Brazil debates economist’s unorthodox plan for beating inflation

Press, 11 October 1988, Page 11

Brazil debates economist’s unorthodox plan for beating inflation

NZPA-Reuter Sao Paulo A Brazilian economist has put forward an antiinflation plan calling for the creation of a new currency which the Government would not be allowed to spend except to meet its wages bill. The highly unorthodox plan by Francisco Lopes has already met with criticism from economists, one of whom called it absurd.

It has been formally presented in Congress and is attracting a considerable amount of attention in Brazil, where inflation was 366 per cent in 1987 and, economists say, will approach 1000 per cent this year. Mr Lopes said in a lengthy interview in the latest issue of “Veja” news magazine that the scheme was designed to prevent hyper-inflation culminating in a collapse of the country’s financial system. For months Brazilians have debated the possibility of a total collapse of the cruzado currency, a direction many economists believe the country

is taking. Economists and journalists have described the horrors of life in Germany in 1923 when the mark collapsed. Mr Lopes painted a grim picture of what hyper-inflation could bring to Brazil. Mr Lopes, one of Brazil’s best-known economists, had a major role in shaping Government price freezes in 1986 and 1987, both of which failed. He owns an economic forecasting company which numbers the Government among its clients. Mr Lopes told “Veja” he envisaged that the plan, which would introduce a new currency called the “real,” would reduce inflation to about 20 per cent a year. He said it had two important elements. ‘The first is to define in law a ceiling on the quantity of the new currency to be issued. To make it viable, we prohibit the Government from making any expenditure in the new currency except for the payment of public employees. “The effectiveness of

this mechanism is enormous because the Government will devalue its own currency if it spends excessively and will end up not having anything more to spend.”

The second central element in the plan was that all short-term indexing in the real currency — linking prices to the general price level index — would be banned.

Inflation-linked savings accounts are a key weapon against the relentless rise in prices for Brazilians.

In the first of the plan’s two phases, the real would be linked for a four-month period to a Government security called the fiscal OTN. In the second phase this link would cease.

Government suppliers, paid in cruzados, could change them into reals at the bank with the rate defined by daily auctions.

The Government would be allowed to use the real “when it is clear that the Government knows how to behave,” Mr Lopes said.

He made it plain that

the aim was to put the Government in a kind of financial exile. There is a wide belief in Brazil that Government corruption has much to do with the crisis.

Mr Lopes told “Veja,” “It is a quarantine of the Government, as if people were sending it to the (Atlantic) island of Fernando de Noronha and decreeing: ‘You stay there, your currency is the cruzado, ours is the real.’ ”

Paulo Rabello de Castro, an economist at Rio’s Getulio Vargas Foundation, said in Sunday’s “Folha de Sao Paulo” newspaper that the plan was absurd.

“The real plan divides Brazilian society into two castes, that of princes and that of beggars — the first, who earn in reals and pay in cruzados and the second who inversely earn in cruzados and pay in reals,” he said.

He argued that instead of preventing hyper-infla-tion the plan would actually speed up the onset of that feared phenomenon.