quarta-feira, agosto 23, 2006

151) Mario Henrique Simonsen: old vintage...

Quem se lembra do Simonsen?

Abaixo uma entrevista dada por Mario Henrique Simonsen, para Richard House, um dos editores do livro sobre grandes nomes ligados às finanças internacionais: “THE WAY IT WAS”. Pgs 453/463

No presente caso, as declarações de Simonsen jogam muita luz sobre alguns dos problemas brasileiros mais difíceis de serem solucionados: nossa eterna dependência da volatilidade dos mercados internacionais...E que aula de Economia!

Regina Caldas

Editor: Richard House
The way It was: An oral History of Finance: 1967-1987
The Editors of Institutional Investor
William Morrow and Company, Inc. NY
First Edition

The central concept of the Geisel government was, let’s invest so we can have import substitution and increase the export capacity at the same time. That was in essence the whole concept. Of course, the strategy that was designed took into account the first oil shock. But in 1974 nobody was predicting a second oil shock. On the contrary, most economists were asking whether OPEC’s cartel could be maintained or not. We tried to act on the safe side, although without predicting either the second oil shock or the interest rate escalation of ’79 and ’80. We had a planned policy to increase the debt and at the same time to have investments that would create additional exports and reduce the demands for imports; so as a result, we would be able to service the debt.

Well, I don’t think the strategy worked badly in spite of all the shocks we had afterward. Of course, once the second oil shock became visible and interest rates went to 15 or 20 percent, it was obvious that we needed more short-term adjustments, which were only adopted in 1981. If you look at what’s been the change in the balance of payments of Brazil from 1974 to 1984, this was consistent with growth. After 1984 we come to a very clear conclusion that what you find in additional exports and reduced imports is substantial enough to justify the amount of the debt. Let’s make some extrapolations: Imagine that Brazil kept the same coefficient as in 1974 -the same imports- gross national product ratio- and that export grow 6 to 8 percent a year. In accordance with that calculation, you find that by 1984 trade deficits would be something around of $20 to $25 billion a year, if the economy had continued in its old-fashioned mode. Of course, nobody would finance such huge trade deficits. This indicates the debt was well used in the sense of reducing imports and expanding exports. That leaves me in a somewhat comfortable position as an administrator.

Looking back –which I don’t think is a pleasant exercise- you never do 100 percent of what you want to do; and second, if you could foresee the future, everything would be different. Well, as a basic strategy I think fundamentally what the Geisel government did was the only viable alternative. If you had chosen to adjust the balance of payments without investing or making structural adjustment, you’d simply have prolonged the stagnation. And Brazil would still have the same GNP as in 1973-with a much larger population and perhaps with a $ 20 billion-plus import bill that could not be financed. Basically, the strategy had to be what we did. Of course, if you could move back and foresee in 1977 the second oil shock, it would have been a period of quicker adjustment in the balance of payments. We had improvement in the balance of trade from a $ 4.7 billion deficit in 1974 to a slight surplus in 1977, a few hundred million dollars. It should have been $ 1 billion or $ 2 billion in trade surplus. But nobody had a crystal ball.

In 1973, when I was minister, I made a study that predicted the debt would peak at $ 35 billion. The projections were very realistic until early 1978. Then we had some deviations which escalated the debt to a peak of around $ 40 billion because of bad crops that reduced our 1978 export capacity. But that wouldn’t have changed very much the substance of the idea. The substantial changes came from two facts- the second oil shock and interest rates- while at the same time there was not an immediate reaction from the government. I had a number of conferences with bankers in the US and Europe to discuss the way debt dynamics work and things like that , and one concern I always had as finance minister was to explain all the debt projections. Obviously, I told bankers they weren’t financing projects but the balance of the payments; I felt this was a point they should have recognized. I think some did, but others didn’t. Even the ones who did probably didn’t anticipate that we might have the troubles of the second oil shock and interest rate escalation; all that was very hard to detect.

In the ‘60s and ‘70s you had a role played by dynamics that was very favourable to international lending in the sense that both GNP and exports grew at rates above international interest rates. When things changed from what I call pleasant to unpleasant debt arithmetic, I was no longer in office; the change occurred in 1981, and I left in 1979. But in any case, I always explained to bankers that there was a possibility of a change from pleasant to unpleasant arithmetic. I think this has been the case with Brazil. And our equation still appears to be solvable even unpleasant arithmetic.

Going back to the period when I was minister, of course we had a plan for structural adjustment. We knew it would take some time to operate; import substitution does not immediately produce export promotion as a result of investment. First we tried to speed up the exchange rate devaluations. That was only part of the problem, for very abrupt change in exchange rates in an indexed economy tends to give you much higher inflation rates. But it’s curious to note that at that time the IMF did not recommend exchange rate devaluations for deficit countries , because it was believed that the deficit was an inevitable counterpart of the OPEC surplus. It as believed that if every country tried to correct its trade deficit by devaluation, you’d have a repetition of the competitive devaluations of the ‘30s. What we did was introduce import controls, encourage export incentives or subsidies and reduce the level of aggregate demand, which was overheated by the beginning of 1974.

We had a lot of discussions at the beginning of the Geisel government. From 1968 to ’73, Brazil had been growing at rates above 10 percent a year; and there was an idea that we should continue this. But that would be impossible under the new balance-of-payments constraints, because the growth of this “miracle period” was partly based on low capital-output-ratio investments. But the consensus at that time was that any rate of growth below 7 percent a year would mean a deep recession! I was always labelled a recessionist at that time because I said the economy could not grow at more than 6 or 7 percent. But the planning minister had more ambitious plans in terms of keeping the old growth rates. At the same time, there was the idea that the supply of credit to Brazil was infinitely elastic, that we could go on borrowing indefinitely with no counterpart in terms of projections of future imports and exports. The final decision was, let’s keep the country growing at a rate close to 7 percent a year. But let’s also make structural adjustments.

In a sense, you could say the key LDC policy decision is always the same crunch between domestic growth and external adjustment. Which comes first? The movie is the same and it always has been. It’s true; this movie appears throughout the world. But look, to make external adjustment at the expense of growth means bad policy. For one reason, if you want to reduce the rate of growth because of external adjustment, you need to do that indefinitely. In the case of inflation it’s different. A recession to fight inflation, that is only temporary; but to adjust the balance of payments, that’s eternal. That’s bad economic policy. Sometimes you need to do that to recover reserves, you no other way out. If you can make a smoother adjustment based on structural changes- import substitution plus investment in the export sector- then, of course, it’s much better. But you can only do that if you have a bridge of external capital. I think what’s needed is a mixed solution.

Whenever you’re in government you have two types of appreciation of your behaviour. Those who like you say you’re a “fine tuner”. Those who don’t like you say you’re a “stop-go-minister”. The difference is a very grave one; it depends very much on the perspectives of who’s criticizing you. When I was in office I wasn’t completely able to teach Brazilians to live within their means; but still I was able to teach them to borrow to invest, not to borrow to consume. The idea of my being a stop-go-minister applies to every minister; you can even to say Paul Volcker’s monetary policy shows he’s a stop-go central banker because of his policy changes.

One of the problems of being in government is that you can design a strategy but you must act on a day-by-day basis depending on what happens. An example is how we reacted to the increase on the energy prices. Before the second oil shock there was this idea of introducing fuel-rationing coupons – a good instance of the Brazilian tendency for complicated economic solutions. Actually, the idea was not mine. The coupons just acquired the popular name “Simonettas” in my honour. The idea come from a Brazilian engineer who sent a letter to President Geisel, and the government decided to adopt it. I was never sympathetic to the Simonettas. Perhaps we should have made some increase in gasoline prices. It was discussed in 1977, but what would have been saved in terms of foreign exchange was very small. Don’t forget that gas is only 30 percent of all oil consumption, so we would be saving $ 270 million, which are peanuts. Actually, the Simonetta was never implemented, and I had a strong responsibility for its abortion. But it still bears my name; I’ve still got two of these coupons at home as souvenirs.

Some people now ask me what it was like working for a general. I reply that it all depends on who’s the General. Generals are not a uniform product. In the case of Geisel, I liked working with him because he had an extreme interest in everything; he wanted to know every detail. He was very informal in his talks; we could ring him up at midnight to work. He was involved in decisions. As a result of that, once you took a political measure that could be tough, you would be backed absolutely by Geisel, because he knew the reasons and he was convinced they were right. In the case of Figueiredo the situation was different. He was a very liberal man and so on, but he didn’t have too much interest in economic affairs. So his initial cabinet was obviously split between those who believed that in 1979 Brazil should make quick adjustment to the second oil crisis plus interest rate escalation and those who wanted to continue expansion at 8 or 10 percent a year. This group said, “Let’s solve all our problems and inflation by growth.” At that time I resigned, simply because I perceived my ideas were not being accepted by the government.

The president was accepting the ideas of my opponent, Delfim Netto (who succeeded Simonsen as planning minister), and he had a clearly different view than mine. Delfim believed the country could continue to grow fast without making adjustment to the external situation. It’s important to say that I think the late 1979 and 1980 policies were actually wrong compared to the needs of the country. But Delfim made a very important change in 1981 when he turned from unorthodox to orthodox economic policies. As a result of domestic expansion, reserves started declining, and with escalation of the debt and the beginning of the international recession, the process went further in 1981. The way Brazil found to keep reserves was to increase short-term borrowing from commercial credit lines and by using the overseas branches of Brazilian banks to borrow on the money markets and to re-lend to Brazil.

This is the point where you can start to attribute blame. But I won’t say the basic fault was of the debtor or the lender. It was of the regulators. I think there was a basic mistake and the USA has some responsibility because there was the idea that competitive markets are efficient in every circumstance to solve everything. In the case of balance-of-payments problems, it’s more subtle, but the banks at that time were trapped by a fallacy of composition. They believed, “If I have a short-term credit I’m on the safe side of the fence, because I can get out immediately,” which is true for each one individually but is collectively wrong. When you have these problems the regulators should intervene. They had never done so until the debt shock. So conventional wisdom about LDC finances changed drastically from 1980 through 1982. In 1980 everyone said the banks would perform a valuable social role by extending credit to nations that needed to import and to finance development and that helped USA exports and so on. After 1982 everyone asked, “Who is responsible for the debt crisis? Those who lent imprudently or borrowers who wasted money?” Actually, both lenders and borrowers made mistakes, but you cannot have a crisis unless you have some systemic flaw.

A very important point that I had the chance of speaking about at the IMF interim committee is that pure commercial bank lending in the international field without the support of strong international financial institutions is a weak system. What one bank likes to supply each country depends on what they think other banks will supply, so you come to the roll-over assumption. The result is, if you don’t have a buffer provided by strong international organizations –basically the IMF and World Bank- you tend either to over finance countries or to produce credit short-ages. Just after the first oil shock, debt recycling was almost wholly conducted by commercial banks; it was a good temporary solution. There was no other way; recycling had to come one way or the other, and commercial banks played this role. Now at that time, what naturally should have been suggested was that there was an obvious need for strengthening both the IMF and the World Bank, so they’d both play a major role in the following years, when recycling would continue to be a problem. Given the fact that commercial banks were providing credit to all the world, there was the wrong perception by the regulators that nothing needed to be done.

What I’m also very critical about is IMF conditionality as applied to debtor countries after the debt shock in 1982. Basically, it’s a naïve model in terms of economics. It needs a lot of improvements and often leads to bad adjustment policies. Most IMF –supported programs since the debt shock were not able to meet either growth or balance-of-payments adjustment targets, so they’re not efficient from this point of view. It’s true that the IMF has recently changed; it’s softened very substantially its criteria. The Mexican agreement, for example, accepts the operational deficit instead of the nominal deficit as a target variable. I’m not discounting IMF conditionality; I think the IMF has to change its conditionality.

A number of things are needed to have a vision of this problem. First you need to have trade debt links. The issue of the debt cannot be discussed without a resolution of trade, and from this point of view you need much closer cooperation between the IMF and World Bank on one side and GATT on the other. The fact that GATT has its headquarters in Geneva should not be an obstacle to having more discussion about debt and trade. For the debt problem to come to a happy end we should allow debtor nations to increase their exports. In a number of cases you need additional money for these countries to allow them to invest to increase exports and substitutive imports, and so improve their trade balances. This is the spirit of Bretton Woods, and you need to have economic policy coordination to have that. Also, you need to require debtor countries to make a number of adjustments. Nobody is going to lend money to these countries to allow them to increase consumption without investment. Actually, you need a coordinated approach in which you allow debtors to invest and grow according to consistent economic plans, and on the other hand, you need trade negotiations that would allow them to export more.

But there ‘s another more basic critique that needs to be made of the IMF: bad economics. It’s systemic bad economics, because when you speak individually to economists in the fund they all realize that. But if you work for an institution, you have to work according to its rules, and the rules still stick to a model which was inspired by the Bretton Woods tradition. That meant small adjustments in individual countries that had a current account deficit or became illiquid because of excess aggregate demand. That’s not necessarily the case of most debtors today.

What I’m saying is pure arithmetic. There are two ways out of the debt. One is to have growth of both GNP and exports in debtor countries. That problem tends to be solved by itself, because once you expand both these two you can borrow additional money, because your basis has been broadened and the need to transfer abroad is not the same. And transfers abroad decline in relation to exports and GNP because of the increase in the denominator. This is the favourable case. The second case is what has happened since 1982- a world with stagnant trade. Assume exports of debtor countries do not increase. If so, new lending to these countries is nothing but disguised interest capitalization, and the debt-export ratios just escalate. This means that you’re going to come to an impasse. In practice, it’s happening throughout the world. Of course, the great difference you should establish is not whether the form is new loans or simply capitalization. The difference is whether the country’s exports are growing or not.

I won’t say Brazil’s the best of the bunch, the only viable debtor. You have a number. Colombia is one: it’s not a large debtor. Venezuela is another; in fact, it’s never really been a debtor. It’s a net creditor country-except they don’t know where the credits are. In Brazil’s case, you have clear signs that the debt weighs heavily on one side of the equation. But on the other side you have import substitution and export promotion, so the problem appears to be solvable.

Look at what’s happened between 1984 and 1986. Brazil had a unique experience; it was the only large debtor country that was fully servicing the debt without borrowing new money and having very high rates of growth. That came to a sudden end because, simply, last year was dominated by a carnival part of spending with the Cruzado Plan. The beginning of the plan was very promising-it was exactly to eliminate the complications of the Brazilian economy, to have de-in indexation, and as such it was very well conceived in its details. And at the same time, the government announced the fiscal deficit had been reduced virtually to zero. So the Cruzado Plan came with great hopes and great popular support.

The distortions started one month later when it became evident that re- monetization of the economy was too quick and the economy was overheating due to excess of demand. Then there were lots of shortages and development of black markets and the evaporation of both export and reserves. Inflation was duly repressed, and then out it came again with all its force. The lesson of experience is that you should have a blend of both orthodox policies and income policies, that they should be well coupled and well designed to defeat inflation.

If you take a long perspective, the main cause of inflation is the fact that we have a budget deficit that has been financed by expansion of the money supply. And the fact that we have no independent central bank helps to create money supply to finance budgetary deficits. That’s an orthodox but a correct long-term perspective on the problem. Now of course, once you try to live with inflation by using widespread indexation-as we did and still do- what you create is self-propelled inflation. That is the reason we have had endemic inflation since the ‘30s and high rates since the ‘70s. When I was in office what we tried to do was prevent inflation from escalating, given the fact we were an indexed economy with a number of supply shocks coming from abroad. My successor, Delfim, went through a number of phases in his period. In 1979-80, there was no attempt to reduce inflation, but later he returned to classic instruments. Then in 1983 we needed to make the maxi-devaluation because of the external adjustment at the time of the debt shock. We had to move from virtually no trade surplus to $6 billions. When you have a devaluation in a fully indexed economy , you lift the inflation rate –so it moved up from 100 percent to 200 percent-plus. This was perfectly consistent with the IMF program, which shows the IMF does not understand very much about how indexing works.

If you take the debt problem as a whole, not only Brazil but other nations that did not invest but used debt to increase consumption or to finance exchange rate over valuation-Argentina and Mexico are examples, what you can say is that transferring 4 or 5 percent of GNP is not a very stable solution. Now, if you ask how you solve the transfer problem, I’d agree that sending abroad 4 percent of the GNP is too much. But why is Brazil doing this? Simply because you no longer have direct investment and because you’re not exploiting the potential access to both official loans and perhaps additional commercial bank loans.

Since I left government I’ve been getting a bird’s eye view of the economy at the Getulio Vargas Foundation, a semi-official institution where I’m in charge of the graduate school. I’m also an outside member of the board of Citicorp in New York. But Citicorp has never asked me to teach Brazilians; I’m expected to give advice to the bank’s top management and to take all the responsibilities of directors, not to tell Brazilians or other people what happens. I have written about the debt situation since the mid-‘70s and have always discussed issues with Citicorp.

Both Walter Wriston- with whom I dealt when I was in government´- and John Reed have been very favourable to Brazil. Reed never took this position as a tough-liner now being portrayed in the American Press. I’ve been discussing these issues with him, and he appears to share my views that the debt problem has to be solved by growth; that’s the spirit of the Baker plan. I think it still has to be implemented, but the central idea has been a breakthrough. What Reed insists is that this should be done in terms that are accepted by the markets and not in terms that the markets wouldn’t normally accept. I think he’s probably right. The top management of Citicorp surely understood right from the start they were financing balance-of-payments problems, not just projects. Did Walter Wriston or John Reed have an idea there was something called sovereign risk separate from commercial risk? I’d say they surely did. The problem, of course, is that in the ‘70s or early ‘80s they could not realize the debt crisis was coming. Nobody did.

When you assess country risk, you must have an idea of what the country does with its money, and you must be more involved in long-term considerations than in the short term. Over the short term the country can be in a bad state- as Brazil appears to be now. But if you look ahead , the Brazilian case doesn’t seem that hard to resolve.

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