Latin Free Market Endures Test

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New Brazilian mandate to reformer Cardoso is good for world

Just because the incumbent Fernando Henrique Cardoso won his second term as president so easily, the significance of the recent Brazilian elections on Oct. 4 should not be overlooked. His victory will shape the political and economic landscape of Brazil and the rest of Latin America for years to come, with important consequences for the global economy as well.

More than anything else, voters closely identified President Cardoso with the market economic reforms that have taken hold in Brazil. In his previous post as finance minister, he orchestrated the real (currency) plan, involving the introduction of a new currency and associated measures to bring Brazil's hyperinflation under control and restart economic growth. As president, he has further opened the economy to foreign trade and investment and has vigorously privatized state-owned companies. Yet, he was reelected in the midst of a punishing economic crisis, caused in part by the volatile capital flows his policies brought to Brazil. He has been battling the crisis with orthodox financial policies - sky-high interest rates, reduced government expenditures, and tax increases - imposing, in short, considerable economic hardship on an already poor country.

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Brazilians voted for Mr. Cardoso because they trusted him and his policies - despite the economic trauma that has emerged on his watch. They had a clear alternative on the ballot, the respected labor leader Luiz Inacio Lula da Silva, who promised to reverse Brazil's turn to market economics and reimpose administrative controls on the economy.

There is an important lesson in the fact that the voters stuck with Cardoso's reform orthodoxy. In Brazil, and in most Latin American nations, good economics has become smart politics. Free markets will endure in Latin America, not because they produce the best long-term economic and social results, but because they win elections for their proponents. If Cardoso - the symbol of economic reform in Brazil - had been defeated by Mr. da Silva, populism would have gained new credibility as an electoral strategy throughout the region. Latin America's economic future would be bleaker.

Cardoso's victory will affect Latin America in other ways. Brazil is now at the front line of efforts to stop the global financial turbulence that started in Asia last year and has spread throughout the world. Brazil's economy came under heavy assault immediately after Russia's financial implosion, but it has so far averted an Asian- or Russian-style meltdown largely because of the high expectation of Cardoso's reelection, coupled with his government's tight monetary policy and adamant rejection of devaluation. Since the election, the economy's prospects have brightened a small bit more - as Cardoso has made plain he will implement even tougher austerity measures; as Brazil; the US, and the IMF close in on a financial assistance package; as the US Congress finally approved added resources for the IMF, making an adequate package possible; and as US interest rates have come down.

It is too soon to start breathing easy. A campaign sticker in Brazil stated, "Get your revenge on President Cardoso. Reelect him." Cardoso has a hard road in front of him. The flow of capital out of Brazil still must be staunched. Investors - foreign and Brazilian - need to be assured that Brazil will be able to pay its obligations without devaluing its currency. They will be looking for a detailed plan from the government to reduce the outsized fiscal deficit, requiring still higher taxes and spending cuts. Cardoso also must move quickly to gain support for constitutional amendments to reform Brazil's social-security system and its civil service, both extraordinary drains on the federal treasury. The political heat will rise sharply once those who have to pay the costs of this economic retrenchment are identified.

Preventing the collapse of the Brazilian real (and the economy along with it) is in everybody's interest. Financial havoc in Brazil, the world's eighth-largest economy, would provoke shocks throughout Latin America and beyond. The US economy would surely not escape unharmed. It is too closely linked to Brazil and Latin America.

The Clinton administration knows what has to be done. The US must continue to work with Brazil and the IMF to promptly come up with a program of support sufficient to ward off new assaults on the real and give Brazil the room it needs to start recovering its economic vitality. This would not only make Cardoso's job a little easier, it would also be a critical step toward containing global financial turmoil.

* Peter Hakim is president of the Inter-American Dialogue in Washington.

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