International Policy

Budget Cuts And Reforms Rescue Brazil

Just a few months ago, it looked like the Asian crisis would plunge Latin America's largest economy into a pit of disaster. But Brazil has turned a surge in capital flight from the country into an equally dramatic inflow of dollars today.

The quick reversal is being attributed to a massive increase in interest rates, a package of $18 billion in emergency budget cuts, and a new emphasis on long-stalled congressional reforms to trim the role of government.

  • A recently approved overhaul of the federal social security system should eventually reduce benefit payments by about 1 percent of Gross Domestic Product -- with the full effect still some years off.

  • One major problem, international economists report, is high spending by Brazil's state governments -- which are spending the proceeds from privatizations with unhealthy haste.

  • Nevertheless, reforms have helped the country accumulate hard-currency reserves of about $63 billion -- about $12 billion above their low point last fall and nearing a historic record.

Some of the capital inflow has been directed to investments in plant and equipment. Observers say that what makes this impressive is that only a small portion has been directed toward privatizations, which have been the main magnet for foreign direct investments to date.

Still, Brazil isn't out of the woods. Interest rates remain at 28 percent, bad debts and unemployment are rising, and there is a long-term trend toward more moderate growth in durable goods sales.

Source: Matt Moffett, "Brazil's Economy Stages a Speedy Rebound," Wall Street Journal, March 23, 1998.

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