(Journals)

       *BRAUDEL PAPERS*                                                         
         No. 2                                                                  
         September 1993                                                         
         Fernand Braudel Institute of World Economics                           
         Associated with the Fundacao Armando Alvares Penteado                  
                                                                                
         Executive Director:  Norman Gall                                       

Board of Directors: Rubens Ricupero (president), Beno Suchodolski (vice- president), Roberto Paulo Cesar de Andrade, Roberto Appy, Alexander Bialer, Diomedes Christodolou, Roberto Teixeira da Costa, Edward T. Launberg, Carlos Alberto Longo, Luiz Eduardo Reis de Magalhaes, Idel Metzger, Mailson da Nobrega, Yuichi Tsukamoto e Maria Helena Zockun.

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Braudel Papers is a bimonthly publication of the Fernand Braudel Institute of World Economics

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     Editor: Norman Gall                                                        
     Resp. Journalist: Pedro M. Soares                                          
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      Copyright 1993 Fernand Braudel Institute of World Economics               


FEDERALISM AND INFLATION Why Brazil Needs a New Federal Pact

Aspasia Camargo


Aspasia Camargo is president of IPEA, the Brazilian government's economic research institute, and a member of the Fernand Braudel Institute of World Economics. This essay is drawn from a book manuscript, _Dilemmas of the Brazilian Federation_, produced in a joint research project of the Fernand Braudel Institute of World Economics and the Fundacao Getulio Vargas.

In the beginning we underestimated the real scale of the Brazilian crisis. Perplexed, we lived through successive phases, each of which revealed isolated facets of the same underlying problem. It was only after 15 long years of anguished incomprehension that we discovered finally that the whole building was collapsing. It was our model of development, with which we had been so closely associated for so long, that was coming to an end.

First of all, we discovered the foreign debt, and then the internal debt (which provoked a complex, technical debate over whether or not we were running public deficit). Though it was not identified at first, it is possible with hindsight to say that the crisis in the state arose long ago, with the beginnimg of the business community's campaign in support of the denationalisation of the economy. Slowly the crisis deepened, causing first the collapse in public administration and then, largely as a result, the slow but inexorable escalation of inflation.

The disarray in the state sector and the mounting public deficit together forged the social crisis which each year has gained greater momentum. Feeling increasingly insecure in the impoverished urban centres, Brazilians have retreated into defensive self-interest, ending the long tradition of the "cordial Brazilian." Partly as a reaction, the country was shaken in 1992 by a moral and ethical crisis that culminated in the impeachment of the president.

We are now at a crossroads: the crisis has become so severe that only at enormous cost to the country can we postpone deep structural reforms, the only measures that will be able to get the country developing once again, with a new, more efficient, competitive, decentralised and participatory model of development. The longer reform is postponed, the more profound the maladjustment will become.

Why has it been so difficult for us to find our way? Why have we felt so perplexed and impotent? And why have we behaved for so long like a primitive society faced with an inexplicable natural disaster? Even now no- one is quite sure where to begin and how long the reforms will take. Prisoners of our cultural inheritance, we are still looking for a magic solution, a miracle.

Are we then doomed to fail, to be cruelly punished for asking for too much, for behaving as if we were God's Chosen People? We are undeniably a volatile people, who swing from deep depression to illusions of grandeur, from passivity to hyper-activity. We need now to become realistic, to acquire the pragmatism that our old elites always found at difficult moments. We need to be more restrained, more organised and more confident, without overdoing it. But it will not be easy, for exaggeration and special pleading have become part of everyday political life: no sooner had the finance minister, Fernando Henrique Cardoso, announced the new economic stabilisation plan in June than numerous, remarkably different versions were being produced of the size of the debts owed by the municipal and state governments, making it very difficult to carry out sensible negotiations over the issue. The Brazilian crisis is, above all, an administrative crisis, manifest in the absence of crucial information. It is a crisis of facts and figures.

Yet another expression of the crisis is the old, ideological debate between free marketeers and state capitalists, a debate which has become more heated as the crisis has unfolded. It is wrong to believe that the solution lies in opting wholeheartedly for economic liberalism, without making any attempt to adapt it to Brazilian conditions, but merely following rules fixed abroad. To turn one's back on Brazil is just another frenzied option that strengthens the old power groups and cartels. What is needed, instead, is a compromise solution that brings together the two currents, without clearly opting for either. In the past, Brazil's rulers were pragmatic, with a strong instinct for political survival. Good sense can help us to redefine the national pact that many wrongly confuse with the elite's old habit of fixing things behind the scenes. If the word "pact" is so discredited today, it is not because there is anything wrong with the term itself, but because the wrong protagonists were chosen to negotiate the agreement. The term has acquired a bad name because of the repeated failure of those involved to broaden out the discussion and to include in the agenda a real process of economic adjustment. In the end, whose fault is it that the discussions were so limited?

At the heart of the Brazilian crisis lies the failure of the federal authorities to administer the country adequately. This problem is linked to the size and poverty of the country. Because of its huge size, Brazil is fragmented, unequal, and socially and politically diverse. We inherited a huge territory, but the central authorities have rarely been able to control such an expanse thanks to a Portuguese emperor, and his military and diplomatic active during the Second Reign, that political control of this territory was established. After the Republic was founded, the new elites wisely joined forces with the descendants of the monarchy, and it was because of them that the Republic was able successfully to administer the large territory. Our monarchy was a hybrid power, considerably advanced for its time and circumstances. The emperor -- a patriarchal and personalist figure who mediated between the pressure groups -- stood midway between the old absolutist monarchies and present-day constitutional sovereigns.

The objective of this article is to analyse the pendular and incomplete nature of our federal system. We copied our system from the United States, but we retained in it characteristics inherited from the empire, namely, the heterogenous nature of territorial alliances and a system of patronage based on personal favors revolving around a centre -- even when this centre was weakened by the decentralised Republic of the "colonels". Oscillating between these two tendencies, we managed to consolidate control over our territory and to establish a strong domestic market, which transformed the sleeping giant into an industrial power. When the crisis began in the mid-1970s, we were intoxicated by our great achievements and seduced by the role that we seemed destined to occupy among the great nations of the world. We naively believed in the upward spiral of our development, and were convinced that we were being propelled forward by a bizarre logic: it seemed that each step forward not only represented an irreversible advance towards development but also automatically prepared us for the next stage. The cycle would end, it seemed, when we reached full industrial maturity, with a developed manufacturing industry and extensive infrastructure, after heavy investment. This belief in the dynamic of the domestic market was overwhelming, blinding us to the eruption of the crisis, even when it was slashing investment and decapitalising industry.

It was this vision of the state and of the development process that hid from us the perverse nature of the political mechanisms for the transfer of resources and of the system of political representation. It is only recently that we have become aware that our political structure is severely weakened, that the disorder in public finances, the escalation in chronic inflation and the collapse in public administration all demand coherent measures to prevent the collapse of our federative system. In this essay we will examine our options.



THE SOLUTION IS POLITICAL: A NEW FEDERALISM Mailson da Nobrega


Mailson da Nobrega was Finance Minister of Brazil (1988-90) and is a member of the board of directors of the Fernand Braudel Institute of World Economics.

Inflation in Brazil has resisted all previous treatment. So-called orthodox as well as heterodox policies have failed. Both accommodation and audacious initiatives have ended in political confusion. Were they simply errors of diagnosis and implementation? Or did institutional difficulties and the lack of political will block adjustments in the public sector? A comprehensive study by Aspasia Camargo for the Fernand Braudel Institute of World Economics and the Fundacao Getulio Vargas finds that the core of the problem, and the solution, lies in the nature of Brazil's federal system. Some people try to explain the deepening crisis with arguments about the foreign debt or the "financial character of the public deficit." These explanations have no substance. Only a small but noisy minority still insists on them. Unfortunately, their simplicity has led to still more oversimplified arguments: the need for Central Bank independence and the "voluntary" stretching of the public debt.

No one doubts the need for Central Bank autonomy, nor for amelioration of the profile of the internal debt of the public sector which could contribute to a better performance of monetary policy and to strengthening of society's expectations in terms of the solvency of the public sector. However, these new proposals are not magic solutions.

Most of our economic analysts are endowed with an instrumental doctrine allowing them to diagnoses and formulate solutions to the problem of inflation. However, they do not always perceive the institutional and political difficulties faced by those in charge of implementing economic policy in Brazil, which frustrate the management and execution of monetary stabilization programs.

Given this frustrations, some have taken to authoritarian ravings, with proposals for immediate and "savage-like" privatizations of state enterprises, the "courageous extinction" of state banks and the like. Others say that balancing the federal budget is merely a question of sheer determination, dependent upon the political "will" of the President of the Republic and the tenacity of the Finance Minister. Some still believe that spending cuts can be achieved simply by publication of decrees by economic authorities.

There is no doubt that we need to privatize, control state banks, balance the federal budget and change the closed system of government by the few. To meet these goals, we must restructure our fiscal and monetary systems, revive the federal government's capacity for macroeconomic management and mount a frontal and definitive attack on inflation. This challenge is not met merely with the competence and courage of the Finance Minister or the political will of the President of the Republic.

Creation of the conditions needed to stabilize the currency in Brazil depends on much more than the specific measures and changes that we have been discussing. The central political question is how to make the necessary complex decisions within a system of representative democracy. In Brazil, this question forces us to deal with the current system of federalism.

Aspasia Camargo's analysis put us on the track to understanding this puzzle. She argues that the "Gordian knot of the Brazilian crisis lies in the compleity of the task of management in relation to the size of the country. The socio-political consequences of Brazil's continental dimensions are characterized, as in all of the great imperial powers in past history, by fragmentation, by inequality and by heterogeneous social and political traits".

Here is the root of the crisis and the explanation for our dismal conditions of governability. By this we do not mean public swearing of support by career politicians for the President of the Republic. Governability is a political system's capacity to make complex decisions that are accepted by society and that are effective in terms of results and the constraints of time. Ingovernability is, apart from the absence of these requirements, the excess of society demands, going beyond the capacity of the government to meet to them.

Brazil's political system is on the edge of ingovernability. It has low capacity to decide important questions due to the excessive fragmentation of political parties, lack of adherence to party programs and to a permissive electoral law. Professor Camargo argues that Brazil is a case of "political underdevelopment" when compared with many other counties, including those of Latin America. It is virtually impossible to form stable majorities to govern and to make the complex decisions demanded by the current crisis. Among the major decisions facing Brazil are the constitutional reforms destined to reestablish the financial viability of the Union, destroyed by the disastrous division of resources between the three levels of government introduced over time by way of various constitutional amendments (1979, 1983, 1986) and reaching a paroxysm in the Constitution of 1988. These changes cost the federal government severe losses of revenue , through transfers to state and municipal governments and an increase in central government spending for which there are no resources. They thus created a structural deficit in the National Treasury, which is being tackled with artificial and temporary measures that worsen an already acute fiscal crisis. Roughly 90 percent of federal government revenue is earmarked for compulsory spending programs.

This problem is at the core of our current difficulties. The paralysis of the decision-making process is a direct consequence of our current political and federal structure. As Camargo says, "state and municipal governments are interested in gaining access to more and more resources with the minimum of responsibility". The Congress, on the other hand, as Deputy Nelson Jobim says, is an "agent" of state and municipal government interests that do not represent the general will of the nation. Besides having contributed to the impoverishment of the Union, members of Congress year after year enlarge the hole in the federal budget by way of amendments by exclusively local interests that are unjustified in the context of our present impoverishment. Aspasia Camargo's proposal of a new federal pact is what we need. At bottom, it is a question of power. We must reexamine the access to political resources and thus redefine our concept of federalism. Concretely, in the realm of politics, we must redistribute seats in the Chamber of Deputies to end current imbalances in representation. In terms of fiscal policy, we must change the structure of revenues and spending allotted between the Union, the states and the municipalities. At the same time, we must guarantee and strengthen the process of decentralization in order to reduce the power of the bureaucracy, eradicate corporatism and opportunism and reduce the potential for corruption.

Electoral and party reforms are needed to assure effective decision-making by Congress. Without a new federal pact, it will be hard to create conditions for stabilizing our currency, returning to growth, reducing poverty and consolidating democracy.



THE ILLUSION OF CHANGE Aspasia Camargo

Federalism is a non-European kind of state organization marked by the coexistence of two sovereignties. The Union controls and carries out certain nationwide functions, while the federated units (states and municipalities) assume the remaining tasks. This remarkable product of political engineering emerged for the first time as a form of democratic state in the United States late in the 18th Century. Later, in the 19th Century, it spread to countries like Canada, Australia and the young Latin American republics. In Latin America, the new states' colonial origins prompted the emergence of superimposed political structures in two layers, shaped by communication difficulties and by economic and cultural differences. One, inherited from the old metropolis, tended to centralize power. The other was rooted in regional and local autonomy.

In Brazil, these two different and relatively autonomous powers can be seen in the distribution of constitutional powers between the States and the Union. Each have their own sources of revenue, their own authority for maintaining law and order and their own form of political and judicial representation at the state and federal levels.

In Brazil, unlike the United States and other Latin American countries, the term "Federation" refers not to the central power but to the multiplicity of federated states. Brazil's bizarre confusion of federalism with regionalism, of federation with confederation, represents the blurring of authority in the creation of its federal system from the top downwards over a continental territory that the central power had difficulty controlling.

The formation of the State came before the formation of the Nation. This led to what at first seems an incomprehensible paradox created by two contradictory tendencies --on the one hand, excessive centralism; on the other, the undisputed power of local bosses. Classic studies of Brazilian political life use opposing arguments to stress first one and then the other trend. Those stressing the centralizing trend point to Brazil's origins in the Portuguese Empire, with its extensive bureaucracy and concentrated land ownership, permitting the Portuguese elites to control huge territories that, together with the surprising continuity between colonial and independent Brazil, guaranteed the integrity of its enormous territory under the command of traditional elites. This unifying tendency was slowed but not interrupted by the republican decentralization of 1889. It regained strength after the 1930 Revolution, when President Getulio Vargas (1930-45; 1950-54) seized power. However, those who explain Brazilian politics in terms of local power argue that for four centuries the big rural landlords always imposed their will on a national state that seemed powerful but in practice was weak and distant.

Both analyses are partially correct. It was the patrimonial agreement between the centralizing bureaucracy on one hand and the big landlords on the other that, step by step, made possible the consolidation of the national state. Behind the apparent autonomy of the imperial elite loomed the private rule of the "colonels" of the National Guard and the slave-owners, who found in the centralizing regime of the monarchy the support they needed to maintain a labor regime abandoned in other parts of the world. At the same time, private local power was limitless in economically marginal areas of the country which, since the creation of the colony, had not attracted the interest of the tax collectors.

Republican decentralization failed to promote the pluralism and the civic initiatives that the ideologues of the Republic had imagined. The separatist fantasies of the early days ended. The republican elite incorporated a large part of the ideological baggage of the Empire. The decentralization that extended the network of public authority to the different states paradoxically consolidated, according to Francisco Jos de Oliveira Viana,"the integrity of the Nation through the fragmentation of power". This fragmentation was enshrined in the "politics of the governors," devised by President Manuel Ferraz de Campos Salles (1898-1902), as a way of containing the pressures of local power inside Congress, which was weakening even further the already limited role of the President. Strengthening the linkages between the state and federal levels gave back to the President the role of "moderating power," which had once made the Emperor an effective arbiter between the federal units.

In the economically strong states, decentralization of powers brought great progress. But in the poorer regions, such as Minas Gerais and Northeast, it led to strengthening of "coronelismo", increasing the power of the local bosses. Universal direct suffrage was introduced after 1891. However, the vote was not secret and electoral tribunals were not independent. Elections were a farce

The centralizing and decentralizing tendencies dividing Brazilian elites are partly caused by nature, according to Oliveira Viana. The main question, he said, was "to resolve administrative and defense problems through application of unifying and centralizing principles, to maintain union and cohesion in an amorphous and extensive mass." Working against this centralizing project was, however, "the undeniable fact with invincible and insuperable distances." He concluded: "No strong central organization is possible in a country with a vast physical base, low population density and rudimentary transportation."

Brazil's political crises spread through exhaustion of one or other of these two trends, at times favouring intervention and the standardization of rules and at other times reinforcing autonomy and diversification. This continuing dispute follows a pendular movement that General Golbery do Couto e Silva christened the "heartbeat, the contractions and expansions," of the Brazilian Federation. According to this pendular and evolutionary logic, the unifying and centralizing cycle periodically becomes exhausted and is replaced by a new cycle, which is decentralizing, federative and more democratic. Since 1975, we have seen the decentralizing tendency gain strength, climaxed by the 1988 constitution, which expanded the transfer of resources to states and municipalities as well as fiscal burdens of the central power. [Until now, more funds than responsibilities have been transferred from federal to local authorities.] This notorious source of disorder is the main cause of the chronic public deficit, nourishing the danger of hyperinflation.

The phases of authoritarian centralization, which lasted for several decades, were able to coexist with the formal, federative structure inherited from the Old Republic (1889-1930). Politicians in the centralizing tradition, like Getulio Vargas, always had to negotiate and collaborate with regional powers and, when possible, rule with them. In the same way, the military governments (1964-85) institutionalized the political structure, keeping Congress open, holding some elections and having their gubernatorial nominees ratified by state assemblies. The military government also fortified itself against adverse election results by decreeing the "April package" of 1977, one of many cases of "political engineering" in Brazil's history by which the constitution and the electoral laws were changed to secure desired outcomes, this time by packing Congress with docile representatives from Amazonia and the Northeast. But this brand of regionalism, entrenching authoritarian rule, has little to do with real federalism or with the liberal-democratic political forms in countries such as Canada or the United States.

The old policy of catering to the state governors, invented by Campos Sales, was incorporated into the institutional system and political culture of the elites, functioning since the beginning of the century as an important federal counterweight to the power of Congress. It was a mediating (and stabilizing) force, always present in the conflicts between the executive and Congress. To some extent, the size of the country makes this mediation necessary, just as differences in population and level of development establish firmly-based hierarchies between the states, with Minas Gerais and Sao Paulo claiming primacy, and Rio Grande do Sul, the homeland of centralizing military officers, playing the role of mediator. At times when central power weakens and the alternative power of the Congress becomes stronger, the influence of the strongest state governments gains importance, both inside and outside Congress, working like a pump sucking federal resources to the states. Even when the Executive is strong, the role of Congress is important, except that negotiations are more shadowy.

A corporate structure of professional, business and labor representation, organized at a regional level, has become institutionalized. All of them expect their share of political appointments and favors, made in strict accordance with the rules of regional distribution. Regional claims have been the sap nourishing the economic and political life of the Republic. Generous distribution -- that greatest of all gifts -- has been proof of the commitment and the interest of the Federal government, that is, of the President of the Republic and his aides, in the destiny of each of his children. The constitution of 1988 granted the powers of distribution to the beneficiaries of these favors. Incontinence in the federal system bankrupted the country and bred chronic instability in the government.

What is new in today's situation is that the centralizing and decentralizing trends in the federal system weaken each other to the point of exhaustion. Their pendular movements lose energy at both extremes. The central power is exhausted by the impoverishment of its bureaucratic machinery and by the irrationality and unrepresentative nature of the policies it tries to execute. The decentralizing process collapses with the excessive fragmentation of political power, leading to immobility and paralysis, with the polarization and radicalization created by fierce clashes between Executive and Congress. Inside the Congress, the division of power among factions is overwhelmed by a parallel process of polarization and radicalization.

The recent centralizing regime, which has reigned with great turbulence for the past half-century, was able to produce coherent economic policies around a development-oriented and modernizing state, while failing to create institutional and constitutional stability. The discontinuities in its political structure gave Brazil six constitutions and four and party systems over the past 60 years. Cupidity and improvisation in changing the politico- legal system disorganized and atomized the party structures, superimposing one over another, with perpetual alterations in the rules of the game that we may call "the cult of change."

During the Second Empire (1840-89), the emperor was constitutionally empowered to dismiss the party that was backing the cabinet. He used this power to force a rotation in office, which would not have occurred otherwise. Given the oligarchic structure of the parties, based in local power, it was the emperor who thus sustained party democracy. During the Old Republic (1889- 1930), oligarchic rigidity led in 1912-13 to the so-called "derrubadas estaduais" (state coups) which in turn led to the replacement of the old ruling groups by new leadership. Vargas dissolved the parties and Congress in 1937. The military created two different political party systems, one at the beginning and one at the end of the regime.

The main purpose of this cult of change is to alter the facade, modernize formally laws and rules and even at times change the men in charge. This is to create an illusion that the immobility inherent in these traditional pacts has been definitively overcome, without this actually happening. The rigidity was shaken by the prolonged economic crisis of the 1980s, lasting through 11 consecutive years of the governments of Joao Figueiredo and Jos Sarney, ending in the traumatic disintegration of the national-development pact during the 1989 presidential campaign and the brief, tragic government of Fernando Collor de Mello (1990-92).



POOR COUSIN, RICH COUSIN Aspasia Camargo

Since colonial times, different regions of Brazil have recorded different rates of growth. This happened because a series of economic cycles moved across the country -- sugar in the Northeast, gold in Minas Gerais, coffee in the Southeast -- culminating in the industrialization of Sao Paulo in this century. In debates that led to creation of SUDENE (Superintendency for Development of the Northeast), Northeasterners argued-- as they do again today -- that industrial protectionism hurt the Northeast and benefited the Southeast, particularly Sao Paulo. But others argued that feudal land tenure survived in the Northeast because rural oligarchies lined their pockets with federal government money intended for drought relief.

Because the Northeast is still seen as a problem region needing investment for infrastructure and other special resources to drive the economy and to combat poverty, we must try to evaluate fairly the progress already made and the changes still needed to create a more rational system of incentives and subsidies, not only for the Northeast but for all regions. In a democracy, both distribution of resources and their uses should be open to public scrutiny. The information available shows that public investments in the Northeast made the region more dynamic. The waste and the absence of objective criteria for selecting projects flawed government projects in the Northeast no more than in the rest of Brazil.

A wide-ranging system of tax incentives was adopted for the region in 1959. Many Brazilians argued that Northeasterners were being given a handsome subsidy, paid for by their "rich cousins" in the South. However, tax statistics show that it was not quite like that. All tax breaks, in fact, amounted to 1.1% of GNP and, at most, to 17.6% of tax revenue. Of all incentives, 45.8% went to the Southeast, 38.3% to Amazonia, 9.6% to the Northeast, 4.8% to the South and 1.0% to the Center-West. Moreover, most of the incentives going to the Amazonia and the Northeast benefited companies from the Southeast.

The main source of tax revenue for the Northeast are federal transfers that redistribute income from the Southeast. While the economy was growing, these constitutional transfers were regarded as a normal contribution. When the economy stopped growing, each region and state developed its own way of accounting to see who is winning and who is losing.

According to the Northeasterners, there is a historical debt bred by "internal colonialism", akin to the transfer of resources that Brazil made to England and Portugal. They say that, through "foreign exchange confiscation", the federal government expropriated Northeastern export earnings by exchanging their dollars for over-valued cruzeiros, with the difference amounting to as much as 25 % of these earnings. This "confiscation", they argued, meant, that the Center-South of the country was able to import capital goods at subsidized prices, which helped its industrialization. General Humberto Castello Branco (1964-67), a Northeasterner who was the first President after the 1964 military coup, finally ended this scheme.

Critics of this internal colonialism usually admit that the Northeast also needs to get rid of its corrupt political elites. Much of the money brought in to develop the region was misappropriated and misused by political bosses, just as in the South.



DERANGED ECONOMIC TRANSFERS Aspasia Camargo

The chronic Brazilian crisis grows more serious each year as the result of maladjustments in the federal system, mainly from transfer of favors, pressures and resources among the municipal [country], state, and central levels government, as well as government banks and enterprises. The Fernand Braudel Institute of World Economics is engaged in research on the operation of deranged economic transfers at the core of the civilizational problem of chronic inflation.

Decentralization has made the municipio the great protagonist of the federal pact and turned the central government into a scapegoat. A weakened central government faces the great tasks of formulating and carrying out policies of economic stabilization, giving direction and rhythm to the political and constitutional changes already underway and curbing the most harmful effects of the confusion of governmental functions and the public accounts. Tasks like privatization and decentralization become extremely complex management problems in the context of collusion between politicians at different levels of government.

While the State has been paralyzed, the politicians were not able to break away from the old centralist model and redefine their roles. Nor were they able to simplify, using new management methods, application of new criteria --regional, social sectorial-- for redistributing public funds. The fiscal crisis was bred by the debts of the wealthier states and credits granted by undisciplined state banks, which, beyond the control of the Central Bank, act as if they had a license to print money to finance elections as political agents of state governments. Also, irrational policies adopted by civil servants in Brasilia waste money because they are far away from their target public in the municipios and because they operate through a multi-tiered bureaucracy with resources lost at every level of transfer. Corruption flows naturally from this state of affairs, since the gradual collapse of the centralist model stripped the central government of capacity to control or account for spending. Oligopolies and business groups try to maintain old privileges granted by the mercantile state, while regional cliques in the budget committee of Congress distribute scarce public resources between organized cabals. Official development banks hand out credits in exchange for votes in Congress. The Executive needs these deals to form a majority, without which its budget cannot be approved.

Pressured by inflation, amid financial and budgetary disarray, the Executive cannot act upon macro-economic priorities. Jobs in the ministries -- from top to bottom of the bureaucratic ladder-- are horsetraded with regional leaders to win support of state governors within Congress.

Labor and professional groups ally themselves with regional economic monopolies, which are seen as an important source of employment. It is hard to separate sectoral and class interests from their geographic base of power, exercised through state governments, through their friends in key jobs in the economic ministries in Brasilia, through lobbying the judiciary and, of course, in Congress.

The new constitutional order created in 1988 decreed for the first time the primacy of the Nation over the State and submission of the demands of development to the claims of citizenship. Fiscal decentralization, under the new constitution, tried to create a new federal pact bringing rulers and citizens closer together at the regional and municipal level. This confused pact failed to fix a clear distribution of responsibility between levels of government, compatible with the transfer of resources to the states and municipios. and also failed to spell out the new coordinating roles of the federal government. So the Executive in Brasilia is still formulating social programs that it no longer has money to carry out and is managing them in the worst possible way. The Executive made only a timid attempt to transfer responsibilities to the states and municipios in keeping with their added resources under the 1988 constitution, perhaps because it hoped that it would soon recover the primacy it had just lost. It remained defenseless against the deranged economic transfers that aggravated inflation and weakened the political structure.

To gain time, economic officials resorted to the old custom of raising taxes. This recurrent practice, unsuccessful for the past ten years, represents the hope of politicians in Brasilia that they can continue to use the central government as a springboard for boosting their standing in regional politics and for increasing their power of patronage, using the umbilical cord that links the central, state and municipal governments in the transfer of federal funds. On the other hand, it is in the interests of the states and municipios to get the most money and the least responsibility, as this implies fewer constraints on their budgets. Congress vehemently defended decentralization while deputies in the budget committee kept pressuring, in piecemeal fashion, for more money for localities. According to Nelson Jobim, one of the most enlightened Congressmen, Brazilian legislators continue to act as lobbyists for municipios , seeking federal resources for their regions. This also happens in mature democracies, like Britain and the United States, but with more respect for fiscal limitations and more party discipline adhering to a program of government.

The 1988 Constitution, despite its faults, has the unprecedented peculiarity of having been drafted by many hands and diverse interests. Society was unable to go beyond exhaustive enumeration of rights and privileges disassociated from citizens' obligations. The obstacles blocking attempts to implement the new federal pact, like those blocking efforts to curb inflation, surface at the administrative, financial and fiscal levels, but at bottom are bred by politics. This is why successive anti-inflationary plans, drafted by brilliant economists using diverse methods, have been devoured by the logic of dark pressures and secret codes of political and administrative practice. The same happened to fiscal reform, always blocked by those who should be managing the process. Brazil's North-South conflict of the country demonstrates the disintegration in the old federal pact --with its unequal distribution of privileges and benefits and its obscure accountability. This obscurity impedes evaluation of the benefits, seen as lifetime mealtickets which, in paternalist fashion, are decreed for all regions but are applied in an unequal and distorted way, through special tariffs, incentives and taxes.

These distortions appear in politics through unequal representation in Congress. Sao Paulo state is seriously under-represented in the Chamber of Deputies, to the benefit of states in the North and Center-West. However, this situation could be bypassed in a federal framework in which more negotiation takes place in Congress and the vertical dealings between the central government and the states are moderated. does not impose its will to the same extent on the states. The hostility toward distorted distribution of government funds in favor of the poorer states comes from the fact that other sources of funds suddenly are drying up and because the distortion in political representation is so clearly reflected in the makeup of the budget committee of Congress.

In many ways, the discontent is anachronistic. In the first place, Sao Paulo's share in the country's wealth is declining, as the very dynamic of economic growth leads to a greater regional diversification. Secondly, the rest of Brazil needs Sao Paulo's prosperity, since much of the money going to the new economic poles comes from the Great Locomotive.

Nor is a political solution to the problem impossible. A recent survey by IBEP (Brazilian Institute of Political Studies) shows that a majority in both houses of Congress believe that Sao Paulo is unfairly under-represented. Only 29% of the members of the Chamber and 11% of the Senate consider the situation just; in contrast, 58% and 56%, respectively, favoured change. Most of those favouring change supported proposal to alter the maximum and minumum quotas of members allowed each state. The swelling criticism of the lack of representativity of Congress seems just the tip of an iceberg, a quick judgment of failure against the federal structure adopted in 1988, incorporating both corporativism and the old patrimonial pact between political clans and clients that gave it a kind of perverse coherence.

The debate about political representation and the North-South clashes is another facet of the growing fragility of the federal system with respect to tax revenue, monetary control and the public budget. The Gordian Knot of the federal crisis is wrapped around a confusion of accounts that is much more complex than is generally imagined. Much is unknown, since the economic and fiscal indicators used to measure our difficulties are always incomplete and methodologically precarious. The black box of the crisis is the traumatic adjustment still to come, having been postponed for over a decade, amid desperate maneuvers of entrenched interests. The lack of control weakening the Brazilian state and economy is the result of management disorder at a systemic level that breeds entropy and blocks rational decision-making along generally accepted criteria.

The regional and corporative gearing of the system is a vast network of differentiated and hierarchical privileges linked to fierce disputes over thousands of high-ranking jobs in the federal government. The jousting for jobs, between various political parties in different states, is always worse in democratic periods, when it is propelled by so-called "electoral pressures." It also survives in a more discreet way under authoritarian regimes, sustained by leaders of powerful regional oligarchies that may be more carefully chosen. What has changed since 1985 is the expansion of this oligarchic system in direct proportion to the growth and proliferation of parties. The fragmenting of the parties that made it impossible for the federal executive to negotiate coalition majorities in Congress, forcing successive governments to seek support for each important vote, aggravating political fatigue by making ephemeral deals with many individual parties.

This disorder in the federal structure breeds deranged economic transfers in several ways. Some of the most important of them flow through Seven Faucets in the fiscal system:

  1. Transfers come from the federal budget, above all from income tax and sales tax revenue, mainly benefiting the backward states and municipios' in Amazonia and the Northeast through the "Participation Funds," which also can go to big development projects in the large states. Many municipios' without their own income are entirely funded by these "external resources", part of which is channeled to an inflated local political class. Some states also survive in the same way. Failure to monitor spending and investment made through the federal cash cow encourages squandering, irresponsibility and parasitism on the part of the local elites.
  2. Internal debts and the systematic subsidizing of bad debts grow within the modern sector, benefiting private and official banks in the most developed states. Another flow, difficult to quantify, is the public capital invested in private industrial or financial companies. In the past, bankrupt private companies were bought by state agencies in an unscrupulous way, on the pretext that the state must protect investors and employees. Many of these firms now swell the list of companies to be privatized by the BNDES (National Social and Economic Development Bank).
  3. Over the past 30 years, incentives and subsidies have transferred US$9 billion to the Northeast, through funds shared with Amazonia. These funds also indirectly benefited the Southeast, through companies operating with tax incentives and in the duty-free zone of Manaus. The balance of resources in recent years favoured the Southeast.
  4. Massive flows come from grants and loans at subsidized interest rates from official federal banks for industry and farming, for the construction of owner- occupied homes and for water and sewage works. These flows bankrupted the Federal Savings Bank (Caixa Economica Federal) which controls the forced savings in the FGTS, a retirement and emergency savings fund into which all employers and registered workers must pay and which finances the government's low-cost housing program. These deficits spread through the whole vast government banking system.
  5. Nobody knows how and where direct investments are made by state companies in certain regions of the country. Not even the President of the s can also be identified as "bureaucratic enclaves", concentrated in the Sao Paulo-Brasilia-Rio axis, but which include middle-class state employees in other large capital cities and even in smaller towns that have public companies, universities and official banks. As Tania Bacelar has observed for the Northeast, these institutions form a huge internal market spawned by government funds. This internal market, funded by public credit and taxation and by monetization of deficits by the Central Bank, embraces state and local governments too, which also "privatize" public resources.
  6. Transfers also are made through giveaways or pricing below cost of public goods, from water supplies to electricity to university education, as well as through monopolies and concessions benefiting industries of the Southeast, thanks to the regulating role played by the state and its developmental ideology, transferring income from exporters to protected industries, from the countryside to the city, from North to South. Through the protectionism it has isolated the economy, forcing the poorer states to buy goods "exported" from the richer regions, even though they are costlier than imports from abroad. This flow is reinforced through value-added taxes which penalize consumer states and strengthens producer states and big cities, "neutralizing" the losses they have borne through income and sales taxes.
  7. The social welfare system projects an actuarial deficit of US$40 billion over the next 25 years. The 1988 constitution makes it into an instrument for transferring income to poorer regions and to very young retirees. Thanks to connivance with politicians and judges, there is widespread fraud, like paying pensions for non-existent people and false disabilities.

The map of interregional transfers could also be drawn for flows from the states to the municipios. Neither these fiscal, financial and human transfers, nor the financial performance of the municipios, states and regions, are duly recorded and accounted for. No political system can sustain such confusion. We must stress the singularity of the Brazilian political model, developed during the Second Empire. Its strength rests in its use of the Union for multiple functions: to protect the territory; to promote development and mediate between national and international economic groups; and to redistribute income on a modest scale between social classes and regions. All these functions are today either suspended or collapsed.



THE SEVEN FAUCETS AND THE FIVE PLAGUES

Aspasia Camargo

Federalism is a term that needs to lose its old regionalist connotations and, instead, be associated with the ideas of freedom and justice. These public goods should be distributed by a civil society capable of being the protagonist of communal life and not merely exist as shadow and reflection of the powers of government.

We have in Brazil some dramatic examples of the development of local power, the cradle of democratic practice in countries where democracy works. Cooperative schools proliferate in both middle-class neighborhoods and shantytowns. We have partnerships between the public and private sectors working together at the local level to protect public goods. Community self- help projects, organized by poor people, help families to build their own homes and bring basic services to their neighborhoods. Cooperation does not exclude government agencies. Many municipal governments work together on projects of mutual interest.

Our society will never be homogeneous, but much can be done to reduce inequalities and to help people live together according to the principles of justice. For this we need clear political rules and open public accounting, so that resources can be allocated in a just and democratic way. Without clear political rules, Brazil risks losing its advances toward modernity. In many spheres of human activity, modernity means mastery of scale and knowledge. In modern societies that work, the demands of scale sustain constant tensions between local interests, without clear winners or losers, negotiating exchanges that strengthen the society as a whole.

What would a new federal pact be like? How would it reflect changes taking place in Brazil and in the world? In Brazil today, the crisis that is destroying the federal system leaves unanswered a crucial question: Are we heading, like Russia, toward a political system resembling a confederation? Or are we seeing in federalism a flexible framework, capable of accomodating heterogeneity, allowing great differences to be represented politically? Some politicians already propose some kind of confederation as the solution to our problems. Our fiscal legislation, with all its contradictions, is already decentralized by international standards. We even could say that our weakened federal system is already, in fact, a disguised confederation. So what would our political structure be like if decentralization was carried further, either through the collapse of the central power, or through constitutional changes? We see Five Plagues on the horizon:

  1. Vast regions of Brazil, spread out in an archipelago of communities far from each other, would lose what they have achieved of modernization. The shantytowns surrounding the big cities and large swaths of the backward interior, away from the islands of high technology and export enclaves scattered about the country, would be excluded from the dynamics of competitive integration. Many municipios, surviving today only because of federal transfers, would bite the dust and disappear from the map.
  2. Modern Brazil's main asset --its integrated market, of continental size-- would be fragmented if the federation were to divide into confederate states. Obstacles to trade between the states would emerge as in earlier attempts at confederation, such as the experience of the United States, with the Articles of the Confederation (1781-89) which were rapidly abandoned, and recent developments in the former Soviet Union. Without a central authority to carry out investment, maintenance work, planning and administration, the collapse in the domestic market would, in its turn, hasten the decline in the integrated system of communications and transport. The confederated states would adopt different standards to regulate trade, sale of manufactured goods, education and professional qualifications as disguised forms of autarchy and protectionism.
  3. The breakup of the domestic market and the deterioration of transport and communications networks would be separate aspects of overall regression that would cut off the interior of Brazil from the world knowledge system, which has been the driving force in the development of modern life. For all their defects and poverty, the federal government's universities and specialized agencies operating in many areas, such as agricultural research, energy, public health and telecommunications, are the main channel of access for most Brazilians to the knowledge system of the outside world. States and municipios, loosely joined in a confederation, would lack the technical capacity to seek and absorb what other people outside Brazil have learned or are in the process of discovering.
  4. The public health system, already in crisis, would grow even poorer, with further decline in its professional and administrative standards. The decline would accelerate at a time when infectious diseases, such as malaria and cholera, which only a short time ago were either eradicated or under control, are resurging with new force, and when new infections, such as AIDS, are adding new burdens to the system. What professionals in the field call the "scrapping" of the public health system would be aggravated by demographic pressures, with new groups of adults reaching mature ages when they need continual medical attention to deal with chronic diseases. Today's neglect of the health system is a prescription for greater mortality tomorrow. If public health services were scattered around a continental territory without channels of coordination and access to the knowledge and information generated by the international public health system, the threat of higher mortality would grow.
  5. A continental Brazilian confederation would breed different kinds of local power structures. Some areas would develop a strong civil society. Others would become trapped in traditional systems of bossism. In isolated regions, new criminal networks would appear with more financial and technological resources than those of a weakened central authority, which would be unable to fulfill its traditional role of protecting citizens and combating crime. The lesson here that there is no viable alternative to the strengthening of the federal system. What drives the inflationary confusion that we live in today has been the abusive use of the Seven Faucets, exposing us to the danger of the Five Plagues. The difference between our weakened federal system and a formal confederation is only a matter of name and degree. But there is no historical force preventing our recovery nor predestining further disintegration.

What we need is a fiscal reform that strengthens the federal government in its basic functions. Enormous political obstacles block reform. The corps of functionaries deteriorated over the past decade, sinking in inefficiency and poverty, but it remains strong enough to bar restructuring. Congress does not take reform seriously, ranking it eighth in its list of national problems. This trance is one more sign of how far the decay of the federal bureaucracy has gone, measured its the low salaries, the swollen ranks and its many tasks for which there is no fiscal backing. Another federal power that needs strengthening is the Central Bank, which frequently becomes a clandestine cashbox for the government, pressured to intensify inflation by printing money to finance political deals between Congress and state governments, on one hand, and the central government on the other.

We can define a new federal pact on the basis of subsidiarity, the principle, enshrined in the German constitution, that everything capable of being done by the smaller community should not be done by the larger. In other words, the state should not do those tasks which could be society's initiative. The municipio could effectively become the key protagonist in the federal pact. To be able to play this role, the municipio must be empowered to raise more taxes and be given more responsibilities.

The second major point in the federal pact would be to restrict the central government's main functions to coordination and evaluation; justice; internal and external security; diplomatic representation and monetary control. Investments in infrastructure, science, technology, education and training would also need a federal presence. The central government would expedite access for all to international networks and the benefits arising from globalization of the world economy.

In terms of progress, Brazil lost the decade the 1980s and has skidded into the 1990s. To celebrate with pride the 500th anniversary of its discovery in the year 2000, Brazil must overcome obstacles as historically important as the beginning a new century and a new millennium. The last time we began a new century, a grandiose book was commissioned, written by Count Afonso Celso and entitled _Why I am Proud of My Country_. It elegantly recounted the main virtues of the country that promised so much for the future: the size of the territory; the natural beauty found within it; and the wealth hidden in a young country endowed with enormous potential. Today, a century later, we live at the other extreme of our manic-depressive cycle, spanning two decades of unwarranted triumphalism, followed by another decade of insecurity and perplexity without precedent. We can end these wild swings of mood only by seeking maturity and discovering our own identity. We must live with our limitations and struggle against our delusions and, on this basis, decide sensibly which road to follow. We must learn where the boundary lies between our own weaknesses and the ills of the world.



INFLATION AND GOVERNABILITY

Juan de Onis


Juan de Onis was Latin American correspondent of the _New York Times_ for 25 years and is a member of the Fernand Braudel Institute of World Economics.

When we talk about "hyperinflation and governability", using Brazil and Russia as examples for comparative analysis, we must eliminate the imprecision of the terminology. Although "hyperinflation" may some day take place, that is not what is happening in Brazil. Monetary collapse, which characterizes hyperinflation, has been forestalled by indexation. The Brazilian problem now is not hyperinflation, which is terminal, but a chronic, or inertial, inflation. Hence the tone of catastrophism that underlies the historical references to past hyperinflationary experience is not useful for putting the real problem in clear focus.

The Brazilian inflation is controlable by well-know, orthodox remedies, which have been applied succesfully in Brazil before (Campos Salles, Bulhs-Campos) and these examples should be given closer attention now than they are getting. These, or similar, remedies have not been applied now in the face of accelerating inflation for political and/or ideological reasons that produce incompetent governance. This goes back to Delfim Neto's shell games during the end of the military period, but the most damaging deceptions of all took place during the Sarney-Ulisses-PMDB-PFL cohabitation, with the succession of Funaro-Bresser-Mailson dressing up their evasions with specious erudition. The electorate understood this clearly, and protested accordingly --putting Collor and Lula into the final round--but the political class, with rare exceptions, didn't change its greedy, self-serving behaviour .

The fundamental question of "governability", therefore, has to be clearly stated. Does that concept mean that Brazil's historical formation has produced intrinsic, inherent deficiencies of a social and cultural nature that prevent the adoption of economic policies that can control inflation and encourage productive work and efficient use of capital? In that case, Brazil is "ungovernable" as a nation in its present form and is exposed to political fragmentation and social disintegration.

But if "governability" means something more like a defintion of what is necessary in contemporary Brazil for the emergence of a national polity, based on existing political and social forces, that will provide solutions for problems that everyone recognizes (jobs, crime, education, health, corruption, etc.) then the analysis become less augurial, and more specific and particular to the conditions that need to the faced in Brazil. Of these, the most essential is clearly "regime competence", through whatever combination of central institutions and decentralized local administration is deemed most practical. In this latter sense, I am not convinced that comparision with the conditions in Russia are particularly relevant to Brazil, given the enormous historical, political and cultural differences between these two. What seems more relevant to me for the Brazilian situation is the revolt of the electorate in Italy against politically institutionalized corruption, or the recent innovative experiences in Mexico, Chile and Argentina with economic and social reforms in cultural and political contexts that are sufficiently similar to Brazil's to provide examples of governance that can be applied to Brazil. The most fundamental question raised by the Brazilian mess is: Why doesn+t Brazil learn from experience? There seems to be a systemic dysfunction that manifests itself in an inability to develop from experience an adequate model of the world and a capability for operating within this perceived environment in a way that achieves conditions for survival and reproduction.

Brazil's failure to extract useful information from its environment seems to be the reason why it persists in the same errors, time after time. In biology, by analogy, all living systems depend on constant feedback loops that adapt the organism's response to life around it. Brazil's present political "culture" appears to accept only feedback loops that reinforce maladaptive behavior. Why is this so? In Brazil, there are interest groups that benefit from perpetuating a distorted perception of conditions that have to be recognized as contrary to the public interest. These distortions are reinforced by inappropriate linkeages to abstract ideas (social justice, nationalism, etc.) that need to be adapted to realities, not imposed ideologically. As a result, the response to objective situations (fiscal disorder, inefficient investment, corruption, etc.) is chronically inadequate. In the absence of solutions, there is a repeated sense of failure, but no sensible lessons are drawn. We must learn from those failures.



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Posted: 8 Apr 1994