Brazil: Working for Stability

The middle road is a difficult political path to follow, especially in Latin America, and Brazil’s President Joao (“Jango”) Goulart may yet veer back into the leftist demagoguery that gave him his start as a labor leader. But last week he showed that he means what he says about fiscal stability, economic austerity, and a fair shake for foreign investors. At the same time, as an astute politician, he remembered his vows to the nationalists who have long been his supporters.

To attack Brazil’s roaring inflation, Goulart raised the required reserves of private banks from 14% to 22% of deposits. The move should cut the amount of currency in circulation, by tightening the amount available for loans. Next, Goulart went after Brazil’s sorely unbalanced trade (last year’s deficit: $67 million), increasing the rate of exchange from 310 cruzeiros to the dollar to 350 for buying, and from 318 to 359.30 for selling. This should encourage exports and make imports more expensive.

Goulart’s third measure yielded to the clamor from all sides to nationalize major foreign-owned utility companies. But he made it clear that he intends to give fair value for the properties. Since World War II, increased expenses and government-set rates have caught the U.S. and Canadian companies that run Brazil’s telephone and power plants in a profit squeeze that has kept them from needed expansion. Canada’s $1 billion Brazilian Traction, Light & Power Co. Ltd., which owns 82% of Brazil’s 956,000 telephones and one-third of the installed power capacity, has been making only 1% to 2% on its investment. It says it can do nothing about the complaint that some 300,000 citizens of Rio de Janeiro have been waiting as long as ten years for a phone.

On his trip to the U.S. two months ago, Goulart got President Kennedy’s general agreement to a plan under which the utilities would be nationalized for fair value. Brazilian Traction agreed. So did American & Foreign Power Co. Inc., whose eleven subsidiaries, worth $250 million, produce 10% of Brazil’s power. International Telephone & Telegraph Corp., which recently lost a telephone system to Rio Grande do Sul’s Leftist Governor Leonel Brizola and is still trying to collect, was noncommittal. But Goulart’s decree last week should do something to ease I.T. & T.’s pain. The government promises a down payment of 10%, with the rest to be repaid on a long-term basis provided the company agrees to reinvest at least 75% of the total in Brazil.