As the Brazilian economy goes from bad to worse, the optimism that greeted the late-September impeachment of President Fernando Collor de Mello, is rapidly evaporating.
Collor`s departure-the result of a corruption scandal-brought millions into the streets declaring a new era of democracy and accountability. But last week`s resignation of finance minister Gustavo Krause has heightened worries that Collor`s replacement, acting President Itamar Franco, is tipping Latin America`s largest country into economic chaos.
The result is an apparent abrupt end to the country`s 2 1/2-year experiment with free-market reform.
On Monday, the Franco government released details of an economic plan designed to increase social spending, reduce interest rates, kick-start the faltering economy and fight an annual inflation rate of more than 1,000 percent.
Most business and political analysts believe the goals are contradictory and say there is little chance Brazil will pull out of its decade-long recession anytime soon. Instead, they see an increase in political conflict and increased state intervention as Franco tries to reconcile his fast-growth and low-inflation goals.
Krause`s resignation on the eve of the plan`s announcement increased speculation that Franco`s economic team is deeply divided between orthodox free-marketers and neo-Keynesian interventionists. John Maynard Keynes was a Depression-era economist seen as the precursor of modern-day deficit financing.
Brazil has been in economic crisis for almost a decade. Beginning in 1990, Collor began attempting to reform the country`s bureaucratized and inefficient economy; but most of the other countries in the region have been moving much faster. In the 1970s Brazil was Latin America`s economic star, but now it is lagging far behind.
Figures just released by the United Nations show Latin America and the Caribbean`s gross domestic product grew 2.4 percent in 1992. Without Brazil, the figure would have been 4.3 percent.
According to Mario Simosen-who himself resigned as finance minister in 1979 after unsuccessfuly opposing a similar plan that led to Brazil`s big crash and debt crisis in the early 1980s-no rapid-growth policy can succeed when inflation is running at an average of 25 percent a month.
”Franco`s plan is more evidence of Brazilians` fantastic capacity to recognize the details but forget the essentials,” he said. ”The plan is like taking a person to the beach who has a 102-degree fever and double pneumonia.”
Adding to the uncertainty is Franco`s position as acting president. He has been reluctant to fully explain his ideas until Collor, suspended by Congress Sept. 29, is formally removed from office. That is not expected until Tuesday, when Collor is scheduled to appear before the Senate to hear its verdict on his alleged role in a giant influence-peddling ring.
”The economy is in a state of chaos,” said Steven Popovics, the president of Aplicacao, a Sao Paulo-based commodities brokerage. ”We have no real president and no finance minister. Everyone is throwing up their hands. No one has any idea what is going to happen.”
Those who see Franco`s presidency as good for the country are pinning their hopes on what they see as a common-sense approach involving fiscal stimulation.
”Franco has been called an old-style 1950s nationalist,” said Anastasia Camargo, a leading Brazilian political scientist. ”That`s not true. He believes the state has a role. He`s saying Collor`s free-market programs didn`t work and added to misery. Let`s take a third path. Lets return to Keynes.`
”But Keynesians don`t signify a return to economic tomfoolery anymore. These people know they need to balance their budgets.”
In line with this ”third path” approach, Franco pledged to continue the country`s privatization of 200-odd, mostly money-losing state enterprises, avoid ”quick-fix” economic shock plans, reduce tariffs and continue a policy of fiscal and monetary restraint.
At the same time he wants to ease the hardship caused by Collor`s tight money and spending plans and hopes to spend $4 billion on new social and infrastructure projects.
Still, he has been unable to reform the tax system to collect the money needed to pay for his plans. According to the government, an estimated 50 percent of Brazilians evade taxes and the government has only enough money to cover salaries and debt payments. Tax reform was a political minefield for Collor, and he chose instead to cut spending.
Despite a stated commitment to a revamped tax system, Franco opposes new taxes or harsher enforcement on individuals, saying they would create too much of a burden on the recession-shocked society.
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Failure to pass reform measures could make it harder for Brazil to comply with an International Monetary Fund agreement reached last summer to refinance the country`s estimated $115 billion foreign debt.
Budget problems began to appear in November when Brazil posted its first monthly budget deficit since March 1990, the month Collor took office. The $885 million shortfall was equal to 25 percent of government revenue.
Gross domestic product figures for 1992 were revised down to a negative 1.5 percent from a rise of 0.2 percent.
During his 62-day term of office Krause tried hard to resolve Franco`s desire to alleviate the country`s crippling poverty-made worse by Collor-era budget cuts-with the fact the country is nearly bankrupt. But he told friends he was fed up with Franco`s interest in policies that would undermine his attempts to stabilize the economy. Krause plans to reclaim his congressional seat to fight for tax reform.
Krause was also upset about the acting president`s tendency to take bold action without consulting him.
Franco pushed for and won lower interest rates, but when, as he was warned, the value of the cruzeiro, the local currency, fell against the dollar, Franco was livid. Placing an angry call to the Central Bank president, he demanded intervention to bolster the cruzeiro, to little effect.
The cruzeiro has dropped more than 40 percent in value over the last month, making debt payments more difficult and making it harder for businesses to import industrial equipment for expansion and modernization.
In November Franco suspended the long-planned sale of a state-owned steel company with a hand-scrawled fax to lead brokers hours before the scheduled auction.
While Franco`s successful call for lower interest rates pleased many businessmen, it has renewed fears of increased inflation. Real rates now are at 20 percent a year, down from 29.84 percent in October.
While current inflation is still astronomical, it has remained at an average of 25 percent a month for all of 1992, down from 78 percent a month when Collor took office.
Last week, Franco suspended all privatization efforts until April 1993 and promised more investment for major state-owned industries, such as telecommunications and petroleum, which he hopes to keep in government hands. ”Franco became horrible faster than I imagined,” said Alexandre Barros, a Brasilia-based political risk analyst who wrote a glowing portrait of the prospective Franco presidency just before Collor was impeached.
”I didn`t think he would show so much incompetence,” he said. ”All I can really say now is that the period of economic reform and privatization is probably over and that we will have some major economic intervention in the next month.”