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Estadao, Brazil

To Avoid Decades of Crisis, U.S. and E.U. Should Look to Latin America


"The crisis in America and Europe threaten to contaminate the entire world and to a lesser extent, developing countries, among them Brazil. Around here, it took time to recognize the source of our problems … In the U.S. and E.U., there is a lack of political courage. And, the longer it takes to get results, the longer the crisis will last. We took 25 years. How many will they take?"



Translated By Brandi Miller


August 28, 2011


Brazil - Estadão - Original Article (Portuguese)

A Graphic showing which countries buy the most American debt. Brazil is no slouch, holding the fourth largest share of U.S. debt, coming in behind China, Japan and Britain.


FINANCIAL TIMES VIDEO: Mort Zuckerman says a double dip recession is nearly inevitable, Aug. 21, 00:05:42RealVideo

While the U.S. Republican Party rejected President Barack Obama’s proposal to raise taxes on wealthy Americans, sixteen French multimillionaires signed a document asking to pay more taxes. It was a quickly granted request: on the following day, President Nicolas Sarkozy instituted added a temporary additional rate of 3 percent on the incomes those who make over €500,000 per year. As the economic crisis goes on, it defies the wealthy, tests their personal reactions and behavior.


Of course, French millionaires are looking after their companies and want to avoid plunging the country into the risk of a ratings downgrade.


But wealthy French are doing their part and taking money from their own pockets. The Americans, however, haven’t budged - even after seeing Standard & Poor’s downgrade U.S. debt. But other ratings agencies haven't followed S&P, and three weeks later, the president of S&P, Deven Sharma, resigned from office. And on Thursday, S&P raised Brazil an improved debt rating.


In this tangle of unusual and unexpected crisis situations, the president of the Inter-American Development Bank, Luis Alberto Moreno of Colombia, drew a parallel between what Latin America lived through in the 1980s and what the United States and Europe are confronting today. He urged rich countries to learn from Latin America how to manage in times of economic crisis.


“Over the past 25 years, there have been 31 financial crises. For Latin American countries, decision-making and the capacity to manage are stronger than in developed countries,” admonished Moreno when he recently passed through São Paulo. With this flurry of crises in such a short period of time, Latin Americans learned to diagnose their ills - inflation being the biggest, but there were many others - and how to take them on. And they have accumulated enough experience to be able to teach.


Now the situation is different. In the 1980s, comfortably seated as creditors, wealthy countries pressured Latin America to put the brakes on the economy, eliminate social spending, invite unemployment and cut wages, thus expanding the human ordeal. Today they suffer from problems that we now have a degree in - elevated debt and fiscal deficits - but we aren't their creditors nor are we pressuring them.


So how did Latin America correct its mistakes?


Take the case of Brazil. Among the 31 crises cited by Luis Alberto Moreno, we faced the bitter effects of two downturns - in 1982 and 1987. The country ran out of credit; plunged into recession and unemployment; inflation soared and the Figueiredo, Sarney and Collor governments resorted to five plans to stabilize the economy - all of which failed.


At the time, creditor countries (European, the United States and Japan) pressured the International Monetary Fund, which put a magnifying glass over the Brazilian economy every three months, at which time we hosted their technicians. The IMF granted conditional loans to imposed harsh fiscal austerity. Brazil and its population suffered and became impoverished. It was called the lost decade.


At the end of the 1980s, the Brady Plan restructured the debt and helped Brazil recover its external credit. But chronic budget deficits persisted with governments continuing heavy spending, expanding the fiscal hole and triggering soaring inflation. Outgoing Prime Minister Sarney handed Prime Minister Collor a country to with a hyper-inflation rate of 86 percent per month and 2.750 percent per year. Within two years, Collor imposed two stabilization plans - both fiascos.


To reorganize the economy it was necessary to end inflation. The Real Plan fulfilled this role, inflation decreased and Brazilians began to boast about their currency, which had been beaten down and worthless. From that point on, the governments of Presidents Itamar Franco and Fernando Cardoso launched a barrage of changes to the framework of laws to modernize the economy and recover what was destroyed in the lost decade. President Cardoso privatized banks and state enterprises that were draining the Treasury, and created laws and rules that forced governors and mayors to adjust their spending to match revenue. With a mush modernized and better-organized structure, private investment boomed, creating income, jobs and tax revenue.   



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But President Cardoso continued spending more than Brazil earned and the fiscal deficit grew. Only after the Russian financial crisis of 1998 did the government begin pursuing balance with a consistent program of spending reductions. But the crises that struck from abroad got in the way and Brazil's foreign exchange reserves were insufficient to meet them.


In October 1998, Brazil turned to the IMF. It was all that President Cardoso's economic team didn’t want but couldn't avoid. Again, just as it had in the 1980s, the country fell under the yoke of the IMF. Twice - in 1999 and 2002 - the Real Plan was threatened, but it survived under the good macroeconomic management of Brazil's Central Bank, led by Arminio Fraga.


Upon assuming the presidency, Lula did none of the things he had preached for 20 years. His merit was to keep President Cardoso's economic policy intact, and not plunge the country in the outlandish adventures sought by the Labor Party. His government knew how to take advantage of the long period of prosperity around the world, and by 2008, the external crisis has been resolved. But in 2008, not only Brazil but its Latin American neighbors were much better prepared to confront a crisis that they didn't create and wasn’t theirs.


They were 25 years that were anything but boring, full of emotions and ups and downs. Things were never calm. It was like hiking a sinuous and turbulent mountain that required quick actions and decisions from those responsible for the nation's management. That is what IDB President Moreno means.


The crisis in the United States and Europe threaten to contaminate the entire world and to a lesser extent, developing countries, among them Brazil. Around here, it took time to recognize the source of our problems - overspending by governments that created gigantic public deficits topped by mounting debt that produced hyperinflation.


For now, Europe and the United States still don't face runaway inflation, but if they don't act quickly… it will creep in and be hard to dislodge.


Crisis management on the two continents has been criticized for producing decisions that were at best palliative and which haven't resolve anything. There is a lack of political courage. And, the longer it takes to get results, the longer the crisis will last. We took 25 years. How many will they take?



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[Posted by WORLDMEETS.US Aug. 30, 10:31am]


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