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| THE LAST STAND | |
 November 24, 1998 
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The IMF put together a $41.5 billion deal to help Brazil defend its economy against the spreading global economic crisis. Asia's and Russia's economies have already been crippled. Will the IMF plan work this time? Return to this forum's introduction.
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Marcus Anthony Baptista of Natick, MA, asks: Assuming unemployment will begin to rise even more so, how many years will it take for the economy in Brazil to begin to pick up again in order for there to be less immigration to the U.S. as an option for improved living conditions? Steven
Radelet of the Harvard Institute for International Development responds: The IMF's program in Brazil assumes that the economy will shrink by 1% in 1999 and then rebound to grow 3-4% in the following two years. This seems very optimistic, considering the program's focus on defending the exchange rate with high interest rates and sharp budget cuts. It is worth noting that at every stage of the crisis in Asia, the IMF dramatically overestimated the potential for a rapid return to growth. For example, in Korea, the IMF initially estimated that growth in 1998 would be 2.5%, whereas the actual turnout will be closer to -7%. In Mexico, following the peso crisis of late 1994, output fell 7% in 1995 before rebounding in 1996, and Mexico was buoyed by $23 billion in loans from the international community (not promises for funds, as in most of Asia, but actual delivery of funds early in the program) and a robust U.S. economy next door. Brazil may avoid a deep recession under the current program, but only through the support of generous international loans. A more growth-oriented approach that included lower interest rates, a modest exchange rate depreciation, and debt restructuring would not only moderate the immediate recession, but would help lay a stronger foundation for more sustained economic growth after the crisis passes. Improving living conditions sufficiently to slow immigration flows is a much longer term process, as with Mexico. Brazil has made remarkable progress during the last decade by implementing wide-ranging reforms including the liberalization of foreign trade and investment rules, privatization of state-owned enterprises, and a strengthening of the financial sector. With appropriate macroeconomic and exchange rate policies, careful strengthening of financial systems, and a focus on integrating its manufacturing firms with the global trading system, Brazil has the potential to grow rapidly during the next decade and raise standards of living for a broader segment of the population. Mary
Bush, former IMF executive board member, responds: For several years, Brazil has been engaged in a program of fairly aggressively opening its markets to foreign trade, privatizing large enterprises and bringing down inflation. It has also been benefiting from large flows of foreign direct investment; it increased from approximately $2 billion in 1994 to more than $20 billion in 1998. Brazil is also undertaking some simplification of its tax system specifically the VAT. On the other hand, this new adjustment program increases the corporate turnover tax. That could be a problem for growth and I believe should be reconsidered. Although unemployment has risen, the breadth of adjustments just mentioned, coupled with reduction of public sector spending and deficits, should give a boost to the economy sooner rather than later. In view of these factors, I do not believe that levels of immigration to the United States will be a problem.
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