Economy and Energy
Year  II - N° 8
May/June/1998

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Energy Sector - Institutional Organization
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Camilo Penna
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Inside a real Brazil
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Graphic Edition:
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dition
marcos@rio-point.com
Revised:
Sunday, 13 December 1998.

http://ecen.com

Inside a Real Brazil

Interview to Estado de Minas
English Version:
Frida Eidelman
frida@password.com.br

ESTADO DE MINAS - What do you think about Fernando Henrique Cardoso’s administration?

JOÃO CAMILO PENNA - The administration of Fernando Henrique Cardoso should be examined from a wider perspective, from back in the past and into the future and we should need more space for that. But, in this perspective, he seems well, since Brazil has in its history a series of problems connected with the government. We see it start in 1964, with a series of governments that were not such but were called authoritarian. Afterwards we had the "direct elections now" crisis, and Tancredo Neves’ tragedy - the fastest and most anguished rise and fall in our history. Then, in Sarney’s administration, we had also the rise and fall of Minister Dilson Funaro and soon after, the same happened with Fernando Collor de Mello. At this time, the inflationary process was aggravated until it reached unbearable levels. From 1980 until 1993, the per capita income did not grow and we lost 14 years. This impact of the first years of the nineties were so negative that we see them repeat the eighties and we would have lost two decades. The Brazilian inflationary process resulted mostly from government’s deficits, unbalance, waste and privileges. Also, the totally unbalanced Social Security problem helped in what I would call the collapse of the Brazilian State. But, in order to analyze FHC administration, we should go backward, long before history, from the discovery, going through the imperial time, up to the present days. But when FHC came, he announced that he found a monthly inflation of 80 % in July 1994 and he managed to reduce it to 5 % a year. It is not that exactly. Inflation reached 80 % in July 1994 because the URV caused its rise on purpose in order to be corrected afterwards. He did not found the country with a 80 % inflation but rather with 50 %. The Real Plan was a big success but, from my point of view, made a huge mistake which was to adopt two anchors : valued exchange and high interest to support the currency. However they do not combat the causes of inflation but their effects. These are tactical measures but in Brazil they were transformed into strategic ones. Fast and deep changes for reducing inflation were necessary starting on the first day, but this was not done. We stayed anchored in high interests, attracting external capital - which made dollar valuable - but reduces internal demand. This, in the short term was excellent, but not for a long time, and it makes four years now. It would have been acceptable if there would not have been the dollar reduction to 0,83 at the time of the Real Plan and until now we have an exchange rate which has a gap of 10, 15, 20, 30 % relative to other currencies. In my opinion, this is the difficult point and maybe the error of all this process. And this, obviously, submits the Brazilian company to unbalanced competition with foreign ones and is curbing our growth.

EM - Is it time to make some changes in the Real Plan?

CP - The reforms, which should be fast and deep, as I said, were very slow and only now the Administrative , Social Security and Tax Reforms are really being implanted and they still are stuck. But the truth, without condemning anyone, is that we all are to blame for this delay. Until now, after these four years, Brazil lived on controlling inflation with high interests, attracting foreign money, restraining demand and with valued exchange to permit more imports and less exports, which increased the internal offer. The Collor administration opened the economy but did not foresaw valued exchange. When Fernando Henrique came, it was put into practice. Then the Brazilian enterprise was submitted to an opened economy, with valued exchange and faces now large difficulties in spite of having accomplished notable productivity increase, particularly in industry and agriculture. It could not get it in the service sector in a general way, but its profits have lowered in such a way that it is not investing to grow, which explains unemployment. In my opinion, it is time for a strong attitude in order to hasten the necessary reforms and to decrease interests as far as possible, because its not possible anymore for Brazil to continue depending on external capital and with such fiscal deficit. It is also necessary for the Brazilian society to spare more and our enterprises to try to export more. This implies, from my point of view, compensatory measures to nullify the effect of valued exchange , if it is not possible to modify it. Decreasing now the so called Brazil Cost by the government would also be very important.

EM - Among all these problems what are the competitive advantages that Brazil still has as compared to other emerging countries like China, Argentina, Mexico...

C P - We should be very humble in this matter because among the main ten emerging countries in the world are, here in Latin America, Argentina, Brazil and Mexico. Then we have China, Indonesia, South Korea, Russia, Turkey and South Africa. There are other ten countries that are considered emergent ones. But it occurs that of the mentioned ten emergent countries, Brazil has the lowest growth of them all and among the twenty countries, we are only ahead of Russia, Greece and South Africa. While last year, Argentina and China grew 8% and India 7% , Brazil grew only 3%. Among the emergent countries, we have also the highest deficit in current account and the worst exportation rate over product, which is only 7%. In terms of exportation we hold the last place. Furthermore, we have one of the lowest minimum wage in the world, a high illiteracy rate and the worst income distribution in the planet. With all that, due to high interests and to problems in Social Security, in the last four years the tax revenues in Brazil increased from 24 to 32% of the GNP. Likewise, the public debt grew from 23 to 33%, in spite of privatization. Among the emerging countries, we have one of the highest revenue growth and public debt growth relative to the internal product. As one can notice, we have a group of serious problems. Not to mention a multitude of retired workers. This is the dark side. Now, on the light side we have notable things such as the currency stability, a collective change of mentality, in the Congress as well as, which is already approving the reforms. The restructuring of the banking financial system in the country, almost normalized, was also an excellent thing. In spite of the problems, we have large room for hope. But for that, it is necessary to have productivity.

EM - Among the notable things attained by the country, there is the currency stability. Is it fair for Brazil to continue with a stable currency with growing unemployment?

CM -Actually, for the poor population things got better, mainly in what concerns food. On the other hand, your question is very specific : stability versus unemployment. There isn’t really a linear relationship between them, since stability is not the cause of unemployment, which here in Brazil is the result of various things. Recently, most of the unemployment was caused by industry, because its productivity demanded modernization in order to be inserted in the open economy. In this sense, if Brazilian industry had not been modernized it would have died and, consequently generated much more unemployment.

Another important factor is that the Brazilian medium and high class consumes in standards of rich countries and saves very little. Our saving level is very low, 16% of the product, while in Asia it is from 35 to 40%. Without capital accumulation, which would come from savings and from reinvested industry’s profits, Brazil practically stopped growing. Therefore, there is no generation of jobs because there are not activities for investments combined with capital formation, necessary for constructing new factories, hospitals, schools, highways, etc. So, the first cause of unemployment, in my opinion, is absence of productivity and the second is the lack of investments, which demands three things: stable currency, government without deficit and a society that values enterprises and their profit. On the other hand, it demands capital. But they do not exist. First, as I already said, because the family is not saving and second because the enterprise’s profit has plunged due to the careless opening and to the exchange, which lost 15%. Another fact: of the mentioned emerging countries we are the only one which has negative saving, and this is absurd. And finally it is necessary a policy for reducing interest and a secure and slow devaluation of the Real so that enterprises may have profit and grow again. Only then the unemployment problem will be solved. But I’m convinced that we will start a new cycle of investment for productivity and competitivity. This is vital : either this happens or the country will have serious difficulties and will have to close itself again. And if this happens, from the economical point of view, fatally it will also happen politically - and what I’m talking about is serious.

EM - Could the policy of concessions be an alternative now?

CP - I have worked on this law of concessions when FHC was a senator, invited by one of his advisers, Doctor Marilia Barros. This is an important law because it allows for the private sector to be responsible for public services. I’m still working today on the electrical energy part. It is a big solution but one must be careful , for example, not to sale for a low price what is owned by the government, in making good concession contracts and also in regulating them well in order to avoid failures in privatization, as has already happened. The government should be also aware of the following: if it sells Cemig, Volta Redonda, the Porto Alegre/ Curitiba highway, etc. it must use this money to take care of education, health and not to pay interests or early retired public servants.

EM - As we talked about privatization - in the particular case of Minas - do you find it correct to sell assets from Minas Gerais such as Bemge, Credireal, Cemig at giveaway prices, as has been alleged by the opposition ?

CP - Minas Gerais was lead to privatization not so much by ideology but out of necessity, because the high interest rates and other wasteful problems involving the top of the state demanded the sell off. On the other hand, I don’t know if it (the state) put into action large programs to increase internal productivity in order to reduce costs. Then it was obliged to sell off. Now, if the price was high or low, I’m not able to judge. But it was really the time to sell, specially the banks. As to the selling of Cemig, it is subject of discussion the selling of only one part, maybe to be forced to sell it in the next administration. But the results concerning Cemig seem to be good. As to prices , I cannot judge either. But I have no doubts that the Brazilian steel industry, for example, was sold by a very cheap price.

EM - Governor Eduardo Azeredo has been complaining that the federal government has not been helping Minas economically. Is that true or has he no cause for complaint?

CP - The Governor is right : it is enough to look at the Brazil in Action Program which includes for Minas only the duplication of the Fernão Dias highway, but this was already started before the Program was initiated. On the other end, I have the intuition that President Fernando Henrique likes Rio and São Paulo very much. I have this intuition because the President wants Brazil to be competitive in the world and for this to happen, São Paulo - which has 35% of the Brazilian product - because it is better and richer, will be able to better compete. And also because the country needs a visiting card and which is our visiting card? It’s Rio de Janeiro.

EM - Do you think that the fiscal dispute is legitimate in the policy for attracting new industries?

CP - When I was Finance Secretary here in Minas, this subject was also present. The state gave some incentives and had some participation in the case, for example of Fiat, Açominas, etc. I took part in that and did it convinced that I was correct, because inside Brazil, which is a common market and where there are not barriers among states it is very difficult - once a state takes the leading position - for other states to develop themselves. It is the typical Brazilian case : here the movement of goods, capital and people is free, which is not true in many countries, which have internal barriers. This does not exist here - we are the largest common market in surface in the world. As São Paulo and Rio have taken the leading position, it is very difficult for other states to develop themselves if they don’t have any type of attraction. This being the case, I find it correct for states to adopt policies to attract development to their ground. Nevertheless, this permits the use but does not recommend the abuse: it is a question to give incentives to projects that would be viable without them but that, for example, would go to São Paulo or Rio. Unless the federal government - following the constitution - should organize the national economical situation - what is not happening - I think that each Brazilian state has the right to take care of itself.

EM - In all presidential elections, since the republic was proclaimed, in 1889, succession passed through Minas. Why is it not happening anymore?

CM - It is a pendulum-like process. In the all the history of the country, Minas have always had a very important role for two reasons : one because it had a large population and consequently many voters. But a large number of voters is not enough, it is also necessary to have national leadership which the states presently has not. I remember very well that these leaderships existed in Minas, they thought much more about Brazil as a whole than about their own state. But they got tired of it and the governors started to think more about Minas and less about Brazil. This is not much commented but it is true. Therefore, I think that this process in which presently Minas is rather absent from Brazil is not decadence but a new attitude: let the country aside and take care more of itself. It is the pendulum in action. Now, in my opinion, it is time for it to oscillate to the other side. It is time for Minas to assume that it is the second or third economy in Brazil - even though it takes the risk to loose to Rio Grande do Sul or Paraná. The homework was done and it’s time for the state to regain power in Brasilia, in order to be able to take care of itself again, gaining the credit it has for having worried about Brazil. It’s time for us to think again about the Planalto (headquarter of central government in Brasilia).

EM - You were minister, state secretary, have occupied other important functions and this year you have the 50th anniversary of your graduation as an engineer. In this period, what were your greatest disappointments and joys?

CP - This is a difficult question, it is personal, particular. But it’s o.k.. I had great joys, particularly with my parents, who were poor farmers in Corinto, They thought me by lamplight and I was happy to attain some success while they were alive and I was able to help them in some way. My wife had also a large participation. I’m very happy too due to the fact that I am working on my own for eight years and for the first time I’m earning some money. But I’m happy mainly because my experience of 40 years is very important for me presently. I am rather sought for advice. I’m also working at Itaipu were I have an important position. As to my greatest frustration, it is the Brazilian poverty. I am also frustrated by the excess of privileges still existing here. And I have personal sadness of which I will not tell here, connected mainly with public life.