ECONOMICS : Brazil’s Bout With Inflation Produces a Record Recession

Brazilian President Fernando Collor’s anti-inflation measures have helped drive Latin America’s biggest economy into its deepest recession on record.

The government’s latest price freeze is holding cost-of-living increases to relatively mild rates of less than 10% a month. But many economists fear a surge of double-digit monthly inflation as price controls are eased.

Nobody, it seems, is happy with the results of Collor’s policy 14 1/2 months after he took office. The dissatisfaction contributed to the downfall in May of the economy minister, Zelia Cardoso de Melo.

Marcilio Marques Moreira, the new economy minister, obviously has a difficult job ahead but says he will stick to his predecessor’s basic plan of government austerity and inflation control.

“I think the recession has bottomed out,” Moreira told a Brazilian newspaper recently. “I don’t believe, however, that it would be healthy to step on the accelerator.”

Brazil’s outlook, then, appears to be a continuing economic slump until inflation is finally conquered. Even optimists are predicting no quick solution.

“There is no longer a possibility of eliminating inflation in a short period of time,” said Carlos Langoni, a prominent Rio de Janeiro economist. “It probably will take a year and a half, two years.”

That is a discouraging forecast in a country where, according to a study by a Sao Paulo labor-research institute, the purchasing power of salaries fell by 22% in the last 12 months. Total economic production shrank by nearly 7% in the same period.

A former banker, Moreira was ambassador to the United States when Collor picked him to replace Cardoso de Melo. She had become associated with a “hard” policy of confrontation while Moreira says his style will be “soft” but firm.

Brazil’s economic retraction is attributed mostly to anti-inflation austerity, but opinions are divided on why inflation continues. Some economists say that even though the government is apparently operating with a balanced budget, expectations that it may print too much money in any given month to cover public spending keep feeding pressure for higher prices.

Moreira blames an “inflationary culture,” in which business leaders habitually escalate prices to anticipate cost increases and ensure profits. Others blame the recession. They reason that in a deep recession, industry produces fewer goods while fixed costs remain the same, so the cost per unit goes up and higher prices follow.

After a monthly inflation rate of 20% in January, Collor imposed a near-total freeze on prices and salaries. But officials say controls must be maintained for at least several months to avoid an inflationary explosion.

Most economists agree that freezing prices is mainly a way of buying time to begin changes in Brazil’s economic structure that will lead to long-term stability and growth.

Among changes planned by Collor are reducing the government’s size and privatizing many government-owned enterprises, reforming the inefficient social security and tax systems andrenegotiating the foreign debt.