For seven years, Kurt J. Meier, chief executive of General Electric do Brasil, has been nursing along an ailing joint venture that builds locomotives. Some foreign multinationals might have shut down the factory in Campinas because of the protracted slump in capital-equipment sales. But Meier made up for his losses with profits from electric motors, generators, and lightbulbs. Now, Meier thinks his long wait for a Brazilian upturn is about to be rewarded. "People just have to start believing in the country again," he says.
The reason is that Brazil seems poised for sweeping changes that could finally unleash its vast economic potential--and make it a locomotive for growth for all of Latin America. The launching of a new currency, the real, has helped slash inflation from 50% a month in June to just 1.97% in August. It has achieved that thanks to a loose linkage to the dollar combined with such measures as lower import barriers and a curb on government deficits. The revival of consumer credit has triggered a spending surge, giving new strength to many industrial sectors.
WATCHING. The key question is whether October's election will help accelerate Brazil's embryonic recovery. Fernando Henrique Cardoso, the former Finance Minister who launched the currency reform, is the front-running presidential candidate. He is expected to win either in the first-round Oct. 3 vote or in a Nov. 15 runoff against leftist Luiz Incio Lula da Silva. A convincing victory could give Cardoso the momentum to push through a broad agenda of even more aggressive free-market reforms.
The rest of Latin America is watching to see if this time Brazil will follow the course of several neighboring countries that have conquered inflation, opened their markets, and attracted billions in foreign investment. With 160 million people, a $500 billion gross domestic product, and Latin America's biggest industrial infrastructure, an economically stable Brazil could give a powerful boost to the whole region, already racking up its fastest expansion in decades. "A stronger Brazil will benefit us all," Argentina's Economics Minister, Domingo Cavallo, told BUSINESS WEEK. "We feel that Brazil has a real chance of forming a government that is capable of running the economy well."
A Brazilian upturn would also add to the boom in U.S. exports to Latin America. Betting on recovery, billions of dollars of foreign investment have been flowing into Brazil's stock market, pushing it up 92% so far this year (chart). Foreign companies also are increasing direct investments. Brazil already hosts the biggest U.S. stake in Latin America, totaling $16.9 billion at the end of 1993, against Mexico's $15.4 billion--although Mexico has been catching up. Now, Compaq Computer Corp., for example, is opening a new, $30 million plant in So Paulo to make 500,000 personal computers per year to sell throughout Latin America, and General Motors Corp. is planning a third auto factory.
SHOCK THERAPY. The economic revival could still go off track. After all, Brazil has had eight finance ministers, three currencies, and two economic-shock-treatment plans just in the past four years, all of which failed to tame inflation. Thus, Brazilians' hopes for the latest attempt, the Real Plan, are tempered with skepticism. So Paulo housewife Marcia Gil Marques, for example, says she "adores" the plan, which has increased her purchasing power. "But after the elections, they're going to reveal the real inflation rate," she warns. "I don't believe it is just 2% or 3%."
Indeed, in the battle against inflation, "we're living through a truce," warns Roberto Teixeira da Costa, president of Brasilpar Financial Services. "1995 will bring us a bit of realism." To help Cardoso win, Brazilian business has held off price boosts--but the election will end that restraint. That could trigger demands from workers to tie their wages to a price index again, building in inflationary momentum. "If prices go up, labor will have room to demand reindexation," cautions So Paulo Stock Exchange President Alvaro Augusto Vidigal.
Cardoso's gains against inflation could also erode if he is unable to convert an election victory into legislative approval of major new economic reforms. "These things have to be done right away, otherwise clientelismo will come back," says Vidigal, referring to traditional patronage and pork-barrel spending. Cardoso will face resistance even among election allies to curbs on such outlays. His biggest ally, the Liberal Front Party, will want to keep the money flowing to the governorships and 1,100 city halls that it controls.
DRAMATIC OPENING. Despite the obvious challenges, most analysts believe the real, currently worth $1.07, and the election are giving Brazil its best shot at economic stability in many years. "Brazil is surrounded by countries that have been successful in their economic planning," says John E. Polhemus, president of Goodyear do Brasil, whose domestic tire sales are up 121% since 1992. "Brazilians look around and know they could do it, too."
Harvard economist Jeffrey Sachs, an adviser to many governments on inflation fighting, believes that Brazil has made a good start. Measures include $16 billion in funds set aside by the Congress last February to give the federal government more control over social spending; an accord with creditors in April to restructure Brazil's foreign bank debt; and a buildup of hard-currency reserves to $43 billion. A dramatic trade opening has slashed average import tariffs to 14%, down from 80% in 1985.
Spurred by such reforms, GNP is expected to grow by as much as 4% this year after a 5% rebound in 1993. The trade opening has forced industries to invest in new technology and slash workforces, while privatization has turned eight money-losing steel companies into profitable, technologically revamped producers. As a result, productivity has jumped 36% in the past three years, keeping Brazilian goods competitive worldwide and piling up huge trade surpluses, totaling $15 billion last year. "I don't think we've ever had the combination of ingredients that we have today to profoundly change the country," says Israel Vainboim, president of Brazil Warrant, a banking and industrial conglomerate. He predicts growth averaging 7% to 8% a year over the next decade.
A crucial question is whether all this free-market economic activity can translate into tangible gains for individual Brazilians, some 40% of whom live in grinding poverty. One sign that slower inflation is easing the squeeze on some family budgets: Sales at McDonald's restaurants in Rio de Janeiro and northern Brazil were up 7% in June, 30% in July, and more than 60% in August.
Such benefits of the Real Plan have helped Cardoso. As recently as mid-June, rival contender Lula, 48, a former union leader and candidate of the leftist Workers Party, was the front-runner in opinion polls with 38% of the vote against 23% for Cardoso, the candidate of the center-left Brazilian Social Democratic Party. Now, with inflation down sharply, their positions are reversed: Cardoso is scoring 43% against Lula's 23%.
THINKING MAN? That means Brazilians, like other Latin Americans, are opting increasingly for economic stability, shunning Lula's message of social revolution at the polls. But Cardoso is offering more than an inflation-busting currency. He also has a reputation as a thinking man's politician. The 63-year-old sociologist and former senator was a professor at universities in So Paulo, Cambridge, Palo Alto, and Berkeley. His cautious air and reputation for honesty reassure many Brazilians that he would impose order on Brazil's economic confusion. "Cardoso has the intellectual and ethical background to organize the state," says Pedro H. Mariani, president of Banco da Bahia, an investment bank in Rio de Janeiro.
It's because of his sensible approach that many Brazilians, inspired by their nation's fourth World Cup soccer title, feel it's time for Brazil to stop sitting on the economic sidelines, watching as its smaller and leaner neighbors score big. Although there are big hurdles ahead, Brazilians seem ready to send Latin America's biggest player back into the contest.