History, Economic Crisis and Reelection

Largely because of Cardoso’s popularity and his success in revitalizing the economy, Brazil’s legislature passed a constitutional amendment in 1997 allowing the president to run for a second term in office. Later in the year, however, Brazil’s economy was shaken following a collapse in Asian stock markets. The resulting financial crisis affected stock markets in many developing economies. Reacting to the crisis, Brazil’s government introduced an austerity program that reduced federal spending and temporarily restored foreign confidence in the economy. The economy received a second jolt in August of 1998 after the government of Russia defaulted on its foreign debts. Fearing that the economic crisis might spread through Latin America, investors began withdrawing their money from Brazil. Cardoso began negotiating an economic bailout with foreign lenders through the International Monetary Fund (IMF), an international agency designed to stabilize the world economy.

Even though the economy had taken a turn for the worse, Cardoso won election to a second four-year term in October 1998. The following month, the IMF and Brazil announced a $41.5-billion loan package to protect Brazil’s economy. In return, Cardoso agreed to introduce legislation designed to cut back on government spending and to restructure Brazil’s taxation and social security systems. In January 1999 the government devalued the national currency, the real, by 8 percent against the U.S. dollar. (Devaluation involves lowering the value of a nation’s currency in relation to foreign currencies.) Financial experts hoped the devaluation would put the economy on a more secure footing by lowering the cost of Brazilian products in overseas markets, making exports more attractive and increasing the flow of cash into Brazil.

In June 1999 the government placed the military under direct civilian control. The separate army, navy, and air force ministries, which had been led by top military men, were combined into one Defense Ministry headed by a civilian cabinet minister appointed by the president.