Brazil's economic `shock' plan: risk for Sarney

Brazilians are not yet carting currency around in wheelbarrows, as some of their Latin American neighbors do. But inflation remains one of the most destabilizing threats to Brazil's young democracy. Brazil's new economic ``shock'' program is considered to be President Jos'e Sarney's first real political initiative since he took office last year. Much like the dramatic Argentine Austral Plan instituted last June, it contains a package of wage-price controls and creates a new currency, the cruzado, worth 1,000 of the old cruzeiros.

The program, announced Feb. 28, is part of a larger effort by Latin American debtor nations to create their own austerity programs at their own pace, rather than take directives from their creditors and the International Monetary Fund.

It is a bold reversal for Mr. Sarney, who had previously been successful in promoting rapid growth. Despite the burden of a $104 billion foreign debt, Brazil's economy grew by 8 percent in 1985 -- the highest growth rate in the world.

The rapid growth is what pushed annual inflation over 250 percent -- and what impelled Sarney to ask fellow Brazilians to show restraint and make sacrifices. But that request is a gamble that could affect how long Sarney, the nation's first civilian president in 21 years, remains in office.

Observers say that the mood set by the program will directly affect fall elections for a constitutent assembly that will set the date of the next presidential election.

Sarney was originally vice-president for President-elect Tancredo Neves who died before taking office a year ago. In the transition from military to civilian rule, the two had been chosen by an electoral college rather than direct vote. As a result of his unusual rise to power, says one political scientist, Sarney spent a timid first year in office ``apologizing for being there.''

Noting the uncharacteristic decisiveness of the program, one Brazilian newspaper editorial said on the day the program was announced that ``the new government began today.''

The success of the zero-inflation program depends largely on the willingness of the people to stick to the wage-and-price controls. Sarney needs all the public confidence he can get: If some people rebel against the price controls, the rest could rush to raise their own prices, thus starting the inflationary spiral again.

Inflationary habits have become ingrained in Brazilian society, thanks to a government indexing program. The indexing has long provided automatic price increases for goods and services in order to maintain a uniformity of prices as they went ever higher. The new program suspends this practice.

Initial Brazilian reaction has been favorable, with the exception of some union complaints about possible losses in the conversion rate of cruzeiros to cruzados.

Reaction to the program is a ``carbon copy'' of the reaction to the Austral Plan in Argentina last June, says political scientist Guillermo O'Donnel, an Argentine who lives in Sao Paulo.

He says the Argentine and Brazilian programs stir citizens' emotions and raise national pride. ``It tells the common people they are actors and they are invited to play a role and that in a sense they are responsible in controlling prices,'' he explains.

The timing of the program appears to have been a response to hints that the economy was moving toward hyperinflation. A drought pushed food prices very high, and January and February inflation rates reflected that with 16 percent and 14.3 percent rates that represent a doubling of the annual rate to 500 percent.

The importance of getting inflation under control can be gauged by the risk that Sarney appears to be taking, says Juan Lara, director of the Latin America economic service of Wharton Econometric Forecasting Associates. If Sarney's anti-inflation program is not successful, he risks a recession that could set him back in the economic indicators as well as possibly losing his office, Mr. Lara adds.

The new plan was created independently from an agreement this week between Brazil and private banks, which restructured Brazil's payments on its 1985 foreign debt.

But it is undoubtedly related to pressure from creditors for such a program during debt negotiations, says Riordan Roett, director of the Center of Brazilian Studies at the Johns Hopkins School of Advanced International Studies.

Economists generally criticize the ``shock'' programs in Brazil and Argentina for not providing for ways to remove the wage-price controls. The real way to end inflation, they say, is to overhaul the public sector, where inefficiency saps government coffers.

The writer recently spent a week reporting in Brazil.