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³A New Economic Order?

: Brazil and the IMF in the Wake of the 2008-2009 Financial Crisis´

DJuan Bracey

Table of Contents Abstract Introduction IMF and Inequality How will IMF affect Lula¶s Popularity? IMF as a Prestige Mechanism Conclusion Appendix Endnotes and References 2 3 4 9 15 19 20 25

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Abstract: ³Um homem sem gravata não vale nada´1 - Bahian proverb As the world continues to cope with the greatest financial downturn since the Great Depression, the current relationships between financial organizations and their member states should receive more attention. In this paper, I find that Brazil¶s economic contraction warrants requesting loans from the International Monetary Fund. To defend this argument, I will rebut claims concerning the IMF¶s effect on inequality, finding internal, social factors to be the greatest barriers in eliminating social stratification. Moreover, I find IMF funds may serve as a ³safety net´ among society¶s most disadvantaged by allowing for continued financing of public assistance and health programs. Furthermore, I find that IMF conditions for loans may be avoided as Brazil considered is a ³powerful´ nation and will be further useful for the central government as a ³scapegoat´ for spending cuts. Finally, I argue that Brazil take advantage of an opportunity to loan to the IMF as a prestige factor and as a method to gain more standing on the world stage after having received loans.

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I. Introduction Brazil¶s role in global finance will become of greater interest due to the nation¶s continued rise as the strongest regional power in Latin America. In particular, its future participation in the International Monetary Fund (IMF) may witness significant role reversal; President Luiz Inacio Lula da Silva has been recently invited to give a 4.5 billion dollar loan to the organization from the former debtor state.2 Significant questions should be addressed due to these events: Should Brazil continue to accept loans from the IMF in the future after this offer? If so, how will future loans affect domestic problems, such as income disparity? Finally, what benefits will Lula gain from lending to the organization? The goal of this policy memo is threefold: 1) The first and most important is to advise Lula to accept IMF loans. Critics of this

proposal will point out the IMF¶s historical tendency to increase income inequality in debtor nations and point out the overall stigma attached to the organization. However, I intend to rebut this view with three counter-arguments. Firstly, I will point out that inequality in Brazil has remained stagnant not due to the role of outside actors, but due to societal attitudes, particularly in regards to race. Secondly, I will show that the effects on IMF and poverty/inequality are a matter of debate. In fact, I will present arguments which find that at times, such as during economic contractions, IMF loans are helpful. Finally, Brazil may avoid IMF conditions, or the obligations to adopt certain economic policies, given its status as a ³powerful´ nation and an ally of the United States. This is significant because these conditions are the main factors associated with widening wealth gaps. For reasons to be discussed, I suggest accepting $30-40 billion in loans. 2) Secondly, accepting loans would allow Lula to pursue policies often unpopular among the rank-and-file under the guise of IMF conditions. What I mean is that Lula

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can pursue reforms by ³selling´ macroeconomic reforms to his domestic audience without tarnishing his public image. In other words, scapegoating the IMF will allow Lula¶s political party, the leftist Worker¶s Party, a better chance in the upcoming 2010 elections. Moreover, I will discredit the stigma argument mentioned above by showing that when nations have been previously introduced to IMF programs, their populations are less likely to oppose them later on. 3) Thirdly, I will support Lula¶s loan proposal, finding it to be a prestige issue - an indicator of Brazil¶s ascension to the world stage as the ninth largest economy backed by a 190 million-person-strong workforce.3 Although I propose Brazil borrow an amount which is significantly greater than what it will lend, I feel that the ³prestige´ factor will remain beneficial especially if it lends after having accepted loans. II. The IMF and Inequality On March 28, 2009, Lula received worldwide criticism for blaming the current economic downturn on ³whites with blue eyes,´ further claiming ³I do not know any black or indigenous bankers«´4 Although Lula¶s words are politically divisive, observers should still recognize the unfortunate reality underlying the statement. In spite of significant economic progress, Brazil¶s income gap remains one of the widest in the Western Hemisphere, based substantially on racial hierarchy. In turn, critics of the IMF are rightly concerned about the organization¶s potential to increase Brazil¶s already massive inequality. Nevertheless, historical and current trends show that inequality is based foremost on domestic problems rather than outside actors. Specifically, Brazil¶s economic hierarchy is rooted in a complex, centuries-old caste system likely to remain in force due to social attitudes relegating the non-white into poverty. As I will argue, IMF loans may actually help combat this discrimination by allowing Lula to fund newly created government assistance programs for the poor and traditionally suppressed races. These include several poverty-alleviation projects undertaken by Lula, such as

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the anti-hunger Fome Zero5 campaign and the Bolsa Familia6 public assistance program. However, the debated effects of the IMF on inequality cannot be critically examined without discussing briefly inequality itself. The racial dynamics of this social stratification are clear - one 2002 World Report notes a 47.2 percent poverty rate of Amerindians, a 34.64 percent rate of Afro-Brazilians in contrast to a rate of only 12.62 percent among whites.7 Brazil¶s lower income in comparison to developed nations is excuse; one World Bank study notes that ³while in Brazil thirty percent of the total population is poor, on average only ten percent are poor in countries with similar per capita income.´8 Moreover, consistency remains among the most noteworthy features of Brazilian income inequality. World Bank shows that inequality has remained constant during the 1980s and 1990s, in spite of the re-democratization and trade liberalization which occurred at this time.9 Therefore, the common adage quem tem dinheiro é branco10 ± ³he that has money is white´ ±unfortunately remains a truism. How may the IMF have contributed to this stasis in inequality and racial hierarchy? At first glance, the history of the IMF in Brazil gives considerable weight to IMF critics, particularly after a military dictatorship assumed power in 1964. Having

been an original signatory to the IMF¶s Articles of Agreement in 1945, Brazil¶s pre-coup relationship was at times raucous; President Juscelino Kubitschek, pressured by domestic critics due to the high inflation at the time,11 broke with the organization in 1959.12 In contrast, the post-1964 era witnessed considerable cooperation between the military regime and the IMF, along with noticeably poor performance of Brazil¶s economy. Under Finance Minister Roberto Oliveira de Campos, Brazil complied with many IMF conditions, particularly by reducing subsidies to wheat and oil and by ending 75-100 percent wage hikes seen during the inflation period.13 Moreover, the military government raised taxes, even though 1965 saw a 144 percent increase in the average

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cost of living.14 Undoubtedly, these practices disproportionately affected Brazil¶s poor, while being wholly ineffective; one source indicates Brazil¶s GDP dropped seven-percent in 1965.15 Also, the common criticism of the IMF acting as a tool for American policy also has considerable merit. The military regime, backed by US support, was championed in American circles. For example, 1965 Times Magazine article praised the military regime for ³giving Brazil a breath of political and economic stability.´16 Meanwhile, inequality ± particularly along its racial lines ± was wholly ignored, as the false notion of ³racial democracy´17 existing in Brazil was instead upheld by the elite. However, other underlying factors better indicate why Brazil¶s racial relations have remained in stasis than the IMF/dictatorship cooperation. For example, Thales de

Azevedo (1966) a sociologist active in Bahia during the dictatorship, that inequality was deadlocked due to popular attitudes, basing this conclusion off of face-to-face interviews and field work.18 Among blacks, Azevedo noted that the ideal of being ³socially white´ became the ideal among Salvador¶s Afro-descendents, concluding ³a black whitens himself to the measure in which he elevates himself economically and acquires the manners of the superior group.´19 More significantly, poorer whites often called themselves prêtos meaning ³blacks.´20 Another sociologist, Florestão Fernandes (1969) found similar attitudes in São Paulo during the same period, such as the common habit among healthier blacks of using terms such as morisco or mulato (meaning roughly ³brown´) for self referral rather than prêto.21 Therefore, in spite of economic policies pursued by the military regime, the current social divisions are still the cause of income inequality. An obvious counter-argument arises regarding my conclusion: By simply showing negative effects of social attitudes, I have not completely rebutted harmfulness of IMF loans. In response, I find that the military government and its American/IMF supporters should be faulted for the continuation of inequality rather than international lending in

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general. The IMF, as the brainchild and foreign policy tool of the United States, pursued American-directed Cold War policies at this time. Therefore, US interests demanded turning a blind-eye to the authoritarian regime¶s human rights abuses, let alone its supply-sided economic policies which disadvantaged the poor. Therefore, I believe Lula should accept loans for two reasons: 1) Current IMF policies are markedly different than past U.S. balancing acts, specifically because the support of rightist regimes as a counterweight to the Soviet Union is no longer necessary. 2) Moreover, IMF loans do not necessarily have to be followed by economic downturn. Lula¶s predecessor, Fernando Henrique Cardoso signed an IMF agreement in 1998 after a similar financial crisis. According to one source, ³Brazilian stock markets recovered the worst of their losses«[and] the economic fundamentals remained strong´ afterwards.22 Moreover, the overall effects of the IMF programs on poverty/inequality are still a matter of debate. World Bank analyst William Easterly (2001) finds that structural adjustment loans have both positive and negative effects, basing this argument on sixtyfive case studies in developing countries. On the one hand, Easterly finds that ³growth under structural programs is less pro-poor than in economies not under structural adjustment programs.´23In other words, economic expansion when IMF programs are in force is less likely to benefit the poor because of the decrease in public spending as obliged by the organization¶s conditions.24 On the other hand, Easterly finds that during economic contraction, IMF loans are positive by serving as a cushion for those likely to be the most affected by financial meltdowns. In this regard, lending programs may serve as ³social safety nets´25 during times of economic downturn, specifically by providing the central government with funds which help to assure the continued financing of public assistance, health programs, etc. Easterly also finds conditions are

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less rigid during times of downturn. In defense of Easterly¶s findings, economist Patrick Conway (1994) similarly finds that while growth may be harmfully affected in a first year of an IMF program, these effects soon thereafter decline.26 Given the conclusions offered by these economists, I feel Lula should consider the following: 1) Easterly¶s findings support my argument for an IMF loan because Brazil ± as the world at large ± is experiencing a serious economic contraction. More importantly, the injection of funds is becoming a necessity in order to avoid a possible humanitarian crisis. Lula should borrow from the IMF in order for continued funding for his aforementioned government assistance programs. Poorer families will find adequate healthcare and food supplies more unaffordable, making Bolsa Familia and Fome Zero a life source for many. Cutting funding to these programs, in contrast, would cause social unrest amongst poorer classes, where Lula¶s support base originated. 2) Lula should also attempt to stimulate his economy, as developed countries usually do in times of crisis. Specifically, Lula should allow for government created jobs for developing infrastructure, such as building schools, bridges, etc. Of course, the ³austerity´ ± that is, reduction in spending - requirements set by IMF would appear to make stimulation difficult, but as I will argue later, Brazil may avoid the most unfavorable of these conditions. 3) The amount of IMF loans Lula should accept also requires attention. Brazil¶s 1998 Letter of Intent requested ³13,025 million´ in special drawing rights, roughly $18 billion27 (approximately $22 billion in 2007 dollars).28 Brazil¶s crisis a decade ago, spurred by a Russian moratorium on repayment of its foreign debt,29 was likely less severe than the current global meltdown. Therefore, I believe this amount should be compared to that of a current Latin American country in crisis

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would give a better estimate. Mexico, with an economy expected to contract 3.7 percent,30 has requested a $47 billion loan from the IMF.31 Brazil, whose economy will likely shrink only by 1.3 percent,32 should probably request a figure between the two discussed, roughly $30-40 billion. Furthermore, other criticisms of IMF are less relevant in Brazil¶s case. Joseph Stiglitz, a prominent IMF critic and a former Chairman of Economic Advisors33 finds fault with the abovementioned austerity programs imposed on developing nations largely because stimulus programs are instead pursued by developed states.34 The IMF usually imposes three important conditions with questionable effects on domestic economies: (1) a reduction in budget deficit, usually by lowering national spending and raising taxes (2) reducing money supply by raising ³central bank interest rates and placing ceilings on credit creation,´ and finally (3) by devaluing the national currency.35 The negative implications are clear: Lowering national spending entails less spending on roads, schools, infrastructure, health programs and social welfare projects. Devaluing currency means salaries, wages will no longer meet the costs of living in the short run. Moreover, all of these conditions are understandably unpopular due to ³sovereignty costs,´ in which individual nations lose considerable control over their domestic economy when accepting agreements, thereby causing central governments to appear incompetent. However, several caveats arise when critically examining this argument in Brazil¶s case. Firstly, condition will likely be less rigid on Brazil, considered a ³powerful country.´ By powerful, I am speaking especially in terms of its voting power, proportioned relative to its influence in the IMF. At the time of this writing, the IMF¶s website shows that Brazil¶s voting share is currently 1.40 percent of total, based on its possession of slightly over three billion special drawing rights.36 Although this is a far cry from the 17.09 percent share of its most powerful member, the United States, or even

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smaller yet wealthier European nations such as the Netherlands, at 2.38 percent,37 it is still significant. In contrast, twenty-three sub-Saharan African nations combined only comprise 1.35 percent of voting power.38 Moreover, with Colombia, Brazil currently cochairs a bloc of ten Caribbean and Latin American nations which account for 2.42 percent of vote shares in all.39 Moreover, its role in other international organizations plays a role in its power: As a member of the four-member BRIC economic bloc, Brazil stands with Russia, India and China40 as the most rapidly growing developing economies in the world. Lastly, Brazil has played an increasingly vocal role among the world¶s twenty largest economies, known as the G-20,41 and is the regional hegemon in the most important Latin American-based trading bloc, MERCOSUR.42 Moreover, Brazil¶s long-standing friendship with the United States further trumps its power status, therefore amounting to even fewer conditions. Economists Axel Dreher and Nathan Jensen (2007) find that voting along U.S. lines will result in favorable terms in the IMF and other U.S. dominated organizations. The authors have three main

hypotheses: (1) The IMF will set conditions based on ³domestic economic conditions including the growth rate of real GDP, the government¶s consumption, the budget deficit, the rate of monetary expansion and the current account balance.´43 (2) The IMF will ³set more conditions in the period prior to democratic elections.´44 Lastly, (3) the IMF will impose fewer conditions in the period prior to domestic elections for countries allied with the United States.45 Given both its ³powerful´ status and its ties with the United States, Lula is able to pursue three significant courses of action: 1) Lula must decide his bargaining technique for accepting IMF conditions. By this I mean that Lula, ruling a ³powerful´ country, will have considerable control on which IMF conditions he is willing to enforce domestically or not. However, according to the first hypothesis, Brazil may not enjoy the full benefit of its status

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as ³powerful,´ as it had recently entered into a current account deficit and is experiencing contraction. Nevertheless, as I will discuss in the following section, Lula may find it beneficial to pursue some IMF conditions while disregarding others. 2) Given Dreher and Jensen¶s second and third points, I believe Lula should continue to vote alongside the U.S. in the General Assembly and should work closely with the newly-elected Barack Obama. In doing so, I believe Lula should choose his words more carefully in the future, certainly avoiding remarks blaming ³whites with blue eyes´ for economic woes. In other words, because other strategic U.S. allies, such as Western Europe, would be particularly reactionary to these racially-charged statements, Lula should be more diplomatic to ensure fewer conditions. 3) Because there are fewer conditions before election season, Lula should accept an IMF deal at some point soon before the next elections in October 2010.46 As I argue in the next section, this will not have negative effect on the chances of the Worker¶s Party winning elections next year, giving the stigma attached to the IMF has declined due to the public¶s pre-exposure. III. How will IMF loans affect Lula¶s popularity? According to a late-March Reuters article, Lula¶s approval rating ± before among the highest of world leaders ± began to decline as a result of the financial meltdown.47 Polls indicate that his 84-percent approval last year fell to 65-percent last month due mostly to ineffectiveness in combating unemployment.48 An awry warning gives Lula ample reason for concern: ³If the economy does not bounce back later this year, [Dilma] Rousseff, the likely candidate for Lula's leftist Workers' Party, could see her chances in next year's presidential race erode«´49 Two questions should be addressed when asking how to ensure Lula¶s popularity does not decline any further: Firstly, is Lula able

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to use the IMF as a scapegoat for current economic woes? If so, will Lula be able to undertake financial policies which will improve his nation¶s economic situation? In addressing the first question, political scientists Alastair Smith and James Vreeland (2006) find that aside from using IMF loans to solve balance of payment problems, political leaders also accept IMF arrangements in order to ³«do what they privately wish to do, but are powerless to do so domestically«´50 In this regard, austerity programs are commonly undertaken under the guise of IMF conditions.51 In any event, the official motivation for these programs - the repayment of external creditors - gives Lula ample reason to accept IMF conditions. The World Factbook indicates Brazil entered a current account deficit of $27 billion in late 2008, while its public debt made up 40.7 percent of its gross domestic product.52 Therefore, although Brazil may be ³powerful´ enough to avoid IMF conditions, given its current circumstances, following some IMF conditions may be beneficial. Therefore, Lula should pursue the following courses of action: 1) For reasons already discussed, cutting back spending in the public services would be very harmful to Lula and Brazil in general. Lula should therefore attempt to ³sell´ IMF conditions to other segments of the government. The military should be among the first; the World Fact Book indicates that Brazil spends 2.6 percent of its GDP on the armed forces,53 which ± according to its estimated overall GDP of $1.9 trillion54 - should equate to nearly $52 billion. In contrast, according to the Brazilian Congress, 10.4 billion Brazilian reais55 have been allocated to Bolsa Familia, which, according to exchange rates as of lateApril, amounts to only $4.8 billion.56 2) Lula should raise taxes among the higher classes. According to one source, Brazil maintains a progressive income tax; income brackets between $9,080 and $18,144 are obliged to pay fifteen percent, whereas those above $18,144 are

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charged 27.5 percent of income.57 In turn, the United Nations Human Development Report shows that the wealthiest twenty percent of Brazilians hold 61.1 percent of wealth, whereas the wealthiest ten percent hold 44.8 percent.58 Therefore, a modest increase of perhaps three percent in the $9,080-$18,144 range, and 5 percent in the and above $18,144 range would substantially aid in increasing revenue. 3) Lula should consider one obvious way to reduce spending: eliminate bureaucracy and begin government reforms. Specifically, corruption59 and cronyism60 in the government should be reduced. In regards to the former, Luiz Cavalcanti, a law professor at the Federal University of Pernambuco, finds that corruption wasted two-percent of Brazil¶s GDP in 2005.61 Furthermore, reducing cronyism would eliminate under-qualified and/or deadweight employees, thereby reducing salaries allocated to non-effective workers. Again, I have to address an obvious counter-argument: Lula may find all of my policy proposals difficult to enforce, specifically because these segments of the population (e.g., the military, elite and government) are the most powerful. While admitting this will be risky, I find that Lula can ³blame´ the IMF for having undertaken these procedures. As Smith and Vreeland have shown, when a state is hit ³by a bad enough shock,´ its governments may enter IMF programs, and in turn, adapt its policies, without looking incompetent.62 In turn, if the elite, military and government officials remain non-complacent, Lula should attempt to gain support from his traditional fan base, the working class. Raising taxes among the wealthy while retaining adequate public assistance for the poor would surely benefit Lula¶s image in this regard. Finally, in regards to the stigma argument, national case studies have shown that the IMF¶s unpopularity declines with repeated exposure. For example, Vreeland (2007) documented the negative public reaction in Nigeria when it signed its first IMF in 1987.

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One newspaper captions best summarized popular opinion: ³IMF: What For?´63 In spite of this widespread initial unpopularity, Vreeland shows that after populations are introduced to the programs, ³the country was more likely to sign again and again.´64 In Nigeria¶s case, the government adopted new IMF in 1989 and 1991, ostensibly with less opposition.65 Brazil¶s future confrontation with IMF-stigma will have a very unique twist: Lula and many others from the political left were the most vehement opponents of Cardoso¶s 1998 loan. In fact, in Rio de Janeiro¶s main newspaper, the Jornal do Brasil, Lula¶s criticisms were quoted: ³Fernando Henrique Cardoso is the executioner of the Brazilian economy, responsible for one of the greatest economic disasters in the history of Brazil. I find it almost incomprehensible that the victims voted for their own executioner.´66 Nevertheless, Cardoso enjoyed the support of most Brazilians, even when making speeches stating that Brazil needed to cut spending and increase taxes.67 More significantly, Cardoso¶s acceptance of loans came during an election year. Whereas Lula and other leftists attempted to use the IMF loans to dissuade voters from reelecting the former President, Cardoso won the elections anyhow with 53 percent of the popular vote.68 Therefore, the Cardoso case shows that IMF loans will not be political suicide but Lula will have to hope that either Brazilians turn a blind-eye to his former opposition or otherwise have short-term memory. In any event, the tendency of Brazilians to ³to rally around their leader in a crisis´69 may allow Lula to salvage his reputation when accepting the loans. IV. The IMF as a prestige mechanism On April 20, Bloomberg reported that Brazil¶s loan proposal to the IMF was a tool to gain more influence within the organization. The head of the IMF¶s Western Hemisphere Department notes, ³The fact you become a potential creditor makes your

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voice stronger.´70 In other words, Brazil¶s loan offer is a prestige issue, indicating that Lula is also attempting to guide his nation to the center of the world stage. In all, I support Lula¶s decision, finding the loan offer helpful in at least three ways: 1) Brazil¶s proposal sends a strong signal to the developing world because the loans to the IMF are meant to aid low-income countries. Furthermore, Brazil plays a unique role as it will be among the few developing nations to join the club of creditor states. In turn, Lula may use this role as a leveraging tool in international organizations where the poorest nations are the most numerous. 2) Brazil will have a considerably stronger voice among nations calling for IMF reform. Specifically, requests for fairer vote shares within the IMF will allow greater cooperation with other BRIC nations. India, for example, has promised to buy $10 billion in IMF bonds,71 which allows for considerable potential for partnership among the two states in calling for the organization¶s improvement. 3) Finally, Brazil may increase its influence in other international organizations and its global standing in general after granting loans. Its bid for membership on the United Nations Security Council, already backed by the United States, would gain considerable weight and decisive advantages over its main regional contenders, such as Mexico.72 Brazil¶s creditor status is not altogether new as the nation once loaned to the IMF in 1982.73 However, two factors make this loan strategically significant: (1) The IMF requested loans from Brazil and (2) did so during a time of considerable economic challenges. In regards to the first point, Brazil¶s invitation is a powerful signal to itself and the developing world, given it now lays claim to be a ³success-story.´ In regards to the second point, timing and semantics are significant because the current crisis has turned traditionally ³First World´ states such as Iceland into debtor-states.

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In turn, Lula should consider two arguments given by his Finance Minister, Guido Mantega, when engaging in diplomacy with the developing world: 1) ³[The invitation] shows that Brazil is seen as a country with a solid economy." 2) ³It is also important because it will help make more credit available to emerging nations facing economic difficulties and thus help activate the world economy."74 For example, within the United Nations General Assembly (UNGA) and the G-77, Brazil may act as the ³voice´ of developing nations. In regards to the former, Brazil will be able to take advantage of the Third World-majority status of the UN¶s central organ. In other words, by acting as a representative for the developing world, Brazil may persuade several developing nations to vote in its favor. In regards to the latter, Brazil¶s economic advice may be accepted among the seventy-seven developing nations eager to follow Brazil¶s ³success story.´ In regards to reform issues, Vreeland (2007) discusses several techniques for improvement, the most pertinent three being: (1) the scaling back of conditions (2) the adaptation of more transparency within the organization, as well as the (3) reorganization the vote-sharing arrangement of member states.75 In turn, I find that Brazil¶s creditor status will give it considerable options in all three of these proposed reform techniques: 1) Although Brazil will not likely face conditions imposed on other developing nations, it could press for a reduction of conditions in other developing states. This move would be very popular among IMF-dependent, underdeveloped states, allowing for more alliances cooperation with the developing world. 2) In terms of transparency, a more open IMF would lead to less distrust among individual nation¶s and their constituents. Here again, Brazilian calls for reform

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will allow more friendship among developing nations which are most disadvantaged by IMF policies. 3) Finally, calling for reform in vote-sharing is another beneficial option for Lula. For example India¶s vote share is similar to Brazil¶s at only 1.91 percent. Nevertheless, because both of the nations are proposing loans, their joint calls for reform in the organization would significantly challenge its status quo. Furthermore, Lula could also recruit other major economies, namely Russia and China, in creating a ³reform´ coalition, given their vote sharing stands at 2.74 percent and 3.72 percent respectively. Moreover, with Brazil¶s share, these four nations would control 9.77 percent of vote, a significant portion, although less than the 15 percent veto-power benchmark.76 Finally, Lula¶s loan proposal gives Brazil a comparative advantage over other regional powers. Mexico, another Latin American giant, opposes Brazil¶s UNSC bid as it would void its own chances to join the Great Powers club.77 However, it has recently experienced serious economic downturn, as seen by its aforementioned $47 billion loan request from the IMF. Of course, there seems to be a double standard in this argument: If accepting loans makes Mexico look economically weak, why have I suggested Brazil request loans? I find that Brazil¶s appearance of economic weakness will be offset by the invitation to loan to the IMF. Although the amount I am suggesting that Brazil should accept loans which greatly outweigh what it is lending to the organization, I find that the current economic crisis mitigates the negative image associated with accepting large amounts of aid. For example, as the Latin American Business Chronicle indicates, Brazil¶s image is that of a ³handful of countries with the greatest growth potential.´78 On the other hand, Mexico, with an economy expected to contract more than Brazil¶s, has not received an invitation, indicating that its international image is not as positive as Brazil¶s.

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Therefore, I find that timing also plays a factor as to how Lula should use this prestige mechanism. I realize my proposal to act as a creditor and debtor will send mixed messages to the world at large. For this reason, I believe Lula should accept loans before lending to the IMF. As I have stated, the financial crisis will allow Lula to retain a competent image in spite of accepting outside aid. Moreover, Brazil recently paid off its $33.9 billion debt from past loans relatively quickly, repaying its external debts, including the 1998 IMF loan, fully in 2004.79 Therefore, in spite of its current account deficit, Brazil will become highly regarded after lending to help solve the crisis, especially if it manages to pay off its debt quickly again.80 Finally, Lula will enhance his standing abroad without affecting his own economy by lending, as the loans are to be made against special drawing rights reserves rather than actual revenue.81 I find that Lula should consider using more of these reserves (boosting loan amounts to perhaps $6-9 billion) in the near future. Of course, this would cause less voting power at first but I believe due to prestige, alliance with the US and relatively few conditions, Lula should sacrifice a slightly larger portion of his voting share for larger gains in the long run. For example, most predictions indicate the current financial crisis will worsen,82 meaning IMF creditors will likely become fewer and more highly valued in the near future. Therefore, if Lula waits a bit longer to give loans, his international image will look even better in the later on, especially if the amount he lends is great then being proposed. In all, I am suggesting a very busy last year for Lula¶s presidency, finding that both borrowing (perhaps in December 2009/January 2010)83 and lending (perhaps in August/September 2010)84 should come at these times. V. Conclusion Although the IMF has received rightful criticism for its effects on domestic economies, I have pointed out that loans will likely be beneficial for Brazil. Firstly, I find that inequality is foremost the result of internal, social factors. Therefore, the IMF¶s role

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in Brazil¶s social divisions is at best a peripheral one. In fact, the IMF may play a positive role as a ³safety net´ among the nations poor by helping to allow public assistance programs, etc. continue to operate. Furthermore, I believe Brazil will benefit from its status as ³powerful´ and as an American ally, meaning it will have to follow fewer conditions than normally imposed on developing states. Along with allowing Lula to solve his balance-of-payment problems, the IMF is also beneficial as a scapegoat. In other words, Lula can fault the IMF for spending cuts and tax hikes, which I feel should he should direct toward the military, higher classes and government workers. Finally, I believe Lula should loan to the IMF after having lent to the organization in order to fully benefit from prestige. Accepting now would not hurt Lula¶s image, as the current economic contraction mitigates the perception of government incompetence after receiving aid. At the same time, if the economy grows worse, loaning to the IMF will make Brazil even more economically strong in the future.

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V. Appendix Maps of Brazil: (Source: Wikimedia Atlas)85

Brazilian inequality also has regional dimensions; the indigenous-populated North contained only 4.6 percent of the nation¶s population, yet 9.3 percent of its poor. In contrast, the white populated Southeast region has a poverty rate of only 8.8 percent. Likewise, the African populated Northeast region contained 29.4 percent of the population, yet 44.3 percent of the nation¶s poor.86 Region 1 is Cento-Oeste (Mid-west), Region 2 is Nordeste (Northeast), Region 3 is Norte (North), Region 4 is Sudeste (Southeast), Region 5 is Sul (South), compare the bottom map gives a racial comparison:

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Races in Brazil, maioria branca signifies majority white states; maioria parda signifies with a majority pardo (mixed race) status. Notice the poorest regions are parda.

GDP per Brazilian states and examples: Dark green signifies nations with high GDP per capita (São Paulo and Rio de Janeiro), Light green with high moderate per capita GDP (Santa Catarina), the lightest shade of green signifies moderate income (Mato Grosso, Rio Grande do Sul), Yellow signifies moderate low GDP per capita (Minas Gerais), Orange signifies low income (Mato Grosso do Sul, Roraima), Dark orange is slightly lower income (Bahia), Red is highly low income (Pará, Pernambuco), Dark Red is extremely low income (Piaui). See map on next page for state locations:

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Brazilian States

Orange is low Human Development Index (HDI) (Maranhão, Sergipe), Light green is moderate HDI, Dark green is high HDI.

G20 Countries: Argentina, Australia, Brazil, Canada, China (PRC) , European Union (including France, Germany, Italy, and the United Kingdom as independent members) India, Indonesia, Japan, Mexico,Saudi Arabia, South Africa Turkey, South Korea, United States.

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IMF members, UN members except Cuba, North Korea,

This map shows nations currently affected by the economic crisis. The darkest shades of red shows those most adversely affected, the lightest shade shows the countries least effected. Nations marked in blue have experienced economic growth. Notice Brazil has been affected less than the other regional powers of Latin America (i.e. Mexico, Argentina).

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G-77 nations: Member states are marked in dark green, observer states are marked in light green, non-members are marked in gray.

BRIC nations: Brazil, Russia, India, China

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Endnotes
1

³A man without a necktie is worthless,´ quoted in Azevedo, pg. 38.

2

Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´

Bloomberg. 20 April 2009. < http://www.bloomberg.com/apps/news? pid=20601086&sid=aApYqdODdNfY&refer=news>
3

United States Central Intelligence Agency. ³Brazil.´ World Factbook. Lula gave the ³whites with blue eyes´ comment to Gordon Brown at the 2009 G-20

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summit in London. Daily Mail on-line gives the following quote: ³µThis was a crisis that was fostered and boosted by irrational behavior of people that are white, blue-eyed, that before the crisis looked like they knew everything about economics.´ < http://www.dailymail.co.uk/news/worldnews/article-1165089/White-blue-eyed-bankersbrought-world-economy-knees-What-Brazilian-President-told-Gordon-Brown.html>
5

Fome Zero¶s English webpage states it ³is a dream that will allow us to effectively

reduce hunger to "zero". Found here: <http://www.fomezero.org/>
6

³Bolsa Família: Changing the Lives of Millions in Brazil.´ The World Bank. Description

is as follows ³[Bolsa Familia] reaches 11 million families, more than 46 million people, a major portion of the country¶s low-income population. The model emerged in Brazil more than a decade ago and has been refined since then.´
7

World Bank. ³Poverty Measurement.´ Brazil - Attacking Brazil's Poverty. Vol. II,

(2001), 20.
8

Joaquim Bento de Souza Ferreira Filho and Mark Horridge. ³The Doha Round,

Poverty and Regional Inequality in Brazil,´ p. 2.
9

Ibid, p. 4. Thales de Azevedo. Cultura e Situação no Brasil. (Rio de Janeiro: Editôra

10

25

Civilização Brasileira, S.A, 1966), 33. Thales de Azevedo found this quote frequent among Bahians to describe racial stratifications in the region.
11

³História da Dívida Externa do Brasil.´ Memorial do Brasil. Ibid. ³Brazil Towards Stability.´ Times Magazine, Dec. 31, 1965. Ibid. ³World Bank ± IMF Support to Dictatorships.´ Committee for the Abolition of Third

12

13

14

15

World Debt.
16

³Brazil Towards Stability.´ Times Magazine, Dec. 31, 1965. Thomas E Skidmore. ³Race and Class in Brazil: Historical Perspectives.´ Race and

17

Class and Power in Brazil, ed. by Pierre-Michel Fontaine. (Los Angeles: University of California Press, 1985), p. 21.
18

Thales de Azevedo. Cultura e Situação no Brasil. (Rio de Janeiro: Editôra

Civilização Brasileira, S.A, 1966), p. 46.
19

Ibid, p. 31. Ibid, p. 33. Florestão Fernandes. The Negro in Brazilian Society. Jacqueline D.

20

21

Skiles, A. Brunel, Arthur Rothwell, trans. Phyllis B. Eveleth, ed. (New York: Columbia University Press, 1969), p. 418.
22

Ted George Goertzel. Fernando Henrique Cardoso: Reinventing democracy in Brazil.

Boulder, Colo: Lynne Rienner Publishers, 1999), p. 174.
23

Easterly, William. The Effect of International Monetary Fund and World Bank

Programs on Poverty(November 30, 1999), p. 26.
24

Ibid, p.8. Ibid, p.16

25

26

26

Found in Adam Przeworski and James Raymond Vreeland, "The Effect of IMF

Programs on Economic Growth," The. Journal of Development Economics Vol. 62 (2000), p. 385.
27

Brazil¶s 1998 Letter of Intent may be found here: <

http://www.imf.org/external/np/loi/111398.htm>
28

I found this correction for annual inflation by using the Consumer Price Index, found

here: <http://www.westegg.com/inflation/>
29

Goertzel, Ted George. Fernando Henrique Cardoso: Reinventing democracy in Brazil.

Boulder, Colo: Lynne Rienner Publishers, 1999 p. 171
30

CBS News gives a forecast of the various downturns in national economies, including

Mexico, in this online article: < http://www.cbsnews.com/stories/2009/04/22/business/main4961284.shtml?source=RSS attr=Business_4961284>
31

Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´

Bloomberg. 20 April 2009. < http://www.bloomberg.com/apps/news?
32

http://news.xinhuanet.com/english/2009-04/23/content_11240136.htm James Raymond Vreeland. The International Monetary Fund: Politics of Conditional

33

Lending. (New York : Routledge, 2007), p. 114.
34

James Raymond Vreeland. The International Monetary Fund: Politics of Conditional

Lending. (New York : Routledge, 2007), p. 117
35

James Raymond Vreeland. The International Monetary Fund: Politics of Conditional

Lending. (New York : Routledge, 2007), p. 23
36

³IMF Executive Directors and Voting Power.´ International Monetary Fund. Ibid. Ibid.

37

38

27

39

Ibid. Described as ³An acronym for the economies of Brazil, Russia, India and China

40

combined. The general consensus is that the term was first prominently used in a Goldman Sachs report from 2003, which speculated that by 2050 these four economies would be wealthier than most of the current major economic powers´ at < http://www.investopedia.com/terms/b/bric.asp/>
41

Described as ³International forum of finance ministers and central bank governors,

working to promote international financial stability on its website: <http://www.g20.org/>
42

Described as ³an organization with an important operating network specially in

Argentina, Brazil, Chile, Uruguay and Paraguay - who offers specialized services in international trade aiming that our customers could get a higher increase in their business, profitability, risks spread and better competitive conditions´ on its website. < http://www.mercosurtc.com/>
43

Axel Dreher and Nathan M. Jensen. 2007. "Independent Actor or Agent? An Empirical

Analysis of the Impact of US Interests on IMF Conditions." Journal of Law and Economics 50 no. 1. (November 2007), p. 6.
44

Ibid, p.6. Ibid, p.7. The newspaper Folha better describes these elections on an online article:

45

46

<http://www1.folha.uol.com.br/folha/brasil/ult96u83745.shtml/>
47

Raymond Collitt. ³Approval for Brazil¶s Lula hit by Economic Crisis.´ Ibid Ibid Smith, Alastair and James Raymond Vreeland. 2006. "The Survival of Political

48

49

50

Leaders and IMF Programs." In Gustav Ranis, James Raymond Vreeland and Stephen

28

Kosack (eds.), Globalization and the Nation State: The Impact of the IMF and the World Bank. New York: Routledge, p. 1.
51

Ibid, p. 3 United States Central Intelligence Agency. ³Brazil.´ World Factbook. Ibid Ibid ³Comissão Mista de Planos, Orçamentos Públicos e Fiscalização: Projeto de lei

52

53

54

55

orçamentária para 2008.´ Consultoria de Orçamento e Fiscalização Financeira.
56

As per the currency converter on Yahoo! Finance on 1 May 2009, found here: <

finance.yahoo.com/m3?u>
57

http://www.internationalliving.com/Countries/Brazil/Taxes ³Human Development Index Reports.´ United Nations Development Programme. Cavalcanti, Luiz Otávio. Como a corrupção abalou o governo Lula : por que o

58

59

presidente perdeu a razão e o poder. (Rio de Janeiro, RJ : Ediouro, 2005), p. 38
60

Ibid, p. 39 Ibid, p. 39 Alastair Smith and James Raymond Vreeland. 2006. "The Survival of Political Leaders

61

62

and IMF Programs." In Gustav Ranis, James Raymond Vreeland and Stephen Kosack (eds.), Globalization and the Nation State: The Impact of the IMF and the World Bank. New York: Routledge, p. 1.
63

James Raymond Vreeland. The International Monetary Fund: Politics of Conditional

Lending. (New York : Routledge, 2007), p. 61
64

Ibid, p. 61 Ibid, p. 61

65

29

66

Ted George Goertzel. Fernando Henrique Cardoso: Reinventing democracy in Brazil.

(Boulder, Colo: Lynne Rienner Publishers, 1999), p. 171
67

Ibid, p. 172 Ibid, p. 173 Ibid, p. 171 Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´ http://economictimes.indiatimes.com/India-ready-to-buy-10-bn-IMF-bonds-

68

69

70

71

Montek/rssarticleshow/4453072.cms
72

Mario Osava discusses that Brazil would void Mexico¶s entry into the Security Council

as only one Latin American member is commonly considered. Found in Global Policy article at <http://www.globalpolicy.org/security/reform/cluster1/2005/0705screform.htm>
73

Marco Sibaja. ³Brazil to become an IMF Creditor.´ Business Week. Ibid. James Raymond Vreeland. The International Monetary Fund: Politics of Conditional

74

75

Lending. (New York : Routledge, 2007), p. 125.
76

³IMF Executive Directors and Voting Power.´ International Monetary Fund. See note 71. ³Brazil Banks Stronger Despite Crisis.´ Latin American Business Chronicle Andre Soliani. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´

77

78

79

Bloomberg.
80

The San Francisco Chronicle gives a great prediction of a worsening economy from

economist Paul Bernake. < http://www.sfgate.com/cgibin/article.cgi?f=/n/a/2008/02/14/national/w002706S02.DTL&tsp=1>
81

Here too, I must offer a caveat: Brazil will find it more difficult to finance debt if the

crisis worsens. Of course, based on the policy procedures I have outlined here, I feel

30

Lula should begin my prescriptions (raising taxes, etc) to pay its current debt along with the future ones I am suggesting before accepting the loans.
82

Marco Sibaja. ³Brazil to become an IMF Creditor.´ Business Week. Vreeland has noted that reduction in IMF conditions usually takes place six months

83

before elections. Nevertheless, I believe Lula should accept loans as many as nine months before elections because Brazil¶s ³election season´ has been premature, similar to the U.S.¶s in 2007-2008. The Chinese People¶s Daily, for example, has discussed the resurge of opposition movements and the course of the upcoming elections. < http://english.people.com.cn/90001/90777/90852/6549838.html>
84

I chose this date because this may result in considerable favor for the Worker¶s Party

among international observers. Also, the economic crisis, as I mention, will be likely worse by then, making any lender a hot commodity. In other words, my argument is that Brazil should take the loans now so it may boost its own economy before the crisis worsens and wait until more nations are in straints, making any loan desirable, in spite of whatever deficit Brazil may hold at the time. Consider a more common scenario: You (Brazil) ask your neighbor (the IMF) for a loan to repair your leaky roof after light showers damaged it yesterday. At the same time, you have watched weather forecasts which indicate heavy rains will come tomorrow. Your neighbor¶s roof is severely damaged the next day, while you already have used the loan money to begin repairs on your own. Lending even a smaller amount to this neighbor in worse weather makes your loan more desirable especially if you have kept repaying your past debt. In Brazil¶s case, this desirability amounts to prestige, whereas the forecast for the economy, as stated, are predictions for worse economic conditions in the future. In all, the months I am projecting therefore serve the purpose of Brazil having more time to pay off its past debts and the debt it will accumulate after following my procedures.

31

85

Wikimedia Atlas, which is copyright-free, is found here:

http://commons.wikimedia.org/wiki/Atlas
86

Joaquim Bento de Souza Ferreira Filho and Mark Horridge. ³The Doha Round,

Poverty and Regional Inequality in Brazil,´ p. 2.

32

References Azevedo, Thales de. Cultura e Situação no Brasil. Rio de Janeiro: Editôra Civilização Brasileira, S.A, 1966. ³Bolsa Família: Changing the Lives of Millions in Brazil.´ The World Bank. 2009. <http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/BRAZILEXTN/0, ,contentMDK:21447054~pagePK:141137~piPK:141127~theSitePK:322341,00.html> ³Brazil Banks Stronger Despite Crisis.´ Latin American Business Chronicle. 23 April 2009 < http://www.latinbusinesschronicle.com/app/article.aspx?id=3349> ³Brazil Towards Stability.´ Times Magazine, Dec. 31,1965. <http://www.time.com/time/magazine/article/0,9171,842333,00.html> Cavalcanti, Luiz Otávio. Como a corrupção abalou o governo Lula: por que o presidente perdeu a razão e o poder. Rio de Janeiro, RJ : Ediouro, 2005. Collitt, Raymond. ³Approval for Brazil¶s Lula hit by Economic Crisis.´ Reuters. 20 March 2009. < http://www.reuters.com/article/worldNews/idUSTRE52J5T220090320> ³Comissão Mista de Planos,. Orçamentos Públicos e Fiscalização: Projeto de lei orçamentária para 2008.´ Consultoria de Orçamento e Fiscalização Financeira. 9 May 2007. Dreher, Axel and Nathan M. Jensen. 2007. "Independent Actor or Agent? An Empirical Analysis of the Impact of US Interests on IMF Conditions." Journal of Law and Economics 50 no. 1. (November 2007). Easterly, William,The Effect of International Monetary Fund and World Bank Programs on Poverty(November 30, 1999). World Bank Policy Research Working Paper No. 2517. <http://ssrn.com/abstract=632587> Fernandes, Florestão. The Negro in Brazilian Society. Jacqueline D. Skiles, A. Brunel, Arthur Rothwell, trans. Phyllis B. Eveleth, ed. New York: Columbia University Press, 1969. Ferreira Filho, Joaquim Bento de Souza and Mark Horridge. ³The Doha Round, Poverty and Regional Inequality in Brazil.´ Chapter 7 in Putting Development Back into the Doha Agenda: Poverty Impacts of a WTO Agreement, Thomas W. Hertel and L. Alan Winters (ed.) forthcoming from World Bank, Washington, D.C. Goertzel, Ted George. Fernando Henrique Cardoso: Reinventing democracy in Brazil. Boulder, Colo: Lynne Rienner Publishers, 1999 ³História da Dívida Externa do Brasil.´ Memorial do Brasil. 1 September 2002. < http://www.memorialdobrasil.com.br/DividaExterna.htm>

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³Human Development Index Reports.´ United Nations Development Programme. < http://hdrstats.undp.org/countries/data_sheets/cty_ds_BRA.html> ³IMF Executive Directors and Voting Power.´ International Monetary Fund. 1 May 2009. < http://www.imf.org/external/np/sec/memdir/eds.htm>

Przeworski, Adam and James Raymond Vreeland, "The Effect of IMF Programs on Economic Growth," The. Journal of Development Economics Vol. 62 (2000): 385-421. Sibaja, Marco. ³Brazil to become an IMF Creditor.´ Business Week. 9 April 2009. < http://www.businessweek.com/ap/financialnews/D97F7S2G2.htm> Smith, Alastair and James Raymond Vreeland. 2006. "The Survival of Political Leaders and IMF Programs." In Gustav Ranis, James Raymond Vreeland and Stephen Kosack (eds.), Globalization and the Nation State: The Impact of the IMF and the World Bank. New York: Routledge, p. 263-289. Soliani, Andre. ³Brazil Seeks More IMF Influence After Loan Promise: Week Ahead.´ Bloomberg. 20 April 2009. < http://www.bloomberg.com/apps/news? pid=20601086&sid=aApYqdODdNfY&refer=news> United States Central Intelligence Agency. ³Brazil.´ World Factbook. Lasted updated. 23 April 2009 < https://www.cia.gov/library/publications/the-world-factbook/geos/br.html> Vreeland, James Raymond. The International Monetary Fund: Politics of Conditional Lending. York : Routledge, 2007. World Bank. ³Poverty Measurement.´ Brazil - Attacking Brazil's Poverty Vol. II, (March 2001) pp. 1 - 119. <http://www.worldbank.org/.pdf> ³World Bank - IMF support to dictatorships.´ Committee for the Abolition of Third World Debt. 28 September 2004 < http://www.cadtm.org/spip.php?article809>

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