Why Brazilians dance on an economic tightrope

Brazil is a key player in today's global market, and many economists say a Brazilian economic collapse would cause Latin America to suffer an Asia-like meltdown.

The financial world awaits the results of President Fernando Henrique Cardoso's strenuous efforts to prevent such an outcome - and so do individual Brazilians trying to cope with economic setbacks along with his highly unpopular austerity program.

Even Rio's famous carnival will become the "crisis carnival," as the press here has dubbed it, with sponsors harder to find for the marching samba schools, and elaborate floats reduced to recycled materials.

Today Congress begins a special session during its usual January break to speed up passage of reforms. The stakes are high, both in the region, where Brazil is the principal motor of economic growth, and in the United States, whose largest developing world trading partner is Brazil.

Brazil is Latin America's largest market, with 162 million people, more than half of South America's 300 million. A deep recession in Brazil would be expected to jeopardize the future of Mercosur, the southern trade pact including Brazil, Argentina, Uruguay, Paraguay, and associate members Bolivia and Chile. Argentina, one of Latin America's strongest economic performers, would be especially threatened, with its economy closely tied to Brazil's.

US companies have invested billions in Brazil in recent years. Collapse here would send shockwaves through the US banking community, which has loaned billions to Brazil - for example, Citibank, $3.7 billion; BankBoston, $3.4 billion.

"The financial stability and prosperity of Brazil is of vital importance to the United States," said US Treasury Secretary Robert Rubin in September.

It's also of vital importance to Dionisio Lemos dos Santos and his family. Mr. dos Santos, a boat mechanic, was laid off after working 16 years for the same firm at Rio de Janeiro's port. Forced to work as a freelancer, he watched his salary sink from $3,000 a month to an average $1,260, causing major lifestyle changes for him, his wife, Claudia, and two small sons, Bernardo and Andre Luiz. He borrowed money from relatives, pleaded with a pre-school director to keep Andre Luiz in class without paying tuition, and applied for a scholarship at Bernardo's private elementary school.

"Asking for favors has been the toughest part in dealing with this economic crisis," he says.

As 1998 ends, dos Santos and millions of other working Brazilians are having to tighten their belts still more.

While many economists say the austerity program is the only sensible way out, critics say it is causing too many hardships for average Brazilians. They say it will force the economy into a recession, increase unemployment, accelerate destruction of the environment, aggravate decaying public services and infrastructure, and, most important, increase poverty in a nation where nearly half the population is already considered poor.

Financial troubles began after economies in Asia and Russia took a nose dive last summer, and nervous investors pulled out $35 billion from Brazil, the world's ninth-largest economy. In a single day, the Brazilian stock market plummeted 16 percent. Many small and middle-size companies went bankrupt or laid off thousands of employees.

In an effort to regain control, President Cardoso announced in October the Fiscal Austerity Plan, which called for higher interest rates, more taxes, and spending cuts of $84 billion from the federal budget over the next three years. The package is expected to help Brazil lower its unsustainable budget deficit, which equals more than 8 percent of the nation's $800 billion gross domestic product (GDP).

As a result, a satisfied US-backed International Monetary Fund announced in November a rescue package of $41.5 billion to reassure investors that Brazil would not go the way of Asia and Russia.

But even Cardoso predicts a hard road ahead. "I can't promise that 1999 will be an easy year," the president told reporters recently. "What I can promise is a year of correction, of preparation, and of hardship."

Many consumers are bouncing checks in record numbers. Currently, there are 9.5 bounced checks per 1,000, a substantial increase from 1.3 checks per 1,000 in 1994, according to a national agency that tracks bank checks.

Ecologists are irate after the government announced steep budget cuts for the Environment Ministry. "It will affect the entire Brazilian ecosystem," says Roberto Kishinami, executive director of Greenpeace Brazil.

The austerity measures will also keep Brazil from ending its dubious distinction of being the nation with the world's worst distribution of wealth. In Brazil, 10 percent of the richest households control 47 percent of the economy, while the poorest 50 percent earn just 13 percent of the nation's wealth.

"Brazil is not an underdeveloped country but an unjust country," Cardoso has said.

Yet not all is bleak.

Congress - after rejecting a plan to tax pensions of retired state workers that would have saved the state an estimated $2.5 billion - passed a bill last month that would slash social security tax exemptions for certain philanthropic groups, generating some $1.2 billion next year.

Bank lending interest rates have been reduced from 50 percent at the height of the crisis to the current 36 percent, a much bigger reduction than expected. The government says rates will fall to 20 percent by the end of 1999 and the recession will not be as deep as first anticipated.

Moreover, despite defections, foreign investors have showed continuing interest. According to a UN study, Brazil received $24 billion in direct foreign investments in 1998, or 22 percent more than in 1997. If Brazil gets into renewed trouble with its cash reserves, the government could earn between $40 billion and $50 billion from selling off state companies in 1999. Finally, Demosthenes Madureira Pinho, director of the Central Bank's International Affairs Office, predicts the austerity package will make the deficit fall to a much more manageable 3.5 percent of GDP by the end of 1999.

"We can only pray," says dos Santos, the mechanic, "that things will get better."