brazil and the imf
TRANSCRIPT
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³A New Economic Order?: Brazil and the IMF in the Wake of the 2008-2009 Financial
Crisis´
DJuan Bracey
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Table of Contents
Abstract 2
Introduction 3
IMF and Inequality 4
How will IMF affect Lula¶s Popularity? 9
IMF as a Prestige Mechanism 15
Conclusion 19
Appendix 20
Endnotes and References 25
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Abstract:
³Um homem sem gravata não vale nada´ 1
- Bahian proverb
As the world continues to cope with the greatest financial downturn since the
Great Depression, the current relationships between financial organizations and their
member states should receive more attention. In this paper, I find that Brazil¶s
economic contraction warrants requesting loans from the International Monetary Fund.
To defend this argument, I will rebut claims concerning the IMF¶s effect on inequality,
finding internal, social factors to be the greatest barriers in eliminating social
stratification. Moreover, I find IMF funds may serve as a ³safety net´ among society¶s
most disadvantaged by allowing for continued f inancing of public assistance and health
programs. Furthermore, I find that IMF conditions for loans may be avoided as Brazil
considered is a ³powerful´ nation and will be further useful for the central government as
a ³scapegoat´ for spending cuts. Finally, I argue that Brazil take advantage of an
opportunity to loan to the IMF as a prestige factor and as a method to gain more
standing on the world stage after having received loans.
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I. Introduction
Brazil¶s role in global finance will become of greater interest due to the nation¶s
continued rise as the strongest regional power in Latin America. In particular, its future
participation in the International Monetary Fund (IMF) may witness significant role
reversal; President Luiz Inacio Lula da Silva has been recently invited to give a 4.5
billion dollar loan to the organization from the former debtor state.2 Significant questions
should be addressed due to these events: Should Brazil continue to accept loans from
the IMF in the future after this offer? If so, how will future loans affect domestic
problems, such as income disparity? Finally, what benefits will Lula gain from lending to
the organization?
The goal of this policy memo is threefold:
1) The first and most important is to advise Lula to accept IMF loans. Critics of this
proposal will point out the IMF¶s historical tendency to increase income inequality in
debtor nations and point out the overall stigma attached to the organization.
However, I intend to rebut this view with three counter-arguments. Firstly, I will point
out that inequality in Brazil has remained stagnant not due to the role of outside
actors, but due to societal attitudes, particularly in regards to race. Secondly, I will
show that the effects on IMF and poverty/inequality are a matter of debate. In fact, I
will present arguments which find that at times, such as during economic
contractions, IMF loans are helpful. Finally, Brazil may avoid IMF conditions, or the
obligations to adopt certain economic policies, given its status as a ³powerful´ nation
and an ally of the United States. This is significant because these conditions are the
main factors associated with widening wealth gaps.
For reasons to be discussed, I suggest accepting $30-40 billion in loans.
2) Secondly, accepting loans would allow Lula to pursue policies often unpopular
among the rank-and-file under the guise of IMF conditions. What I mean is that Lula
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can pursue reforms by ³selling´ macroeconomic reforms to his domestic audience
without tarnishing his public image. In other words, scapegoating the IMF will allow
Lula¶s political party, the leftist Worker¶s Party, a better chance in the upcoming 2010
elections. Moreover, I will discredit the stigma argument mentioned above by
showing that when nations have been previously introduced to IMF programs, their
populations are less likely to oppose them later on.
3) Thirdly, I will support Lula¶s loan proposal, finding it to be a prestige issue - an
indicator of Brazil¶s ascension to the world stage as the ninth largest economy
backed by a 190 million-person-strong workforce.3 Although I propose Brazil borrow
an amount which is significantly greater than what it will lend, I feel that the ³prestige´
factor will remain beneficial especially if it lends after having accepted loans.
II. The IMF and Inequality
On March 28, 2009, Lula received worldwide criticism for blaming the current
economic downturn on ³whites with blue eyes,´ further claiming ³I do not know any black
or indigenous bankers«´4 Although Lula¶s words are politically divisive, observers
should still recognize the unfortunate reality underlying the statement. In spite of
significant economic progress, Brazil¶s income gap remains one of the widest in the
Western Hemisphere, based substantially on racial hierarchy. In turn, critics of the IMF
are rightly concerned about the organization¶s potential to increase Brazil¶s already
massive inequality. Nevertheless, historical and current trends show that inequality is
based foremost on domestic problems rather than outside actors. Specifically, Brazil¶s
economic hierarchy is rooted in a complex, centuries-old caste system likely to remain in
force due to social attitudes relegating the non-white into poverty. As I will argue, IMF
loans may actually help combat this discrimination by allowing Lula to fund newly
created government assistance programs for the poor and traditionally suppressed
races. These include several poverty-alleviation projects undertaken by Lula, such as
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the anti-hunger F ome Zero5 campaign and the Bolsa F amilia6 public assistance
program.
However, the debated effects of the IMF on inequality cannot be critically
examined without discussing briefly inequality itself. The racial dynamics of this social
stratification are clear - one 2002 World Report notes a 47.2 percent poverty rate of
Amerindians, a 34.64 percent rate of Afro-Brazilians in contrast to a rate of only 12.62
percent among whites.7 Brazil¶s lower income in comparison to developed nations is
excuse; one World Bank study notes that ³while in Brazil thirty percent of the total
population is poor, on average only ten percent are poor in countries with similar per
capita income.´8 Moreover, consistency remains among the most noteworthy features of
Brazilian income inequality. World Bank shows that inequality has remained constant
during the 1980s and 1990s, in spite of the re-democratization and trade liberalization
which occurred at this time.9 Therefore, the common adage quem tem dinheiro é
branco10 ± ³he that has money is white´ ±unfortunately remains a truism.
How may the IMF have contributed to this stasis in inequality and racial
hierarchy? At first glance, the history of the IMF in Brazil gives considerable weight to
IMF critics, particularly after a military dictatorship assumed power in 1964. Having
been an original signatory to the IMF¶s Articles of Agreement in 1945, Brazil¶s pre-coup
relationship was at times raucous; President Juscelino Kubitschek, pressured by
domestic critics due to the high inflation at the time,11 broke with the organization in
1959.12 In contrast, the post-1964 era witnessed considerable cooperation between the
military regime and the IMF, along with noticeably poor performance of Brazil¶s
economy. Under Finance Minister Roberto Oliveira de Campos, Brazil complied with
many IMF conditions, particularly by reducing subsidies to wheat and oil and by ending
75-100 percent wage hikes seen during the inflation period.13 Moreover, the military
government raised taxes, even though 1965 saw a 144 percent increase in the average
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cost of living.14 Undoubtedly, these practices disproportionately affected Brazil¶s poor,
while being wholly ineffective; one source indicates Brazil¶s GDP dropped seven-percent
in 1965.15 Also, the common criticism of the IMF acting as a tool for American policy also
has considerable merit. The military regime, backed by US support, was championed in
American circles. For example, 1965 T imes Magazine article praised the military regime
for ³giving Brazil a breath of political and economic stability.´16 Meanwhile, inequality ±
particularly along its racial lines ± was wholly ignored, as the false notion of ³racial
democracy´17 existing in Brazil was instead upheld by the elite.
However, other underlying factors better indicate why Brazil¶s racial relations
have remained in stasis than the IMF/dictatorship cooperation. For example, Thales de
Azevedo (1966) a sociologist active in Bahia during the dictatorship, that inequality was
deadlocked due to popular attitudes, basing this conclusion off of face-to-face interviews
and field work.18 Among blacks, Azevedo noted that the ideal of being ³socially white´
became the ideal among Salvador¶s Afro-descendents, concluding ³a black whitens
himself to the measure in which he elevates himself economically and acquires the
manners of the superior group.´19
More significantly, poorer whites often called
themselves prêtos meaning ³blacks.´20 Another sociologist, Florestão Fernandes (1969)
found similar attitudes in São Paulo during the same period, such as the common habit
among healthier blacks of using terms such as morisco or mulato (meaning roughly
³brown´) for self referral rather than prêto.21 Therefore, in spite of economic policies
pursued by the military regime, the current social divisions are still the cause of income
inequality.
An obvious counter-argument arises regarding my conclusion: By simply showing
negative effects of social attitudes, I have not completely rebutted harmfulness of IMF
loans. In response, I find that the military government and its American/IMF supporters
should be faulted for the continuation of inequality rather than international lending in
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general. The IMF, as the brainchild and foreign policy tool of the United States, pursued
American-directed Cold War policies at this time. Therefore, US interests demanded
turning a blind-eye to the authoritarian regime¶s human rights abuses, let alone its
supply-sided economic policies which disadvantaged the poor.
Therefore, I believe Lula should accept loans for two reasons:
1) Current IMF policies are markedly different than past U.S. balancing acts,
specifically because the support of rightist regimes as a counterweight to the
Soviet Union is no longer necessary.
2) Moreover, IMF loans do not necessarily have to be followed by economic
downturn. Lula¶s predecessor, Fernando Henrique Cardoso signed an IMF
agreement in 1998 after a similar financial crisis. According to one source,
³Brazilian stock markets recovered the worst of their losses«[and] the economic
fundamentals remained strong´ afterwards.22
Moreover, the overall effects of the IMF programs on poverty/inequality are still a
matter of debate. World Bank analyst William Easterly (2001) finds that structural
adjustment loans have both positive and negative effects, basing this argument on sixty-
five case studies in developing countries. On the one hand, Easterly finds that ³growth
under structural programs is less pro-poor than in economies not under structural
adjustment programs.´23In other words, economic expansion when IMF programs are in
force is less likely to benefit the poor because of the decrease in public spending as
obliged by the organization¶s conditions.24 On the other hand, Easterly finds that during
economic contraction, IMF loans are positive by serving as a cushion for those likely to
be the most affected by financial meltdowns. In this regard, lending programs may
serve as ³social safety nets´25 during times of economic downturn, specifically by
providing the central government with funds which help to assure the continued
financing of public assistance, health programs, etc. Easterly also finds conditions are
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less rigid during times of downturn. In defense of Easterly¶s findings, economist Patrick
Conway (1994) similarly finds that while growth may be harmfully affected in a f irst year
of an IMF program, these effects soon thereafter decline.26
Given the conclusions offered by these economists, I feel Lula should consider
the following:
1) Easterly¶s findings support my argument for an IMF loan because Brazil ± as
the world at large ± is experiencing a serious economic contraction. More
importantly, the injection of funds is becoming a necessity in order to avoid a
possible humanitarian crisis. Lula should borrow from the IMF in order for
continued funding for his aforementioned government assistance programs.
Poorer families will find adequate healthcare and food supplies more
unaffordable, making Bolsa F amilia and F ome Zero a life source for many.
Cutting funding to these programs, in contrast, would cause social unrest
amongst poorer classes, where Lula¶s support base originated.
2) Lula should also attempt to stimulate his economy, as developed countries
usually do in times of crisis. Specifically, Lula should allow for government
created jobs for developing infrastructure, such as building schools, bridges, etc.
Of course, the ³austerity´ ± that is, reduction in spending - requirements set by
IMF would appear to make stimulation difficult, but as I will argue later, Brazil
may avoid the most unfavorable of these conditions.
3) The amount of IMF loans Lula should accept also requires attention. Brazil¶s
1998 Letter of Intent requested ³13,025 million´ in special drawing rights, roughly
$18 billion27 (approximately $22 billion in 2007 dollars).28 Brazil¶s crisis a decade
ago, spurred by a Russian moratorium on repayment of its foreign debt,29 was
likely less severe than the current global meltdown. Therefore, I believe this
amount should be compared to that of a current Latin American country in crisis
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would give a better estimate. Mexico, with an economy expected to contract 3.7
percent,30 has requested a $47 billion loan from the IMF.31 Brazil, whose
economy will likely shrink only by 1.3 percent,32 should probably request a figure
between the two discussed, roughly $30-40 billion.
Furthermore, other criticisms of IMF are less relevant in Brazil¶s case. Joseph
Stiglitz, a prominent IMF critic and a former Chairman of Economic Advisors33 finds fault
with the abovementioned austerity programs imposed on developing nations largely
because stimulus programs are instead pursued by developed states.34 The IMF usually
imposes three important conditions with questionable effects on domestic economies:
(1) a reduction in budget deficit, usually by lowering national spending and raising taxes
(2) reducing money supply by raising ³central bank interest rates and placing ceilings on
credit creation,´ and finally (3) by devaluing the national currency.35 The negative
implications are clear: Lowering national spending entails less spending on roads,
schools, infrastructure, health programs and social welfare projects. Devaluing
currency means salaries, wages will no longer meet the costs of living in the short run.
Moreover, all of these conditions are understandably unpopular due to ³sovereignty
costs,´ in which individual nations lose considerable control over their domestic economy
when accepting agreements, thereby causing central governments to appear
incompetent.
However, several caveats arise when critically examining this argument in
Brazil¶s case. Firstly, condition will likely be less rigid on Brazil, considered a ³powerful
country.´ By powerful, I am speaking especially in terms of its voting power,
proportioned relative to its influence in the IMF. At the time of this writing, the IMF¶s
website shows that Brazil¶s voting share is currently 1.40 percent of total, based on its
possession of slightly over three billion special drawing rights.36 Although this is a far cry
from the 17.09 percent share of its most powerful member, the United States, or even
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smaller yet wealthier European nations such as the Netherlands, at 2.38 percent,37 it is
still significant. In contrast, twenty-three sub-Saharan African nations combined only
comprise 1.35 percent of voting power.38 Moreover, with Colombia, Brazil currently co-
chairs a bloc of ten Caribbean and Latin American nations which account for 2.42
percent of vote shares in all.39 Moreover, its role in other international organizations
plays a role in its power: As a member of the four-member BRIC economic bloc, Brazil
stands with Russia, India and China40 as the most rapidly growing developing
economies in the world. Lastly, Brazil has played an increasingly vocal role among the
world¶s twenty largest economies, known as the G-20,41 and is the regional hegemon in
the most important Latin American-based trading bloc, MERCOSUR.42
Moreover, Brazil¶s long-standing friendship with the United States further trumps
its power status, therefore amounting to even fewer conditions. Economists Axel Dreher
and Nathan Jensen (2007) find that voting along U.S. lines will result in favorable terms
in the IMF and other U.S. dominated organizations. The authors have three main
hypotheses: (1) The IMF will set conditions based on ³domestic economic conditions
including the growth rate of real GDP, the government¶s consumption, the budget deficit,
the rate of monetary expansion and the current account balance.´43 (2) The IMF will
³set more conditions in the period prior to democratic elections.´44 Lastly, (3) the IMF will
impose fewer conditions in the period prior to domestic elections for countries allied with
the United States.45
Given both its ³powerful´ status and its ties with the United States, Lula is able to
pursue three significant courses of action:
1) Lula must decide his bargaining technique for accepting IMF conditions. By
this I mean that Lula, ruling a ³powerful´ country, will have considerable control
on which IMF conditions he is willing to enforce domestically or not. However,
according to the first hypothesis, Brazil may not enjoy the full benefit of its status
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as ³powerful,´ as it had recently entered into a current account deficit and is
experiencing contraction. Nevertheless, as I will discuss in the following section,
Lula may find it beneficial to pursue some IMF conditions while disregarding
others.
2) Given Dreher and Jensen¶s second and third points, I believe Lula should
continue to vote alongside the U.S. in the General Assembly and should work
closely with the newly-elected Barack Obama. In doing so, I believe Lula should
choose his words more carefully in the future, certainly avoiding remarks blaming
³whites with blue eyes´ for economic woes. In other words, because other
strategic U.S. allies, such as Western Europe, would be particularly reactionary
to these racially-charged statements, Lula should be more diplomatic to ensure
fewer conditions.
3) Because there are fewer conditions before election season, Lula should
accept an IMF deal at some point soon before the next elections in October
2010.46 As I argue in the next section, this will not have negative effect on the
chances of the Worker¶s Party winning elections next year, giving the stigma
attached to the IMF has declined due to the public¶s pre-exposure.
III. How will IMF loans affect Lula¶s popularity?
According to a late-March Reuters article, Lula¶s approval rating ± before among
the highest of world leaders ± began to decline as a result of the financial meltdown.47
Polls indicate that his 84-percent approval last year fell to 65-percent last month due
mostly to ineffectiveness in combating unemployment.48
An awry warning gives Lula
ample reason for concern: ³If the economy does not bounce back later this year, [Dilma]
Rousseff, the likely candidate for Lula's leftist Workers' Party, could see her chances in
next year's presidential race erode«´49 Two questions should be addressed when
asking how to ensure Lula¶s popularity does not decline any further: Firstly, is Lula able
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to use the IMF as a scapegoat for current economic woes? If so, will Lula be able to
undertake financial policies which will improve his nation¶s economic situation?
In addressing the first question, political scientists Alastair Smith and James
Vreeland (2006) find that aside from using IMF loans to solve balance of payment
problems, political leaders also accept IMF arrangements in order to ³«do what they
privately wish to do, but are powerless to do so domestically«´50 In this regard,
austerity programs are commonly undertaken under the guise of IMF conditions.51 In
any event, the official motivation for these programs - the repayment of external creditors
- gives Lula ample reason to accept IMF conditions. The World Factbook indicates
Brazil entered a current account deficit of $27 billion in late 2008, while its public debt
made up 40.7 percent of its gross domestic product.52 Therefore, although Brazil may
be ³powerful´ enough to avoid IMF conditions, given its current circumstances, following
some IMF conditions may be beneficial.
Therefore, Lula should pursue the following courses of action:
1) For reasons already discussed, cutting back spending in the public services
would be very harmful to Lula and Brazil in general. Lula should therefore
attempt to ³sell´ IMF conditions to other segments of the government. The
military should be among the first; the World Fact Book indicates that Brazil
spends 2.6 percent of its GDP on the armed forces,53 which ± according to its
estimated overall GDP of $1.9 trillion54 - should equate to nearly $52 billion. In
contrast, according to the Brazilian Congress, 10.4 billion Brazilian reais55 have
been allocated to Bolsa Familia, which, according to exchange rates as of late-
April, amounts to only $4.8 billion.56
2) Lula should raise taxes among the higher classes. According to one source,
Brazil maintains a progressive income tax; income brackets between $9,080 and
$18,144 are obliged to pay fifteen percent, whereas those above $18,144 are
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charged 27.5 percent of income.57 In turn, the United Nations Human
Development Report shows that the wealthiest twenty percent of Brazilians hold
61.1 percent of wealth, whereas the wealthiest ten percent hold 44.8 percent.58
Therefore, a modest increase of perhaps three percent in the $9,080-$18,144
range, and 5 percent in the and above $18,144 range would substantially aid in
increasing revenue.
3) Lula should consider one obvious way to reduce spending: eliminate
bureaucracy and begin government reforms. Specifically, corruption59 and
cronyism60 in the government should be reduced. In regards to the former, Luiz
Cavalcanti, a law professor at the Federal University of Pernambuco, finds that
corruption wasted two-percent of Brazil¶s GDP in 2005.61 Furthermore, reducing
cronyism would eliminate under-qualified and/or deadweight employees, thereby
reducing salaries allocated to non-effective workers.
Again, I have to address an obvious counter-argument: Lula may find all of my
policy proposals difficult to enforce, specifically because these segments of the
population (e.g., the military, elite and government) are the most powerful. While
admitting this will be risky, I find that Lula can ³blame´ the IMF for having undertaken
these procedures. As Smith and Vreeland have shown, when a state is hit ³by a bad
enough shock,´ its governments may enter IMF programs, and in turn, adapt its policies,
without looking incompetent.62 In turn, if the elite, military and government officials
remain non-complacent, Lula should attempt to gain support from his traditional fan
base, the working class. Raising taxes among the wealthy while retaining adequate
public assistance for the poor would surely benefit Lula¶s image in this regard.
Finally, in regards to the stigma argument, national case studies have shown that
the IMF¶s unpopularity declines with repeated exposure. For example, Vreeland (2007)
documented the negative public reaction in Nigeria when it signed its first IMF in 1987.
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One newspaper captions best summarized popular opinion: ³IMF: What For?´63 In spite
of this widespread initial unpopularity, Vreeland shows that after populations are
introduced to the programs, ³the country was more likely to sign again and again.´64 In
Nigeria¶s case, the government adopted new IMF in 1989 and 1991, ostensibly with less
opposition.65
Brazil¶s future confrontation with IMF-stigma will have a very unique twist: Lula
and many others from the political left were the most vehement opponents of Cardoso¶s
1998 loan. In fact, in Rio de Janeiro¶s main newspaper, the J ornal do Brasil , Lula¶s
criticisms were quoted:
³Fernando Henrique Cardoso is the executioner of the Brazilian economy,
responsible for one of the greatest economic disasters in the history of Brazil. I
find it almost incomprehensible that the victims voted for their own executioner.´66
Nevertheless, Cardoso enjoyed the support of most Brazilians, even when making
speeches stating that Brazil needed to cut spending and increase taxes.67 More
significantly, Cardoso¶s acceptance of loans came during an election year. Whereas
Lula and other leftists attempted to use the IMF loans to dissuade voters from reelecting
the former President, Cardoso won the elections anyhow with 53 percent of the popular
vote.68 Therefore, the Cardoso case shows that IMF loans will not be political suicide
but Lula will have to hope that either Brazilians turn a blind-eye to his former opposition
or otherwise have short-term memory. In any event, the tendency of Brazilians to ³to
rally around their leader in a crisis´69 may allow Lula to salvage his reputation when
accepting the loans.
IV. The IMF as a prestige mechanism
On April 20, Bloomberg reported that Brazil¶s loan proposal to the IMF was a tool
to gain more influence within the organization. The head of the IMF¶s Western
Hemisphere Department notes, ³The fact you become a potential creditor makes your
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voice stronger.´70 In other words, Brazil¶s loan offer is a prestige issue, indicating that
Lula is also attempting to guide his nation to the center of the world stage. In all, I
support Lula¶s decision, finding the loan offer helpful in at least three ways:
1) Brazil¶s proposal sends a strong signal to the developing world because the
loans to the IMF are meant to aid low-income countries. Furthermore, Brazil
plays a unique role as it will be among the few developing nations to join the club
of creditor states. In turn, Lula may use this role as a leveraging tool in
international organizations where the poorest nations are the most numerous.
2) Brazil will have a considerably stronger voice among nations calling for IMF
reform. Specifically, requests for fairer vote shares within the IMF will allow
greater cooperation with other BRIC nations. India, for example, has promised to
buy $10 billion in IMF bonds,71 which allows for considerable potential for
partnership among the two states in calling for the organization¶s improvement.
3) Finally, Brazil may increase its influence in other international organizations
and its global standing in general after granting loans. Its bid for membership on
the United Nations Security Council, already backed by the United States, would
gain considerable weight and decisive advantages over its main regional
contenders, such as Mexico.72
Brazil¶s creditor status is not altogether new as the nation once loaned to the IMF
in 1982.73 However, two factors make this loan strategically significant: (1) The IMF
requested loans from Brazil and (2) did so during a time of considerable economic
challenges. In regards to the first point, Brazil¶s invitation is a powerful signal to itself
and the developing world, given it now lays claim to be a ³success-story.´ In regards to
the second point, timing and semantics are significant because the current crisis has
turned traditionally ³First World´ states such as Iceland into debtor-states.
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In turn, Lula should consider two arguments given by his Finance Minister, Guido
Mantega, when engaging in diplomacy with the developing world:
1) ³[The invitation] shows that Brazil is seen as a country with a solid
economy."
2) ³It is also important because it will help make more credit available to
emerging nations facing economic difficulties and thus help activate the world
economy."74
For example, within the United Nations General Assembly (UNGA) and the G-77, Brazil
may act as the ³voice´ of developing nations. In regards to the former, Brazil will be
able to take advantage of the Third World-majority status of the UN¶s central organ. In
other words, by acting as a representative for the developing world, Brazil may persuade
several developing nations to vote in its favor. In regards to the latter, Brazil¶s economic
advice may be accepted among the seventy-seven developing nations eager to follow
Brazil¶s ³success story.´
In regards to reform issues, Vreeland (2007) discusses several techniques for
improvement, the most pertinent three being: (1) the scaling back of conditions (2) the
adaptation of more transparency within the organization, as well as the (3)
reorganization the vote-sharing arrangement of member states.75 In turn, I find that
Brazil¶s creditor status will give it considerable options in all three of these proposed
reform techniques:
1) Although Brazil will not likely face conditions imposed on other developing
nations, it could press for a reduction of conditions in other developing states.
This move would be very popular among IMF-dependent, underdeveloped
states, allowing for more alliances cooperation with the developing world.
2) In terms of transparency, a more open IMF would lead to less distrust among
individual nation¶s and their constituents. Here again, Brazilian calls for reform
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will allow more friendship among developing nations which are most
disadvantaged by IMF policies.
3) Finally, calling for reform in vote-sharing is another beneficial option for Lula. For
example India¶s vote share is similar to Brazil¶s at only 1.91 percent.
Nevertheless, because both of the nations are proposing loans, their joint calls
for reform in the organization would significantly challenge its status quo.
Furthermore, Lula could also recruit other major economies, namely Russia and
China, in creating a ³reform´ coalition, given their vote sharing stands at 2.74
percent and 3.72 percent respectively. Moreover, with Brazil¶s share, these four
nations would control 9.77 percent of vote, a significant portion, although less
than the 15 percent veto-power benchmark.76
Finally, Lula¶s loan proposal gives Brazil a comparative advantage over other
regional powers. Mexico, another Latin American giant, opposes Brazil¶s UNSC bid as it
would void its own chances to join the Great Powers club.77 However, it has recently
experienced serious economic downturn, as seen by its aforementioned $47 billion loan
request from the IMF. Of course, there seems to be a double standard in this argument:
If accepting loans makes Mexico look economically weak, why have I suggested Brazil
request loans? I find that Brazil¶s appearance of economic weakness will be offset by
the invitation to loan to the IMF. Although the amount I am suggesting that Brazil should
accept loans which greatly outweigh what it is lending to the organization, I find that the
current economic crisis mitigates the negative image associated with accepting large
amounts of aid. For example, as the Latin American Business Chronicle indicates,
Brazil¶s image is that of a ³handful of countries with the greatest growth potential.´78 On
the other hand, Mexico, with an economy expected to contract more than Brazil¶s, has
not received an invitation, indicating that its international image is not as positive as
Brazil¶s.
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Therefore, I find that timing also plays a factor as to how Lula should use this
prestige mechanism. I realize my proposal to act as a creditor and debtor will send
mixed messages to the world at large. For this reason, I believe Lula should accept
loans before lending to the IMF. As I have stated, the financial crisis will allow Lula to
retain a competent image in spite of accepting outside aid. Moreover, Brazil recently
paid off its $33.9 billion debt from past loans relatively quickly, repaying its external
debts, including the 1998 IMF loan, fully in 2004.79 Therefore, in spite of its current
account deficit, Brazil will become highly regarded after lending to help solve the crisis,
especially if it manages to pay off its debt quickly again.80
Finally, Lula will enhance his standing abroad without affecting his own economy by
lending, as the loans are to be made against special drawing rights reserves rather than
actual revenue.81 I find that Lula should consider using more of these reserves (boosting
loan amounts to perhaps $6-9 billion) in the near future. Of course, this would cause
less voting power at first but I believe due to prestige, alliance with the US and relatively
few conditions, Lula should sacrifice a slightly larger portion of his voting share for larger
gains in the long run. For example, most predictions indicate the current financial crisis
will worsen,82 meaning IMF creditors will likely become fewer and more highly valued in
the near future. Therefore, if Lula waits a bit longer to give loans, his international image
will look even better in the later on, especially if the amount he lends is great then being
proposed. In all, I am suggesting a very busy last year for Lula¶s presidency, finding that
both borrowing (perhaps in December 2009/January 2010)83 and lending (perhaps in
August/September 2010)84
should come at these times.
V. Conclusion
Although the IMF has received rightful criticism for its effects on domestic
economies, I have pointed out that loans will likely be beneficial for Brazil. Firstly, I find
that inequality is foremost the result of internal, social factors. Therefore, the IMF¶s role
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in Brazil¶s social divisions is at best a peripheral one. In fact, the IMF may play a
positive role as a ³safety net´ among the nations poor by helping to allow public
assistance programs, etc. continue to operate. Furthermore, I believe Brazil will benefit
from its status as ³powerful´ and as an American ally, meaning it will have to follow fewer
conditions than normally imposed on developing states. Along with allowing Lula to
solve his balance-of-payment problems, the IMF is also beneficial as a scapegoat. In
other words, Lula can fault the IMF for spending cuts and tax hikes, which I feel should
he should direct toward the military, higher classes and government workers. Finally, I
believe Lula should loan to the IMF after having lent to the organization in order to fully
benefit from prestige. Accepting now would not hurt Lula¶s image, as the current
economic contraction mitigates the perception of government incompetence after
receiving aid. At the same time, if the economy grows worse, loaning to the IMF will
make Brazil even more economically strong in the future.
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V. AppendixMaps of Brazil: (Source: Wikimedia Atlas)85
Brazilian inequality also has regional dimensions; the indigenous-populated Northcontained only 4.6 percent of the nation¶s population, yet 9.3 percent of its poor. In
contrast, the white populated Southeast region has a poverty rate of only 8.8 percent.Likewise, the African populated Northeast region contained 29.4 percent of the
population, yet 44.3 percent of the nation¶s poor.86 Region 1 is Cento-Oeste (Mid-west),Region 2 is Nordeste (Northeast), Region 3 is Norte (North), Region 4 is Sudeste
(Southeast), Region 5 is Sul (South), compare the bottom map gives a racial comparison:
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Races in Brazil, maioria branca signifies majority white states; maioria parda signifieswith a majority pardo (mixed race) status. Notice the poorest regions are parda.
GDP per Brazilian states and examples: Dark green signifies nations with high GDP per capita (São Paulo and Rio de J aneiro), Light green with high moderate per capita GDP (Santa Catarina), the lightest shade of green signifies moderate income (Mato Grosso,
Rio Grande do Sul), Yellow signifies moderate low GDP per capita (Minas Gerais),Orange signifies low income (Mato Grosso do Sul, Roraima), Dark orange is slightly lower income (Bahia), Red is highly low income (Pará, Pernambuco), Dark Red is
extremely low income (Piaui). See map on next page for state locations:
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Brazilian States
Orange is low Human Development Index (HDI) (Maranhão, Sergipe), Light green ismoderate HDI, Dark green is high HDI.
G20 Countries: Argentina, Australia, Brazil, Canada, China (PRC) , European Union
(including F rance, Germany, Italy, and the United Kingdom as independent members)India, Indonesia, J apan, Mexico,Saudi Arabia, South Africa T urkey, South Korea, United
States.
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IM F members, UN members except Cuba, North Korea,
T his map shows nations currently affected by the economic crisis. T he darkest shadesof red shows those most adversely affected, the lightest shade shows the countries least effected. Nations marked in blue have experienced economic growth. Notice Brazil has
been affected less than the other regional powers of Latin America (i.e. Mexico, Argentina).
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G-77 nations: Member states are marked in dark green, observer states are marked inlight green, non-members are marked in gray.
BRIC nations: Brazil, R ussia, I ndia, C hina
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Endnotes
1 ³A man without a necktie is worthless,´ quoted in Azevedo, pg. 38.
2 Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´
Bloomberg . 20 April 2009. < http://www.bloomberg.com/apps/news?
pid=20601086&sid=aApYqdODdNfY&refer=news>
3 United States Central Intelligence Agency. ³Brazil.´ World F actbook .
4 Lula gave the ³whites with blue eyes´ comment to Gordon Brown at the 2009 G-20
summit in London. Daily Mail on-line gives the following quote: ³µThis was a crisis that
was fostered and boosted by irrational behavior of people that are white, blue-eyed, that
before the crisis looked like they knew everything about economics.´ <
http://www.dailymail.co.uk/news/worldnews/article-1165089/White-blue-eyed-bankers-
brought-world-economy-knees-What-Brazilian-President-told-Gordon-Brown.html>
5 Fome Zero¶s English webpage states it ³is a dream that will allow us to effectively
reduce hunger to "zero". Found here: <http://www.fomezero.org/>
6 ³Bolsa Família: Changing the Lives of Millions in Brazil.´ T he World Bank. Description
is as follows ³[Bolsa Familia] reaches 11 million families, more than 46 million people, a
major portion of the country¶s low-income population. The model emerged in Brazil more
than a decade ago and has been refined since then.´
7 World Bank. ³Poverty Measurement.´ Brazil - Attacking Brazil's Poverty. Vol. II,
(2001), 20.
8 Joaquim Bento de Souza Ferreira Filho and Mark Horridge. ³The Doha Round,
Poverty and Regional Inequality in Brazil,´ p. 2.
9 Ibid, p. 4.
10 Thales de Azevedo. Cultura e Situação no Brasil. ( Rio de Janeiro: Editôra
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Civilização Brasileira, S.A, 1966), 33. Thales de Azevedo found this quote frequent
among Bahians to describe racial stratifications in the region.
11 ³História da Dívida Externa do Brasil.´ Memorial do Brasil .
12 Ibid.
13 ³Brazil Towards Stability.´ Times Magazine, Dec. 31, 1965.
14 Ibid.
15 ³World Bank ± IMF Support to Dictatorships.´ Committee for the Abolition of T hird
World Debt.
16 ³Brazil Towards Stability.´ Times Magazine, Dec. 31, 1965.
17 Thomas E Skidmore. ³Race and Class in Brazil: Historical Perspectives.´ Race and
Class and Power in Brazil, ed. by Pierre-Michel Fontaine. (Los Angeles: University of
California Press, 1985), p. 21.
18 Thales de Azevedo. Cultura e Situação no Brasil. ( Rio de Janeiro: Editôra
Civilização Brasileira, S.A, 1966), p. 46.
19 Ibid, p. 31.
20 Ibid, p. 33.
21 Florestão Fernandes. T he Negro in Brazilian Society. Jacqueline D.
Skiles, A. Brunel, Arthur Rothwell, trans. Phyllis B. Eveleth, ed. (New York: Columbia
University Press, 1969), p. 418.
22 Ted George Goertzel. F ernando Henrique Cardoso: Reinventing democracy in Brazil.
Boulder, Colo: Lynne Rienner Publishers, 1999), p. 174.
23 Easterly, William. The Effect of International Monetary Fund and World Bank
Programs on Poverty(November 30, 1999), p. 26.
24 Ibid, p.8.
25 Ibid, p.16
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26 Found in Adam Przeworski and James Raymond Vreeland, "The Effect of IMF
Programs on Economic Growth," The. Journal of Development Economics Vol. 62
(2000), p. 385.
27 Brazil¶s 1998 Letter of Intent may be found here: <
http://www.imf.org/external/np/loi/111398.htm>
28 I found this correction for annual inflation by using the Consumer Price Index, found
here: <http://www.westegg.com/inflation/>
29 Goertzel, Ted George. F ernando Henrique Cardoso: Reinventing democracy in Brazil.
Boulder, Colo: Lynne Rienner Publishers, 1999 p. 171
30CBS News gives a forecast of the various downturns in national economies, including
Mexico, in this online article: <
http://www.cbsnews.com/stories/2009/04/22/business/main4961284.shtml?source=RSS
attr=Business_4961284>
31 Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´
Bloomberg. 20 April 2009. < http://www.bloomberg.com/apps/news?
32 http://news.xinhuanet.com/english/2009-04/23/content_11240136.htm
33 James Raymond Vreeland. T he International Monetary F und: Politics of Conditional
Lending. (New York : Routledge, 2007), p. 114.
34 James Raymond Vreeland. T he International Monetary F und: Politics of Conditional
Lending. (New York : Routledge, 2007), p. 117
35 James Raymond Vreeland. T he International Monetary F und: Politics of Conditional
Lending. (New York : Routledge, 2007), p. 23
36 ³IMF Executive Directors and Voting Power.´ International Monetary F und .
37 Ibid.
38 Ibid.
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39 Ibid.
40 Described as ³An acronym for the economies of Brazil, Russia, India and China
combined. The general consensus is that the term was first prominently used in a
Goldman Sachs report from 2003, which speculated that by 2050 these four economies
would be wealthier than most of the current major economic powers´ at <
http://www.investopedia.com/terms/b/bric.asp/>
41 Described as ³International forum of finance ministers and central bank governors,
working to promote international financial stability on its website: <http://www.g20.org/>
42 Described as ³an organization with an important operating network specially in
Argentina, Brazil, Chile, Uruguay and Paraguay - who offers specialized services in
international trade aiming that our customers could get a higher increase in their
business, profitability, risks spread and better competitive conditions´ on its website. <
http://www.mercosurtc.com/>
43 Axel Dreher and Nathan M. Jensen. 2007. "Independent Actor or Agent? An Empirical
Analysis of the Impact of US Interests on IMF Conditions." J ournal of Law and
Economics 50 no. 1. (November 2007), p. 6.
44 Ibid, p.6.
45 Ibid, p.7.
46 The newspaper F olha better describes these elections on an online article:
<http://www1.folha.uol.com.br/folha/brasil/ult96u83745.shtml/>
47 Raymond Collitt. ³Approval for Brazil¶s Lula hit by Economic Crisis.´
48 Ibid
49 Ibid
50 Smith, Alastair and James Raymond Vreeland. 2006. "The Survival of Political
Leaders and IMF Programs." In Gustav Ranis, James Raymond Vreeland and Stephen
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Kosack (eds.), Globalization and the Nation State: T he Impact of the IM F and the World
Bank . New York: Routledge, p. 1.
51 Ibid, p. 3
52 United States Central Intelligence Agency. ³Brazil.´ World F actbook .
53 Ibid
54 Ibid
55 ³Comissão Mista de Planos, Orçamentos Públicos e Fiscalização: Projeto de lei
orçamentária para 2008.´ Consultoria de Orçamento e F iscalização F inanceira.
56 As per the currency converter on Yahoo! Finance on 1 May 2009, found here: <
finance.yahoo.com/m3?u>
57 http://www.internationalliving.com/Countries/Brazil/Taxes
58 ³Human Development Index Reports.´ United Nations Development Programme.
59 Cavalcanti, Luiz Otávio. Como a corrupção abalou o governo Lula : por que o
presidente perdeu a razão e o poder. (Rio de Janeiro, RJ : Ediouro, 2005), p. 38
60 Ibid, p. 39
61 Ibid, p. 39
62 Alastair Smith and James Raymond Vreeland. 2006. "The Survival of Political Leaders
and IMF Programs." In Gustav Ranis, James Raymond Vreeland and Stephen Kosack
(eds.), Globalization and the Nation State: T he Impact of the IM F and the World Bank .
New York: Routledge, p. 1.
63 James Raymond Vreeland. T he International Monetary F und: Politics of Conditional
Lending. (New York : Routledge, 2007), p. 61
64 Ibid, p. 61
65 Ibid, p. 61
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66 Ted George Goertzel. F ernando Henrique Cardoso: Reinventing democracy in Brazil.
(Boulder, Colo: Lynne Rienner Publishers, 1999), p. 171
67 Ibid, p. 172
68 Ibid, p. 173
69 Ibid, p. 171
70 Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´
71 http://economictimes.indiatimes.com/India-ready-to-buy-10-bn-IMF-bonds-
Montek/rssarticleshow/4453072.cms
72 Mario Osava discusses that Brazil would void Mexico¶s entry into the Security Council
as only one Latin American member is commonly considered. Found in Global Policy
article at <http://www.globalpolicy.org/security/reform/cluster1/2005/0705screform.htm>
73 Marco Sibaja. ³Brazil to become an IMF Creditor.´ Business Week.
74 Ibid.
75 James Raymond Vreeland. T he International Monetary F und: Politics of Conditional
Lending. (New York : Routledge, 2007), p. 125.
76 ³IMF Executive Directors and Voting Power.´ International Monetary F und .
77 See note 71.
78 ³Brazil Banks Stronger Despite Crisis.´ Latin American Business Chronicle
79 Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´
Bloomberg .
80The San F rancisco Chronicle gives a great prediction of a worsening economy from
economist Paul Bernake. < http://www.sfgate.com/cgi-
bin/article.cgi?f=/n/a/2008/02/14/national/w002706S02.DTL&tsp=1>
81 Here too, I must offer a caveat: Brazil will find it more difficult to finance debt if the
crisis worsens. Of course, based on the policy procedures I have outlined here, I feel
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Lula should begin my prescriptions (raising taxes, etc) to pay its current debt along with
the future ones I am suggesting before accepting the loans.
82 Marco Sibaja. ³Brazil to become an IMF Creditor.´ Business Week.
83 Vreeland has noted that reduction in IMF conditions usually takes place six months
before elections. Nevertheless, I believe Lula should accept loans as many as nine
months before elections because Brazil¶s ³election season´ has been premature, similar
to the U.S.¶s in 2007-2008. The Chinese People¶s Daily , for example, has discussed the
resurge of opposition movements and the course of the upcoming elections. <
http://english.people.com.cn/90001/90777/90852/6549838.html>
84 I chose this date because this may result in considerable favor for the Worker¶s Party
among international observers. Also, the economic crisis, as I mention, will be likely
worse by then, making any lender a hot commodity. In other words, my argument is that
Brazil should take the loans now so it may boost its own economy before the crisis
worsens and wait until more nations are in straints, making any loan desirable, in spite of
whatever deficit Brazil may hold at the time. Consider a more common scenario: You
(Brazil) ask your neighbor (the IMF) for a loan to repair your leaky roof after light
showers damaged it yesterday. At the same time, you have watched weather forecasts
which indicate heavy rains will come tomorrow. Your neighbor¶s roof is severely
damaged the next day, while you already have used the loan money to begin repairs on
your own. Lending even a smaller amount to this neighbor in worse weather makes
your loan more desirable especially if you have kept repaying your past debt. In Brazil¶s
case, this desirability amounts to prestige, whereas the forecast for the economy, as
stated, are predictions for worse economic conditions in the future.
In all, the months I am projecting therefore serve the purpose of Brazil having more time
to pay off its past debts and the debt it will accumulate after following my procedures.
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85 Wikimedia Atlas, which is copyright-free, is found here:
http://commons.wikimedia.org/wiki/Atlas
86 Joaquim Bento de Souza Ferreira Filho and Mark Horridge. ³The Doha Round,
Poverty and Regional Inequality in Brazil,´ p. 2.
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