The Brazilian government and the IMF have not yet discussed
the possibility of a renewal of
their agreement, which expires in
December. It’s doubtful that Brazil will commit to a continuing
primary surplus of the magnitude it is now amid clamors for more
action on social problems and stimuli to
The Chamber of Deputies has made progress this month toward the passage of pension reforms. The special
committee studying the matter approved a somewhat less tough version of the government’s original proposal. This means that the
matter could go to the floor of the lower chamber as early as next week.
The president of the Chamber of Deputies, João Paulo Cunha of the PT (Workers’ Party), called out the Military
Police to control the crowds of government workers that had invaded Congress to protest against the proposed changes.
This unprecedented move caused criticism from the Left, but perhaps avoided more confusion.
It remains doubtful that measures that will significantly improve the social security deficit, that reached a record R$
9.6 billion (US$ 3.27 billion) for the first six months of 2003, will emerge. Opposition even within the government’s own
party remains strong.
A partial strike of government workers in protest against the reforms continues. The already precarious public health
service has been curtailed in same areas. Retirees have had difficulties in receiving their meager pensions. The Social Security
offices are closed making it difficult for firms wishing to meet the July 31 deadline for rescheduling payments of contributions
The federal tax collectors and customs inspectors also staged a slow down causing delays in clearing imports and
expediting exports. This is not good for companies installed here to use Brazil as an export platform that operate with slim
stocks of components and finished goods.
Several categories of judges have stated that they will strike on August
5th, the date that the debate over pension
reform may start in the Chamber of Deputies. Judges and prosecutors are not happy with the possibility of losing some of
their unreasonably generous retirement benefits. This may fizzle out as not all magistrates think this is a wise move.
If they strike there will be no one to judge the legality of the strike. Many judges are lawyers that could not make it
in private practice. Their salaries and benefits are among the highest in the land. Their complaints have aroused little
sympathy in the community at large. In fact, their attitude could help Lula gain support to instigate an investigation of the whole
judicial system, if he ever gets around to it with all the other problems he faces.
Too Much Power
As a layman, I would say that there is something wrong with a judicial system that gives enormous power to judges
to disrupt happenings that affect the lives of many people. Three flagrant examples of how judges block progress come to mind:
The on again off again merger of Varig and TAM, Brazil’s two biggest airlines.
The recent confusion over rates that fixed line phone companies may charge their customers.
The holding up of the duplication of a dangerous stretch of an important federal highway linking São Paulo to Curitiba,
southern Brazil and the Mercosul countries.
An IMF mission headed up by Jorge Marquez-Ruarte, an Argentine, is meeting with the economic and monetary
authorities in Brasília this week. It is expected that the International Monetary Fund will approve Brazil’s economic
performance so far in 2003.
The primary surplus of nearly R$ 37 billion (US$ 12.6 billion) achieved through May of this year exceeds the
targets previously established by the Fund and Brazil. This will make way for the next to last disbursement in August of US$ 4
billion under the US$ 31 billion agreement signed during the twilight of Fernando Henrique Cardoso’s government last year.
One more parcel of US$ 7 billion should be doled out in November, assuming the October inspection goes well. The
existence of this IMF agreement, coupled by the surprisingly responsible behavior of Lula’s government in monetary and fiscal
matters, has led to a positive inflow of short-term capital this year enabling the country to meet its maturing overseas obligations.
Direct Foreign Investment during the first semester of 2003, however, has dropped by two thirds from the same
period last year. This may be due to economic conditions in the First World but the apparent inability of Brazil to live up to
contractual agreements and the unstable juridical atmosphere help little to encourage investment.
Both parties, the Brazilian government and the IMF, are maintaining a low profile and have not yet discussed the
possibility of a renewal of this agreement, which expires in December. They prefer to leave this matter up in the air until
later in the year. I doubt if Brazil will commit to a continuing primary surplus of this magnitude amid clamors for more
action on social problems and stimuli to the economy. A renewal of this agreement in its present form will be difficult. Lula
cannot afford to be seen as caving into the international bankers. It will be interesting to see the reaction of creditors should the
safety net of the IMF no longer exist.
The real economy continues feeble. The automobile manufacturers are loaded with inventory and threatening
layoffs. An emergency plan of the government to reduce taxes on cars in order to stimulate sales seems to be faltering in the
midst of contradictory declarations by cabinet members. I think they would find it difficult to authorize tax reductions when
the factories continue to raise prices in spite of low demand for their products. Unemployment continues at record levels
and family income is less now than a year ago in real terms.
Makers of toys, appliances, cell phones, PCs and other electronic gadgetry are all complaining of poor sales. The
packaging industry, often a sign of things to come, is also dreary according to press reports. July is traditionally a slow
month due to winter school holidays. Some expect a slow recovery leading up to the Christmas season. But it is difficult to see
from where the money to purchase discretionary items will appear.
The reduction last week of SELIC or basic interest rate by 1.5 percent per year to 24.5 percent will do little to
stimulate investment or consumption. The productive sector considers this reduction too little too late. Monetary authorities argue
that they must move slowly in order to continue to keep inflation at bay. Pressure to further reduce interest rates and lower
banks’ reserve requirements are mounting. How much longer Palocci and Meirelles can continue to wield the power to keep
creditors happy is a quandary.
The situation in certain rural areas and the invasion of unoccupied apartment houses and hotels in downtown São
Paulo has attracted further attention in the international press. Sunday’s
"New York Times ran a balanced article by Larry Rother.
An inflammatory speech by the national leader of MST, João Pedro Stedile, in Rio Grande do Sul State this past
week, has caused consternation in several quarters including certain ministries of Lula’s government. 6,000 families have
unlawfully invaded and are camped out in an area owned by Volkswagen in the industrial suburb of São Bernardo do Campo,
in the Greater São Paulo. VW’s legal efforts to have them expelled have thus far been thwarted.
Unless the government becomes more vocal and better enforces the law, the powder keg may explode. The
impression is that they are unwilling or unable to control the illegal acts of those who helped elect Lula.
Certain elements of the PT together with the families of 22 guerrillas who disappeared during skirmishes with the
army in the Araguaia region between 1966 and 1974, during the period of military rule, have won a judge’s decision to force
the army to turn over secrete documents. The army claims they have no such documents that would indicate where the
bodies of these men are buried. It could turn out that extremists wind up causing an end to Brazil’s latest experience with
democracy, less than 20 years old that permitted a leftist government to come to power.
São Paulo, July 29, 2003.
Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, Hayes has
worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance
consultant and can be contacted at email@example.com
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