NCPA - National Center for Policy Analysis

Brazil Again Approaches The Brink

December 18, 1998

Only a month ago, it appeared that Brazil might solve its economic problems and avoid a currency collapse which would deeply affect U.S. banks and bring on an Asian-style debacle in the rest of Latin America.

But the country's politicians are balking at vital reforms and, indeed, appear oblivious to the potential chaos their inaction invites, financial analysts contend.

  • A bill limiting social security benefits to former bureaucrats has been voted down in the county's Congress by members of the government's own coalition.
  • Efforts to introduce key legislation in Congress have been opposed by the president of the Senate -- on the grounds that he was not properly informed.
  • Brazilian policy makers are in denial about the country's internal debt problem -- claiming that the highly patriotic Brazilians will hold on to government-issued securities come what may, rather than rushing to bail themselves out in an orgy of self-interest.

Brazil's economic salvation lies in embracing three policies, analysts say.

  • The government must adopt new expenditure cuts.
  • It should get serious about its privatization program -- including divestment of such sacred cows as Brazil's National Development Bank and Petrobras, the state-owned oil company.
  • Finally, it should adopt a currency board to dispel the notion of devaluation.

Economists say that with these three measures in place, interest rates -- now as high as 35 percent -- would rapidly decline, growth would resume and Brazil would be able to move toward heretofore elusive prosperity.

Source: Sebastian Edwards (UCLA's Anderson Graduate School of Management), "Brazilia Is Playing Chicken With Investors," Wall Street Journal, December 18, 1998.


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