Brazilians Brace for Hard Times

The mood among stockbrokers and executives in Brazil has oscillated along with the volatile stock markets. Yet among workers at the soon-to-be shuttered factories of Sao Paulo’s industrial district, a smokestack metropolis within the world’s third-largest city, the mood is not wavering. It is pessimistic.

Volkswagen, Ford and other automotive giants will shut temporarily Sept. 28 in response to plunging consumer demand, giving 35,000 auto workers a 10-day paid furlough to contemplate a darkening horizon.

“It’s going to be a nervous vacation,” said Clarindo Ferreira, a quality-control inspector at a Volkswagen plant. “People are tense.”

Scrambling to counteract the loss of about $26 billion because of capital flight, the government has been forced to raise interest rates, slash spending and prepare further austerity measures that will take an inevitable toll on working-class Brazilians--the great majority of a population of 160 million.

Unemployment is already at its highest level of the decade and will keep rising, most analysts say. The middle class is struggling with more debt and less credit.

This nation’s remarkable four-year transformation has not eliminated its economic inequalities: 10% of Brazilians still control half the wealth, while a quarter of the population still lives in desperate poverty. It has, however, pushed an estimated 10 million people out of poverty.

An expected period of belt-tightening and recession threatens to erase some of the gains of the anti-inflationary “Real Plan,” named after the currency unit introduced in 1994. Some of those lifted out of poverty are in danger of sliding back, said Marcelo Neri, an economist for the government’s Institute of Applied Economic Research.

“I am very worried,” Neri said. “We are going to see a deterioration of poverty, of inequality.”

On Friday, Brazilian stock markets closed higher after a volatile week that opened with two days of gains followed by two days of losses.

But well before repercussions of the Asian and Russian economic crises infected Brazilian stock exchanges last month, 1998 had been a hard year.

Last year’s mini-Asian crisis helped push unemployment from 6% to 8%. In Sao Paulo, where industry has lagged behind booming service and construction sectors, the jobless rate has reached 18%. Car makers have fired about 20,000 workers this year, according to union officials.

Hard Times Help Incumbent President

Even among the poor, however, hard times have only helped President Fernando Henrique Cardoso’s chances in Oct. 4 elections.

Opinion polls show him increasing his lead over challenger Luis Inacio “Lula” da Silva to a commanding 27%. Da Silva, a former leader of the Metalworkers Union, criticizes the government’s free-market orthodoxy. But voters blame generalized global turmoil rather than the president and are sticking with Cardoso, the acclaimed architect of the Real Plan, despite the bad economic news.

“They believe Cardoso is better qualified to confront international problems,” said Walder de Goes, a political scientist. “Some people have changed their vote to Cardoso from Lula during the crisis.”

Ferreira and other auto workers fear that they will return from their furlough to an announcement of massive firings.

Many workers have put family plans--end-of-the-year vacations, purchases of cars and homes--on hold, said Ferreira, a Metalworkers Union organizer who has worked for Volkswagen for 22 years.

“We are bracing ourselves for what could happen,” said Ferreira, 44, a muscular man with thick, curly hair and a bushy mustache. “There is great instability.”

Ferreira’s salary of $1,900 a month supports a wife and three daughters. He owns a small house, a 1990 Chevrolet Monza and two semirural plots of land where he dreams of building a hideaway. He lives in a tough neighborhood that experienced 19 of 97 homicides in Sao Paulo during a three-day holiday weekend this month--a bloody sign of the social problems here.

Though Ferreira considers himself lower-middle class, the chasm between the rich minority and impoverished majority makes him part of a blue-collar elite.

Recent measures, such as 50% interest rates, hurt the expanding middle class more than the poor. During 1994-95, the latter group experienced a dramatic improvement in living standards thanks to a potent one-two anti-poverty punch: the elimination of inflation and a rise in the minimum wage.

“All of a sudden people could buy refrigerators, televisions, even an old car,” said Marcio Perez, 23, a street vendor who sells colorful blankets and hammocks typical of his native state, Paraiba. “Things got much better in 1994 and 1995. But now they are getting worse.”

Perez and his brother, Magal, wander downtown Sao Paulo with their wares slung over their backs. They wear baseball caps, floppy shirts and shorts. They earn about $400 each during a good month.

Signs of Crisis Seen Every Day

The brothers see tangible signs of crisis every day. The size of the informal sales force has grown during the past year, they said. And sales have dropped noticeably, especially during the past month.

“The worst thing that could happen is if inflation comes back,” Marcio said. “That would really be bad.”

Pro-government politicians and economists emphatically deny persistent rumors that Cardoso will risk a return of inflation and devalue the national currency, the real, if he wins reelection.

“It is ruled out,” said Paulo Levy, director of macroeconomic studies at the Institute of Applied Economic Research. “Because in the current international environment, with these capital flows that move so fast from one country to another, it’s very difficult to say you can devalue only a certain amount.”

A devaluation could trigger a catastrophe such as the “herd behavior” that broke out after Mexico devalued the peso in 1994, resulting in the Latin America-wide “tequila crisis,” Levy added. He predicted that the Cardoso administration will gradually correct the exchange rate during the next few years.

If a devaluation went out of control and sparked inflation, it could deal a death blow to the president’s credibility. Cardoso has built his career on his triumph over hyper-inflation, which Brazilians of all income levels have come to see as a demon of the past.

The government has announced $6 billion in spending cuts and is expected to keep hacking away at a federal budget deficit that totals $66 billion. The already-beleagured health, education and social services that the poor depend on will suffer, analysts say.

On the other hand, some government officials do not believe that the austerity measures and economic slowdown will have especially drastic effects.

The poor “are going to stay pretty much the same,” said Sen. Arthur da Tavola, chief of the Cardoso campaign in Rio de Janeiro. “The lower-middle and middle class, who consumed more, will have difficulty acquiring consumer goods. But . . . they will maintain their lives. I don’t think things will get that much worse for them.”

Auto worker Ferreira does not like any of the potential scenarios: devaluation, inflation, recession. He finds it hard to decipher the mentality of investors and speculators who lurch from euphoria one day to panic the next, endangering his livelihood in the process.

* BRAZIL EXPOSURE: Billions of dollars of loans in Brazil from major U.S. firms are now in jeopardy. D1