Brazzil
Economy
October 2002
In October 2002, Mr. Luiz Inácio da Silva (Lula) was finally elected president of Brazil. After so many tries (four in all), what put him over the top in this election? What made such a difference this time around for Mr. Lula to achieve his presidential victory?
First, we have the catastrophic economic situation in South America; with various economies collapsing one after another, such as Argentina, Uruguay, Paraguay, Colombia, Bolivia, Venezuela, and Brazil.
Second, the people in Brazil are tired of 1) the widespread poverty and despair of the Brazilian population, 2) a crime wave which is completely out of control all over Brazil—related to the illegal drugs trade, 3) the mismanagement of economic resources by the Brazilian government, 4) the complete political apathy of the government to resolve the major economic and social problems afflicting the country.
Third, also having a major impact on this mess is corporate and political corruption. Fourth, we had a very poor economic policy and performance the last four years by the current Brazilian government economic team. Since January 1999, the Brazilian Real lost over 60 percent of its value in relation to the US dollar. The country Brazil and the Brazilian population are getting poorer and poorer every day.
Somebody has to do something drastic to improve the situation in Brazil, before Brazil falls into the same economic crisis and final economic collapse similar to the one in Argentina. The status quo has to go! Brazil needs a major and radical government change to be able to survive.
Finally, we could list all the usual reasons to justify the economic collapse of South America, but the economic mess is already done. It is there for everybody to see. Please don't underestimate the power of greed, incompetence, and corruption; things still can get a lot worse for all countries in South America.
Brazil is running out of time to take the only economic steps which can save the Brazilian economy from total collapse. Brazil still has some economic reserves left and is still in a position to negotiate its way out of this economic mess. This is pretty much a last call for Brazil. If Brazil misses this last chance, then good luck when you enter into the economic black hole.
After what has happened economically in Argentina and Uruguay, Brazil can become at this point, the laughing stock of the rest of the world, if the new Brazilian economic team lets this last opportunity slip through its fingers, without trying something drastic to save Brazil from economic meltdown.
The new administration should move the Brazilian economy away from the direction demanded by the IMF and the rules followed by the Cardoso administration, because that is the direction to an economic black hole, meltdown and chaos.
A Plan to Save Brazil
The only way to avoid an economic meltdown in the near future in Brazil, similar to the one which destroyed the Argentinean economy, is for the new Brazilian president to implement immediately and adopt a radical economic plan as follows:
1) The first priority for the Brazilian economy is for Brazil to adopt the euro immediately as its new currency. The Brazilian government should first adopt the euro as the new currency, then they should workout the details with the European Union for a reasonable timetable for the Brazilian economy to meet the requirements for full membership in that club.
Out of the 15 countries which comprise the European Union (EU), 12 countries also belong to the new European Monetary Union (EMU). The (EMU) country members adopted the new currency, the euro, as of January 1, 1999.
The resulting euro market created an economy with more than US$ 7 trillion in gross domestic product (GDP). If Brazil becomes a member of the European Monetary Union (EMU) the Brazilian economy would add another 10 percent to the size of the (EMU); an increase of (GDP) to almost US$ 8 trillion.
There are some (EMU) criteria established by the Maastricht Treaty, which countries wishing to join the (EMU) are required to meet before they are allowed to join the euro group. The criteria are as follows:
• Their inflation rate should be within 1.5 percentage points of the three best performing (EMU) countries.
• Their exchange rate should be stable in relation to the euro.
• Their government debt must be less than 60 percent of gross domestic product (GDP).
• Their government budget deficit must be below 3 percent of their (GDP).
The short term sacrifices required from the Brazilian people to meet these requirements will be rewarded in a big way in the future—with monetary stability, lower interest rates, a sound economic environment for investments, and access to European money markets.
With today's technologies in computers, communications, satellites, air travel, etc, distance is not an issue to stop any country from adopting the euro as its new currency. I want to bring to your attention the fact that the euro is the official currency of a country in South America—French Guyana belongs to France and the official currency in French Guyana is the euro.
After Brazil adopts the euro and it is protected by the power implicit in the value of the euro, only then the new Brazilian administration should take the second step of the economic plan.
2) The second step is for the Brazilian government to renegotiate its $ 250 billion dollar public debt to a more manageable longer term, and at a better interest rate. This is not a big deal as they make it to be in the press, since American companies in the US restructure their debt load all the time when they run into economic problems. The Brazilian government debt of US$ 250 billion is nothing today, when compared with the US$ 8 trillion debt of the US government.
I am not suggesting a major program of defaults on debt payments to banks and investors. I am suggesting a restructuring of the debt for a longer term period at a more reasonable interest rate.
It will be easier to restructure the government's debt after Brazil adopts the euro as its new currency, because it will give banks and investors the confidence that Brazil will be able to repay its debt in the future, in this new sound currency—the euro. Brazil would be renegotiating its debt from a position of strength implied by the value of the euro, also recognized as an international reserve currency.
Stability and Prosperity
Today, the fortune of countries can change very fast. As we look around the world we can see what happened to the Soviet Union, Malaysia, Indonesia, Thailand, and Brazil, just to give a few examples of countries with weak currencies. A strong currency such as the euro implies that the governments behind that currency will protect the value of the currency, in turn creating a safe environment for investments to flourish and grow.
If you are a Brazilian, you know that to protect your assets you have to transfer them out of Brazil to a safer and more stable economic environment, such as the major countries of the European Union or the United States.
The adoption of the euro by Brazil would stop this Brazilian and foreign capital flight and would provide a sound economic environment in Brazil, with a sound and stable currency which Brazilians and foreigners can trust.
The benefits of such a move should be immediate for Brazil. The one major benefit is currency stability. Brazilians will not be afraid of losing all their savings because of major currency devaluations. Currency stability would give Brazilians confidence to repatriate to Brazil the over US$ 200 billion that they have stashed away in Europe and in the United States to protect these assets from currencies meltdowns.
The other major benefit is that interest rates charged to Brazilian businesses and to the Brazilian population would go very low—they would get in line with interest rates charged in the euro countries.
Another immediate benefit would go to the companies of the euro countries that have investments in Brazil. After Brazil adopts the euro, Brazil will have eliminated the currency risk between Brazil and the European countries of the European Union. Europe is a very important exporting market for Brazilian goods and services, and the elimination of the currency risk will help increase the volume of business between Europe and Brazil. Afterwards, the market place would make the necessary adjustments to the prices of assets in Brazil to reflect the fair market value of these assets in terms of the new euro currency.
Why not the U.S. Dollar
The fact that I have been advocating in my writings that Brazil should adopt the euro as its new currency, has nothing to do with being anti-American. It has to do only with what is best economically from the Brazilian point of view.
I believe that the Brazilian economy matches much better with the economies of the countries which comprise the European Monetary Union than with the economy of the United States. From a Brazilian point of view, it is more appealing to adopt the euro instead of the US Dollar, because of the US Dollar's vulnerability to the international monetary market system.
The long term US trade imbalances have created a large pool of US Dollars in the hands of relatively few central banks around the world. These nations continue to run large trade surpluses with the United States, and they continue to increase the pool of US Dollars held by their central banks.
It is estimated that today 70 percent of US currency circulates outside the United States. The major holders of this currency are the euro countries, Japan, China, Hong Kong, Taiwan, South Korea, Indonesia, and Singapore. Probably today, there is an oversupply of US Dollars floating outside of the United States.
The U.S. government has a cumulative federal government debt of over US$ 6 trillion as of July 2002. The US government also has other borrowings from various funds which are not included in the above figure. These other U.S. government borrowings added to the debt another US$ 1.8 trillion as of July 1999, and included the following: Social Security US$ 845 billion, Medicare US$ 148 billion, Military Retirement US$ 140 billion, Civilian Retirement US$ 490 billion, Unemployment Compensation US$ 81 billion, Highway US$ 35 billion, Airports US$ 15 billion, Railroad Retirement US$ 21 billion, all others US$ 58 billion.
When the numbers are adjusted to reflect all this other debt, then the new total of the US cumulative debt as of July 2002 is estimated to be around US$ 8 trillion. Since the US government will be running budget deficits in the coming years, it will not be long before the US government debt reaches a new astronomical total of about US$ 10 trillion. I wonder how much debt the US government can get away with, before international investors realize that the US has way too much debt. On top of this figure, 45 states in the US have another $ 50 billion in deficits to add to the debt burden.
Eventually, the US government debt will catch up with reality, and the value of the US dollar will be adjusted accordingly in relation to other major world currencies. This is why Brazil should adopt the euro instead of the US dollar currency. It will be a major mistake for Brazil to adopt the US Dollar, since that would be the equivalent of investing in a company that is way over leveraged.
The United States has a much stronger and powerful economy because it operates with one currency—the US dollar. The economy of the United States would not be as strong if California, New York and Texas—each had its own currency. We have in the United States different economies operating under a single currency. Texas has its oil economy, California has its high tech economy, Nebraska has its agricultural economy, but they all operate reasonably well under a single currency, even though some times a change in the value of the US dollar would benefit the economy of one state and hurt the economy of another state at the same time.
In the same fashion, the adoption of the euro by Brazil will help some Brazilian states at a certain time and will hurt other states at other times.
I hope the new Brazilian president have the courage to make these radical decisions. Today, this is the kind of political leadership we need in Brazil, to guide Brazil for membership in Euroland and create a more stable economic environment for the country, and start the new millennium on the right path for growth and prosperity.
Other Suggestions
1) Related to the Iraq war, Brazil should do the same thing that France and Russia are doing today—Brazil should try to get as many business contracts as possible from the Iraqi government. The Iraqis have the oil revenue from authorized U.N. oil sales, and Brazil should try to sell to the Iraqis as much as possible to help the Brazilian economy.
It seems to me that there is nothing new about Iraq's mass destruction weapons. If there was any sign of danger, then Israel would have taken care of the problem as they did in the past. The information that Saddam Hussein is a ruthless dictator is nothing new, and certainly is not a good reason to start a war in Iraq. According to an article on the front page of The New York Times of August 18, 2002; "the Reagan administration provided Iraq with critical battle planning assistance at a time when American intelligence agencies knew that Iraqi commandos would employ chemical weapons in waging the decisive battles of the Iran-Iraq war, according to senior military officers with direct knowledge of the program."
A war in Iraq will be devastating to most economies around the world. I would be worried about Saddam Hussein if he was a religious fanatic, but he is not. Saddam is just a greedy and ruthless dictator; no different from many dictators that the US did business with and kept in power in the past.
This ridiculous talk of war against Iraq is only a "wag the dog" tactic or a diversion by the US administration from the real economic problems facing the United States today. The administration should be doing something more productive such as finding a way to create new jobs in the US economy. The administration should show that they care at least about the American people by giving the people that run out of unemployment benefits an extension to their unemployment coverage until the economic situation improves in the US.
2) Related to the new World Court, Brazil should not give an exemption for Americans from the jurisdiction of the International Criminal Court.
If the leaders of the US government act according to international law, then there is no reason for them to fear the new World Court. I know that many people thought that they could get away with murder and that they were above the law. Today many of these people are in trouble because of their past wrongdoings; included on that list are the following people to mention just a few:
1) The Serbian dictator Slobodan Milosevic is being tried by the War Crimes Tribunal at the Hague in the Netherlands.
2) General Augusto Pinochet has been having all kinds of legal problems related to his 17 year dictatorship of Chile. Even Mr. Henry Kissinger is afraid to leave US soil today, and recently he canceled a trip to Brazil, because he was named in legal actions over the Chilean coup that brought Mr. Pinochet into power.
3) The leaders of the repressive Argentinean military dictatorship that ruled Argentina from 1976 to 1983 also have all kinds of legal trouble today related to their actions during that period. They thought that they were above the law, but now they will pay the price for their arrogance.
The lesson to learn from recent past history is that no country or any one can act above the law. You might feel arrogant and untouchable today, and believe that you are superior to everyone and that you will get away with it, but given enough time you will also have your downfall similar to the above examples. Any country or individual that acts according to international law will not need any special exemption from future prosecution from the World Court.
Ricardo C. Amaral, economist and author, can be reached at amaral@alumni.fdu.edu