Civil Society, Economy & Trade, Financial Crisis, Global, Global Geopolitics, Global Governance, Headlines, Latin America & the Caribbean

FINANCE-BRAZIL: Payback Time?

Mario Osava

RIO DE JANEIRO, Nov 17 2008 (IPS) - This is a good time for all those who resisted the “neoliberal” free market economic model of the past few decades, often as lone voices preaching in the wilderness. Politicians, experts and social activists want to take advantage of the current financial crisis to bury this model once and for all, together with all forms of speculation.

“We must be radical and propose structural changes” to the international financial system, because “such a serious crisis is the best time to demand them,” French economist Bruno Jetin, a professor at the University of Paris North, told IPS.

All banks should be nationalised, but that is not enough: they must also be “democratised, and subjected to social oversight,” because many public banks, like the Bank of Brazil, “operate as if they were private concerns,” said Jetin, who is also a member of the scientific committee of the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC).

There is an ongoing “ideological dispute among schools of economic thought,” that goes above and beyond operational measures to contain the damage done by the crisis, said Rogerio Sobreira, a professor at the Getulio Vargas Foundation, a centre for research and teaching on public administration in Rio de Janeiro.

The conflict between a greater role for the state, and a free market, is a crucial debate. When the crisis became acute, everyone was in favour of strong state intervention, even the nationalisation of banks, in all sorts of countries, but this was “emergency action by the state as saviour,” and the continued presence of the state will be questioned by the economic liberals later on, according to Sobreira.

Some internal contradictions within governments, especially between Central Banks and Economy Ministries, are becoming more acute. In Brazil, the dominance of the monetary authority (the Central Bank) suffered a blow when emergency measures were needed to avoid a greater economic slowdown.

The finance ministers and Central Bank presidents of the Group of 20 (G20), who met Nov. 8-9 in Sao Paulo, supported anticyclical measures, such as increasing public spending and cutting interest rates, in the face of the recession unleashed by the U.S. subprime mortgage crisis.

The disagreement between Brazilian Finance Minister Guido Mantega over the conservative policies of the Central Bank, which advocates high interest rates and an unrestricted floating exchange rate, was already common knowledge.

But the crisis and the recommendations of the G20 strengthened Mantega’s position. As chairman and spokesman of the meeting, he emphasised the need for anti-recession measures.

The president of the Central Bank, Henrique Meirelles, tried to soft-pedal this approach, underlining instead the concerns over inflation that were also expressed in the meeting’s final communiqué, and the special characteristics of each country.

Panic, followed by recession in rich countries and its repercussions in the developing world, are fuelling a rapid expansion in unemployment, which is sure to provoke reactions from trade unions and social movements in general, although labour organisations have been weakened in the past few decades, and will have difficulty in leading protests.

In a profound crisis, active social movements will be essential to the fulfilment of the dream of a financial system that serves social needs, like cooperative banks, said Jetin, who went so far as to say that the economy, even a capitalist economy, “can function without a financial market,” as it did in the past.

Jetin and Sobreira took part in a workshop of economists and experts working in the “third sector” (non-governmental, non-profit social organisations) on Nov. 13 and 14, to discuss ways of helping civil society develop strategies to influence a possible future reform of the financial system.

The goal is to reduce its “democracy deficit,” according to the group’s coordinator, Fernando Cardim, a professor at the Federal University of Rio de Janeiro.

The international discussion group, which brings together academics and activists, is a project of the Brazilian Institute of Social and Economic Analyses (IBASE). It began in 2006 by discussing the Basel Accords on banking laws and regulations, but in the light of the current crisis it has broadened its scope.

Another economist in the project, Marcos Cintra, a professor at the University of Campinas, is sceptical about any changes in the global financial and monetary system other than “cosmetic” ones. In his view, the world is caught in an irreversible “trap.”

If the United States reduces its external current account deficit, which amounts to nearly seven percent of its gross domestic product (GDP), the world would experience a “catastrophic depression,” he said.

Therefore, “the U.S. economy has to go on working,” with the rest of the world, led by China, financing its deficit. This is a consequence of “functional asymmetry,” he said.

The global financial architecture will remain the same, with perhaps more regulation and other minor modifications, because “only a war” – also unlikely – could bring about structural changes in the system, since the United States continues to enjoy hegemonic power, which means it can “veto any changes,” Cintra told IPS.

Derivatives contracts worldwide totalled 596 trillion dollars at the end of 2007, according to the Bank for International Settlements (BIS), said Cintra, stressing the extent of financial globalisation on which the whole world depends. That is over 10 times the value of the gross world product, and the present crisis has caused the loss of “only” a few tens of trillions of dollars.

Daniela Prates, a colleague at Cintra’s university, presented a paper at the workshop recognising that the present crisis is different from previous ones because it has its epicentre in the United States, but concluding that peripheral countries are still vulnerable to its shocks, shattering “the illusion that they would be unaffected” by any crisis arising in the central countries.

Given the reality of this situation, she proposed the limited goals of preventing sharp exchange rate fluctuations such as have occurred in recent months, mainly in countries like Brazil, Mexico, South Africa and South Korea, by “controlling capital” with some restrictions on short-term speculative investments.

This measure has been adopted by many countries, including some with conservative governments, but it has been rejected by the countries mentioned.

This is another issue that puts the Central Bank of Brazil on the defensive, because of the damage caused to the economy of this country by a currency that has lost more than 30 percent of its value against the dollar in the past two months.