Economic Plan Is Hot Potato for Brazil Vote

INFLATION has taken a nose dive in Brazil - from 5,000 percent for fiscal year 1994 to just 5.5 percent in August - as a result of a government economic-stabilization plan. But skeptics say it won't last much beyond the end of this year.

The economic plan, which the government introduced this spring, has become a hot political issue in the Oct. 3 presidential election between front-runner Fernando Henrique Cardoso and his main challenger, Luiz Inacio Lula da Silva. As finance minister, Mr. Cardoso devised the plan and has been reaping political credit for its success ever since.

But Joao Machado, an economics professor and top adviser to the Da Silva campaign, calls it: ``only a Band-Aid that favors the rich over the poor.'' He says the current government is manipulating the economy to help Cardoso win.

Finance minister and Cardoso supporter Rubens Ricuperio lent credence to that view this month when he admitted that the government has only revealed good news about the economy in order to bolster the Cardoso campaign. Mr. Ricuperio resigned from his job the next day.

Skyrocketing inflation has plagued Brazil for much of the past two decades. The well-off adjusted to the problem, depositing their money in bank accounts paying 3 percent or more daily interest. But the majority of Brazilians, like Otaviano Cristiano da Rocha, don't even have bank accounts.

Mr. Da Rocha works in a factory making car headlights and lives in the Capuava slum outside Sao Paulo. He earns the equivalent of $500 per month, but food, utilities, and other essentials eat up more than $400 of his salary. ``The value of my pay was cut in half by the time I got it from the company,'' he says.

The economic-stabilization plan, which aims to help workers like Da Rocha and stabilize the economy for investors, contains a number of elements:

* Attempts to balance the federal budget, in part by diverting funds earmarked for social services to pay off internal debt.

* The introduction of a new currency - the real - and backing it with $42 billion in foreign-currency reserves. This month the currency had risen in value 12 percent compared with the value of the United States dollar.

* The elimination of indexation of wages and prices.

* Allowing retail prices to increase greatly in the hope that they would fall later.

``The plan has been highly successful,'' says Luis Carlos Bresser Pereira, a former finance minister and adviser to Cardoso, ``and has contributed to my candidate's lead in the polls.'' Recent opinion polls have put Cardoso 22 points ahead of Mr. Da Silva in the runup to the election.

But critics point out that Cardoso's plan eliminated automobile workers receiving indexed wages under their union contracts. These employees went on a one-week strike that ended Sept. 20, and they won a 60-hour bonus in pay to make up for inflation since the economic-stabilization plan took effect.

The plan is fundamentally flawed, Mr. Machado says, because it relies on large foreign-currency reserves to temporarily prop up the real. ``Sooner or later, the reserves will run down,'' and the value of the real will sink, he says.

The government is paying higher interest rates on the internal debt than originally planned, according to Machado, so the budget isn't really balanced. ``I think the plan will only contain inflation until, perhaps, the end of the year.''

Da Silva's campaign proposes an alternative method of halting inflation, including raising money for the government by cracking down on tax evaders. He would promote land reform and lower interest rates, hoping to stimulate investment and create jobs.

But this plan would be disastrous, Cardoso supporters claim. Da Silva ``stresses regulation too much,'' says adviser Bolivar Lamounier. ``They want to pick the sectors to receive incentives and then try to direct investment to those sectors.'' Such policies, he continues, ignore the free market and would lead to even greater inflation.

Mr. Lamounier readily concedes that, if elected, Cardoso will have to implement new policies beyond the current economic plan. To maintain a balanced budget, the government will have to sell off many nationalized industries and lay off state workers.

``You need much deeper reform in the public sector,'' along with other free-market reforms, to lower tariffs and stimulate international investment, Lamounier explains.

But Da Rocha responds that he can't wait for such free-market solutions. ``We need measures to lessen poverty right away.''