Drowning in Debt

An interview with Marcos Arruda

Multinational Monitor: What is the origin of Brazil's debt crisis?

Marcos Arruda: During the 1970s, there was an enormous flow of petrodollars seeking easy investments throughout the world. The Northern countries sent ambassadors offering very cheap loans to finance investments in Southern countries. The 1970s was the decade of the two oil crises of 1974 and 1979, and it was also the decade of military regimes all over the world, many of them sponsored by the CIA. During the 1970s, 18 out of 21 Latin American nations were under military dictatorships. So the bankers actually dealt with our dictators on the big loans that created our countries' overwhelming indebtedness.

The military dictatorship in Brazil used the loans to invest in huge infrastructure projects - particularly energy projects - that were useful to the private sector. After the government investments cleared the path, private capital was drawn in with subsidies, fiscal investment incentives, even co-investments with state companies, and private investors reaped the profits.

The state projects were intended to serve as radiators of development. The idea behind creating an enormous hydroelectric dam and plant in the middle of the Amazon, for example, was to produce aluminum for export to the North. The project involved the use of subsidized energy from the hydroelectric facility, minerals from Para (a state in northern Brazil) and a plant set up by transnational companies, including Alcan and Alcoa, in connection with a Brazilian state company. The government took out huge loans and invested billions of dollars in building the Tucurui dam in the late 1970s, destroying native forests and removing masses of native peoples and poor rural people who had lived there for generations.

The government would have razed the forests, but deadlines were so short that they used Agent Orange to defoliate the region and then submerged the leafless tree trunks under water. Now the trees are rotting, and we are having to pay millions of dollars to clean up the excessive amount of organic matter that is decomposing under water.

 The hydroelectric plant's energy is sold at $13 to $20 per megawatt when the actual price of production is $48. So the public sector of Brazil - meaning taxpayers - is providing subsidies of $28 to $35 per megawatt. We are financing cheap energy for transnational corporations to sell our aluminum in the international market, often to themselves; Alcoa in the United States or Alcan in Canada buy what Alcoa sells from Brazil, a product with very little value added.

We think these sorts of projects are destructive to the environment and financially irrational for the Brazilian government. The government is now responding to this irrationality with the magic word "privatize."

MM: What has been the overall effect of the debt on the Brazilian economy?

 Arruda: Let's take the decade of 1980-1989, which is now being called a lost decade - as I am sure the 1990s will be. From 1980 to 1989, Brazil paid a total of $148 billion as service on its debt - $90 billion in interest and the rest in principal. In 1980, the debt was $64 billion. Ten years later, having paid $148 billion on that debt, Brazil now owes $121 billion. This illustrates the vicious cycle of the debt, which has a simple logic: the more we pay, the more we owe. We argue that unless we break this cycle, there is no way out.

The way to break the cycle is to cancel the debt. But even cancellation will not solve the whole problem. Why? Because it is the very model of development that we have adopted in Brazil that is at the root of the process of indebtedness. And this holds true for all of the South. Our government and the rich of our countries have talked us into the idea that the more we imitate the North, the more we will develop. The International Monetary Fund [IMF] and the World Bank have come up with the same recipe for the development of the entire South, saying, "If you follow this prescription, you will clean up your economy, you will reshape your financial flows and you will be on good terms with the international financial community." But we've done it for 13 years now, and the results are devastating.

The main component of the adjustment process prescribed by the World Bank and the IMF for Brazil and the South as a whole involves restructuring our economy so as to drive all savings to investments in exports. The logic was: exports are the main source of foreign currency; sell your products abroad and you will have currency to pay the debt. So everywhere in the South there has been a massive effort to produce enough goods for export at the expense of the internal economy.

Let us think of our national economy as divided between the domestic economy and the external economy that produces for other countries. How can you drive investments in the internal economy to the external sector of the economy? By reducing the effective demand of the internal economy, reducing the real purchasing power of wage earners and using the surplus investment to produce for exports. This has meant 10 years of impoverishment and decapitalization of the domestic economy, which the national figures do not reflect.

The GDP figures show that we have had fair results because our exports did very well. Brazil alone averaged exports of between $25 and $30 billion every year.

However, what counts in paying the debt is not how much you export. What matters is the trade surplus, the difference between what is exported and what is imported. So the other mechanism to gain international currency to pay the debt was to compress imports. Since most of our industries still have to buy equipment and technology from abroad, the primary method for import compression involved deindustrialization, the cutting-down of internal production. For the most part, our industry could not replace its equipment over the last 10 years, so it is worse off now than it was 10 years ago.

 Through the various adjustment measures, we actually were able to produce a trade surplus of approximately $69 billion in the 1980s. But we paid $148 billion to service the debt. How did we cover that deficit? First, we depleted our international reserves, which a nation maintains to cover imports that it cannot cover with its export earnings. Second, we took out new loans to pay old loans. That is the crucial element of the vicious cycle of indebtedness: you stop borrowing to invest in production, and you borrow to pay the former debt. The money does not even come in; it goes from one banker's book to another, in the process becoming a liability of the Brazilian government.

MM: What is your argument in favor of cancellation of the debt?

 Arruda: Many loans were illegal according to our countries' existing constitutions. They were often secured under unconstitutional terms, requiring, for example, that a country give up its sovereignty and accept a biased court to decide contractual disputes. They were also often secured without any knowledge of Congress, which is itself a violation of the law. We believe that there should be an audit of our debt and we should decide how much of it is legal and how much is illegal and therefore should be recognized as nonexistent.

There are other important reasons the debt should not be paid in full. First, the creditors knew who they were lending to. The banks should be responsible for their irresponsible loans. They were lending money to unaccountable governments. The bankers knew that sooner or later the governments would be taken down and those loans would be called into question. They entered into those transactions anyway. So the creditors have to pay part of the price.

Second, our debt increased sharply as a result of the unilateral U.S. decision at the end of the 1970s to increase interest rates. Those interest rate increases multiplied the amount of Third World debt - at least that which was negotiated under flexible term interest rates - three or four times. This is another factor that was external to the actual borrowing process and should be taken into account when we decide how much we should pay.

Third, there is a secondary market for debt, in which the free market establishes how much any given Third World country's debt is worth. Why don't we use the free market rule to evaluate how much we should be paying as interest on the debt? In the case of Brazil, if you take the debt as $120 billion, and you take into consideration that the market value of our debt titles is 30 cents per dollar, the country should have to pay interest on only $36 billion out of the $120 billion. And yet, this year alone, Brazil is probably going to pay between $10 and $12 billion in principal and interest.

But the Brazilian government is not interested in confronting the creditors because it continues to cling to the myth that we cannot grow without foreign capital. This may be true for small countries like Puerto Rico or Uruguay, but it is not true for large countries like India or Brazil, especially given our immense natural resource base. If we decide that the existing model of development is not desirable, then we can go another way. Each part of the world can go a people's way: a Latin American way, an African way, a Hindu way, instead of the white Western way of conceiving development.

MM: What elements have made up the imposed Northern method of development?

 Arruda: After 1985 and the build-up of the Third World debt, the World Bank declared that it would make loans to Third World countries to begin to pay back or buy back their debts, but only if the countries agreed to abide by conditions. These included opening up their economies, bringing down tariff and non-tariff barriers, facilitating international investment in their countries, reducing the size of their governments, privatizing state companies and accepting debt-for-equity and debt-for-nature swaps. Latin America's oil producing countries, Mexico and Venezuela, have accepted or are in the process of accepting these conditions. Just imagine the pressures on the other countries that do not produce oil. Argentina sold out and is now giving in to the conditions of the World Bank and the IMF.

Southern governments have reshaped the economy of their countries to the priorities of the North. The deal offered by the North was that it would help Third World countries diminish the size of their debt if they continued to pay. We argue that we cannot continue to pay. We have to use the surplus we are producing to invest in the internal economy. We have to redistribute wealth so that people's demand for products increases, the economy grows again and only then can the surplus be used to pay the debt.

MM: What has been the effect of privatization in Brazil?

 Arruda: Brazil has sold some of the most productive state companies to the private sector at very low prices. If the government prices the companies too low, it ends up giving out public assets that were the result of investments over decades.

Who buys these discounted companies? Usually companies of the same industry which already have oligopolistic power. Take the steel sector, which is run by a small number of companies. State investment in that sector was very important in regulating the market as well as not allowing it to be totally controlled by a cartel. Now we are selling the state steel companies and we are increasing the oligopolistic power of the cartel in that sector.

By criticizing the privatization policy, we are not saying that we reject all privatization. I belong to the Workers Party, which argues that we need a deep restructuring of the state of Brazil. But that restructuring does not involve transferring the best and most productive assets of the state to the private sector. Rather, we advocate democratizing the state.

MM: What do you mean when you talk about a Latin American model of development, or about democratizing the state?

 Arruda: First of all, we want to move away from the logic of the free market, which is not truly free. The United States and Japan protected their economies when they were in the process of industrialization. Now we should have the same right to protect our economies.

The second element is to submit capital to the rule of human needs, putting human beings and their labor at the center of our projects. We have to give people the power to manage, control and participate in decision-making about the direction in which their companies, factories or farms are going to move. There must be more collective ownership and co-management of production. Collective decisions should be made about trade and about which technologies to adopt.

We argue against an economy centered on capital and based on the logic that the main purpose of economic activity is to produce more and more. That means depleting nature, destroying natural resources and using up non-renewable sources of energy.

We have to use the economy of enough as the criterion to plan the economies of the South and the North. There has to be a redistribution of wealth and resources from North to South. The North is using most of the world's energy resources. The North is the cause of most of the world's pollution, natural destruction and waste precisely because of its compulsive drive to always produce more. The North has to give up some of its excessive consumption. The world is one and its resources are limited. One of the conditions necessary for structural transformation of the South is structural transformation of the North.

At this time, the world is moving in the opposite direction. In 1960 and 1970, the richest 20 percent of the world controlled 70 percent of the world's income. By 1980, the figure rose to 76 percent, and, by 1989, to 82.5 percent. So there is an acceleration of income concentration on a world scale which means fewer people have greater wealth, and more people are in need, everywhere on the globe. Something has to change for the earth to be viable over the next millennium.

MM: Do you view the creation of Mercosur, a planned common market for the Southern Cone of South America, as an example of a "Latin American model of development?"

 Arruda: We do need a subregional arrangement that prepares the ground for more extensive integration. Countries of the subregion need to organize themselves to not submit so quickly to the strongest power in the region which is the United States. But even that benefit is undercut by the existing role of Northern corporations in our economies.

 The Mercosur treaty sets January 1, 1995 as the date for the economic and commercial integration of Brazil, Paraguay, Uruguay and Argentina. Tariffs on between 400 and 900 products, ranging from agro-industrial goods to cars, are to be gradually reduced until they are eliminated altogether in five years. The agreement also covers infrastructure, especially energy. The intention is to more completely integrate, but these products and areas are to be integrated first.

There were many mistakes in setting the 1995 date, and in the treaty negotiating process as a whole. The treaty was agreed upon without any serious study of the reality of trade between these countries. There was no research about how each of the products will be affected by the creation of the free trade zone. How are these products' markets structured? How do the products flow? How many people and what sectors do they involve? What will be the social, environmental, political and economic impact of creating a commercially integrated zone for each of these products? These questions were not considered.

The treaty process was almost totally improvised. Private companies are mostly in the front line of this process, because the governments don't have all the information. And even if they did, they are not willing to take a leadership role. Europe has been integrating for almost 40 years, and when European countries attempt to negotiate economic, monetary, financial and even political integration, the conflicts are so great that they cannot come to an agreement. I believe that our timeline for the creation of Mercosur is absolutely unrealistic, that the process of commercial integration is going to have a very negative impact on people's lives and that integration will intensify the process of production for exports in a way that is unsustainable.

MM: What are the main forces pushing Mercosur and pushing it so quickly?

 Arruda: Companies that have already been working in this direction like Autolatina, which is a joint venture of the Brazilian subsidiaries of Ford and Volkswagen formed to face the competition of GM, Fiat and Mercedes Benz in the region. Autolatina was formed long before the Mercosur treaty was signed in 1991 and now it is one of the companies that is most prepared to take a prevailing role in the process of integration. Other strong proponents include grain companies and chemical companies like the German Bayer and BASF.

MM: So foreign multinationals that invest in the Southern Cone are well positioned to take advantage of Mercosur's free trade zone?

 Arruda: Absolutely. There is a growing trend toward creating export processing zones, which are completely free of controls and regulations. This gives transnational corporations the right to move in and produce without abiding by any rules. Proponents say that this is a way of preparing the ground for integration, but what it actually does is provide open havens in which corporations of any country, including those of the North, can come in, settle down and become an integral part of the territory that will have protections regarding the rest of the region and the world.

The fact is that these economies are already penetrated by Northern corporations. The creation of a zone that favors internal trade obviously has an underlying statement: "We protect ourselves from capital or trade coming from outside the zone." But we are still looking for the protections from the outside. Because when free market and neoliberal ideology is so widespread, countries are concerned with reducing and eliminating protections regarding any type of capital. So the idea that we are in the process of integrating the Southern cone is, in part, a lie. The governments are not interested in protecting the economy of the region from outside actors or in allowing this subregion to develop its own industrial infrastructure to produce and export with sovereignty or capacity to compete.

MM: How will the impeachment of Brazil's President Fernando Collor de Mello affect Brazil's basic economic development strategy?

 Arruda: After Collor stepped down, his successor, President Itamar Franco announced a new secretariat. The two men now responsible for economic decisions are Paulo Haddad, a professor and consultant, and Gustavo Krause, an economist who was mayor of a medium-sized city of the Northeast. Both tend to be conservative, the latter being a member of the parties that kept the reins of power during military rule. So far, in terms of economic development, they have defined only what the Itamar adminstration will not do or change.

They do not seem to recognize that the 10 years of recession with inflation, which ruined our economy and caused severe suffering for the people, prove that the IMF's and the technocrats' concepts that have dominated economic planning for decades have failed with respect to the aims they proclaim. They do not intend to redefine "modernization" to give it a comprehensive meaning that includes social and human, scientific, technological, political and cultural development, rather than simply extensive and non-selective privitization.

They also seem to have decided that the politics of indebtedness - and Brazil's relationship with international creditors - will continue as under Collor. If these hypotheses are borne out, I foresee a new inflationary surge, deeper recession and growing masses of unemployed people. Without a deep change in the rhythm of debt repayment, and in our relations with creditors and transnational capital, we will never overcome the crisis, nor escape the position of being subordinate to priorites that are not our own.