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Is Recession Brazil’s Price for Stability?

October 25, 1995

RIO DE JANEIRO, Brazil (AP) - Rarely have things looked so good for Brazil: Inflation has nosedived from 50 percent a month in mid-1994 to around 1 percent, and seems to be heading even lower.

The trade balance is again in the black, after eight straight monthly deficits. The nation’s coffers bulge with record high reserves of nearly $50 billion, and foreign investors are returning.

So why aren’t Brazilians happy?

An unlikely alliance of businessmen and labor unions has attacked the plan that has brought unprecedented stability to the world’s 10th-biggest economy. They say it is leading the country into recession.

There are various reasons for the discontent, but most agree on one point: Brazil is paying the price for low inflation and the easing of trade barriers that for generations kept foreign competition at bay.

The most visible signs are massive layoffs and scorching interest rates.

In Sao Paulo, the country’s industrial locomotive, 115,000 workers have lost their jobs since May, the worst wave of layoffs in five years.

In September, Mercedes-Benz dismissed 1,600 workers, one-tenth of the employees at its truck and bus plants in Sao Paulo, following similar moves by GM and Ford.

Although the layoffs may seem a mere ripple in a labor pool of 64 million, they are significant in a country where half the workers are jobless or underemployed.

Unions say real unemployment is twice the official rate of 5-6 percent. Industrial output in the first seven months shrank 13 percent, its worst performance in years.

Putting aside traditional feuds, labor unions and small businesses recently signed a manifesto protesting policies they called ``a path toward generalized recession.″

``Stability is a goal of all Brazilians, but not at any price,″ the statement said. ``It is not worth having a stable currency if the by-product is ... more unemployment, more hunger and more misery.″

Farmers also are unhappy. They say high interest rates and stagnant prices have caused them record losses of nearly $10 billion. As a result, this year’s harvest, which also was a record, is unlikely to repeat in 1996.

Food prices are relatively stable, at least partly thanks to imports.

Fueled by an overvalued real, Brazil’s currency, foreign goods have entered the country aggressively, pushing some local prices down.

For years, imported goods were luxuries reserved for the affluent. But today, Honda and Mitsubishi have become household words. Even soccer balls are no longer home-made. The four-time World Cup winner imports Pakistani balls, which cost about half as much as the local product.

Many Brazilians blame their plight on sky-high interest rates set by the government. At 34-plus percent yearly above inflation, interest rates make Brazil heaven for short-term investors but hell for small businesses needing to borrow money.

The government takes a different view.

``Only fools could have thought it was possible to come out of a 5,000 percent a year inflation to close to 16 percent in a painless way,″ said Finance Minister Pedro Malan.

Brazil, he said, is not on a recessive path. ``You can’t talk of recession when the economy this year will grow around 5 percent.″

Other officials say layoffs are inevitable as industry modernizes.

For example, they say, in 1992 automakers employed 122,600 workers and made 1,095,000 cars. Last year they made 1,634,900 cars with just 121,400 workers.

Malan promises interest rates will fall. But he says it will happen slowly, to avoid a consumer buying binge that could sink Brazil’s seventh anti-inflation plan in eight years.

The government itself is a victim of its interest rates.

As foreign investors pour dollars into Brazil, the Central Bank buys them to keep the excess currency from pushing up inflation. As a result, Brazil’s domestic debt jumped from $64.2 billion last December to dlrs 96.8 billion in August.

Still, the government says its a small price to pay after 30 years of whirlwind inflation.

``It is salty,″ says Edmar Bacha, president of the government’s National Development Bank. ``But it’s still reasonable.″

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