Tropic of Chaos (24 page)

As the Comando Vermelho was moving into the favelas
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the Brazilian economy was falling to its knees; the protests were a symptom of that. In the first two weeks of January, 14,860 workers in São Paulo were fired. At the same time, the government was implementing austerity measures: cutting public services, aid to the poor, and support for industry. In early April, the rage boiled over: the unemployed marched, only to be met by 10,000 riot police. The protests and chanting soon gave way to rock throwing and looting. The police answered with volleys of tear gas, charges, and vicious beatings. For three days the violence went on, and at least 11 supermarkets and dozens of bakeries were looted; thousands of protesters, shouting for jobs, even attacked the state governor's palace. Police arrested more than 450 people; damages reached $1.5 million.
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Brazil was entering a period of painful economic restructuring. Mired in debt, the government turned to the International Monetary Fund (IMF) and World Bank for new loans, but emergency help came with strict new economic conditions. To balance the books, Brazil would suffer a wave of pauperization, unemployment, hunger, homelessness, and desperation.

This was the context for the rise of the drug trade and the Comando Vermelho's pivot from Rio's prisons out into the favelas
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To understand the catastrophic convergence, we must first understand the foundational crisis of violence and poverty into which is now added accelerating climate change.

Like many developing economies, Brazil had followed a model of state-directed import-substitution industrialization (ISI) from the 1930s onward. Arrived at as a reaction to the collapse of markets for traditional exports during the Great Depression, this state-led form of capitalist development involved an uneasy compact between business and labor brokered by an interventionist state. In exchange for discipline on the shop floor, the state created social security programs and allowed rising wages for the aristocracy of labor. Investment and finance were regulated, and banks were often state owned. Throughout the 1930s and 1940s, in response to the Great Depression and World War II, forms of corporatism took root in many places. Sometimes corporatist policies were enacted by democratic states; witness the American New Deal. More often the developmentalist pact between labor and capital was delivered by “relatively autonomous” and authoritarian states, such as mid-century Italy, Spain, Portugal, Japan, Bolivia, and Argentina.

Domestic industry and markets were heavily protected. For example, in 1960 Brazil's tariffs on manufactured imports were almost ten times as high as those charged by the European Economic Community (EEC)—a 165 percent markup in Brazil versus 17 percent in the EEC.
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Both infant and well-established industries were heavily guarded against foreign competition. Under this regime, industry grew robustly but unevenly. Some
sectors were dynamic, efficient, and innovative, “a group of leading firms gained a competitive edge in the manufacturing sector,” while others languished due to the artificial monopolies allowed by ISI. Overall—and contrary to the assertions of today's economic orthodoxy—labor productivity, living standards, and the economy as a whole increased under ISI.
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David Harvey described the age of state-led development as follows: “This system had delivered high rates of growth in the advanced capitalist countries and generated some spillover benefits (most obviously to Japan but also unevenly across South America and to some other countries of South East Asia) during the ‘golden age' of capitalism in the 1950s and early 1960s.”
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In the early 1970s, the model in its various iterations hit trouble—partly due to internal problems and partly due to a worldwide crisis of overproduction and overaccumulation.
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The so-called golden age of capitalism, roughly 1945 to 1973, was essentially the story of postwar reconstruction: the long boom was the big rebuild following the devastation of World War II. The war destroyed not only 59 million human lives but also vast amounts of existing capital: factories, cities, farms, docks, gas works, water mains, roads, rails, and communications systems. For six years the scientific genius and herculean industrial might of the major economies was fed wholesale in the maw of war. The overall costs are variously estimated as at $1.5 or $2 trillion, but we'll never know the real total.

The post-1945 economic boom was essentially the big rebuild or big recovery. The war's end meant there was pent up demand and plenty of investment, and industrial planning enjoyed broad legitimacy. During the big rebuild, wages, taxes, and profits all grew together. However, during the mid-1960s there started to be too much stuff and not enough demand.
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By 1970, 99 percent of American homes had refrigerators, electric irons, and radios. More than 90 percent had washing machines, vacuum cleaners, and toasters.

As one economist put it, “Saturation in one market led to saturation in others as producers looked abroad when the possibilities for domestic expansion were exhausted. The results were simultaneous export drives by companies in all advanced countries, with similar, technologically sophisticated products going into one another's markets. . . . Increasing exports . . .
from developing countries such as Taiwan, Korea, Mexico and Brazil further increased the congestion of mass markets in the advanced economies.”
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By the early 1970s, capitalism was suffocating from industrial success. Around the world and across industries, firms found it increasingly difficult to maintain their amazing (if not aberrant) postwar profitability.
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By the early 1970s, a new factor had entered the equation: there was a global glut of liquidity—too much capital was competing for too few investment outlets. That translated into very inexpensive and abundant credit. Brazil had always borrowed to fund its industrialization, but now growth slowed, and capital became cheap.

In 1973, the other shoe dropped: Arab defeat in the Yom Kippur War led to an oil embargo by many key exporters. The price of oil quadrupled in less than a year. That hit Brazil hard. Though now a major oil producer, it then imported 80 percent of its petroleum. Before prices could subside, the Shah of Iran fell to a revolution, precipitating a second oil shock in 1979. Prices nearly doubled again. By the early 1980s, the Brazilian government was desperately trying to stimulate its economy by borrowing and spending. The
Miami Herald
business section pointed out the unfairness of the macroeconomic situation: “In contrast to Argentina and Mexico, a very high proportion of the billions borrowed here went to productive projects, analysts say. Many were the projects of ‘Brasil Grande'—nuclear power plants, hydroelectric dams, jungle highways, petrochemical complexes, an export-oriented arms industry, steel mills, and a $3-billion railroad to facilitate steel exports.”
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But Brazil was subject to the same austerity as those who had borrowed less productively.

Then, a third layer of the crisis hit. The world's leading economy, the United States, also faced deep trouble. Overcapacity globally meant a collapse in the rate of return on investment—a collapse of profits. “From a peak of nearly 10 percent in 1965, the average net after-tax profit rate of domestic non-financial corporations plunged to less than 6 percent during the second half of the 1970s—a decline of more than a third.”
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After
twenty years of continual expansion during the long postwar recovery, profits began to sag in 1966 and continued to decline steadily until 1974, until they reached a low of around 4.5 percent.
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The same pattern was visible from Germany to Japan, as all advanced capitalist countries experienced an after-tax profit decline of between 20 and 30 percent.

Robert Brenner, a leading scholar on this history, put it this way: “Due to the onset of over-capacity and over-production, world manufacturing prices had been unable to grow in line with product wages and the cost of plant and equipment: the result was falling profit shares and output-capital ratios, making for falling profit rates.”

How was this to be dealt with?

Fundamentally, for profits to recover, wages had to fall, and not just wages, but the social wage—the share of national production redistributed to the working class in the form of public goods like government-funded education, health care, and welfare. Rescue arrived in the form of Paul Volcker, the new chairman of the US Federal Reserve. Beginning in 1979, Volcker began a dramatic rise in interest rates from 7.9 percent in 1979 to 16.4 percent in 1981. This had the effect of cutting borrowing throughout the economy, and with that, investment and consumer spending also ratcheted down abruptly. Unemployment reached 10.8 percent by December 1982.
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At the same time, both Reagan and Thatcher launched offensives against the power of organized labor, cut social spending, and slashed taxes on the wealthy. As a result, the US economy plunged into what was then the most severe recession since the Great Depression.
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In the process, it dragged down many of its trading partners with it, as US imports shrank radically.

In Latin America the new monetary policy also meant that interest payments on existing debt soared. Thus began the Latin American debt crisis. From 1978 to the end of 1982, total Latin American debt more than doubled, from $159 billion to $327 billion. Debt servicing—that is, interest payments—grew even faster: the average Latin American country used more than 30 percent of its export earnings just to service its debts. Brazil paid nearly 60 percent.
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Journalist Andres Oppenheimer explained, “As the old debt gets more expensive it begets new debt; to meet their interest payments the major Latin American countries have had to rely more and
more on emergency loans from the International Monetary Fund and commercial banks. In effect, they are receiving with one hand and paying back with the other.”
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As public debt soared, the Brazilian currency lost value until chronic inflation became hyperinflation, hitting 1,765 percent by the end of the 1980s.
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The solution to the crisis came in the form of IMF- and World Bank–enforced austerity. In 1983 Brazil had the largest foreign debt of the developing world: $83.8 billion. Just to service its debt, it had to borrow more and more in a downward spiral. In early 1983, Brazil went to the IMF for $6 billion, then the single-largest loan in the Fund's history. In return, Brazil agreed to a brutal austerity program: to cut inflation, growth was strangled, public spending cut, the currency devalued, imports restricted, public assets privatized, and exports boosted.
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In São Paulo, workers soon rioted.
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Over the next decade the crisis dragged on.

Brazil's military government did push back a bit, resisting the Bretton Woods institutions' more draconian stipulations. As Finance Minister Dilson Funaro explained in 1986, “The way out of the debt crisis is through growth, and the IMF formulas don't provide growth.”
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But, in the end, neoliberalism won; deflationary austerity, deregulation, privatization, aggressive exporting, unemployment, suppressed wages, hunger, corruption, crime, and migration all defined the economic landscape.

Unfortunately, Brazil's export drive took place amidst falling commodity prices. Two factors contributed to this. The Bretton Woods institutions were simultaneously pressuring other Third World debtors to export more; meanwhile, deep recessions and high interests rates in the richer countries held down consumption. Increased supply plus reduced demand meant plummeting prices. Sugar, copper, aluminum, and other raw materials all hit deep lows.

The IMF's structural-adjustment program resulted in higher unemployment, rising poverty, and growing urbanization as the rural poor went to cities in search of work. From 1980 to 1990, Rio's overall population growth rate was 8 percent, but the favela population surged by 41 percent. As economist
and Latin America expert Mark Weisbrot explained, “From 1960–1980, income per person—the most basic measure that economists have of economic progress—in Brazil grew by about 123 percent. From 1980 to 2000, it grew by less than 4 percent.” Weisbrot estimates that, had Brazil not embraced neoliberalism, “the country would have European living standards today. Instead of about 50 million poor people as there are today, there would be very few. And almost everyone would today enjoy vastly higher living standards, educational levels, and better health care.”
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Even if Weisbrot overstates the case a bit (Which Europe? Rural Greece or urban Holland?), his larger point about neoliberalism's damaging impact is valid.

Had Brazil not embraced neoliberalism, violence would surely be less of an issue. As poverty increased and the favelas grew, social relations within them frayed. Amidst this neoliberal transformation, the Comando Vermelho and other gangs grew to become guerrilla armies
minus
the ideology or political cause, employing only the methods and organization of war.

“By 1991 the CV had become purely criminal. There was no ideology anymore,” explained Commander Rodrigo Oliveira of Rio's Civilian Police Special Forces when I met him in his office to discuss the gangs and the war on them. “Now their goal is power, plain and simple—not even huge private fortunes for the slum ‘owners,'” he said, using the colloquial term for the gang leaders. “Mostly it's just about organizational power, weapons, and status.”

Academic analyses of Rio's gangs often note the absence or failure of state institutions. Others, most notably Enrique Desmond Arias, argue that the criminal structures in the favelas bring together gangsters, police, community leaders, and mainstream politicians in a matrix of mutually beneficial relations. Such an arraignment, essentially the criminalization of the local state, has evolved out of the crisis of neoliberalism.
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To the extent that Arias is correct, criminality in the favelas becomes a matter less of state withdrawal and more of societal rot—a whole society infected by the gangrene of sub-rosa economics, corruption and violence.