The Real Cost of Controlling Inflation in Brazil

By Fábio Lacerda Soares Petrarolha

Seductive images of a tropical paradise have historically attracted a large number of visitors to Brazil. But added to excursions to the rainforest, beaches, and carnival are organized tours to the "favelas," the vast Brazilian slums. In this new kind of tourism, the human race is invited to enjoy humanity's miserable condition - and to take pictures. As Michael Jackson sang in a recent music video, partly filmed in a Brazilian slum, "They don't care about us."

To the benefit of ogling visitors and the horror of the people involved, poverty continues to spread. In cities like Rio de Janeiro, misery and luxury live side by side in mind-blowing contrast. Just beyond the impressive line of five-star hotels at Copacabana beach lies a slum with more than 300,000 inhabitants. And Brazilian slums are even worse than their North American second cousins: full of shabby one-room shacks, piled on top of one another and precariously built from wood, cardboard, or whatever their owners find in the streets.

While the current government did not create these problems of underdevelopment, its economic policy is making things worse. The recent increase in poverty among Brazilians is intimately connected with the 1994 introduction of the "Real Plan," the newest strategy to control inflation in Brazil. The government's biggest mistake has been in seeing inflation as enemy number one and not taking into account the devastating side effects of its economic policy: unemployment, mass starvation, homelessness, and large-scale agrarian conflicts. According to the government, inflation must be stopped before thinking about economic growth or social justice. This myopic focus on a short-term solution has led to a huge escalation in social conflict throughout the country.

The government's inflation-controlling strategy, encouraged by the International Monetary Fund, includes introducing a new currency, and overvaluing it to stimulate imports and boost competition in the domestic market; and hiking interest rates to nearly 25% a year above the rate of inflation in order to promote savings, discourage consumption, and attract foreign capital. This has brought inflation down from nearly 47% a month in June 1994 to about 1.5% a month today.

However, these stratospheric interest rates have stifled entrepreneurship as businessmen now find it more profitable to invest in financial instruments. Foreign competitors have replaced production of the domestic economy and funds have moved from production to finance, making unemployment soar to dramatic levels.

Along with the rise in unemployment, Brazil's approximately 3,500 notorious slums are expanding. Studies by the Ministry for Planning show that by the year 2000, 11 million families will have nowhere to live. In the cities, squatting is on the rise.

The slums provide recruits for the Landless Workers' Organization, which fights for agrarian reform with both a political program and a para-military apparatus for farm invasions. This organization has become particularly powerful on a national level under the Real Plan as a growing number of desperate, homeless people are willing to engage in farm invasions as a last-ditch effort to find a place to live and work.

Some Landless actions have resulted in massacres of peasants. In a recent incident in the state of Pará, between 19 and 40 demonstrators were killed by military police, depending on the source of the report. These massacres should be added to Brazil's long list of human rights violations.

Meanwhile, another horrifying phenomenon of the 1990s is that of the so-called "arrastões," mobs of 100 to 300 poor people who leave their slums in a group, fall like an avalanche on the inhabitants of a particular neighborhood or beach, and steal everything they can find. Even the police are helpless against such huge raids.

President Fernando Henrique Cardoso has done little to compensate for the side effects of his economic stabilization plan. Thus, instead of making progress in tackling most of Brazil's deep-rooted social problems, his anti-inflation policy has exacerbated them.

World Bank statistics show that Brazil's distribution of income is now the most skewed in the world. While the richest 20 percent of the population control 67.5 percent of the gross national product (in the United States, the figure is 49.1 percent), the poorest 20 percent survive on 2.1 percent. These people have an income on average only one-ninth that of the U.S.'s poorest 20 percent.

As the statistics show, Brazil's stabilization program has generated more misery and enlarged the gap between rich and poor to an explosive level. As Rudiger Dornbusch, professor of economics at Massachusetts Institute of Technology, puts it, higher inflation would better address the country's needs than this foolish pursuit of the ideal of the single-digit rate.

The price Brazil's people have been paying to get rid of the inflation spiral is too high and too dangerous. There is a real threat of civil war between the haves and have-nots. Several signs point to that direction, including the increasing number of invasions by landless and homeless organizations, and violent repression against them by the landowners and the state. Brazil has become a gigantic gunpowder barrel with a burning wick.

Tourists: Take photos while you still can.

Fábio Lacerda Soares Petrarolha is a Brazilian economist and sociologist, specializing in development and Latin American issues. He was recently a Visiting Fellow at The Bulletin of the Atomic Scientists magazine.

Peace Magazine Nov-Dec 1996

Peace Magazine Nov-Dec 1996, page 16. Some rights reserved.

Search for other articles by Fabio Lacerda Soares Petrarolha here

Peace Magazine homepage