New York Times
August 1, 1998
Brazil's Economic Half-Steps
By DIANA JEAN SCHEMO
RIO DE JANEIRO, Brazil -- Last fall, as the wave of financial crises surging through Asia threatened to engulf emerging markets around the world, Brazilian President Fernando Henrique Cardoso appeared to be taking swift, decisive action to distance his country from the trouble.
He doubled interest rates to 43 percent, a move intended to protect the real, Brazil's currency. He announced a package of 51 measures to raise $18 billion in government revenue and to cut costs, in part by dismissing more than 30,000 civil servants, freezing public-employee wages and clearing the rosters of dead pensioners whose survivors, conveniently, failed to notify the government.
It was months before Cardoso would begin his campaign for re-election, and Wall Street hailed Brazil's decisiveness at a time of waffling, mud slinging and excuses from Asian leaders unable to confront their own countries' structural problems.
But as the October presidential election gets closer, the tough talk of last year has disappeared, and the promises of civil service and social security changes that backed the fiscal-stabilization program four years ago remain half-done. Though Brazil is still vulnerable to the strains and threats from emerging markets half a world away, the federal government in Brasilia has ceased moves to cut spending.
Of the 51 austerity measures, only those that involved raising revenue were enacted, while layoffs and other cost-cutting measures were either watered down or abandoned. Even the crackdown on fraudulent pensioners has collapsed.
Eager to make up for a series of political gaffes in recent months, the president renounced some of the measures as "unnecessary evils" and instead raised civil service wages at a cost of more than $400 million this year and an estimated $2 billion in the coming years. He spent more than $5 billion to spur the construction of low-cost housing, and opened the tap for billions in agricultural credits.
Faced with polls that showed growing popularity for his left-of-center rival for the presidency, Luiz Inacio Lula da Silva, Cardoso also relaxed the pressure on government agencies to reduce spending for the rest of the year, saying they could spend money on the basis of projected, rather than actual revenue. The expected cost? More than $4 billion.
With official unemployment running at 8.2 percent, sharply higher than the year before, the president pledged that creating jobs would be a priority during a second administration, unlike in the first.
"They've come down off their high horse and seen what the polls were saying," said David Fleischer, a political science professor at the University of Brasilia, who writes the newsletter Brazil Focus. Cardoso is again more comfortably ahead in voter surveys, and most analysts expect him to win the required majority in the first round of balloting.
Fleischer and others credit the Brazilian president with acting quickly to contain the effects of the Asian crisis. Wednesday's auction of Telebras, which brought the government $19 billion for its controlling stake in the national telecommunications system, showed investors remain bullish on the country's long-term prospects. Brazil receives the most direct foreign investment of any emerging market.
But analysts add that Brazil's economic health has suffered with the president's failure to follow through. In part because of the sharp increase in interest rates, the budget deficit climbed to 6.7 percent of the gross domestic product, with the deficit for April nearly 80 percent higher than that for April 1997.
"A lot of the measures were 'for the English to see,"' said Alexandre Barros, an economic consultant, using an expression dating back to the 1800s, when Brazil, deeply in debt to England, distracted its creditors by pledging to turn over customs revenue, which had been falsely inflated.
Despite the pledges to outsiders, Barros said, the government has increased rather than cut spending since November. "The government did a lot, but the lot that it did was not enough, especially with the deficit," he said.
In a recent interview in Brasilia, Finance Minister Pedro Malan acknowledged that the austerity measures Cardoso promoted last fall were "absolutely essential" to shoring up Brazil's standing at the time. Though they were not all carried out, he said, "we showed that we were firmly committed to continuing to move forward with the real."
With the country's foreign-exchange reserves at nearly $71 billion, after falling to $52 billion when the government was forced to defend the currency last fall, Malan argued that Brazil was now "in a better position," and he called a devaluation "out of the question." The real, which trades within an exchange-rate band, is selling at 1.163 to the dollar, down from 1.10 last November.
The economic and financial restructuring effort known here as the Real Plan began four years ago. It proceeded from policies the president instituted as finance minister in the preceding administration, reducing inflation to less than 5 percent this year from quadruple digits at its worst stage. And it has helped lift millions of Brazilians out of poverty, in part by broadening access to credit. Before the effects of the Asian crisis spread, the sales of cars, appliances and other consumer goods had mushroomed in this country.
But the plan required sharp changes to modernize the economy: privatizing state industries, removing obstacles to foreign investment, cutting government payrolls and social security expenses, and dismantling obstacles to the dismissal of workers.
Privatizations and other revenue-producing measures have taken off, while more difficult efforts to reduce social security benefits or civil service rolls have either stalled or been approved but not yet enacted. Special-interest groups like judges and politicians have maneuvered to maintain relatively lavish pensions, for example, making it politically harder to demand sacrifices from ordinary workers. The last ballot on social security reform failed by two votes.
David Rothkopf, president of Newmarket Co., an investment firm in Washington, reflected on Brazil's defeat in the world soccer finals by France and remarked: "There is a growing sense that the World Cup loss might not be the biggest disappointment Brazil faces this year. They are not looking like they'll be able to deal with some of the scenarios that might come along."
Those could include another round of devaluations in Asian currencies, an eventual collapse in Russia or a ballooning domestic trade deficit. And because Brazil, Argentina, Paraguay and Uruguay are linked in a regional alliance known as Mercosur, a devaluation in Brazil might well have a domino effect.
Even analysts like Ernest Brown, a senior economist for Latin America with Morgan Stanley Dean Witter, who praises the Brazilian government for strides in privatizing state industries and reforming government, acknowledge that investors view emerging markets in general more skeptically. Morgan Stanley forecasts 1.5 percent growth here this year, while others predict no growth. In July, the investment house lowered its expectations for growth in 1999 to 3.5 percent from 4.9 percent.
Brown blamed the government's "failure to rein in fiscal red ink" for the dimmer forecast. "From that perspective, they've certainly come up short in terms of Wall Street's expectations," he said.
Analysts are predicting that the jolt Cardoso received from the polls in June will not alter the direction of Brazil's economics but will spur him to think more about selling his economic changes to voters. And as fewer state entities remain to be sold off, this argument goes, pressure will build for delivering on the promised reforms in a second term.
Cardoso's popularity plunged after he publicly called workers who opposed making the minimum retirement age 65 "bums." A few months earlier, he derided his countrymen as "hillbillies." The attacks reinforced a growing perception of presidential arrogance and insensitivity.
"The poor start working early and they die early," Barros said. Requiring all Brazilians to work until 65 further concentrates wealth among the upper classes. "It's taking the income from the poor and giving it to the rich," he said. "People don't know if the government thought about that." |
