Will Brazil catch the Asian flu?

LONDON: The sharp economic downturn in East Asia threatens to slow growth and development in many emerging markets, particularly in Brazil. With a population of 161 million, Brazil is the world's fifth largest state -- bigger than Russia -- and its industrial output surpasses that of China. The country dwarfs Argentina and Mexico in size and influence, and is central to building a stable and prosperous Latin America.

To maintain international confidence in its economy, the Brazilian government has taken a number of fiscal, monetary and other policy steps, including:

* introducing in November 1997 an US$18 billion package of tax increases and public-sector spending cuts;

* raising interest rates to 43 percent; and

* convening an extraordinary session of Congress in January 1998 to complete a series of constitutional amendments, including taxation and social-security reform.

Although these measures seem to have allayed the fears of most foreign investors, and the market turmoil has apparently strengthened Brazilian President Fernando Henriqui Cardoso's capacity further to enact his economic and other reform programs, the Asian crisis is continuing and its consequences are unpredictable.

A second economic downturn -- possibly caused by political upheaval in Indonesia -- could seriously undermine development in Latin America, especially in Brazil. The country has a substantial foreign debt, has only recently got inflation under control and has considerable commitments to social-security and welfare payments.

For the moment, the government seems to have succeeded in averting a financial crisis. Economic growth in 1997 was 3.5 percent and, despite a contraction in the first quarter of 1998, gross domestic product (GDP) is expected to rise by 1-2 percent this year. Net foreign direct investment increased to $17 billion in 1997 from $9.8 billion in 1996, and most overseas investors appear ready to keep their assets in Brazil.

Other trends also indicate that the country's economy is in relatively good condition:

* consumer price inflation fell to 8 percent in 1997;

* interest rates have been cut twice since November. On Jan. 28, 1998, the Central Bank reduced its lending rate from 38 percent to 34.5 percent;

* export earnings from goods and services increased to $59 billion in 1997. Primary-product sales -- particularly of coffee and soya -- have led the rise, growing by 36 percent;

* manufacturing output increased by 2.9 percent in 1997; and

* foreign sales of aircraft, cars and trucks rose by 300 percent, 100 percent and 59 percent respectively in 1997.

Despite these promising statistics, international markets remain concerned. The real is overvalued by as much as 20 percent, $8 billion of foreign-exchange reserves have been used to defend the currency and the country's 1997 budget deficit was equivalent to 5.9 percent of GDP. The deficit is the main cause of Brazil's vulnerability to financial market volatility. Moreover, significant falls in the value of the national share index threaten Cardoso's political support base and his carefully engineered plans for re-election in the Oct. 3, 1998 presidential polls.

The austerity initiatives also threaten to undermine social stability. This is indicated by the unprecedented levels of violent crime and the growing restlessness among landless laborers. According to the Instituto Brasileiro de Geografia e Estatistica (IGBE), the richest 20 percent of the population still owns more than 60 percent of the nation's wealth, while the poorest 20 percent account for approximately 2 percent. Widening the level of inequality and inflicting further pain on the poor and other vulnerable groups could have grave ramifications.

Support for the government fell from 60 percent in October 1997 to 50 percent in February 1998. However, the opposition has failed to capitalize on Cardoso's difficulties. His popularity rose from an all-time low of 27 percent in November 1997 to 39 percent in January 1998. Cardoso has staked his political reputation on maintaining economic stability and the value of the real. As a result, he remains vulnerable to unpredictable economic forces and the consequences of any further financial volatility in Asia.

Latest polls indicate only 18-22 percent support for Cardoso's closest challenger, Luiz Inacio Lula da Silva of the Partido dos Trabalhadores (PT). On Dec. 4, 1997, da Silva announced that he would lead a coalition of opposition and left-wing parties. His likely running-mate is Leonel Brizola, the former governor of Rio de Janeiro and the leader of the social democratic Partido Democratico Trabalhista (PDT).

Former president Itamar Franco of the centrist Partido do Movimento Democratico Brasileiro (PMDB) and rightist Paulo Maluf of the Partido Progressista Brasileiro (PPB) are currently both polling 7 percent. Another former President, Fernando Collor de Mello, has expressed an interest in competing in the elections, but he is banned from politics until 2000 after resigning in disgrace in December 1992. Ciro Gomes, former Finance Minister and founder of the ruling Partido da Social Democracia Brasileiro (PSDB), considered launching a leftist challenge to Cardoso in late 1997. However, with the re-entrance of da Silva, it seems unlikely that Gomes will participate in the contest.

The greatest threat to Cardoso's electoral prospects stems from Brazil's burgeoning social problems. Many of his former supporters claim that he 'sold out' to industrialists and bankers when he became President in 1994, and that he has failed to pursue a social agenda. Cardoso contends that the economic stabilization initiatives introduced by the government in 1994 have been highly effective in tackling poverty. According to official figures, one-quarter of Brazil's population was living below the poverty line in 1996, compared to one-third in 1994.

Many observers question these statistics, noting that greater economic growth has not translated into more jobs. For instance, according to a study by Campinas University, two-thirds of the labor force was employed in the officially recognized or 'formal sector' of the economy in 1980, compared to 55 percent in 1998. The other 45 percent of the labor force is now either unemployed or is engaged in precarious activities such as illegal street vending and garbage recycling. The report predicts that the November adjustment measures will further increase unemployment and perhaps permanently reduce opportunities in the 'formal sector'.

The Movimento dos Trabalhadores Rurais Sem Terra (MST) claims that 400,000 small farms have disappeared and around 450,000 jobs have been eliminated in the cotton, cacao and sugar-cane sectors since Cardoso took office. MST leader Joco Pedro Stedile has warned that continued austerity will lead to a dramatic escalation in rural violence and social conflict.

The MST has emerged as an important social and political force, instigating land invasions and fomenting opposition to local leaders and landowners. However, the group's use of other more radical tactics, such as the occupation on Dec. 2, 1997 of the Agrarian Reform Ministry in Brasmlia, has caused national politicians such as da Silva to distance themselves from the MST.

Cardoso has responded to the problem by introducing a new agrarian-reform program. On Dec. 22, 1997, the government announced that it had exceeded its target of distributing land to 80,000 families. However, the MST contends that only 16,000 have actually received territory, and 4.8 million rural families are still without land.

The government seems to have avoided tackling the real problem of instituting reform in traditional agricultural zones -- such as the impoverished north-east -- by distributing cheap land from regions like the Amazon Basin. However, promoting colonization in unsettled areas places the government in direct conflict with environmentalists and indigenous groups.

The rural-workers movement has become the main conduit for resentment in the countryside. Over the past three years, it has organized 279 land occupations and presently has illegal camps situated on 552 hectares of territory. More than 50,000 people live on these sites; 21,000 have taken up residency in the past 12 months alone. There is a very real possibility that this movement could develop into a rural insurrection similar to the one in the Chiapas region of Mexico.

Another issue rapidly gaining political attention is the upsurge in violent crime. Brazil now has the highest number of gun-related deaths in the world. Murders increased by 18.5 percent in 1997 to approximately 43,000 per year (26.9 per 100,000 people). For 15-19-year-old individuals, the statistic is significantly higher at 88.38 per 100,000.

Cardoso has responded to the problem by increasing the police presence in the most violent shanty-towns, many of which are major drug-trafficking and consumption centers. Critics argue, however, that the government's strategy has only aggravated the problem. The New York-based Human Rights Watch, for example, has reported that acts of police brutality and human-rights abuse have substantially increased since the new programs were introduced. The number of civilian deaths caused by police officers has doubled to an average of 32 per month.

There has also been an ominous rise in the number of 'social- cleansing squads' operating in Rio de Janeiro -- a city in which police officers are known to be particularly brutal. Armed units, which have been consistently linked to the police, murder homeless people, beggars, street children and other 'undesirables'. These practices are now spreading well beyond Rio de Janeiro. Other cities, particularly Sao Paulo, have endured a dramatic increase in violent crime. This has led to a growing sense of insecurity in Brazil and to rising demands for effective government action.

Although Brazil may have succeeded in managing the effects of the current financial crisis, the country is still vulnerable to any further economic turmoil in East Asia. Brazil has taken a huge risk by opening up to the global market. While the gamble could transform the country into a major international actor, the process has already resulted in rising poverty, crime and unemployment.

In addition, the MST has emerged as one of the most radical movements in South America, and the effects of the illegal narcotics trade are being felt throughout Brazilian society. When Cardoso entered office in 1994, he declared that Brazil suffered from injustice, not under-development. Four years later, parts of the economy are under-developed and many would argue that injustice is on the rise.

Window: Although Brazil may have succeeded in managing the effects of the current financial crisis, the country is still vulnerable to any further economic turmoil in East Asia. Brazil has taken a huge risk by opening up to the global market.