Brazil The Biggest Shake-Up

By MICHAEL S. SERRILL BRASILIA

If the lesson of these times is that free markets succeed where governments fail, Brazilian President Fernando Collor de Mello is a very voguish thinker. Though his effort to revive his country's punch-drunk economy gets much less attention than the shake-ups transforming Eastern Europe, his monetary program . is every bit as revolutionary. To corset the bloated public sector and turn the economy over to the entrepreneurs, Collor has adopted policies more radical than anything attempted in Brazil in decades -- or perhaps ever -- since taking office on March 15. His approach, says Kenneth Maxwell, senior fellow at the New York City-based Council on Foreign Relations, "is the most severe one-bullet strategy to beat inflation attempted anywhere in the world."

But can he make it stick? And will it work? While economists believe that Collor's bold program is well reasoned and long overdue, the consensus is that he overshot the mark initially, stopping inflation but nearly halting business as well. In the process, he has angered Big Business, alienated much of the middle class, and invited the risk of a major recession. He has also provoked the wrath of Big Labor, as evidenced last week by strikes at a state-run steel plant outside Rio de Janeiro and at the main Ford auto factory near Sao Paulo. Now Collor must scramble to reaffirm his popular mandate, while at the same time staving off public demands to push his rigorous program off track. Can he do it? Warns Brazilian political scientist Walter de Goes: "The speciality of this economic team is detonating bombs, not picking up the pieces."

No one disputes that the youngest President in Brazil's history -- he is 40 -- has shaken up his nation as has no other recent chief executive. Hurrying to create "O Brasil Novo," the new Brazil he promised during his campaign, he has reduced an 84% monthly inflation rate to less than 13%; axed some 100,000 employees from the government payroll; and begun to halt the destruction of the country's greatest resource, the Amazon rain forest.

Collor describes his goal in a phrase borrowed from the Spanish conquistador Hernan Cortes: "To win -- or to win." His long-distance vision is to boost Brazil from the Third to the First World, and he is convinced he can do it with a freer market, greater industrial efficiency and a leaner bureaucracy. Certainly, Brazil's potential is enormous. It has immense rivers and forests, rich agricultural lands, huge deposits of gold, gems, petroleum, iron ore and minerals. With a gross domestic product of $350 billion and annual exports of $34 billion, it is Latin America's most developed nation.

But alongside that highly industrialized Brazil lives another, desperately poor country where 70% of the 150 million citizens live in poverty. That is the legacy of the chronic overspending that began in the 1970s when military rulers borrowed heavily from Western banks to cope with spiraling petroleum prices and to finance an ambitious industrial expansion scheme. By the time Collor took office, Brazil was saddled with a $115 billion foreign debt. Interest payments to foreign commercial banks were stopped last July. Chaos loomed as the economy zoomed into hyperinflation, with prices rising at a rate of more than 100,000% annually.

Collor's answer was a monetary "shock" that a Bank of Boston report called "the most severe program of economic stabilization ever imposed in a Latin American country, or perhaps in any country." Under its main provisions, the majority of all financial assets, including savings accounts in excess of about $1,200, were frozen for 18 months. Millions of Brazilians were affected: Collor's action took about $85 billion out of play, abruptly halted most business activity and dropped inflation to 3.29% in April. Collor also announced the immediate abolition of two dozen state agencies and said he would sell off most state-owned industries. In addition, he called for massive public-sector layoffs and higher taxes. The cruzado novo was replaced by the cruzeiro, Brazil's fourth currency in four years.

At the same time, Collor reversed a long-standing government policy that treated the Amazon basin principally as a source of wood products and a locale for development. He declared that he would work vigorously to stop the burning of the forest by ranchers and settlers, then appointed Brazil's foremost environmental activist, Jose Lutzenberger, to enforce the program. In an interview with TIME, Collor was unapologetic about the abrupt turnaround. "On questions of ecology, we have made a fundamental commitment to life," he said. "We have nothing to hide and nothing to explain."

In June a "new industrial policy" was added that abolished import quotas and removed bureaucratic red tape, and aims to slash high tariffs over the next five years. The move effectively ended an indulgent era of high tariffs and import quotas, during which duties ranged up to 105% and imports of 1,200 goods were prohibited outright. Still to be tackled is the thorny issue of foreign debt. Since Brazil stopped payments, arrears of $7 billion have accumulated, taxing the patience of creditors.

Initially, both the Brazilian public and Congress applauded Collor's ^ program, especially the asset freeze, which was perceived as a slap at the rich. After all, 9 of 10 Brazilian depositors had less than $1,200 in the bank. Then Collor and his relatively inexperienced team blinked. Fearing a full-blown recession, they made it possible for many businesses and individuals to recover frozen funds. Companies were allowed to trade impounded cruzados for negotiable cruzeiros by using them to pay taxes and debts. Exceptions were also made for retirees, unemployed workers and people needing emergency medical treatment.

By mid-May, more than half the frozen funds were back in circulation. The remainder belonged to increasingly irate middle-class Brazilians who would not gain access to their money until September 1991. "The feeling was that ((Collor and his government)) did something very dramatic, and then they simply blew it off through bad management," says economist Edmar Bacha of the Pontifical Catholic University in Rio. "That gave the impression that the rich got away with it again." The meltdown of the program rekindled inflation, which more than tripled to a rate of 12.9% last month. That set off new price hikes, which led workers to demand salary increases and wage indexation.

Collor has run into other problems. The Central Union of Workers, representing many government employees, has threatened work stoppages to block the privatization of state-owned industries. A plan to furlough bureaucrats has stumbled on a provision of the 1988 constitution that grants lifetime employment guarantees to all civil servants with five years' tenure. The President has tried to circumvent the law by putting employees on "reserve" status and reducing their pay, but the Supreme Court has stifled that effort.

To counter the setbacks, Collor strives to keep his personal popularity high with feats of derring-do. On weekends he can be spotted practicing karate (he has a black belt), riding his motorcycle or piloting an ultra-light aircraft. The son of a wealthy, political family, he makes no attempt to hide his affluence, favoring custom-tailored European suits and fancy watches.

But his personal style gets mixed reviews. What some call confidence others call arrogance. The one thing few dare to call him is Fernando; the President dislikes being addressed by his first name. Collor, says his chief of staff, Marcos Coimbra, "is secure, responsible, determined." Others charge that Collor is too autocratic. Says Herbert de Souza, who runs a left-wing think , tank in Rio: "He's like a doctor who tells us he's going to cause us the maximum pain and suffering, but it's for our own good."

Brazil's fractious Congress has moved quickly to capitalize on the slippage in public enthusiasm. In July it approved an inflationary wage-indexation program that calls for monthly upward adjustments of salaries. The President, whose tiny National Reconstruction Party has only a handful of congressional seats, has vowed to veto the bill, a move certain to be unpopular. To avoid a backlash at the polls two months from now in congressional elections, the government will offer low-income workers a onetime wage bonus. Following through on the rest of his program will depend heavily on the returns from those elections, when as many as 70% of the current legislators may be replaced. The question is whether the infusion of fresh blood will help Collor in his drive toward the First World -- or will erect new Third World roadblocks.

With reporting by John Maier/Rio de Janeiro and Ian McCluskey/Brasilia