After Eight Years, Lula Inherits a Better Country
Brazil Advanced During Fernando Henrique Cardoso's Two Terms as President
But it is Still Fragile and Unequal
 -  translated by Ted Goertzel - Portuguese Text Here
by Fernando Dantas, Estado de São Paulo, 1 January 2003.
http:/www.estadao.com.br/eleicoes/governolula/noticias/2003/jan/01/24.htm -

São Paulo - It was a little more than nine and a half years, from May 1993 to December 2002.  The history of Brazil during this period is intertwined with the biography of the sociologist Fernando Henrique Cardoso, who came to dominate the economic and political scene in the country since he was shifted from the Ministry of Foreign Relations to the Finance Ministry by President Itamar Franco.  On 3 October 1994, with the Real Plan launched and hyperinflation conquered, Fernando Henrique was elected president in the first electoral round, with Itamar's support.

The FHC era profoundly changed Brazil, and probably many years will past before History makes a dispassionate judgment of his strengths and weaknesses.  In 1993, the country was experiencing its sixth year of a strange form of hyperinflation with hyperindexation, which had defeated five heterodox stabilization plans:  Cruzado, Bresser, Verão [summer], Collor 1 and Collor 2.  With great difficulty, after three implicit or threatened moratoria in the decade of the 1980s, the future Finance Minister, Pedro Malan, had just succeeded in negotiating the external debt, within the framework of the so-called Brady Plan.

Frustrated Euphoria

In the political sphere, the Brazilians discovered that the civic euphoria of the Elections Now movement and of the election of Tancredo Neves, in 1984, was not translated into an automatic improvement of the socio-economic conditions of the majority of the population.  Nor did it begin a period of political tranquility.  In the period of 1985 to 1994, the economy grew on average 2.8% per year, and the indicators of poverty, education, health, inequality, sanitation, etc., continued to be very bad.  Of the three presidents - José Sarney, Fernando Collor and Itamar - before Fernando Henrique, two had been vice presidents and one suffered impeachment.

Fernando Henrique introduced to the national scene a series of novelties to which Brazilians had long become unaccustomed.  Perhaps the most important has been an extensive period of democratic normalcy under the same president, at whose side the institutional machinery - opposition, parties, judiciary, civil society, etc. - functioned without breaks or discontinuities.

In the economy, the great victory was the stability of prices.  With the exception of 1995, when the inflation rate was 22.41%, the worst year will be 2002, precisely at the moment at which Fernando Henrique leaves power.  The latest prediction of the inflation rate for 2002 is 12.53%.

This worsening of inflation at the end of his mandate may encourage the idea that the principal - and for many critics, practically the only - economic achievement of Fernando Henrique went down the drain with the electricity blackouts.  This view is, quite simply, wrong and unfair.  The average annual inflation rate for the period from 1985 to 1994 was 757%, which is equivalent to 19.5% per month - more, that is, than the total annual inflation of the last year of Fernando Henrique's government.   The so called IFP-M [producer price index]increase of 25.30% in 2002 is not a measure of consumer prices, and it reflects the increase of 54% in the value of the dollar during the year, which has great influence in this indicator.  In 1999, the other year of great devaluation of the real, the IGP-M reached 20.20%, falling back to 9.95% in 2000.  If it is true that Fernando Henrique is passing on to president Luiz Inácio Lula da Silva an increased inflation rate, which will create work for him, it is also true to say that the ex-president broke definitively with the cycle of hyperinflation and hyperindexation of the 1980s and 1990s.

On the front of economic growth - one of the final objectives of any economic policy - Fernando Henrique skidded [derrapou].  The average annual growth rate during his two governments, 2.3%, is below the 2.8% of the period from 1985 to 1994 (if 1994 is included in the FHC era, the average increases to 2.7%).

Criticisms

Some critics of the government present these numbers as irrefutable proof of the fiasco of Fernando Henrique's economic policies.  The economic performance of FHC, however, is far from indefensible.  It is possible to argue that the ex-president administered the transition from a failed economic model, from protectionism, statism and interventionism, to a more open system, stable and dependent on the private sector.  But errors of conception, failures in implementation and unfortunate chance events (such as the succession of international financial crises beginning in 1997 and the Argentine collapse in 2001) made it impossible for the fruits of economic growth to be realized during Fernando Henrique's government.

Whatever may be the judgment of history, the changes under Fernando Henrique were immense.  The government privatized $91 billion dollars worth of government owned enterprises (including those owned by state governments, stimulated by him).  It concluded the sale of industrial and mineral enterprises, such as the Vale do Rio Doce, privatized telecommunications, parts of the electric and railway sector, and sold most of the state government-owned banks.

In the telephone industry, residential landlines increased from 13.3 million to 49.4 million, while cellular phones increased from 800 thousand to 31.6 million.  In the electrical sector, a poorly executed change of model led to rationing in 2001.  In the area of relations with state and municipal governments, the Social Democratic Party government completed a megarefinancing of the debts of these governments, with a value of R$ 205 billion.  More than that, breaking with the past historical norm, the operation included draconian measures - complemented and reinforced by the Fiscal Responsibility Law of 2000 - which forced states and municipalities to adjust their accounting procedures.

The Fernando Henrique government also repaired the private financial system with Proer - a program that became an international model for its efficiency, although in Brazil it was insistently sold as a present of the government to the bankers.

The critics of Fernando Henrique's economic policies say that he implanted a mistaken model, but the definition of what would have been the correct model has never been made very clear.  There is one point that the critics agree on: he should have had a more robust industrial policy, with strong emphasis on exports and linked to a tax reform.  But it has not been demonstrated in detail, by the critics, how to finance more stimulation of exports in the context of strong budgetary restrictions.

Overvalued Exchange Rate

The debate about the negative side of FHC's legacy is complex, and it is only beginning.  The most common argument is that the great error was the overvaluation of the real during his first term.  The international experience beginning with the decade of the 1990s, moreover, shows that almost two dozen countries in Europe, Latin America and Asia, abandoned fixed or semi-fixed exchange rate policies for floating exchange rates, and that this change almost always was accompanied by turbulence which weakened or overthrew established government.

In any event, although this could not have been as easily avoided as the critics assume, the face is that the overvalued exchange rate is one of the causes of the two large deficits that tormented Fernando Henrique's government: the external and the public deficit.  The public deficit was stimulated by the extremely high interest rates that were needed to attract the financing for the external deficit.

Furthermore, the government had in hand a tool that could have counterbalanced these effects, and that was not used in the first term: fiscal rigor.  The abundance of foreign capital in the middle 1990s, combined with Fernando Henrique's generosity to the political forces that he attracted, with success, for his re-election project, dictated the dynamic of the events.  The government achieved a primary budget balance (excluding interest payments) that was even [i.e., neither positive nor negative; a positive primary budget balance is needed to properly service the country's debts: TG], and the president declared, in the middle of 1997, that governing was easy.  Soon afterwards, a sequence of foreign crises in the Asian countries and in Russia forced Brazil onto bent knees, by the end of 1988.  Fernando Henrique managed to get reelected, but the real was devalued in January of 1999, and his popularity and command over Congress would never be the same (although the emergency measures needed to sign an accord with the International Monetary Fund in 1998 and 1999 were passed).

Fernando Henrique's second term of office had paradoxical aspects, with good accomplishments in the social area, competent results despite bad luck in the economic realm, but disastrous political results.  The economic model was radically changed, with the introduction of floating exchange rates, large surpluses in the primary budget, and inflation targeting.  Even with all the turbulence of 2001 and 2002, from the Argentine crisis to the electoral uncertainties, those three macro-economic policies, introduced with the appointment of Armínio Fraga to the presidency of the Central Bank, in 1999, continued in place and were adopted by the new Workers Party government.

In the social area, Fernando Henrique reinforced, consolidated and amplified a series of initiatives that had already been outlined in his first term.  Programs that transferred resources directly to the most poor, some tied and some not tied to agreements that allowed them to keep their children in school, were established all around the country, on the municipal and state and federal level.  Targeting and evaluating social programs became the order of the day.

Almost all the children of school age were enrolled in primary school.  During FHC's eight years in office, infant mortality was reduced from 40 per 1000 births to 30, and illiteracy also fell.  The system of public health agents reached 50 million Brazilians, compared with about 1 million in 1994.  Poverty and indigence had moderate declines, but not insignificant ones, as a proportion of the population.  The average income increased, although it had fallen during the second term, and inequality almost did not change.  Unemployment had a large increase, beginning with the economic stagnation at the beginning of 1988.

Bloody Battles

In politics, bloody fights between its two principal parties, the Brazilian Social democratic Party (PSDB) and the Liberal Front Party (PFL) weakened the political coalition supporting Fernando Henrique.  In the end, the PSDB imposed the complicated candidacy of José Serra, which was easily defeated by Lula.

An ironic aspect of Fernando Henrique's government is that, despite so many accusations of being neoliberal and seeking to establish a minimal state, he presided over a large increase in public revenue and spending.  Considering only primary expenditures (excluding interest) by the federal government, there was an increase from 16.5% of GNP in 1994 to 21.8% of GNP in 2002.  There was also an increase in the expenditures of the states and municipalities.  On the side of revenue, tax collections jumped from 29.5% of GNP to 34%.

Part of the increase in government revenue and spending can be explained by the fact that Fernando Henrique had inherited an increasing trend in public expenditures required by the 1988 Constitution and by the Unified Civil Service Law, put in place in the 1990s.  But, according to recent studies, the constitutional inheritance and the civil service law do not explain everything.  Primary expenses, excluding interest, increased at an annual rate of 6% during the Fernando Henrique government, in real terms.  Especially during the first term, loose controls contributed to this increase.  On the other hand, it is this same expansion of spending which perhaps explains why, in the end, Fernando Henrique invested much more in the social area (including agrarian reform) than most Brazilians think.

In any event, since spending, including interest, ran ahead of revenue, Fernando Henrique delivers a government with a significant nominal public deficit (including financial expenditure), high internal debt (57.5% of GNP), and with high interest rates and the instability caused by those factors.  The large external debt, the other vulnerability of the economy in the FHC era, was only definitively reduced at the end of his mandate, at the cost of a megadevaluation.  This, for its part, threw fuel on the flames of inflation.

Positive Balance

As a general and provisional evaluation - the definitive one is left to History - Fernando Henrique seems to be giving Lula a much better country than he received.  But it is quite far from what could have been, if he had governed with more prudence in the first term, and had better luck in the second.  If the present conjuncture is very difficult, and there still remain very grave structural problems - such as growing crime rates and a social security deficit of 5.2% of the GNP - institutional advances and the advances in thinking during the FHC government were impressive.  Today, fiscal and monetary responsibility is no longer treated as the enemy of social commitment in Brazil.  This is a good base for constructing a successful government, one that Fernando Henrique did not have at the beginning of his first term.