The Economist: Sachs to the IMF: Get Real

By Sachs, Jeffrey | Global Finance, September 1999 | Go to article overview

The Economist: Sachs to the IMF: Get Real


Sachs, Jeffrey, Global Finance


Harvard economist Jeffrey Sachs explains how the International Monetary Fund's good intentions encouraged Brazil to "chase its own tail." Second of a two-part series excerpted from The Milken Institute Review. BY JEFFREY SACHS

In October 1997 Brazil first faced the intense speculation emanating from the Asian panic. It raised interest rates to more than 50% and announced plans to slash the budget deficit from around 4.5% of GDP to 2.5%. Growth was forecast 3% in 1998. But how that was to be achieved in the teeth of astronomical interest rates, sharp budget cuts, and an unchanged exchange rate policy was never explained.

Brazilian growth evaporated in 1998; in fact, output fell by 1.5% in per capita terms. The budget deficit went up to 8% of GDP-not down, as had been programmed-and for laughably predictable reasons: High interest rates designed to defend the exchange rate fed directly into the costs of servicing the government debt. And since government debt in Brazil is very short term (who would trust it, long term?), a change in interest rates becomes embedded in nearly the entire debt within months. By 1998 interest payments on internal debt approached 10% of GDP And unlike the case in 1994, these interest payments were not merely a reflection of inflation; they were "real."

The IMF's own policy recommendation of high interest rates was thus, ironically, responsible for much of the rise in the budget deficit. In 1998 Brazil was chasing its own tail-and all with enthusiastic support from Washington.

Austerity in 1997 pushed Brazil into recession. In 1998 it pushed the country over the cliff. When Russia defaulted on its debts on August 17 1998 (its IMF program collapsing within four weeks of signing), Brazil was hit again with a new wave of speculation.

Again the IMF pointed to the budget deficit as the culprit and again urged Brazil to defend its exchange rate through a policy of high interest rates. As of August 1998 Brazil's central bank still had about $70 billion of foreign exchange reserves. But after several months of speculative attack, during which foreign investors cashed in their credit lines and Brazilian investors moved their money to offshore accounts, the central bank had lost approximately $45 billion of its reserves.

In mid-January the Brazilian government threw in the towel, abandoning the defense of the currency and allowing it to float. By mid-March 1999 the real had lost approximately 36% of its value vis-- vis the dollar.

The low level of reserves ($25 billion) has left Brazil in a fragile position. Investors might still panic this year, especially in the face of the huge gap between short-term debts (perhaps $50-60 billion in foreign short-term debts and as much as $250 billion worth of internal shortterm debts) and meager liquid assets. Even if investors do not cut and run, they will certainly demand interest rate premiums for holding Brazilian securities. And that will lead to a deeper recession than would have been likely a few months ago, when reserves were still around $70 billion.

Washington argued for currency stability to the bitter end, even throwing Brazil a $41 billion lifeline in November 1998. The terms of the agreement were pure IMF boilerplate: Use IMF money to defend the currency; raise interest rates further; commit to huge fiscal cuts. This program lasted just eight weeks before it collapsed. Like the Russian plan the previous summer, it did nothing to restore market confidence, to ease the hemorrhaging of reserves, or to bolster the internal political equilibrium in favor of the chosen economic policies.

When the real collapsed in January 1999, the Brazilian team rushed back to Washington for "further instructions" from the IME They got the same package-high interest rates and budget cuts-but without a fixed exchange rate. This time, however, even the IMF acknowledged that the Brazilian economy was in collapse. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Economist: Sachs to the IMF: Get Real
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.