Brazil, Argentina Fight Inflation

AUSTERITY MEASURES - AGAIN

THE neighboring economies of Brazil and Argentina underwent abrupt change last week, in reaction to deepening crises in both countries. In Brazil, economic officials announced a series of new measures designed to contain inflation. These included a temporary wage and price freeze and the extinction of the high-return overnight money market.

In a marked exception to the freeze, the government also increased utility and fuel prices by as much as 90 percent. There is also a new program to attract foreign investment and strengthen the stock market.

Brazilian analysts and many consumers don't expect the new plan, the sixth since 1986, to work. ``The freeze will bring a fall in inflation, and there'll be a big victory celebration. Three months later, inflation will return,'' predicts Clovis de Faro, a Rio de Janeiro economist.

While businessmen complain that they won't be able to pass on higher utility costs to customers, workers fear product shortages and a further squeeze on their wages.

``I don't believe in [the measures],'' Ailton Luis Gestinari, a personnel manager, said last weekend. ``Monday I called to find out the price of a box of candy. It was 4,000 cruzeiros. I said I'd stop by Saturday. Today I went there and the price was 6,400. And our wages are frozen. That's a jump of almost 80 percent!''

In Argentina, President Carlos Sa'ul Menem replaced his economy minister and made other cabinet changes after the dollar began rising sharply against the local austral. Former economy minister Antonio Erman Gonzalez is now the defense minister, having been replaced by former foreign minister Domingo Cavallo. The new foreign minister is Guido di Tella, Argentina's former ambassador to the United States.

On Feb. 3, Mr. Cavallo announced new measures meant to lower the federal deficit to 2 percent of gross national product from 8 percent. They include utility increases of as much as 50 percent, increased corporate taxes, an emergency wage bonus of $25, and a lower tariff on imported industrial inputs. The government also legitimated a 41 percent devaluation of the austral that took place over recent weeks.

Both the Brazilian and Argentine governments had initially managed to bring down inflation, but now face new and bigger price increases.

January inflation in Argentina is estimated around 7 percent. But the rate is expected to rise to about 25 percent this month.

Cavallo, a Harvard University-trained economist and free market advocate, faces the challenge of reactivating the depressed Argentine economy.

The task is especially critical as Mr. Menem struggles to improve his public image and political support before the gubernatorial and congressional elections set for this fall.

Last weekend, Cavallo urged workers and businessmen to defend the free market system by moderating wage demands and price markups. ``If an irresponsible distributive tug-of-war breaks out, we will have no alternative but a harsh monetary policy,'' he said.

Governments in both Brazil and Argentina are looking for more elbow room in making and implementing economic policy. Cavallo takes on an economy ministry that was recently broadened to include the social and public works ministry, responsible for a major privatization scheme.

The new Brazilian measures, which did away with standard inflation indices, allow the Central Bank a greater hand in deciding how much prices and wages should reflect inflation.

Opinion surveys show Brazilians are increasingly pessimistic, even though the government needs their support for the measures to work. ``It's just another plan,'' says business consultant Antoninho Trevisan. ``Brazilian public opinion has an aversion to plans, so each time they get less credibility and less support. Greater production, day-to-day activity is what makes an economy run, not plans. They don't create wealth.''