Karina Robinson interviews Pedro Malan, Brazil's finance minister, who has less than two years left in office before elections.

Interviewing Pedro Malan, Brazil's long-standing finance minister, is like having a tutorial with a university professor. You have to be intellectually rigorous, although he will forgive a lapse or two, as he puffs on his pipe. Sitting on a comfy sofa, his woolly jumper at odds with his grey flannel suit, the professor's outward appearance, and protestations - "I am not a politician" - do not tally with a year as president of the Central Bank and a six-year stint as finance minister during a time when some of Brazil's most reformist legislation passed through Congress. "I am the longest-serving finance minister in Brazil under a democratic government," he says with pride.

Pre-election ambitions

With elections due to take place in late 2002, he has less than two years left in office. Some of the tasks he wants to accomplish in that time are to increase private domestic savings to reduce dependence on foreign flow of funds, to raise the efficiency of the public sector, to integrate infrastructure in South America "and the subject dearest to my heart and mind, which is investing in people, in education. That yields by far the highest rate of return you can get in social terms. The level of inequality in Brazil is politically unacceptable. It means the agenda for reform will take one or two generations," he says. "Somehow, I will continue to be involved."

Like him, Brazilian president Fernando Henrique Cardoso and central bank president Arminio Fraga will try to stay involved in the movement for reform after they leave office. Technocrats in Brazil are a small group, many of whom know each other from the Catholic University of Rio de Janeiro, a Jesuit institution that taught them intellectual rigour and the ability to obfuscate.

Latin American technocrats do not criticise each other in public. Commenting on Argentine economy minister Domingo Cavallo's strategy for solving his country's problems by trying to achieve the effect of a devaluation without devaluing, Mr Malan will only say: "The important thing is to have a signalling effect."

He disagrees with the thesis that Argentina should exit Mercosur, the regional trade body, which some commentators say is a closed market that benefits Brazil. He notes that intra-Mercosur trade trebled from its inception, although the terms of trade are skewed in Brazil's favour. It will be interesting to see the reaction in Brasilia to Mr Cavallo's attempts to impose tariff duties on consumer goods - Brazil took liberties with Mercosur rules two years ago during its crisis. Mr Cavallo is adopting another Brazilian idea: a financial transactions tax that he would ultimately offset against VAT or income tax. In Brazil, it raised about 1.7% of GDP last year. But foreign investors do not like it.

"It does have a distortive effect in terms of capital markets and liquidity and it should have been deductible," admits Mr Malan. "But it is a tax that is hard to evade and it is relevant for the broader tax effort, in helping us match the [real] income of individuals and firms."

The Brazilian government will have to find another way of raising money when the tax expires in mid-2002.

Experience in crises

Mr Malan is accustomed to problems. But the crisis of 1998-1999, when the government was forced to allow the real to devalue following Russia's default on its debt and plummeting confidence in emerging markets, was nothing compared with that of 1993-1994 "when I lost many years of my life", he says. "In 1993, Mr Cardoso was the fourth finance minister in Itamar Franco's administration, and inflation was running at 3000% a year. We were a small team, facing elections in 1994, and we felt if we did not defeat inflation in this government it would surge to 7000% or 8000%."

In that year, Mr Malan was Brazil's external debt negotiator. That September he became the central bank president and was on the front line in the creation of the Real Plan, a mixture of structural changes and monetary policy that saw inflation fall to 5% by the end of President Cardoso's first term in 1998. He denies the forced devaluation of the real in mid-January of the following year was a failure of the government's strategy. "The real had devalued in real terms in 1997 and 1998. We were going to make it faster when a variety of circumstances [forced our hand]," he says.

Both at the central bank and in the ministry of finance, Mr Malan had to deal with the banking system. It was especially hard work to convince state banks they were going to lose inflationary revenue - about 30% of their revenues at the time - and that their cost structure was too high. Some banks, though, had learned from the Cruzado plan in the 1980s. Unfortunately, "the three big private banks - Economico, Bamerindus and Nacional - failed to learn a lesson" and they were nationalised in the mid-1990s, he notes.

Now, the majority of banks are generally well capitalised and healthy. The challenge they face is to expand their business, since private credit is only 30% of GDP.

Argentina's problems are already affecting Brazil, as are those of the US. Brazil's exports to the US are about 22% of total exports, equal to 10% of GDP. The central bank was forced to raise interest rates in March for the first time in two years as the real plunged 10% in the year to date. Growth, more than 4% last year, is bound to be affected. Analysts are busy downgrading their forecasts and are concerned about the budget deficit, 4.6% of GDP, and a similar-sized current account deficit.

Momentum of reform

In addition, problems in the ruling and rather fractious coalition government seem to have abated for the moment, raising hopes that a few more measures of economic reform will be approved before momentum is lost as electioneering starts.

Nonetheless, many of the fundamentals in Brazil are in place, such as reform of the pension system, which just needs a few finishing touches, and last May's fiscal responsibility law. "It was a watershed, a historical benchmark in Brazil. Time will show how important it is," says Mr Malan of the new legislation. The law forced spendthrift states and cities to apply budget discipline while forbidding the central government to bail them out.

Whoever wins the next election, that law will stand, as will the notion that "preserving purchasing power is a public good", he says in response to concerns that a new government might follow a different economic policy.

Tough policies

Mr Malan may be a tad optimistic about the person on the street's comprehension of economic theory, but he does have a point when he says the Brazilian people elected President Cardoso even when, only 10 days before the election, he reiterated his tough message that there would be three years of hard work to stabilise the debt situation. Further evidence of a sea change in erstwhile profligate Brazil lies in the number of mayors and governors from opposition parties in power for the past five years who have been carefully trying to reduce the debt burden of their cities and states.

"There is a big difference between the opposition when not in power and once in power. It is the same all over the world. Look at [Italy's former prime minister] Massimo d'Alema and Lionel Jospin [prime minister of France]: they were both of the left and yet both showed a basic commitment to fiscal responsibility," says Mr Malan. "Brazil is clearly heading in the same direction."

A harder side of the avuncular academic appears when he talks about the Free Trade of the Americas. He argues there is no need to set deadlines for negotiations - the existing one of 2005 is enough. He is not confident about an agreement by then, noting that two major issues remain to be resolved: access to agricultural markets and the inclusion of anti-dumping procedures.

Ending the interview, Mr Malan tells a long, not very funny story about a man lost on a muddy road in Ireland who spots a local and asks: "Excuse me, can you tell me the way to Dublin?" The local scratches his head. "If I were to go to Dublin, I wouldn't start from here," he says. "Well," says Mr Malan, "that does not apply to Brazil anymore. It did six years ago. It shows we have come some way. Do not underestimate Brazil."

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