Conclusion: back to the future?

An optimistic analysis o f the up-to-now successful stabilization programme would highlight that the Brazilian economy is finally embracing the principles of sound

administration: fiscal discipline, privatization and deregulation. Put together, these principles should allow for a sustained path of growth. However, this optimism should be confronted with the conditions on which the stabilization is based. The questions are how much o f the present stability relies on favourable external conditions, which may suddenly change, and when the modernization o f the economic relations will be reflected in the effective improvement of the well-being of most of the population.

As shown in this chapter, the dilemma between stabilization and external adjustment constituted the main struggle in the Brazilian adjustment experience. In the early 1980s, the external sector crisis was the major constraint to be solved. The policy option adopted then clearly benefited the external objective with the sacrifice o f the domestic situation, particularly the public accounts. Gradually the massive efforts to reduce imports and increase exports reduced the pressure caused by the payments o f the services o f the external debt. However, one o f the costs o f solving the balance o f payments problem was the increasing loss of control o f the internal macroeconomic variables, such as the public indebtedness and the rate o f inflation. Another consequence was the growing pressure over natural resources. Chapter 6 analyses the expansion o f mineral depletion and chapter 7 discusses the growth in industrial pollution, both phenomena associated to the expansion of exports after the external debt crisis.

The improvement of the external accounts resulted in a shift on the emphasis o f economic policy. Controlling the inflation gradually became the most important objective and the greatest failure of all but the two last governments. The Cruzado Plan started a cycle of boom-and-failure, short-term driven economic programmes: the failure o f each economic plan restrained further and further the possibility o f the following programme to become successful, plus a considerable push in the inflation rates. Many different policy proposals, reflecting diverse theoretical positions (from the IMF orthodoxy to the inertialist heterodoxy), were tried at least partially but none of them proved to be enough to stop the pace o f inflation. However, during the short time stabilization was reached in all o f these experiments, the external accounts were sacrificed, particularly by the overvaluation o f the exchange rate.

This problem is also true for the Real Plan. So far it has been solved by the inflow of capital through an aggressive policy o f high domestic interest rates. The government argues that this is the consequence o f the growing confidence of the international financial community in the seriousness of the policy reforms.

However, it is arguable that, at least partially, this is the consequence o f a particularly favourable external situation. The 1990s have been characterized by a considerable inflow of capital to Latin American countries. Countries such as Argentina and Mexico also experienced recent stabilization programmes in which the accumulation o f reserves was essential to assure confidence on the new currency (Frenkel, 1995).

The great problem is that the capital inflow may suddenly be reversed, as in the Mexican situation. The parallel with Mexico does not mean that the two countries are in identical situations. Indeed, the Mexican stabilization and structural programme was seen as the road ahead for Brazil and other Latin American countries. This is the particularly concerning feature of Mexican crisis at the end o f 1994 - it involved the most exemplary free market reform in the continent during the 1990s:

"While instability in Brazil was seen as an enduring symptom of the 1980s awaiting a definitive solution, the Mexican crisis represents the emergence o f instability and uncertainty in a country that was supposed to have defmitively left behind these symptoms" (Frenkel, 1995, p .l).

Therefore, the external fragility may abruptly reverse all the achievements o f the adjustment programmes. In the Brazilian case, the confidence in the real is directly related to the maintenance o f a safe volume o f international reserves. In October 1995, the stock o f reserves at the central bank reached the record volume o f US$ 49.7 billions (Jomal do Brasil, 1995). This value was important to reassure the financial community that, even though the trade surplus has not yet been reinstated, there was no risk of external crisis. However most o f these reserves correspond to hot-money (applications o f less than 360

days), which is intrinsically speculative. The total inflow of short-term capital from January to September 1995 was US$17.8 billions, in contrast to US$ 2.7 billions of direct

investments and US$ 1.2 billions of inward stock market transactions.

This external fragility is closely connected to the financial fragility of the public administration. The attraction of foreign capital is possible because the federal government keeps the interest rates at higher levels than in the international market. This is done through open market transactions where the government recycles its own debt. However, this results in an increase o f the total payment o f interest and, ultimately, in the expansion of the total size o f the debt at all levels o f administration (federal, state and municipal). In the long term, it represents an always larger amount o f interest to be paid, which became the most important component of the increase in the public deficit: only in October 1995 the payment o f interest reached USS 2.5 billions, one US$ billion more than in September. The total public debt, net of reserves, was USS 81 billions in September (Jomal do Brasil, 1995). Note that the interest rate the government has to pay on its debt is higher than the interest rate received from the reserves accumulated.

This process o f growing public indebtedness in order to accumulate reserves which could settle down external disturbances is remarkably similar to the situation in the late 1970s when, given another boom of liquidity in the international market, there was the acceleration o f the external debt. Despite the considerable differences in the two situations, the risk o f an external shock which revert the short-term capital inflow - for instance, an increase in the international interest rates, such as in 1979 - may destroy the confidence on the stability o f the economy, despite all the achievements in the stmctural reforms. This is a sour lesson from the recent Mexican crisis.

The other main problem questioning the current optimism is the social debt. The worsening o f social conditions is one o f the most dramatic legacies from the 1980s and early 1990s, despite the considerable reduction in demographic growth. The emphasis on the short term objectives o f increasing the trade surplus and reducing inflation resulted in the abandonment o f social investment. Cutbacks on government spending affected the

poor asymmetrically, who are more dependent on the access to infrastructure and assistance services. Moreover, one of the most constant patterns o f macroeconomic management was the intent to control aggregate demand through reductions in the real wages. This affected urban sectors particularly, which has been a traditional absorber of labour surplus from rural areas (the effect of the reduction in the opportunity cost of labour to deforestation is discussed in chapter 5).

Inflation played a role in the concentration of income because the poor did not have access to the best financial and indexation instruments available to the higher income classes. Therefore, the reduction o f inflation is a necessary condition to reverse the income concentration. But it is not sufficient. The historical experience shows that even if the economy recovers successfully there is no assurance o f effective improvement in living standards. It requires the combination of growing employment opportunities with active social policies, especially in the education and health areas. However, despite the rhetorical position of the present government, no effective measures have been presented so far to revert the present paralysis in the social area.

5

ADJUSTMENT POLICIES AND DEFORESTATION IN THE BRAZILIAN

AMAZON

5.1

Introduction

The environmental economics literature frequently refers to deforestation in the Brazilian Amazon as a good example o f bad policies in environmental terms. The debate has largely been dominated by the postulates developed by a number o f influential studies on the economics of deforestation (Browder, 1985; Mahar, 1988; Binswanger, 1989; Feamside, 1990; and many others). These studies heavily criticize the use of economic incentives to accelerate economic expansion in the region, and argue that most policy interventions to date have been economically unfeasible, socially unfair and environmentally disastrous.

However, most o f these studies do not connect such policies with the macroeconomic objectives pursued by the Brazilian government. This is precisely the objective of this chapter: to investigate the possible connections between the policies which favoured deforestation in the late 1970s and 1980s with the broader objective o f adjustment, i.e., the necessities o f improving the balance o f payments situation and monetary stabilization. This analysis does not deny the importance o f local political alliances and lobbying of powerful economic groups in order to obtain privileges. However, it is assumed that a broader perspective is necessary to understand the scenario in which the 'deforestation policies' were formulated.

This chapter discusses the possible ways adjustment policies can be linked to the deforestation process. Section 5.2 focus on the structural causes o f rural migration, which is strongly linked to the deforestation in the Brazilian Amazon. In section 5.3, the role of economic policy in this process is described, highlighting the coimection with adjustment objectives. Section 5.4 changes the perspective of the analysis, focusing on a model which describes decision-making on land clearing from the farmers' point o f view. Section 5.5 presents the results of an econometric exercise, providing empirical support for the theoretical analysis. Section 5.6 concludes the discussion about the role o f adjustment

policies in the perpetuation of the deforestation process, highlighting that no effective change can be expected without significative institutional reforms.