The Militant(logo) 
    Vol.63/No.4           February 1, 1999 
Brazilian Gov't Begins To Push Through Austerity  

In an effort to comply with the demands of their imperialist masters on Wall Street, Brazil's lower house of congress approved January 20 a cut in social security. The move came after the country's currency, the real, was devalued 9 percent against the U.S. dollar on January 13, causing fears that the "Asian flu" will spread to the continent's largest country and affect the entire Latin America. Four days later, the Brazilian government of Fernando Henrique Cardoso let the real trade freely in the market, no longer pegged to the dollar, to avoid the depletion of hard-currency reserves. In the last five months, those reserves had plunged to $30 billion as the government used hard currency to buy up reals to shore its declining value.

Last year, Washington and other imperialists had cobbled up through the International Monetary Fund (IMF) a $41.5 billion "rescue package" to avoid what is now unfolding in Brazil. The IMF conditions for turning over the loans centered on major belt-tightening demands, which the Brazilian government had been reluctant to pass. The Cardoso regime has received $9 billion of those loans and another $9 billion is due at the end of February.

After rejecting austerity measures four times in the past, Brazil's congress passed a change in the social security system that requires retirees, for the first time, to pay taxes - an effective cut in benefits. Those over 70 years old, and those with less than $400 monthly income, are exempted. The measure amounts to $10 billion in spending cuts, out of the $23.5 billion the government had proposed to comply with the IMF demands before the devaluation. The bill is now in the Senate for ratification.

In a news conference in Washington, Brazilian finance minister Pedro Malan said January 18 that the Cardoso government was ready to take any measures necessary to avert the danger of a new inflation, and reassure foreign investors so they would not flee. "We know additional measures may be required," he told reporters. Malan met with U.S. Federal Reserve chairman Alan Greenspan and deputy U.S. treasury secretary Lawrence Summers January 18 to assure them of his government's determination to push ahead with austerity measures.

Following the meeting, a U.S. official reiterated that the adoption of "strong policies, which especially meant carrying through on deficit reduction measures, strong anti-inflation monetary policies and continued structural reforms" was necessary. Malan met with IMF managing director Michel Camdessus, who welcomed the social security cut. He made his visit along with Brazil's new central bank president, Francisco Lopes. Malan had indicated before his arrival that he would ask for a release of the IMF loans ahead of schedule. No such discussions took place, however.

Brazil's central bank has also raised interest rates to make it more expensive to speculate against the real. Overnight loan rates jumped to 41 percent from 36 percent, and the interbank rate was set at between 24.75 percent and 41 percent. Working people and middle-class layers are those hardest hit by the cumulative impact of these measures as unemployment is rising and prices are beginning to soar. Unemployment is expected to reach 12 percent this year.

Air fares have gone up already, with the lowest price on the popular Rio de Janeiro-Sao Paulo shuttle jumping to 113 reals from 65 in mid-January. A sale on air fares, with reductions of up to 35 percent, has been canceled.

At Electro, a major electronics chain in Rio de Janeiro, credit terms had become onerous before the devaluation. The store has been charging its customers an interest of 6.9 percent per month, almost 83 percent per year. Imported goods prices are rising quickly now. An imported refrigerator-freezer at Electro, for example, now costs nearly $3,500.

Food prices are also rising. Basic food items such as milk have gone up to 95 centavos per liter from 79 in the last week; and staples such as beans have jumped to 2.40 reals per kilogram from 1.80 in the same period (1 kilo = 2.2 pounds). As a result, in a country of 165 million, the largest in Latin America, social inequalities are sharpening. Brazil's wealthiest 10 percent of the population hold 48 percent of the country's income. In comparison, the poorest 10 percent receive only 1 percent of Brazil's income, according to a World Bank report.

The Brazilian crisis is increasing strains in neighboring Argentina, where the regime of president Carlos Menem insists it will maintain the country's peg to the U.S. dollar at all costs. Estimates show this may push the unemployment rate in Argentina to 18 percent from the current 12 percent. Argentina is Brazil's closest trading partner, with 30 percent of its exports going to that country.

According to Argentina's economy minister, Roque Fernández, the country's gross domestic product could shrink as much as 1 percent this year, instead of a previous projected growth rate of 3 percent for 1999. This will affect auto, steel, and cement industries in particular. Ford Motor Co. has already laid off 1,400 workers. Rising interest rates and falling real wages are expected to reduce demand and sink national car output from 455,000 units in 1998 to 430,000 this year. "The Argentine economy will react with a deep recession," said Dario Lizzano, head of equity research at Santander Investments in Buenos Aires.

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