Global Policy Forum

Making the Poor Foot the Bill –


Susanna Mitchell

Jubilee Research
October 15, 2002


As Brazil's presidential election enters its final stage, the country is poised on the edge of another devastating economic meltdown. In August this year the IMF provided a new `rescue package' amounting to a potential $30bn, in order to stave off impending collapse. Apart from the first $6bn, this loan is to be disbursed after the elections, mostly in 2003, and payment will be dependent on a number of stringent conditions. In timing and intention, the bailout is virtually a repeat performance of the IMF loan of $41.5bn in November 1998, which preceded the economic crash of January 1999. In practice, the 1998 loan bought two months grace, postponing the collapse of the currency until after Cardoso's re-election, and affording an opportunity for foreign investors to extract their capital from the country. This paper points out that the new IMF bailout has also been strategically timed to influence the electoral process, and that once again the outcome will be the salvaging of the assets of rich creditors at the expense of the poor of Brazil.

The failure of the current regime

It is now beyond dispute that the neoliberal policies followed by the Cardoso Government in Brazil since 1994 have failed. The country's GDP has fallen from almost $800bn in 1997 to $503bn in 2001. External dependency has been steadily increasing, and after nearly a decade of volatility and intermittent crisis, the currency has reached an all time low. When the real was created in 1994, it was pegged to the dollar at 1 real to $1; in July 2002 it was standing at 3 reals, and at the time of writing it is hovering around the 4 reals to the dollar mark. In response to the growing pressure on the currency, interest rates have just been raised by 3 points to 21%. This is a desperate measure that will increase the cost of servicing the public debt burden, and will further depress the economy in a country that is already plunged in deepening recession and is facing its second major meltdown in under four years.

The central problem is Brazil's foreign debt, which has tripled since 1980. By 1999 it was already the larger than that of any other developing country, and Brazil's Letter of Intent to the IMF in March 2002, presents her total external debt at the end of 2001 as $211.7bn or 41.2% of GDP (excluding some $16bn in inter-company loans, which the Central Bank's new methodology has recently removed from the total). In addition, the latest full IMF Country Report, reflecting Brazil's position at the end of 2000, puts her debt-to-exports ratio at 442.2%. [1] It should be noted here that the criterion established by the World Bank to assess the sustainability of the debt burdens of highly indebted poor countries (the HIPCs) holds that a country's debt is not sustainable if it exceeds a debt-to-export ratio of 150%. Although Brazil is classed as middle income country, this criterion illustrates the degree to which her debt must be regarded as unsustainable. This situation is further compounded by the fact that the country's domestic debt has risen sharply, with net public debt standing at 53.3% of GDP in 2001. [2] Under these circumstances, there seems no realistic prospect of Brazil becoming solvent without substantial debt reduction.

Meanwhile, the country is still one of the most unequal in the world, with a deplorable Gini coefficent of 0.60 which has remained unchanged during the eight years of the Cardoso regime. The World Bank's World Development Report shows that the richest 10% of the population enjoy about 48% of the national income, while the poorest 20% exist on 2.5%. This distribution of the national wealth leaves 45 million people living below the poverty line.

The country's tax system is extremely regressive, and taxation is now the highest in Latin America, having risen from 28% of GDP in 1995 to 34% of GDP in 2001 (compare Argentina's 22-24% or Mexico's 14/16%). Direct taxation is designed in such a way that it hits lower income earners, and there is a heavy reliance on indirect taxation, which inevitably has a severe impact on the poor. For example, families with an income of up to two minimum wages lose 26.48% of their income to indirect taxation, while those with an income above 30 minimum wages lose only 7.34%.

Worse still, the increased resources from this high and regressive taxation have failed to improve public services because they have been devoted to footing the bill presented by the country's international creditors. Both in 1998 and 2001, the Brazilian government signed stand-by agreements (SBAs) with the IMF prioritising the servicing of public debt over other fiscal expenditures, and the new dictates attached to the present bailout have now placed even heavier constraints on pro-poor policies. Indeed, although Brazil's budget is not currently in deficit, the Fund has now stipulated that the Government maintain a primary budget surplus target of no less than 3.75% of GDP in 2003 and through to 2005, a promise that can only be guaranteed by making more social spending cuts.

Despite the agrarian reform packages implemented by the Cardoso government over recent years, land distribution in Brazil remains another source of entrenched poverty. This state of affairs is notorious; indeed, the Landless Rural Workers' Movement, the Movimento Sem Terra (MST) is one of the largest social movements in Latin America and one of the most successful in the world. While at first MST cautiously welcomed Cardoso's Agrarian Reform proposals, particularly his pledge of widespread redistribution and peasant resettlement in 2002, the movement now denounces them as a farce. They claim that `no government in Brazil's history has confronted the challenge of agricultural reform and redistribution of income', and that the current Ministry of Agrarian Development has falsified its resettlement figures, while the media has long been so subservient to the government that it has systematically failed to report these distortions. The result is that less than 3% of the population owns two-thirds of Brazil's arable land, leaving 60% of the country's farmland lying idle while 25 million peasants struggle to survive by working in temporary agricultural jobs. [3]

Background to the crisis – dependency and capital flight

Cardoso's 1994 Plano Real pegged the real to the dollar, and was entirely founded on principles that prioritised creditor interests. It entailed radical import and capital account liberalisation, and made foreign capital the lynch pin of Brazil's economic development. [4] As has been the pattern in so many other global crises, this strategy resulted in soaring imports and an overvaluation of the currency as foreign capital flooded into the country, leading to rapidly widening trade and current-account deficits, and a vast increase in domestic debt, which swelled from $60bn in 1994 to more than $350bn in 1998. [5] It also exposed the country's development to the vagaries of the financial capital markets, and since March 1995 (when the currency suffered its first speculative attack in the wake of the Mexican crisis) recurrent bouts of capital flight have plunged Brazil into a series of worsening financial crises.

In October1997, following the Asian catastrophe, $17.5bn fled the country and $8.5bn of foreign reserves had to be spent defending the real, [6] an outflow that was eventually checked by a huge rise in interest rates and a package of wage freezes and job cuts that impacted heavily on the poor. Economic recovery was abruptly halted by the Russian default the following August, when the haemorrhage of speculative funds reached $31.2bn. At this point, conditional on a budget reduction of $28bn that resulted in massive lay-offs and savage social spending cuts, the IMF provided their rescue package of $41.5bn.

In practice, however, the bailout did not stem the speculative onslaught; rather it accelerated the outflow of money. Indeed, in the two months after the package was introduced, $20bn left the country. Brazil's central bank was losing its reserves at the rate o $400m a day, and by January 1999 the first $9bn tranche of the loan (which was in any case barely sufficient to finance one month's capital flight) had already been used to prop up the currency. [7] By the middle of January when the peg was finally abandoned, the Bank's coffers were virtually empty. The real then plummeted, losing over two-fifths of its value against the dollar, and the economy lay in ruins. By this time, however, the rich had moved vast amounts of capital out of harm's way, and Cardoso had been re-elected for another term to continue his close relationship with the G7 nations and the IFI's.

The short respite that followed Brazil's recovery from this calamity has now ended. Initial claims that the economy would avoid contagion from the appalling situation in Argentina soon proved to be unfounded. Despite another hike in interest rates, and a further $15bn loan from the IMF, GDP growth in 2001 fell to 1.5% (down from 4.4% in 2000), FDI dropped away, and the real lost 44% of its value between January and October. By August this year, it was all too plain that the country was hovering on the brink of default, and that huge foreign investments were under threat. Moreover a new election was in the offing – one that offered a real hope of radical change in favour of the poor of Brazil.

At this point the IMF abruptly reversed their new `tough line' policy, and provided a further loan of a potential $30bn to Brazil.

Repeat performance – the poisoned chalice refilled

Circumstances have obviously changed somewhat since 1998, and while the IMF's new bailout has the same objectives as their November 1998 package, the outcome may be yet more disastrous for the country's population.

Firstly, the new loan is not simply designed to boost what little remains of the credibility of the Cardoso/Serra regime, but expressly to undermine the pro-poor policies of Louis Ignacio Lula da Silva, the probable winner of the current presidential contest.

(As is now well known, two main contenders have emerged for the presidency: Jose Serra, the government-backed candidate, who is overwhelmingly favoured by the IFIs, foreign investors and the rich elite of Brazil; and Louis Ignacio Lula da Silva (Lula), of the Left-wing workers' Party (PT). Lula is an enormously popular radical political veteran who has contested three previous presidential elections, and he is regarded as the only candidate offering a solid alternative to neoliberal policies. His avowed determination to reverse the free-market approach to economics and trade, and to improve the lot of the poor has caused much dismay among international finance capitalists. On the 7th October, Lula came within a hair's breadth of winning the first ballot outright. He needed 50% of the vote to do so, and polled 46.4%, the largest majority that a left-wing political party has ever achieved in Brazil, the world's fourth largest electorate. He now faces Jose Serra in the run-off, and the uncertainty of the outcome is keeping the global financial markets in limbo.)

Lula toned down his fiery rhetoric for this election campaign, and chose the textile tycoon Jose Alencar of the centrist Liberal party as his vice-presidential running mate, but nonetheless his mandate continues to highlight the failure of Cardoso's handling of the economy. In campaign speeches he has continually reaffirmed that "Brazil cannot discuss economics looking only at the interests of the financial system" and that, with 45 million people going hungry, it must first address its own crying social needs. This kind of remark has greatly alarmed the financial markets and the IFIs, who foresee the possibility of a reduction in the large primary surplus they demand, or even of outright default.

However, although state-led pro-poor policies are urgently required, Lula's hands are now effectively tied by the need to fulfil the demands insisted on by the IMF if its new loan is to be disbursed through 2003. Although his inheritance would have been dire enough before the bailout, his options are now even more restricted. The stipulation that the primary surplus be maintained at 3.75% throughout the period is particularly damaging, for the extra resources this surplus appropriates to satisfy the demands of foreign investors are critically needed to alleviate the widespread destitution of the people.

As far as capital flight is concerned, the IMF loan has again provided a breathing space for foreign investors and the rich elite to salvage their wealth. It has often been said that as far as the rest of the world goes, Brazil is `just too big to fail', and foreign involvement is indeed colossal. Brazil is the world's nineth largest economy, and its annual trade with the US alone is worth $40bn. Much of the country's debt is owed by the private sector to major international banks and corporations, and the exposure of US and European banks is especially high. They include Citigroup (9.7bn), Fleetboston Financial Corporation ($11.1bn), Banco Santander Hispano and ABN Amro of the Netherlands ($12bn), JP Morgan (2.7bn), Bank of America ($2bn), HSBC ($5.8bn) and Loyd's TSB (2.8bn). [8]

In 1998 capital made haste to leave before the abolition of the peg and the devaluation of the currency. This time it is escaping from the threat of disadvantageous political change and possible default. And of course, as wealth continues to pour out of the country, its departure becomes a self-fulfilling prophesy, compounding the extent of the collapse it anticipates. The poor will once again be left amid the ruins, servicing yet another `rescue package' that has given a reprieve only to rich investors.


Brazil clearly needs to reverse the free-market policies that have devastated her economy, and to replace them with policies that focus on the growth of the domestic market, prioritising local industry, employment and poverty alleviation. In order to achieve this goal, radical redistribution of land and wealth are imperative, and if Lula is elected, there is a real possibility that these issues may begin to be properly addressed for the first time.

Such recovery cannot start, however, unless Brazil can first escape from the classic debt trap in which she is currently bleeding to death. Since the country's debt burden is clearly unsustainable, she should call for a debt moratorium while her position is assessed. Instead of more debt-creating loans in the form of IMF bailouts, an essential part of such a standstill would have to be the immediate imposition of capital controls to halt the haemorrhage of her currency. A level of debt cancellation, as opposed to restructuring measures that simply postpone repayment, would also be essential if the economy is to remain viable in the long term, and the human rights of the Brazilian population are to be protected.

We accordingly recommend that a Jubilee Framework [9] be put in place, in order to establish a consultative body under a neutral mediator to take stock of Brazil's debt burden, and we suggest that a solution based on this independent assessment of the situation be adopted without delay. Unless such a course is taken, it seems plain that economic collapse is ultimately inevitable.


[1] IMF Country Report No. 01/10, January 2001

[2] IMF – Brazil Letter of Intent, March 4th 2002

[3] Movimento Sem Terra (MST) home page.

[4] For a more detailed description of the policies of the Cardoso regime, see ‘Neo-dependency in Brazil' by Geisa Maria Rocha at

[5] Michel Chossudovsky, professor of Economics at the University of Ottawa, ‘Brazil hostage to IMF's designs' , Le Monde Diplomatique, March 1999.

[6] Boletim do IPEA no.40, January 1998

[7] Op. Cit. Michel Chossudovsky.

[8] Standard & Poors ‘Brazil Turbulence Heightens Ratings Pressure on some Global Banks', 27th August 2002. With masterly understatement this report comments ‘there are some institutions that are visibly vulnerable to developments in Brazil …..'

[9] For a detailed description of the Jubilee Framework see ‘Chapter 9/11 – Resolving international debt crises – the Jubilee Framework for international insolvency' at

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.