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Monday, April 26, 2004

426."Letters from the New World" (South Africa)
Denis Beckett
#3: "Hair Cut."

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(Note: The following is the third in a series of "Letters from the New World" from Denis Beckett, one of South Africa's best-known journalists, and our newest Contributing Editor. His latest book is the highly-acclaimed Redeeming Features. (London: Penguin Books, 2004.))

HAIR CUT

Scared? No, not scared, not really. You can’t be scared of a barber. Can you? True, this (South African) Shavathon was invented by sadists. True, going in wasn’t easy, past streams of bald guys coming out, clutching their heads in shell-shocked daze.

But that’s not “scared”, surely, so much as rational. A lifetime of long hair gives a ou identity, right? It instills a persona, a self-image, which has never been short hair, let alone no hair. Now you’re about to make the brushcut guys look like hippies. For sure you aren’t overjoyed.

But not “scared”, please. “Lunatic”, maybe. When they start to cut, red-alert clangs. This is the only mirrorless barber seat you ever met. Your head gets cold, in a way you never knew. Clumps of you slide down your shoulders, clumps not of plain untidy excess, but of what has been part of you since you were in nappies....

Your friends who did the easy option, the one-day green dye, are hosing themselves, pointing at you and high-fiving and slapping their sides like at Barry Hilton on the cuzzin routine.

There comes an instant that you can not believe this thing that you are doing. You feel central processing unit contacting your leg muscles with the instruction to bolt. But before the message downloads, the volunteer barber is shaking out the towel. They’re speedy here, whipping off the entire woolsack in 10% of the time that a real barber with mirrors takes to do a trim.

Rub the head, feel strange, be relieved by the touch of a film of stubble. It’s short, but it’s hair. Then the sadists guide you to the blades.

The blades. So far has been only Army-short. Kojak is yet to come. The blades are gonna abolish every wisp, everything but eyebrows.

You can choose to duck this, but a mad instinct says go the whole hog. Partly, there’s testosterone and rank order. The Kojaks are main manne, army-cuts come second and green-dyes are but honorary members of the human race. The other part is duty. Companies pay money to the Cancer Association for every bald head. Plus the world record, 55 000 heads in a day, is up for challenge, and it’s held by… Australia.

And hey, anyway, it’s just this once.

So the shaver lady sprays the lather. This time, it does take time. A head is a bigger thing than you think. A head-shave covers the acreage of six or ten face-shaves, and is a bumpier ride.

The end is shock. A hand ascends to explore, and recoils in instant horror. This is no longer foreign hair on a familiar pate. This is horror-story, feeling not like a head at all, any head, let alone the personal private head you’ve known since youth. It’s a lumpy sticky thing, foreign to the touch, as if a mother dinosaur plonked a reject misshapen egg on top of your neck.





You can choose to duck this, but a mad instinct says go the whole hog. Partly, there’s testosterone and rank order....The other part is duty. Companies pay money to the Cancer Association for every bald head. Plus the world record, 55 000 heads in a day, is up for challenge, and it’s held by… Australia.



A ou gets a skrik, but not as much as when the lady says: “there you are then. It nearly always grows back, even at your age. Just scrub the skin or it can grow inward.”

Nearly always? Can grow inward? This night was poor in sleep; strong in images of traumatised dead hair refusing to re-start, of trapped stalactite strands clutching downward and strangling the brain.
Furthermore, resting a newly bald head on a pillow is like rolling a brick on a croquet lawn. Hair is a lubricant; one of its less known virtues. Shining and slithery as the naked noggin appears, it glues to the
pillow. Each toss and each turn is a sticky, jerky, jolt.

But nightmares end. The second day the dogs stopped barking. By the third I could enter my bathroom without startling at the ugly bald stranger. By the fourth I ceased to instinctively reach for the hairbrush after the morning shower. Now my family are saying “quite nice, really”, and I’m relishing seeing the world from a short-hair vantage-point.

Sixty thousand bristly heads are walking around town feeling interconnected and a tiny bit smug. We were arm-twisted into it, yes, but whatever the motives, our haircuts brought packets into cancer support and brought us a flash of solidarity with a deeply real cause.

We give each other friendly recognising nods to say “we shared that scared moment, which we won’t admit to.” And the Aussies have come second at something.


***

© Denis Beckett, SubmergingMarkets™, 2004. All rights reserved. No reproduction without express consent of the author.

April 26, 2004 at 10:54 PM | Permalink | Comments (0) | TrackBack

Saturday, April 24, 2004

424."Letters from the New World" (South Africa)
Denis Beckett
#2: "Walk Tall."

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(Note from the Editor: The following is the second in a series of "Letters from the New World" from Denis Beckett, one of South Africa's best-known journalists, and our newest Contributing Editor. His latest book is the highly-acclaimed Redeeming Features. (London: Penguin Books, 2004.))

WALK TALL

In 1973 no-one was as non-apartheid as we all now like to think we were. Hiring the Smuts farm at Irene for a black staff picnic was a mission. Blacks? Little old United Party people in Moth badges wrung hands for weeks. They talked about “the natives”, and “raising expectations”.

But people were moving forward, groping, in that way they do. Permission was finally granted, subject to a stack of promises and guarantees nine yards high.

And everything went fine. Until lunchtime in the meat queue, when Walk Tall got aggrieved. In his view he’d been given an undersize portion, by a little old UP lady.

As the name suggests, Walk Tall was a toughie, a towering strong guy with attitude. He was also afloat in ingested substances. He drew a knife as long as a thigh, and informed the lady that he would cut off her ears to make up his protein.

At this point, you can imagine, picnic day came a little unstuck. Monday morning Walk Tall was contrite as well as hung over. I was sorry to sack him; normally he was a dynamo, and full of personality. But he had to go.

Fast forward 15 years. I’m in Anderson street, back end of town. On foot. It’s winter, it’s dusk, the air is thick with smoke. I’m alone, very alone. I’m vulnerable.

Suddenly there’s a gang around me. Instantly, I know this is farewell to my possessions. Perhaps it’s farewell to blood and breath too. Then I see that one of them is Walk Tall. My heart clangs on the tar. Day of vengeance! I telepath goodbyes to my loved ones.

Walk Tall stares, holding his pals back. Then he roars out my name. To my astonishment he’s not roaring in fury, but in tones you’d use for a long-lost brother. He grabs me – I get a close-up of a wicked blade, sideways on – and smothers me with a huge hug.

I’m introduced to the pals. Knives vanish and all four walk me to the Carlton Hotel. “You can’t walk alone!” says Walk Tall. “There are bad people here!”

On route he says he hasn’t had a job since I fired him. Once in the Carlton’s light I risk the question: doesn’t he perhaps bear ever so slight a bit of, uh, anger?

Walk Tall cracks up like I’ve made a great joke. “What! Angry! At you! No, you had to fire me! And you shook my hand!” The gang returns to the night, waving.





Having latched on to the high ground,Walk Tall has made it his life. You can practically see the halo. But this old world is full of rabbit punches. A year ago he got a job. A month ago he was told to take certain steps in re a collectable debt. In his old incarnation these steps were well in the day’s work. But this is the new moral Walk Tall. He says “I don’t do assault”, and he quits. And who gets the rap? Yeah, right. Me. “You’re the one who told me to stop doing crime, and I listened to you so now I have nothing to eat.”



Fast forward again, 12 years to 2000. Walk Tall re-appears. He has adventure stories that make Sinbad look stay-at-home. He also has a shining moral high point of his career, viz, having not killed me. His reasons have become complex enough to baffle Freud, wild flights into love and hate and black pride and conquering demons. But the outcome is clear. He has come to see Not Killing Beckett as a Nobel-deserving achievement, or at minimum worthy of eternal thanks.

I mention the mundane fact that six billion other people have also, to date, not killed me, but he is unfazed. He says 5 999 999 999 never had to do anything to not kill me; he alone stayed the knife. It is a bit different, I grant, but no way am I in lifelong debt because he aborted a crime he should never have started. He shakes his head, saddened that such callous ingratitude exists.

That subject remains an impasse, though we’ve tried several times to work it out. Once was on radio where he spoke grippingly about crime and white victims, the mugger’s eye view. People couldn’t stop listening. One guy missed a plane.

Having latched on to the high ground, Walk Tall has made it his life. You can practically see the halo. But this old world is full of rabbit punches. A year ago he got a job. A month ago he was told to take certain steps in re a collectable debt. In his old incarnation these steps were well in the day’s work. But this is the new moral Walk Tall. He says “I don’t do assault”, and he quits.

And who gets the rap? Yeah, right. Me. “You’re the one who told me to stop doing crime, and I listened to you so now I have nothing to eat.”

He hopes I’ll cough up in return for my unpunctured ribcage. I’ve told him to forget that, but another factor grows: all those parables about mercy and lost sheep and returned prodigals. Isn’t that how we’re supposed to live, giving a chance to a guy who reforms? Why do all the reformed sheep I see seem to be staring at slammed doors? Somewhere there’s an employer-type person who believes in reformed characters or in happy endings or in both, and who might communicate with (the name on the ID), at (Joburg address.)

***

© Denis Beckett, SubmergingMarkets™, 2004. All rights reserved. No reproduction without express consent of the author.

April 24, 2004 at 09:50 PM | Permalink | Comments (0) | TrackBack

Thursday, April 22, 2004

422."Letters from the New World" (South Africa)
Denis Beckett
#1: "Return."

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About Denis Beckett

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(Note from the Editor: The following is the first in a series of "Letters from the New World" from Denis Beckett, one of South Africa's best-known journalists. At a time when a great many countries are struggling just to make ends meet and keep hopes for democratic development alive, South Africa has just held its third democratic election in a row. True, it has more than its share of serious challenges, from crime and corruption to inequality, HIV/AIDs, unemployment, and lingering racism. But as Denis' extraordinary eye for individual stories makes clear, it is also a place where a huge number of people of all races are excited to get up in the morning, meet and greet each other, and pitch in together to build a new and better country. That's a spirit that many of us in the so-called "developed world" may well look to with some degree of jealousy. Denis' latest book is the highly-acclaimed Redeeming Features. (London: Penguin Books, 2004.))

RETURN

When she left for Australia, Joy cited all the regular reasons, crime and decline and Africa’s uncertainties. She got a nice job in Sydney, and lots of peace and security, and nobody stole the paper from public toilets, never mind the seats.

But Joy’s six siblings in Jo’burg made much reason for many visits. From time to time she’d get a sense that in South Africa she felt the sun on her face in a warmer way.

She kept it quiet, of course. Men in white coats would come. Aus was for The Chosen..

One day Joy and her laaitie, Luke, were at the jungle-gym at the Zoo Lake. This is a very individual jungle gym. It didn’t come out of a box, with plastic fittings. It came out of a forest, big solid logs. It’s the gorilla of jungle gyms, a cousin of the army’s combat training courses, high on opportunity for kids to break arms and bash heads.

Luke was nervous. This was a fearsome thing, after the park at home in Sydney. That park was lawsuit proof, waxed and pasteurised and shrinkwrapped, certified safety precautions at every hinge.
But as he got into it Joy noticed a strange thing: he was having more fun. In fact, she was having more fun too.

She was enjoying this pre-waxed Africa-type park, and enjoying Luke enjoying it. Also, people greeted Luke, and greeted her, and talked to her, sommer, as in “a stranger’s a friend you do not know”. In the waxed world, thought Joy, that was stuff you heard in church. To walk up in a spirit of “hullo, friend I do not know” … you’d get a harassment charge.

On a train in Cape Town an old man befriended Luke, like a grandad, sharing sweets and games, as if Joy wasn’t there. And the conductor ad libbed. Each time he called the route he gave her a wink and a last line like “and enjoy the ride.” It struck Joy that if his Aussie counterpart broke the rules like that, there’d be disciplinary hearings.

A touring black school group and their teacher include Luke as an honorary member. Joy asks the teacher why. She’s implying: “he pays you no fees and no bonus, why should you bother?” She’s also implying, deeper down: “and what is more he’s not even your, um, race”. The teacher replies: “children are our future”. Full stop.

Joy returns to Aus. After a year there, she tallies how many strangers interacted with Luke. Answer = two. In South Africa, she reckons, it’d be hundreds, mainly of course blacks, the pastmasters, but some of the pale lot as well. That was a thing about SA’s new freedoms; the whites were picking up the good habits of Africa, by osmosis.

Joy mumbles about a return to SA. Everybody says What! You crazy? Not only the Aussies say that, so do Seffricans. She feels very alone. Is she crazy? Someone points her to www.homecomingrevolution.co.za, and she’s astounded. Lots of South Africans are going home. That fortifies her, but people say: “To indulge yourself you’re inflicting crime and decline and dead-end-for-whites on your innocent son.” She says: “No, that’s exactly wrong, it’s for my son, so he can grow up enriched by the human connectivity of Africa.” The chorus: What! You crazy?

Joy knows she’s right, in her bones, but damn, she’s scared. The chorus says: “at least put him in private school”. She can’t afford it. Everyone insists a SA government school will doom Luke to placards on street corners. She nearly chickens out. Then her Jo’burg teacher friend Dale phones to say “you’re hearing junk, you want to be here, block your ears and get here.” She did.

Last week Luke’s government school asked Joy if she could do transport, for an outing. She burst into tears. They were surprised. She explained. She’d love to help with transport. She wasn’t allowed, before. Only designated buses and certified drivers carry Aus school outings. No cowboy stuff like Mom’s Taxi.
“I realised”, says Joy, “that I like the cowboy stuff. I like a world with loose ends. I like a world that isn’t all comfort zone. And I like being required to give. It’s not ideal that so many are in need, but for me it’s better to have to give than to never give. You think bigger.”

You do, hey. You think frinstance that we may never be the world’s richest country or continent, or the calmest, or even the kings of the pitch. But heck, we can be the nicest.

***

© Denis Beckett, SubmergingMarkets™, 2004. All rights reserved. No reproduction without express consent of the author.

April 22, 2004 at 09:55 PM | Permalink | Comments (0) | TrackBack

Sunday, April 11, 2004

412.The Coffee Connection:
Globalization's Long Reach, From Vietnam To Nicaragua To Starbucks

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INTRODUCTION – THE "G" WORD

I remember the first time I heard the “G” word - “globalization.” It was 1985, and I was interviewing a new McKinsey recruit, a former assistant Harvard Business School professor who had decided to exchange the classroom lectern for a larger bank balance. He was about as excited as business intellectuals ever get about the latest HBS paradigm. This was the notion that, in the wake of the 1980s debt crisis, countries would soon be forced to “globalize.” According to him, this meant that they would soon dramatically reduce all barriers to trade, investment, and labor migration, so that, over time, the world would become one great big happy marketplace.

I reacted with the economist’s usual disdain for business school paradigms. While “globalization” might be a new term, surely the basic concept was not new. For example, the world had also experienced a dramatic rise in trade and investment in the late 19th and early 20th centuries. Nor was it nirvana. As I recalled, this earlier period of free trade been marked by numerous speculative bubbles, debt crises, and even some devastating famines in India, China, and Ireland. Then, during the 1930s, many countries had retreated from the winds of global competition behind tariff barriers, import controls, exchange controls, and fixed exchange rates. At the time these “beggar thy neighbor” policies were damaging to the world recovery. But after the world economy was revived by World War II, it did pretty well during the period from 1950 to 1973. Indeed, many economic historians now refer to that distinctly “un-global” period as the 20th century’s “Golden Era,” the only prolonged period in the 20th century when global growth and income equality have both improved dramatically at the same time.

So I could not help but tweak the young professor's nose a bit about the fact that “globalization,” as he called it, was not new, and was evidently neither necessary nor sufficient for strong performance by the world economy.

TWENTY YEARS LATER…

I t is now twenty years later, and many neoliberal pundits are still discussing “globalization” as if it were something strange and new – and as if it did not already have a very long and really quite problematic track record, including its very mixed record since the early 1990s.

What should by now be clear to any careful student of the subject is that in fact there really is no such thing as “globalization” per se. Its effects cannot be assessed or even measured apart from specific historical contexts. In other words, the liberalization of trade and investment is never implemented across all markets or trading partners at once. Its impact depends crucially on the precise sequence of deregulation, initial conditions, and on complex interactions with all the other market and regulatory imperfections that remain after specific barriers have been removed.

EXAMPLE - MEXICO Vs. CHINA

Just to take one specific example – in 1993, Mexico signed the NAFTA, giving its export sector much more access to the US market. However, the gains reaped by Mexican exports have been somewhat disappointing, because it discovered that just as NAFTA was being implemented, China was also dramatically expanding its exports to the US. This was partly just a reflection of China’s lower labor costs. However, for capital intensive sectors, it also reflected China’s artificially lower cost of capital. Unlike Mexico, where the banking sector had been privatized, China’s banking sector remained entirely in state hands, and it provided $billions in subsidized credit to the export companies that Mexico had to compete with. Having liberalized its capital market at the same time that it liberalized trade, Mexico had essentially given up one of its main weapons in its competitive battle with China.

The following case study of the global coffee market provides another example of “globalization’s” complex side effects. In the early 1990s, the World Bank and the IMF, which have been two of the most fanatical sponsors and promoters of “globalization” around the world, decided to encourage the Socialist Republic of Vietnam to boost its exports and growth rate by aggressively entering the world coffee market. Millions of poor coffee farmers around the world are still suffering from the effects of this grand strategy.

THE COFFEE BARRONS

If one is looking for a good example of the unintended impacts of “globalization,” a good place to start is with the world’s second most globalized commodity -- coffee, which is consumed almost everywhere, produced in 70 countries by more than 25 million farmers, and second only to oil as a share of world trade.

Coffee has certainly has had its ups and downs in the health literature, although the latest scientific evidence is apparently that, at least in moderation, it can do some good, at least if one is prone to gallstones, asthma attacks, cirrhosis of the liver, headaches, or heart trouble. But it has been undeniably beneficial to the shareholders of leading First-World companies like Nestle, Kraft, Sara Lee, P&G, and Germany’ Tchibo, the giant conglomerates that dominate the international business of roasting, processing, wholesaling, and at least in Starbucks’ case, retailing gourmet coffee to millions of First World customers.
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In the last decade, all these coffee conglomerates have prospered, and Starbucks, in particular, has struck a veritable gold-mine. Founded in 1985, since its 1992 IPO, Starbuck’s share price has risen at an astounding average rate of 28 percent a year, with four 2-1 stock splits along the way. In February 2004 its market value reached a 12-year high of almost $15 billion, and its revenues now exceed $4.4 billion, growing at 32 percent a year. Entering the vaunted ranks of truly global brands like IBM or Coca-Cola, Starbucks now has more than 74,000 “partners” (actually, employees) and more than 6000 stores in over 30 countries, and it expects to add another 1300 stores this year. Indeed, it is even opening stories in markets that one might have thought would be difficult to crack, like Paris, Saudi Arabia, Mexico, the Philippines, Indonesia, and Lima, Peru, where a cup of Starbucks java reportedly two-thirds of the minimum wage.

One might have hoped that the folks at the other end of the pipeline who actually grow all the coffee might have benefited a bit from all this downstream prosperity. But in fact it would actually come as a something of surprise to the world’s 25 million coffee farmers around the globe, most of whom exist at the very bottom of the income distribution in developing countries like Vietnam, Brazil, Nicaragua, Kenya, and Ghana. Even as the processors, roasters, and retailers were cashing in, conditions for these farmers became more fiercely competitive than ever before. Indeed, from 1997 to 2001, composite world coffee prices fell by two-thirds, reaching the lowest levels in 30 years. Since then, average prices have recovered slightly, but they still remain at just half their (real) 1997 levels.

Since the demand for coffee beans is price-inelastic, the result was that coffee bean exports and the incomes of coffee farmers all over the world just collapsed. The result was one of the most socially -devastating commodity market crashes in modern history, with millions of poor coffee growers from Mexico’s Chiapas region, Guatemala, and Nicaragua to Kenya and Ghana to Indonesia and Vietnam all suffering the effects.

"FAIR TRADE" - MORE OR LESS

As one of the younger, less diversified companies in the industry with a retail brand to protect, Starbucks was perhaps more sensitive to the growing contrast between its own prosperity and the farmers’ desperate situation. In the late 1990s it responded with a new emphasis on “corporate responsibility.” This included support for “fair trade-certified” and “organic” farming, the implementation of sourcing guidelines that emphasized “sustainable” farming practices, paying premium “fair trade-like” prices above market averages, providing a certain amount of credit to coffee farmers and financial aid to poor farming communities, and other measures. In 2003, for example, Starbucks’ paid an average of $1.20 per pound for its Arabica beans, at a time when the open market price was less than half that much.

True, this amounted to just 4-5 cents per cup at most for the farmers, compared with a “vente” coffee based drink that might go for $2.50 to $4.50, depending on what’s in it. True, much of the $1.20 per pound did not get through to the farmers, but was digested by middlemen – even in 2003, at least half of Starbucks’ coffee was purchased through brokers and short-term contracts.

True, the 2.1 million pounds of “fair-trade certified” coffee that Starbucks purchased in 2003 amounted to less than 1% of its bean purchases. And true, the social programs and credit that Starbucks distributed to poor coffee farming communities in 2003 amounted to just $1 million and $2.5 million, respectively, scattered across nine countries – less than 1 percent of its operating income that year. But at least Starbucks deserves credit for making an effort, which the other giants in the industry have failed to do.

However, if Starbucks had really wanted to assist poor coffee farmers around the world, it would not have wasted time with all the “fair trade” and “green farming” activity, as valuable as these symbolic gestures might be in the abstract.

As the following tale explains, Starbucks and the fair traders would have had far more social impact if they had simply persuaded the World Bank to keep its mitts off coffee production.

GLOBALIZING COFFEE PRODUCTION

In 2000-2002, an acute coffee market crisis hit poor countries like Nicaragua, Guatemala, and Kenya broadside. The tale of this fiasco is worth telling just because of its dire impact on such countries, which depend on coffee for 25 to 30 percent of their exports. But it is also a striking example of the unintended side-effects of globalization, and of neoliberal development banking at its worst. After all, as noted, coffee is grown by more than 25 million small farmers in more than 50 developing countries, including several of the world’s most heavily-indebted nations. Indeed, it is second only to crude oil as a developing country export. So if you wanted to pick one global commodity market not to screw up, this would be it. But that did not stop the World Bank, the IMF, and the Asian Development Bank from doing so.

As this story also demonstrates, even in the 21st century, countries like Nicaragua not only remain at the mercy of intransigent rightists, corrupt elites, and egomaniacal leftists. They are also at the mercy of massive screw-ups by half-baked neoliberal experiments located half-way around the globe – and by fellow “former socialist countries!”

In 1986, the Socialist Republic of Vietnam’s Communist Party leadership decided to switch from central planning to a liberalization policy called “doi moi” – “change and newness.” This was partly just because, like Cuba, Vietnam could no longer depend on the (crumbling) USSR for huge subsidies. It was also because senior economists at the IMF, UNDP, World Bank, and ADB were preaching the glories of free markets, and holding out the prospect of billions in aid.

The resulting program, designed with extensive assistance from the world’s leading development banks, was a controlled version of a standard orthodox adjustment program. It set out a 10-year plan – oops, “strategy” - for export-led growth, based on opening up Vietnam’s heretofore-closed economy to trade and investment, allowing state-owned banks freedom to lend to individual borrowers, decollectivizing the farm sector, and – in particular -- encouraging small farmers and state-owned companies to develop new cash crops for export.

At the same time, political power was to be kept firmly in the hands of the Communist Party’s Politburo. Despite that slightly-illiberal grace note, from 1993 on, this doi moi economic liberalization package was generously supported with plenty of advice and more than $2 billion a year of foreign loans and grants from the Asian Development Bank, the UNDP, Japan’s JIBC, the France’s Development Fund (AFD), the World Bank, the IMF, and the aid agencies of the US, Sweden, France, and several other Western governments.

Nicaragua’s 44,000 small coffee farmers, the 6 million small farmers in 49 other countries who collectively produced more than 80 percent of the world’s coffee beans, and the more than 100 million people whose jobs and livelihoods depended on coffee beans, had probably never heard of doi moi. But they became one of its first targets. Right from the start, evidently without much thought about collateral damage, Vietnam and its neoliberal wizards decided to embark on a brave new coffee export business.

While coffee had been grown in Vietnam ever since the 1850s, production and exports had been limited. The domestic market was small, and there were few facilities to process the raw beans. As of 1990, green bean exports were a mere 1.2 million 60-kilo bags per year. But Vietnam’s central highlands did have rich hilly, lots of rainfall, and low labor costs, which were ideal conditions for achieving high yields and low prices.

This was especially true for low-grade, easy-to-grow robusta beans. From a consumer’s standpoint, this species was inferior to the Arabica beans grown by Nicaragua and most other Central American producers, as well as big producers like Brazil and Colombia. Arabica had traditionally accounted for more than three-fourths of the world’s coffee production. But robusta had twice the caffeine content of Arabica at half the price, and it could also be used as a cheap filler and blending ingredient.

By the 1990s, bean quality was no longer an absolute barrier to entry in coffee farming. The global market was increasingly dominated by a handful of giant First World coffee processors, roasters, and grinders, including Nestle, Kraft, Sara Lee, P&G, and the German company Tchibo, as well as retail store owners like Starbucks, which generated their own blends. Increasingly, these companies sourced coffee beans from all over the planet, mixing and matching them to produce blends that not only satisfied customer tastes, but also minimized costs. These global buyers had been working overtime on new technologies that took the edge off the cheaper robusta beans and allowed them to be used for extra punch and fill. With the help of commodity exchanges, the giants had also defined standardized forward and futures contracts that allowed them to hedge against price fluctuations – making for a much more “perfect” global coffee market.

From the standpoint of small farmers, most of whom did not have easy access to such hedging devices, “market perfection” was in the eyes of the beholder. The changes introduced by the giant buyers amounted to a radical commoditization of the market that they depended upon for their livelihoods, a sharp increase in direct competition. Accordingly, even as downstream market power became more and more concentrated in the hands of the First World giants, the farmers’ share of value-added plummeted. In 1984, for example, raw coffee beans accounted for more than 64 percent of value-added in the US retail coffee market. By 2000, this share had dropped to 18 percent. From 1990 to 2000, while global retail coffee revenues increased from $30 billion to $60 billion, the revenues earned by bean-growing countries dropped from $10 billion to $6 billion. By then, for every $3.50 café latte sold by Starbucks, the farmers earned just 3.5 cents.

The farmers’ shrinking role was due in part to the basic structure of the global coffee industry. On the supply side, as noted, by the 1990s, raw beans were being exported by more than fifty countries, who were competing head-to-head. But while a few growers like Brazil and Colombia had tried to break into foreign markets with their own processed brands, a handful of global First World buyers still dominated processing and marketing. Indeed, many of the world’s leading exporters of processed coffee, like Germany and Italy, grew no coffee at all.

This long-standing First World control over global coffee processing is partly due to technical factors. There are economies of scale in processing, but not in coffee farming. Unlike petroleum or natural gas, which can be warehoused for free in the ground, coffee beans are costly to store. Unlike wine, aged beans also have no incremental value. Furthermore, most small coffee farmers depend on coffee sales for their current incomes. Global coffee demand is actually not very price-sensitive, and it is only growing at a modest 1 percent per year. All this means that prices tend to fluctuate wildly with current production, so there is an incentive for processors to stay out of farming, shifting market risks to millions of poorly-diversified producers. The fact that coffee beans be stored 1-2 years, while roasted or ground products have a much shorter shelf-life, also favors locating processing facilities close to the final consumer markets. And anyone who has been to France, Italy, or Brazil knows that tastes for particular kinds of coffee vary significantly across countries.

But the coffee industry’s international division of labor is not only based on such technical factors, many of which are actually declining in importance. It is also based on long-standing trading patterns and colonial relations – for example, the 16th century role of the Dutch in smuggling coffee plants out of Yemen to their colony in Java, which fostered Indonesia’s entire coffee industry; the role of French, British, Portuguese, and Japanese trading companies in Africa, Jamaica, Guyana, Brazil, and Asia, and the role of American companies in Colombia, Central America, and Southeast Asia. The First World’s dominance has been reinforced by trade barriers that favor the importation of raw beans over processed coffee.

The net result of all this is as if France, Italy and California were compelled to export all their grapes to Managua, Nairobi, and Jakarta, in order to have them processed into wine.

Along these lines, given the importance of small coffee farmers to debtor countries, and the World Bank’s supposed commitment to “poverty alleviation,” it may seem surprising that the World Bank, the IMF, and other development lenders devoted zero energy in the 1990s to designing a monopsony-breaking strategy for coffee growing countries, to help them break down this division of labor its supporting trade barriers.

Instead, the development bankers did just the opposite, helping Vietnam implement an anti-producer-cartel strategy that ultimately helped to drive the coffee- countries’ association, a rather pale imitation of OPEC, completely out of business in 2001. Could it be that these First World development banks were not influenced by the fact that the world’s leading coffee conglomerates also happen to be based in countries like the US, Japan, France, Switzerland, and Germany, not far from the development banks’ headquarters?

COFFEE CONTRAS

Vietnam’s decision to push coffee bean exports as a cash generator in the 1990s was not just based on rational economics. Like most critical decisions in economic development, it also had a crucial political motive. Vietnam’s best region for growing coffee turns out to be the Central Highlands, along the border with Cambodia and Laos. This region is inhabited by about 4 million people, including 500,000 to 1 million members of non-Buddhist ethnic minorities who are known collectively as the Montagnard/Dega hill tribes. These fiercely independent peoples have battled the Communist Party, and, in fact, most other central authorities, for as long as anyone can remember. In the 1960s, 18,000 of them joined the CIA’s Village Defense Units and fought hard against the NLF. They had many run-ins with South Vietnam’s various dictators. After the war ended in 1975, some Montagnard tribes continued armed resistance at least until the late 1980s.

To shore up control over this volatile region, in the early 1980s Vietnam’s government embarked on its own version of ethnic cleansing – or at least dilution. It actively encouraged millions of ethnic Kinh – Vietnam’s largest ethnic group – plus some other non-Montagnard minorities, to migrate from the more crowded lowlands to the Central Highlands. At first, these migrations were organized directly by the government. But by the 1990s, they were being driven by a combination of market forces and government subsidies. On the one hand, the migrants sought to escape the poverty and resource exhaustion of the lowlands. On the other, they were attracted by the prospect of obtaining cheap land and credit to grow coffee, the exciting new cash crop, which became known to the peasants as “the dollar tree.”

The result was an influx of up to 3 million people to the Central Highlands provinces in less than two decades. In 1990-94 alone, some 300,000 new migrants arrived in the provinces of Dak Lak, Lam Dong, Gia Lai, and Kontum, looking for land. By 2000, these four provinces alone accounted for 85 percent of Vietnam’s coffee production. This reduced the Montagnard tribes to the status of a minority group in their own homelands. They watched in anguish as their ancestral lands were reassigned to outsiders, including state-owned companies, controlled by influential Party members in Hanoi who had close ties with leading Japanese, American, and Singaporean coffee trading companies. Many Montagnards were forced to resettle on smaller plots, without compensation. Over time, as the local economy became more vulnerable to fluctuations in world coffee prices, this contributed to explosive social conflicts.

From the standpoint of Nicaragua’s campesinos, the key impact of all this was on world coffee prices. In Vietnam, the migrants and Montagnards alike turned to coffee for support on increasingly-crowded plots. At the time, in the early 1990s, coffee still offered greater revenue per unit of land, compared with other cash crops like rice or peppers, and it was also being actively promoted as a cash crop by state banks, trading companies, and the government.

It took three to four years for a new coffee bush to mature, so the real surge in exports did not occur until 1996-2000. Then, in just a four-year period, Vietnamese exports flooded the market. From 1990 to 2002, they increased more than ten-fold, from 1.2 million 60-kilo bags to more than 13.5 million bags. By 2000, Vietnam had become the world’s second largest coffee producer, second only to Brazil and ahead of Colombia. In the crucial market segment of cut-rate green robusta beans, the blenders’ choice, Vietnam had become the world leader. While other producers like Brazil also increased their robusta exports during this period, Vietnam alone accounted for more than half of all the increased exports. This helped to boost robusta’s share of all coffee exports to 40 percent.

In pursuing this strategy, Vietnam did not bother to join coffee’s OPEC, the Association of Coffee Producing Counties. Indeed, it acted rather like a scab, providing an incremental 800,000 metric tons of low-priced coffee by 2000, roughly equal to the world market’s overall surplus. The giant coffee buyers were quite happy to buy up all this low-priced coffee and swap it into blended products like “Maxwell House” and “Tasters’ Choice,” using it to discipline other leading supplier-countries. At the same time, foreign debt-ridden countries like Indonesia, Brazil, Uganda, Peru and Guatemala also boosted their coffee sales, in order to generate more exports. In September 2001, partly because of this beggar-thy-neighbor strategy, the ACPC completely collapsed and was disbanded.

The resulting export glut caused world coffee prices to tumble to a 33-year low by 2002. According to the World Bank’s own estimates, this caused the loss of at least 600,000 jobs in Central America alone, and left more than 700,000 people in the region near starvation.

Worldwide, the effects of the coffee glut were even more catastrophic, because the world’s fifty-odd coffee producing countries included many of the world’s poorest, most debt-ridden nations. Ironically, just as they were supporting Vietnam’s rapid expansion into exports like coffee, in 1996 the World Bank and the IMF had launched a new program to provide debt relief to the world’s most “heavily-indebted poor countries” -- the so-called HIPC program. By 2001, indeed, the HIPC program had made some progress in debt reduction, cutting the “present value” of the foreign debts for those countries that completed the program by a median of thirty percent. However, of the 28 heavily-indebted poor countries that had signed up for the World Bank’s HIPC program by 2003, no less than 18 of them were coffee growing countries – including not only Nicaragua, but also desperately poor places like Bolivia, Honduras, Uganda, the Congo, Cameroon, Rwanda, the Ivory Coast, and Tanzania.

Indeed, for the larger coffee exporters in this group, even when they managed to wend their way through HIPC’s complex program and qualify for debt relief, they found that most of its benefits had been offset by the coffee crisis! For example, Uganda, the very first country to qualify for HIPC relief, discovered that by 2001, just one year after qualifying for HIPC, its foreign debt was higher than ever -- mainly because it had to borrow abroad to offset the impact of the coffee crisis on exports!

Furthermore, many other “not-quite-so-heavily indebted” developing countries that produced coffee, like India, Indonesia, Peru, Guatemala, Kenya, Mexico, and El Salvador, were also hurt badly. Overall, if one had set out to create destitution and suffering in as many of the world’s developing countries as possible at one fell swoop, one could hardly have devised a better strategy than to encourage Vietnam to thoughtlessly expand its commodity exports in general, and coffee in particular – free markets be blessed, all other developing countries be damned.

In Nicaragua’s case, the average wholesale price for its Arabica beans fell from $1.44 a pound in 1999 to $.51 cents a pound in 2001 and less than $.40 a year later, compared with typical production costs of $.83 a pound.

Among the hardest hit were Nicaragua’s 44,000 small producers, who accounted for two-thirds of Nicaragua’s production and provided jobs that supported another 400,0000 Nicaraguans, most of them landless campesinos in the rural northwest around Matagalpa, north of Managua. They depended upon Nicaragua’s annual coffee harvests for most of their employment and income. The resulting crisis in the countryside set off a migration to Managua and other cities, with thousands of hungry, landless people crowding into makeshift shacks on the edge of town.

Obviously all these developments begged many questions so far as the role of the World Bank and Vietnams’ other international lenders and advisors was concerned. After all, Vietnam was just a very poor state-socialist country that was undertaking all these free-market reforms for the first time – after fighting and winning a thirty-years war of its own with the US. The World Bank, IMF, and the ADB, on the other hand, were supposed to be the experts – they had implemented such reforms all over the world, backed by billions in loans and boatloads of Ivy-League economists. And Vietnam was intended to be one of their poster stories for de-socialization, and for the claim that growth, free markets, and “poverty alleviation” could go hand-in-hand.

In April 2002, sensitive to NGO charges that the World Bank and the other development lenders might actually bear some responsibility for this fiasco, the World Bank went out of its way to issue a press release denying any responsibility for the crisis whatsoever. Or more precisely, it denied having directly provided any financing to expand coffee production in Vietnam. It also maintained that its $1.1 billion of lending to Vietnam since 1996 had tried – though evidently without much success – to diversify farmers away from cyclical crops like coffee. It also argued that, after all, its lending to Vietnam’s rural sector had only started up after 1996, while coffee production had increased since 1994, and that none of its investments had been “designed to promote coffee production. (emphasis added) ” It did identify two World Bank projects that “could be linked” to coffee production – a 1996 Rural Finance Project that helped Vietnamese banks lend money to farmers, and a Agricultural Diversification Project. But for these projects, the Bank simply observed that it didn’t dictate how Vietnamese banks re-loaned the funds that it had loaned to them.

Overall, then, World Bank basically washed its hands of the coffee crisis -- one of the worst disasters to strike small farmers, their dependents, and debtor countries in modern times. The World Bank did assure the public that it was extremely concerned about the plight of these farmers, and promised to address their woes.

On closer inspection, this defense had more than a few holes. First, whether or not the Bank financed any new coffee farms, clearly the World Bank and its cousins at the IMF, the UNDP, and the ADB were up to their elbows in designing, managing, and financing Vietnam’s economic liberalization program. In the first place, they played a key role in pushing Vietnam to liberalize trade, exchange rates, and banking quickly. To set targets for Vietnam’s macroeconomic plans, they had to have known which export markets the government planned to go after. After all, coffee was not just another export. After the removal of Vietnam’s quotas on coffee and other exports in 1990, partly at the request of IMF, coffee quickly became the country’s number-two export, second only to oil. It continued to be one of the top ten exports even after prices cratered. The ADB and the World Bank also worked closely with Vietnam’s Rural Development Bank, the country’s largest rural lender, to improve management and structure new lending programs. They also advised Vietnam on how to set up a Land Registry, so that rival land claims could be settled and farms – at least the non-Montagnard claimants who found it easier to get titles -- could borrow to finance their new crops more easily.

At the same time, far from encouraging Vietnam to work with other coffee producers to stabilize the market, or design an overall long-term strategy to break up the buy-side power in the market, the development banks bitterly opposed any such interference with “free markets” – no matter how concentrated the buyers were, or how many artificial restrictions had been placed by First World countries on the importation of processed coffee. As one senior World Bank economist remarked in 2001, at the very depths of the coffee glut:



Vietnam has become a successful (coffee) producer. In general, we consider it to be a huge success...It is a continuous process. It occurs in all countries - the more efficient, lower cost producers expand their production, and the higher cost, less efficient producers decide that it is no longer what they want to do.

So, despite its 2002 press release, the World Bank’s true attitude about this whole fiasco appears to have been a combination of “not my problem,” sauve qui peut, and Social Darwinism.

Meanwhile, back in Vietnam, the small farmers in the Central Highlands learned the hard way about the glories of global capitalism – thousands of them had decided that it was “no longer what they wanted to do,” but were finding few easy ways out. After the 1999-2002 plunge in coffee prices, Vietnam’s export earnings from coffee fell by 75 percent from their level in 1998-99, to just $260 million in 2001-02. In 2002-03, they fell another 30 percent. In the Central Highlands, thousands of the small farmers – low-lenders and Montagnards alike -- had gone deeply into debt to finance their growth, and were struggling to feed their families and send their children to school, because market prices now covered just 60 percent of their production costs.

In short, ten thousand miles from Managua, on the opposite side of the globe, these highland farmers were facing the same bitter truths that Nicaraguan campesinos were facing -- that they had more in common with each other than with the stone-hearted elites who governed their respective societies, and designed futures that did not necessarily include them.

In Vietnam, the resulting economic crisis severely aggravated social and political conflicts in the Central Highlands. In February 2001, several thousand Montagnards held mass demonstrations in Dak Lak, demanding the return of their ancestral lands, an end to evictions for indebtedness, a homeland of their own, and religious freedom ( since many Degas are evangelical Christians). Vietnam responded with a harsh crackdown, sending thousands of elite military troops and riot police to break up their protests. They arrested several hundred of them, and then used torture to elicit confessions and statements of remorse. They also destroyed several local churches where the protestors had been meeting. Those protest leaders who did not manage to escape to Cambodia were given prison sentences up to 12 years.

From one angle, this repressive response was the typical handiwork of a Communist dictatorship. From another angle, however, it was just another example of the repressive tactics that neoliberalism required to implement free-market “reforms” by non-Communist regimes, in countries like Venezuela, Ecuador, Bolivia, Egypt, Indonesia, the Philippines, Argentina, and post-FSLN Nicaragua.

In Vietnam’s case, far from helping to solved its political problems in the Central Highlands, the Politburo discovered that their neoliberal reforms had inadvertently helped to revive the Dega separatist movement. Evidently, economic and political liberty did not always go hand in hand.

At least the Politburo and their foreign advisors did have something to show for the coffee strategy, however. In 2000-2002, the profit margins earned by the five giant companies that dominated the global coffee market were higher than ever. Furthermore, cocaine producers in the Andean region no longer had to worry about small farmers substituting coffee for coca. In Colombia’s traditional coffee-growing regions, just the opposite started to happen in the late 1990s, as many farmers converted coffee fields to coca, in the wake of the coffee glut.

Indeed, from 1995 to 2001, coca cultivation more than tripled in Colombia, including a 20 percent increase in 2000-01 alone. This occurred despite hundreds of millions of dollars spent by the USG on coca eradication efforts, the so-called “centerpiece” of its “Plan Colombia.” In 2000-01, coca production started to increase again in Peru, Bolivia, Ecuador and Venezuela. There were also reports that farmers were even turning away from coffee and towards coca in areas that had never before seen coca, like the slopes of Kenya’s Mount Kilimanjaro. Cocaine production from the Andean countries also rose sharply from 1998 to 2002.

After all, unlike coffee, at least coca and cocaine were products for which both the farming and the processing could be done at home.

EXAMPLE - THE IMPACT ON NICARAGUA

Overall, by 2003, Nicaragua’s real per capita income had fallen to $400 (in real $1995), roughly its 1951 level. With population growth averaging 2.4 percent a year in this overwhelmingly Catholic country, the economy would have to grow at 5 percent a year for 30 years just to recover the 1977 per capita income level – compared with the actual average growth rate of 1.3 percent during the 1990s. By now, the country’s entire national income is just $11.2 billion, less than three Starbuck’s annual revenues.

By 2003, underemployment levels exceeded 60-70 percent in many parts of the country, and the overall proportion of people living in poverty was 67 percent, second only to Honduras in Latin America. This means that there were some 1.6 million more Nicaraguans living on the borderline of existence than in 1990, at the end of the contra war.

Earlier, in the 1980s, the Sandinistas had been justifiably proud of their health, education, and literacy programs. Even in the depths of the contra war, rates of infant and maternal mortality, malnutrition, and illiteracy had declined. Infant mortality fell sharply from 120 per 1000 live births in 1979, immunization coverage rose, and the share of the population with access to health care increased from 43 percent to 80 percent.

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In the 1990s, however, there were sharp increases in all these maladies, aided a 75 percent cut in public health and education spending by 1994. By 2000, Nicaragua was spending four times as much on debt service as on education, and a third more than on public health. The infant mortality rate was still 37 per 1000, and the under-age-five mortality rate was 45 per thousand, among the highest in Latin America. (Cuba’s equivalent rates, for comparison, were 7 and 9 per thousand.) As of 2000, 12 percent of Nicaraguan children were underweight, and 25 percent were under height. More than 22 percent of children under the age of 9 – 300,000 children -- were malnourished. By 2000, 37 percent of school-age children were not enrolled in classes, and illiteracy, which an intense campaign by the Sandinistas in 1980-81 had reduced to 15 percent, had climbed back up to 34 percent, and was even higher in rural areas. Women’s rights also suffered, as the Church conspired with the new conservative governments to drive abortion underground, even at the cost of higher maternal mortality rates because of botched illegal abortions.

Coincidently, Nicaragua’s $400 per capita income was almost exactly the same as that of the Socialist Republic of Vietnam, its new direct competitor on the other side of the planet. Indeed, in one of history’s many ironies, these two formerly “leftist” countries were now passing each other on the globalization escalator, heading in opposite directions. By 1998, if we believe the statistics published by the UNDP, Vietnam’s poverty rate had dropped to 37 percent, below Nicaragua’s, while adult literacy had reached 94 percent, above Nicaragua’s (declining) rate of 63 percent. Vietnam’s average life expectancy had also matched Nicaragua’s 68.3 years. And far from having a chronic foreign debt crisis, which Nicaragua has had since 1979, Vietnam became one of the development banks’ darlings, as we saw earlier, drawing down $2 billion a year in concessional finance throughout the decade, plus more than $30 billion in foreign investment. Yet Vietnam’s ratio of debt to national income was just 35 percent – not exactly low, but only one-tenth that of Nicaragua’s.

Furthermore, with all the outside help, on top of its entry into the coffee export market, Vietnam’s growth rate averaged more than 9 percent a year in the 1990s, even as Nicaragua’s growth stagnated. In 2001, when Vietnam’s Ninth Communist Party Congress adopted its “Tenth Ten Year Strategy” for the period 2001-10, the World Bank and the IMF were both on hand in Hanoi to celebrate with yet another generous structural adjustment loan program – carefully shielded, of course, from any angry Montagnards who might wish to complain.

All told, by the New Millennium, out of 173 nations ranked by the UNDP according to their “human development” metrics, by the year 2000, Nicaragua had dropped from 68th in 1980 to 118th. It passed Vietnam on the way down, which was in 101st place and rising. The responsibility for Nicaragua’s decline appears to have been almost evenly divided between the contra war of the 1980s and the neoliberal war of the 1990s. Relative to more prosperous (haven) neighbors like Panama and Costa Rica, as well as to the pro-US, military-dominated abattoirs to the north, Guatemala and El Salvador, Nicaragua’s relative decline has been even more striking.

So evidently it wasn’t enough to pull off a revolution and defeat a US-backed puppet army, as both Vietnam and Nicaragua had succeeded in doing. Daniel Ortega and his comrades must have occasionally wondered a little wistfully, “If only we had managed to install a full-fledged, centrally-planned Communist dictatorship, as we were accused of trying to do! Maybe the world would have been as generous to us as it has been to the Socialist Republic of Vietnam!”

***

© James S. Henry, SubmergingMarkets™, 2004. All rights reserved. No reproduction without express consent of the author.

April 11, 2004 at 08:46 PM | Permalink | Comments (0) | TrackBack

Thursday, April 01, 2004

"The Worst April Fool's Joke Ever:"
Brazil's 1964 Coup
The Foundations of Regressive Development

PDF Version
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April 1, 2004 is not only April Fools Day in the US and Europe. It is also the fortieth anniversary of the worst April Fools’ joke ever,” as many Brazilians called it, the 1964 US-backed military coup in Brazil that overthrew the constitutional, democratically-mandated government of its populist President, João Goulart.

This coup led directly to 21 years of disastrous rule by Brazil’s military. During that period, the military cracked down sharply on all political opposition, independent trade unions, and critical media. It also piled up one of the world’s largest foreign debts, tried to develop nuclear weapons and intercontinental missiles, and pursued a national development strategy that favored the construction of huge, poorly-planned but highly lucrative hydro dams, Amazonian highways, and nuclear plants over investment in education and other basic human needs.

As described in more detail in the following excerpt from The Blood Bankers, all this proved to be very profitable for the officials, generals, and foreign and domestic bankers that catered to the regime’s needs.

But it also created a legacy of distorted development, poverty, concentrated land and media ownership, deforestation, environmental pollution, high-level corruption, and inequality, as well as a culture of violence and disregard for human rights.

Fortunately, Brazil, a country with 182 million people that accounts for more than two-thirds of South America's entire economy, returned to civilian rule in 1985. But it still struggles with most of these problems to this day.

As the following account makes clear, the US Government was deeply involved in encouraging the coup at the highest levels -- n.b. recently-declassified White House tapes and documents. Once in power, Brazil’s military also played a crucial role in the empowerment of right-wing regimes in several other Latin American countries, including Bolivia and Uruguay. Indeed, top US policymakers viewed Brazil’s military as a very useful agent, which could be used to impart a hard right spin to political development all over the Southern Hemisphere.

The standard apology for all this is that it was the price that had to be paid to contain the global Communist menace. When examined carefully in the bright light of day, this excuse turns out to be a canard. The fact is that Brazil never faced a serious revolutionary threat from the Left; that Goulart and his supporters were at worst populist, nationalistic land-reformers and union supporters; that the generals and their friends in Brazil's elite systematically exaggerated the leftist threat in order to justify their appetite for power, which gave many of them offshore bank accounts; that Presidents Kennedy, Johnson, and, later on, Nixon, were completely spooked by the Castro fiasco into overreacting to such populists all over the Third World; that the Brazilian coup completely undermined the rule of law, labor unions, human rights, and political freedoms for many years; and that it also led to decades of short-sighted economic policies that damaged millions of lives.

In short, if we really want to understand the roots of Latin America's comparative poverty, inequality, violent culture, and distorted development, as well as why many Latin Americans do not necessarily share the gringos' high esteem for their own role in history, the story of Brazil's 1964 military coup is a good place to start.

FOUNDATIONS

One long-time Brazilian banker recalled that at that time (the early 1960s) JPMorgan's position in Latin America was “essentially nowhere.” Years earlier, of course, it had been one of the first U.S. banks to do international banking. In the l880s, J.P. Morgan Sr. acquired Morgan et Cie in France and a third of London’s Morgan Grenfell, and in l908 the bank added Guaranty Trust Company, which had French, Belgian, and UK branches. From l890 to l930 Morgan floated more Latin American bonds than any other bank. But from the Depression until the l950s it had largely neglected Latin America. By l964, its entire Mexican exposure was only $15 million, and its Brazilian exposure just $50 million, and Morgan’s Latin American group was run by people who were ”not very aggressive....bright but not out-going.....(the head) would show up in Rio and wait at his hotel for clients to call on him.” Of the group’s five bankers, only Fred Vinton, the son of a long-time Citibank rep in Buenos Aires, had ever lived in Latin America. Citibank, Chase, and Bank of Boston all had local branches in Rio and São Paulo, but not Morgan.
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Kubitschek

Of course, at the time, Brazil was viewed as quite a risky place to do banking. Juscelino Kubitschek, the country's President from l955 to l961, had embarked on an ambitious ”Fifty Years in Five” program, promoting industrialization and huge projects like Brasilia, the new federal capital in the remote state of Goiás, that was aptly described as “the revenge of a Communist architect against bourgeois society.” Kubitschek’s program produced five years of 7 percent growth, unprecedented corruption, and the Third World's largest debt, $2.54 billion by l960. That may not sound like much now, but it consumed forty percent of Brazil’s export earnings. In l961, Janio da Silva Quadros, Kubitschek's successor condemned this debt in terms that later generations would fully understand:

All this money, spent with so much publicity, we must now raise bitterly, patiently, dollar by dollar and cruzeiro by cruzeiro. We have spent, drawing on our future to a greater extent than the imagination dares to contemplate.
Kubitschek’s excesses provoked a conservative reaction. In 1960, Quadros, a former Governor of São Paulo, ran for President on an anti-corruption platform with a broom as his symbol. He was elected, and took office in January 1961. His Finance Minister, a wealthy banker, quickly signed a tough IMF agreement that agreed to devalue the currency, slash subsidies, and repay the debt. quadros.jpg
Janio Quadros

But Janio Quadros soon proved to be one of Brazil’s weirdest leaders. He also tried to ban horse racing, boxing matches, and bikinis on the beach, and when the U.S. pressured him to embargo Castro, he defiantly journeyed to Havana and awarded Che Guevara the Ordem do Cruzeiro do Sul, Brazil's equivalent of the Legion d'Honeur. At one point early in his term he had been visited by Adolfe Berle, Jr., President Kennedy’s special assistant on Latin America. Kennedy was quietly seeking Quadros’ support for the upcoming Bay of Pigs invasion. According to John M. Cabot, the US Ambassador to Brazil at the time, Berle effectively offered “Brazil” a $300 million bribe in return for cooperation. But Quadros became “visibly irritated” after Berle ignored his third rejection, and sent Berle off to the airport unaccompanied. A few months later, in August 1961, Quadros resigned, complaining of being surrounded by ”terrible forces,” and blamed his downfall on a cabal that included “reactionaries” Berle, Cabot, and US Treasury Secretary C. Douglas Dillon.
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Goulart and Kennedy

This allowed the succession of João Goulart, Janio’s Vice President, a wealthy populist cattle farmer from Rio Grande do Sul. Goulart visited the US in April 1962, addressed a joint session of Congress, and received a ticker tape parade in New York City. But he immediately proceeded to alienate every key interest group at once, launching an aggressive land reform, boosting taxes on foreign investors, nationalizing utilities and oil refineries, and even encouraging enlisted men in the Army to organize a union. Inflation soared to the unheard-of level of 100 percent, exhausting four Finance Ministers in two years. All this was a splendid recipe for counterrevolution -- Brazil’s usually fractitious military leaders banded together and organized a coup, was supported by business, most of the “middle class,” and the U.S., which spent tens of millions of dollars on a covert ant-Goulart media campaign. In l963, Goulart's second Finance Minister visited Washington and asserted that the left-leaning regime’s social reforms had been inspired by President Kennedy’s so-called "Alliance for Progress" But he received a cold shoulder -- the US aid window closed down until April 1964, after the coup. As early as l962 U.S. intelligence had warned of coup preparations, and was more than sympathetic. As David Rockefeller, who was at that point the President of his family’s bank, Chase Manhattan, told a closed-door conference at West Point in the fall of l964, ”It was decided very early that Goulart was unacceptable....and would have to go.”

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Amb. Gordon

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Ball and Johnson

A newly-declassified audio tape, recorded by the White House taping system on March 31, 1964, just as the coup was just beginning to unfold, shows President Lyndon Johnson personally involved in reviewing US support for the coup, and monitoring the latest developments. In a phone conversation with Undersecretary of State George Ball, who was coordinating US activities, Johnson expressed support for aggressive action: "I think we ought to take every step that we can, be prepared to do everything that we need to do, just as we were in Panama if that is at all feasible. I’d put everybody who had any imagination or ingenuity in (Ambassador) Gordon’s outfit or (CIA Director) McCone’s or yours or (Secretary of Defense) McNamara’s. We just can’t take this one, and I’d get right on top of it and stick my neck out a little.” US Undersecretary of State George Ball: That’s our own feeling about it, and we’ve gotten it well organized.”

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The April 1, 1964, coup that followed -- ”the worst April Fool's joke ever” -- was led by General Humberto de Alencar Castello Branco, commander of the Fourth Army in Recife. During World War II, he had served with Brazil’s Expeditionary Force, which fought with the Allies in Italy. His “trench buddy” there was Colonel Vernon A. Walters, the U.S. “military attaché” from September 20, l962 to l967, who would later be promoted to Lt. General for his accomplishments in Brazil, and then move on to serve as senior CIA officer, the CIA’s Deputy Director from March 1972 to 1976, and Ronald Reagan’s UN Ambassador in the 1980s. Colonel Walters spoke fluent Portuguese and also very close to General Emílio Garrastazu Médici, head of Brazil’s Black Eagles military school during the 1964 coup, then military attaché to Washington (64-65), head of Brazil’s CIA, the “Serviço Nacional de Informaçoes (SNI)” from 1967 to 1969, and then Brazil’s President, courtesy of the junta.
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General Walters

During the coup, Castello kept both General Walters and U.S. Ambassador Lincoln Gordon “very well-informed of pre-coup deliberations,” a US Navy “fast” Carrier Task Group was standing by offshore, and six US Air Force C-135 transport plants with 110 tons of arms and ammunition were standing by, in case there was any resistance. Fortunately, the coup was almost bloodless, although there would be many disappearances, deaths, and cases of political torture during the 21 years that followed.

Castello Branco was supposed to step down after a short period of housecleaning, but Brazil’s military proved to be a better master than a maid -- it stayed in power from l964 to l985. At first, Castello turned the economy over to Octavio Bulhões, an academic-cum-Finance Minister, and Roberto Campos, a U.S.-educated ex-Jesuit and former head of Brazil’s powerful National Development Bank (BNDES), who became Planning Minister. Their reign from April l964 to March l967 was the first in a series of rather disappointing Latin American experiments with monetarism, the notion that controlling the money supply was the sine qua non of economic policy. To fight inflation, they reigned in credit, slashed spending (which they viewed as driving money growth, because the government was financing by selling bonds to the banking system) , and opened the door to imports. They also eased restrictions on foreign investment, eliminated taxes on foreign profits, and outlawed strikes. Dozens of labor leaders were jailed, and wages were frozen, although inflation was still raging at forty percent a year. But the regime was careful to protect investors against inflation by indexing bonds and bank deposits. A new capital markets law also created Brazil’s first investment banks and provided “the most sophisticated company law in Latin America.” In l965, in an attempt to control the money supply, Campos also created Brazil’s first Central Bank and a National Monetary Authority.

All these conservative measures went down rather well with bankers and the U.S. government. Regardless of who staged the coup, it soon became quite clear who would pay for it. From l964 to l970, Brazil got more than $2 billion of U.S. aid, which made it the third largest aid recipient in the world. About $900 million of this arrived in the first six months after the coup -- in l964, after the coup, the U.S. Treasury paid seventy percent of the interest due on Brazil's debt. In July 1964, Brazil also signed another IMF agreement, and in the next three years it got $214 million of IMF loans, which had been zero from l959 to l964. Brazil also suddenly became the World Bank’s largest customer, after getting no loans at all from 1950 to l965, as well as the largest borrower the IDB and from our old friends, the US EX-IM Bank. From l964 to 1970, direct investment by American companies increased fifty percent. In January l967, the IMF held its 22nd convention in Rio, presided over by General Artur Costa e Silva, a former War Minister and Castello Branco's successor.
fig. 5.9. General Golbery.jpg

General Golbery

Unfortunately for the majority of Brazilians living in poverty, most of this aid went to pay for budget deficits, planning exercises, and capital-intensive projects -- original Alliance for Progress objectives like “eliminating illiteracy from Latin America by l970” and “income redistribution” got short shrift. The real value of the minimum wage dropped by one-fourth from l964 to l967, and malnutrition and infant mortality rose dramatically. Domestic industry was hit by foreign competition and a recession at once, even as multinationals were getting cheap finance and lower taxes. Many foreign investors also got ”sweetheart” deals -- Campos was especially generous to Amforp, an American-owned utility, and in l965 the American billionaire Donald Ludwig was allowed to buy an Amazon forest tract twenty percent larger than Connecticut for $3 million. General Artur Golbery Couto e Silva, the military’s “gray eminence,” later became President of Dow Chemical do Brasil and a representative of Dow’s Banco Cidade. A top professor at the Escola Superior de Guerra, Brazil’s version of the National War College, and the author of the seminal Geopolitica do Brasil, in the early 1960s Golbery had used CIA funding to launch the Institute for Research and Social Studies (Instituto de Pesquisas e Estudos Sociais--IPES), the SNI’s precursor. Over the next two decades, the SNI would employ more than 50,000 people to spy on and otherwise deal with “subversives” at home and abroad. Golbery later served as head of the Casa Civil, a key aid to President Ernesto Geisel. Not surprisingly, along the way, Dow Chemical got special permission for a new plant in Bahia.

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Roberto Campos

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Ernesto Geisel

Soon, even nationalist critics started attacking Roberto Campos' program as a ”pastoral plan” designed by Americans to eliminate domestic industry -- he became widely known as ”Bob Fields,” “a full-time entreguista.” In l964, a popular Rio bumper sticker said, “Enough of intermediaries! -- (U.S. Ambassador) Lincoln Gordon for President!” In l966, the U.S. Ambassador complained that American advisors were implicated in ”almost every unpopular decision concerning taxes, salaries and prices.”

In October 1965, in the last free elections until l982, the military’s candidates for state governorships in Rio de Janeiro and Minas Gerais were defeated. Workers, students, and church organizers turned radical, and several civilian leaders who had supported the coup, including Magalhães Pinto and Carlos Lacerda, also pressed for new elections. There was a sharp increase in capital flight -- in 1966 Brazilians sent more money abroad than all the new foreign investment and foreign aid brought in. The nationalists in the military also began to treat the “internationalist” segments of the upper classes harshly -- they unleashed a spy operation to catch wealthy Brazilians who had foreign accounts. In November 1966 the police, assisted by Brazil’s intelligence service, the SNI, under the command of General Fiuza de Castro, raided the offices of Bernie Cornfeld's Swiss-based I.O.S. flight capital operation in seven cities, arrested 13 salesmen, and seized files on 10,000 clients.
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Costa e Silva

All this set the stage for a hard-line backlash, led by members of the military who believed that the castellistas were selling out to foreigners and were not tough enough on subversivos. In late l966, Castello Branco gave way to the IMF’s favorite, General Costa e Silva. Political parties were consolidated into a ”majority” party, ARENA, and an official ”opposition” party, the PMB -- as they soon came to be known in the underground, the parties of ”yes” and ”yes sir.” Many opposition politicians, union leaders, and students were stripped of their civil rights. In December 1968, when a federal deputy asked Brazilian women to stop having sex with military officers until political repression ceased, the Army demanded that Congress lift the fellow’s immunity so he could be prosecuted for “insulting the Armed Forces.” When the Congress refused, Costa e Silva closed it, disbanded state assemblies and city councils, suspended habeas corpus, and imposed press censorship. Dictatorial niceties like arrests without warrant and torture now became common, while elections were reduced to ratifications of the military’s “bionic” candidates.

As for Roberto Campos, in March l967 he moved over to the private sector, giving way to a more dirigiste economic team. He never again exercised much power, although he served as Ambassador to England in the mid-1970s. His l982 diary reads like a “Who’s Who” of prominent Brazilians and Americans. Tony Gebauer was one of the friends listed there. But unlike some of his successors, apparently Roberto Campos didn’t do his private banking at Morgan -- the diary lists accounts at Geneva’s Pictet et Cie and Trade Development Bank, whose founder, Edmond Safra, also founded Republic Bank of New York and Safra Bank, and was an old Campos acquaintance.

So by 1967, Brazil was thus well on its way to becoming a marshal law state. With the support and guidance of the US government, a left-leaning, if democratically-elected, government had been vanquished, and a right-wing dictatorship put in its place. Especially after 1968, until the mid 1970s, the level of repression increased, and the number of political opponents who were murdered or “disappeared” reached into the low thousands. This was modest, compared with what went on in Argentina, Chile, and Paraguay, , but Brazil made up for the body count by sharing its early experiences with these countries. (See below.)

DICTATORSHIP OF THE IMAGINATION

While Brazil’s military deserved much of the credit for this new system, the US national security apparatus also played a key role. One of its crucial long-term influences was a variation on the “Mighty Wurlitzer” concept that it had pioneered with great success in France, Italy, Germany, and Japan in the 1940s and 1950s, and continues to use right up to the present in places like post-Soviet Eastern Europe, Southeast Asia, Lebanon, Pakistan, Iraq, and the Philippines.

This was to develop a nation-wide media network that could be used to shape public opinion. In 1964, an energetic, personable young Time-Life executive named Joe Wallach went to work with Roberto Marinho, a Brazilian businessman who at that point was running a newspaper and a local TV station in Rio. Wallach, didn’t speak any Portuguese at the time, but he had a background in TV production and accounting in California. Suddenly he became O Globo’s Executive Director. “Time-Life” also invested $4 million -$6 million in a joint venture with Globo, a great deal of money for that time, which helped Globo buy up concessions and steal a march on its competitors. “Time-Life” and its friends also encouraged multinationals to direct advertising to Globo, which soon came to run a kind of advertising cartel. Meanwhile, Globo also was careful to take a pro-government line in its reporting – cynics came to refer to it as “The Ministry of Information.”

All this, plus the special licenses for satellite broadcasting, radio, and local stations that it received again and again from the government, made Globo prosper. Over the next twenty-five years, under Wallach’s leadership, TV Globo became the world’s fourth largest TV network. The deal was rather simple – Globo provided favorable coverage to its political allies, and they helped it get the TV, satellite broadcasting, radio, and cable concessions that it needed to keep growing. In special cases, the politicians and their families also shared in the ownership of these “goodies,” as we’ll see below.

Over the next three decades, Globo became one of the most politically-influential media empires in the developing world – by 1990 it owned 78 stations in Brazil, with more than 50 million viewers in Brazil alone, ad revenue of $600 million a year, 8,000 employees, more than 30 subsidiaries in Italy, Portugal, Cuba, Japan, and other countries, and it was producing and exporting TV programming to 112 countries. Furthermore, even after Brazil returned to democracy in 1985, Globo continued to exert strong influence over political selection of many key political leaders, including several Presidents. All along, it was a consistent opponent of candidates that it perceived as threats to the system, often using blatant propaganda to influence elections, as in the hard-fought 1989 Presidential race between Lula and Fernando Collor.

Only in 2001-2002, long after Wallach had retired and Roberto Marinho had passed the empire on to his evidently less-able sons, would Globo’s disappointments in Internet and cable investments and crushing foreign debts finally bring it down to earth – not unlike the similar fate that befell its original partners at “Time-Life,” now part of the hapless AOL Time Warner conglomerate. The Marinho family’s estimated wealth on the Forbes’ annual billionaire survey peaked at $6.4 billion in 2000, with the Internet’s peak. By 2002 they were down to their last $1 billion, barely eligible for a mention on the Forbes list.

Even then, however, Globo still would try to use its political influence as currency. In the 2002 Presidential race, in a move that must have made its original partners turn circles in their graves, Globo for the first time threw its support to Lula, the left-wing candidate, who ended up finally winning on this fourth try for office. Evidently, having backed the “system” that, as we’ll soon see, ultimately made Brazil the world’s largest debtor, Globo was hoping for some government relief from its own crushing foreign debts.

BANKING ON THE STATE

In any case, in addition to military action and media support, the top-down development strategy adopted by Brazil’s military and its foreign allies in the 1960s also had a crucial economic component. At first glance – and indeed, at second – this strategy was a little hard to reconcile with free-market principles and democratic rule. But it cleared the way for bankers like Tony to earn huge fortunes. As Auden says, “When there was peace, he was for peace. When there was war, he went.” These bankers joined forces with a corrupt coalition of officials, industrialists, and agro-exporters to support a new debt-intensive strategy that was designed and implemented by a powerful new Minister also named Antonio, who became one of JPMorgan's Tony Gebauer’s closest friends of all.

Antonio Delfim Neto was an extremely fat academic-cum-bureaucrat from a middle-class Italian family in São Paulo. In the l950s, he wrote a brilliant Ph.D. dissertation on the coffee industry and taught macroeconomics at the University of São Paulo (U.S.P.). In the l960s he was a consultant to Ralph Rosenberg, whose Ultra Group was the largest private investor in Petrobras, as well as Antonio Carlos de Almeida Braga, the owner of Bradesco, Brazil's largest bank, and Pedro Conde, another bank owner. From 1963 to l967, Delfim, in his late thirties, advised São Paulo governors Carvalho Pinto and Lauro Natel, who was on leave from Bradesco. Then, from l967 to 1985, Delfim came to wield more influence over the economy than anyone before or since.

He was as quick-witted as Campos, but most of his success was due to a lack of ideology. As Delfim said in l969, “I am not going to sacrifice development only to pass into history as someone who defeated inflation at any cost.” He was the grand master of bureaucratic infighting, inserting his “Delfim boys,” mostly U.S.P.-trained economists, into key positions all over the government, where they operated a kind of Florentine patronage system, keeping a running tally of favors owed to important people. “I was in the office of (an important banker) when Delfim called. He needed $5 million right away,” one banker recalled. “The only argument was how to get it to him. We knew he'd make it up to us.” In a country where most ministers rotated quickly, this network of favors and influence earned Delfim unusual longetivity. He was Finance Minister in l969-74, Ambassador to France in l974-78, Minister of Agriculture in l979, Planning Minister in l979-85, and even after civilian rule returned in l985, an important behind-the-scenes leader in Congress, where he also enjoyed immunity from prosecution. Among those responsible for Brazil's massive debt burden in the 1980s, only Tony Gebauer enjoyed similar continuity.

In August 1969, General Costa e Silva died of a stroke, after learning that his wife had helped deliver Brasilia’s telephone exchange contract to Ericsson, a Swedish company that bribed its way all over Latin America. Vernon Walter’s friend, the even-more hawkish General Emilio Medici (1969-74), then took over, and some of Delfim’s critics seized the opportunity to accuse Delfim of corruption. But he was so popular with all his other “clients” that Delfim was soon reappointed. He promised Medici, echoing the grandiose Kubitschek in the 1950s, “Give me a year and I will give you a decade.”

Medici.jpg General Medici

Meanwhile, from a national security standpoint, Medici was exactly what Brazil’s US allies were looking for – he visited Nixon, Henry Kissinger, and General Walters in December 1971. In the meeting just two weeks later with Secretary of State William Rogers, recorded in a transcript only just released by the National Archives in 2002, Nixon described Medici in glowing terms:

  • Rogers: “Yeah, I think this Médici thing is a good idea. I had a very good time with him at lunch and he…”
  • Nixon: “He’s quite a fellow, isn’t he?”
  • Rogers: “He is. God, I’m glad he’s on our side.”
  • Nixon: “Strong and, uh, you know…(laughs)…you know, I wish he were running the whole continent.”
  • Rogers: “I do, too. We got to help Bolivia. He’s concerned about that. We got to be sure to…”
  • Nixon: “Incidentally, the Uruguayan thing, apparently he helped a bit there…”

The “Uruguayan thing” was clarified in another transcript, recently released, of a Nixon conversation with Britain’s Prime Minister Edward Heath that same month. According to Nixon, “The Brazilians helped rig the Uruguayan election…Our position is supported by Brazil, which is after all the key to the future. ”(emphasis added.) He was referring to the November 28, 1971, elections, in which Uruguay’s Frente Amplio, a coalition of left-leaning political parties not unlike Allende’s Unidad Popular in Chile, had been defeated by the right-wing Colorado Party. The result was indeed unexpected, and evidently Medici had had a key role in it.

In March, 1972, the Colorado’s new right-wing President Bordaberry, gave Uruguay’s security forces a green light to go not only after the Tupamaros, Uruguay’s urban guerillas, but also against its labor unions, student associations, and political opponents. In June 1973 the military made Bordaberry a puppet, and in 1976 took complete power, following in Brazil’s footsteps. The result was a bloodbath that anticipated the thousands of political murders that later occurred in Chile, after Allende’s demise in September 1973, and in Argentina after its military seized power in 1976. By then, Uruguay, a country with just 3 million people that had once been known as “the Switzerland of Latin America,” had become its torture chamber, with more political prisoners per capita than any other country in the world. Like Brazil, once gone, civilian government did not return to Uruguay until 1985.

According to other newly-released documents, General Medici had also assisted with the right-wing in Bolivia in August 1971. More generally, it has recently become clear that Brazil’s military, with US support and coordination from the US, played a key role in training and guiding the repression that went on in Chile, Argentina, Paraguay, and Bolivia in the late 1960s and 1970s. As one scholar noted, “Brazil had a head-start on terror.” Even prominent journalists, like Waldimoro Herzog, who was murdered by the Brazilian regime in 1975, were not safe.
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Indeed, one of the victims may even have been former President João “Jango” Goulart himself, who died in 1976 of a curious “heart attack” at the age of 58, at his ranch in Parana. Goulart’s family had long suspected that he’d been murdered by the military. In 2000, Brazil’s Congress finally got around to starting an official investigation of the death. Of course Brazilian Presidents have a history of unfortunate endings – Juscelino Kubitschek, Quadros’ predecessor, also died in 1976, in a car accident, and Tancredo Neves, the first civilian President after military rule ended in 1985, died after three months in office.

In any case, whether or not the “domino theory” really ever applied to Communist revolutions, clearly it worked quite well with respect to these Latin American right-wing regimes. And their US patrons discovered that with only a little nudge, one big domino – “the key to the future” – could wield extraordinary influence.

***


© James S. Henry, SubmergingMarkets™, 2004

1 The above is an excerpt from James S. Henry, The Blood Bankers. Tales from the Global Underground Economy. (New York: Four Walls, Eight Windows, December 2003, 417 pp.)

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