Hard-Decision Time in Brazil

When Brazil’s latest financial crisis broke on Wednesday, visions of the Mexican collapse of 1994 must have flashed through the minds of world leaders and their finance ministers. Many signs of a crash were there. Now it’s up to the Clinton administration, the Group of Seven industrialized nations and the International Monetary Fund to step in immediately with political support for Brazilian President Fernando Henrique Cardoso and his economic reform plan.

Cardoso will need much more than good wishes. He’s running out of time and choices. He can follow the now traditional IMF approach and embrace an austerity program and high interest rates to encourage investor trust in his leadership and the Brazilian currency, the real. This would help prevent capital flight. But he also must get tough with the political establishment in Brazilian statehouses that oppose austerity and the rigors it imposes on their political plans.

In this regard, Cardoso has a target in his sights. He can start with Gov. Itamar Franco of Minas Gerais state, whose announcement of a 90-day moratorium on debt payments to the central government precipitated the current crisis. The president could, for instance, immediately retaliate by withholding federal funds for Franco’s state and then move on to other measures designed to command obeisance to the federal government.

Yet, given the depth of Brazil’s troubles, some economists believe Cardoso will need far more than tit-for-tat political warfare with the governors. Roberto Mangabeira Unger, a Brazilian academic at Yale Law School, says that only a program that will “reorganize public finances and establish the basis for longer lasting policies” can save Brazil. What that means is a program that includes changes in the existing tax system to make the very rich pay their fair share; making internal savings compulsory, and changing the current exchange rate regime to allow the real to float. It also means revising the IMF route.

With his successful reelection late last year Cardoso has accumulated all the popular political support he ever will muster. Now is the time to make tough and wise decisions. Waiting is not an option.