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Brazilians Find a Political Cost for I.M.F. Help

August 11, 2002

RIO DE JANEIRO, Aug. 10 - Brazil and other Latin American
governments have followed Washington down the free-market
path, only to find they are now losing control over their

The immediate consequences are most visible here in Brazil,
which is in the midst of an important national election.
Brazil, Latin America's largest country, has just engaged a
$30 billion lifeline from the International Monetary Fund,
but one that imposes strict policies on the next
government. There is a strong chance that it will be a
left-leaning one that promises to improve the lives of the
poor who were left behind in the economic experimentation.

"Don't try to strangle us," President Fernando Henrique
Cardoso, who leaves office in January, told market
speculators who have sent Brazil's currency plummeting in
recent weeks on fears of a government default. He said the
loan gave Brazil vital oxygen, and showed that the monetary
fund played an important role in developing economies.

But to some Brazilians, it is the fund that could do the
strangling. The bailout announced this week is described as
the most far-reaching package since the Clinton
administration and the I.M.F. came to the rescue of Mexico
in 1995, a successful intervention that was paid out almost
all at once. But Brazil's comes with unusual strings, and
it thrusts the lending agency into the uncomfortable
position of being in the middle of Brazil's democratic

That is because $24 billion of the loan would be delivered
next year only if the new government met certain budgetary

"This agreement is an extremely shrewd and subtle piece of
political engineering," said Gilberto Dupas, director of
the international studies program at the University of São
Paulo. "No candidate is going to want to be responsible for
a brutal reversal of expectations" that would come from not
receiving financing from the fund.

After eight years of free-market orthodoxy that has
produced only modest growth, Brazil has a strong chance of
turning in another direction. A poll released Thursday
shows the government's candidate slipping and two leftist
opposition candidates - Luiz Inácio da Silva, known as
Lula, of the Workers' Party and Ciro Gomes of the Popular
Socialist Party - with more than 30 percent each. They are
possibly heading for a second-round runoff in October.

With so large an amount of money at stake, both Mr. da
Silva and Mr. Gomes have reluctantly endorsed the loan

The bailout was intended to stanch a sudden crisis of
confidence, manifested by a plummeting currency, investor
flight and the prospect of a new government defaulting on
$250 billion in public debt.

Such fears have vastly increased the regional tumult that
began with Argentina's financial crisis late last year. The
crisis propelled the monetary fund to act, with the
reluctant backing of the Bush administration, which had
earlier opposed new money for Latin American countries.

In the extreme circumstances, the I.M.F. promised the $30
billion, nearly twice the amount that market analysts had

"This is going to contribute to reducing the financial
panic that was threatening to make the crisis worse," José
Antonio Ocampo, director of the United Nations' Economic
Commission for Latin America, said of the monetary fund's
package. But he said the effects might be short- lived, and
the "consequences for economic growth are limited."

Brazil's new money is to be doled out over 15 months and
requires whatever government takes power on Jan. 1 to
maintain a budget surplus of 3.75 percent through 2005.

But both of the leading candidates are chafing at what they
perceive as an intrusion on Brazil's sovereignty and on
their ability to fulfill campaign promises. Guido Mantega,
Mr. da Silva's chief economic adviser, complained that the
I.M.F. was trying to confine a Workers' Party government
"in a plaster cast."

"This limits the capacity for social investment we plan to
make," Mr. Mantega said. "If we reduce interest rates and
the primary surplus is maintained until 2005, the effort to
reheat the economy will be in vain."

The penalties for noncompliance are equally clear.
Brazilians need only look next door at Argentina, which has
been bogged down for months in futile negotiations to
restore its line of credit with the fund.

"When it comes time for the rest of the money to be
dispersed in Brazil, because they have quarterly targets
and reviews, the first time that Lula misses they can tell
him he's not getting any more money," said Walter Molano, a
market analyst with BCP Securities. "That's what they did
to Argentina last year, saying there would be no waiver,
and they will do the same to the next administration in

As goes Brazil, so goes the rest of the continent. The
slide of the currency here, which lost nearly 20 percent of
its value last month, was reflected in similar dips in
Colombia and Chile and helped fuel a banking crisis in
Uruguay. That was resolved only when the Bush
administration agreed to an emergency $1.5 billion bridge
loan last weekend.

The standard advice of the fund to clients facing crises
has been to insist on increased austerity, arguing that
fiscal discipline is a necessary precondition to
prosperity. But that translates into enormous suffering for
millions of people, strengthens the appeal of left-wing
critics of free-market economies and weakens governments
that have made the changes Washington is urging.

"It's easy at the top to say cut back on expenditures, but
it is hard when you are a politician and the unemployment
rate is 18 percent," said Joseph E. Stiglitz, winner of the
Nobel Prize in Economics in 2001.

Latin America "is not like the United States where you have
a social safety net," he added. "Firing a worker has
enormous economic and social consequences."

From 1980 to 2000, per capita incomes in Latin America grew
at only one-tenth the rate of the previous two decades,
when governments followed more interventionist and
protectionist policies.

In a report that came out early this month, the Economic
Commission for Latin America forecast no immediate
improvement, saying that Latin America's economy will
actually contract nearly 1 percent this year, largely
because of the implosion of Argentina's economy.

Despite its reluctant approval of bailouts in Brazil and
Uruguay this month, the Bush administration continues to be
baffled as to a long-term solution to that problem.

Asked during a news conference in Argentina this week why
Latin Americans were increasingly rejecting the magic
recipe of privatization, lower tariffs and increased
foreign investment, Treasury Secretary Paul H. O'Neill
replied, "I have no idea." When it was suggested to him
that such policies were not yielding the expected results,
he said, "I don't know of another plausible answer, do

Mr. O'Neill appeared to offer free trade as the panacea for
the region's current difficulties, referring repeatedly to
Mr. Bush's approval of trade promotion legislation this
week and the opportunities that offers. But Latin American
officials consider that formula as simplistic as many of
Mr. O'Neill's earlier declarations about the region.

"We're in so extreme a situation here right now that the
banks won't even give us export credits," even when the
banks are not at risk, a senior Argentine official said
after Mr. O'Neill's departure.

"If all of our economies fall apart and have to rely on an
I.M.F. life support system to survive," he said, "there's
not going to be anyone around for you to trade with."

International Monetary Fund bailouts, like the $30 billion
lifeline to Brazil this week, translate into enormous
suffering for millions of people, strengthens the appeal of
left-wing critics of free-market economies and weakens
governments that have made the changes Washington is