I. Interview with President Fernando Henrique Cardoso, Gazeta Mercantil, June 19, 1997
Gazeta Mercantil — What is your greatest fear at present? Excluding the possibility that your re-election bid will fail, of course, although no one expects such a failure.
President Fernando Henrique Cardoso — I’m not a candidate yet.
Gazeta Mercantil — What is your greatest fear at this time?
President Cardoso — From the economic viewpoint, for example?
Gazeta Mercantil — From any viewpoint.
President Cardoso — Overall, the main threat to our prospects would be an upset in the international financial system. I cannot predict such an upset, but if it happened it would be a shock to us because we wouldn’t have the wherewithal to control the situation.
What do you mean by "fear"? Fear comes to you when you can’t control something. Why are so many people afraid of flying in airplanes? Because they don’t understand what’s happening. Once they have a grasp of what’s going on, their fear usually diminishes. So a genuinely difficult situation is only likely to arise in face of the unforeseeable. I don’t believe there are many unforeseeable factors for us in our present situation, except for the one I’ve just mentioned. I hear a lot from the media about other factors, factors that worry journalists, and indeed factors that worry the Government, but they aren’t unforeseeable factors.
The issue of the trade deficit is notorious, for example. There are ways and means of tackling it, measures that can be taken. Of course, if the situation were to change, giving rise to very significant, generalized social pressure, we would be faced with another unforeseeable factor. There are no contradictions here. Social pressures exist and are significant, but not generalized. They’re localized, rather.
If we turn to another level of fear — a factor that isn’t beyond control but is cause for concern — I should mention the slow pace of reform. This issue concerns me because it is within the scope of my control. Sometimes we ourselves give public opinion the impression that the speed of reform depends on the Government’s determination. I often hear people say, "Oh if only the Government had as much determination to win approval for the reforms as it did to get the re-election amendment passed, the reforms would have been passed long ago." That isn’t true. We do have the will. The problem is that the issue of re-election motivated the political forces very strongly, whereas the reforms run into obstacles from the political forces instead of motivating them. In fact, some groups are afraid — wrongly, in my view — that they will face negative electoral consequences if they approve certain positions in Congress. This fear hinders the process.
I believe that when you look judiciously at what it’s possible to do and compare that with what is in fact being done, you have to be concerned about timing. Because however considerable the means at our disposal (and we do have the means to keep the Real under control), we don’t have the means to accelerate development. That’s what is urgent in Brazil. So that’s what genuinely concerns me.
Gazeta Mercantil — You’ve touched on some crucial issues, including the fear of an unforeseen upset in the international financial system. This fear evidently arises from Brazil’s present difficulties with the balance of payments, especially the significant current-account deficit. If everything happened to be satisfactory in that area, the effect of an international crisis would be far less significant. What do you plan to do or tell your economic team to do in this area in order to attenuate the risk?
President Cardoso — First of all, let me say a bit more about the international question. At bottom, if we look at the question in universal or general terms, it’s clear that globalization of the economy means there are no rules. Political power isn’t international. The economy is international but political power is not. This is the crux of the matter.
The institutions that were set up to deal with international economic issues after World War II, after Bretton Woods — the International Monetary Fund, the United Nations and the World Bank — are simply not up to the demands of the situation we face today. The UN is in crisis. The IMF confines itself to ensuring an adequate level of liquidity for world trade, which has become an obsession. The World Bank hasn’t done enough to counterbalance the tendency toward a concentration of wealth. We’ll have to live with these problems until this contradiction, which is a global one, is resolved.
Of course, that isn’t the question I was referring to. Globalization and its problems are just a backdrop for the potential crisis I’m talking about. What I was referring to would be a crisis in the financial system. There’s a vast amount of capital flowing around the global economy but no one can say where it will end up next. For the time being, this liquidity is beneficial to Brazil. Why? Because Brazil is one of the few places in the world where capital can come in and make a profit. There’s a huge amount to be done here. In Europe, it’s quite the contrary. It just isn’t possible for capital to increase in value in Europe. In Asia, it is. In the United States, it is. In Brazil, too.
Now to return to your question. Given what I’ve just said, what must we do to attenuate or minimize the risk? The central bet for my economic team and myself is that this risk is a temporary one. As you know, in politics and economics you always have to bet, because politics is the realm of the unforeseeable. Politics isn’t management. In management, you apply the rules and resolve problems. Similarly in law. Politics is the opposite of that. It’s facing up to challenges. You’re always obliged to bet, to gamble. So how are we betting? Well, the person most responsible for this bet is with us here right now. It’s José Roberto Mendonça de Barros, Economic Policy Secretary at the Ministry of Finance.
What are we putting all our chips on? We believe we’re now in a stage which entails a transformation in the structure of our productive system. And during this stage we must import large amounts of machinery and equipment, as well as raw materials. These goods will enable us to strengthen the productive basis of the economy so that in the ensuing stage we will be more competitive internationally. If we increase our efficiency, we’ll be competitive.
The market in today’s world is a single entity. Not just the external market. The domestic market is the same. The concept of single pricing will become more and more applicable. In international trade there’s already a trend toward single pricing. You’ll see, there will soon be a theory of single pricing for commerce and trade in general — I’m not sure if someone hasn’t already formulated one.
Very well, so we’re putting all our chips on this bet and that’s what we’re going to do. We expect this stage to last three or four years. During that period, even if there’s a deficit, as there is now in trade, it will be perfectly feasible for development and political stability to proceed, and meanwhile we’ll have the capacity to attract the foreign funds required to finance the deficit.
Gazeta Mercantil — There’s an ongoing debate in Brazilian society about the importance of foreign investment, especially direct investment. Foreign direct investment is long-term capital. It’s here to stay, although there’s the other side of the coin in the form of profit and dividend remittances. However, it’s a fact that some Brazilian companies are unable to obtain foreign lines of credit, which come at low rates of interest, for investment in their own business. Companies that cannot do this are obliged to borrow from domestic lenders at very high interest rates. What can be done to alleviate this problem for segments that don’t have easy access to the international market? Can interest rates be cut? Can special treatment be afforded to those who require it? Some market analysts say the president of Brazil is now much closer to the kind of external economic policy formulated by Secretary José Roberto Mendonça de Barros, who is with us here, than the initial approach to economic opening and exchange-rate policy advocated by Gustavo Franco (currently international director at the Central Bank). Franco’s initial version was to throw the economy totally open and let the devil take the hindmost. Some observers now expect the Government to implement a policy designed to rescue as many local companies as possible.
President Cardoso — The measures we’re taking, as part of this restructuring process I’ve been describing as our "bet", are designed to make sure the nation’s business base isn’t destroyed in the process. The economic opening didn’t start with me, let alone with Gustavo Franco. It started with President Fernando Collor de Mello and was accelerated by President Itamar Franco. In that case I did indeed have a role to play: under President Franco I was Finance Minister when import tariffs were cut to an average of 14%. There was a tidal wave of lobbying from São Paulo to stop me from doing that. However, I agreed to the measure because I took the view that interrupting the economic opening would be tantamount to destroying our opportunity to modernize the productive system. After that, the process was accelerated under Finance Minister Ciro Gomes after the accords signed at the Ouro Preto summit, when we reduced import tariffs drastically.
It wasn’t Gustavo Franco’s responsibility. He was in a different sector, taking care of exchange-rate policy. He presented the rationale. He explained, quite rightly in my view, that such a policy was necessary to inject a "shock dose of capitalism", to use an expression coined by Mário Covas. Otherwise we would be overprotecting our industry with an exchange-rate policy that favored exporters and inflicting suffering on the Brazilian people.
I recall an incident that happened when I was Minister for Finance. Domingo Cavallo, Argentina’s Finance Minister, said this to me one day: "I don’t understand why you don’t implement a stabilization program right away. Your international reserves are at a higher level than we had in Argentina when we introduced our program. Your present policy benefits exporters and a few branches of industry, but the population is paying the price." However, we didn’t implement the program right away, I admit that. We were allowing some segments to enjoy privileges to the detriment of the entire population. That doesn’t mean the Government should forget about the industrial segments that are suffering from the effects of the opening. If we had concerned ourselves solely with these segments at that time, we simply wouldn’t have opened up the economy. Even if I accept for a moment what you say about the different approaches proposed by Gustavo Franco and José Roberto, I see them as forming a sequence, not as in opposition to one another.
The time has now come when we have the necessary flows in international trade and a much more open economy not just to enable us but indeed to oblige us to do something actively to assist the industries that can be restructured internally. BNDES( 1) is taking care of this matter.
Gazeta Mercantil — What sectors is BNDES restructuring?
President Cardoso — Textiles, footwear and auto parts. BNDES has changed its approach. What was the old approach? Back in the eighties, it adopted a suitable policy that served as a jumping-off point from the period of President Ernesto Geisel, when resources were concentrated in the hands of a few big companies which alone were capable of creating a capital goods industry, a petrochemicals industry, driving the steel industry forward, making a great leap forward. That was achieved. BNDES extended loans at subsidized interest rates, enabling these industries to be set up. Now we’ve privatized what was created as a tripartite structure, as a partnership between foreign capital, local capital and the state. We’ve privatized all the steel mills, as well as the petrochemicals and fertilizer industries. The capital goods industry was never state-owned.
As I said, BNDES is now using a different approach, lending to small and medium enterprises. That’s very important. The loans are extended at subsidized interest rates. Why did Embraer sell aircraft? Because BNDES lent to the company at competitively low rates. When I was finance minister, the issue of privatizing Embraer was brought up. Even before that, when I was a senator, we voted through an injection of capital for the company. Mário Covas worked with me on that. As senators for São Paulo we worked hard to get a subsidy of nearly 500 million dollars for Embraer, which was heading for bankruptcy. Later on, when I took office as finance minister, I had to deal with Embraer’s effective bankruptcy. Thanks to the patient work done by Air Minister Lélio Lobo and my own grasp of the issue as finance minister, as well as that of President Itamar Franco, we privatized Embraer.
The process hasn’t yet reached an optimal point, however. We lack the conditions to extend subsidized credit to every industry that needs it. We’re moving in that direction, nonetheless. In agriculture, we’ve abolished the Reference Rate (TR) and created in its place a Long-Term Interest Rate (TJLP). We’re helping these sectors to restructure.
Initially I was worried about the prospect that too many state-owned enterprises might pass into foreign ownership as a result of privatization. There too, not only BNDES but also the pension funds have created conditions to prevent that from happening. I hear people say, "Oh dear, privatization in Brazil has been conducted without any protection for local capital." That’s untrue. We must help strengthen local ownership, but the conditions are quite different now.
Gazeta Mercantil — What conditions are you referring to?
President Cardoso — The need for a renewal of technology. The need for aggressive marketing instead of relying on subsidies. Interest rates on official loans can now be equivalent, so as to level the playing-field rather than ensure superiority, and that approach will drive forward progress in the technological factors.
Gazeta Mercantil — But if you don’t create general structural conditions in the financial sector and decide instead to favor certain industries with subsidized loans, won’t you in fact be cementing a distortion or a bias in the allocation of resources?
President Cardoso — If that were to become a permanent policy, leading to a generalized trend, I’d agree with you. We’ve reduced interest rates considerably. There’s room for rates to come down further but the conditions for that aren’t right just now. We’re trying to reduce rates. Hence the reforms, hence the anxiety about the slow pace of things, about fiscal disequilibrium. That’s the crux of the matter. We must have interest rates that are right for the situation in general terms. What have we done about that? We’ve considerably improved access to foreign credit. Look at agriculture, for example. We’ve introduced a new facility called Resolution 63 farm loans. When I was finance minister, the big farmers lobbied Congress to stop this measure. It took two years to win approval for it. Why? Because everyone wanted soft loans from Banco do Brasil, right?
Gazeta Mercantil — In sum, the Government seems to have opted for intervention in selected industries for the time being, allocating resources to this or that sector. The aim is apparently to protect national industry and ensure that foreign capital doesn’t just take over altogether. Is that in fact your intention? If so, what’s the importance of warding off the threat to local ownership?
President Cardoso — Because that’s what the United States does. So do France and Germany. It has to do with the possibility of guaranteeing that the key drivers of economic growth will be present. In a globalized world, if you don’t keep those key variables under control, you may face serious problems with employment. In Brazil the issue of employment is a major concern.
Take the example of cotton. There was intense debate about the need for change. The first idea was to throw the market open. So it was in fact opened up and people started to import cotton. Cotton producers collapsed in Paraná, Mato Grosso and the Northeast, driving up unemployment in rural areas. From the standpoint of abstract economic logic, imported cotton was far more attractive to industrialists because it would result in a cheaper finished product, and the entire population would benefit. But then we went to take a closer look at why it was more attractive. The key was credit. It was a means of raising working capital, you see. So the right way to proceed is to change the credit policy and enable local producers to survive. As a result, the acreage under cotton this year has increased and so has the number of jobs.
I don’t believe market forces can simply be left free to operate. In the argument about liberalism and neoliberalism, I side with O Estado de S. Paulo. The newspaper has published two excellent editorials about the Government and what we’re doing. We no longer live at a time when dogmatism is necessary. Who needs "isms" to guide their actions? You have concrete problems, and you have your goals. What’s the main goal? To improve the lives of the majority of the population.
Gazeta Mercantil — Would you agree that the concern about preserving local ownership is a survival from the past?
President Cardoso — But where is this concern you’re talking about? Let’s go back to something I said earlier. The contradiction between political power and economic power still exists in the world. Political power is national. Economic forces are global. Why is the United States having trouble with NAFTA? Because the U.S. Government is being pressured by labor and by American business. The problem is the same everywhere. It’s not a matter of protecting local industry as it was in the past. We’re not interested in closing the economy up again. What we’re doing is giving local companies the conditions to compete.
Gazeta Mercantil — Consumers are still victims in Brazil.
President Cardoso — The economic opening has improved the lot of consumers considerably.
Gazeta Mercantil — Of course.
President Cardoso — That’s exactly why we’re not interested in closing the economy up again.
Gazeta Mercantil — The economy needs opening just as a plant needs oxygen.
President Cardoso — Right. It’s fundamental. We’re working to give Brazil the wherewithal to compete. That means having an open economy. It doesn’t mean fiddling with the exchange rate to favor this or that sector, or providing subsidized credit, or restricting imports. We want to see an open economy with businesses that are equipped to compete both at home and in international markets. For that to be possible, it’s important to have foreign capital here in Brazil, competing against local capital.
Gazeta Mercantil — Even in the service sector, it seems the economy’s eager to see new players coming in to compete.
President Cardoso — Take the example of the banking industry. The suggestion came from officials in the Finance Ministry and I took the decision. I signed things that no one had ever signed before, flouting the interests of domestic finance capital, which has always wanted to keep the sector closed. I authorized the entry of many banks. Only recently we’ve seen the arrival of HSBC, for example. We’ve opened up the financial services industry. We haven’t yet succeeded in resolving the issue of health insurance. The population is protesting loudly at the high cost of medical insurance here.
Gazeta Mercantil — In connection with your advocacy of competitiveness, a study by the Inter-American Development Bank (IDB) shows that Brazil falls below an average for 19 countries in terms of education and ranks virtually last in terms of income distribution. If we don’t solve fundamental problems such as education, income distribution and the fiscal deficit, how can we achieve growth?
President Cardoso — I’d have to see the statistics. I don’t have much confidence in international comparisons of that kind. In education, for example, we simply don’t have reliable statistics. If things were as bad as they say, we wouldn’t have the skilled workers we have. Everyone is full of praise for the Brazilian workforce. Yet when you take a look at the figures on formal schooling of our workers, it’s very low. Something doesn’t fit.
As for income distribution, the statistics show that for the first time ever the distribution of income has effectively been shifted in favor of the poorer strata since the Real Plan’s inception. All strata have gained, but the poorest have gained more than the richest. IPEA(2), our economic think-tank, has statistics that prove what I’m saying. International statistics don’t reflect that. They reflect the past. Anyway, the changes we’re implementing will have effects in the long term. I recall reading a paper on income distribution in England. Nothing improved for a century. It’s easy to talk about distributing income better, but it’s very hard to do. Income concentration has intensified again in the United States.
Just as important as income distribution is minimum real income. That gives you an indication of the population’s well-being. The real minimum wage has risen significantly in Brazil. There’s a perverse factor here, which is that the labor market in Brazil is governed by laws dating from a remote period in the past. They provide protection of the European variety for workers. The United States doesn’t have that. So what we see in Brazil is a vast informal labor market, which is a perverse way of adjusting to the new times. It’s perverse because it gives workers no guarantees, while also giving no resources to the state because no payroll taxes or social security contributions are paid in the informal market. When you look at incomes in the informal sector, just one study conducted in Rio de Janeiro shows that the minimum wage in the informal sector is higher than in the formal sector, as is the average wage as well. Is that factored into our statistics and included in our calculations of gross domestic product?
I’m frequently quite shocked by statistics. The other day I saw one that said Brazilian blacks are the poorest in the world. Where did they get that from? No such statistic exists.
Gazeta Mercantil — The study conducted in Rio de Janeiro shows that workers in the informal sector are better off. Isn’t there a lesson to be learned there? Don’t you think the labor market is excessively regulated and that this should be changed?
President Cardoso — Food for thought. I’m very cautious about statistics that show Brazil is improving or getting worse.
Gazeta Mercantil — Brazilians are accustomed to a state that invests in the productive sector. Present-day economists conceive of the state differently, but society doesn’t seem to have understood. What shape is this new kind of state taking and what are its attributes?
President Cardoso — The state is changing. I want it to go on changing. Some business leaders and economists say they expect this or that to happen. But I can’t fulfill expectations that I haven’t created and can’t be fulfilled anyway. The other day I was asked what will happen to poverty by the end of my second term, if I’m re-elected. I’m no demagogue. How can you get rid of poverty in four years? Impossible. It’s a process. It takes a long time to achieve growth. Specific policies are required. The same goes for education. The real question is whether we’re moving in the right direction. We’re investing in basic education, which simply didn’t exist in the past. Teachers will have ten volumes sent to their homes. Today there are schools for every child in Brazil. That doesn’t mean every child is going to school. If they aren’t at school, it’s because of the high drop-out rate, which is a trend we’re taking steps to combat. That’s what economists and business leaders must understand. It’s a process. You can’t just press a button and produce change.
I’d like to take the opportunity to raise an objection to that argument. When Congress is about to take an important vote that will change things, who do we see over there lobbying the congressmen? The people who don’t want change. Where are those who do? Aren’t they just sitting there, calling for change but doing nothing? It’s not a matter of what the Government wants — it’s what the nation needs. I don’t complain of lack of interest on the media’s part. It’s the business community, the people who genuinely want to see change, who too often just sit back and do nothing. You get the impression that the Government is a gladiator in the arena, surrounded by lions, while the crowd packing the grandstands give the thumbs-up or thumbs-down, like the Romans used to do. But the truth is it’s society as whole that should be fighting to bring about change.
Gazeta Mercantil — You say resolving the problem of poverty is a gradual process driven by growth and specific programs. However, some people say your Administration is at a crossroads: either you adopt a new exchange-rate policy or you produce a recession so that relative prices can adjust to prices in the international market.
President Cardoso — I think both alternatives are wrong. We’ve innovated in that area. It’s strange how even people who recognize that we’ve innovated do so only partially. I frequently hear people say the Real Plan is part of history, the history of the fight to control inflation. The Real Plan isn’t an anti-inflation program. What has happened in Brazil is far bigger than that. We’re looking at a change in the structure of society. What we’re witnessing is an economic transformation. We’re creating a new society. This point isn’t clear to a lot of people because all they can see is the new low-inflation economy. Even if we hadn’t brought inflation under control, we would still be changing society.
When I was foreign minister, I never tired of repeating that point on my travels around the world. Even before that, when I was in the Senate, I once came under intense criticism for making a speech in which I advocated an economic opening. What I was advocating was that Brazil should play its rightful role as a sovereign player in the new international order. Changes were already taking place because of globalization and also because of Brazil’s immense potential. When I was foreign minister, inflation made it very hard for me to state that the economy was growing. Later on, when I was finance minister, I used to say the Brazilian economy was already liquid, the corporate sector had adjusted, and it was up to the state to follow suit. The changes were already happening but the state was lagging behind, so we were marking time.
Today, however, the state has changed and society hasn’t noticed yet. Take exports, for example. We’ve introduced many measures designed to boost exports. So let there be exporters! Exporting is something the state can’t do. It’s up to private enterprise. Just don’t come back later asking the state to get in there and do it, because if it does it will do it badly. Society has to realize that the state has changed. The concept of governance has moved on. This new concept deserves to be highlighted.
Very well, you say many people talk about this supposed alternative — devaluation or recession. What they fail to see is that it’s neither one nor the other. We take the view that there’s a new society in which the driver of export growth is no longer the exchange rate but productivity. Moreover, recession isn’t acceptable here. We’re not going to pay that price, and we don’t have to. And despite the pressing need for reform, and the very slow pace at which it’s moving, the state has the instruments with which to keep inflation under control. What I’m saying is self-evident: we have enormous wealth, as privatization is demonstrating. We have resources, and I believe we won’t make mistakes, not least because this is an open society and when the Government makes mistakes, there’s an outcry that helps us make corrections. This isn’t a one-party state, with press censorship or cronyism and widespread patronage in local government. In my view that dichotomy is false. We have the means to keep the situation under control without either falling into a recession or tweaking the exchange rate.
Gazeta Mercantil — What growth rate do you foresee if present trends continue? Everyone says 4% is too slow.
President Cardoso — Everyone has to say it’s too slow because they overlook the fact that our economic growth is a zigzag: one year we grow 2% and the next we contract 2%. Of course, the faster we grow, the better. The crux is to grow in the right way, without fueling inflation, without relying on boom-and-bust cycles in consumption or investment due to protectionism. What we’re pursuing is sustained growth. It’s fundamental to bear in mind that unemployment hasn’t risen in Brazil. It’s risen in people’s imagination and as a menace.
Many people think Brazil is doomed to follow in Europe’s footsteps. It isn’t. Our society isn’t organized along European lines. It’s far more similar to the United States. In Brazil, companies and labor tend to move from one region to another, there’s mobility of capital and labor, in contrast with what you see in Europe. Brazilians are good at moving out of one occupation and into another, which isn’t the case in Europe. We’re American. I don’t see anything wrong with that. We have more mobility and we have an agricultural frontier. There’s no likelihood of a catastrophic rise in unemployment, so even with 3% or 4% economic growth we don’t expect social problems to get worse. The rate of population growth is slowing down. Of course I’d be happy if GDP were to expand 6% or 7% per annum. But we don’t want to grow 6% or 7% and find ourselves with a foreign-exchange crisis or inflationary pressure that we can’t control.
Gazeta Mercantil — The economy is slowing down too. Even with elections approaching, growth is unlikely to pick up. At the last election, you campaigned on your successful record in stabilizing the currency and reducing inflation. People expected economic growth to be much faster than it has been. What new ideas will you campaign on this time around?
President Cardoso — I’ll answer that question in just a moment. First, though, it’s wrong to say the economy is heading for a slowdown. The public don’t know what GDP means. They don’t care, either. They want a job and three square meals a day. The people who care about GDP are the economists, particularly the opposition’s economists. They use this issue of growth rates as an argument to stymie whatever we’re trying to do, but it doesn’t get through to ordinary people.
Things aren’t getting worse in Brazil. They’re getting better. Ordinary people realize that. Why should they be getting worse? Look at the figures on consumption. How can you go on about difficulties when sales of TV sets amount to 15 million in two years? When the computer industry expands 50% in a single year? When production of cars is rising amazingly fast? People who bandy these accusations about have never been out in the real world.
Gazeta Mercantil — You’ve spoken about reforming the state, reforming the national consciousness, reforming society. Allow me to ask you something that’s not at all meant to be a trap or a leading question. Is this model of democracy the right one for us at the moment? This Congress with hundreds of members, whose performance not even the media are able to monitor...
President Cardoso — That’s because they’re dynamic.
Gazeta Mercantil — Wouldn’t it be far easier, Mr. President, wouldn’t it be a patriotic gesture to start re-examining this structure? After all, it doesn’t say in a manual somewhere that democracy has to have this format, especially that the Chamber of Deputies has to have so many members that it can’t operate smoothly.
President Cardoso — I think it’s undoubtedly true that we need a political reform. So then you’ll ask why hasn’t the Government brought forward a proposal. If we had, everyone would be debating political reform and nothing else. It’s easier ex post. Today everyone says it should start with this or that. The fact is, however, that if we hadn’t started by abolishing state monopolies, there wouldn’t be economic growth. If we hadn’t won approval for new laws allowing the Government to license private-sector operators of public services and to privatize the state-owned enterprises, liberalizing telecommunications, ensuring equality of treatment for foreign-owned companies, and so on, we wouldn’t be seeing the large amount of investment we’re seeing, and none of the rest would have happened.
If we’d opted first of all for a political reform, I’d be up to my neck even now in the discussion of institutional policy. It’s very hard to tackle issues relating to electoral and party politics because they directly affect the interests of congressmen. I was a member of Congress for many years, so I know what I’m talking about. However, it will have to be done.
I’ve always advocated a system of semi-proportional representation with constituency lists, similar to the German system. I think it’s important. But we won’t be able to introduce such a system until we’ve worked out how to ensure the population is represented proportionally in Congress. The authoritarian regime introduced a major distortion in this respect, when the so-called "April package" [imposed by General Geisel greatly increased the number of seats for some regions to the detriment of others. That’s one issue. The Senate is examining a bill on that issue drafted by Senator Sérgio Machado, the leader of my party [PSDB] in the upper house. They’re trying to tackle that very important issue.
In my view, to inject more vitality, more legitimacy into our democratic system, make it more trustworthy, we need an electoral reform to enhance the credibility of Congress. Since I was elected president, it’s been absolutely clear to me that the way forward is to increase respect for Congress. Totally irresponsible statements are very frequently made about my conduct, sometimes by members of the opposition in Congress, sometimes by public prosecutors, members of the Judiciary and others, who accuse me of acting undemocratically. I have never acted undemocratically. I have consistently complied with the Constitution. I have always maintained a flexible dialog with Congress. Actually, from the electoral standpoint, and in terms of public opinion, that very flexibility has damaged my ratings. People are aware of that. The president loses when he isn’t publicizing Government investment projects or discussing practical matters that affect people’s everyday lives but discussing institutional issues. I know that.
So why have I done things that way? Because previous attempts to change things without winning approval from Congress have proved a failure. They’ve never succeeded. The president has to establish a relationship of mutual respect with Congress, so that progress can be made. If not, we all get bogged down. That’s what happened to Jango [President Goulart], Jânio [President Quadros], the generals, and [President] Collor. They all found themselves unable to move forward. As for me, I have a deeply held conviction that Congress is a fundamental part of the democratic process. Even though this conviction can make me unpopular, I persevere because one has to have long-term objectives. My objective is to ensure that democracy puts down deep roots. I think that’s most important. If I gave up persevering toward this objective and took a short cut, I would find myself in trouble.
The issue you raise is frankly not a top priority for me, but it’s true nonetheless that we need an electoral reform in order to have a better Congress. Don’t forget I supported the movement to amend the Constitution so that we could adopt a parliamentary form of government, and I’m still in favor of that. But we can’t have parliamentarism without a reform of the parties and the electoral system.
Gazeta Mercantil — And what about this new state? What will it look like?
President Cardoso — That’s a very important question. When I took office, I said I would bring the Vargas era to an end. The state we have now arose basically as a result of two forms of authoritarianism: the form introduced by Getúlio Vargas with his Estado Novo, and the form created by the generals [who seized power in 1964]. That form of state, which the left wants to preserve even now, is the outcome of two profoundly authoritarian periods in Brazilian history. It’s an omniscient, ubiquitous state based on a centralized command and control model that confused the interests of the state with the interests of the nation. Its authors had no belief in the citizens — in fact, they didn’t acknowledge the existence of civil society. So it’s an anachronism. The state we have was created to serve private interests and the clientelistic interests of politicians — these two kinds of interests mingle incestuously in the state.
How are we working to rid ourselves of this and forge a new society? Let me focus on three directions of change. The first is that the state will stop producing, except in a few specific areas, and concentrate instead on promotional activities, regulation and oversight. That’s why we’re setting up agencies to regulate the energy, petroleum, transportation and telecommunications industries.
We’re dismantling the vast bureaucratic apparatus set up in the past to control the state-owned enterprises that held a monopoly in all these sectors — or if they didn’t hold a monopoly, they held the private sector in a vice-like grip, as for example in the electric power sector. Conversely, the private sector infiltrated the state, struck alliances with the bureaucracy, and took control of all key decisions. Society was suffocated as a result. We’re dismantling the old structure.
The other day a TV news program said I was planning to shut down all the ministries. Not quite. It’s important to get this clear. We can’t reform the structure overnight. That’s not the way to get things done. Congress is debating a framework for the creation of a public space that isn’t owned or controlled by the state but operates under rules drawn up by Congress and by society. These rules will be stable rather than changing all the time in accordance with private interests entrenched in the state or with the dictates of patronage.
The old state is already on the way out. There are countless examples of this. CADE(3)[the anti-trust watchdog] is one. We’re replacing some agencies. We’ve shut down SUNAB(4) because we don’t control prices. Instead, we have CADE and the Economic Defense Secretariat as new instruments. We’re not abolishing the state in the name of what is often referred to as neoliberalism, a doctrine of laissez-faire whereby the market can do what it likes. Not at all, absolutely not.
This is a quite different matter: How can the citizenry control the public sector? We need clear rules. That’s what is happening now. We’re privatizing the state-owned enterprises and at the same time creating a system of regulation to prevent what has happened in other countries where privatization without regulation has led to the emergence of monopolies and sky-high tariffs.
The second major direction of change is in the social area. The state is investing more in this area but must also invest in close cooperation with society in health, education, social security and the countryside. In education we’re decentralizing, transferring powers to states and municipalities. The Education Ministry is the regulator, issuing guidelines and policies. The universities will be given autonomy. Not the autonomy to spend and be reimbursed by the National Treasury. Congress is debating a bill to give universities the freedom even to decide on teachers’ pay, but in exchange they’ll be accountable to society for the way they spend their money. We’re decentralizing education and transferring the power of oversight to society. We’re transforming the health system significantly. We’ve shut down CEME(5) and INAM(6). We’re reformulating policy on vaccination, although there’s strong resistance to that move. We’ll be deciding on what to do about the National Health Council.
There’s a great deal to do, and as we change things we have to destroy the old clientelistic habits, the system of patronage controlled by parties and politicians. That can be done by defining priorities for budgetary appropriations. Caixa Econômica Federal [the national savings bank] is also changing as a result of the new housing finance system we’ve introduced. It took a long time, but we’re now signing 500 contracts a day, without any interference by congressmen, mayors or ministers.
Gazeta Mercantil — Is all that also part of the legacy of Getúlio Vargas, which you say you want to dismantle?
President Cardoso — Yes. These changes boil down to reforming the behavior of the bureaucracy. That’s very hard to do. The third direction of change involves the civil service reform bill now before Congress.
Gazeta Mercantil — Will this process of reforming the state lead to a reduction in the volume of funds that the Government extracts from society?
President Cardoso — No, it won’t. Society continues to require the resources of the state. The crux is to decide what areas the state will fund. We must make more productive use of the funds spent on health, education, science and technology.
Gazeta Mercantil — So there’s no room for reducing the tax burden in Brazil?
President Cardoso — I can’t discuss that in the abstract. We’ve introduced a number of tax cuts. There are now only two rates of personal income tax. Corporate income tax has been streamlined. Value-added tax [ICMS] on exports and investment has been reduced. A special simplified tax system [Simples] has been created for small business. Many of the measures covered by what’s commonly referred to as tax reform have been introduced already without waiting for a constitutional amendment [which requires a two-third majority in both houses]. The new state will need money. You can’t rid Brazil of poverty without health and education. That requires funding. The same goes for land reform, which will also take a long time. It took 50 years to forge the state we have. It will take five to ten years to reform it. But the process has begun.
Gazeta Mercantil — A fundamental prerequisite for economic stabilization is control of the public deficit. Given Brazil’s social inequalities, is it possible to reduce the budget deficit to zero in the short run or will we have to live with the deficit for a long time?
President Cardoso — We can’t afford to run the risk of a recession or tighten so radically as to trigger a rise in unemployment. Even if it takes longer, we must take this factor into account. The statistics on the consolidated public-sector deficit, which includes the states, show that there has been an increase in payroll. But the fact is that the Federal Government hasn’t increased payroll expenditure. During my own term, payroll expenditure has decreased, even though no legislation has been passed to achieve such a reduction. Last year, we spent 1 billion dollars less on civil service pay. Similarly this year. We’re controlling expenditure tightly. Capital expenditure and running costs have also been held level. The explosive increase in public spending has basically been due to the social security system. If we succeed in changing over to a contributory pension scheme — i.e. one in which an individual can retire only after contributing for a given number of years — the situation will improve considerably. Now that we’ve incorporated that suggestion from Raul Velloso, the issue of what to do about public pensions is much clearer. A bill is now before the Senate to create a new contributory system for all future civil servants and establish a fund for Federal assets and receivables in order to handle the transition.
Gazeta Mercantil — No one expects the public deficit to be eliminated overnight. Even multilateral agencies don’t advocate reducing the deficit to nothing all at once. The goal is a slow but steady reduction. Is that the objective you have given your economic policy-makers? Do you want to send the market a signal that the deficit will be reduced?
President Cardoso — Exactly. We’re persevering in this matter. We’re constantly controlling and monitoring the deficit. We have put in place mechanisms of control. Staff hold regular meetings. There’s no risk that the deficit will spiral out of control. Moreover, the Union still has a vast amount of assets. For example, an immense amount of oil has been staked out. These reserves of oil belong to the Union, not to Petrobrás.
Gazeta Mercantil — Have you told Petrobrás?
President Cardoso — Well... We’re setting up a regulator for the oil industry, the National Petroleum Agency, and then Petrobrás will be told. We can use that as we like. Oil is an asset we’ve never considered selling off. Never.
Gazeta Mercantil — Is it permissible to use that oil while it’s sitting underground in the form of reserves?
President Cardoso — Sure. It’s money.
Gazeta Mercantil — Could it be used to fund a securitization deal in the financial market?
President Cardoso — Yes, of course. No one has ever considered doing so. Nothing is being planned in that regard. All I’m saying is that the possibility exists. If the oil reserves were used for a fund of that kind, then oh boy, we’d abolish the deficit all right. Another example is telecommunications. The sale of "B" Band cellular licenses alone is expected to fetch between 6 billion and 8 billion dollars. All it requires is that I sign a piece of paper. We’re beginning to enhance the value of the state’s assets, as you see. The conclusion therefore is that there is no sword of Damocles hanging over us. We run no risk of disaster provided we’re competent.
Gazeta Mercantil — I’d like to pick up on another issue, although I’m somewhat reluctant about this. When we last met, you expressed concern about the Government’s ability to work out where to go next: you wondered whether the Government would have enough imagination to embark upon the second stage of the Real Plan. Do you think you have the answers now?
President Cardoso — Yes, I think so. We did indeed find it very hard to work out what needs to be done, but we now have the answers in these areas. So much so, in fact, that I’ve been saying all along that the language Brazilians have to assimilate is the language of a new society. The economic question has been resolved but we’re on the right track. Now this new society requires more justice, equality and freedom, a sense that progress is being made. More confidence and more efficiency are what we need.
Since the eighties, or more precisely since 1982, we’ve been suffocated by a lack of resources — inflation and lack of funding went hand in hand. This was torture: it profoundly disorganized everything, especially in the public sector. It led to a dictatorship of the Treasury, which wields the power to release funds. The Finance Minister was the premier. All it needed was to withhold the funds and inflation resolved the problem of fiscal disequilibrium. No importance at all was given to managing the public sector in order to get things done. Ends were entirely subordinated to means. Stabilization has enabled us to begin organizing the financial area, particularly the budget and decisions on appropriations. Now the problem we’re facing is that the funds are there but they aren’t used to get things done. So the question of administration is now more important than the funding.
Between now and the end of 1998, Caixa Econômica Federal (CEF) has 17 billion dollars to spend on sanitation and housing. BNDES has 12 billion dollars this year. Banco do Nordeste has 4 billion dollars. BNDES is spending. Banco do Nordeste has introduced major changes and is disbursing funds efficiently to assist small farmers in the Northeast. It used to close 20,000 financing contracts per year. Now it’s closing 20,000 per month. This is due to a new policy that centers on community development agents, who go out into the field to talk to farmers in loco and provide assistance there. CEF is closing 500 home loans per day and expects to reach 1,000 contracts per day in the second half of the year. As time passes, the population will reap the benefits.
There used to be Government departments that didn’t administer or control resources not because they lacked funds but because they weren’t properly organized, with well-defined priorities. This is the reason why we have the "Brazil In Action" program. It enables us to monitor project implementation and fund disbursement schedules.
Gazeta Mercantil — Interest rates on home loans are still very high. Anyone who takes out a home loan with rates at this level will be saddled with huge debts in ten years’ time.
President Cardoso — That’s no longer the case. Interest rates have fallen. The new rate for home loans is 6.5% per annum, equivalent to inflation.
Gazeta Mercantil — One of the gravest problems facing Brazil is financial intermediation. In fact, there’s no such thing in the case of home loans or farm loans. These funds are simply handed over to private-sector banks but they don’t get through to the final borrower because of the high spread, which makes them unaffordable.
President Cardoso — That may have been so in the past, but it’s less so now. There are customers for home loans now. Moreover, we’ve submitted a measure to Congress designed to introduce an important change. This will create two housing finance systems: one will be the official scheme, as now operated by CEF, but there will be a new, market-operated scheme as well. This new scheme will be similar to the one used in the United States, where securitization of mortgage loans enables banks to finance home ownership for the middle class over a thirty- or forty-year period. The key is to foster competition among banks by opening up the banking industry to foreign capital. In agriculture, too, profound changes have been made. We took two years to bring these about, but then interest rates fell. If you look at Brazil overall, I think you’ll see we’re on the right track.
Gazeta Mercantil — Speaking of agriculture, it’s universally agreed that land reform is a crucial necessity in Brazil. But it must be rational. Why is the Government lenient toward the landless movement, who want to impose a land reform by force and recently occupied Planning Minister Antônio Kandir’s office in a violent manner that certainly wasn’t acceptable to you? Why not be equally indulgent toward the homeless, the "car-less" or the "dishwasher-less"? Shouldn’t the Government take tougher action against that kind of thing?
President Cardoso — You forgot to mention the "patience-less". Anyway, the point is it’s a political issue, not an economic one. There’s been a kind of marriage between public opinion and the land question. We’ve reached the limit. Everyone thought the big issue in Brazil was land, but that’s not true. The Government has adopted every possible measure to break up the vast estates that don’t produce. Every one. In five or six years’ time, the issue will be dead. In fact, it should have been dead since the last century. Nevertheless, the landless movement is organized around the idea that the big landowners are the real rulers of the nation and must be met head-on by confiscation. That’s a mistaken view but it has widespread support from society. The support is justified by extreme poverty in the countryside. Brazil has too been lenient with the big landowners, in fact. My Administration has broken with that tradition radically by effectively collecting land tax and introducing summary judicial proceedings to speed up compulsory purchase. These measures are more effective than mere confiscation. We recently adopted a tougher measure, which determines that when land is occupied by squatters no inspections will be carried out to ratify compulsory purchase. We weren’t able to do that before now because it’s only now become clear to society that the intransigence isn’t on the Government side. I offered to negotiate with the MST(7). They were the ones who demonstrated intransigence.
You mentioned the occupation of Kandir’s office by Contag [the farm laborers’ union]. Those people weren’t arrested only because the police force involved wasn’t subordinated to me. If it had been, they would all have clapped in jail. On the morning of the day in question I issued orders to surround the building and arrest them all, but the police belonged to the Federal District [governed by the opposition Workers Party]. Those militants went too far. The public know they went too far. In political terms, it wasn’t possible to take the measures I took until after that incident. Only now have we been able to set up what we call the Land Bank. We’ve brought BNDES in to handle the issue. We believe it’s possible to distribute land without confiscating the large estates. There’s plenty of land available at an affordable price. The problem can be resolved via the market. I expect the Government to take a tougher stand from now on.
