Brazil’s War on Inflation Has Mixed Results : Shortgages, Black Market Mar Booming Economy

Brazil’s “cruzado” plan to halt inflation without slowing economic growth has produced what is being called here a Dr. Jekyll and Mr. Hyde economy--part good and part bad.

The good part is that the economy is booming. Retail sales and industrial output are at their highest levels since 1980. Inflation has dropped dramatically, to less than 1% a month from 15% a month in February, before the plan was undertaken.

The bad part is that shortages have developed for many essential goods, including milk and beef. There is illegal price gouging in the growing black market. Auto makers’ lots are filled with vehicles unfinished for lack of parts from suppliers asking for more money. Avid customers pay money under the table for cars and other goods in short supply.

Beef has disappeared from neighborhood meat markets. The housewife who asks for a frozen chicken--the price is controlled at about 40 cents a pound--is told that there is none available. But she is offered a chicken that has been cut up, at twice the price because chicken parts are not among the 2,000 items on the price-control list.

Blames Speculators

“The question is, which disappeared first, the chicken or the egg,” quipped Jo Soares, a popular television comedian.

For Finance Minister Dilson Funaro, who sees the cruzado plan as a crusade to save Brazil from inflation, it is no joking matter. He blames the shortages on speculators, whom he calls “traitors.”

To discourage speculation and gouging, special tax audits have been ordered. And in an effort to end the shortages, the government is importing $500 million worth of beef and dry milk.

Funaro says the shortages show that low-income Brazilians are eating better, buying medicines for their children and acquiring home appliances because inflation has been halted by price controls.

But critics of price controls say the consumer fever, particularly in durable goods and real estate, reflects a feeling that price stability will not last and that goods should be bought as fast as possible while prices are frozen.

For whatever combination of reasons, the cruzado plan has made Brazil, with its 135 million people, the brightest spot in Latin America’s otherwise depressed economic scene. The Brazilian economy, the eighth-largest among the non-Communist countries of the world, expanded at a rate of nearly 8% in the first half of this year.

Funaro, a Sao Paulo industrialist, says the way to overcome shortages is to increase production. Many Brazilian businessmen evidently agree, because imports of machinery are running at $180 million a month, double the level of a year ago. Applications for credit to expand industries have tripled.

In agriculture, the government is counting on a record crop of grains and oil seeds, based on increased sales of fertilizer and seeds. Farm machinery sales have boomed since March.

Cruzado Plan

It has been six months since President Jose Sarney announced the cruzado plan, which takes its name from the new unit of currency. One-thousand cruzeiros became one cruzado, and the cruzado was valued at 13.88 to the dollar. The plan froze prices, eliminated from contracts the monthly correction for inflation and put a limit on wage increases for one year.

The public greeted the price freeze with enthusiasm, and Sarney called on housewives to serve as price vigilantes. Supermarket managers who violated the official prices were packed off to police stations by angry customers.

Sarney’s popularity rating soared. After years of inflation, which raised prices by 235% in 1985, people found that their money had stable purchasing power.

“Before, when I got my pay at the end of the month, I never knew how much it would buy because prices were always higher,” said Airton Guedes, who works at an electronic circuit-board factory. “Now I buy more at stable prices.”

The circuit-board factory, with 900 workers, has orders that will keep it busy for eight months, and its workers are putting in three shifts a day, even on weekends. On weekends, overtime rates are paid.

This new money in the workers’ pockets has raised demand, primarily for food. Beef consumption is up 30%, supermarket sales, 25%.

The government seemed to have found a formula that combined lower inflation and economic growth. But will it last? Sarney said in a televised interview last week that “the only way the cruzado plan can fail is if the Brazilian people abandon their participation in seeing that it works, as they have until now.”

Sarney said he had made a “political decision” to maintain the price-control system for as long as necessary to achieve “a change in the speculative mentality that is so deeply ingrained in Brazil.”

With national elections scheduled Nov. 15 for Congress and governors in all 23 states, it had been assumed that there would be no lifting of price controls until after the election. But Sarney’s remarks indicate a longer-term commitment, along with a determination by the government to defeat the speculators.

Early last month, the government took action against the black market in currencies, which is believed to handle about $5 million a day. The government closed several exchange houses, and the so-called parallel rate of exchange, which had been about 25 cruzados to the dollar, fell back to about 20 to the dollar.

To win the battle against inflation, Sarney not only will have to control speculators but resist pressure from unions for wage increases that would cause pressure for increased prices.

According to Labor Minister Almir Pazzianotto, stable prices benefit workers, as has been reflected in higher levels of employment and higher real wages since March. But union leaders are demanding more.