economy then ran out of control, resulting in hyperinflation by the end of the Sarney administration and reaching 84 percent per month by March 1990.

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The Collor Plan

The Collor Plan (March 1990) came in two phases. The first, heterodox, combined the retention of private savings accounts with a quick freezing of wages and prices, which initially dropped inflation to 3 percent a month. The second, starting in May, was based on a rigorously orthodox fiscal adjustment and the definition and persecution of a monetary goal. In spite of the deep recession that resulted, inflation actually began to increase gradually, reaching 20 percent per month by the end of the year. A serious program of privatization launched at the beginning of the administration expanded the types of payment allowed for purchase, with the first company auctioned off in October 1991. A second Collor Plan, imposed in January 1991, was a heterodox emergency plan that in combination with tarifaço, a hike in utility and service prices, again dropped prices temporarily: but inflation rose immediately afterward, to almost 7 percent in April and to 10 percent in June. Collor’s attempts at fiscal reform, including cutting federal employees, were rejected by the congress, and his economics minister, Zélia Cardoso de Mello, resigned. The Marcílio Era

In May 1991, Marcílio Marques Moreira was brought back from Washington, D.C., where he was ambassador to the United States, and made finance minister. This was an attempt to bring coherence and stability to the chaotic economic policy left by the Collor Plan. He applied an orthodox stabilization program, throwing the country into another recession, raising interest rates, and bringing the real minimum wage to its lowest level ever. Industrial production fell and unemployment rose. The neoliberal modernization policies of the beginnings of the Collor administration were maintained, including both the scheduled reduction in tariffs and the privatization process. Inflation, which had dropped to 3 percent a month at the beginning of the Collor administration, rose and stabilized at about 25 percent a month. The major contributions of Collor’s administration were the recognition that the import substitution strategy had run its course; and the negotiation of accords on the foreign debt signed with the IMF, the Paris Club, and creditor banks. Itamar Franco

Itamar Franco, taking over the presidency after the impeachment of Collor in late 1992, had problems defining his economic plan; and despite his earlier criticisms of Marcílio, he simply continued with the same policies while seeking a way to end the recession. Itamar had problems with economists as

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ministers; he sometimes publicly criticized them and as a result had three finance ministers and a minister of planning resign during the first eight months of his government. Economic policy during those early months tried to control the public deficit on a day-to-day basis and end the recession by lowering interest rates and shifting government funds to create employment—but without much success. Itamar had problems with congress, which consistently thwarted his attempts at partial fiscal reform. These attempts were openly opposed by two of the most powerful politicians in the country: Antônio Carlos Magalhães, head of the PFL and then governor of Bahia; and the mayor of São Paulo, Paulo Maluf, who controlled the Partido Progressista Renovador (PPR).24 In April 1993, Itamar announced a timid plan to end the recession, giving lip service to fighting inflation. Despite the fact that his ministers had earlier been blunt on the imperative for fiscal reform, which would require changes in the constitution, the issue was not even mentioned in the president’s announcement of his plan. The reasons were two: fiscal reform could not pass in congress, and the president placed ending the recession as his priority, a goal that called for greater, not less, federal spending. To avoid conflict with congress over reform that might derail improvement in the economy, he chose to try to end the recession.

Real Plan

Fernando Henrique Cardoso became finance minister in May 1993 under the agreement that he would have full and independent control over economic policy. Cardoso, a sociologist, had an independent political base as a PSDB senator from São Paulo and had been serving as foreign minister to Itamar. A new attempt to control inflation, designed by economist Edmar Bacha, concentrated on fiscal reform. Cutting the national budget and eliminating the domestic deficit had previously proved politically impossible, but the new minister had a history of leadership within the legislature and a national sense that perhaps this was the last opportunity for the country to recover its economy. Phase one of the new stabilization plan was the Programa de Ação Imediata of fiscal reform, initiated in June 1993. This program cut the budget, pushed through a new tax on check transactions, pursued tax evasion, expanded privatization, restricted borrowing by state banks, and began collecting debts owed by the states to the federal government. In August, three zeros were cut from the inflated cruzeiro, and a new currency, the cruzeiro real, was introduced. A major financial problem for the government was that the 1988 constitution consigned a major portion of federally collected revenues to the states and municipalities, effectively leaving the central government permanently short of funds and making

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balancing the budget next to impossible. To deal with the problem, the Fundo Social de Emergência was passed by the legislature in February 1994, temporarily returning some funds to the federal government over a two-year period (1994–1995). Phase one of the Real Plan was based on monetarist theory that blamed inflation on fiscal deficits and monetary expansion. At the same time, foreign debt rescheduling proceeded with the signing of an agreement with the Paris Club in late February, and with the signing in April of an agreement with U.S. private bank creditors to restructure U.S.$47.1 billion of Brazil’s more than $120 billion debt. Phase two of the plan was aimed at inertial inflation and began March 1, 1994, with the creation of the Unidade Real de Valor (URV), an inflation-free index of monetary value calculated by the Central Bank based on three domestic price indexes.25 Contracts and prices were gradually revalued in terms of URVs rather than the inflating cruzeiro real. This followed the original concept underlying the Cruzado Plan of creating a monetary unit independent of inertial inflation based on the theory that much of Brazilian inflation resulted from expectations of inflation and the consequent price hikes based on those expectations. Phase three began July 1, 1994, by eliminating the cruzeiro real and introducing the real as an inflation-free currency. URVs were converted into the new currency on a one-to-one basis and were backed by a Central Bank exchange policy to sell dollars if the dollar exceeded one real in value, and to buy dollars if the real fell below 0.85 reais per dollar. Behind the policy were foreign exchange reserves of U.S.$40.1 billion. Quantitative targets were set for the monetary base. Throughout the period of the Real Plan, the process of tariff reduction begun during the Collor government was continued and accelerated to counter oligopolistic pricing practices in the domestic economy with imported foreign products. The Real Plan reduced inflation from 50 percent a month in June to below 2 percent in July, a level that has been maintained despite fears that the plan might collapse following the fall election, as happened with the Cruzado Plan. As of this writing (1997), the success of the real continues with a president, Fernando Henrique Cardoso, whose reputation lies in its continuing success. The Politics of Stabilization

A new constitution was a priority for the first postmilitary congress, aimed at removing the authoritarian elements of the existing constitution created

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by the generals. Constitutional reform became the major issue in stabilization because the 1988 constitution did not provide funding for the new expenses it mandated for the federal budget. The new constitution represented the interests of the governors and mayors, as opposed to the earlier federally dominated charter, which centralized fiscal power in the president. The new constitution allocated more federal revenues to states and municipalities and expanded the social security system, all without new receipts to pay for them. In 1993, federal receipts were U.S.$75.6 billion. Of that, $36.4 billion was allocated to health, social security, and education; $13.5 billion was passed on to states and municipalities; and an additional $5.85 billion went to regional development. This left $19.8 billion for federal administrative expenses, including salaries and benefits.26 This was insufficient to fund the health care system, education, and social security and required severe restrictions on salaries for the military and for government employees. Stabilization plans have been politically unpopular, as they typically impose serious costs on various groups and reduce the supply of public goods. They usually require restrictions on wages and a loss of jobs. As former finance minister Bresser Pereira pointed out, “Behind the theory of politics is, on one side, the whole problem of economic populism and, on the other side, the lack of political power to impose the ‘costs of transition’ implicit in fiscal adjustment and in the market oriented reforms that are necessary. There is no doubt that all plans face serious difficulties in this area.”27 Stabilization programs threaten public support for politicians, who then risk losing positions of profit. Fiscal adjustment is particularly threatening, as it means cutting the supply of public goods distributed by the government. Other former members of the government concur in blaming political objectives for the failure of stabilization plans. Maílson da Nóbrega said that the politicians resist understanding that the only exit for the nation is major fiscal reform. Edmar Bacha claimed that all attempts at implementing economic plans have fallen apart when they came up against the political question.28 Members of congress and the executive have usually been unwilling to take the necessary steps for stabilization, fearing for their political futures. Stabilization efforts have died because no sector of the economy is willing to pay the cost. The inflationary “spiral” involves the classic “free rider” problem, as no one feels compelled to contribute to the current costs of the stabilization effort because they perceive their impact on the collective cost as minor. Seen in this manner, the basic problem is one of coordination. 29 And a preference for current public goods over future public goods both contributes to and results from the failure of coordination. In

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the framework of Chapter 1, whereby citizens seek to maximize their public goods and politicians seek to maximize their profits, maximization is increasingly for the short term. One way to accomplish a cooperative strategy is to coordinate expectations of the various players, negotiating an agreement for the collective good based on an accord not to defect from the agreement. At various points, different administrations have tried to build “social pacts” that business, labor, and government collectively support, with the aim of holding price and wage hikes. However, just as in the case of the prisoners’ dilemma, social pacts as a means of halting the economic problems of the country, even when they are negotiated and agreement is reached, usually break down, because defection remains the dominant strategy of each player. Neither business nor labor, nor even the government, has the power to coerce its members to cooperate, and players find it to their advantage each to allow the others to pay the cost while refusing to adhere to the agreement: to defect is more rewarding.30 The Sarney administration twice tried to attain a social pact that would require business and labor to forgo price and wage increases. The first attempts to negotiate with labor and business, in October 1985 and later in January 1987, were unsuccessful. Another attempt, in October 1988, which established a schedule for wage and price hikes for the next two months, failed because business could not control its membership. Collor tried to reach agreements on inflationary increases on three separate occasions: in June and December 1990 and in December 199l. Itamar Franco also tried to reach accords with labor and business, in particular over the issue of wage increases, in July 1993. All failed, with labor representatives particularly resistant because they believed that pacts would inevitably bring wage losses. One of the most polemic issues has been privatization, a part of the larger structural adjustment of the Brazilian economy. Strongly supported by the business and financial elite of the country, the sale of public sector industries is just as strongly opposed by nationalists and labor.31 Nationalists hold that the investment in the estatais belongs to the people and that as public enterprises supplying public goods in the form of secure wages and employment, they do not rob the consumer with excess profits. Labor prefers the protection of jobs inherent in public enterprise in contrast to the job cutting and the more difficult wage negotiations that might come with private ownership. Though a major component in the modernization program of Collor, privatization received mixed acceptance from Itamar in the beginning. Subsidies for the estatais have been a serious part of the budget deficit, as the state companies have been inefficient, bloated in their workforce, and too generous to their director and managers. Eventually Itamar decided to continue with the privatization program despite his original

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Political Macroeconomy

opposition, making a few alterations regarding the kinds of payment allowed for purchase. The most important was the April 1993 sale of the Volta Redonda steel mill, the Companhia Siderúrgica Nacional (CSN), which was not only large, but also emotionally connected with Getúlio Vargas, nationalism, and Brazilian participation in World War II. The government also decided to accelerate privatization and include in its plans the selling of interest in some 600 small businesses partly owned by state banks or industries, valued at U.S.$10 billion. The Politics of Fiscal Reform

Certainly one of the most difficult problems facing the government is to balance the federal budget. Balancing the budget requires increased taxes or cuts in government services and investments, or both. Either action is unpopular with the voting public, and politicians resist unpopular legislation, looking toward the next election. There have been a number of attempts to correct the domestic federal deficit (ajuste fiscal), but all have failed. Fiscal problems include the following:

1. External debt and payment of interest absorb a significant portion of the budget, though this has dropped in importance because no major new loans have been obtained since the early 1980s. Also the dollar has fallen in value, making repayment easier; and the economy of Brazil has grown, making debt servicing a smaller percentage of the budget. 2. Internal debt has come to dominate the fiscal problem, in part because of the high cost to the government of buying foreign exchange, principally dollars. 3. The public sector is bloated; with government employment constitutionally protected, it is almost impossible to eliminate a job once someone has been hired. 4. Estatais have been subsidized. Despite the antisocialist rhetoric about development, the Brazilian economy has been in many ways a centralized economy. Beginning with the administration of Getúlio Vargas and the construction of the national steel mill at Volta Redonda—and the “petroleum is ours” (petróleo é nossos) campaign resulting in the establishment of Petrobrás, the national oil company—the state has owned much of major industry. Telecommunications is a protected state monopoly and energy is state owned. Under Kubitschek, construction of Brasília was done by NOVACAP (Companhia Urbanizadora da Nova Capital) a state construction company. During the military era, the public sector expanded dramatically as the leadership shifted from infrastructure development to state

The Inflation Tax

27

entrepreneurship in terms of import substitution industry in areas where private initiative seemed lacking. In many of these public sector industries, prices to the consumer were set in part by executive decision rather than by market forces, often reflecting political imperatives instead of costs. In addition, the estatais were used to reward allies or pay debts. Most of the companies as a result were overstaffed, inefficient, and subsidized. 5. The constitution of 1988 provided for transfers to states and municipalities. The 1988 constitution was ratified by both houses of congress sitting as a committee of the whole; the document was written by a joint constituent committee. President Sarney was at his weakest, and members of congress provided for their home constituencies by requiring that a substantial portion of federal revenues be passed directly to the individual states and municipalities. The constitution also added eighty-eight new charges to the social security system, including raising the floor of retirement payments from a half to a full minimum wage and extending benefits to rural workers, all without new taxes. 6. Pork barrel politics was widespread in the congress. In preparing the 1993 budget, congress insisted on funds for individual deputies and senators. A final agreement allocated Cr$16 trillion for personal projects, to be evenly divided among the 584 members of congress to be used for public works in their constituencies, the equivalent of U.S.$1 million for each member at the time of the agreement.32 7. Presidents became weak, and the veto power of the congress increased. Sarney lacked legitimacy, and after the failure of the Cruzado Plan, he spent all his political capital on maintaining a five-year presidential term. Collor won the presidency by running against the profit-seeking interests of congress, established politicians, and political parties. Later, when his administration was found to be full of corruption and excessive profit-seeking itself, Collor lost all power. Itamar Franco, chosen as Collor’s vice-president precisely because he was without a political party, found it very difficult to form a congressional majority coalition. Coming to office as a result of Collor’s impeachment, Franco lacked the strong arm of legitimacy necessary to push through a program of stabilization. In fact, he did not have a program, only projects, like getting Volkswagen to again produce the Beetle automobile. In the past, técnicos (experts) of the secretariat of the ministry of planning (SEPLAN [Secretaria de Planejamento]) had managed the federal budget through a contingency fund, giving the executive a flexibility that now was being blocked by a congress with power for the first time in Brazilian politics under the 1988 constitution.33 Explanations for the persistence of inflation have resulted in strong debates and varying policies to restore it to acceptable levels. Certainly two major reasons that Brazil has found it difficult to reduce inflation are that stabilization programs are politically expensive to the government,

28

Political Macroeconomy

and inflation is an integral part of public financing. The treasury has little room for maneuverability with the budget. During 1992, the operational deficit was Cr$29.7 trillion (December 1992 prices), equal to 1.67 percent of gross domestic product. This was covered by the “inflationary tax.” The secretary of political economy of the finance ministry, Carlos Eduardo de Freitas, was blunt: As long as the deficit exists, the government needs the inflationary tax in order to finance itself. Inflation, as you know, inflates receipts at a greater rate than it does expenditures. The National Treasury and Social Security would go bankrupt if the rate of inflation, today, were in the single digit range. If you could control the operational deficit, there would no longer exist a rationale for the rate of inflation to climb, unless it happens by its own inertia.34

Like many nations, Brazil has at times resorted to printing money. Printing money is the same as financing a government that gains seigniorage.35 However, the high inflation of the 1990s cannot be attributed to the use of seigniorage to finance federal government deficits. Table 2.2 shows the levels of seigniorage and demonstrates that it cannot be held responsible for the level of inflation. So far, Brazil has not created an independent institution of monetary control. Getúlio Vargas established the Superintendência da Moeda e do Crédito (SUMOC), precursor of the Central Bank of Brazil, to control the money supply, but it remained a part of the executive branch of government. Today the Central Bank is responsible for the monetary system, but the president of the bank is a political appointee, responsible to the minister of finance and the president. As a result, the money supply is determined by the needs of the treasury and the political requirements of the executive. During the Bresser Plan, great pressure was placed on the finance minister by the president of the chamber of deputies to expand the money supply. Deficits regularly have been covered by the issuance of money. Despite the fact that no central bank is totally independent in its decisions, the present situation in Brazil makes the bank particularly susceptive to political manipulation. When the issue of an independent central bank was raised with Maílson da Nóbrega, he did not believe it was practical at that time but agreed that the major problem of the finance minister in Brazil is that he has too much power. And having too much power, he has the power to print money. And as he has the power to print money, everybody knows this: the President knows, the ministers know, the deputies know, business knows. And they pressure the minister. Directly or indirectly, in all forms, they pressure the minister. And the minister ends up giving in. Therefore,

The Inflation Tax Table 2.2 Year

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Seigniorage and Inflation

Seigniorage (GDP) 2.84 1.30 1.81 1.87 1.84 1.64 1.39 2.75 1.46 2.50 2.34 3.13 3.98 4.13 3.50 3.52 1.35 1.59 2.16 1.21 0.78 1.55 0.92 1.57 1.07 1.07 1.61 1.95 1.65 2.61 1.52 1.69 1.99 1.62 1.94 2.13 3.55 1.72 2.28 2.76 4.92 2.32 2.31 1.80 1.78

29 Annual Inflation

11.6 11.9 12.9 20.8 25.6 12.4 24.4 7.0 24.3 39.5 30.5 47.7 51.3 81.3 91.9 34.5 38.8 24.3 25.4 21.2 19.2 19.8 15.5 15.7 34.5 29.3 46.3 38.8 40.8 77.2 110.2 95.2 99.7 211.0 223.8 235.1 65.0 415.8 1037.6 1782.9 1476.6 480.2 1157.9 2708.6 5153.5

Money Base (GDP) 12.0 11.6 11.6 11.1 9.5 9.5 8.8 8.8 9.0 7.8 7.6 7.5 7.3 7.0 6.6 6.8 6.4 6.4 6.1 5.7 5.3 5.0 4.8 4.4 3.9 3.4 3.4 3.9 4.1 4.0 3.4 2.9 2.9 2.4 1.8 1.6 3.1 2.1 1.3 1.2 2.1 1.7 1.1 0.8 0.6

Source: Jeffrey Sachs and Álvaro Zini, Jr., “Brazilian Inflation and the ‘Plano Real,’” The World Economy, 1996.

30

Political Macroeconomy

the only way to resolve this, in the medium run, is to reduce the power of the minister personally in this area.36

A similar analysis came from former finance minister Mário Henrique Simonsen, who tied the expansion of the supply of money to profit maximization of politicians: In Brazil, particularly in the New Republic, where directorships of the Central Bank have been transformed into positions that turn over rapidly, it is difficult to imagine that the supply of money can effectively be considered an exogenous variable. Accordingly, the battle against inflation remains subordinate to the maximization of some utility function (of politicians, not necessarily of society) that does not like inflation, but that also abhors recession. The result can be chronic inflation if future utilities are discounted, which is usually the case.37

But independence for the Central Bank would have a salutary effect and reduce the present political manipulation of its decisions. Policymaking must be structured in the light of the reality that politicians tend to maximize personal profit unless they are prevented by law from doing so. Itamar Franco’s former minister of finance Resende claimed that until the constitution is reformed, the government can only tread water as it tries to meet its commitments. Governors fear constitutional reform would cut their budgets and much of their power: At stake, is a permanent fiscal adjustment. . . .Public sector employees and firms will need to be deprived of their privileges (guaranteed life employment and hefty pensions, for example) and constitutional monopolies, while fiscal discipline will need to be imposed on autonomous bodies (including the Legislative and the Judiciary) and local governments.38

Inflation has made it possible to run the government without fiscal reform—that is, congress will not pass the fiscal reform necessary to balance the federal budget, because it would cost in terms of support for pet programs—and the government must make up the deficit. Foreign loans no longer are available for this purpose. Printing money avoids the needed fiscal reform, eventually resulting in greater inflation due to the greater money supply. Edmar Bacha, adviser to Finance Minister Fernando Henrique Cardoso and architect of his stabilization plan, bluntly stated, “Without fiscal reform, we are only drawing a picture; the government is going to continue turning to the inflation tax. If inflation, because of a shock or social pact, were to fall to zero, we would have a public deficit of $40 billion.”39 Industry as well as the government benefits from inflation, but it opposes correction of inflation through a restrictive monetary policy. In an oligopolist and inflationary economy, companies can and do raise prices on the basis of correcting for possible future inflation; they then add a bit

The Inflation Tax

31

to make sure that they are fully covered. The result is inertial inflation, but with high profits. This is especially true with industries where demand is relatively inelastic, such as pharmaceuticals.40 Banking too benefits from inflation. In Brazil, banking is big business, with a federal banking system, state banks, private banks, and foreign banking. Brazilian banks had an average profitability of 13.6 percent between 1987 and 1991, as compared with Asian banks, which earned 9.5 percent, and U.S. and Canadian banks with 7.4 percent profitability.41 Banks not only handle normal banking operations, but they also administer the resources of the social security system and collect payment for utility bills and some government taxes. They also act as intermediaries for interest paid by the government for indexed savings accounts. State banks maintain the accounts of government funds, earning profit on the financial market while they are on deposit. Brazilian banks’ largest profits from inflation come from high-interest, overnight loans to government. At the height of inflation, money deposited into checking accounts was invested in government debt instruments paying as much as 2 percent a day. Additional profit comes from legally allowed delay between payment by check and the crediting of the payment in another account. During the “float,” the bank earns on the basis of correction for inflation, running at over 1 percent a day in the early 1990s. The time the funds remain in the control of the banks is regulated by the Central Bank, depending on the location of the banks; São Paulo acts as the check-clearing center. A check drawn on a bank in one city to pay a bill in another city has up to eleven workdays’ float before being credited, which, with the addition of weekends, means a two-week period the funds can earn interest in the financial market.42 When the Cruzado Plan drastically cut inflation, 110,000 bank employees were laid off.43 Finance Minister Resende said that “if the government had the funds to liquidate the debt today it would kill not only our debt but perhaps it would be killing the Brazilian financial system.” He went on to quote the bankers: “For the love of God, please, don’t kill the debt because you would kill us too.”44 While the fears and desires of the banking community do not decide inflation questions, banks cannot be expected to support the demise of inflation without some expression of their interests.45 Thus, profit maximization by politicians, especially the toleration of considerable inflation, often coincides with profit maximization by banking and industry—an oligopoly of an elite. Conclusion

Inflation in Brazil might be called the “tragedy of Sarney,” a Hamlet-like figure not knowing what to be or to do. Sarney’s administration had the

32

Political Macroeconomy

two best chances to control inflation and return the country to growth. In the opinion of a number of economists, the Cruzado Plan, whatever its faults, had a chance to both bring inflation under control and begin the process of redistributing wealth. To have done so would have required strong executive action in May or June 1986 to rein in demand, a singularly politically unpopular action that undoubtedly would have reduced the overwhelming PMDB victory in the November election. Such action was recommended by the authors of the plan but vetoed by both the president and the minister of finance, Dílson Funaro. The second major chance to control the economy was during the office of Finance Minister Bresser Pereira. He planned a new freeze in January 1988, intending to follow a strategy similar to the original Cruzado Plan, but with corrective measures to avoid overheating demand. However, he left office without being able to implement the policy due to differences with Sarney. If Bresser Pereira is to be believed, his plan was consistently undercut by the irresoluteness of the president until conditions finally made economic correction impossible.46 Sarney never took strong action after the failure of the Cruzado Plan and his loss of popular support. Still he remained powerful enough to buy an additional year for his presidency and, until the promulgation of the new constitution, retained the ability to use decree law powers. The choice of Bresser Pereira as finance minister was imposed by congressional leadership. In turn, Sarney could have used the fact that Bresser was the choice of congressional leaders to push congress into accepting reforms. But by the end of his administration inflation was out of hand, reaching over 80 percent a month. Furthermore, heterodox stabilization plans no longer were viable with the public, as Fernando Collor discovered when he tried to implement one, again unsuccessfully. There is general agreement now that fiscal reform is a prerequisite for controlling inflation and restoring the economy. But debate remains whether fiscal reform can halt inertial inflation—or is some shock to the economy necessary? By July 1993, the stabilization program of Finance Minister Fernando Henrique Cardoso had eliminated much of the fiscal deficit, but inflation continued. Economists, with the exception of a few diehard monetarists, were in general agreement that the government had cut its budget and increased its income to the point where there was no fiscal deficit—where the government was no longer paying its bills by issuing new money.47 Whatever the truth about money creation, certainly the continuing and increasing inflation could not be explained by covering a nonexistent or at least minimal deficit.48 Monetary control should be placed in the hands of persons protected from immediate political pressure, recognizing that such independence is relative, as legislatures and executives always hold the threat of removing that independence as a form of blackmail to obtain decisions they want.

The Inflation Tax

33

The Brazilian Central Bank, however, remains a political arena, with rapid turnover of its directors and administration—all positions of political spoils and payoffs. As one economist related, there is too much power there to give it up.49 A final point that is seldom discussed is the information cost of inflation. The average citizen in Brazil expends considerable energy managing money to maintain buying power—waiting in long lines at banks and spending hours trying to find items not yet marked up or at least not marked up too much. Business similarly devotes time and energy accounting for inflation, contracting to receive immediate notification of macroeconomic data from data-collecting institutions in order to better inform their decisions. The energy costs in terms of lost productivity are great. One economic analysis estimates that inflation costs Brazil the equivalent of 6 percent of its gross domestic product, some U.S.$25 billion a year. Winners from inflation are the state, industry, and financial institutions; losers are the poorest sector of the population, who lack the protection of investment funds and savings accounts. If inflation fell to zero, state revenues would be 30 percent short of expenses.50 Notes

1. The real actually replaced the dollarized URV (units of real value), which were used as an inflation-free indicator for contracts. The real does change its value against the dollar within a Central Bank–established range. 2. Robert J. Gordon, “The Demand for and Supply of Inflation,” Journal of Law and Economics 18:3 (December 1975), p. 808. 3. O Globo, December 29, 1992, p. 7. 4. Donald E. Syvard, Foundations of Brazilian Economic Growth (Stanford: Hoover Institution, 1974), pp. 18–19. 5. Luiz Carlos Bresser Pereira, Desenvolvimento e Crise no Brasil, 2d ed. (São Paulo: Brasiliense, 1970), pp. 61, 65. 6. Indexation, a system by which an increase in prices triggered the increases in wages, was based on a government correction formula in part determined by cost-of-living indexes. 7. A good collection of technical articles on inertial inflation can be found in Eduardo Modiano, Inflação: Inércia e Conflito (Rio de Janeiro: Campus, 1988). 8. Pérsio Árida and André Lara Resende, “Inertial Inflation and Monetary Reform in Brazil,” in John Williamson, ed., Inflation and Indexation (Washington, D.C.: Institute for International Economics, 1985), Chap. 3; Francisco L. Lopes, “Só uma Choque Heterodoxo Pode Derrubar a Inflação,” Economia em Perspectiva (August 1984) (São Paulo). 9. Interview with Gustavo Franco, assistant secretary for political economy, Jornal do Brasil, June 20, 1993, p. 13. 10. Antonio Carlos Lemgruber, “Real Output: Inflation Trade-offs, Monetary Growth and Rational Expectations in Brazil–1950/79,” Brazilian Economic Studies no. 8 (Rio de Janeiro: IPEA/INPES, 1984), p. 70.

34

Political Macroeconomy

11. Francisco L. Lopes, “Inflation and the Level of Activity in Brazil: An Econometric Study,” Brazilian Economic Studies no. 8 (Rio de Janeiro: IPEA/ INPES, 1984), p. 248. 12. The term “economic ministers” was used because at different times the real head of the economic team might be either the minister of planning or the minister of finance, depending on how a president organized responsibility in his cabinet. 13. Eventually known as the Real Plan, this strategy brought inflation down, and at the time of this writing (1997), it had maintained stabilization. 14. Decree laws, a presidential power under the 1967 constitution designed by the military, allowed presidents to issue laws. Congress then had sixty days to vote to ratify or reject a law. If congress did not vote within the sixty days, the law was ratified. This power was removed in the 1988 constitution, which nevertheless provided for medidas provisórias (provisionary measures) to allow presidents to issue emergency laws, which must obtain congressional approval within thirty days. If congress does not vote approval, the measures are voided. The change in the constitution greatly enhanced the power of the legislature vis-à-vis the executive. 15. Lourdes Sola, “Heterodox Shock in Brazil: Técnicos, Politicians and Democracy,” Journal of Latin American Studies 23:1 (February 1991), pp. 186–187. 16. Edmar Bacha, “Jogamos Fora o Bilhete Premiado,” Jornal do Brasil, July 4, 1993, p. 12. 17. Luiz Carlos Bresser Pereira, “Experiencias de um Governo,” Cadernos de Conjuntura no. 16 (Rio de Janeiro: Instituto Universitário de Pesquisas do Rio de Janeiro, 1988), p. 1. 18. Comments by José Serra at the annual meeting of the Latin American Studies Association, spring 1991. In 1994, Serra was elected to the senate from São Paulo, then named minister of planning in the Fernando Henrique Cardoso government in January 1995. 19. O Globo, p. 1. “Sarney pode faturar o plano Cruzado, que deu certo por seis meses. Mas foi ele mesmo que não permitiu que a equipe revisse o plano a tempo.” Professor Tavares shifted to the PT during the 1994 presidential race, criticizing the Real Plan and winning election to the chamber of deputies. 20. Mário Henrique Simonsen, “Inércia Inflacionária e Inflação Inercial,” in Fernando de Holanda Barbosa and Mário Henrique Simonsen, eds., Plano Cruzado: Inércia x Inépcia (Rio de Janeiro: Globo, 1989), pp. 24–26. The entire volume by Holanda Barbosa and Simonsen is devoted to articles that critically analyze the Cruzado Plan. 21. Eliana A. Cardoso, “Inflation and Poverty,” Working Paper 4006 (Cambridge, Mass.: National Bureau of Economic Research, 1992), p. 13. 22. Sola, “Heterodox Shock in Brazil,” pp. 163–195. 23. Bresser Pereira gave an informative evaluation of his term as minister of finance, including his plans and the politics and the problems of that period. Although somewhat self-serving, it gives the best view of the inner workings of macroeconomic politics in the Brazilian government (see Bresser Pereira, “Experiencias de um Governo”). Former finance minister Mario Henrique Simonsen says that Bresser repeated the errors of the Cruzado Plan; see Holanda Barbosa and Simonsen, eds., Plano Cruzado, pp. 12, 26. 24. The PPR replaced the old PDS (Partido Democrático Social), which earlier had been the Aliança Renovadora Nacional (ARENA). Maluf had been the PDS presidential candidate in 1985. Antônio Carlos Magalhães was elected senator

The Inflation Tax

35

from Bahia in 1994 but still controlled much of the PFL. His son, Luís, became leader of the government in the chamber of deputies. 25. The URV was not a currency but an index that kept a constant value in terms of the U.S. dollar and was readjusted daily against the inflating cruzeiro real. Use of the URV was phased in gradually, first denominating wages and then contracts and prices. This gave an inflation-corrected value to monetary transactions. Eventually the URVs were replaced by a new currency, the real, which was backed by the Central Bank in terms of dollar value. Árida and Resende had noted in the early 1980s that despite inflation, the indexed ORTN (Obrigações Reajustáveis do Tesouro Nacional), a government bond, maintained its value. They believed that the creation of an inflation-free monetary unit would be a first step toward ending inertial inflation. 26. Jornal do Brasil, July 11, 1993, p. 5. 27. Luiz Carlos Bresser Pereira, “1992: A Estabilização Necessária,” Revista de Economia Política 22:3 (July–September), p. 100. 28. “Seu Bolso,” Jornal do Brasil, April 18, 1993, p. 5. 29. Gustavo H. B. Franco, “Inércia e Coordinação: Pactos, Congelamentos e Seus Problemas,” Pesquisa e Planejamento Econômico 19:1 (April 1989), pp. 65–84, esp. p. 66. 30. Leslie Elliott Armijo has used game theory—in particular, Prisoners’ Dilemma, Chicken, and Deadlock—to reveal the political problems in creating and maintaining social pacts as an answer to inflation in Brazil. See Armijo, “Inflation and Insouciance: The Particular Brazilian Game,” Latin American Research Review 31:3 (1996), pp. 7–46. 31. At the beginning of 1981, an estimated 500 companies were controlled either directly or indirectly. For a short history and the point of view of the financial community, see Privatization in Brazil, São Paulo Stock Exchange, March 1992. 32. O Globo, March 15, 1993, p. 5. For an important study on pork barrel politics, see Barry Ames, “Electoral Rules, Constituency Pressures, and Pork Barrel: Bases of Voting in the Brazilian Congress,” Journal of Politics 57:2 (May 1995), pp. 324–343; and Ames, “Electoral Strategy Under Open-List Proportional Representation,” American Journal of Political Science 39:2 (May 1995), pp. 406–433. 33. “Ministério Festeja Fim da Ditadura da SEPLAN,” Jornal do Brasil, March 27, 1993, p.3. 34. Gazeta Mercantil, April 14, 1993, pp. 1, 3. 35. Seigniorage is the revenue a government obtains through its ability to create money. The government, in effect, prints money to pay for goods and services, with the money absorbed by the public. 36. Bresser Pereira, “Experiencias de um Governo,” p. 7. 37. Simonsen, “Inércia Inflacionária e Inflação Inercial,” p. 8. Simonsen was finance minister in the Figueiredo government and one of the leading monetarist economists of Brazil. 38. Edmar L. Bacha, “Savings and Investment for Growth Resumption in Latin America: The Cases of Argentina, Brazil, and Colombia,” Texto para Discussão no. 285, Department of Economics (Rio de Janeiro: Pontifícia Universidade Católica do Rio de Janeiro, 1992). 39. O Globo, July 21, 1993, p. 25. 40. Nancy Scheper-Hughes gives a revealing portrait of the importance of medicines in the culture of the northeast of Brazil; see Chapter 5, “Nervosa: Medicine, Sickness, and Human Needs” in Scheper-Hughes, Death Without Weeping:

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The Violence of Everyday Life in Brazil (Berkeley: University of California Press, 1992). 41. Report of a study by Albert Barges Manias of the University of São Paulo, in O Globo, March 8, 1993, p. 17. 42. In reality, Brazilian banking, which is interstate, was mostly handled electronically. But with inflation running at high rates, the legally allowed delays in crediting gave banks money that could earn interest on the financial markets. 43. Sola, “Heterodox Shock in Brazil,” p. 188, uses a higher figure, saying that by July 1986, banks had laid off 250,000 employees. 44. “Banco Carom Manger Governo Individuate,” O Globo, May 1, 1993, p. 7. With the Real Plan, a number of banks went bankrupt on the basis of bad loans, increased reserve requirements, and a loss of high income. 45. In the first years following the Real Plan, with its low inflation, a banking crisis of national proportions developed, with many banks going insolvent. Also see Armijo, “Inflation and Insouciance,” pp. 7–46. Armijo says that banking interests did block stabilization. 46. Bresser Pereira, “Experiencias de um Governo.” 47. The rapid increase in M1 (currency and demand deposits) is the result of demand for money and its creation due to the demand created by the inflation. M1 and M2 dropped and M3 and M4 rose in 1993 (figures from Conjuntura Econô mica, August 1993). 48. I owe much of the information in this paragraph to a conversation with André Urani. 49. Interview with Sérgio Ribeiro da Costa Werlang at the Fundação Getúlio Vargas, October 19, 1992. 50. The study was done by Alexandre Barros de Cunha of the Fundação Getúlio Vargas and reported in O Estado de São Paulo, June 6, 1994, p. 1.

3 Jobs, Quasi Jobs, and the Cost of Unemployment

Unemployment is one measure of underutilized production. In addition, it represents a measure of personal and family loss of income, along with the resulting lower standard of living, position in the community, and hope for the future. Personal tragedies of the unemployed are a common scene in modern Brazil; and the national tragedy extended for over ten years, beginning in 1982, with a brief respite in 1986. Emigration from Brazil, traditionally a country of immigration, has been estimated at more than 600,000 in the last few years, with persons of Italian or Japanese ancestry claiming the legal right to work in the countries of their forebears. Others have gone to Portugal, and hence into the European Union, while cities like Boston, New York, and Miami now have significant Brazilian communities.1 In part, government policy can change the rate of unemployment through stimulation or dampening of the economy; through investment, or lack of it, in infrastructure and education; and through trade policy, exchange rates, taxation, and subsidies. Certainly nongovernmental factors also influence the level of employment, including the conditions of the international market, available resources, and cultural preferences in terms of work, leisure, and education. All these factors have played a part in Brazilian employment, with policies of recession to combat inflation one of the most salient. Levels of unemployment show something about the priorities of a society, at least those priorities that motivate governmental policy. Unemployment may affect inflation rates and levels of support for the government among diverse groups. Labor is a factor of production that influences costs, while the level of employment and the income derived from it affect consumption and demand. Unemployment results in increased expenditure for social services, a rise in public disorder and crime, and lower tax revenues. Unemployment, in addition to being a personal issue for those out 37

38

Political Macroeconomy

of work and for those fearing loss of work, is a negative externality, or a public “bad.” Reduced unemployment is therefore a public good that politicians can supply as they seek to maximize personal profit. There are two major sources of unemployment figures: the IBGE; and those of the Sistema Estadual de Análise de Dados, the São Paulo state system of data analysis, made in collaboration with the Departamento Intersindical de Estatística e Estudos SócioEconômicos (SEADE/DIEESE, called SEADE from here on). The two sets of figures are limited in scope. SEADE surveys are focused on greater São Paulo, and the two give different pictures of the reality. SEADE bases its analysis on methods developed by the International Labor Organization and only began collecting unemployment figures in 1985, while IBGE figures go back to 1979. Both SEADE and IBGE obtain their estimates from field polls. There are two major differences in defining the unemployed out of the economically active population (EAP): SEADE considers persons of ten years of age as the lower limit of the EAP, while the IBGE cut is at fifteen years. IBGE registers persons as unemployed if they had no paid employment in the week of the survey and had sought employment during that week; this category is similar but not identical to the open rate of unemployment reported by SEADE. Others are categorized as inactive and are not included in the EAP. The SEADE definition of unemployment is less restrictive, categorizing as unemployed not only those unemployed in the reference week, but also including discouraged workers (persons who had previously sought work but said that they had given up looking) and persons who had sought work in the previous three months. Figure 3.1 shows the correspondence between SEADE and IBGE figures for unemployment in São Paulo, the only area of Brazil where comparable data are available over a significant period of time. The IBGE figures are lower and have less variation than those of SEADE, though they covary. Correlation between the two sets of data is 0.854 with a mean difference of 6.107 percentage points; the standard deviation of the SEADE figures is 2.18 points and those of IBGE 1.30, taken over the January 1985 to August 1992 period. If the official, or open, rate of unemployment in Brazil seems low, it is partly because of the large informal labor sector that works for cash and absorbs many who would otherwise be classified as unemployed. Even though open unemployment figures are low, their variation gives some indication of the changes in the economy and the extent of the problem. Open unemployment since 1980 shows four distinct periods (see Figure 3.1). Over the 1980–1984 period, there was an increase of almost two percentage points as a result of the recession. The 1984–1986 period saw a fall in unemployment as the country came out of the recession and the economy grew. Over the next three years, 1986–1989, unemployment

Jobs, Quasi Jobs & Unemployment

39

Figure 3.1 Comparative Unemployment Figures 17.5 15.0

SEADE/DIEESE

Percentage

12.5 10.0 7.5 5.0 IBGE

2.5 0.0

1980

1981

1982 1983

1984

Sources: IBGE and SEADE/DIEESE.

1985

1986

Year

1987 1988 1989

1990 1991 1992 1993

stayed relatively stable at a low level despite a decline in the level of economic activity. With the beginning of Collor’s administration in 1990, unemployment rose again, reaching levels similar to those of the 1984 recession. Unemployment figures leave out the economically inactive, those persons who are not seeking permanent work. According to SEADE figures in 1981, the economically active population was 47.8 percent; the remaining 52.2 percent were inactive, including persons less than ten years of age and the retired. Among the EAP, SEADE breaks down total unemployment (DUNEMPSP) figures into its components, as can be seen in Figure 3.2. Open unemployment (ABERTO) makes up the largest component of the total figure, corresponding closely to the total in its variation. The two groups that comprise discouraged workers (DESALENT)—who have given up seeking work—and those doing temporary work—the underemployed (PRECARIO)—are much smaller, vary less, and even temporarily crossed in mid-1986, probably the result of the increased employment that came with the first months of the Cruzado Plan. Beginning in 1990, the general tendency was for rising unemployment, especially among those with temporary jobs (the contingent labor market).

Political Macroeconomy

40

Figure 3.2 Varieties of Unemployment, São Paulo 20

DUNEMPSP

Percentage

15

10

ABERTO

5

0.0

1985

1986

1987

1988

1989

Year

PRECARIO

1990

1991

The Phillips Curve

DESALENT 1992

1993

1994

With the SEADE figures showing some of the reality of un- and underemployment, the reasons for recession have to be examined. One of the reasons for high unemployment in some periods is the anti-inflation battle that has been waged by orthodox methods of restricting the economy; this approach worked during the Castello Branco government but only created stagflation when it was used later. The basic argument against stimulating the economy to approach full production is the theoretical relationship between unemployment and inflation, the Phillips curve: inflation increases as unemployment decreases, because labor shortages result in wage increases that are passed on to prices. Such a relationship may exist short term in Brazil, but not long term.2 As one economist stated, “The impact of variations of the level of activity on the rate of inflation is very small.”3 Regressing the annual change in the percentage rate of inflation with the unemployment rate gives an adjusted R2 of 0.05 over the 1980–1991 period. As can be seen in Figure 3.3, there is no long-run Phillips curve.4 Of the eleven ordered pairs of curves, only two, those of 1988–1989 and 1990–1991, exhibit the negative curve characteristic of the Phillips curve. The latter negative curve (1990–1991) is the result of a policy variable, based on an orthodox stabilization effort during the Collor administration. Most of the initial changes, from 1980 to 1986, show major changes in

Jobs, Quasi Jobs & Unemployment

41

Figure 3.3 Phillips Curve for Contemporary Brazil (percentage) 3000

1990

2500

Inflation

2000 1500

1989

1000 1988

500 0

1986 3

4

1985 5

1991 1981

1984 6

Unemployment

7

1980

8

unemployment without a similar change in inflation. Then in the 1986– 1990 period, inflation increased dramatically while unemployment changed only a little more than a single percentage point. Arguments about the existence of a Phillips curve have an extended history in macroeconomic theory. When the public loses its “money illusion” and expects inflation, inflation will not have any effect on the longterm natural rate of unemployment. 5 Certainly this description fits the Brazilian case, where the expectation of inflation and compensation for it have been a normal part of life. What has been happening to jobs can better be seen by plotting the two variables over the 1980–1991 period. Figure 3.4 shows a level rate of change in inflation until the hyperinflation at the end of the Sarney government, followed by the beginning of the Collor Plan; unemployment changed independently of prices. The Informal Economy

Open unemployment data from Brazil do not give a clear picture of the employment reality. Official unemployment figures are only the tip of the iceberg, and they do not reflect the unemployables or the persons who live

Political Macroeconomy

42

Figure 3.4 Unemployment and Inflation (percentage) 3000

8 7

2000

Unemployment

1500

6

Inflation

1000

5 4

500 0 1980 1981

1982

1983

1984

1985 1986

Year

1987 1988

1989

1990

Percent Unemployment

Change in Inflation

2500

3 1991

outside the formal economy. Legal employment in Brazil requires a carteira de trabalho (work card), which in turn requires a carteira de identidade (identity card), the most important single document a Brazilian possesses. Only persons with a signed work card can receive social security benefits, and presentation of a birth certificate is the normal means of obtaining the identity card. Obtaining a work card is difficult, but various jeitos facilitate the task.6 Some measure of the size of the informal economy can be seen in the figures in Table 3.1, which show how many Brazilians have official documents and bank accounts (note that only persons over eighteen are included in the survey). Persons without documents are excluded from the formal economy; however, possessing such documents does not necessarily give one a place in the formal economy. The national secretary of labor stated that the informal labor market is greater than the formal: “In our work force are some 60 million persons and more than 30 million work without being registered.” 7 The informal economy grew from 1.16 percent of the gross domestic product in 1980 to 6.94 percent in 1983, according to an estimate of the IBGE.8 By other estimates, these figures are low. The president of the IBGE, the official statistical collection agency of the federal government, said that they “know that millions of Brazilians work without registering and without paying taxes, moving an astronomical quantity of resources,” and the ministry of

Jobs, Quasi Jobs & Unemployment Table 3.1

43

Possession of Documents (Persons 18 or more years of age in 1988) Total 82,514,891

Bank account Possess Do not possess No answer Birth certificate Possess Do not possess No answer Identity card Possess Do not possess No answer Work card Possess Do not possess No answer

31.6 68.3 0.1

Urban 62,972,981

Percentage of Population 36.6 63.3 0.1

62.3 37.6 0.1

15.5 84.4 0.1

63.4 36.5 0.1

78.6 21.3 0.1

73.3 26.4 0.1

Rural 19,541,910

58.8 41.1 0.1

85.3 14.6 0.1

Source: PNAD, Anuário Estatístico do Brasil 1991, p. 441. Note: The rural area of the north is not covered.

56.8 43.1 0.1

79.6 20.2 0.1

53.1 46.8 0.1

social security estimated that the invisible or informal economy employed approximately 12 million persons, which represents 20 percent of the gross domestic product.9 Persons in the informal economy free-ride on the government, enjoying public goods but not paying fully for them. The distribution between holders of signed work cards and nonholders shows that income in the informal economy is often better than that of persons officially registered as employed (see Table 3.2). It has become quite clear that the segmentation of the Brazilian labor market according to positions with and without work cards (carteira de trabalho) cannot explain a significant portion of inequality. Such segmentation would be of importance if there were high wage differentials and low mobility between the two groups. However, our studies reveal high mobility and small differentials between them.10

Table 3.2

Distribution of Salaries Among Work Card Holders (Pay in Terms of Minimum Salaries)

With card signed Without card signed

Below 1 51.1 16.4

Source: DIEESE (1992), p. 17.

1 to 5 40.1 61.9

Over 5 7.8 21.3

N/A 1.0 0.4

Total

100.0 100.0

44

Political Macroeconomy

The informal economy acts as a buffer for persons at low income levels during periods of rising or high unemployment, as persons laid off from jobs or seeking work turn to the informal sector to maintain their incomes. An important cost of unemployment is the loss of taxes and contributions to social security. Informal sector employment is usually transacted in cash, and no income taxes are paid. At the same time, government expenditures rise during recession to cover social costs of job losses, including health and unemployment insurance. Public expenditures also rise as children are moved from private to public schools when upper-middleclass families lose employment. Recession means that some persons previously employed turn to selfemployment, often selling items in the streets, many without licenses. The city of Rio de Janeiro estimates a monthly U.S.$3 million tax loss from such sales.11 The number of vendors, known as camelôs, restricting foot traffic on the main streets and walkways of the major cities gives a rough, though subjective, measure of the severity of a recession. In Rio de Janeiro, there are an estimated 200,000 camelôs, five for each retail store in the city. 12 They earn on average two minimum wages, comparable to what many of them could earn if they were in the formal sector (42 percent of the formal work force earn two or less minimum wages). A study of Rio de Janeiro by the Instituto Brasileiro de Geografia e Estatística found that 560,000 persons worked in the informal economy as compared to some 2 million in the formal economy, and that camelôs made five times more than public school teachers. Rio’s informal economy represented 18 percent of the gross domestic product of the city.13 Workers in the informal sector can get almost as good medical services from the public health service—the Instituto Nacional de Serviço Social (INSS), paid out of the budget of the ministry of health—as they can from the underfunded Instituto Nacional da Previdência Social (INPS), paid through salary deductions.14 Bóias frias, rural unskilled immigrants from the northeast to urban areas, especially in the industrial south and southeast, seek manual labor for cash payment and remain outside official figures. Similarly, no attempt is made to count subsistence farmers left unemployed by drought, or seasonal workers during the off-season. The officially illegal numbers racket (jogo do bicho), which operates openly on the streets and is protected by the police, employs thousands of numbers-selling bicheiros. The banqueiros do bicho, who control the rackets, achieve popularity as sponsors of the samba schools; they pay expenses for preparations for Carnaval and are honored in the celebration for their charity. Jogo do bicho has been estimated to be a U.S.$2 billion business annually. The informal sector also includes unregulated child care, domestics who work only for cash, child labor, and small unlicensed industries. It has been estimated that for each

Jobs, Quasi Jobs & Unemployment

45

percentage point increase in open unemployment, participation in the selfemployed sector rose 0.58 percent during the 1982–1992 period.15 The recession of 1990–1993, which became progressively worse without reducing inflation, did reduce the level of employment and increase unemployment. Data on industrial employment collected by the Federação das Indústrias do Estado de São Paulo (FIESP), the only record of employment levels that has been maintained over time in Brazil, showed a regular decrease in São Paulo area employment until bottoming out in January 1993. A serious problem for the future is whether lost jobs will be recuperated when growth returns to Brazil. A necessary process of restructuring the economy is under way, reducing the oligopolistic power of some industries, lowering prices to the consumer, and in the long run improving the competitive position of the country internationally. Brazilian industry is becoming leaner and meaner. The lowering of protective tariffs and other import barriers, along with the privatization of the estatais, is forcing the private sector to make changes to increase efficiency and productivity. But such restructuring has its costs, as it often requires greater capitalization and a reduction of the work force. Table 3.3 shows one example. One of Brazil’s economists stated in a newspaper interview titled “Productivity Major Reason for Unemployment Rise” that production would have to increase 30 percent in order to return to the same level of employment as in 1990: There are gains in productivity. And if, or when, the economy stabilizes, productivity will improve even more because of investments in new technologies. . . . The gains in productivity are part of an irreversible process; what is happening even here . . . is not linked to the introduction of new machinery in the factories. It is based on the reorganization of work inside the companies.16

One result of the restructuring has been a slight drop in the Gini coefficient, as the upper middle class has been hit by the elimination of middle-management jobs, reducing the wages of the upper-income quintiles.17 The Table 3.3

Privatization

Uniminas Steel Company

Income Profit Production of liquid steel Employees

Source: Istoé, May 17, 1995, p. 111.

Before 1990

U.S.$ 680 million U.S.$ 11 million 3.54 million tons 13,413

After 1994

U.S.$ 2.3 billion U.S.$ 422.8 million 4.27 million tons 10,448

46

Political Macroeconomy

Gini, which had ranged from 0.58 in 1981 to 0.60 in 1990 in six metropolitan areas, dropped to 0.56 in 1991. Normally it would be expected that unemployment and employment figures would be strongly negatively correlated, with an increase in employment reducing unemployment. Using IBGE unemployment figures and industrial employment data from the FIESP, correlation is negative, but the strength of the relationship is much smaller than expected, R = –0.339 (January 1981 to August 1992). Much of this low relationship is due to restructing where increases in production have required some new employment, but not enough to compensate for the increasing productivity. The Cost of Unemployment

Okun’s law associates the level of unemployment with changes in real output.18 This can be quantified by regressing the proportional rate of change in the GDP ∆(Q) with changes in the rate of unemployment ∆(U). The longest time series on unemployment in Brazil is that of the IBGE, going back to 1980. Using annual data of the 1980–1992 period results in the following (standard error in parentheses): (1n Qt – 1n Qt-1) = 0.017–0.028 (Ut – Ut-1) (0.0079) (0.0071) Adjusted R2 = 0.596, SER = 0.026, DW = 1.41

This shows that a 1 percent increase in official unemployment over a year is associated with a 2.8 percent decline in the GDP. In the Brazilian economy of 1992, with a GNP of U.S.$420 billion, this means that each additional percentage point in the unemployment rate costs $11.8 billion in lost output; future costs will be greater because part of this is lost investment.19 Wage Policy and Multiple Jobs

Certainly new jobs will be produced as the economy grows. But with an annual population growth of 2.1 percent during the 1980s, the number of persons entering the urban workforce will probably remain greater than the job openings. The wage policy that has been in effect since 1965 because it has aggravated the employment problem, indexes salary increases at a rate below inflation and thus reduces the buying power of take-home pay. This has pushed women out of the home and into the workforce with their husbands; both men and women often work two or more jobs in

Jobs, Quasi Jobs & Unemployment

47

order to feed their families. Figures from São Paulo indicate that the percentage of salaried employees working more than the legal workday rose from 22.1 percent in May 1985, its lowest point in official statistics, to over 40 percent in 1991–1992. Children also enter the workforce at young ages, taking some of the lowest-paying jobs; 51.7 percent of persons making one minimum wage or less are heads of household. The monthly DIEESE record of the number of hours of work at the minimum wage required to buy a basic food basket in São Paulo for a family of four has exceeded 200 hours in thirty-three of the months since July 1983 and has been over 150 hours a month in all but thirteen months of that period.20 One study called the entry of women into the salaried workplace “one of the most important phenomena observed in the Brazilian labor market in the last decade”21 (see Figure 3.5). The proportion of wives (cônjuges) working increased from about 30 to almost 40 percent during the 1980s. This growth is concentrated in economic groups of high and low income, while wives of husbands in middle-income groups participate significantly less. For wives of the upper-income sectors, participation is probably the Figure 3.5 Participation of Women in the São Paulo Workforce 39 38

Percentage

37 36 35 34 33 32 31

1985

1986

1987

1988

Year

1989

1990

1991

Source: Pesquisa de Emprego e Desemprego, no. 87, São Paulo: Fundação Sistema Estadual de Análise de Dados, pp. C116–117.

Political Macroeconomy

48

result of enhanced opportunities for women in the professions and business; for lower-income families, increased participation of wives compensates for the instability of their husbands’ employment and the loss of purchasing power due to regressive wage policies. We find evidence that part of the increase of feminine participation observed in the last decade can be associated with attempts of the family to recompense variation in the income of the husband. Such results suggest that comparisons among indices of wealth concentration underestimate the impact of this phenomenon on the well-being of the family, for not taking into account the reduction in the level of well-being associated with the intensification of the participation of secondary members of the family in the workforce.22

In addition to the increased entry of women into the workforce and the number of children working, a large percentage of Brazilians work more than the legally constituted workweek. Figure 3.6 shows the extent and variation of overtime work. The figures represent the percentage of persons working overtime at their primary jobs. The jump in the number of Figure 3.6 Rate of Overtime Employment, São Paulo 55 50

Percentage

45 40 35 30 25

1985

1986

1987

1988

Year

1989

1990

1991

Source: Pesquisa de Emprego e Desemprego, no. 87, São Paulo: Fundação Sistema Estadual de Análise de Dados, pp. C126–127.

Jobs, Quasi Jobs & Unemployment

49

persons working overtime in November 1988 came from a change in the law that lowered the legal workweek from forty-eight to forty-four hours. What this does not show is the number of persons working more than one job, a common occurrence in metropolitan Brazil. Increasing the minimum wage and its lowest multiples could result in a drop in unemployment without necessarily increasing total output: some persons could opt for a single job, with their former additional jobs filled by the unemployed. However, persons with multiple jobs may produce less per job, and efficiency and output per job would increase if the number of persons holding multiple jobs could be reduced. If the purchasing power of lower-salaried workers were increased, it is possible that workers would prefer less work and more leisure, opening jobs for other workers. This is contrary to the generally held view that increasing salaries reduces the workforce. While increasing salaries would reduce jobs as industry and the service sector capitalize to compensate for increased wages, the number of persons holding jobs could also increase as multiple jobs became less popular. Increasing minimum wages would also increase the market for goods, even if it did not stimulate the consumer durable industry as greatly as the previous wage policy. An additional problem that increases unemployment comes from the new laws that were emplaced to protect employment. Employers, to protect their flexibility in terms of workforce size and profits, avoid the new laws by contracting for temporary workers and by laying off workers before they have worked long enough to collect the mandated thirteenth wage.23 Conclusion

Unemployment, along with the dramatic drop in the purchasing power of lower-income workers, has created a major change in Brazil as it reconfigures society and family life. Traditionally men were the breadwinners and women maintained the household and cared for the children. Today the inability of men to earn sufficient money to care for a family has increasingly forced mothers and children into the workplace. The restructuring is a two-edged sword. For some women it means new opportunities to emerge from under the shadow of male domination. At the same time, the cement of family life has come apart without new structures to replace it. Unemployment generated by modernization and industrialization of agriculture has also generated massive internal migration and overwhelming urbanization without providing adequate educational, social, and physical infrastructure to absorb it. During the Brazilian Miracle, growth made social mobility a reality and gave hope to each year’s incoming workforce.

50

Political Macroeconomy

The lost decade of the 1980s created social deterioration that only new jobs can remedy. Jobs cannot be produced by governmental expenditures because of the need for fiscal reform, and at the same time there was a loss of industrial jobs due to restructuring.24 Notes

1. “O Povo da Diáspora,” Veja, August 7, 1991, pp. 37–43. According to the cover story, an estimated 630,000 Brazilians had left the country by the middle of 199l, with major emigration to the United States (330,000), Japan (150,000), Italy (45,000), and Portugal (30,000). The story claimed that the number of emigrants more than doubled in the 1987–1991 period. 2. The Phillips curve has come under considerable attack, with many economists questioning its existence over the long run. It is important here because economists in Brazil accepted its reality and used recession, with accompanying unemployment, as the means of trying to control inflation. 3. Francisco L. Lopes, “Inflation and the Level of Activity in Brazil: An Econometric Study,” Brazilian Economic Studies no. 8 (Rio de Janeiro: IPEA/ INPES, 1984), p. 248. 4. Vincent Parkin, Chronic Inflation in an Industrialising Economy: The Brazilian Experience (Cambridge: Cambridge University Press, 1991), pp. 45–51. 5. The money illusion refers to the failure to realize that money rises and falls in value. 6. Brazilians often have ways to dar um jeito, an untranslatable term meaning roughly to cut through red tape and avoid bureaucratic controls. Frequently despachantes, professional red tape cutters, are paid to make things happen that normally would confound the uninitiated. 7. Jornal do Brasil, “Negócios e Finanças,” September 6, 1992, p. 4. 8. “Em Busca da Realidade: A Economia Informal,” Federação das Indústrias do Estado do Rio de Janeiro, n.d., p. 13. 9. Jornal do Brazil, January 24, 1984, p. 17. 10. Ricardo Paes de Barros, Luiz Carlos Eichenberg, Lauro Roberto Albrecht Ramos, and Sônia Rocha, “Research Program on Labor Markets and Income Distribution in Brazil” (Rio de Janeiro: IPEA, August 1992). 11. Jornal do Brasil, July 4, 1993, p. 36. 12. O Globo, April 30, 1993, p. 13. As the reader of this manuscript pointed out, Rio de Janeiro established a camelodromo in 1994, a marketplace where the vendors have marked plots on a concrete slab. The city has encouraged vendors to move there and has attempted to sweep some of the streets clean by prohibiting sales on the sidewalks. 13. Veja, June 5, 1996, pp. 106–107. 14. Personal conversation with Martha Rocha, IBGE economist, March 24, 1993. 15. André Urani, “Inflação e Desemprego como Determinentes do Nível e da Distribuição de Renda do Trabalho no Brasil Metropolitano: 1982–1992” Série Seminário no. 04/93 (Rio de Janeiro: IPEA, 1993). 16. Interview with José Márcio Camargo, O Globo, June 7, 1993, p. 16. 17. Urani, “Inflação e Desemprego.” 18. Arthur Okun, “Potential GNP: Its Measurement and Significance,” Amer-

Jobs, Quasi Jobs & Unemployment

51

ican Statistical Association, Proceedings of the Business and Economic Statistics Section, 1962. 19. Douglas Hibbs, using annual data from 1950 to 1983 in the United States, found an estimate of Okun’s law multiplier of –0.021. Two percent is the lower bound of most estimates, while Okun’s original estimate was about 3.0 percent. See Hibbs, The American Political Economy: Macroeconomics and Electoral Politics in the United States (Cambridge, Mass.: Harvard University Press, 1987), p. 50. 20. The figures were supplied by DIEESE and covered the period January 1959–August 1992. The average number of hours normally worked during a month is 240. In 1959, the number of hours of work required to buy the basic basket of food averaged around 65. Figures for the basic basket in the major urban centers are published monthly in the Boletim DIEESE. A printout of the data was supplied for this study by DIEESE’s central office in São Paulo. 21. Guilherme Luís Sedlacek, “Estratégia de Sobrevivência da Família Brasileira: Um Estudo da Participação das Esposas,” in Perspectives da Economia Brasileira: 1992 (Rio de Janeiro: IPEA, 199l), p. 488. 22. Ibid., p. 496. 23. By law, workers with permanent jobs must be paid a thirteenth month salary, normally at Christmastime. Financially, employers prefer to hire temporary workers, laying them off before they have worked long enough to be classified as permanent. 24. The one level at which the government is creating jobs is at the municipal level. Mayors are well funded, thanks to the 1988 constitutional provision that passes federal revenues on to them. One effect of these new riches is that mayors have been able to finance social projects, which enables incumbent mayors to choose and ensure the election of their successors.

4 The Distribution of Wealth and Income

For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath. —Matthew 13:12

Wealth in Brazil is notoriously maldistributed by geography, by economic class, and by color. Political decisions have resulted in a social welfare system for the middle class and have left the northeastern states and the lower class in both rural and urban areas among the very poorest in the world. Persons of color, while not officially discriminated against, remain in general more poorly paid, educated, and housed than persons of European or Asian descent. Long cycles of drought have created a desert, the sertão, that dominates much of the northeast; it is situated in the eastern bulge of the nation between the Rio São Francisco and the Amazon. Within that region, infant mortality rates have reached staggering proportions as newborns die of thirst and diarrhea. Internal immigration from rural to urban areas, pushed by droughts and the high birthrate, floods cities with unemployable multitudes that live either in the favelas (squatter settlements) that occupy mountainsides and swamps, or in the streets; cities like Rio de Janeiro are filled with homeless children and crime rates are increasing.1 Although maldistribution of wealth is serious in many nations, especially those in Latin America, Brazil has one of the worst records internationally. As can be seen in Table 4.1, the differential wealth ratio between the upper 10 percent and the lowest 40 percent in 1990 was more warped in Brazil than in countries like Peru and India, both nations with serious wealth distribution problems. Rationales for the inequalities are many. The richer states of the southern region of Brazil were developed by immigrants from Italy and Germany, 53

Political Macroeconomy

54 Table 4.1

Comparative Wealth Ratios (Top 10% and lowest 40% in 1990)

Brazil 5.7

Colombia 2.9

Source: Taken from Tolosa (1991b), p. 7.

Peru 2.8

Venezuela 2.5

India 1.3

who brought with them considerable experience and educational capital. In the wealthiest state, São Paulo, coffee earnings brought the initial investment in industry that has grown to First World standards, and descendants of Japanese workers brought to pick coffee at the beginning of the century now dominate much of the agricultural production of the area. The northern region of Brazil, where more of the population is of Amerindian and African ancestry, is poorer, with little investment in education, industry, or infrastructure. Maldistribution of income follows the pattern of wealth in Brazil, with the northeast showing radically inferior wages. The gross domestic product of U.S.$918 per capita for the northeast compares with a figure of $3,217 for the southeast; 36 percent of agricultural workers earn one minimum wage or less (see Table 4.2). Income and wealth inequality in Brazil are a legacy of the era of slavery and colonialism. Recognition of the problem, following on the occupation of uncultivated land by the landless in the northeast and increased political radicalization, resulted in the first major program of regional wealth redistribution, the Superintendência de Desenvolvimento do Nordeste (SUDENE), during the late 1950s. Since then a number of programs have been developed, all competing for scarce resources insufficient to resolve the problem. 2 Domestic and foreign debt also squeeze the budget, limiting the ability of the government to make transfer payments to the lower class. Only rarely are macroeconomic policies neutral in the distribution of wealth, determined as they are by a combination of economic theory and the drive for political support and profit. Various political decisions have Table 4.2 Year

1985 1989

Geographical Distribution of Workers Earning One Minimum Wage or Less North 21.2 19.0

Northeast 44.4 41.1

South 20.2 17.0

Regions

Southeast 24.2 18.5

Source: IBGE: PNADs of 1985 and 1989; DIEESE (1992), p. 15.

Center-West 26.3 23.8

Brazil 29.1 24.6

The Distribution of Wealth & Income

55

affected wealth distribution. The corporate structure of labor organization, decreed by Getúlio Vargas during the Estado Novo (1937–1945) and continued by the military, has generally kept unions weak, thereby preventing them from organizing a larger percentage of the workforce and negotiating higher wages (the few exceptions include automobile industry workers). As can be seen in Table 4.3, the value of the labor sector in production has consistently dropped over time. Industrial production in Brazil is usually either monopolistic or oligopolistic: weak antitrust legislation results in a lack of competition, high prices, and failure to reduce prices when demand falls. Excess profits often are not reinvested, since the market is already saturated, and the profits pass instead into higher salaries for management. What is crucial is the debate over the relationship between economic growth and the maldistribution of wealth. Table 4.4 shows how distribution of income has worsened at a time when the economy has grown. From the political-economic point of view, the strategies of the last twenty years that economists advocated to combat poverty and that emphasized Table 4.3

Internal Urban Income Distribution (percent of GNP)

Income Origin Labor Other

1949 56.6 43.4

1959 55.5 44.5

1970

1980

52.0 48.0

50.0 50.0

1984 46.7 53.3

1988 38.0 62.0

1989 35.0 65.0

Source: Prado (1990), p. 5; updated from a lecture by author in Capetown, February 14–28, 199l.

Table 4.4

Cumulative Income

Distribution of Income of the Economically Active Population

Lowest 20% Next 20% Next 20% Next 20% Highest 20% Highest 10% Highest 5% Highest 1% Gini index Ratio 1/40b

1960

3.5 8.1 13.8 20.2 54.4 39.7 27.7 12.1 0.500 1.048

1970

Percent of Income

3.2 6.8 10.8 17.0 62.2 47.8 34.9 14.6 0.568 1.460

1980

3.2 6.6 9.9 17.1 63.2 47.8 34.9 18.2 0.590 1.862

1979a

2.9 6.6 10.1 17.6 62.8 46.8 33.8 13.8 0.580 1.453

1990a

2.3 4.9 9.1 17.6 66.1 49.7 35.8 14.6 0.615 2.012

Source: Bonelli and Ramos (1993), p. 3. Notes: a. Data from annual PNADs, not directly comparable with census data. Data for 1960–1980 calculated from census data. b. Ratio of income of the 1% richest to the 40% poorest.

56

Political Macroeconomy

increasing basic necessities are being reevaluated, with a return to the belief that only increased growth can reduce poverty. “In its essence all of the argumentation is centered on the existence or not of a Kuznets curve, associating growth with inequalities of income.”3 Kuznets suggested that income distribution changed as economies modernized, with distribution at first worsening then eventually bottoming out as the pool of rural labor ran out; the result was a more egalitarian distribution as wages rose in response to labor scarcity accompanied by further growth of the economy. This is the famous inverted-U pattern of income distribution versus per capita income.4 However, the pattern is not universal among developing countries, even among the NICs (newly industrializing countries). In Brazil, the pattern has been one of increasing concentration of income and greater inequality with greater growth. Such concentration, the greatest of any major country, is at least partly the result of political-economic decisions about the strategy of development. Brazilian developmentalism, with its emphasis on import substitution, intensified the regressive distribution of incomes sectorally, regionally, and socially, as macroeconomic policies, correctly anticipating a greater return of growth for a given investment, provided greater stimulus to concentration of income and power in southeast Brazil, especially São Paulo.5 Developmentalism was not redistributive. In fact, “developmentalists argued that in the underdeveloped economy the primary problem was production and growth rather than redistribution of income,” that redistribution without development would be the distribution of poverty.6 The reality is that growth has not produced a better distribution through trickle-down, but growth has instead been accompanied by losses in real income of lower-salaried groups since 1960. Figure 4.1 plots the change in the gross domestic product per capita and the real minimum wage. Increased maldistribution of income has accompanied not only economic growth but also orthodox programs of stabilization that use recession as a means of reducing demand to lower inflation. Recession, which hits the lowest-salaried workers the hardest, increases unemployment, both open and hidden, and drives people into the informal economy, as shown in the preceding chapter. Orthodox stabilization plans have increased both absolute and relative poverty by reducing the level of economic activity. In particular, stabilization has affected those with few savings and no social nets, such as unemployment insurance or labor contracts. 7 Stabilization policies have been designed to favor politically well organized groups. Any stabilization policy must take into account the effect it will have on such sectors of the urban middle class as organized industrial labor, which can, through political protest and access to politicians, be a threat to social stability.

2,5

2.0

Thousands of U.S.$

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