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Has Brazil Missed Its Best Chance For Reform?

International Outlook

Has Brazil Missed Its Best Chance for Reform?

Brazil is still suffering from its chaotic devaluation of the real earlier this year, which deepened the country's recession. But to President Fernando Henrique Cardoso, the return of hard times offered one solid opportunity: to use the crisis to cow his opponents into supporting some long-delayed reforms. The conventional wisdom was that the fractious Congress would finally move ahead with the structural reform program Cardoso has advocated since taking office in 1995.

But Brazil may already have missed its best chance to achieve some badly needed change. Cardoso has sent a bill to Congress on social security reform, to be voted on this October. It's a keystone to his program of eliminating lavish handouts and widespread waste. But his opponents are likely to water the bill down badly, if they vote for it at all. A similar fate may well await Cardoso's other reforms.COMPLACENT. What went wrong? Cardoso may have done too good a job of containing the crisis. After he and his economic team, led by Central Bank President Arminio Fraga and Finance Minister Pedro Malan, stopped investors' panic by aggressively raising interest rates and reassuring investors, Congress became complacent. And members of Brazil's 17 parties began listening once more to special-interest groups ranging from farmers to retirees, who want the social security bill gutted to preserve their state-supported incomes and privileges. Meanwhile, state and city bureaucrats have stepped up their opposition to another Cardoso plan to limit debt-fueled government spending.

Congressional flip-flopping is another problem. About half the members of Congress have switched parties since Cardoso took office. Without party loyalty, the government cannot count on a core of backers and must line up support for every bill. Now the only way that many lawmakers even show up for a vote is if they are assured of pork-barrel largesse from the state. That spending is keeping the budget deficit high and interest rates at 19%.

Cardoso is trying desperately to bring the spotlight of public censure on these legislators. In a recent speech, he accused opposition politicians of "pretending that we're taking away social rights, when we're trying to do away with abuses of privilege." Cardoso also is trying to quell the opposition in his own Cabinet. In early September, he fired Development Minister Clovis Carvalho, a close friend, after Carvalho said Finance Minister Malan's attitude favoring low inflation over growth was "cowardice." The move reasserted Cardoso's commitment to fiscal austerity. But it did little to bring over his opponents in Congress.

Concern about reforms recently sent the real to its weakest level since the depths of the crisis in March. Without far-reaching reform, the currency will remain weak, interest rates punishingly high, and recovery slow. Yet with his approval ratings at record lows, the President lacks the popular support needed to pass the toughest measures. And Cardoso may be running out of time. With municipal elections set for October, 2000, he has until about April, when the campaigns shift into full swing, to prevail over Congress.

Cardoso isn't completely helpless against the legislature. His coalition, stung by recent antigovernment protests and the increasingly confident opposition, is beginning to close ranks. Although Cardoso is more comfortable as a consensus-builder than as a campaigner, his uncharacteristic attack on Congress showed a new willingness to confront the legislature. But it may be too little, too late.By Ian Katz in Sao Paulo; Edited by Christopher PowerReturn to top

Italian Brouhaha

A political firestorm over last May's $36 billion hostile takeover of Telecom Italia by upstart Olivetti could imperil further big privatizations by Italy's center-left government. The government tacitly approved the deal, but now Olivetti Chief Executive Roberto Colaninno wants to transfer Telecom Italia's controlling stake in mobile subsidiary TIM to Tecnost, the shell company that was used for the takeover. TIM's rich cash flow could help Olivetti pay down the $15 billion debt taken on in the Telecom takeover. But Telecom's minority shareholders are charging that the transfer vastly reduces the value of their holdings. The brouhaha could sour the markets on one of Italy's most ambitious privatizations ever, the upcoming sale of a first 15% tranche in electricity company Enel.Edited by Christopher PowerReturn to top

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