Civilian Rule at Risk as Argentina, Brazil, Peru Fight Inflation

As a hurricane of inflation pounds Brazil’s economy, wage earners, consumers and savers seek whatever flimsy shelter they can find: They ask the boss for mid-month advances, knowing that their salary will buy a lot less by payday; they stock up whenever possible on food staples and household supplies, whose prices leap frequently.

If they have any extra money, they switch it from indexed savings accounts to the short-term money market or to black market dollars, depending on which seems to offer more protection at the moment.

But few find a haven from the economic devastation. According to a study by the Sao Paulo State Federation of Commerce, workers’ salaries have lost 42% of their purchasing power since 1984.

Brazil’s monthly inflation has been calculated in double digits for all but four months since the beginning of 1987. In July, the official monthly rate surged to 24%, which, compounded, would amount to an annual rate of more than 1,200%.

Severe as it is, the Brazilian storm is not unique. In nearby Argentina, July inflation was 25.6%, while in neighboring Peru, it was 30.9%.

Together, the three countries are suffering one of the most remarkable onslaughts of inflation in history, according to Jeffrey Sachs, a Harvard University economist who specializes in Latin American problems.

Sachs said in a telephone interview that civilian governments in the three countries can bring inflation under control only if they take tough measures to cut deficit spending at home and hold down payments on huge foreign debts. Without effective measures, he said, political instability will increase. “It is becoming virtually impossible to govern in Argentina, Peru and Brazil,” Sachs said. “There is a tremendous risk of destabilization.”

In a recent Brazilian seminar on economic prospects, some panelists expressed fear of eventual military intervention.

“Problems somehow get solved, even if badly. But the price could be democracy,” said congressman Jose Serra.

Military governments relinquished power in Peru in 1980, in 1983 in Argentina and in 1985 in Brazil. After serious economic crises under military rule in all three countries, the change to civilian administrations raised hopes for improvement. But the problems have persisted, and one of the most painful symptoms is rampant inflation.

According to Argentine economist Eduardo Albertal, the problem is political, not economic. He said the current civilian governments in the three countries are too weak to control the distribution of limited national income among competing interest groups.

“The interests are more powerful than the government,” said Albertal, who heads the Program of Joint Studies for Latin America Economic Integration, a Rio de Janeiro-based think tank. In an attempt to cope with competing demands, he said, governments spend in the red. They cover big deficits by borrowing at inflationary interest rates or simply by printing more money.

Albertal predicted in an interview that inflationary pressure will increase next year with presidential election campaigns in Brazil and Argentina. “There is no better way to aggravate inflation than an election,” he said.

The best way to control inflation, he said, is through negotiated compromise among competing interest groups such as industry, commerce, labor and government. Paradoxically, a further increase in inflation could help produce such a compromise, he said.

“It will produce something--either a coup, which in my view would be counterproductive, or a consensus among important sectors,” he said.

Albertal said foreign debt has little to do with the inflation crisis. But Sachs, the Harvard economist, argued that civilian governments find it politically difficult to impose austerity at home when they are making large payments on foreign debts that were accrued under unpopular military regimes.

Without austerity, however, hyper-inflation could force out moderate administrations and bring in populist, leftist or military governments, Sachs said.

“The military eventually intervenes in these kinds of circumstances, if and when leftist or populist governments take power or are about to take power,” he said, suggesting that Washington would be wise to help arrange relief for Latin American nations laboring under heavy burdens of foreign debt.

“As long as the United States continues to demand full repayment, which is a completely idiotic policy, we’re going to have all the good guys in government going under in this region,” he warned.

Peru, under President Alan Garcia, is making only partial payments on its $15 billion foreign debt, but its government deficit is still estimated at 12% of the country’s total economic production. The government fixes consumer prices, but inflationary pressure requires periodic readjustments. July’s inflation rate of 30.9% was the result of major adjustments that month.

Uncontrolled Deficit

“It was a record for the entire history of Peru,” said Peruvian economist Carlos Paredes. Speaking by telephone from Lima, Paredes estimated that total inflation for 1988 will be between 500% and 600%.

“The problem is the totally uncontrolled fiscal deficit,” he said.

In Argentina, the government of President Raul Alfonsin announced a series of anti-inflation measures on Aug. 2 after July’s 25.6% rise in prices. But the country’s powerful trade unions denounced the measures, and many economists predicted that they would be ineffective. Argentina’s budget deficit has been running at more than 10% of the gross domestic product.

Brazilian President Jose Sarney has set a goal of keeping the government deficit to 4% of GDP in 1988, but independent economists said the 24% inflation rate for July reflected a much higher deficit level. Finance Minister Mailson Nobrega has said that his main hope is to “control” inflation in the 20% monthly range and stave off warp-speed “hyper-inflation.”

Economists define hyper-inflation as price increases exceeding 50% a month. In Bolivia, South America’s poorest country, hyper-inflation raged for four months of 1985 at an annualized rate of 60,000%.

President Victor Paz Estenssoro stopped the surge with a strict, painful and politically costly austerity program, including an undeclared moratorium on most foreign debt payments. Bolivian inflation has reached 15% this year, after being held to 10.7% last year.

Although Brazilian inflation this year is the worst ever, this nation of 140 million people has a long history of dealing with annual rates in triple digits. Luiz Carlos Mendonca de Barros, a Sao Paulo economist, said experience has created an “inflationary culture,” which he described as a set of mechanisms and attitudes that make high inflation seem routine, almost normal.

Brutal Distortions

While prices are readjusted frequently, salaries are raised every month. Rents, loan installments and other contracted payments are indexed--that is, pegged to an official index that is constantly adjusted to reflect inflation.

“You get the impression that inflation is not a problem,” Barros said in an interview, but he added that the inflation causes “brutal distortions in the economy,” including restraints in investment needed for growth.

Investors, unable to count on a steady and affordable cost for borrowed capital, often choose not to invest.

“We are in a process of accelerated deterioration of the economic fabric,” he said.

Brazilians with money in the short-term financial market, called the “overnight,” recently made a nice profit when the interest rate shot up to 30% a month. But then it dropped suddenly to 23.7% and the profit margin vanished.

When the overnight is unpromising, speculators can switch to an illegal but generally tolerated black market in dollars--which rose recently by more than 11% in one week--or busy stock markets, or indexed savings accounts.

Like many consumers, Jairo Vasconcelos puts any extra money into pantry goods before it loses its purchasing power. Vasconcelos was checking out at one of 41 cash registers in a big supermarket the other day. His purchases included many items for stockpiling, including several boxes of laundry soap and steel wool.

“If you buy every week, it is more trouble and more expensive,” he said.

Another shopper, Aloisio Castro, said inflation is forcing his family to buy less meat, cheese and other increasingly expensive food items.

“We go three or four days without shopping, and when we come back things are more expensive and we can’t buy the same quantity,” Castro said.