Is the giant of Latin America next in line for crisis?

Thursday August 15, 2002 16:10

by Urbis Felicitas - Happy City Samba School

Brazil gets IMF loan-and austerity

BRAZIL HAS become the latest victim of the economic crisis that began in Argentina and is now spreading throughout Latin America. The International Monetary Fund (IMF) was forced to issue its largest ever single loan last week to Brazil.

The aim was to prevent the country going the way of neighbouring Argentina, which has sunk into a 1930s-style depression over the last three years. The $30 billion IMF loan, however, comes with demands that the Brazilian government pursues neo-liberal economic policies even more rigorously. The IMF has insisted on public spending cuts so that the Brazilian government sucks 3.75 percent of total production out of the economy every year to hand to international bankers and Western governments.

The IMF is also withholding 80 percent of the loan until next year. That is a deliberate attempt to straitjacket the winner of Brazil's presidential election, due in October. The crisis facing Brazil is part of a wider crisis across much of Latin America. In neighbouring Argentina unemployment is now 40 percent on some estimates, and half the population is living below the official poverty line.

The US government, which is the dominant force among the rich countries that make up the IMF, ensured that it refused to help in the Argentinian crisis. It claimed the country had pursued "reckless economic policies". In fact Argentina was a showcase for the IMF throughout the 1990s. The IMF and Western governments lent Argentina and Brazil billions of dollars in 1998.

That year saw financial crisis in another "model region" for capitalism, East Asia, spread from one country to another across the world. The crisis hit Russia, most of Latin America and "hedge funds"-financial gambling syndicates-in the US.

The conditions the IMF attached to loans in the wake of that crisis helped ensure that most of the economies of Latin America did not recover from the crisis. They meant public spending cuts, falling wages, privatisation and higher unemployment. The result was companies going bust, leading to more unemployment and a vicious spiral of crisis.

Privatisation left more of the economy prey to the whims of big investors, who could threaten to move money abroad if they feared they could not make enough profit. That is precisely what happened in Argentina at the end of last year. None of this is the fault of workers and the poor, who have borne the brunt of the austerity measures.

But the IMF's policies are designed to ensure that ordinary people are screwed even harder-to convince international investors they can continue to make a profit.

Brazil was one of the few Latin American countries which did, at least partly, recover from the crisis of 1998. The new IMF package shows that the US is worried about what the consequences would be of Brazil, Latin America's biggest economy by far, sinking into the kind of crisis that has hit Argentina.

But the package also threatens the mass of Brazil's population with the kind of austerity that has hit much of the rest of the continent, and which-as well as misery-has provoked resistance and protests by workers and the poor.

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What US fears

THE IMF intervention in Brazil is a sign of just how serious the worldwide economic crisis is. US treasury secretary, Paul O'Neill calls the shots at the IMF. Two weeks ago he said there was no point bailing out Brazil and other Latin American economies with loans.

That helped deepen the financial crisis in Brazil. He had already blocked moves to issue big loans to Argentina. The US government believed the Argentinian crisis could be contained. President George Bush said the US was not prepared to prop up collapsing economies elsewhere. It was a declaration of extreme free market policies.

Far from being contained, the crisis has spread-to Uruguay, and now to Brazil. The US is getting worried about what could happen if Brazil, Latin America's biggest economy, sinks into a huge crisis. The Latin American meltdown is part of a global crisis.

Argentina was not a Third World country. For many decades it enjoyed southern European living standards and was highly industrialised. Uruguay was called the "Switzerland of Latin America" as it was regarded as a solid banking centre.

Two weeks ago the government shut the banks to prevent people withdrawing money, leading to riots and a general strike. Some estimates say that Brazil is the tenth largest economy in the world . The crisis comes as experts warn about renewed recession in the US, Europe and Japan.

The Financial Times said on Saturday, "US consumers remain severely stretched and are more likely to retrench than to increase their borrowing in the short term. After the downward revisions to past US economic performance, the dream of future riches to pay current debts is dimming. Investment, too, is unlikely to provide a big boost, given the spare capacity in the economy. The economic backdrop has darkened."

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The spectre of resistance

THE COMING general election in Brazil triggered the withdrawal of billions of dollars from the country. Capitalists in Brazil and internationally feared that Jose Serra, the government's candidate for president and a defender of neo-liberal policies, would be knocked out.

The two frontrunners in opinion polls are Luiz Inacio "Lula" da Silva of the left wing opposition Workers' Party, and Ciro Gomes of the centre left Workers' Front.

Both have talked about improving welfare and labour rights. Lula has also raised calls for radical land reform to assist peasants and the rural poor. The government-backed candidate rushed to endorse the IMF package last week. Lula offered "preliminary support" for it, and in an official statement the Workers' Party said, "Because it is inevitable, we accept the accord." That is not the kind of gung-ho support the IMF and bankers wanted.

A new opinion poll on Friday of last week again put the two left opposition candidates way out in front. Big investors reacted by wiping 3.8 percent off the value of the Brazilian currency and pushing up the extra interest Brazil pays on its debt by 11 percent.

They fear that a victory for Lula in October would raise expectations among workers and the poor that his government would break from the demands of the IMF. The Argentinian crisis has brought immense suffering, but it also led to last December's revolt and continuing protests since, which have left a weakened and fragile government.

It is the prospect of such resistance spreading to Brazil and the rest of Latin America that terrifies the US government, the IMF and the multinationals. And even many defenders of the IMF say that its package is as likely to bring economic meltdown and political turmoil to Brazil as it is to stave crisis off.