Brazil Verges on Retreat From Free-Market Steps

Finance minister's resignation makes interventionist policy likely

THE resignation of Paulo Haddad, Brazil's second finance minister in just over two months, has increased fears that Latin America's largest economy is headed for even deeper trouble.

Amid a global trend toward freer markets, Brazil seems poised to revive policies that favor government intervention in the economy because leaders here feel that liberalization has been too harsh on the poor.

Ordered by President Itamar Franco to both reduce the country's annual inflation rate of 1,200 percent and boost its stagnant economy within three months or be replaced, Mr. Haddad stepped down Feb. 28 sending prices up, confidence down, and markets into confusion.

Many now expect Franco and his new finance minister, Eliseu Resende, to implement a sweeping economic intervention package and bury the country's three-year-old experiment with free-market economic liberalization.

"This resignation is definitely a negative," said Luis R. Luis, the chief macroeconomist with Scudder Stevens & Clark Inc., a Boston-based manager of Latin American investment funds. "Haddad had begun to make progress in the stabilization of Brazil's economy. Despite uncertainty about Franco, he had made progress in building confidence in Brazil," Mr. Luis says.

Until his resignation, Haddad had been the key figure in Brazil's efforts to restore economic confidence in the wake of last year's impeachment and resignation of President Fernando Collor de Mello. Made planning minister when Franco took over in early October, he took over the finance portfolio Dec. 15 when his predecessor, Gustave Krause, resigned under similar circumstances.

The chief source of conflict was Franco's impatience with Brazil's perennial problems: inflation, stagnant growth, debt, and the poverty that affects at least half of the country's 160 million people.

During the last year and a half of Mr. Collor's presidency, the country tried to deal with its chaotic economy with a strict free-market stabilization program. Collor cut the budget, boosted interest rates, slashed subsidies, renegotiated Brazil's debt, and began selling off money-losing state enterprises.

Inflation was seen as the main problem. When Collor took office prices were rising 78 percent a month, a situation that reduced the value of workers' wages by nearly 2.5 percent a day and favored short-term speculation over long-term investment.

When he was impeached Sept. 29 on corruption charges, inflation was down to about 25 percent a month. In recent months it has crept up to over 30 percent.

But when Franco took over, he immediately it made clear that he thought the cost of liberalization was too high. Collor's policies had deepened the country's recession and economic growth was near zero. Budget cuts, while they put the country's accounts into surplus, had a heavy effect on services to the poor.

Franco said he would not support any drastic quick-fix "shock plans" or a stabilization effort that made these conditions worse.

Ultimately, however, Haddad and his predecessor found it impossible to increase social spending and boost the economy while trying to stabilize currency and inflation rates.

Both ministers favored a gradual approach based on spending controls, better revenue collection, and a tight rein on interest rates.

Both men also clashed with Franco over his interest in price controls, which many believe would give short-term relief to harried consumers, but force prices up in the long run.

"Everyone knows you can't reduce inflation and kick-start the economy at the same time," said Carlos Langoni, a Rio de Janeiro-based economist and former president of the Central Bank. "At least you can't do it in the short term. Franco has been very impatient."

Over the weekend, Franco again expressed his growing frustration at the condition of the Brazilian economy.

"The people will no longer just sit and listen to the idea that we will have no shock plan," he told the newspaper O Globo Feb. 27. Haddad, who had received promises that his economic plans would be carried out without drastic intervention, resigned the next day.

"Franco really knows nothing about economics," said Alexandre Barros, a Brasilia-based political risk analyst. "Haddad was not making great progress, but Franco doesn't seem to realize that the things he wants to do will probably only make things worse."

Mr. Resende, the new finance minister, an engineer and former president of several large state-owned industries, says he too is against heavy intervention.

His appointment, however, was seen as a political stepaimed at putting a man Franco can control in charge of the economy. The fact that he is not an economist worries many.

"In all of Latin America, the people who have supervised the reform of similar economies have all been economists," Luis said. "The difficulties and problems Resende will face are very complicated and require strong direction from the top."

Haddad's resignation also came at a bad time for the country's attempts to renegotiate its estimated $115 billion foreign debt with the International Monetary Fund. IMF delegates arrived in the country for talks the day after the resignation.

"Under the circumstances, any substantial talks will have to be put on hold," Barros said. "It is likely that things will get worse."

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