BRAZIL: PROSPECTS FOR THE REGIME

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00126R001401820004-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 22, 2016
• Document Release Date: July 20, 2010
• Sequence Number: 4
• Publication Date: April 25, 1984
• Content Type: NIE

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Director of Secret
-~'- Central
Intelligence
Brazil: Prospects
for the Regime
National Intelligence Estimate
MASTER Fill COPY
DO NOT GIVE OUT
OR MARK ON j
Secret
NIE 93-84
25 April 1984
copy 499
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N I E 93-84
BRAZIL: PROSPECTS
FOR THE REGIME
Information available as of 25 April 1984
was used in the preparation of this Estimate.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS,
EXCEPT AS NOTED IN THE TEXT.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, the Federal Bureau of Investigation, and the intelligence organizations of the
Departments of State and the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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CONTENTS
SCOPE NOTE ............................................................................................................ v
KEY JUDGMENTS .................................................................................................... 1
DISCUSSION .............................................................................................................. 9
Two Decades of Change ........................................................................................ 9
President Figueiredo's Principal Underlying Problems ....................................... 10
Declining Resources ............................................................................................ 10
Weak Leadership ................................................................................................ 10
A Too-Powerful Bureaucracy ............................................................................ 11
The Immediate Challenges .................................................................................... 11
The Current Political Dynamic ............................................................................. 13
The Ruling Elite ................................................................................................. 13
The Political Class .............................................................................................. 14
The Military ........................................................................................................ 14
The Bystanders .................................................................................................... 15
The Coming Year ................................................................................................... 15
Economic Challenges and Uncertainties ........................................................... 16
The Presidential Succession ............................................................................... 21
Impact of Economic Developments on the Presidential Race ........................ 24
Outlook and Implications ....................................................................................... 25
For Brazil ............................................................................................................ 25
For US-Brazilian Relations ................................................................................. 27
ANNEX A: Figueiredo's Problems in More Detail ................................................. 29
ANNEX B: The Political Actors ...............................................................................
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SCOPE NOTE
Brazil-as well as efforts to understand what may happen there-
is probably gripped by greater uncertainty today than at any other time
since the military took power 20 years ago. Most observers expected that
some uncertainty would characterize the period during which the
Brazilian military transferred control over the political process back to
civilians. No one realized, however, that this would happen at the same
time that Brazil was in the throes of its greatest economic crisis since the
1930s.
As a result, the Brazilian Government confronts a variety of forces
that have placed it under tremendous stress. This Estimate measures
and delineates this stress, assesses what chances the government has for
coping successfully with it, estimates what kinds of outcomes may occur
over the next year or so, and indicates what these outcomes may mean
for Brazil and US-Brazilian relations.
The US stake in whether Brazil makes it successfully through these
twin challenges is high. On the economic side, how well Brazil manages
its foreign debt-the largest among developing countries, at $93 billion
by yearend 1983-has consequences for the well-being of the interna-
tional financial system. The direct economic implications for the United
States are also large, because US banks hold nearly one-fourth of this
debt, and US exports to this extremely important market are in sharp
decline. On the political side, it would be a major positive gain for the
United States and other democratic nations if the sixth most populous
country in the world successfully completed the next-to-last stage in the
transition to an open, democratic regime, and a major loss if Brazil
returned to repressive military rule or encountered severe political
instabilityF_~
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KEY JUDGMENTS
The Brazilian Government is faced with two primary challenges
over the next year: managing an ailing economy and holding elections
for the first civilian president in two decades. In this last year of
transition from military to civilian rule, attention will be focused on
three central issues:
- The economic prognosis and specifically whether Brazil makes
enough progress toward its IMF-mandated retrenchment goals
to be eligible for sufficient external funds to get through the
next year.
- What rules will govern the presidential election, what are the
chances of the most likely candidates, and whether it makes
much difference as to which candidate wins.
- The extent to which economic developments are likely to affect
politics-specifically, what are the prospects for major political
instability, including cancellation of elections, reinstitution of
military rule, or massive social protests.
Prospects for the Economy
After 16 years of growth the Brazilian economy has shrunk about
8.5 percent in the last three years. Inflation reached over 200 percent in
1983, and an estimated 25 percent of the labor force had no jobs or were
only marginally employed. Brazil's international financial relations are
also in difficult straits. By the end of 1983, Brazil had accumulated $2.6
billion in interest payment arrearages and only narrowly avoided
having its US bank loans classified as "nonperforming."
Because of the Figueiredo administration's shortcomings, few
Brazilians expect it to accomplish much in its remaining year in office.
There is virtually no expectation, for example, that the government will
succeed in restoring growth. At the most, hopes seem to be centered
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around the possibility that inflation will drop somewhat and the rate of
decline of the economy will slow from the approximately 5-percent
drop last year. The international financial community's expectations of
the government's performance are not much higher.
we agree, that
Brazil will need new money-perhaps on the order of $2 billion more-
before the year is over. An alternative view holds that Brazil will not
have to secure additional funding for 1984. The holder of this view
believes, however, that Brazil will have to return to the market late in
the year to arrange bank financing for 1985 on the order of $3-4
billion.'
In our judgment, the fact that these expectations are modest is a
good sign that Brazil will be able to maintain political stability at home
and obtain adequate financial support from abroad. It means that there
is a reasonable chance that most groups within Brazil will continue to
cooperate with the austerity program, although very grudgingly, and
that foreign financial circles will continue to fund Brazil, even if very
reluctantly. For both audiences, decisions about whether to continue to
support the Brazilian Government's economic program will revolve
more around perceived progress toward meeting 1984 economic goals
than on actually attaining mandated or promised goals. For domestic
groups, the primary economic indicator of how well Brazil is doing will
probably be monthly inflation figures. If they drop to single-digit
figures and remain there, we believe there will be a widespread
perception that Brazil has turned the corner economically and that the
future will be better, even if not in 1984.
For the foreign financial community, the main focus is whether
Brazil can earn enough foreign exchange to pay at least the interest on
its loans in 1984. The key that will be watched here is monthly figures
on the trade surplus. If, in 1984, Brazil can significantly increase its ex-
ports (the target is by 14 percent over 1983) and can hold imports almost
level, then the IMF and foreign bankers are likely to believe that
Brazil's economy can eventually grow enough to enable it to manage its
foreign borrowing needs successfully. This assumes that no adve~se
external events occur, such as a rise in interest rates or the price of oil.
We believe the chances are reasonably good that Brazil will make
significant progress toward meeting its 1984 economic goals, although it
will probably not fully achieve any of them. Inflation, for example, is
likely to be at least 150 percent-not down to the recently revised
government target of 130 percent but a substantial enough improve-
ment to persuade Brazilians to stick with the austerity program.
' The holder of this view is the Special Assistant to the Secretary for National Security, Department
of the Treasury
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Similarly, Brazil is likely to run a healthy enough trade surplus during
the year to hold the current account deficit to close to the 1983 deficit
of about $6 billion, somewhat higher than the $5.3 billion target set by
the government. Prospects for exports are continuing to improve
because of the foreign economic recovery and because the agricultural
harvest, especially for soybeans (the main farm export), will probably be
much better than in 1983. Still, growing foreign protectionism and
sluggish commodity prices will make a 14-percent export growth target
not easy to achieve. Whether Brazil can fully reach its target for imports
by not permitting them to expand much beyond last year's level is also
doubtful. Even with a good harvest there will be increased pressure
during an election year to maintain an adequate food supply and, since
Brazilian exports have a relatively high import content, more imports
than planned may be necessary to prevent industrial material shortages.
Given the uncertainties surrounding these projections
b
li
, we
e
eve
there is a small but not insignificant chance that Brazil's economic
performance will be considerably worse than outlined above. In such
case, a confrontation would almost certainly occur between Brazil and
the IMF, with the IMF possibly demanding additional austerity meas-
ures before it would help to reschedule mounting debt or approve new
loans. In this circumstance, the Figueiredo administration might at-
tempt simultaneously to placate international bankers by trying to
tighten fiscal and monetary austerity and lessen domestic political
opposition by replacing the government's economic team. Nationalistic
sentiments would be so aroused by a new collision with the IMF and the
political atmosphere so heated up by the presidential election campaign,
however, that it is doubtful that additional austerity measures, such as
new wage restraints, would be accepted by the Brazilian business and
political elites.
Even under these circumstances, we doubt that the government
would formally break with the IMF and declare a moratorium on debt
payment, although such a situation might have come into de facto
existence as interest arrearages mounted. The most likely outcome of
this situation, in our view, is that the Brazilian Government and the in-
ternational financial community would use the coming change of
administration to postpone resolution of the issues dividing them and
that some sort of temporary rescue package, possibly involving the
direct intervention of major Western governments, would be put
together to prevent Brazil's US loans from being placed in a "nonper-
The Presidential Succession
The Brazilian Constitution mandates the indirect election of the
president. Despite widespread clamor by the public and by opposition
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political parties for direct elections, we doubt that the Brazilian
Congress will muster the two-thirds vote necessary to change these
electoral rules substantially. We believe this will not happen because the
military appears to be unalterably opposed to opening up the political
system that far at this point. It fears in particular that direct elections
would permit a leftist politician, such as Leonel Brizola (now Governor
of Rio de Janeiro), to become president. We believe that the public and
political opposition will be disappointed if direct elections are rejected,
but most will continue to concur in the indirect procedure as an
acceptable next step in restoring civilian rule.
The chances are good, therefore, that the next president will be
chosen indirectly by an electoral college. As a consequence, however, of
Figueiredo's weak leadership and the insistence by the progovernment
Social Democratic Party (PDS) members that they will make their own
decision, Figueiredo has lost the power to impose his successor. With an
overall majority in the electoral college, the PDS will retain the inside
track for selecting the president if it can unify behind a single candidate
during its September 1984 nominating convention.
There is some doubt, however, that the P can achieve the
necessary degree of unity actually to select a winning candidate. Three
candidates have announced for the PDS nomination. The most favored,
at this point, appears to be Paulo Maluf, an aggressive PDS federal
deputy and successful businessman from Sao Paulo. Maluf is disliked by
President Figueiredo, in part because he did not wait for the President's
nod before he began campaigning, and Figueiredo so far has refused to
support him
The second candidate is Interior Minister Mario Andreazza, a
retired colonel. Andreazza is the preferred choice of Figueiredo, an old
comrade-in-arms, and he has support from important PDS political
bosses and the head of the National Intelligence Service. Nonetheless,
Figueiredo has not come out publicly in his favor, possibly because he
doubts Andreazza can win, because his image as a throwback to the
worst of old-fashioned politics harms him among government support-
ers, including those within the military.
Vice President Aureliano Chaves has also recently launched his
candidacy for the PDS nomination. He is respected as a competent, if
somewhat colorless, administrator and is generally liked in military,
government, and business circles for the effective performance he
turned in as Acting President on the two occasions when Figueiredo was
ill. He is perceived as the most honest of the candidates, which makes
him popular among the general public but does not help him with PDS
party bosses. He has also gained in popularity as the only candidate who
supports a change to direct elections
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If the opposition political parties do not succeed in their drive for
direct elections, they probably will attempt to take advantage of
President Figueiredo's unhappiness with the struggle for power going on
in the PDS to persuade him to support a "consensus" candidate for the
presidency. The major possibility at present for such a consensus
candidate is the Governor of Minas Gerais, Tancredo Neves. Neves
leads the moderate wing of the major opposition party and is widely re-
spected in all the places that count, including the military. A second
possible consensus candidate is Vice President Chaves, if he is denied
the PDS nomination and a legal stratagem can be found to permit his
nomination by an opposition party.
With respect to the way in which presidential politics will unfold
in the remainder of 1984, however, it probably will make little
difference which of the possible candidates are actually nominated by
their parties. The positions of all the announced candidates or likely
winners are very similar. Virtually all of them, for example, are
stressing that Brazil needs to renegotiate its foreign debt on easier terms
if economic recovery is ever to happen. None of them is proposing, or is
likely to propose, permanently breaking with the IMF, although if
economic circumstances worsened considerably, all of them might call
for a temporary and conditional moratorium on debt repayment if only
as a negotiating tactic. Any candidate with a serious chance to win is
likely to be relatively restrained in his criticism of the United States,
even if relations with the IMF become difficult, because they would all
probably perceive the United States as the only actor that might be able
to put together a rescue package that would enable them to avoid
having to take office with Brazil ineligible to receive additional
international loans
The Likelihood of Significant Instability
In our estimation, social unrest is likely to rise during the next year,
but not to the level that it will threaten the government's ability to
maintain order or to conduct the presidential election. Virtually all
groups in Brazil believe they have a significant stake in seeing the
election take place and a civilian president take office; and the military
is eager to put down the burdens of ruling and return to essentially pro-
fessional pursuits. In addition, one main aspect of the political culture
that has continued even through three years of recession is a relatively
low level of political intensity among virtually all groups in the society.
In the past, this has led to a high level of tolerance for imperfect regime
performance and a tendency not to translate personal aspirations or
disappointments into organized political demands.
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An alternative view, while in agreement with the conclusions of
this Estimate, holds that it does not give due emphasis to the risk of seri-
ous political turmoil this year in Brazil. According to this view, the
growing public campaign for direct presidential elections has height-
ened the intransigence of both the military and the opposition, and it
could delay the negotiation of a political compromise. The holders of
this view note, moreover, that a further rise in international interest
rates may undermine Brazil's commitment to the IMF-mandated
austerity program. Failure to resolve the succession controversy soon,
coupled with the necessity of renegotiating the IMF rescue package,
could, in their view, lessen the chances for an orderly transition to
civilian rule.'
There are few signs that any of the groups in the society, including
politicians, business, labor, the middle class, or the left, are successfully
undertaking new kinds of organizational initiatives or developing a new
class of leaders that might threaten to overturn these values. The
extreme left, for example, which has always been small and weak,
seems at a complete loss as to how to take advantage of an ostensibly
fertile environment for growth of its influence. What little evidence
exists of the attitudes of Cuba and the USSR toward Brazil indicates that
neither sees much hope of stimulating significant popular agitation
against the Brazilian regime any time soon.
Some possibility for regime-threatening agitation may occur, how-
ever, during the tenure of Figueiredo's successor. If the economy does
not recover because another world economic slump or round of tight
money policies frustrates even Brazil's best readjustment efforts, or
domestic political pressures prevent the new president from bringing
about structural changes necessary for restoring growth, then the basic
values of the political culture could eventually change. A move to
shorten the scheduled six-year term of the new president and choose a
new one through direct, popular vote could delay major instability. But
if decisionmaking stalemate continued and political chaos ensued, the
chances would rise steadily for a return to military rule sooner or later.
Relations With the United States
US-Brazilian relations have steadily improved over the last two
years or so as Brazil has perceived that the United States is treating it as
a mature negotiating partner on a wide range of commercial, nuclear,
technological, military, and other matters. Moreover, Brazilian attitudes
at the popular and elite levels have remained generally favorable
C The holders of this view are the Deputy Director for Intelligence, Central Intelligence Agency; the
Director, National Security Agency; and the Assistant Director, Intelligence Division, Federal Bureau of
Investigation.
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toward the United States even as frictions with the IMF and interna-
tional bankers have developed, because the government and many in
the private sector perceive the US Government as essentially an ally
thus far in their attempts to negotiate debt relief, obtain new m,,,,7
and, despite many commercial frictions, expand exports.
We believe continuation of good, if sometimes frank, relations will
probably persist as long as Brazilians continue to believe that the US
Government is doing its best to contain protectionist pressures in the
United States, is encouraging the IMF and the banks to be as forthcom-
ing as possible, and is not perceived as attempting to undermine the in-
dependent foreign policy Brazil has been following. We believe oppor-
tunities to expand relations with the Brazilian armed forces will be
especially good if the United States can respond to their professional
needs after they reduce their political role
The one area where Brazilian-US relations could most likely
become more strained over the course of the next year or so involves
Brazil's continued need for IMF support, particularly if its economic
performance falls noticeably short of meeting IMF goals. Before and,
especially, after the election, there will probably be increased pressure
on the United States to support Brazilian requests for a major restructur-
ing of Brazil's debt. These pressures will become very insistent if Brazil
fails to recover economically because of events over which it has no con-
trol, such as increased oil prices, or a rise in US interest rates or
protectionism.
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Estado capital
Boundary representation is
not necessarily authoritative
0 250 500 Kilometers
0 250 500 Miles
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DISCUSSION
Two Decades of Change
1. Some 20 years after having deposed Brazil's last
civilian President, Joao Goulart, the Brazilian military
is in the process of voluntarily turning over power to a
new civilian president and largely removing itself
from direct involvement in politics. The modalities of
precisely how this will occur and the identity of the
next president are still uncertain, but the chances are
very good that a presidential election will take place as
scheduled in January 1985 and that the new chief
executive will take office two months later.
2. The society that the military will return to the
control of civilian politicians is far more developed
than the one it took charge of in March 1964. In the
early 1960s the country was still largely agrarian, and
per capita income was low. By 1980, however, per
capita income had multiplied more than 250 percent
to $1,650, and 50 percent of the population lived in
cities of more than 20,000, as compared with only
about 30 percent in 1960. Total energy consumption
doubled between 1966 and 1976. The labor force size
and structure also changed, increasing by 1.5 million
persons annually in the 1970s, as the rate of job
creation doubled from the 1960s. By 1980 almost 70
percent of the labor force was engaged in nonagricul-
tural activity, as compared with less than 50 percent in
1960.
3. Substantial gains in living standards and welfare
were achieved during this period by all economic
classes, although severe regional disparities continued
and the income gap between rich and poor grew. The
educational system was expanded rapidly, as reflected
in increased enrollment rates and reduced illiteracy.
Social security health programs were strengthened and
extended to over 90 percent of the urban and two-
thirds of the rural populations; the consequences are
evident most notably in declining infant mortality
rates. Considerable efforts were also expended on low-
cost housing programs for the poor and improved
provision of water, electrical, and sewerage services;
over 75 percent of urban households-including the
occupants of favelas (urban squatter slums)-now have
piped water and electricity
4. One particularly important aspect of this change
was the enormous expansion in the size and influence
of government throughout Brazil-especially the fed-
eral government. In 1982, for example, the financial
resources under the direct allocative control of the
federal government were equivalent to 46 percent of
the gross domestic product (GDP) of Brazil, a share of
the economy seldom exceeded by any public sector in
the world outside the centrally planned economies. A
large portion of these resources is directed into the
production of goods and services not only by govern-
ment-owned or -controlled firms but also by privately
owned firms through transfers to the private sector
through such means as subsidized credit. This has
given the government the lead role in shaping almost
all significant economic activity in Brazil in recent
years, including setting investment priorities, influenc-
ing sectoral growth, controlling prices and wages,
and-as a major employer of labor and purchaser of
goods-largely determining labor force composition.
5. During these two decades, Brazil has been a
remarkably stable society considering the stresses of
rapid modernization through which it has been pass-
ing. In part, this stability is attributable to the extraor-
dinary economic growth which took place from 1968
through 1980. Through this period, annual growth
dropped below 5 percent only once, and for a number
of years it exceeded 10 percent. As a consequence,
income disparities between the large number of poor
and the rest of society widened, but a more important
result was that all sectors of the population benefited
from the growth, sometimes spectacularly
6. The other major underpinning to stability has
been the military's success, at least until recently, in
creating a governing arrangement that has been large-
ly in harmony with the dominant aspects of Brazil's
political culture, in contrast with the populist ap-
proach of Goulart a generation ago. Many commenta-
tors have noted that the patterns of authority tradi-
tionally preferred by Brazilians-from institutions of
the family through that of the presidency-have been
basically patronal and hierarchical rather than plural-
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ist and democratic. This means that the military's
emphasis on governing through large bureaucratic
structures, while depoliticizing the middle class, labor,
students, peasants, and other mass elements, was essen-
tially congruent with the Brazilian experience of
looking to the bureaucracy as a more reliable source of
benefits and channel for grievances than to elected
officials and political parties. The military's success
until very recently in governing in this fashion was also
enhanced by another crucial aspect of the political
culture: the relatively low level of political intensity in
Brazil. This political passivity, which has varied his-
torical and cultural roots, expresses itself in several
useful ways for a modernizing military/bureaucratic
regime. It leads to a high level of tolerance for
imperfect regime performance, a tendency not to
translate personal aspirations into organized political
demands, and a remarkably easy capacity for co-
optation of potential opposition groups by those wield-
ing power.F__~
President Figueiredo's Principal Underlying
Problems
7. Both of the conditions that brought stability to
Brazil-rapid economic growth and trust in the bu-
reaucracy-have deteriorated sharply since President
Figueiredo took office in 1979. While many of the
causes of deteriorating stability predate his administra-
tion, the shortcomings of his government have exacer-
bated three weaknesses that are common to bureau-
cratic authoritarian regimes generally. The first is the
tendency for administrative rigidity to rise as the
bureaucracy ages and develops such a degree of
autonomy and self-interest that it increasingly fails to
respond in a timely way to changing societal needs.
The second is the strong dependence of this kind of
system on relatively sensitive and innovative leader-
ship. With so few countervailing powers or other self-
correcting mechanisms available in the society-as
might be the case if political parties and organized
interest groups were stronger-the top leadership must
be able accurately to sense changing needs and to meet
them. The third weakness is that the long-term legiti-
macy of such bureaucratic systems rests heavily on
their ability to generate a constantly expanding stream
of resources to provide the benefits-in the absence of
widespread political participation-on which ultimate
loyalty to the system frequently depends. The Figue-
iredo administration is in serious trouble on all three
fronts.
Declining Resources
8. For the last three years, Brazil has been in
recession. GDP has fallen some 8.5 percent since the
beginning of 1981, inflation has more than doubled
and is running at an annual rate of over 200 percent,
real wages have dropped, and an estimated 25 percent
of the labor force have no jobs or are marginally
employed. This economic shrinkage has sharply limit-
ed the resources available to the Figueiredo adminis-
tration and has been a major factor in undermining
public confidence in its ability to govern.
9. The reputation of the administration has also
been badly damaged by its decision to turn to the
International Monetary Fund in 1982 for help when it
essentially could no longer pay its mounting interna-
tional bills. For 25 years, Brazilian governments of all
political varieties had been consistent in denying that
Brazil would ever submit itself to the harsh conditions
imposed by the IMF for access to its money. Even 25X1
after loans from the IMF and commercial banks were
obtained, Brazil's international financial relations re-
mained very shaky throughout 1983. A crisis with US
banks, arising from the legal requirement to place
many of Brazil's US loans in a "nonperforming"
category when interest payments on them lagged more
than 90 days, was only narrowly avoided late in the
year by a revised stabilization agreement with the
IMF and negotiation of a new jumbo international
bank loan of $6.5 billion.' This secures a large part of
the external financing Brazil will need for 1984, but
complete disbursement of the money will require
further adherence to tough domestic austerity meas-
ures, which the Brazilian public will be increasingly
loath to accept if economic conditions-such as the
rate of inflation-do not soon show some signs of
improvement.
Weak Leadership
10. Fundamental doubts about the governing abili-
ty of the military-and especially of the technocrats
who make and implement Brazilian policy-began to
grow a year or so after President Figueiredo took
office. The first major blow to the Brazilians' confi-
dence in their leaders occurred when Minister of
Planning Delfim Netto was unable to use previously
' US banking regulations require loans to be placed in a "nonper-
forming" category when no interest has been paid for more than 90
days. This adversely affects a bank's earnings and makes it unlikely
that it will lend additional money to the debtor.F___1
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successful expansionist economic policies to cope with
the drop in growth brought about by the 1979/80 oil
price shock. These concerns were compounded by a
feud between two top presidential advisers, which led
to the resignation of General (Ret.) Golbery do Couto e
Silva in August 1981. Golbery was considered by the
public to be one of the strongest influences for eventu-
ally returning the government to civilian control.=
11. The most recent blow to government credibility
has been occasioned by President Figueiredo's seeming
lack of interest in governing, particularly since early
last year. He has failed to exercise leadership on most
of the difficult issues the country faces. On the
economic side, decisionmaking at the top and down
through the bureaucracy has degenerated into day-to-
day attempts to cope with immediate problems, and
the government's statements about the economy and
its program for coping with adversity are largely
disbelieved. On the political side, the President has
clearly lost control over his own political party and the
ability to impose his successor
A Too-Powerful Bureaucracy
12. Of the three central problems the Figueiredo
government faces, the one it is probably least responsi-
ble for is the public perception that the civil bureauc-
racy has developed such power and independence that
it is largely out of control. At the popular level, the
state enterprises in particular are seen as baronies, led
in many cases by retired military officers who have
gained vast wealth while heading these companies.
13. The autonomous behavior of the state enter-
prises does, in fact, complicate Brazil's efforts to
overcome its current economic difficulties. While they
were well suited to taking on the immense develop-
mental tasks that the government tackled in the days
of a rapidly expanding economy, they have been
largely unable to adapt to slow or declining growth.
Their deficits have been a major source of inflationary
pressure, their preferential access to credit has crowd-
ed out private enterprise, and their heavy foreign
borrowing has contributed substantially to Brazil's
indebtedness. Figueiredo has attempted to cut back
their role in the economy. But they are so well
entrenched that they have generally been able to
maintain their operations and personnel rosters, avoid
sharp reductions of their official investment budgets,
and protect their basic equities.
The Immediate Challenges
14. Very few people in Brazil expect the Figueiredo
government to accomplish very much in the year it
has left in office. There is little expectation that any
lameduck administration could undertake the policy
initiatives that would be necessary to attack the eco-
nomic, political, and social problems of the magnitude
Brazil faces. In addition, expectations of the Figueir-
edo government are greatly reduced because of its
perceived poor quality. Consequently, Brazilian elites
and masses give the impression that they would be
satisfied if the government restricted itself pri1'
to damage-limiting activities in all three sectors)
25X1
15. In the economic arena, for example, there is no
expectation that the government will succeed in re-
storing growth in the next year. At most, hopes seem to
be centered around the possibility that the rate of
inflation-which began to drop in November and
December 1983, rose again in January and February
1984, and dropped once more in March-can be
further reduced and that enough foreign exchange can
be obtained-through a combination of expanded
export earnings and, if necessary, new loans-that
imports will not shrink further. Both these goals will
require considerable activity on the part of the Fi-
gueiredo administration and are by no means certain
to be achieved, but they are seen as within the reach of
even a relatively weak government
16. Socially, the government is expected not to
permit a severe deterioration in law and order. Some
additional strikes, demonstrations, food-market loot-
ings, and even riots are thought likely. Crime in the
form of break-ins and robberies, which 'rose sharply in
the last year, is not expected to decline dramatically
either as long as there is no improvement. in the
economic situation. There is the expectation, however,
that the federal government will help provide enough
resources to the state governments and municipalities
to prevent any sudden, further deterioration in securi-
ty for the individual. There is virtually no belief that
the Figueiredo government will take measures to
reduce corruption, aid education or health services, or
otherwise improve social conditions for the middle
class or the poor.
17. There is one general expectation in the political
arena that seems to be held by all sectors of the
Brazilian public: that the government will continue to
do all it can to further the process of political liberal-
ization (abertura) so that a civilian president can take
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office in March 1985. In many respects, toleration of
the Figueiredo administration, with all its perceived
ineptitude, rests on the belief that the President is
committed to this goal.
18. There is considerable public interest in what
form the January presidential elections will take and
in the maneuvering that is taking place among the
political elites as they jockey to strengthen the position
of one candidate or another. However, while the
general public may prefer direct elections, it will
acquiesce in indirect elections as a reasonable next
stage in the political liberalization process. Significant
public alarm would probably occur only if Figueiredo
were seen to be backing away from his commitment to
liberalization, or if it appeared that he were losing
control over elements of his administration that might
favor continuation of military rule
19. In the immediate aftermath of successfully
completing negotiations with the IMF and commercial
banks for the $6.5 billion in new foreign loans that will
be disbursed to Brazil in the next few months, foreign
policy questions do not rank high on the government's
immediate action agenda, or in the perceptions of the
public. In fact, with the exception of foreign economic
policy, foreign policy issues are seldom the focus of
attention in Brazil, because foreign policy has been
based on a relatively broad and unchanging consensus,
because it has been perceived as clearly furthering
Brazil's basic interests, and because it has been carried
out in a generally skillful and nonconfrontational
manner. Moreover, neither Brazil's economic difficul-
ties nor the uncertainties involved in making the
transition to a civilian government are having any
immediate impact on its noneconomic foreign policy
goals. These include its efforts to maintain good
relations with Argentina and the countries of the
southern cone of Latin America generally; to guard
against the development of any security threat on its
borders (as it is doing in Suriname); to maintain good
relations with the Arab states (especially Iraq) that are
its main sources of oil; to avoid strong leadership
positions on North-South issues so as not to create
counterproductive bilateral tensions with any possible
source of markets, technology, or money; and, while
remaining clearly anti-Communist, to maintain as
wide an array as possible of good relations with
countries of varying ideological positions. F__1
20. Foreign economic policy, except for manage-
ment of the foreign debt, is also essentially uncontro-
versial. There are concerns among businessmen that
Brasilia not agree to cut back too quickly on export
subsidies and other government types of assistance that
help make Brazilian goods cost competitive in the
international market. And there also was unhappiness
with the way in which the central government took
control in 1983 of all foreign exchange transactions
(the decree was recently revoked), which made it
extremely difficult for many Brazilian businesses
whose goods have an import component to pay their
bills and obtain the needed foreign ingredients in a
timely fashion. These specific problems have been
compounded for both Brazilian and foreign business-
men by the seemingly erratic and inconsistent way the
Brazilian bureaucracy has interpreted and implement-
ed constantly changing rules and regulations as the
government has attempted to cope with the growing
economic crisis. Nonetheless, there is little fundamen-
tal opposition to the notion that the country's econom-
ic well-being depends significantly on Brazil's ability
to export, and that the primary function of foreign
economic policy is to obtain the necessary markets and
to facilitate sales.
21. Brasilia's approach to handling the country's
massive foreign debt is another matter, however.
Criticism has grown in the last year or so concerning
what is perceived as the unchecked arrogance and the
grandiosity of the technocrats who contracted the debt
over the years and, particularly, their stubborn refusal
to recognize when world economic conditions had
changed in a way which should have led to a more
modest Brazilian approach to financing growth
through foreign borrowing. There is also much grum-
bling about the way in which the Brazilian Govern-
ment economic team has negotiated with the IMF.
Brazilian private-sector businessmen, in particular,
believe that Delfim Netto and his associates have not
represented Brazil's interests well. While there is
broad agreement on the need for austerity and even
with some IMF objectives (such as cutting public-
sector spending), the team is criticized harshly for
accepting unrealistic targets (such as an earlier agree-
ment to attempt to lower the inflation rate to 50
percent in 1984) and for failing to make any signifi-
cant effort to restructure the entire foreign debt. The
apparent success of the government in securing the
new loan package from the IMF and commercial
banks has momentarily muted some of this criticism.
But distrust of the government is so pervasive it is
certain to rise to new heights if Brazil has to return to
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the international banking community to secure addi-
tional loans to make it through 1984. If that becomes
necessary, renewed criticism of the government's eco-
nomic team and its strategy is almost certain to arise
from the business community, the politicians, labor,
the middle class, and even some in the military and
among the technocratsF__-]
The Current Political Dynamic
22. Some of these groups were once part of the
coalition that has governed Brazil since the military
takeover in 1964. That coalition has changed in recent
years and months, however, as some partners have
dropped out and the balance of power among those
who remain has become much more complex. At
present, the number of groups involved directly and
actively in national-level politics is relatively limited.
Those most active now are a small ruling elite sur-
rounding the President and a small but expanding
number of ostensibly progovernment and opposition
civilian politicians. Most other groups, including the
bulk of the military, businessmen, and the middle
class, have become essentially political bystanders,
even when they are vocally opposed to the govern-
ment
The Ruling Elite
23. For most of the period since 1964, relations
among the groups that make up the ruling elite have
been fairly orderly, with power clearly centered in the
hands of the President and his closest advisers. In
recent years, however, these relationships have
changed quite sharply. Decisionmaking power, for
example, is much more fragmented. Technocrats man-
ning the ministries and the state enterprises now
represent, after 20 years of growth and accumulation
of resources, a separate power base, no longer directly
dependent on the military for their positions and
authority. The politicians, as an outcome of the gradu-
al transition back toward civilian rule, have also
acquired separate interests and an independent politi-
cal base now that they have popular constituencies to
represent and to answer to. At this stage in the political
transition process there is no center of gravity: the
military is withdrawing from direct involvement in
politics, the bureaucracy is strong enough to protect
itself from outside control but does not have the power
of initiative, and the politicians are powerful enough
to interfere with the wishes of the executive branch
but are not yet strong or well organized enough to
impose their authority
24. Normally, Brazilian presidents could exercise
sufficient leadership to cope with even this amount of
confusion if the President exercised the power avail-
this disarray within the ruling group, there is wide-
spread uncertainty about what kinds of policies the
administration will pursue, the vigor with which it will
enforce the laws and regulations it ostensibly supports,
and how it will cope with opposition to its programs.
25. This kind of political situation offers clear
incentives for bargaining, particularly between the
executive and legislative branches. One of the stron-
gest signs that the Brazilian political system will be
able to survive the current crises is that, as happened
with congressional passage of a restrictive wage law
demanded by the IMF and in an increasing number of
other areas, real negotiations between the executive
and the legislature have begun to occur. A collective
sigh of relief could be heard from the Brazilian public
and from most foreign observers when agreement on
the wage bill was finally reached, for example. There
had been widespread fear that either complete deci-
sionmaking paralysis would grip the policymaking
machinery if neither side would give in, or that the
government would be tempted to impose its will by
unconstitutional means, setting back abertura and
threatening a return to repressive government. Since
the Brazilian Congress and the major political parties
are led by political moderates and since the President
remains fundamentally committed to the restoration
of civilian political rule, the prospects that they will be
able to continue to resolve differences for the rest of
Figueiredo's term-unless the President seeks tougher
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new austerity measures-are relatively good. Nonethe-
less, considerable friction will almost certainly occur
during this process, and uncertainty over final out-
comes will remain high becomes both sides are inexpe-
rienced at this kind of bargaining and, in these
changing political circumstances, are not sure of their
respective strengths.
26. The prospects and influence of professional
politicians have revived strongly enough in the last
year or so to allow them to be thought of, after 20
years in the wilderness, as significant political actors.
Partly because they have been powerless for so long
and partly because they are riding a wave of tremen-
dous popular sentiment in favor of restoring civilian
rule, they are successfully demanding a larger role in
the political process. Some of their energies are con-
sumed by strong rhetoric focused on attacking the
government's economic team and the alleged disas-
trous effect its policies are having on the well-being of
the middle class and poor. The opposition parties have,
for example, passed a nonbinding resolution decrying
the IMF austerity program and advocating a break in
relations with the IMF. These activities, while they
contribute to the perception that the government is
beleaguered, do not seriously affect relations between
the administration and Congress.
27. In other matters, however, the politicians have
become a force with which the executive branch must
reckon, especially since Figueiredo cannot take the
support of the "progovernment" Social Democratic
Party (PDS) for granted. Although the five political
parties represented in the federal Chamber of Depu-
ties ostensibly divide between 235 members of the
PDS and 244 members of four opposition parties, this
distinction blurs in practice. The administration fre-
quently finds that it must negotiate at least as vigor-
ously with the leaders of its own party to achieve
passage of needed legislation as it does with leaders of
the opposition, because congressional members of all
political stripes have developed institutional loyalties
to the Congress that take priority over party differ-
ences when, in struggles with the executive branch,
they feel their prerogatives as legislators are being
ignored
28. Executive-congressional relations are further
complicated by the President's strong dislike for the
apparent preference of a majority of the PDS for the
presidential candidacy of Paulo Maluf, a PDS federal
deputy from Sao Paulo. Figueiredo's bitterness over
PDS support for Maluf has caused him to state that he
is no longer willing to oversee the choosing of a PDS
presidential candidate and that it might be appropri-
ate to engage in consultations with a wide range of
civilian groups, including members of the political
opposition, before a presidential nominee is selected.
This at least suggests to the PDS that he would be
willing to make a deal with the opposition political
parties to name someone not supported by the PDS as
a "consensus" presidential candidate, thereby taking
the power of presidential choice away from the PDS.
The Military
29. For most of the last two decades, military
officers, because of the perceived close link between
national security and national development, have gen-
erally believed their institutional interests were virtu-
ally identical with those of the government and that
their primary role was to maintain firm hierarchical
discipline in support of the President and his advisers.
In the last two years, however, senior officers have
become increasingly disturbed by the government's
lack of direction and, particularly, Figueiredo's failure
to provide leadership during this period of increasing
economic trouble and political uncertainty. They fear
that the military will be more and more blamed for
the country's problems, thereby further damaging its
reputation in the eyes of the public. Stimulated by
events in Argentina, they are also concerned with
rising popular reaction against corruption in govern-
ment, some of which is directed at those military
officials who hold office in the ministries and state
enterprises. This concern about corruption extends
down through the ranks, with some middle- and
junior-grade officers beginning to worry about the
effects on their careers of loss of public esteem for the
military.
30. The stress of being targets of public criticism is
creating some dissension within the military. Nonethe-
less, despite signs of internal division, the Brazilian
military high command remains loyal to Figueiredo,
and hierarchical discipline within the ranks is strong.
Unlike in earlier years, there are virtually no "hard-
line" officers left in the higher ranks around whom
disgruntled officers can rally. Virtually all officers
continue to support further political liberalization and
a return to civilian rule, because they see that avenue
as the only way the military can regain its professional
orientation and its historically good reputation.
31. Some top officers are concerned that, after the
military leaves power, the civilians might be tempted
to examine "human rights" violations during the two
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decades of military rule, as is happening in Argentina.
There is also widespread determination that the left, in
the person, for example, of former "subversive"
Leonel Brizola, now Governor of Rio de Janeiro, not
be permitted to run for president.
sion of aborting the abertura process, however, be-
cause military officers generally believe that they will
retain enough influence even after they have returned
to the barracks to prevent these things from occurring.
The Bystanders
32. Brazilian businessmen are massively unhappy
with the Figueiredo administration. Antiadministra-
tion feelings, already high because of business percep-
tions of inept government performance, have been
exacerbated by businessmen's beliefs that Planning
Minister Delfim has failed to demand or at least to
negotiate strenuously for more lenient conditions on
IMF and commercial bank loans and, in particular,
that Delfim has treated the business community in a
cavalier way. They believe, for example, that the costs
of austerity have been placed much more heavily on
the private sector than on the many businesses run by
the government and that even modest growth rates
cannot be restored until spending by state enterprises
is brought under control. They also believe Brazil's
foreign debt mnst he restructured if growth is to
its own members as possible substitutes for the current
economic team; nor has it tried to unite behind a
presidential candidate sympathetic to private-sector
interests.
level politics
34. Most other sectors of the Brazilian public are
even less politically active than the business communi-
ty, and there are few signs that any of the sectors are
undertaking the kind of organizational initiatives or
producing the leaders that might bring about such
activity. Organized labor, the middle class, and even
what little exists of an extreme left (see inset on next
page ) all seem to be concentrating on finding ways to
lose as little as they can in the present difficult times
rather than seeking ways for an immediate reversal of
present economic and political circumstances. Even
the Catholic Church, which three years ago or so was
developing grassroots community organizations that
might have some political potential, now seems to be
concentrating on encouraging self-help projects among
the poor and longer term educational programs with
labor that have little immediate relevance to national-
35. There is one general sentiment that all sectors
appear to share. That is a strong desire to return to a
fully open, competitive political system headed by a
directly elected civilian president. While deeply dis-
turbed by the economic sacrifices that are being
visited upon the middle class and the poor, and
alarmed by the drift in government and the national-
level leadership vacuum they perceive, most people
believe that Figueiredo and his government remain
committed to continuing the abertura process. Many
express doubt that the country can generate the kind
of sustained effort that will be necessary to turn
around the economic situation until there is a directly
elected president who will have the political clout to
rein in special interests-particularly what they claim
is a bloated and unresponsive public bureaucracy.
Nonetheless, indirect elections for president are an
acceptable way station as long as momentum toward
eventual direct elections does not come to a halt.
33. Despite the intensity of their opposition to the
government, however, businessmen have engaged in
relatively little political activity beyond rhetoric. The
influential Sao Paulo State Federation of Industries,
for example, has not developed its own comprehensive
program for combating the recession or boosted any of
The Coming Year
36. As Brazil enters the last year before its sched-
uled presidential election, there is a rising level of
uncertainty about how the economic situation and its
political consequences, on the one hand, and the
presidential succession issue, on the other, will resolve
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The extreme left in Brazil is remarkably small and
weak considering the fertile ground for its activities
that might be thought to exist because of widespread
and growing economic discontent. Both the middle
class and the poor, despite their frustrations, remain
extremely difficult to organize for any purposes, and
they show no signs of being attracted by leftist causes
or values
Even if the poor and the disappointed middle class
were more susceptible to leftist appeals, the radical left
in Brazil is not in a position to take advantage of
growing economic and social discontent. It suffers from
three main problems:
- The government's program of political liberaliza-
tion has taken away the antiauthoritarian issue on
which it might have been most vulnerable.
- State dominance over the Brazilian economy is so
extensive that there is little room on the left to
agitate for greater socialist control.
- Radical leftist groups are so racked with internal
dissent and penetrated by government security
and intelligence organizations that it would be
very difficult for any of them to pose a serious
threat
The largest of the extreme leftist groups, the Moscow-
line Brazilian Communist Party (PCB), probably has
fewer than 10,000 members and considerably fewer
activists. It is striving so hard for legalization (a very
unlikely prospect) that it has become a force for
moderation, cautioning the left against general strikes,
student protests, or civil disturbances
Other groups on the extreme left are even weaker,
generally having only a few hundred members. Some
have attempted to exploit street riots and foodstore
lootings, but none has the capability to organize them. A
few of them have displayed banners at large public
gatherings organized to support direct elections, but the
organizers have generally been careful to force them to
the fringes of the crowds in order not to provoke a
government reaction
Active foreign involvement with the extreme left in
Brazil appears to be minimal. What little evidence
exists of the attitudes of Cuba and the USSR toward
Brazil indicates, for example, that neither government
believes there is much hope of stimulating significant
popular agitation against the Brazilian regime any time
soon
themselves. On the economic/ political side the
major short-term questions are:
- How likely is it that Brazil will make consistent
enough progress toward its IMF-mandated re-
trenchment goals to persuade the banks to dis-
burse the entire $6.5 billion new loan package
completely and on time?
- In the absence of sufficient progress or in the
case that new loans are needed from the interna-
tional community to enable Brazil to get through
1984, what additional austerity measures might
be required? To what degree are pressures for a
unilateral moratorium on payment of the debt
likely to grow?
- What economic signs would persuade Brazilian
businessmen and the public that enough progress
was being made toward stabilization to make the
government's austerity program worth continu-
ing to tolerate and accept sacrifices for? Are
there conditions under which business, other
elites, and the public would accept additional
sacrifices?
- Does the government have sufficient political
clout or maneuvering room to maintain compli-
ance with its stabilization program or to gain
acceptance of new austerity measures?
- What happens if it does not?
Economic Challenges and Uncertainties
37. Entering the Critical Phase. Brazilians may
have passed through something of a watershed in
November and December of last year when glimmers
appeared that the worst of their economic downturn
might be behind them. The rates of inflation for
November and December (8.4 and 7.6 percent, respec-
tively) dropped from previous months, a target of $6
billion in trade surplus for the year was slightly
exceeded, agreement on the new jumbo loan was
reached, and a growing number of businessmen (espe-
cially in Sao Paulo) acknowledged that the recession
had caused them to become efficient enough to begin
to make a profit (or at least to stop losing money).
Clearly, these are very fragile signs of a turnaround.
They could prove to be momentary blips in a contin-
ued deepening recession if no real progress is made on
the fundamental causes of the economic contraction,
such as the size of the public deficit, or if adverse
external events occur, such as a rise in oil prices or
international interest rates. Nonetheless, these signs
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Brazil: Economic Indicators, 1975-84
Real GDP Growth
Consumer Price Growth
December to December
2
150 4
0
100 3
2
2
50
-4
1
Money Supply Growth
December to December
1975-79 80 81 82 83b 84c ' 1975-79 80
a Excludes inflation adjustments to value of outstanding public debt.
b Estimated.
c Projected.
Confidential
have had a positive psychological impact in a country
where buoyant optimism about the future has been an
important underpinning of past economic growth and
political stability. (See charts of economic indicators.)
ahead. These measures, which include ending interest
rate subsidies for agriculture and all exports and
further cutting state enterprise investment, are de-
signed in part to reassure foreign investors and debt
holders that Brazil will pursue austerity in 1984 with 25X1
38. These breaks in the gloom, combined with the at least as much vigor as it did in the last half of 1983.
holiday spirit and congressional recess that accompany They are also a signal to the Brazilian public that the
the Christmas-through-Carnival period, led to a three- government intends to continue to move forcefully to
month respite in public and congressional concentra- make structural adjustments in the economy despite
tion on how bad things are economically and, cone- the sacrifices these adjustments call for. 25X1
quently, to a lessening of immediate pressure on the 39. The real test of the government's commitment
government. During this period the government an- to continued austerity and, particularly, its ability to
nounced a number of budgetary steps for 1984 that manage the stabilization program successfully will
aim at lowering government expenditures in the year probably begin sometime early in the second quarter
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of 1984. By that point, presidential succession politics
will have heated up, and it will become more apparent
how much of an issue presidential candidates will
make of the government's handling of the economy
and how much new resistance there will be in Con-
gress and among important elites to holding firm on
austerity
40. By the beginning of the second quarter of 1984,
enough evidence will also have accumulated to begin
to draw conclusions about how closely Brazil is con-
forming to the economic targets to which it has
committed itself for 1984. Some of these targets were
established as part of the last IMF agreement and will
be used as benchmarks for periodic release throughout
1984 of a little less than'half of the $6.5 billion jumbo
loan. The three major IMF-imposed targets are:
- Reducing the expansion of the money supply and
the monetary base from nearly 100 percent in
1983 to only 50 percent in 1984.
- Cutting the public-sector borrowing requirement
from 18.6 percent of GDP in 1983 to 11 percent
in 1984.
- Devaluing the cruzeiro throughout 1984 at a rate
at least as great as percentage increases in Brazil-
ian inflationF___1
41. A number of other targets are self-imposed
rather than formally part of the Brazil-IMF accord.
Nonetheless, they are at least as important as the IMF-
imposed goals since they are more visible and will
probably be used by the Brazilian public and by
foreign observers as the handiest marks for judging the
degree of success of the austerity program. In particu-
lar, the government's targets of holding the rate of
inflation to 130 percent in 1984 and restraining the
current account deficit to $5.3 billion 2 will be
watched closely.
42. All of the goals-both those that are part of the
IMF agreement and those that are less formal-are
extremely ambitious, and Brazil would be in deep
trouble if there were serious expectations that the
country would be cut off from foreign loans unless
they were precisely reached. We believe, however,
that judgments both within Brazil-as to whether to
continue to cooperate, even though grudgingly, with
the austerity program-and in foreign financial cir-
cles-as to whether to renegotiate overdue debt or to
their current account balance.
loan new money, no matter how reluctantly-will turn
more on perceived progress toward meeting the tar-
gets than on actually attaining them
43. Many of the factors that will determine how
close Brazil will come to meeting its adjustment goals
will be seriously affected by external developments
not under Brazil's control. This is particularly true of
the effort to reduce the current account deficit to $5.3
billion, which turns largely on Brazil's ability to attain
a trade surplus of over $9 billion in 1984 by raising
exports at least 14 percent from last year while holding
the import bill to about the same level as in 1983.
Generating this kind of trade balance depends in part
on how aggressively Brazil markets its products, such
as military goods, and how successful it is in arranging
additional countertrade exchanges, such as the arms-
for-oil deals it has with Iraq and Libya. But it depends
probably even more on how open foreign markets
remain to growth in Brazilian industrial products, such
as semifinished steel, and commercial goods, such as
shoes and textiles. Another factor over which the
Brazilians have little influence will be the prices they
will receive for such key agricultural exports as soy-
beans, orange juice, coffee, and sugar. On the import
side, it is essential that Brazil try to trim $1-1.5 billion
from its oil import bill in order to divert that money to
buy other imports for replenishing low stocks of
critical raw materials and intermediate goods, many of
which are used for the production of exports. This will
depend in part on Brazil's ability to increase rapidly
rising domestic oil production from last year's average
of 337,000 barrels per day to a yearend target of
500,000 b/d. But it is equally crucial that world crude
oil prices, over which Brazil has no control, remain
steady, because every $1 increase in the price of oil
adds $250 million annually to Brazil's import bill.
44. At the moment, prospects for achieving the
export target of $25 billion look uncertain, although
exports will almost certainly grow from last year. A
sharp reduction in petroleum imports and a strong
surge in exports of finished and semifinished goods did
combine to yield record trade surpluses in January,
February, and March, but protectionist forces in the
United States and Western Europe seem to be grow-
ing. In addition, after a sharp decline in agricultural
production in 1983 because of droughts and floods,
harvest prospects for 1984 are greatly improved. The
possibility that the soybean crop will be close to record
proportions is especially important because the Brazil-
ians are counting on that one commodity alone (in
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which they compete with the United States to be the
world's leading exporter) to produce some $3.5 billion
in foreign exchange earnings.3 Reaching this goal
depends at least as much on price as on quantity,
however, and here the indicators are not as good. As of
late January, beans that had sold for $360 a ton last
September were getting only $280 a ton. This could
drop earnings from soybeans to $2.7-2.8 billion. Soy-
beans will enter the world market in April, pointing
again to the second quarter of 1984 as a critical time
for the Brazilian economy.
45. With respect to that part of the economic
picture that is much more under Brazilian Govern-
ment control-especially effective management of
programs to achieve reduction of the public-sector
deficit, cut the money supply, effectively devalue the
cruzeiro to maintain export competitiveness, and re-
strain overall the domestic forces that feed inflation-
we expect the government to turn in a mixed perform-
ance. Very few people either in Brazil or abroad doubt
the Figueiredo administration's commitment to pursu-
ing austerity-and that is an important accomplish-
ment that will work in the government's favor with
foreign lenders. Nonetheless, there is considerable
doubt about its ability to carry out effectively the
many useful steps-such as reducing state enterprise
spending and suppressing wage increases-that it has
initiated to stabilize the economy. Moreover, normal
slippage due to government inefficiency and suscepti-
bility to pleading by special interest groups will proba-
bly increase because of the efforts of various parts of
the government to provide an advantage to the politi-
cal candidates they favor as presidential politics inten-
sify. In addition, if some of the austerity measures
really succeed-especially reducing the budgets of
state enterprises and ministries-they, at least at first,
will have a further recessionary impact on the private
sector because its biggest customer for goods and
services is the public sector. To avoid alienating the
private sector entirely, the government may be tempt-
ed to compensate by loosening somewhat the squeeze
on credit, prices, availability of foreign exchange, and
imports
46. As a consequence of this slippage, we doubt
Brazil can cut inflation to less than 150 percent.
Higher-than-projected inflation, in turn, will further
hinder prospects for achieving the public-sector bor-
s Soybeans and soybean products are Brazil's most important
agricultural export. Coffee, the agriculture export commonly associ-
ated with the country, ranked second in 1983.
rowing drop required by the IMF agreement. In
addition, we doubt that Brazil can hold the current
account deficit to $5.3 billion, although we believe it
will probably not significantly exceed last year's defi-
cit of $6.2 billion. Our major doubts here involve
whether Brazil can achieve fully:
- The level of agricultural exports planned in view
of the need to maintain adequate domestic sup-
plies during a year of political ferment.
- The minimal expansion forecast for imports in
view of possible bottlenecks for production of
exports that could result from industrial material
shortages.
Overall, we believe the most likely economic growth
scenario for Brazil in 1984 is a decline of 2 to 3
percent, better than the drop of approximately 5
percent in 1983 but still not a return to positive growth
rate
47. Relations With the IMF. In our judgment,
economic performance in this range will probably be
perceived as reasonable by the foreign financial com-
munity, and Brazil will be able to proceed with its
stabilization program with its foreign creditor backing
generally intact despite missing some performance
targets. We believe that the IMF will accept-and the
Brazilians are certain to insist on this-that the gov-
ernment has done the best it can under the circum-
stances, even if that means Brazil will need additional
loans to get through 1984.
48. Given the uncertainties surrounding these pro-
jections, we believe there is a small but not insignifi-
cant chance that Brazil's economic performance will
be considerably worse than outlined above. Most likely
this would occur if there were a convergence of 25X1
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adverse world economic trends, domestic political
pressures, and gross economic mismanagement by
Brasilia. In such a case, a confrontation would almost
certainly occur between Brazil and the IMF over
attempts to require additional austerity measures that
the IMF would believe are essential before negotia-
tions could even seriously begin on rescheduling debt
and obtaining the additional foreign loans Brazil
would need. In this circumstance, the Figueiredo
administration, which has staked its entire political
reputation on maintaining good relations with the IMF
and foreign bankers, after negotiating strenuously
might attempt to introduce decrees and legislation
embodying new austerity measures such as further
wage restraints. Simultaneously, it might make such
gestures to placate domestic opposition as replacing
the current economic team and, possibly, offering to
support an opposition candidate for the presidency in
exchange for congressional passage of the new meas-
done, however, as an effort to keep the political
process moving ahead, rather than to end it. On the
other hand, direct elections in this kind of superheated
atmosphere would probably not be acceptable to the
military and other conservative groups, who would
fear that antimilitary leftist or populist figures, such as
Brizola, might gain election in such conditions.
51. The more likely outcome, in our view, would be
that elections would occur on schedule, and that the
Brazilian Government and the international financial
community would use the coming change of adminis-
tration to postpone resolution of the issues dividing
them. Some kind of eleventh-hour financial package,
possibly involving the direct intervention of major
Western governments, would be put together so that
Brazil's US loans would not be classified as "nonper-
forming" at the end of the year. But the stalemate
between Brazil and international lenders would have
led to severe new recessionary pressures in the Brazil-
ures
49. By this time, however, nationalistic sentiments
in Brazil would be so aroused, support for austerity so
low among virtually all elites, and succession policies
so far along that it is dubious the Figueiredo govern-
ment could get the backing it would need to reach
agreement with the IMF. We doubt that, even under
these circumstances, the government would formally
break with the IMF and declare a unilateral moratori-
um on debt payment. Such a situation would have
probably come into de facto existence, however, be-
cause negotiations with the IMF and the banks would
be stalemated, and Brazil would probably be falling
further and further behind in meeting its repayment
schedule.
50. In this turmoil, the chances might increase that
either elections would be canceled and authoritarian
rule reimposed-so that the government could obtain
the power it would need to increase austerity-or a
sudden move in exactly the opposite direction would
occur toward direct elections. We doubt, however,
that either of these options is very likely. If anything,
we believe these conditions would intensify the al-
ready fervent desire of the military to get out of
politics and shed the responsibility for coping with
complex governing problems. We believe the military
would, nonetheless, take forceful measures, if neces-
sary, to contain social riots and protests, including
intervening governments in major urban areas such as
Rio de Janeiro and Sao Paulo if protest activities there
began to escalate significantly. This would probably be
ian economy
52. Signs To Watch. Brazil's economic perform-
ance in the early months of this year will be critical to
the government's willingness and ability to stay its
present austerity course. Following are some of the
important signs to watch in order to see in which
direction the economy is going:
- The rate of inflation. Inflation for January was a
little under 10 percent, somewhat more than the
government had expected. In February it rose to
12.3 percent and in March it dropped again to 10
percent. A clear drop to single-digit price in-
creases in the next two or three months would
support the notion that recovery is under way. A
steady drop in inflation is probably the single
most important thing that could persuade Brazil-
ians that economic retrenchment is working and
should be supported. The failure of inflation to
decline will similarly be read as the failure of
austerity, and even grudging acceptance of such
policies as wage restraint will sharply diminish.
- The size of the soybean harvest and Brazilian
ability to sell the crop at good prices before the
US crop comes on the market.
- The strength and openness of the United States
and, to a lesser degree, the remainder of the
OECD market for Brazilian industrial products.
- The composition of Brazilian imports to see if oil
imports can be cut back and material essential
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for exports increased without greatly increasing
the import bill.
- The degree of government success in cutting
back the operating deficits of the state enter-
prises. Investment outlays, because they are big
and highly visible, have been easier to target, but
the real test of Figueiredo's efforts to gain control
over the public sector will be the extent to which
his administration can reduce day-to-day operat-
ing expenditures for such things as wages and
employee benefits.
- International interest rates, because every 1-
percent rise in the rate Brazil pays on its foreign
debt costs the country $750 million.
The Presidential Succession
53. Chances of Drastic Procedural Change. At
one point in the past year, the question of how Brazil
would choose its next president appeared so unsettled
that even drastic proposals, such as switching to a
parliamentary system in which leadership power
would be divided between a prime minister and a
president, were at least mentioned in some top politi-
cal circles. As the time horizon shortens, however,
selection processes that would require radical changes
in election or other laws become less and less likely. By
this point, it appears possible virtually to rule out a
switch to any procedure that would require a constitu-
tional amendment to bring about. This eliminates a
change to a parliamentary system, a realignment of
the political party structure to create a new party of
the center that would offer a widely backed, "moder-
ate" candidate, and, increasingly, a move to direct
presidential elections in January 1985. The idea of
direct elections did receive a major boost in November
1983 when Figueiredo announced that he, in theory,
preferred that procedure to the present indirect proc-
ess. Opposition politicians, including all the non-PDS
governors, spoke out strongly at that point for a change
to direct elections, and there has been a groundswell of
public support for the idea. In particular, major public
demonstrations in favor of direct elections have been
held in several cities since January. This campaign is
designed to peak in late April, when Congress is to
vote on a proposed constitutional amendment to per-
mit direct elections.
54. The chances that the change to direct elections
will actually occur, however, are slim. The military
has let it be known it does not favor taking the risk of
opening the political system that far at this time. PDS
politicians show no signs of being willing to let go of
their presumed advantage in choosing the next presi-
dent through their voting majority in the electoral
college. And no powerful individual (such as the
President, who was persuaded by the military high
command to withdraw support for his own idea) or
any significant political group in the legislature has
stepped forward to work forcefully for the two-thirds
vote in the Chamber of Deputies and the Senate that
would be required to institute the direct electoral
process.
55. Most Likely Indirect Scenarios. The two most
likely scenarios for choosing the next president feature,
therefore, different kinds of contests for the votes of
the 686 individuals who make up the electoral college. 25X1
The first major scenario, which rests on a straight-line
projection of the current status quo, would involve a
struggle among several candidates to win the PDS
nomination at their September 1984 party convention,
with election to the presidency following almost auto-
matically in January 1985 because of the PDS control
of the electoral college. Right now, the three major
candidates for that nomination are Paulo Maluf, the
aggressive PDS Deputy from Sao Paulo; Interior Min-
ister Mario Andreazza; and Vice President Aureliano
Chaves. (See next page.
56. By most accounts, Maluf has a solid lead in
rounding up the necessary votes for nomination, and
he has claimed commitments from a majority of
delegates. His strength derives from his early start in
hard campaigning, his astute mixing of modern politi-
cal techniques (such as computer-based delegate lists)
and old-fashioned favor granting, his large personal
fortune, and his "take charge" leadership image. C I 25X1
57. Andreazza's candidacy, which has been very
slow to take off, received a major boost in February
when a political boss in the Northeast, who controls 60
PDS convention votes, unexpectedly declared in favor
of Andreazza rather than Chaves. Andreazza is the
preferred candidate of those among the technocrats
and within the PDS who would like to see the least
possible change in who governs Brazil and who has
access to the public coffers as the country shifts from a
military/bureaucratic to an ostensibly more open,
civilian-dominated political system. He was initially
hurt by Figueiredo's failure to designate him as the
government candidate, but his candidacy remained
alive because Figueiredo did not come out in favor of
anyone else either. Despite Andreazza's recent gains,
Maluf probably remains the favorite in the PDS,
because Andreazza's image as a throwback to the
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worst of old-fashioned politics harms him among
government supporters, including those within the
military
58. Vice President Chaves announced his candida-
cy in early February but has only begun to campaign,
and his strength is, difficult to measure. He is respected
as a competent administrator and is generally liked in
military, government, and business circles for the
effective performance he turned in as Acting Presi-
dent on the two occasions when Figueiredo was ill. He
is perceived as the most honest of the candidates,
which, along with his open support of the idea of
direct elections, makes him popular among the general
public. Yet to take the nomination from Maluf or
Andreazza, he will probably have to be willing to
match their wheeling and dealing in bidding for the
votes of individual PDS delegates
59. The one key actor who could give Chaves a
chance, or possibly tip the nomination to Maluf or
Andreazza, is President Figueiredo. If he remains
publicly neutral, as he stated he would in December,
leaving the battle solely to be decided among PDS
politicians in a secret vote, Maluf will probably have
the edge. If, however, he declares openly for Chaves,
or throws his support to one of the darkhorse candi-
dates who are almost certain to appear in the next few
months, Maluf and Andreazza might be stopped.
Maluf appears not to stimulate very strong personal
loyalties among those who now say they will vote for
him, suggesting that his strength could quickly wane if
serious doubts developed about his ability to win.
Andreazza's candidacy appeals only to those who want
61. The other direction the presidential succession
process is most likely to take is the consensus candidate
route. Movement toward this solution would probably
involve the following kinds of decisions within top
political circles:
- Agreement among opposition political parties
that direct elections right now are a dead issue
and that they could gain significant political
strength by having one of their own members
named president, even if he entered office with-
out the political clout that would come with a
popular mandate.
- Maintenance by Maluf of a decisive edge for the
PDS nomination and the decision by a large
minority of PDS members that they have more
to gain politically by supporting a moderate
opposition politician for president than by sup-
porting Maluf.
- Forceful political activity by Figueiredo in favor
of an opposition candidate on the grounds that he
cannot accept a Maluf victory, and he cannot
develop another candidate within the PDS who
can beat Maluf.
62. The prospects that the electoral situation will
evolve in this direction depend on a number of
changes in the status quo and, therefore, it does not
have as high a probability as the first scenario. None-
theless, it is a highly feasible possibility since it does
not require any major changes in election rules, and
events could drive each of the major political actors to
make the necessary decisions to bring it about.F____1 25X1
to see the current ruling group, no matter how discred- 63. At the moment, the opposition politician who
ited, remain in power. To the extent that they believe would most likely receive the nod as consensus candi-
they will have to answer to their constituents, few date is the present Governor of Minas Gerais, Tan-
politicians would relish this prospect. With regard to credo Neves. Neves is widely respected in all the
Chaves, even though his candidacy might appeal to places that count: among politicians of all political
the average PDS politician, he is unlikely to get the stripes, by the military and several of the President's
boost he needs from Figueiredo because of the Presi- top advisers, within business circles, and by the general
dent's unyielding personal antipathy to himr---] public. In addition, he has recently strengthened his
opposition
art
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B
ili
_ .. __ .. ....... ..... ........
p
y,
e
raz
an
60. In the end, Figueiredo is not likely to come out Democratic Movement (PMDB), and would almost
strongly for any of the PDS candidates. He dislikes certainly be its choice for president if the PMDB
Maluf and Chaves too much to support them openly, believed it had a chance to win. Vice President Chaves
and the unacceptability of Andreazza to such a wide has also recently picked up strength as a possible
spectrum of Brazilians, including many in the mili- consensus candidate if he should be denied the PDS
tary, will probably dissuade him from throwing his nomination. It may be difficult, however, for an
reputation behind that candidacy. If the election opposition political party to nominate him, because he
procedure remains unchanged, therefore, we believe may legally be unable to switch parties this close to the
1Vlalul will will Lne presluency. elections. 25X1
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64. One set of circumstances that could change the
odds to favor the consensus candidate scenario might
be new deterioration in Brazilian economic conditions.
Particularly if the President were tempted to go to the
Congress for new austerity legislation either in order to
persuade the banks to release additional tranches from
the already approved $6.5 billion loan or in an effort
to seek new loans, he would probably need to increase
his bargaining strength to have any chances of success.
Certainly, if economic conditions worsen in the next
several months, opposition to the government's stabili-
zation program is likely to be so widespread and
intense that it would take something as significant as
the offer of the presidency to create even the chance
of putting together a coalition that would agree to
free himself of this constraint. Figueiredo also would
probably have to commit himself to an alternative
candidate in the PDS by that same period to strength-
en the chance of denying Maluf the PDS nomination.
that by refusing to make
an open choice he is inviting groups from all sides to
put increasingly heavy pressure on him to decide in
their favor. It is impossible to know if Figueiredo
would actually resign as President if the politicking
around him became too heavy, but that is the one kind
of pressure in the past that has led him to talk of
resignation. Being subjected to strong criticism and
pressure also seem correlated with some of his mo-
additional sacrifices
65. Figueiredo's Role. The main enigma in pre-
dicting what turn presidential politics will take in the
near future is our inability to know what President
Figueiredo will do. Even with the large loss of confi-
dence he has suffered as a leader, the power of the
presidency and the cultural predisposition to respond
to leadership by the president are so strong that he
might be able to exercise decisive influence over the
outcome, should he choose to do so. Yet he refuses to
take definitive action either to affect the choice of
candidate or the choice of electoral process.
66. Figueiredo's lack of committed action creates
two potential complications for determining how the
process will eventually evolve. First, it may delay
significant movement toward the consensus-candidate
route long enough virtually to foreclose the option,
because state governors must resign five months in
advance. The individual who has the greatest possibili-
ties of uniting enough of the PDS and the political
opposition to beat Maluf in the electoral college,
Tancredo Neves, would have to resign as Governor of
Minas Gerais by 15 August to be eligible to run. It
seems doubtful, however, that he would give up the
remaining two and a half years of his governorship to
run for president unless he stood a significant chance
of winning. That chance may not develop if Figue-
iredo does not commit himself openly to the consen-
sus-candidate procedure and, probably, to Neves as
the best candidate by May at the latest. The other
possible consensus candidate, Vice President Chaves, is
not required to resign, but he is ineligible to run for
president if he serves even one day as acting president
in the six months before the election. Consequently,
Chaves, too, is thinking of resigning his post by July to
ments of moodiness, withdrawal
Chaves resigned to run for the presidency, then the
political situation would probably remain relatively
stable. Top military leaders in that circumstance
would probably support Chaves's accession to the
presidency through normal constitutional succession,
and the presidential election would be held as sched-
uled. There is an outside chance, however, that, if the
removal of Figueiredo or his resignation coincided
with a high level of social protests because of a new
economic downturn, a Pandora's box of additional
possibilities might open. These could range from a
short delay in holding the election to a much longer
delay and the reimposition of repressive military rule,
if military leaders decided that restoring social peace
should have the highest priority and could be assured
no other way
Impact of Economic Developments
on the Presidential Race
68. Up to this point, the course of Brazil's recent
economic fortunes has had less influence on develop-
ments in presidential succession politics than might
have been expected, except to intensify almost every-
one's desire to change to a civilian regime. We believe
that economic decisionmaking and the outcome of the
presidential race will continue largely to be influenced
by separate factors unless the economic situation takes
an unexpectedly sharp turn for the worse. The choice
of method for choosing a president, for example, will
be determined most likely by the struggle among
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political elites for advantage, not by pressure from
economic elites. The Sao Paulo business community in
particular is not likely to lobby in the belief that one
method rather than another better serves private-
sector interests. Similarly, we do not believe that the
most likely unfolding of the economic situation in the
next several months-even if Brazil has to return to
the international financial community for $2 billion or
so of new money before the end of the year-will
particularly boost the chances of one candidate over
another. Virtually all of the announced candidates or
likely winners are, for example, stressing that Brazil
needs to renegotiate its outstanding debt on easier
terms if economic recovery is ever to happen. None of
them is proposing, or is likely to propose, even a
temporary break with the IMF. The rhetoric of any
opposition candidate for president will almost certain-
ly be much sharper than that of the PDS candidate in
attacking the government's economic performance
and the role of the IMF. But the election itself, as long
as it is indirect, is more likely to turn on
coalition building than on economic position
69. In the much less likely case that popular senti-
ment in favor of direct elections builds to irresistible
proportions, particularly if accompanied by no sign of
an economic turnaround or a deepening recession,
competition among candidates for party nomination
and then for the presidency will be significantly more
affected by economic conditions. In such a situation,
the candidate who sounds more antigovernment and
anti-IMF will benefit. Of the announced candidates in
the PDS, Maluf would probably gain an advantage
because he can more easily distance himself from the
government's economic policymaking than can
Chaves and Andreazza, who are members of the
government. On the opposition side, a bad turn in the
economy accompanied by a move toward direct elec-
tions would probably work to the advantage of Ulysses
Guimaraes, president of the PMDB, who has been far
more outspokenly anti-IMF than has Tancredo Neves.
Leonel Brizola would also clearly be helped, in the
unlikely case that he were permitted to run.
its debts or break permanently with the IMF. Mort-
over, any candidate with a serious chance of winning
would probably be relatively restrained in his criticism
of the United States, because they would all probably
perceive the United States as the only actor that might
be able to put together an international rescue package
for Brazil once they took office.
Outlook and Implications
For Brazil
71. The Brazilian Government is operating within
very narrow constraints economically as it attempts to
find its way through 1984, trying to avoid having to
demand significantly greater sacrifices from the popu-
lation while simultaneously attempting to satisfy the
international financial community. Most of its maneu-
vering room was probably used up in reaching the
most recent 1983 accord with the IMF. If we are
correct that the government has neither the clout nor
the persuasive powers to tighten austerity further and
that it almost certainly will fall short of meeting its
1984 economic goals, then the second half of 1984 is
likely to be a period of economic and political turbu-
lence in Brazil. Nonetheless, if economic conditions
show steady improvement after the beginning of
April-especially the rate of inflation and continued
growth in exports-then the turbulence will probably
be easily contained even if many of the economic goals
are not fully met. The government, for example, will
probably be able to loosen import and credit restric-
tions enough to keep the private sector no worse off
than it was in 1983, show enough wage flexibility to
prevent widespread strikes, and make enough food
available at high but affordable prices to avoid mas-
sive deterioration of social conditions in such key areas
as Sao Paulo and Rio de Janeiro. Although new money
from the IMF and commercial banks and a reschedul-
ing of maturing debt is likely to be necessary before
the end of 1984 even under this relatively optimistic
scenario, the likelihood that the IMF will be forthcom-
ing as long as the government can demonstrate it made
a good effort suggests that enough trade credits and
other short-term financing will be available during the
year to prevent the economy from being unduly
70. Most of these candidates, if they were running
for direct elections in worsening economic circum-
stances, would probably be sorely tempted to propose
that Brazil adopt a temporary and conditional unilat-
eral moratorium on debt repayment as a central part
of their platform. Even Brizola, however, would prob-
ably not go so far as advocating that Brazil renounce
constrained.
72. A significantly worse economic performance by
Brazil in 1984 than that presumed by the optimistic
scenario would probably lead to a comparably higher
level of turmoil in the society. The belief that IMF-
prescribed policies do not work would spread and
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become a vocal theme for many groups that now
grudgingly accept the necessity of ending government
subsidies, restraining wages and credit, and the like. In
this situation, the government, under open attack from
all sides, would be forced to yield more on austerity
than it desires, and it would be under great pressure to
take a much harder bargaining stance with the IMF
despite its seemingly greater than ever need for IMF
support
73. Even under these more extreme conditions,
however, we doubt that such widespread social vio-
lence or civil disobedience would occur as to threaten
the basic stability of the society during the time frame
of this Estimate. The fundamental values of the
political culture, which stress negotiation and compro-
mise over violent change, would take longer to under-
mine than the months that would remain until the
presidential election. The prospects of changing the
regime through elections to a civilian-dominated one
would also probably continue to appeal to even the
most beleaguered groups as the best available way out
of the country's dilemma. Moreover, it would most
likely still be perceived by the current rulers as an
acceptable method of exit by a largely discredited
regime, which was standing aside in favor of a new
group that might possibly have new answers.
74. Which one of the leading presidential candi-
dates is actually chosen probably makes very little
difference in the way Brazil will be run after the new
regime takes office. The election of Maluf, Chaves, or
Neves would probably be received with much greater
popular acclaim than the elevation of Andreazza since
the latter is so tied to the discredited current regime.
This would ease Chaves's or Neves's relations with
Congress early in their administration, although Ma-
luf-as the PDS nominee-would probably face strong
non-PDS congressional political opposition from the
beginning. Nonetheless, in terms of what any of the
candidates is likely to do, their platforms are very
similiar and none of the candidates represents a sharp
break with tradition. Moreover, as long as the next
president is elected indirectly, whoever is chosen will
probably have made commitments to existing power
groups-such as the military, the political party bosses,
and a variety of economic interests (including the state
enterprises)-to ensure his election and to reassure
them that there will be no drastic or unexpected
changes in policy. Without a popular political base
from which to draw support, such as the one Argentine
President Alfonsin has, any of the indirectly elected
candidates would probably be equally handicapped in
taking actions that would significantly reduce the
influence or otherwise adversely affect these power
brokers after the election. Thus, it is unlikely that any
of the candidates, including Vice President Chaves,
despite his reputation for honesty, or Tancredo Neves,
if the opposition wins with a consensus candidate,
would, as president, investigate very rigorously possi-
ble human rights abuses by the military, institute
corruption proceedings against many former top gov-
ernment officials, or cut back very much the role of
the state enterprises in the Brazilian economy.
75. Their attitudes toward the IMF and Brazil's
foreign debt would probably not differ greatly either.
Any of them will be under considerable pressure to
negotiate much more strenuously with the IMF and
the commercial banks than did the present economic
team, seeking lower interest rates, a stretched-out
grace period, longer maturities, more easily attained
performance goals, and the like. If these negotiations
go badly, economic nationalism will rise sharply and a
temporary delay in interest payments may result, but
virtually any president of Brazil over the next year or
so will probably continue to try to reach agreement
with the IMF rather than take the initiative unilateral-
ly for an indefinite suspension of payments on Brazil's
debt. Brazil is simply too in need of imports, trade
credits, and export markets for any responsible leader
voluntarily to take any other strategy. Since none of
the foreseeable choices as president is likely to have
even the leeway permitted the present government
with respect to pursuing austerity, the really critical
decisions on whether Brazil will continue to receive
loan money and trade credits in 1985 probably will
rest more with the IMF and the bankers than it will
with the Brazilian Government.
76. In the longer term, this lack of freedom of an
indirectly elected Brazilian president to take signifi-
cant new economic initiatives could lead to additional
severe disillusionment on the part of the public with
the government and its ability to return Brazil to the
path of the minimum 4- to 5-percent growth it needs
for future stability. Major structural readjustments are
needed to reduce the economic weight of government,
to hold inflation to tolerable levels, to strengthen the
country's ability to earn foreign exchange, and to cut
back its dependence on foreign borrowing. Without
these adjustments, it will be virtually impossible for
Brazil to meet its large debt servicing requirements in
the mid-1980s as loan repayments contracted in the
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early 1980s come due. In fact, even with most of these
readjustments, Brazil will probably be unable to both
pay back its loans and begin to grow again unless
either the international economic environment re-
mains extremely favorable for the next five years or so
or the Brazilian debt is regularly renegotiated during
this period in order to lighten the debt burden and
provide the resource margin for growth. Another
world economic slump or round of tight money poli-
cies in the industrialized countries would probably
frustrate even Brazil's best readjustment efforts, rais-
ing a question as to whether Brazil could pull out of
economic recession even with a restructuring of debt.
77. If the worst happens and the new president
either cannot bring about the necessary structural
changes or world economic conditions defeat Brazil's
best efforts, then questions about the country's long-
term stability will probably arise. Brazil has remaining
one option, however, that might at least delay a
downward spiral into widespread political violence
and social breakdown on the one hand, or a reimposi-
tion of authoritarian military rule, on the other: direct,
popular elections for a new president. Right now the
appeal of direct elections is very strong to a public
looking for a leader who can galvanize the society and
restore the presidency to its traditionally powerful,
highly respected function. Even under relatively fa-
vorable circumstances, there will be many pressures on
any indirectly elected president to permit a constitu-
tional revision that will cut short his six-year term in
favor of a new, directly elected president. If economic
conditions do not substantially improve by the end of
1985, these pressures will probably become almost
irresistible.
For US-Brazilian Relations
78. In the last decade or so, the state of US relations
with Brazil seems to have been a product more of
Brazilian perceptions of the respect with which the
United States is treating Brazil than it is of the current
level of economic well-being or distress. Relations
reached their lowest point in years in 1977, for
example, despite the relatively good private-sector
commercial and financial relations that existed at that
point, because Brazil felt the US Government was
attempting to dictate to it on nuclear and human
rights matters. On the other hand, relations have
steadily improved over the last two years or so even as
Brazil's association with the US-dominated interna-
tional financial community has become increasingly
difficult. This has occurred because Brazilian leaders
believe the US Government has made a concerted
effort to improve the level of information the two
governments exchange across a broad range of sub-
jects, has approached Brazil as an equal in attempting
to solve problems, and is understanding of its need to
differ with the United States on some foreign policy
issues in areas such as the Middle East. The Brazilian
Government (and many in the private sector) also
perceives the US Government as essentially an ally at
this point in its attempts to negotiate debt relief, obtain
new money, and, despite numerous commercial fric-
tions, expand exports
79. Continuation of this trend toward frank, but
generally good, relations depends on whether these
perceptions continue to hold. Even if negotiations with
the IMF and the commercial banks become more
strenuous later in 1984, we believe the chances are
good that relations will continue on their upward
course as long as the Brazilians believe the US Govern-
ment is doing its best to contain protectionist pressures
in the United States, is encouraging the IMF and banks
to be as forthcoming with Brazil as possible, and is not
attempting to urge on Brazil any strategic relationships
or joint actions that would tend to compromise its
independent foreign policy. As the Brazilian military
returns to focus primarily on professional pursuits, we
believe the opportunities for strengthening relations
with it will be especially good if the United States can
respond to its professionalization needs without pres-
suring it in a way that would arouse its easily stimulat-
ed nationalistic sentiments.
80. Relations in the nuclear area are in a delicate 25X1
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last two years or so as the United States has become
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81. The one area where Brazilian-US relations
could most likely become more strained over the
course of the next year or so involves Brazil's contin-
ued need for IMF support, even if its economic
performance falls noticeably short of meeting IMF
goals. If this happens before the election, Brazil will
expect the United States to do everything it can to
keep the economy afloat until the new Brazilian
president has taken office. After the election, there
will probably be increased pressure on the United
States to support Brazilian requests for a major restruc-
turing of Brazil's debt. These pressures will become
very insistent if Brazil fails to recover economically
because of such external events as a rise in interest
rates or oil prices, or insufficient expansion of markets
in the United States for Brazilian goods
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ANNEX A
FIGUEIREDO'S PROBLEMS IN MORE DETAIL
1. The administration of President Figueiredo has
suffered a major loss of credibility with the Brazilian
people over the last three years or so. Underlying this
loss are three fundamental weaknesses that would be
key vulnerabilities to any bureaucratic authoritarian
political regime but which are especially damaging to
the governing capabilities of the Figueiredo regime. In
brief, the ability of the regime to rule effectively is
being undercut by a sharp drop in available resources,
weak leadership from the President and his principal
lieutenants, and an unresponsive bureaucracy.
Declining Resources
2. For the last three years, the Brazilian economy
has been in decline, sharply limiting the resources
available to the Figueiredo administration and under-
mining public confidence in its ability to govern at
home and to improve Brazil's international status.
Gross domestic product fell about 3.5 percent in 1981,
stagnated in 1982, and fell approximately another 5
percent in 1983. These are the first years of negative
GDP growth since the Brazilians began to keep nation-
al income accounts in 1947. Per capita GDP also
dropped in all three years. Inflation, on the other
hand, was close to 100 percent in 1981 and 1982, and
rose to a little over 200 percent in 1983. Unemploy-
ment and underemployment also climbed during this
period to what are probably close to historical highs;
by the end of 1983 an estimated 25 percent of the
labor force was affected. Government surveys have
shown that real wages dropped in 1982 and 1983,
confirming public belief that, for the first time since
the Brazilian economic "miracle" began in 1968,
general living standards have declined
3. Brazil's international economic standing has also
suffered in the last two years. Particularly damaging to
the Figueiredo government, especially in terms of
projecting the image of Brazil as a country in charge of
its own destiny, was the need to have recourse to the
International Monetary Fund (IMF) in 1982. By that
point, Brazil simply could not earn enough through
exports to pay its mounting international bills. In
addition, turmoil in international financial markets
had caused sources of new financing virtually to
disappear, and Brazil's foreign reserves were dropping
dangerously low. Weighed down by $80 billion in
foreign debt, Brazil applied for a loan from the IMF in
December 1982. While the action came as no surprise
to the Brazilian public, because it was the logical result
of the 1981-82 financial crisis, it nonetheless was
perceived as something of a national humiliation.
Brazilian governments, civilian and military alike, had
made a point of denying Brazil would ever submit
itself to the conditions imposed by the IMF for access
to its money ever since President Kubitsche had
broken off negotiations for an IMF loan in 1959.
4. Brazil's relations with the IMF and commercial
banks were very uncertain throughout 1983 as the
government's inability to achieve certain internal eco-
nomic goals consistent with its agreement with the
IMF caused the IMF to suspend disbursement of the
loan funds and required revising the Brazil-IMF
agreement twice. Both of the revisions created an
additional anti-IMF backlash among many political
and business sectors in Brazil, even among some
politicians who ostensibly are supporters of the govern-
ment. Calls for a unilateral moratorium on debt
repayment were heard from some of these sectors and,
in fact, Brazil had accumulated $2-3 billion in interest
payment arrearages by the end of 1983. A crisis with
US banks was avoided only by frantic last-minute
negotiations with the IMF and -banks, which secured
enough money to pay off those arrearages that would
have been more than 90 days overdue by 31 Decem-
ber. A new loan package of $6.5 billion negotiated
with the IMF and Brazil's commercial creditors has
secured a large part of the external financing Brazil
will need for 1984, but continued access to this money
may require further tough domestic austerity meas-
ures, which the Brazilian public will be increasingly
loath to accept if domestic economic conditions-such
as the rate of inflation-do not soon show signs of
improvement
Leadership
5. As long as Brazil was prospering economically, as
it did in the mid-to-late 1970s, most foreign and
domestic observers believed that national policy was in
the hands of competent leaders. Even after growth
rates began to drop off and inflation picked up in the
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aftermath of the first oil price shock in 1973, concern
about the quality of leaders in the Brazilian Govern-
ment was not widely expressed. In retrospect, funda-
mental doubts about the ability of the military and
especially the technocrats who make and implement
Brazilian policy probably really began to grow only in
1980-81, a year or so after President Figueiredo took
office. The first major blow to the Brazilians' confi-
dence in the ability of their leaders to move the
country forward on the path to grandeza occurred in
reaction to the evident failure of Minister of Planning
Delfim Netto to adapt Brazilian economic policies
successfully to the consequences of the second oil price
shock of 1979. Delfim had the reputation of a "mir-
acle maker," stemming from his days as economic czar
when Brazil was achieving double-digit growth in
1968-74. His attempt to correct Brazil's declining
economic fortunes in 1980 by applying the same
expansionist policies that had worked well during the
earlier period, followed by a sharp swing to austerity
policies in 1981 that were applied in an uncertain and
vacillating fashion, brought widespread disillusion-
ment about whether technocrats knew what they were
doing. These growing concerns were probably acceler-
ated by the abrupt departure from government of
General (Ret.) Golbery do Couto e Silva in August
1981. Golbery had served as top political adviser to
President Castello Branco (1964-67) and to Figueire-
do's predecessor, President Ernesto Geisel (1974-79),
and was generally considered one of the strongest
forces in government for a continued, if measured,
opening (abertura) of the political system that would
lead eventually to a return to civilian control. His
resignation because of policy differences with Delfim
and with another close presidential adviser, General
Octavio Aguiar de Medeiros, Chief of the National
Intelligence Service (SNI), stimulated public doubts
about the government's political astuteness and the
sincerity of its commitment to abertura.
6. The final decline in the government's credibility
and public confidence in Brazil's leaders took place
following Figueiredo's return to office in August 1983
after a six-week absence because of heart surgery.
Figueiredo had enjoyed wide popularity during his
first years in office, primarily because of public
appreciation of his clear commitment to carrying out
the process of political liberalization. By the fall of
1982, however, two years of recession had considera-
bly eroded his popularity and public perceptions of his
leadership ability. These doubts were exacerbated in
mid-1983 as reports began to circulate (and were
played up in the press) that mounting criticism and the
strain of coping with seemingly intractable problems
were adversely affecting Figueiredo's health and state
7. At this point, the public and almost all important
elites have lost confidence that Brasilia knows what it
is doing or that anyone in the government has a vision
of how to lead the country out of its present difficul-
ties. On the economic side, decisionmaking at the top
and down through the bureaucracy has degenerated
into day-to-day attempts to cope with immediate
problems, hesitation to take responsibility to make
difficult decisions, and general drift and vacillation.
On the political side, the President has clearly lost
control over his own political party and the ability to
impose his successor
8. One of the prerogatives that Figueiredo thought
he was acquiring when he accepted the presidency in
1979 was the power to choose-or at least have the
lead role in choosing-the next president as his two
most recent predecessors had done. The first signs that
his control over this process might be threatened
appeared in 1982, as it became apparent that the
progovernment Social Democratic Party (PDS), as a
result of the November legislative elections, might lose
its majority in the federal congress, the institution
which heretofore had functioned as an electoral col-
lege to ratify previous military presidents' choices of
successor. To obviate this problem, the government
quickly brought about constitutional changes that add-
ed electors to the electoral college from the state
assemblies, thereby restoring the PDS's majority be-
cause it was almost certain to retain control of the state
legislatures.
9. This strategy worked insofar as the PDS now has
a 358-to-328 voting edge in the electoral college. What
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Figueiredo and his advisers had not foreseen, however,
was that Paulo Maluf, a newly elected PDS federal
deputy from Sao Paulo, would not wait for Figueire-
do's nod as his choice for the presidency. Instead,
Maluf began immediately a well-funded and highly
professional campaign to lock up as many PDS elector-
al votes as he could so that he could win the PDS
nomination for president regardless of whatever pref-
erence Figueiredo might eventually announce. Per-
haps in part because of this effrontery, Figueiredo has
let it be known he is totally opposed to Maluf. Yet, his
failure to indicate who is his preferred candidate or to
use the immense patronage and other powers of the
presidency to stop Maluf have essentially taken the
The Bureaucracy
10. Of the three central problems the Figueiredo
government faces, the one it is probably least responsi-
ble for is the public perception that the civil bureauc-
racy has developed such power and independence that
it is largely out of control. This criticism is most often
directed against the state-owned enterprises or "paras-
tatals." At the popular level, the state enterprises are
seen as baronies, led in many cases by retired military
officers who have gained vast wealth while heading
these companies. The media frequently play up the
perquisites (large cars, expensive trips, lavish parties)
customarily accompanying these positions, claiming
that the state enterprise officials are flaunting these
status symbols even as the rest of society is having to
tighten belts because of recession and austerity.
11. At a more fundamental level, the autonomous
behavior of the state enterprise is, in fact, a major
complicating factor in Brazil's effort to overcome its
current economic difficulties. The role of the state
enterprise in Brazil is greater than in any other Latin
American country. The top 23 Brazilian firms-and
84 of the top 200-are parastatals. As a group, they
account for 33 percent of GDP, 60 percent of domestic
investment, and 40 percent of nonoil imports. They
employ close to 1.5 million people, including 14,000 to
15,000 former military officers.
12. The state enterprises have played a crucial role
in the economic development of Brazil, often taking
on projects that were too large for the private sector to
handle or not sufficiently attractive as investment
risks. They have been particularly suited to taking on
the immense developmental tasks associated with the
military's attempt to harness Brazil's great natural
resources in its drive toward grandeza. As long as
Brazil's economy was expanding rapidly, they were
very appropriate engines of change. Because of the
momentum they developed, however, in favor of
gigantic expenditures of money and human resources
to solve problems, they have been very slow to adapt
to a constricting economy. In 1981 and 1982, for
example, as the overall economy shrank, the expendi-
tures of the state enterprises grew by 2.5 and 11
percent, respectively. Their deficits-4.2 percent of
GDP in 1981 and 5 percent in 1982-became major
sources of inflationary pressure. Their preferential
access to domestic credit markets crowded out private
enterprise as credit availability shrank, and their
heavy foreign borrowing-their share of the foreign
debt rose from 60 in 1977 to almost 70 percent in
1980-contributed substantially to Brazil's indebted-
ness. The state enterprises also continued to hire new
personnel during most of the last three years, long
after the employee rosters of the rest of the economy
began to drop as part of austerity.
13. Figueiredo entered office in 1979 promising to
reduce the federal government's role in the economy.
His administration subsequently targeted the state
enterprises, which he and his advisers believed had
become so large and powerful that the cumulative
effect of their activities could undermine overall
economic policy. As part of that effort, Figueiredo in
1979 created the Secretariat for the Control of State
Enterprises (SEST) under the Planning Ministry. The
new agency was charged with setting limits on the
parastatals' foreign borrowing, spending, imports, and
prices for goods and services. SEST has had some
marginal impact. For the first time a consolidated
budget for all the state enterprises was created, and
twice last year a series of new budget cuts-particular-
ly in investment-were ordered. Nonetheless, the in-
fluence of especially the largest of the state enterprises
is such, and their role in the economy is so well
entrenched, that they are often able to avoid mandat-
ed restrictions. In general, they have been able to
maintain their operations and personnel rosters, avoid
sharp reductions of their official inv budgets,
and protect their basic equities.
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ANNEX B
THE POLITICAL ACTORS
1. At present the number of groups with significant
national political influence is quite limited. The ruling
elite today essentially consists of the President and his
closest technocratic, military, and political advisers,
and a small group of politicians with whom the
executive must now negotiate to assure passage of
legislation
2. Most other groups, including the bulk of the
military and businessmen, are basically bystanders in
the political process. As the system continues to open,
however, these groups and others possibly representing
the middle class could become more active politically.
The Ruling Elite
3. As long as Brazil had a strong president, the focus
of power within the system was centered on him and
his closest advisers. In the past, the latter usually
included the heads of the president's civilian and
military households; the Army (preeminent), Navy,
and Air Force ministers; the head of the National
Intelligence Service (SNI), and the economic czar
(usually the minister of planning). The Army high
command (all the four-star generals) also exerted major
influence, especially on matters touching on (broadly
defined) national security when they acted to protect
the military's institutional interests. The technocrats
were given considerable latitude to run the day-to-day
business of government, but, with the exception of the
economic czar, they did not often originate major
policies and their initiatives were usually subject to
veto by the military. Businessmen similarly did not
often inspire new policy, but their interests and those
of the government were generally in harmony, and
they had frequent and easy recourse to the sources of
power when they had a complaint. Progovernment
politicians were tolerated (as was an official opposition
party) and were expected to pass whatever legislation
was called for by the executiv
4. The group that rules today no longer contains,
even as junior partners, the industrialists and business
entrepreneurs. In addition, the military high com-
mand has retreated considerably from its previous
policy role and attempts much less often to exert
institutional influence. Most of the politically relevant
statements now emanating from the generals empha-
size their desire to remove the military from politics,
returning it entirely to professional military pursuits.
5. The relationship among those who remain in the
ruling group-the president and his advisers, the
technocrats, and progovernment politicians-has
changed quite sharply. Decisionmaking power, for
example, is much more fragmented. Technocrats man-
ning the ministries and the state enterprises now
represent, after 20 years of growth and accumulation
of resources, a separate power base, no longer directly
dependent on the military for their positions and their
authority. The politicians, as an outcome of the gradu-
al transition back toward civilian rule, have also
acquired separate interests and an independent politi-
cal base now that they have popular constituencies to
represent and to answer to. At this stage in the political
transition process, there is no center of gravity: the
military is withdrawing from politics, the bureaucracy
is strong enough to protect itself from outside control
but does not have the power of initiative, and the
politicians are powerful enough to interfere with the
wishes of the executive branch but not yet strong or
well organized enough to impose their authority
6. Normally, a Brazilian president could exercise
sufficient leadership to cope with even this amount of
confusion if he exercised the nower available to him.
IHe
has, for example, left much o t e daily chores of
running the Office of the Presidency to his SNI chief,
General Octavio Aguiar de Medeiros, most dealings
with politicians and the Congress to head of the
civilian household Leitao de Abreu, and virtually all
economic decisionmaking to Planning Minister Delfim
Netto. The two problems with this arrangement are
that the three advisers do not trust each other and
have difficulty coordinating actions, and that Figueir-
edo's relations with Leitao de Abreu and Medeiros are
increasingly poor. The growing bitterness between
Figueiredo and Medeiros is particularly important,
because it has eliminated the possibility that Medeiros
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might be chosen as Figueiredo's presidential nominee,
a very strong likelihood two years ago. The distance
between the two has also reduced the influence of the
SNI as an institution, especially in terms of the policy
recommendations the SNI had been accustomed to
having accepted by previous military presidents. Fi-
gueiredo is also estranged from Vice President Chaves.
7. The result of this disarray within the ruling
group has been a drop in the predictability of the
decisions the political system yields, concerning both
the likely duration and consequences of decrees issued
by the executive branch and the probable content of
legislation passed by the Congress. The extent of the
existing uncertainty is highlighted by the struggle that
took place recently while establishing a wage law that
was austere enough to satisfy the IMF:
- The executive branch had to issue three execu-
tive decrees with progressively softened provi-
sions on how much wages could be permitted to
rise in relation to past inflation before it arrived
at one that could be used as the basis for
successful negotiations with Congress.
- The leader of the federal Chamber of Deputies, a
member of the progovernment PDS, was instru-
mental in preventing the executive from using a
particular parliamentary strategy for passing the
first version of the decree law when it became
clear it would not pass on its own merits.
- For the first time since the beginning of military
rule, the President was forced into real negotia-
tions with politicians to obtain passage of crucial
legislation.
- Even now that a wage bill has been passed,
uncertainty reigns as to whether its provisions for
not permitting wage raises, on the average, to
increase faster than inflation will be applied
equally to the private and public sectors or will
be used primarily to attempt to bring down the
latter's wages. In any case, there is considerable
doubt that the government will attempt strenu-
ously to enforce the wage-limiting provisions.
The Political Class
8. The prospects and influence of professional poli-
ticians have revived strongly enough in the last year or
so to be thought of, after 20 years in the wilderness, as
significant political actors. Since the November 1982
congressional elections, when opposition parties won a
majority in the federal Chamber of Deputies, the
government has learned, albeit slowly and often reluc-
tantly, that it must treat politicians as serious partici-
pants in the governing process, even though political
parties and the Congress itself remain fairly weak
political institutions that can be manipulated by strong
and determined presidents.
9. Historically, political parties in Brazil have been
artificial, top-down creations, often established pri-
marily to promote the fortunes of individual politi-
cians. Ideology is usually of minimal importance in
understanding the positions the parties are likely to
take on issues. They often group quite diverse inter-
ests, tend to enter into and leave coalitions easily on
different issues, and, partly because of their lack of
ideological fervor, take relatively moderate rather
than extremist stands. Their memberships are also
frequently fractious, and parties usually are composed
of subgroups that often are in combat with their own
leadership. The Brazilian Congress traditionally re-
flects these weaknesses, generally finding it difficult to
find enough common ground and strength of convic-
tion to develop its own initiatives against a purposeful
president
10. Current Brazilian political parties and the Con-
gress have these same weaknesses. Nonetheless, partly
because they have been powerless for so long and
partly because they are riding a wave of tremendous
popular sentiment in favor of restoring civilian rule,
they are successfully demanding a larger role in the
political process. Some of their energies are consumed
by strong rhetoric focused on attacking the govern-
ment's economic team and the disastrous effect its
policies are having on the well-being of the middle
class and poor. The opposition parties have, for exam-
ple, passed a nonbinding resolution decrying the IMF
austerity program and advocating a break in relations
with the IMF. These activities, while they contribute
to the perception that the government is beleagured,
do not seriously affect relations between the adminis-
tration and Congress
11. Although the five political parties represented
in the federal Chamber of Deputies ostensibly divide
between 235 members of the progovernment PDS,
and 244 members of four opposition parties, this
distinction blurs in practice. The administration fre-
quently finds that it must negotiate at least as vigor-
ously with the leaders of the PDS to achieve passage of
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needed legislation as it does with leaders of the
opposition, because congressional members of all polit-
ical stripes have developed institutional loyalties to the
Congress that take priority over party differences
when, in struggles with the executive branch, they feel
their prerogatives as legislators are being ignored. L
12. Lines between the parties blur also because
ideological divisions among them are so imprecise.
Both major parties, but particularly the principal
opposition, the Brazilian Democratic Movement Party
(PMDB), are extremely heterogeneous groupings. The
PMDB, for example, runs a long ideological gamut
from a private-enterprise-oriented right to a Marxist
left. The PDS, while somewhat less diverse ideological-
ly, is split between a majority that tends to support the
government and a large minority (the "participation-
ists") who are as critical of the administration's eco-
nomic policies as are many in the formal opposition.
13. Of the three small parties, the most significant is
the prolabor Brazilian Labor Party (PTB), which has
enough votes to provide the government with a major-
ity in the Chamber of Deputies when it can hold the
PDS in line. PTB deputies are not committed to any
particular political philosophy and, as was demonstrat-
ed in passing the government's wage bill in November,
can sometimes be won over with appropriate patron-
age offers. In that case, they agreed to vote with the
government in exchange for the promise that one of
their members would be named to head a ministry, an
offer that the PDS has not yet achieved despite its
standing as the ostensible progovernment party.
The Military
14. For most of the last two decades, military
officers have generally believed their institutional
interests were virtually identical with those of the
government. In particular, it was basic doctrine that
Brazil needed rapid economic development and re-
spite from civilian politics in order to stave off threats
from domestic leftist forces (possibly abetted by Cuba
and the Soviet Union) and to make a serious effort to
attain major power status by the end of the century.
The primary role of the military, in this situation, was
to occupy many of the main governmental decision-
making offices, to provide support for civilian techno-
crats to apply their developmental policies free from
political challenge, and to maintain firm hierarchical
discipline in support of the president and his advisers.
15. Senior officers have become increasingly dis-
turbed by the government's lack of direction and,
particularly, Figueiredo's failure to provide leadership
during these last several months of increasing econom-
ic troubles and political uncertainty. They fear that
the military will be more and more blamed for the
country's problems, thereby further damaging its rep-
utation in the eyes of the public. Stimulated by events
in Argentina, they are also concerned with rising
popular reaction against corruption in government,
some of which is directed at those military officials
who hold office in the ministries and state enterprises.
This concern about corruption extends down through
the ranks, with some middle- and junior-grade officers
beginning to worry about the effects on their careers
of loss of public esteem for the military
16. The stress of being targets of public criticism is
creating some dissension within the military. Virtually
all officers continue to support continued political
liberalization and to return to civilian rule because
they see that avenue as the only way the military can
regain its professional orientation. Nonetheless, differ-
ences of opinion have developed within the Army over
how to evaluate Figueiredo's performance as Presi-
dent. Some believe he has been a disaster and that it
was a mistake to elect him to the office. Others believe
he has done as well as could be expected under
difficult circumstances. Some Air Force and Navy
officers are bitter toward the Army, agreeing with
opposition politicians that postrevolution governments,
led by Army officers, have committed huge blunders
that have caused the country to lose some of its
economic sovereignty and the military some of its
honor. Junior officers of all services are unhappy with
their senior leaders, who appear to be adrift in the
current economic crisis, who may be involved in
corruption themselves, and who are not speaking out
forcefully to defend the military from what these
officers feel is often unfair criticism.
17. Despite these signs of internal division, the
Brazilian military high command remains loyal to
Figueiredo, and hierarchical discipline within the
ranks is strong. Unlike in earlier years, there are
virtually no "hardline" officers left in the higher ranks
around whom disgruntled officers can rally since,
through skillful use of the promotion process, Figuei-
redo and Army Minister Pires have rewarded loyalty
and removed potential dissidents. A few retired offi-
cers hve spoken in terms of possibly removing Figuei-
redo, but at this point they have virtually no influence
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In addition,
the one active-duty senior officer that dissident mili-
tary personnel might have rallied around, General
Newton do Oliveira Cruz, head of the Brasilia military
command and former chief of the SNI in Rio de
Janeiro, is on the verge of being removed from his
command and forcibly retired by the Army Minister
because of a public temper tantrum with the media
that embarrassed the Army
The Business Community
18. Brazilian businessmen, now suffering through
their fourth year of recession, are massively unhappy
with the Figueiredo administration. Much of the
discontent is the natural outgrowth of bad business
times after many years of expanding markets and high
profits, and probably would have been directed at any
government that had to adopt austerity policies to
combat high inflation and a severe balance-of-pay-
ments crunch. Antiadministration feelings, already
high because of business perceptions of inept economic
decisionmaking and execution by the government,
have been exacerbated by businessmen's belief that
Delfim has failed to demand-or at least negotiate
strenuously for-more lenient conditions on IMF and
commercial bank loans and, in particular, that Delfim
has treated the business community in a cavalier way.
In their view, Brasilia has moved from one stopgap
austerity measure to another in a largely unsuccessful
effort to combat recession. These frequent shifts in
policy have disrupted business planning, and a wide
array of unevenly applied government regulations has
made day-to-day business operations exceedingly dif-
ficult. Most important, private businessmen generally
(including the potentially powerful industrialists of Sao
Paulo) believe they have little of the influence with
Figueiredo and his ministers that they had, and be-
lieved they deserved because of their general support
of military rule, with previous administrations. In
particular, they believe the costs of austerity have
been placed much more heavily on the private sector
than on the many businesses run by the government.
They perceive, quite accurately, that they have had to
absorb much more unemployment, squeeze on profits,
and cuts in investment capital, for example, than have
state enterprises. In addition, they have come last in
terms of access to credit and to foreign exchange with
which to pay their import bills
19. In the last few months, whatever support there
might have once existed in the business community for
the IMF austerity program has largely dissipated.
There is a widespread belief that the program sets
unobtainable goals, will be counterproductive in that it
will inhibit industrial production (and thus exports),
and does not attack what private-sector businessmen
consider the key structural barrier to a return to
economic growth: the size of the public-sector deficit.
Many industrialists and other entrepreneurs fervently
believe that no government program to bring back
even modest growth rates can succeed unless spending
by state enterprises is brought under control on the
domestic side and, internationally, the Brazilian for-
eign debt is restructured.
20. Up to now, business unhappiness has been
reflected more in rhetoric than it has in political
activity. In August 1983 a group of leading Sao Paulo
industrialists did release an unusual public letter de-
nouncing the harsh antirecession actions demanded by
the IMF and acquiesced in by the government, and
they urged Brasilia to counter the recession instead by
stimulating consumer demand. In addition, some of
the congressional opposition to earlier versions of the
government-sponsored wage bill was undoubtedly
sparked by business constituents. Nonetheless, the Sao
Paulo State Federation of Industries, which is by far
the best organized and most influential business orga-
nization in Brazil, has not developed its own compre-
hensive program for combating the recession, argued
in favor of any of its own members as possible
substitutes for the current economic team, or tried to
organize a united front to boost a presidential candi-
date sympathetic to private-sector interes
The Other Bystanders
Labor
21. From time to time, organized labor, which
represents only one-fifth of all Brazilian workers, gives
the appearance of a force ready to break out of its
historically weak position and to exert more influence
nationally, both on bread-and-butter labor issues and
as a national political actor. In 1979-80, for example,
as the political system began to open and the govern-
ment became more tolerant of the potentially disrup-
tive activity, workers struck successfully in record
numbers for higher wages and better working condi-
tions. By 1981 the level of union activism and rhetoric
had escalated to the point that labor leaders were
meeting to attempt to organize a single national labor
confederation, and a prominent former union chief,
Luis Inacio da Silva (better known as "Lula"), was in
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the midst of organizing Brazil's first grassroots labor
party, the Worker's Party (PT)
22. These efforts were not without results. A new
wage law promulgated by Brasilia in November 1979,
which considerably liberalized wage readjustments,
undoubtedly was partially stimulated by government
desires to restore labor peace. And Lula, using the PT
as his political base, ran for governor of Sao Paulo in
the November 1982 elections. Nonetheless, later events
were to demonstrate that organized labor's basic weak-
nesses-the inability of its leaders to galvanize workers
behind common goals, fractiousness among these lead-
ers, and the subservience of unions to the govern-
ment-have not changed. With regard to strike activi-
ty, for example, despite the decline in real wages,
workers have become increasingly reluctant to risk
their jobs by threatening walkouts as unemployment
has continued to rise. The hesitant steps toward labor
unity, moreover, have faltered as union leaders have
split into two groups, each attempting to create com-
peting national labor confederations. On the political
side, Lula's run for governor was a failure. He re-
ceived only 10 percent of the votes cast and could not
even carry some Sao Paulo industrial areas where PT-
affiliated unions were supposed to be strong. National-
ly, the PT did elect eight federal deputies (six from Sao
Paulo), but it showed little strength outside its home
state. At present, its strength does not seem to be
growing, a trend which, if it continues, will eliminate
the PT as a political party after the next congressional
elections. According to current electoral rules, all
parties must poll at least 3 percent of the total vote in a
minimum of nine separate states in the next election to
retain their registration. The PT reached that floor in
only three states in 1982.
23. The main barrier to the evolution of organized
labor into an autonomous political actor is the extent to
which it is controlled by the government. Legislation
passed in the 1930s, which remains basically in force
today, prescribes the structure of union organization
and the permissible scope of labor's political and
economic activities. The government controls the labor
system through a large, permanent bureaucracy which
monitors union activities and has the power to disci-
pline and even remove union leaders for "illegal" acts.
In addition, the bulk of union funds come from the
24. Rapid economic growth in the late 1960s and
1970s has created a large and increasingly influential
middle class which, until the last two years or so,
provided much of the political base for the military/
technocratic regime. This group is estimated to num-
ber some 25-30 million people, or about 20 percent of
the population. Mostly employed in services and in-
dustry, the middle class receives more than one-third
of the country's personal income and accounts for
most consumer spending.
25. The middle class has been hit particularly hard
by recession and by the government's austerity poli-
cies. The government's wage policy since 1979, which
has focused on restricting cost-of-living increases for
those in the middle and upper salary brackets at a
time of accelerating inflation, has caused a significant
loss of income. They could lose another 20 to 30
percent of their ostensible purchasing power during
the next year if the rate of price increases, which
reached more than 200 percent in 1983, does not
decline substantially. A continued rise in unemploy-
ment and underemployment among the middle class is
also likely in those circumstances.
26. The economic frustration of this group has
already had clear, though limited, political repercus-
sions. It undoubtedly played a significant role in the
November 1982 elections, when middle-income voters
shifted in large numbers to the opposition. These votes,
combined with those of less privileged groups, enabled
opposition parties to gain control of Brazil's wealthiest
and most populous states. The discontent of these
constituents also probably contributed to divisions in
the PDS and the assertiveness of opposition parties as
they resisted initial government efforts in the fall of
1983 to pass the new wage-restraint legislation. Direct
economic protests by the middle class have also be-
come more frequent. In May and June 1983, many
homeowners threatened not to pay rising mortgage
payments, and more than 100,000 civil servants struck
for higher pay and job security. Thousands of state-
enterprise employees-mostly middle-class and well-
paid-demonstrated against cuts in budgets and com-
pensation.
government, and only state-approved unions receive 27. Two other major concerns of the middle class
this money. Most important, the rank and file accept are the rise in crime experienced in most cities in the
this patron-client association as the proper relationship last year or so, but particularly in Rio de Janeiro and
between government and labor, and they e is tittle Sao Paulo, and escalating corruption. Informal polls 25X1
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interviewed has been or knows someone who has been
robbed. With regard to corruption, many people feel it
has reached intolerable proportions. In part, this is due
to a perception that those military officials who
participate in government have become tainted, an
image which conflicts directly with that which the
military helped spread when it entered power in
1964-that it is a cleansing or moralizing force with
the duty of combating such influences in society. In
part, the reaction against corruption has also been
caused by its perceived magnitude and pervasiveness.
There is a general belief that no one in the public
bureaucracy will do anything without a bribe. This
becomes particularly difficult to accept as disposable
income shrinks faster for those in the private sector
than for those employed by the government
28. Considering the strength of middle-class griev-
ances against the government, what is perhaps most
noteworthy has been the relatively restrained political
consequences so far of their unhappiness. To a degree,
the government has diverted part of the anger by
making small, even if completely inadaquate, gestures
in the direction of dealing with some of the problems.
The governments of Sao Paulo and Rio, for example,
have increased police patrols in the better parts of
towns and have made big media events out of the
delivery of small amounts of already ordered police
equipment. Much more important, however, is the
fact that middle-class Brazilians, even when their
rising expectations are being frustrated, tend to focus
their energies more on finding private ways to cope
with the situation than on organizing public ways to
change policies or officials. The reaction of middle-
income families to economic distress, for example, has
focused primarily on cutting cash expenses (often
through participation in the rapidly expanding under-
ground barter economy), generating additional income
through employment of more family members or
finding second or even third jobs for the main bread-
winner, and searching out ingenious ways of beating
the system-such as discovering pretexts for with-
drawing forced savings from the National Housing
Bank.
The Extreme Left
29. By almost any standards, the extreme left in
Brazil is remarkably small and weak considering the
fertile ground for its activities that might be thought to
exist because of the widespread and growing economic
discontent. The majority of Brazilians, for example-
some 80-90 million or about 65 percent of the popula-
tion-are impoverished and have been growing more
so in the last three years. Their ranks have been
swelled by some who had reached the lower ranks of
the middle class and now, usually because of unem-
ployment, have fallen back into the lower income
group. Price hikes-particularly for food, which in-
creased some 300 percent nationwide in 1983-have
especially hurt the poor. According to the Brazilian
press, the minimum wage will not buy enough food for
even one adult at current prices.
30. Despite their growing economic problems, how-
ever, the poor, for the most part, remain unavailable
to the radical left. They are generally difficult to
organize for any purpose-even in the urban slums,
unlike in several other Latin American countries.
Rather than being attracted to leftist values and
causes, most of the poor are more interested in just
surviving-or, for those at the top of the lower income
spectrum, in aspiring to middle-class status-than they
are in taking to the streets to agitate against the
government.
31. The foodstore lootings in April and again in
September and October 1983 raised the possibility that
the poor might be becoming more volatile. These
lootings, however, were generally not accompanied by
violence, were fairly isolated and contained by the
authorities, and probably acted more as a safety valve
for hungry people (particularly since the police did not
overreact) than they did as a harbinger of more
widespread violence to come.
32. Even if the poor (and the disappointed middle
class) were more susceptible to leftist appeals, the
radical left in Brazil is not in a position to take
advantage of growing economic and social discontent.
The one possible leader on the left who might have
national appeal is Leonel Brizola, the Governor of Rio
de Janeiro. Brizola, ex-President Goulart's brother-in-
law and a former radical leftist who had his political
rights canceled in 1964, climaxed a remarkable come-
back by winning the governorship in the November
1982 elections with widespread popular support. Since
that time, his image as an effective leader has suf-
fered, however. Polls indicate that many people in Rio
de Janeiro, even in the lower classes where he was
strongest, believe he has been a very poor governor. In
addition, he has alienated many on the left by his
refusal to speak out against the Figueiredo administra-
tion (which he depends on for the resources to run his
state) and by the way he has maneuvered in state
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politics, seeking votes from the center in the state
legislature at the cost of his old-line, leftist supporters.
Brizola's strategy is to build support in the center-left,
hoping that he can run for president whenever direct
elections are held. Most military officers remain
strongly opposed to this prospect, however, and Bri-
zola has made no progress in developing a national
political base or in raising the money he would need
for a national campaign.
Brizola could use national television to make a charis-
matic appeal to the lower and middle classes that
would sweep him into office in a direct election. The
fear that this could happen is enough, we believe, to
assure that the military would not permit him to run
any time soon if, somehow, direct elections come
abou
33. The other groups on the radical left are in even
worse shape. They all suffer from three main
problems:
- The government's program of political liberaliza-
tion has taken away from them the antiauthori-
tarian issue on which the government might have
been most vulnerable.
- State dominance over the Brazilian economy is so
extensive that there is little room on the left to
agitate for greater socialist control.
- They are so racked with internal dissent and
penetrated by government security and intelli-
gence organizations that it would be very diffi-
cult for any of them to pose a serious threat.
34. The largest of the groups on the extreme left,
the Moscow-line Brazilian Communist Party (PCB), is
estimated to have fewer than 10,000 members; it
probably has considerably fewer activists. In recent
years, the PCB not only has formally eschewed violent
antigovernment activity, but has actually become a
force for moderation with those groups, such as orga-
nized labor and students, where it has some influence.
It is now pouring all its efforts into a campaign to
persuade the government to permit registration of the
PCB as a legal political party. Because it fears govern-
ment repression should it step out of line and that
opposition political parties, such as the PMDB, would
withdraw support of its legalization campaign, it has
cautioned leftist allies against attempting to call a
general labor strike or a national student strike or to
sponsor civil disturbances. Its strategy is to play for the
much longer term, hoping that a return to civilian rule
will eventually allow it greater freedom of action.
35. Internal dissension and tight surveillance by the
government's security and intelligence organizations
also diminish the PCB's potential as a political force.
As recently as August 1983, for example, 11 members
of the Sao Paulo State Central Committee were ex-
pelled from the PCB for opposing the legalization
campaign. And earlier, in December 1982, the Brazil-
ian Federal Police raided the Seventh Congress of the
PCB, arresting many members of the national Central
Committee.
36. Other extreme left groups are not prospering
either. The Communist Party of Brazil (PC do B), a
Trotskyite (formerly Maoist) splinter group, consists of
a few hundred members and has survived only in Sao
Paulo. it attempted to
exploit a wave of street riots and foodstore lootings in
Sao Paulo in April 1983, but it could claim no credit
for provoking them. A third group, the 8 October
Revolutionary Movement (MR-8), is also barely alive.
After attempting unsuccessfully to run three candi-
dates for election in the November 1982 race, it split
into three groups. One joined the PMDB shortly after
the election, and the second rejoined the PCB in July
1983. A third faction of 200 to 300 remains active in
Sao Paulo and is attempting, without much success, to
become influential in the Popular movement for direct
election
37. Active foreign involvement with the extreme
left in Brazil appears to be minimal. What little
evidence exists of Soviet and Cuban attitudes toward
Brazil indicates, for example, that neither government
believes there is much hope of stimulating significant
popular agitation against the Brazilian regime any
time soon. The Soviets almost certainly agree with the
PCB's evaluation that their only chance for expanded
influence is to tag along with the legal opposition,
hoping that the change to a civilian-controlled political
system will eventually work to its benefit. The Cubans
provided some training in Cuba to MR-8 members in
the 1970s and may have funded the training and
travel to Nicaragua in 1979 of MR-8 activists who
fought with the Sandinistas against the Somoza gov-
ernment. With the virtual demise of the MR-8 now,
however, that opportunity no longer exists.
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