Brazil's Leader Seeks To Reassure Critics On Economic Reform

Franco voices support for Collor's ideas amid doubts from international creditors

FOR the thousands of Brazilians who took to the streets last week to protest corruption, the Sept. 29 impeachment of President Fernando Collor de Mello was a chance to set their battered ship of state on a more promising course.

Yet only days after Mr. Collor was tossed overboard for his involvement in an influence-peddling scandal (he now awaits trial in the Senate), Brazilians are clearly worried that his replacement, Acting President Itamar Franco, may undermine Collor's one clear success: free-market reforms designed to modernize the foundering, state-dominated economy. Inflation of 22.5 percent a month is eroding wages and consumer confidence, growth is stagnant, and more than 1 in 6 Brazilians are unemployed.

Despite a "commitment in principle" to Collor's basic economic ideas and the release of a 13-point "emergency economic plan" that strays little from Collor's orthodox policies, Mr. Franco's first public statements leave that commitment in doubt.

"Among us are misery, unemployment, insecurity, and the fatigue of fear," Franco said in an address to his new ministers Monday. "I reject as criminal and cruel the modernity that negates basic dignity of education, of honorable work, of health and happiness.... If the state does not serve to promote peace, justice, and well-being among men, what does it serve?"

Echoing President Franklin Roosevelt's famous words, Franco said the only thing to fear was "fear itself." The promise of a state-led "New Deal" was implicit to most listeners, and perceived support for increased government spending and easing of tough fiscal and monetary discipline prompted an 8.6-point drop in Sao Paulo stock markets before lunch.

Planning Minister Paulo Haddad quickly moved to play down Franco's remarks. Reiterating a commitment to financial austerity, anti-inflation measures, free markets, tariff reductions, and an end to direct government intervention in the economy, Mr. Haddad told a meeting of business leaders that any attempt to kick-start the economy would come only in the "medium term" and only after tax and spending reforms gave the country a better revenue base. The government says at least half of all Brazilians evade i ncome taxes.

Economist Carlos Langoni, a former president of Brazil's central bank, says the new government's vagueness threatens the country with dangerous consequences. "If they try to stimulate the economy before the effective implementation of fiscal reforms, there is the danger of increased inflation," he says.

The dominance of Franco's new Cabinet by political cronies from his days as a senator has led the press to dub the Cabinet "a ministry of buddies." Franco's most controversial appointment, however, is an outsider. New Finance Minister Gustave Krause, a congressman from the small, economically troubled state of Pernambuco, has raised more than a few skeptical eyebrows.

Unlike Marcilio Marques Moreira, the highly regarded engineer of Collor's reforms, Mr. Krause has no international or high-level financial experience and speaks no English. With officials putting the final touches on complex treaties to restructure Brazil's estimated $110 billion foreign debt, many consider the new minister out of his depth.

"We are completely disillusioned with the appointment of the new economy minister," says a New York banker who follows Brazil closely.

Reports in the respected daily newspaper Estado de Sao Paulo said European bankers were considering whether to pull out of the debt deals altogether, denying Brazil new credits needed to modernize its cash-starved and inefficient industries.

According to several people who have worked with him, however, Krause has a good record as a cost-cutting administrator. He has also promised to uphold the terms of the debt treaties. The Franco government has also promised to continue a program of lowering tariffs and opening the protected economy. Still, the acting president has expressed concern that Brazil's opening to the world is happening too fast.

"Franco is a man of old ideas," says Robson Pacheco de Souza, former president of the Brazilian investment dealers' association. "I don't trust him to keep the economy on course.

Others, however, point to a broad congressional consensus on the need to reform the tax structure. According to Haddad, new spending will be based on increased revenue or reallocation of current resources. Franco is particularly interested in boosting spending on health, education, and welfare, three areas badly hit by recession and Collor's attempts to control spending.

"Franco isn't planning any radical changes. He's just trying to plug up the holes in Collor's program," says David Fleischer, a professor of political science at the University of Brasilia.

Despite his concern, Mr. Langoni also is taking a wait-and-see attitude. "The pace of reform might slow," he says, "but because of the crisis, most people expect that. That's the price we have to pay to keep the democracy working."

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