Imagine a place where prices of nearly everything
change by the week - and always upward.
Coffee up 50 per cent in two months, while a McDonald's
hamburger more than doubles. Hotel rooms rise 110 per cent in just 30
days. Supermarket employees spend half their time at the shelves -
replacing old price stickers with new ones. Restaurant menus wear thin
from the frequent erasures of prices penciled in. Interest rates for a
one-month bank loan - 25 per cent are higher than what Americans pay on
their credit cards in a year.
This is Brazil, a South American giant gripped by
runaway inflation that threatens to sink both its economy and its
fledgling democracy.
For ten days in April 1987, I examined hyperinflation
in Brazil's vast, beautiful, critter-infested steam bath we know as the
Amazon region. Far from the country's monster cities of the south (São
Paulo alone boasts a population of 15 million), I talked to dozens of
people in three towns: Belém, a port city near the mouth of the Amazon
with a population of a million; Santarém, a town of about 100,000 people
300 miles upriver; and Alter do Chao, a village of about 1,000 on the
Tapajós River, about 30 miles from where the blue-green Tapajós flows
into the muddy Amazon at Santarém.
The Amazon rain forest is an exotic place for any
activity, but it can be uncomfortable for someone accustomed to a dry
climate. Water thickens the air and drenches the earth in
superabundance.
One-fifth of all the fresh water on the planet flows
through the mighty Amazon. As it pours into the Atlantic, it drives back
the salt water of the ocean for more than 100 miles.
Ocean-going ships can navigate for 2,300 miles up the
river's 4,000-mile length. More than 1,500 species of fish inhabit the
Amazon and its 1,000 tributaries, in a basin which drains an incredible
2.5 million square miles of mostly jungle territory.
But water isn't the only thing of which this nation of
135 million seems to have more than enough. It's drowning in paper
money, too, which explains why the value of the stuff plummets with each
round of price hikes. The administration of President José Sarney, an
ill-fated one from the start, is getting most of the blame for it.
In 1985, 21 years of military rule ended with the
election of Tancredo Neves to the presidency. Before ever taking office,
however, Neves died.
His vice-presidential running mate was Sarney, a poet
and politician of little note who suddenly found himself wrestling with
the accumulated economic problems the military had willingly deserted.
He succeeded in making them worse by boosting public spending and
printing more money to help pay for the 50 per cent of Brazil's gross
national product that the government was consuming.
By early 1986, inflation in Brazil was running at an
annual pace of 400 per cent. In February of that year, Sarne, startled
the nation with a dramatic announcement: To end the inflation, he was
freezing wages and prices and reforming the currency. Three zeroes were
dropped from the old "cruzeiro" and a new money, the " cruzado, " was
introduced.
While the freeze was in effect, the government
ballooned the spending of the public sector, fostered a yawning budget
deficit, and tripled the money supply.
Sarney "deputized" the nation's housewives to report on
price violators and sent swarms of armed men onto cattle ranches to
force owners to sell their beef at fixed prices. Goods vanished from
store shelves as black markets flourished. It was like clamping a lid on
a boiling kettle and turning up the heat simultaneously.
The whole thing blew up in February 1987, as the
president was forced to lift the controls and, in a move that sent shock
waves throughout the world's financial community, suspend interest
payments on most of Brazil's $110 billion external debt.
The economy seems to be careening toward an abyss, with
no one sure of what the future will bring. The prestigious financial
magazine, The Economist (February 21, 1987) put it this way: "Brazil's
economy is going downhill so fast it may jump the rails."
Talking to consumers and vendors in Belém's famous
Ver-O-Peso Market, I discovered widespread skepticism about the
government's inflation figures. Rather than the 400 per cent officials
proclaim, the consensus in the street is that the real rate is much
higher.
"The clothes I would like to buy are three times in
price what they were last month," one woman complained bitterly. And
like everyone else I spoke with, her wages had not kept pace, in spite
of the widespread practice of "indexing" wages to the inflation rate.
"Business is way down," lamented a seller of hammocks,
"and with interest rates at 25 per cent per month now, I can't afford to
borrow anymore." He blamed the collapse of his customers' purchasing
power for the loss of business.
"No one saves and no one plans for anything beyond
today," another shopper told me. "As soon as you earn cruzados, you get
rid of them, either for dollars or for something that's real."
The inflation seems to have accentuated class
divisions. A common complaint is that "the not-so-rich are getting
poorer while the rich hold their own or get richer."
"The rich can find ways to protect themselves, but
inflation is doing to the poor and middle class what the piranhas of the
Amazon do to a cow in the water," a vendor of wicker baskets said.
Piranhas are those carnivorous fish with teeth like a newly sharpened
saw and a disposition to match. Schools of them have been know to clean
a live cow to the bone in half an hour.
Labor strife and civil unrest appear to be on the rise
as a consequence of the deteriorating economy. Some residents spoke of
mutiny on the railroads because of a rail strike. Dock-workers are
threatening to shut down Brazil's port cities. In the banks of São
Paulo, an average of 13 assaults per day occur against bank employees.
Rumors of a military coup are on the rise throughout the country.
In Santarém, I gathered detailed price information on
several dozen items. "What did this sell for one month ago, and what is
its price today?" I asked many of the vendors. Here's a sample of what I
found:
"Glymiton," a popular liquid vitamin supplement: from
24 to 60 cruzados (about 26 cruzados equals $1); a one-kilo roll of
twine: from 111 to 390 cruzados; a cup of mineral water: from 2 to 5; a
spool of fishing line: from 60 to 90; and one kilo of meat: from 20 to
70.
Businessmen complain of shrunken inventories and
shortages because of the evaporation of credit.
"We used to get supplies and pay for them 30 days
later," a hardware store owner told me. "Now," he said, "everyone wants
cash up front."
"It's ironic," a restaurant manager said, "that my
suppliers demand immediate payment from me in this worthless paper, only
to turn around and get rid of it themselves. "
At the Aparecida Hammock Factory in Santarém, the best
hammocks of the region are made. Automation hasn't come to this place
yet. The hammocks are hand-woven on giant wooden looms by craftsmen who
work with lightning speed over the intense clacking of fast-moving
shuttles. Profits from sales are given to the Catholic Church to support
social welfare programs. I asked the manager how inflation has affected
the business and heard a familiar story.
"We have been hit hard," the manager said. "Tourism is
down and even local people aren't buying like they used to. There are
needy people who depend upon our success here who will have to do with
less this year. It's sad, but what else can we do?"
When asked where things are going from here, everyone
expressed either complete uncertainty or outright pessimism.
"These problems represent the worst crisis in our
memory. We have no way of knowing what lies ahead," a hotel manager
said.
In Alter do Chao, several people suggested that the
main cause of the inflation was the government's massive external debt
and that the solution was for Brazil to go further than Sarney's
suspension of interest payments and cancel the foreign debt unilaterally
and entirely.
Some blamed the United States for "suckering" Brazil
into the debt dilemma in the first place, but anti-American sentiment
did not seem to be much a part of people's thinking anywhere I traveled.
One of the few enterprises that the inflation actually
may be helping is gold prospecting. In fact, Brazil is in the midst of
one of history's greatest gold rushes.
Nearly half a million "garimpeiros" - individuals
working with little more than a pick and shovel or a pan at the
riverside - hauled out nearly 80 tons of gold from the Amazon region
last year. The Brazilian minimum wage of $70 per month does not affect
them, for they earn whatever the gold they find fetches them, and not an
insignificant number have made a fortune.
I talked to one of the officials at SUDAM, the
government agency that supervises the development of the Amazon area,
about the gold discoveries. The richest find, in a place known as the
Serra Pelada, "may solve Brazil's debt problem one day," he confided.
"If the gold doesn't do that for us, maybe the oil will; we think we are
sitting on a vast sea of oil here in the Amazon. "
It's hard to imagine enough gold or oil to bail Brazil
out of its present difficulties in time to prevent upheaval. This is not
an economy with a lot of time to work on its troubles. The specter of
worsening inflation, depression, and political turmoil clearly stares it
in the face.
Sadly, the Brazilian government seems to have learned
little from the last two years of chaos. In June 1987, it announced a
new program which includes another round of wage and price controls.
That same month, the money supply increased 28.8 per cent.
This is not the first hyperinflation the world has
witnessed. It isn't the first Brazil has had, either. But seeing it
firsthand and sensing the pain and confusion it engenders make one
wonder why it has to happen at all. Surely one of the most enduring
lessons of economic experience is that drowning a nation in paper money
always wrecks the currency and the economy along with it. It's a lesson
Brazil is learning now in a most painful way.
At the time of the original publication, Professor
Reed was President of The Mackinac Foundation in Midland, Michigan,
and Chief Economist for James U. Blanchard & Company, based in
Jefferson, Louisiana.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
January 1988, Vol. 38, No. 1.
Yourname@libertyhaven.com
