Brazil Economy Struggling After President's First Year

Government begins to focus on fiscal reform and foreign investment

IT has been one year since an unknown politician took over the Brazilian presidency from a deposed Fernando Collor de Mello.

Honesty and decency were Itamar Franco's most commendable credentials. At the time, that was enough. Outraged by the corruption and influence-peddling scandal surrounding Mr. Collor's administration, Brazilians took to the streets, demanding the ouster of their country's first democratically elected president since 1964.

The question now is whether Mr. Franco's honesty and decency are still enough. They have not been sufficient to beat inflation, which was 35 percent in September, the highest since Collor dramatically devalued the nation's currency in March 1990. By so doing, he temporarily stemmed what was then the worst inflation in Brazilian history. Today, monthly inflation is higher than annual inflation in Argentina, Chile, and Mexico.

``There's apathy and disillusionment in the country after the people participated in that popular movement to take Collor out,'' says Carlos Alberto Grana, a secretary-general of CUT, Brazil's largest labor union. ``Franco's government is like lukewarm water.''

The rest of the population seems to agree. A recent Gallup poll shows that Franco enjoys only a 14.5 percent approval rating, down from 36 percent in February. But that does not match Collor's lowest rating, 8 percent, at the end of his term.

In his year in office, Franco has appointed four different finance ministers and unemployment has gone up to 5.6 percent compared with the 4.6 percent unemployment rate after Collor's first year in office. All this is in a country where half of the 150 million citizens are already living in poverty.

But Jose Andrade Vieira, minister of industry and commerce, says there is light at the end of the tunnel. ``Growth in the economy has already begun - it's just that last year was so bad that the improvements aren't recognized,'' he says. The industrial sector grew 10 percent this year, but inflation ``annuls a big part of the benefits'' that such growth brings, adds Roberto Jeha, secretary of the Sao Paulo Federation of Industries.

Other signs that the economy is picking up include a $3 billion increase in foreign reserves from $22 billion to $25 billion, a reduction in interest rates for Brazilian corporate bonds, and an increase in trade. Exports in August were $3.45 billion, up 17 percent from August 1992. Imports were $2.75 billion, up 45 percent from August 1992.

So is Brazil better off with Franco?

``It depends,'' says Lawrence Pih, an economic analyst and agribusiness leader in Sao Paulo.

``It's a little more serious country than before and there's more transparency in the government,'' he says ``But the economy is no better.''

Mr. Pih says it is crucial that Brazil implement fiscal reform in order to resume a healthy relationship with the international financial community.

The privatization of government-owned corporations begun by Collor has continued under Finance Minister Fernando Henrique Cardoso, though not without criticism from those who say companies are being sold below value.

Mr. Cardoso also wants to combat inflation by cutting federal spending by $25 billion and raising tax revenue, including a 35 percent tax on people in the highest income bracket. Tax evasion on a wide scale prevents Brazil from collecting half of its taxable revenue.

Cardoso returned from Washington Saturday after presenting an economic plan that included fiscal reform to the International Monetary Fund/World Bank annual meeting. If the IMF signs the agreement by February, private banks will sign a debt-reduction package agreed upon last July. Brazil's total foreign debt - the highest in the developing world - is $115 billion.

Ivo Tonin, representative of a creditor bank here, says he hopes the constitutional review, specified in the 1988 Constitution, will reverse the ``horrible'' restrictions against foreign investment.

Five years ago restrictions forced the sale of many foreign-owned companies. For example, foreign investors are not allowed to hold majority interest in Brazilian companies. Despite restrictions, however, the UN 1993 World Investment Report ranked Brazil fourth in the developing world for foreign investment between 1981 and 1991.

``I think it's possible that [after the constitutional review] it will become easier for foreigners who want to invest,'' Mr. Tonin says. ``There is too much common sense in Brazil for that to not happen.''

But Victoria McCarthy, an investment consultant for Kroll Associates in Sao Paulo, says she is pessimistic about Franco's remaining time in office. ``With next year's elections, everything can go downhill,'' she says. ``Politicians are going to be more worried about their electoral campaigns.''