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Fernando Henrique Cardoso: A crisis foretold

Sep 1, 2013

Former president Fernando Henrique Cardoso reflects on what needs to be done to return Brazil to a path of sustainable growth – the foundations of which he helped set

By Thierry Ogier

The man who two decades ago helped lead Brazil into a new era of economic stability is, today, less than sanguine about the future of his country.

Fernando Henrique Cardoso, Brazil’s president from 1995 to 2002, says a failure in recent years to uphold the principles of economic reform could have devastating consequences for Latin America’s largest economy. In an interview with LatinFinance, he says Brazil must urgently reassess its growth model if the country is to remain competitive in a fast-changing global economy.

As finance minister in 1994, Cardoso oversaw the launch of the Real Plan, an economic stabilization program that was part of a broader process of deep macroeconomic and institutional reforms. The initiative, which saw the real pegged to the dollar, put an end to years of hyperinflation and helped propel Cardoso to the presidency a year later.

In that role, Cardoso pushed through a number of liberal reforms, including a break-up of state monopolies in a number of sectors, including oil, mining and telecommunications, as well as a restructuring of the financial sector.

The reform process, while strengthening competitiveness, was not without its costs – in particular, a sharp rise in public sector debt and macroeconomic imbalances. This culminated in Brazil’s 1998/1999 financial crisis, as investors turned on the nation in the wake of Russia’s 1998 default.

Brazil’s economy eventually stabilized and the ground was set for a boom over the following decade and the country emerged as one of the world’s leading middle-income economies. Yet today, that narrative has soured, amid a collapse in growth, rising inflation and a wave of popular unrest.

At 82, Cardoso remains a potent force in Brazilian politics. Here, the elder statesman reflects on what needs to be done to return the economy to a path of sustainable growth – the foundations of which he helped set.

LF: Has Brazil learned its lessons from decades of economic crisis?

FHC: I believe so. We learned a lot during past crises as well as during the recent one. The quality of financial management improved. There has been a long and persistent effort to put public finances in order, to restructure the public and private banking sectors, including through privatization, and civil service reform.

As a consequence, Brazil has become more resilient in facing crises. This includes the ability now to increase the central bank’s international reserves and deal with exchange rate volatility and inflation in a more sophisticated manner than in the past. There has been some important progress in these areas, that is undeniable.

However, following the 2008/2009 financial crisis, there has been some decline. There has been a lack of persistence and effort: in particular, a lack of focus on the priorities that were central to the economic policies that allowed Brazil to achieve its past success.

Do you mean complacency?

Not only that. There has been a lack of long-term vision. There was an attempt to go back to a model that used to be in place in the past, but that did not work well in my opinion: greater government interference [in the economy]; favors to selected sectors, through subsidies; and, the artificial management of public spending. This makes it harder to accurately assess the economy and could lead Brazilians and outsiders to question the continuity of economic policies.

You are in a unique position to analyze the social unrest that gripped Brazil in 2013. What accounts for it?

I was a sociologist in Paris during the 1968 crisis there, so I have some experience with such [protest] movements. There was a degree of spontaneity in this movement in Brazil. It emerged because of a short circuit. In this case, the short circuit was the rise in public transport fares, although there could have been a number of other triggers.

The more profound question is: how does a short circuit lead to a fire? And how does the movement spread across the whole of Brazil without strong co-ordination? Was this the result of a certain malaise? Where does such a feeling come from?

Inflation had begun to rise and there was a feeling that despite improvements in the employment level, the quality of jobs was not so great. Moreover, industry is in trouble, public services are poorly managed, especially given the poor quality of healthcare and education.

Meanwhile, social mobility and social inclusion are on the rise. At first, these trends are positive but people soon demand better quality services. All of these factors were behind this protest movement.

Even though the demands of the protests were not actually linked directly to the economy – it may have started with a very specific demand, related to bus fares or others linked to the quality of life – there was a kind a snowball effect due to this general malaise, which had gone undetected.

How could such a sentiment go undetected?

In Brazil, like elsewhere, we are living in a kind of dual reality. The government and the official media say everything is marvelous, that Brazil is the world’s seventh largest economy. This is true, in a way, but you cannot forget that the society has not improved as fast as the economy.

There is a lot of insecurity, a lot of violence, the quality of employment is not that great; day-to-day life is harder than the general picture would lead people to believe. What we’re experiencing is a kind of reality shock, or as psychologists would call it, "cognitive dissonance".

Recall what Alexis de Tocqueville said about the French revolution: it occurred after the government made some concessions, when things had started to improve; it did not happen at the height of oppression, although that is also possible.

In Brazil, the crisis came as things appeared to be improving [for society]. Things are improving, but we want more.

Rising inflation and sluggish economic growth were in the background of this latest crisis, but also a demand for better public services?

The issue of bad management and the rise in living costs – all this was ultimately behind this crisis. What I found strange was that the government response seemed to focus mainly on the political angle and tried to resolve this through a political reform. But its solution did not go to the roots of the problem.

There is a greater call to stamp out corruption. Corruption has caused outrage among the middle classes, specifically. The people do not feel they are being represented, especially, though not only, in Congress. There is not a single voice that is widely accepted right now in Brazil.

The voice that was most popular, which was Lula’s, has gone quiet.

Will the social unrest have negative repercussions on the economy?

Yes, it already has. There is a lack of a clear vision on how to deal with the crisis. The social unrest is not the cause of the economic difficulties but it makes things more difficult. There are problems that existed before this crisis, such as Eike Batista’s troubles; there are economic problems, which are not socially or politically related, but when political and social problems emerge, they make economic problems worse.

Brazil is already suffering in terms of investor perception. How long-lasting will these effects prove?

In the short term, markets are overreacting. But these are problems that you must fix in the medium-term. The strength of the Brazilian economy is great, the society is too, but at the moment the feeling is more negative than positive, no doubt about it.

But what will it take for the economy to recover in the longer term?

Brazil must understand that the global financial crisis is coming to an end. The US has invested in new energy technologies that are going to have a global impact. We must take the measures that are required to deal with this issue in our industry, in our oil extraction, energy in general – this is a serious challenge.

All these events unfold against a challenging global background – a slowdown in China, a decline in commodity prices, the prospect of rising US interest rates…

The combined effect of technological change in the US, and the slowdown in China, which will probably impact commodity prices, must lead Brazil to review its strategy. Just as during the 1990s, we had to change everything because of the changes that globalization brought, Brazil again needs to review its strategies.

Hopefully, this will be possible with a change in power and the emergence of a new group that understands better the dynamics of the country and its role in the world. This is essential.

So this is not possible under the current government?

No. With this government, it looks difficult.

There is some concern that a decade of prosperity for Latin America has come to an end. What is your view?

Latin America today is very different from what it was 20 years ago. Now, you have a group of countries that are organized in the so-called Pacific Alliance. You have "Bolivarian countries" on the other side, and Brazil has remained a bit in doubt between the two. Changes that occurred in Latin America have weakened our voice in Latin America. The region is not homogenous. Countries are taking different directions.

How should Brazil position itself towards the Pacific Alliance and its new dynamics in the region?

We must review our strategic position, we must regain the capacity to influence the region. To do that, we have to decide which side we are on. Are we going to keep on accepting forever this Bolivarianism, which is not very clear about what it is going to do? Or shall we take another direction?

It is clear that in Brazil we will always have a government where the state will have more weight than, say, in Chile or Colombia. This is due to our challenges as a very large country, where wealth inequalities are still great and where poverty is still significant. So the state still has an active role.

But we need to see with greater clarity what is the role of the state, the role of the market and what is the role of the society. This has to be rethought in Brazil so that we can adapt to a changing world.

You did not mention Mercosur, of which you were one of the main protagonists. Should Brazil instead be moving closer to the Pacific Alliance?

I think so. The real problem is that Mercosur has not moved forward. There has been a standstill, and Brazil became isolated in terms of international relations and trade agreements while countries of the Pacific Alliance have become more integrated.

Brazil needs to make an effort again to achieve greater integration in the global economy. So yes, we must start to integrate with the most dynamic countries of our region: Colombia, Chile and Peru. I think Uruguay and Paraguay are moving in the right direction. Brazil has more in common with this mentality than Bolivia’s or Venezuela’s or Nicaragua’s… This is not our way.

Do you think the reform agenda has been implemented well since the time you were in office?

From 2004 onwards, president Lula stopped all the reforms. As the global economy was booming, he sought to take advantage of the tail winds. He’d rather avoid domestic political problems and internal divisions. So the reform process stalled. Almost nothing was done.

President Dilma has been trying to resume some reforms in ports, some concessions of public services – but with less political strength than Lula had. But she has been doing it in a shy fashion, and somewhat reluctantly – one may have the impression that she would not like to have done it.

The result is that the infrastructure is still paralyzed, which is serious, it has long-term consequences. There has not been any progress at all in the labor market. There has been limited progress in the social security reform. It would have been easier to push the reform agenda forward during the years of bonanza, but Lula preferred not to change what was difficult to achieve to preserve his popularity. This will have an impact now.

We will have to resume this reform agenda, which is more microeconomic than macroeconomic. The management needs to improve a lot. There has been more interference of party interests in recent years and clientelism in the government machine. This is a drag on efficiency of the government.

Is your legacy – the end of hyperinflation – now at risk? Is the current government proving more tolerant towards inflation?

I would not say it is at risk. Inflation is still small. But here has been a loss of enthusiasm for keeping these key factors under control. There has been a lack of organization to resist inflation. Public spending and debt have increased a lot, and above all, which is more serious, it’s difficult to see what is happening with the public spending.

There is an accumulation of problems, which will have to be tackled later. The government has not completely given up on what is fundamental. But when it comes to improving the lives of Brazilians, there are signs it has started to weaken.

Concerns now center on the depreciation of the real and the risk of inflation – which you faced during the 1999 devaluation. What are the implications today?

In a way, that was already the dilemma at the time of the 1999 real devaluation. Fiscal policy was loose. Now, again, fiscal policy is loose. When the fiscal policy is loose, the only exit is monetary policy, interest rates. It is bad, it has a negative impact, it weighs on the exchange rate.

So here we have to go back to what was done in the past: a more rigorous fiscal policy and interest rates that are not so high. We need a different policy mix. Policy is not science. It is more like navigation. There is no recipe. You need to have a good understanding of the current situation and be able to navigate well. Now there is some uncertainty about the way we are going.

Later, when we are forced to act, we will either need a very austere fiscal policy, which would have an impact like what we see in Europe, or there will be a very steep interest rate hike, which also has a negative impact.

So it would be better to be more cautious now in fiscal policy and give more independence to the central bank – as it has already started to have – so that it can complement fiscal policy and do what can be done in terms of the exchange rate.

We also need to understand what is happening with the US, where the dollar will really strengthen. This is going to make things harder in the whole world, and here too. LF

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  • Sávio S Santos Nov 3, 2013

    Bom ouvir quem pensa e expressa o seu pensamento com clareza e honestidade. Sem pretender possuir a chave de todas as saídas, sugere caminhos viáveis e livres de preconceitos e de qualqure sectarismo, atitude própria de um intelectual e político, que, aos 82 anos, diz o que pensa e não o que correligionários ou companheiros gostariam de ouvir. Espero que os que governam ouçam esta voz, que é uma das mais preciosas relíquias remanescentes em nossa pobre vida política.

  • Diana Watts Oct 30, 2013

    Parabéns, Sr. Presidente.

  • Diana Watts Oct 30, 2013

    “revoluções não acontecem no pior momento, pelo contrário, ela acontece quando as coisas já estão melhorando.”
    Slavoj Zizek

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