Brazil Sets Off on Uncertain Course
To most economic analysts, President Franco's plan to kick-start the economy is a dangerous pipe dream
BRAZIL'S prolonged political crisis ended Tuesday with the resignation of President Fernando Collor de Mello, but many now fear that the new head of state, Itamar Franco, is leading Latin America's largest country into a period of deep economic uncertainty.Skip to next paragraph
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Mr. Franco, who has served as acting president since Mr. Collor was impeached on corruption charges three months ago, takes over the reins of power in the face of persistent high inflation, lingering recession, widespread poverty, and a nearly bankrupt treasury. While no one accuses Franco of impropriety, concern is growing that he is not up to the enormous task that faces him.
In particular, most Brazilian economic analysts believe his sketchy plan to kick-start the economy, increase social spending, and reduce annual inflation in excess of 1,000 percent is a dangerous pipe dream bound to make the problems worse. Many also say his rise to power ends Collor's two-and-a-half-year attempt bring free-market forces to Brazil's heavily protected, subsidized, and regulated economy.
In his first nationally televised address yesterday, Franco said "Brazil has lived through three years of false modernity." He fudged the question of whether he would continue Collor's program of privatizations, but promised to reduce interest rates.
"Franco's ideas are more evidence of Brazilians' fantastic capacity to recognize the details but forget the essentials," says Mario Simosen, Brazil's finance minister in the late 1970s.
Mr. Simosen resigned as finance minister in 1979 after unsuccessfully opposing a similar plan to push growth despite inflation. The policy, implemented during a downturn in the boom years of the 1970s, led to the economic collapse, hyper-inflation, and debt crisis of the 1980s.
Not everyone is so pessimistic about Franco's ideas.
"Franco has been called an old-style 1950s nationalist. That's not true," says Aspacio Camargo, a leading Brazilian historian. "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. Let's return to Keynes.' But Keynesians don't signify a return to economic tomfoolery anymore; these people know they need to balance their budgets."
Franco was elected vice president in 1989 on the same anti-corruption and free-market ticket as Collor. He promised, after the Sept. 29 impeachment, to continue most of Collor's policies, saying only that he would like to reduce the hardship caused by a program of budget cuts and high, anti-inflation interest rates.
But Franco's unwillingness to clearly outline his ideas has heightened concern about Brazil's future. During his three months as acting president, Franco gave no press interviews and said that clarification of his policies would have to wait until Collor's fate was resolved. But he did move to suspend the country's ambitious privatization program and draw back from Collor's successful record of balanced budgets. In November, the country ran its first monthly deficit since Collor took office in March 1990 .
Franco also has called for increased social spending although Brazil has only enough money to pay salaries and make debt payments. Nearly 60 percent of Brazil's budget goes to cover internal debt. Franco's call for a reform of the tax system to pay for his proposed infrastructure and welfare plans also has gone nowhere.
"Franco has no idea what he's doing," said Alexandre Barros, a Brasilia political risk analyst. "He's intelligent and honest, but he just doesn't know anything about economics."
Like Simosen, Mr. Barros says the government cannot kick-start the economy when inflation is 25 percent a month. "The level of [Franco's] understanding is below that of Economics 101. He doesn't seem to realize that inflation hurts the poor the most."
Franco's policies are also rasing fears in neighboring countries. Leaders in Brazil, Argentina, Uruguay, and Paraguay hope to have their Mercosur common market up and running by 1995. Brazil's inability to reform and stabilize its economy has many Mercosur diplomats warning of the program's possible collapse.
Argentina, for instance, has made great progress in reducing inflation and opened its markets to other Mercosur countries, but Brazil's rapidly plummeting currency has brought imports pouring across the border, seriously hurting industries already struggling from lost subsidies and protection.
Brazil is also clouding the great economic strides made by the whole of the Latin American and Caribbean region in 1992. According to United Nations statistics, the region has grown 2.4 percent in 1992 despite a world-wide recession. Excluding Brazil, Latin America's largest economy, the figure is 4.2 percent.
"The economy is in a state of chaos," says Steven Popovics, president of Aplicacao, a Sao Paulo-based commodities brokerage. "Everyone is throwing up their hands. No one has any idea what is going to happen."
Though Collor no longer bears responsibility for the economy, his problems are far from over. Despite his resignation at the opening of a Senate trial, the country's 81 senators continued their prosecution, voting overwhelmingly yesterday to strip him of the right to hold public office for eight years.
Although some observers expected Collor flee the country, the former president vowed yesterday to remain in Brazil, saying: "My only crime was to believe that I could change the country." He said he would fight the ban on holding public office.
Collor also faces several criminal racketeering indictments. No date for the criminal trial has been set, but if convicted Collor could face stiff fines and one to seven years in prison.
Despite lingering economic uncertainty, legislators hailed Collor's departure.
Said Sen. Amir Lando, who wrote the congressional report that resulted in Collor's impeachment: "The nightmare is finally over."