Commentary: At Last A Real Payoff From Brazil's Real Plan

The sign in a trendy Sao Paulo beauty salon boasts that its $16 charge for a haircut hasn't changed since May, 1995. The resale price of scarce phone lines has dropped 25%, heralding the planned privatization this year of Brazil's badly run phone system. The round-trip fare between Sao Paulo and Rio de Janeiro has plummeted from $300 to less than $200 since the Civil Aviation Dept. deregulated fares and flight frequencies late last year.

Competition is becoming a way of life in Latin America's largest market. It's holding down and driving down prices in supermarkets, clothing stores, used-car lots, and real estate offices as businesses frantically bid to retain market share. Overall, inflation should fall to 2.5% this year, Brazil's lowest in four decades. Consumers are benefiting, and so should Brazil's economic competitiveness, as producers eventually reap the advantages of lower costs. "Now prices are being set by market forces and the law of supply and demand," says Walter Molano, Latin America economist for SBC Warburg Dillon Read.

The falling prices are a watershed in President Fernando Henrique Cardoso's bid to create a modern, efficient economy. At the port of Santos, Brazil's largest, for example, costs at the main container terminal have been cut by more than 25% since it was privatized last year. Half of Brazil's ports are now privately run, and the rest are to be sold off this year. Improvements in dozens of highways that have been handed over to private management, including the heavily traveled Sao Paulo-Rio route, have shortened cargo shipping time and cut costs.

But it's too early for Brazilians to celebrate. It has taken nearly four years since the launching of Cardoso's anti-inflationary Real Plan to bring about the current ripple of price cuts, and more are needed. Costs at Santos are still higher than at comparable ports such as Buenos Aires. And highway sell-offs must be accelerated in a country that depends on trucks to carry 55% of its freight. In some key states, such as Bahia in the northeast, 40% of the highways are impassable due to government neglect. "Our biggest headache is transportation," says Luiz Fernando Furlan, chairman of Sadia, Brazil's largest poultry producer and exporter, with $3 billion in annual sales. "Costs are still 50% higher than they should be." Cardoso must also mobilize support to push deeper reforms--including overhauls of government finances, the nearly bankrupt social security system, and archaic tax codes--through Congress.

CASUALTIES. The rising competition is bound to bring some harsh side effects along with lowered costs. Several industries will be shaken up, as only the strongest companies survive. Transbrasil, the country's No.3 airline, looks like a potential victim of the battle among air carriers. There may be casualties in the auto industry, too, as newcomers such as Renault, Chrysler, and Toyota try to wrest market share from Brazil's entrenched top four--Volkswagen, Fiat, General Motors, and Ford. Retail banks are gobbling each other up, with homegrown banks Bradesco, Itau, and Unibanco, and Spain's Santander emerging as the strongest.

Even many of the estimated 25 million workers in the informal economy may find themselves out of jobs. For example, traditional street markets for fruit and vegetables are losing business to hypermarkets such as Wal-Mart Stores of the U.S. and France's Carrefour, which offer greater variety at lower prices.

The shakeout is unavoidable. Indeed, Brazil needs still more competition. One important step would be to rescind last fall's hike of three percentage points, to 15%, in the average import tariff of the Mercosur trade bloc--a measure adopted by Brazil and its Mercosur partners as a cushion against a potential flood of Asian goods. To hold its own in the global economic scramble, Brazil must push ahead with free-market reforms. The recent price drops are a sign that it has made a good start.

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