215. Letter From the Ambassador to Brazil (Gordon) to the Assistant Secretary of State for Inter-American Affairs (Mann)1

Dear Tom:

This is in reply to your letter of July 31,2 carried here by Bill Rogers at the beginning of last week. Bill’s trip was extremely helpful for all of us. In addition to some immediate problems, including the Rio–São Paulo highway question, it gave us the chance to review the broad strategy of our economic assistance relationships with Brazil in the light of the way in which the governmental program has been shaping up. It has also given Bill some most useful firsthand insights into the attitudes and problems of the Campos–Bulhöes team and of the Castello Branco government in general in the economic field.

From our own talks in June,3 I know that you and I are in accord that the coming months are a time of exceptional importance in determining the economic and political course of Brazil for perhaps a long period to come, with derived effects on the whole future of Latin America. In this respect, the revolution was decisive in creating new opportunities, but not necessarily in how those opportunities will be used. The Castello Branco government must make good use of this time, and our own efforts should be directed toward promoting and supporting that objective. It would be a disastrous error for us to relax in our relationships with Brazil on the mistaken theory that the revolution had eliminated the Communist or Peronist danger here and things could now simply take care of themselves. I know that this is not your view, but with the world so full of urgent crises, I occasionally have the feeling that some elements in the bureaucracy are all too ready to relax into a “business as usual” frame of mind.

Your letter of July 31 is concentrated mainly on the stabilization effort. The Castello Branco government, for its part, has constantly emphasized the three-fold goals of stabilization, development, and reform. [Page 472]I believe that this rather broader emphasis is correct, for both economic and political reasons. It is true that rampant inflation is the most acute of the economic problems facing the government. Yet it would be an error to concentrate policy-making entirely on anti-inflation measures, or to give stabilization an exclusive priority, even for a limited period of time.

In economic terms this is because Brazil is still a fairly poor country with a very rapidly growing population, which was suffering in the last year from stagnation along with accelerating inflation. It must continue the building of essential economic and social infrastructure and the stimulation of private investment in both industry and agriculture at the same time that it is fighting hard to reverse the inflationary forces. Even in the interests of stabilization itself, moreover, the acceleration of certain types of investments, such as those designed to finish up projects already begun, so as to get some goods and services out of investment already made, or those designed to improve agricultural output and a better flow to market, will contribute directly to supply and demand equilibrium. The problem cannot be tackled simply on the demand side. And in political terms, there must be a reasonably widespread conviction that burdens of austerity are being spread with equity and that beyond the tunnel of austerity there is the light of development and of progressive reform.

The alleged dichotomy between the “once for all” or “gradualist” attack on inflation, mentioned in your luncheon with the IMF people, seems to me an essentially false option. Inflation at the rate of 120 percent per year, which had been reached in Brazil in the first quarter of this year, is the economic counterpart of a heavy locomotive on a down slope or a heavy merry-go-round, with a tremendous amount of momentum built into it in the form of habits and expectations in all sectors of the community—businessmen, bankers and borrowers, workers and consumers. There is no way of stopping such a machine abruptly without producing an explosion or converting the energy of momentum into such intense heat that it will consume the whole institutional structure.

The realistic questions are: (a) Is the goal really stabilization or is it simply continuing inflation at a substantial even if lower rate, and (b) is the time period by which stabilization is to be achieved politically and economically a realistic one? Even the most orthodox monetarist would not expect to achieve stabilization in Brazil’s present circumstances in less than six to twelve months. Whether it should be six to twelve, twelve to eighteen, or eighteen to twenty-four months does not seem to me a matter of fundamental doctrinal difference. The essential objective is that the goal be the right one, the direction of policy the right one, and the time be what is realistically feasible. An effort [Page 473]to bring about an excessively abrupt halt to inflation would either mean massive deflation, with wholesale bankruptcies and very heavy unemployment, or would require the kind of price-wage freeze and direct intervention in every phase of the economy which could only be enforced in a rigid dictatorship. Given Brazilian habits and attitudes, I doubt whether even a rigid dictatorship could enforce it.

With respect to the restoration of confidence and the change of expectations, I cannot agree that it makes little difference whether the rate of inflation is fifty percent or a hundred percent. In my mind, the direction of change is as important as the actual rate of inflation at any given moment. The change of expectations involved in shifting from a constant or accelerating rate of inflation to a decelerating rate of inflation is as significant as the change involved in shifting from some inflation to no inflation. I see two critical points of inflection in the inflationary curve: the change from concave upward to concave downward (which is the move from acceleration to deceleration), and the later change from concave downward to actual stability.

That much having been said, the problem before us is to judge whether the Brazilian government’s policies are really bringing about this first point of inflection, whether the deceleration will be maintained, and whether its pace is sufficiently rapid. The cases cited by the IMF of “all-out campaigns for a limited period of time”—Greece, Formosa, and Bolivia—seem to me only partially relevant. They involved either beginning situations which were much less severe than the present one in Brazil or volumes of outside aid which constituted a far larger proportion of domestic gross product than can conceivably be envisaged in the Brazilian case. The world is not prepared to finance an import surplus in Brazil of one or two billion dollars a year. Such a surplus could not be absorbed here, even if financing were available, because industrialization has already proceeded to the point where such staggering competition from the outside world would be unacceptable.

I do not want to prejudge the new Brazilian economic plan, since we are just beginning our analysis of it. Ralph Korp’s4 preliminary indications, however, suggest that it is, in some respects at least, encouragingly tough considering the situation with which this government began in April. Castello Branco, Campos, and Bulhöes show no fear of unpopularity as such for a limited period of time. They accept this as inevitable. The danger of those who would play personal politics with Brazil’s profound problems lies at the present in other quarters.

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Castello Branco’s willingness to have his term extended was essentially a result of his conviction that there would be another year of unpopular measures, and that the active campaign period should wait until after the eventual up-turn rather than getting started in the midst of this unpopular phase. I even have doubts as to whether the government program may not be excessively austere on some points, notably the postponement of any further military or civilian civil service wage increases until after December 1965. I should like to leave a quantitative discussion of these matters, however, for analysis in the coming days and weeks when we have had a better chance to study the details of the program.

Although I was not personally involved in the mid-1950’s, as you were, I know the history of the broken promises in connection with past aid package negotiations with Brazil. Since 1961 I have been painfully and intimately involved with them. Looking back at the 1953 and subsequent cases with some historical perspective, however, I am not persuaded that our Export-Import Bank loans were all to the bad. It is a misfortune that Kubitschek was not restrained from various inflationary follies, including the building of Brasilia. On the other hand, the positive things that were done as a result of the project-formulating work of the Joint Brazil–US Economic Commission in the early fifties, and the later help from some World Bank and much Export-Import Bank financing, did make possible the São Paulo development which in turn created the middle class which won the April revolution here in Brazil. And Brazil did enjoy a six to seven percent annual growth rate all through the 1950’s, even though there were imbalances in some of this growth. So neither in economic nor in political terms was that money simply thrown down the drain. Quite the contrary. This is not an argument for aid now regardless of performance, but merely a caveat to the over-gloomy view of our actions a decade ago. Obviously we do want effective performance now, and there is good reason to believe that the Castello Branco government will provide it.

In arriving at judgments on the relation between the performance of the new Brazilian government and our own (and IMF’s and others’) support, we must bear in mind that these are not mutually independent phenomena. These questions always involve the will of the government concerned and the political capacity to make that will effective. On the former point, my judgment is that this government has a stronger will for the right policies than any other in Brazil’s postwar history. On the latter point, our own support in adequate quantity and at the right time may itself make a decisive contribution. If we wait too long to observe performance we may by that very delay make the performance impossible. The only satisfactory arrangement is to have the performance and the outside support run in parallel, and with both related to realizable targets.

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The government is already under heavy political fire from an unhealthy and unholy alliance. That alliance naturally includes the Communist, fellow travelling, and extreme negative nationalist forces who were in the Goulart camp. It includes conservative land owners who hate the thought of even the most minimal land reform. It includes the backward monopolistic nationalist business group which fears competition from foreign private investment and opposes any domestic democratization of capital or internal competition as well. And in recent weeks it has threatened to include the powerful voice of Carlos Lacerda for purely personalistic reasons; I hope that his basic intelligence will soon put these in their proper perspective, but I cannot yet be confident of this.

So far, Castello Branco has maintained a resolute tranquillity in pushing ahead with what he believes is right, but some positive economic and social gains along with the wage austerity and other negative aspects of the stabilization program may be crucial to the survival of the government’s program—and conceivably in certain circumstances, to the survival of the government itself. It is especially important that sacrifices not all appear to be concentrated on wage-earners, or in any event that progress is in sight on housing and education as an offset to temporary wage level sacrifices.

We should also be careful to define performance requirements in terms which are within reasonable judgments of what is politically manageable by a relatively strong and good willed government, but one which does not possess dictatorial powers. As I see the postwar record, a chronic source of disillusionment with IMF stand-by agreements in Latin America has been the extraction of commitments from hard pressed finance ministers who did not themselves believe they were capable of being carried out when those commitments were signed. It is a sobering experience to review the history of these agreements and the brief periods within which many of their provisions were disregarded. These would not be good precedents for us to follow in present Brazilian circumstances.

It is against the above background that we should confront the question of the timing and nature of further economic support for the Brazilian program. We should of course continue processing projects as rapidly as the mechanics permit. As to the next phase of comprehensive negotiation, there emerged from a long discussion Thursday afternoon5 among Bill Rogers, Jack Kubish, Ralph Korp, and myself the conclusion that the desirable timing would be in mid-October, related to the Campos presentation to CIAP now scheduled for about October 10. We believe that it would be most desirable to promote the [Page 476]negotiation of an IMF stand-by agreement at the same time. We have already suggested to Campos the desirability of requesting the presence of at least one IMF Staff man here as soon as possible.

Ideally, IMF assistance should be used to liquidate commercial arrears and reduce the backlog of financial arrears (including payments to small suppliers who cannot be included in the rescheduling negotiations and cutting down the excessive volume of outstanding swaps, the renewal of which is itself an inflationary factor). It would be helpful to obtain corresponding action from the private banks, at least in reopening the $90 million in US bank credit lines and longer-term credits from both US and European banks along the lines of the 1961 arrangements. Our own assistance would include an estimate of the total project support through fiscal ’65 at least, and a complementary program loan from AID. I would hope that at the same time the World Bank would be prepared to make further encouraging qualitative noises about its expectations in Brazil, and that the IDB might indicate some orders of magnitude of its expected assistance. I naturally also hope that Harold Linder6 might by then be prepared to consider some modest new project loans for especially attractive projects within the Export-Import Bank’s traditional fields of activity. Together with a forecast on PL 480, this could make a substantial showing of external support for the GOB efforts, with both good economic and good political results.

It would also be very desirable to give at least some preliminary indications in October of what might be done during the calendar year 1966. Exactly what and in what form, I would prefer to defer for recommendation after seeing how much of a basis the Brazilian program affords. Even with respect to 1965, there is the critical question of what portion of our commitments, if any, may be contingent upon Congressional action in the form of supplemental authorization and appropriation for the present fiscal year.

So far as broad magnitudes of development assistance are concerned, assuming that the stabilization effort is going in the right direction and that IMF resources are concentrated on short-term strengthening of the balance-of-payments position, I believe that Brazilian needs for total annual long-term capital inflow during the next few years are in the general range of six hundred to seven hundred million dollars per year. This is consistent with the “Gordon formula” of thirty percent for Brazil applied to the Punta del Este overall figure of more than two billion per year in annual outside resources. More important, it is consistent with a rough macro-economic analysis of the Brazilian [Page 477]situation, and with rough estimates on sectoral requirements and sectoral lending opportunities and absorptive capacities.

As to the sources from which such a total might be made up, the following indicates reasonable orders of magnitude:

AID and Export-Import Bank $250 million
PL 480 75
IDB 75
IBRD and IDA 100
European and Japanese Bilateral 50–100
Net private (gross would be larger) 100
Total $650–700 million

This total is about three and one half percent of GNP. Since it is additional investment and takes the form of high return imports, it could make the critical difference between an unsatisfactory and a satisfactory growth rate.

The short-term problem of food supply, also mentioned in your letter, is one which has been greatly worrying me. It is a major contributory source to the growing unpopularity of the present government, although it arises now by coincidence and is not a result of the stabilization effort. I have reviewed the problem at length with Dick Newberg7 and Jack Kubish. They advise that the main remedies, some of which cannot be effective rapidly, lie in domestic action here, but there are some contributions we can make through technical assistance and through certain elements of the AID program, such as rural credit and fertilizer imports, as well as through PL 480. We have helped Newberg to secure a strong position in the Agriculture Ministry to advise on improvement of relevant domestic policies, and we will have further specific recommendations for our action in the near future.

Let me conclude on a somewhat personal note. I have the impression—I hope erroneously—that some elements in Washington may look on me as a mere advocate for anything the Brazilian government may request, or a proponent of unlimited and unconditional aid to Brazil simply because I am Ambassador here. This is not a stance that I want to occupy or feel justly described as occupying. Many GOB proposals or requests are turned down here without Washington ever hearing of them. Like Castello Branco, the AID Mission and I are interested in successful policies and good results, not in ephemeral popularity.

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At the same time, having helped guide United States strategy through the tortuous period of the Goulart regime, and also being vindicated (so far at least) with respect to the political moderation and progressive reformism of the Castello Branco regime (see recent issues of Newsweek compared with their June appraisals), I do feel entitled to some degree of credit and to reasonable promptness of response from Washington when I plead urgency. The bureaucratic machine in recent weeks has occasionally been exasperatingly slow or unresponsive. A good example is the absence of action on the declaration of US-use PL 480 cruzeiros as surplus, on which Ralph Burton will show you my recent letter to Kermit Gordon.8 Another example is the very chilly first response to the proposal for including a Guanabara housing project in the AFL–CIO housing guarantee program. These two examples have a direct bearing on our influence with youth and labor groups, both of which we have been repeatedly (and rightly) enjoined to cultivate with all instruments at our disposal.

I have sometimes been reminded of the magnificent little book by F.M. Cornford, entitled Microcosmographia Academica—only fifty pages long and a valiant precursor of Parkinson—which is a masterpiece of exposition of bureaucratic obstructionism. Among other principles, Cornford points out that there is “generally only one reason for doing something, but many reasons for doing nothing”. The present is not the time to apply this principle in Brazil!

I need hardly emphasize, after the recent Foreign Ministers’ meeting on Cuba9 and the prompt Brazilian response on Vietnam,10 that in its international posture the new Brazilian government has now rejoined the free world. In addition to the economic issues discussed in this letter, this political consideration is a valid reason for resolving close cases in favor of support for Brazil. I do not have as long an experience in Latin American affairs as you, but my own has been very intensive in the past eight years. I believe that wise policies on our part may help to set this country, and with it much of the rest of the continent, on a long-lasting course of healthy development as a firmly-anchored member of the free world community and an assured ally of the United States. Such an objective warrants a strong effort on our part and a willingness to take some risks.

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Please forgive the length and rambling character of this letter. I hope it may be helpful in clarifying our frame of mind here in Rio on these fundamental issues.

With warm personal regards,

Sincerely,

Lincoln
  1. Source: National Archives and Records Administration, RG 59, ARA/LA Files: Lot 66 D 65, Brazil, 1964. Confidential; Official–Informal.
  2. Attached but not printed. In his letter to Gordon, Mann reported that the Johnson administration had recently given “a considerable amount of thought to the problem of helping Brazil to get its house in order.” According to Mann immediate action was necessary. “If Brazil fails to act responsibly in the months immediately ahead,” he argued, “we will then be in a crisis situation again, perhaps of even larger proportions.” Mann also reported, however, that IMF officials had expressed “great skepticism about the ‘gradualist’ approach to the problem of inflation,” a concern shared by “those of us who are working on this problem in the Department.”
  3. See footnote 3, Document 214.
  4. Financial Attaché in Rio de Janeiro.
  5. August 6.
  6. President and Chairman, Export-Import Bank.
  7. Director, Office of Agriculture and Rural Development (AID) in Rio de Janeiro.
  8. Director, Bureau of the Budget. The “recent letter” from Lincoln Gordon to Kermit Gordon has not been found.
  9. See Documents 19 23.
  10. Reference is evidently to the Brazilian response to President Johnson’s personal message on the Gulf of Tonkin incident; see Foreign Relations, 1964–1968, vol. I, Document 281.