Interview: Fernando Henrique Cardoso, President, Federative Republic of Brazil

The Cardoso Agenda

It is bold and ambitious: Brazil's head of state seeks to build a more democratic society, impose fiscal discipline, assert leadership in Latin America and claim a new role for his country in the global economic order. Can he succeed?

Outlook Journal, January 2000

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t became a late-20th-century truism: Despite its sheer mass, wealth of natural resources, prodigious industrial and agricultural output, sophisticated financial sector and dynamic people, prosperity and economic stability would elude Brazil seemingly forever.

Decades of import substitution had created an industrial establishment unprepared to compete internationally. Hyperinflation and erratic shifts in government policy undermined investment in the economy. State domination of the economy stifled market mechanisms. Across vast areas of the country, people struggled in poverty and drought. And of perhaps greatest concern to foreign investors, Brazil appeared to be perpetually, and deeply, in debt.

Under the presidency of Fernando Henrique Cardoso, however, Brazil has taken giant strides toward finally becoming the country of the future—today. Since Cardoso was elected to his first term in 1994, the country has adopted new laws and practices designed to integrate Brazil into the global economy, including constitutional reforms that open key sectors of the economy to foreign investment and guarantee equal treatment for foreign investors. He also renewed the privatization program initiated by a predecessor in the early 1990s.

Cardoso was reelected in 1998, and the centerpiece of his second term has been an ambitious agenda of fiscal reform aimed at imposing discipline in public finances and overhauling Brazil's tax and social security systems.

These policies are in fact a continuation of those he had authored as finance minister, beginning in 1994 with the introduction of a new currency, the real. Cardoso's Real Plan brought monetary stability, allowed authorities to tame inflation from historic highs of 50 percent per month to annual rates in the single digits, raised the real purchasing power of low-income Brazilians substantially, and fueled investment and consumer demand by opening and stabilizing the economy.

Cardoso—intellectual, urbane, well-traveled, fluent in several languages—slipped easily into the role once occupied by Carlos Salinas of Mexico: that of the industrial nations' favorite example of the modern Latin American leader. During his administration, Brazil raised its profile on the world stage, assuming new responsibility and influence in international bodies like the United Nations and the Basle Committee and leadership in regional trading blocs like Mercosur.

Brazil could not escape the ripple effect from the Asia crisis and Russia's default, however, and the boom, like so many before it, gave way to bust. The real collapsed on January 13, 1999, losing nearly 9 percent of its value overnight and a total of 37 percent by mid-November. In the wake of devaluation, the economy has contracted, boosting joblessness. Popular discontent has been aggravated by IMF-mandated austerity measures; among the chief casualties: Cardoso's popularity.

Yet it was a robust, charming President Cardoso who received visitors in the spacious, sparsely furnished library of the Palácio da Alvorada, the presidential residence in Brasília, in November. Alternately blunt and self-deprecating but always good-humored and remarkably self-assured, he spent more than an hour with Outlook Editor-in-Chief David Cudaback and Managing Editor Letitia Burton discussing his unfinished economic agenda and his vision of a more open society.

He readily acknowledges the paradoxical nature of his quest: In an already fractious political culture, the more democratic the system becomes, the more difficult it could be to reach consensus over essential reforms.

Does the problem lie with the country's notoriously complex constitution? a visitor asks, pointing to a bound copy on the president's desk. "Oh, that's terrible," Cardoso says with a laugh and dismissive wave of his hand. "I know: I helped write it."

Outlook: In an interview with former Portuguese president Mário Soares, you said that your "political and intellectual ambition is to open a new era" and to "leave a mark" on Brazil. With one term behind you and three years remaining in your current term, how close do you think you are to achieving these goals?
President Cardoso: When I refer to a new era, I'm referring to an open society, an open economy and a much more active civil society. Not a stateless society, not neoliberal, but something that gives much more room to different groups within society. I believe it is important to go more in depth in that direction, to give society much more freedom.

What role do you envision for the government?
The government is becoming much more accountable. Everyone can know what is happening in government. We are decentralizing the state. Instead of a small state, we are trying to organize an effective state, introducing public control in the decision-making system.

You ask me to what extent I think this has been successful. It's difficult to evaluate. But we have come a long way. If you look at Brazil today and compare it to what it was 10 years ago, the results are quite evident.

Your opponents in Congress have not always agreed with your vision of Brazil.
Any process of reform is difficult and involves obstacles. It's enough to see how many deputies in Congress are speaking against our proposals. That's a good indicator of what is happening, and it's very difficult because I need the political support to implement reforms. That is normal in the democratic process, and it gives us greater legitimacy in the results we are able to accomplish.

What tangible results can you point to?
I will give you one highlight: primary education. We have more than 96 percent of children of schooling age enrolled in public schools—37 million students.

Another important contrast with the previous era is the opening of the Brazilian economy and the role of private-sector investment in some public services. I'll give you an example: In my presidential role, around this table, I made an agreement with the so-called barons of Petrobras, which took the form of a constitutional amendment opening oil exploration to foreign private capital. In the area of telecommunications there is also a revolution under way. Now there are, I don't know exactly, perhaps 12 million cellular phones in Brazil. The cost has been reduced dramatically so that now a worker can have a cell phone. This is also very important in terms of democratization, in terms of access to consumption.

Six years ago there was tremendous debate over how to break the state monopolies. Now no one is discussing if it is possible or not to compete. This is no longer an issue.

Brazil's credibility among foreign investors depends on your government's ability to complete its fiscal reform agenda, which, in turn, would bring meaningful reduction of the country's foreign and domestic debt. What progress are you making in these areas?
First, the government foreign debt is not very considerable. In our reserves we have around $40 billion. Our foreign debt is $100 billion. So we have $60 billion; this is a relatively small sum, given the size of the Brazilian economy.

The private sector in Brazil has around $200 billion in foreign debt. Providing they can roll over the debt, it's no problem. When we have a financial crisis, and the foreign creditors prefer not to continue to roll over the debt, that's a tremendous problem. But under normal circumstances, this is not a problem. Our GDP is about $700 billion, so the debt is 40 percent.

What about the domestic debt?
The domestic debt in Brazil is in the hands of Brazilians. It's not like in Mexico, where the domestic debt is in the hands of foreigners as well as Mexicans but not denominated in dollars. In Argentina it is again different, because the Argentineans have 80 percent of the domestic debt denominated in dollars. In our case, the internal debt is in reals, the local currency.

Everyone who has money in the Brazilian banking system is a creditor to the Brazilian state. So it is a domestic relationship.

From time to time abroad they said, "Oh, the Brazilians have not been able to pay the internal debt." And of course if the rate of interest goes up and up, this is true. But if the rate of interest is going down, like it is now, this is nonsense.

But there is nonetheless a downside to the public deficit.
What is bad is that the government is competing for funds with the private sector, and that is one of the reasons why it's necessary to reduce the official interest rate.

The internal debt now is approaching 50 percent of the GDP. If you look at the United States, it's 150 percent; in Italy, 110—120 percent. Now we are extending the maturity of the debt. As an average, it's 11 months; when I was finance minister it was two months. So the situation is absolutely under control, in our hands—providing the interest rate is under control and providing Brazilian savers have their money in domestic currency.

How is your fiscal reform agenda faring in Congress?
The Congress has approved almost everything we sent. Of course, every congress is complicated; in a democracy you cannot imagine the congress will just say yes. From time to time, they say no. And even when they say yes, they correct what's been sent. And the corrections are not necessarily good ones. Democracy takes time. So we are negotiating—again and again and again.

What about reforming the social security system?
I was reading very recently a paper on the social security system modifications in France, Italy and Germany. If you compare Brazil with them, it is clear that we have made enormous progress. The Italian system was perhaps even worse than Brazil's. They have been able to introduce some modifications; we have done the same.

Regarding private-sector pensions, the modifications are enough to provide control in the coming years. The idea is to stabilize and then to reduce the payments as a proportion of GDP.

In practice, our system is in equilibrium if you consider that there are about six million people in the rural areas who never paid into the system but are entitled to receive a pension. This is a social program; it is not a social security program. In the current system the deficit is around $10 million; what is paid to the rural employees is about $9 million. So the system is around the equilibrium point.

But pensions for public-sector employees is a separate problem.
The situation in the public service is much more dramatic, because in Brazil the public service has been always governed by privileges. Congress approved a modification that would impose mandatory pension contributions on retired civil service employees. Why? Because until 1993 they didn't contribute anything to the system. So they have no right to receive a full pension.

And it's more than a full pension. The day they enter into retirement they receive the same amount of money [as their former salary], plus 11 percent. It's the only country in the world where you get more when you retire than when you are working. In this sense, it's crazy. Imposing pension contributions was very difficult to get approved. But the Supreme Court decided that the Constitution lacks an article to allow this. So I sent to the Congress a new amendment proposal that would introduce in the Constitution the possibility to charge retired people.

I will win this battle. This will cost my popularity, of course, because it's not popular to be against these kinds of privileges.

Part of the media claims that reform will affect the poor. This is not about the poor: This is about judges of the Supreme Court, generals, professionals in some universities. They are entitled to receive maybe 20,000 reals [approximately $10,000] per month.

Continued
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