Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.wpost From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: A South American Economic Engine Sputters; Brazil's Many Problems Dampen U.S. Date: Mon, 16 Nov 92 05:02:45 EST Message-ID: <18.1992Nov16.050246@AmeriCast.com> A South American Economic Engine Sputters; Brazil's Many Problems Dampen U.S. Companies' Hopes in a Potentially Huge Export Marketsales director of a U.S. firm down to 336, meaning that 164 companies failed to meet the threshold of $110 million in gross sales achieved by last year's 500 big- gest firms. More than half of those firms recorded a loss in 1991, said the survey's editor, Stephen Kanitz. Superimposed on Brazil's economic problems is a Rube Goldberg tax structure with nearly 60 different taxes on individuals and businesses - which Brazilians have become masters of avoiding. Facing a $12 billion budget shortfall to cover raises for pen- sioners and the military, the government of interim President Itamar Franco has responded by proposing yet another tax, this one on financial transactions, such as checking account with- drawals. "The government has tried again and again to collect more taxes and was unable to do it," said Helio Mattar, owner of a chain of restaurants and coordinator of a business association headquartered here. "So it just increased the number of taxes." "If you buy something in Brazil from one of the large manufac- turers, you're paying 52 percent in taxes and 48 percent for goods" and labor, said Kanitz. But the biggest problem facing Brazil's economy is inflation. The government has tried a half dozen shock plans in as many years to bring it under control with only temporary success at best. Brazilians, weary and suspicious of such efforts, seem resigned to live with inflation as long as it grows by roughly the same amount each month so they can predict their expenses and adjust their prices. But that psychology is exactly what makes it so difficult to curb inflation. Contracts are indexed to past inflation and prices go up based on the expectation of further inflation. "People think there will be inflation because there has been inflation," said econom- ist Gesner Oliveira. So far, the Brazilian central bank, rich in dollar reserves be- cause of high exports and returning capital attracted by high in- terest rates, has been able to hold down the cruzeiro and keep inflation within socially acceptable limits. But economists here don't believe inflation can be sustained at a stable rate, and it could spiral into hyperinflation soon. The Brazilian crisis comes at a bad time for South America. For Brazil, it is happening in the midst of a political crisis that is impeding any strong economic reform measures by the in- terim government. If President Fernando Collor de Mello, impeached on corruption charges, is permanently ousted in a Senate trial next month and Franco is installed in his own right, the new government might be able to begin dealing with the economy in a more forceful way. For Brazil's neighbors, the crisis threatens to deflate what had been a surge of optimism about trade and foreign investment in their economies. There's been a rush to form free-trade agree- ments in the region, sometimes cutting across existing groups in what one United Nations official called a jigsaw puzzle of re- gional integration movements. Brazil and Argentina, with smaller Uruguay and Paraguay, are trying to forge a common market called Mercosur. But the imbalance in growth, inflation rates and trade between the two principal partners is so great that the free-trade zone may never work. Faced with a $1.4 billion trade deficit, Argentina readjusted some tariffs and import taxes this month in what amounted to a closet devaluation of its highly overvalued peso, which was mak- ing Argentine exports prohibitively expensive. Argentina has high hopes of joining the United States, Mexico and Canada in the North American Free Trade Agreement at some point, perhaps after Chile does. But Brazil's crisis and its delay in lowering trade barriers makes it doubtful that Mercosur could negotiate its way into NAF- TA as a bloc, which means Argentina would have to pull out of Mercosur. "If Argentina would pursue integration under current conditions, not only would its noncompetitive companies go broke, its com- petitive companies would go broke too," said Carlos Escude, a former adviser to the Argentine Foreign Ministry. "It would amount to Brazil exporting its turmoil to Argentina." "I can not see a scenario under which Mercosur becomes function- al in a way that enhances free trade," he said, "but the president can't just go out and announce that we are leaving Mer- cosur." Although the idea of an integrated market has a nice pol- itical ring, it's not at all clear that Brazilian business execu- tives would mind Mercosur's demise, as many of them feel they are at a disadvantage in international trade because port costs are among the highest in the world and interest rates are in the neighborhood of 35 percent. "Businessmen tend to praise free trade - as long as it's not their business," said Andre Lara Resende, an economist who heads a Brazilian steel company recently sold from public to private hands. Anyway, he said, "there's no way to have a regional trade agreement when you have the problems of the magnitude you have in Brazil." Latin Americans generally are concerned that the administration of Bill Clinton will be less open to free trade than the outgoing administration. "I just hope Clinton understands that the only sector that func- tions in this country is the export sector," said Bolivar Lamounier, a political scientist. "If that fails, we're dead." "You have economic blocs that are forming, and America has to be part of the American bloc," said restaurateur Mattar, of the business association in Sao Paulo. And if its products do get frozen out of the U.S. market, Mat- tar said, Brazil can always play its ace in the hole: its foreign debt, which now stands at $119 billion, the largest in the developing world. "If Brazil is unable to export," he said, "it will be unable to pay its debt."