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Four Years and Counting

Four Years and Counting

Public approval of the Real plan is not unanimous anymore.
Complaints range from the rise in unemployment and social justice issues to the fact that
many of the Real plan’s proposals have never materialized. But the plan did lower Brazil’s
poverty rates and improved eating habits even for the poorest.
By Marta Alvim

That Brazilians still remembered the Real plan’s 4th anniversary on July 1st can mean
both a good thing and a bad thing. On the bright side, it is a reminder that economic
stability is still maintained, considering the countless short-lived and ill-fated plans
from previous administrations. Nonetheless, the attention given to a date that might
otherwise be insignificant is also a sign that Brazilians are aware of the plan’s
vulnerabilities, and they fear that the country’s future is fraught with uncertainties.

A year ago, public approval of the Real plan was all but unanimous, but now criticism
and dissenting opinions have been mounting, paired with a sharp decline in President
Fernando Henrique Cardoso’s (FHC) popularity (a trend that has been reversed, according to
the latest polls). Cardoso, a second-term candidate in the upcoming October elections, had
been leading the polls by a wide margin from the beginning of the electoral race. In May,
though, a poll conducted by the Vox Populi institute showed that FHC’s main opponent,
labor party candidate Lula, was closing the gap and trailing Cardoso by a narrow nine
percentage point difference.

Voters complaints range from the rise in unemployment and social justice issues to the
fact that many of the Real plan’s proposals have never materialized, such as the recovery
in government accounts, the approval of the social security reform and a more consistent
growth of exports. In May alone, 8.20% of the economically active population was
unemployed, according to IBGE (the Brazilian agency for statistical, geographic,
cartographic, geodetic and environmental information.). Such poor performance of the labor
market was the worst endured since 1982, and only slightly better than the 8.28%
unemployment rate of May 1984, when Brazil suffered one of its worst recessions.

Pressed by such compelling matters which will mostly likely take votes away from FHC,
the government at Palácio do Planalto (Highlands Palace, the Brazilian equivalent of the
White House) went on to orchestrate a party in celebration of the Real plan’s 4th
anniversary with all the overtones of an election campaign. The incumbent President took
advantage of the occasion not only to celebrate his own birthday, but to also present
Brazilians with the "gift" of brand new Real coins (see related story). In his
speech to launch the new coins, the President showed that he was already in the campaign
trail, although officially no electoral campaign was supposed to begin before August 18.
"With the Real, we’ve rescued 13 million Brazilians from poverty. So, how can one say
that we overlook important social issues?", Cardoso asked, defending himself.

In his eagerness to prove his point, FHC went even further and managed to disregard
international protocol by leaking unreleased data from the United Nations that show
Brazil’s improved performance in the world ranking. The report, published annually by the
United Nations Development Program (UNDP), contains updated Human Development Indicators
of over 175 countries. Countries are classified as one of three different developmental
levels—low, medium and high—according to indicators such as life expectancy,
education and income, among other things.

The last UNDP’s report has ranked Brazil in the medium-range level, but according to
Cardoso, the country will now be ranked in the high-range level in the upcoming report.
Since the report’s release is tentatively scheduled for September, FHC’s announcement was
a cause of chagrin at the United Nations headquarters. The President’s privileged
information was only possible because Brazilian governmental entities also participate in
the UNDP’s data gathering process. Moreover, the report will be based on data collected in
1995.

In fairness to FHC, the Real plan did lower Brazil’s poverty rates. In 1997, 25% of the
population lived under the poverty line compared to 35% four years ago. The increase in
buying power was reflected in Brazilian consumer habits, as the lower-income population
was finally able to buy many products once accessible only to the high middle-class.

According to studies conducted by the government, as well as by independent
institutions, the economic stability accomplished by the Real plan was responsible for the
sale of over 10 million color TV sets in the past four years. That accounts for 69.2% of
Brazil’s homes with at least one color TV set compared to 50.2% in 1993. Refrigerator
sales jumped from 71.7% in 93 to 78.2% in 1996. As for food consumption, meat sales
increased 27% since the plan was implemented, and chicken consumption rose 39.9%. In the
same period, sales of soft drinks were up 71.5%, cheese, 51.8%, while yogurt sales
increased 85.9%.

If unemployment rates have soared in the past months, it is largely due to the tough
measures adopted by Cardoso’s administration in October 1997, after the Asian market
fall-out. Fearing that an economic crisis similar to that in Asia might spread throughout
Latin America, the Brazilian government was compelled to devise an austere fiscal plan,
followed by an astronomical increase of the annualized prime lending rates to a whopping
43.3% in November. Since then, Banco Central (Central Bank) has cut interest rates to
19.75%, but consumer demand is still sluggish.

On the other hand, Brazil registered a trade surplus of $12 million last June, after
two consecutive years of trade deficit. Economists agree that the posted surplus is not
significant, and is largely due to the economic slowdown that ensued from the Asian
crisis. As the year progresses, followed by the traditional rebound of economic activities
in the second semester, imports will again outgrow exports.

Only by having a consistent trade balance surplus can Brazil be less dependent on
foreign capital, which is greatly responsible for the nation’s current international
reserves of $72 billion. The positive recovery in reserves and the approval of important
constitutional reforms have increased investors’ confidence in Brazil. In 1997, foreign
companies were responsible for $13 billion in investments through mergers and acquisitions
involving over 200 deals with Brazilian enterprises.

Analysts point to an increase on import tariffs and changes in the current exchange
rate policy as the only ways to maintain a trade surplus, none of which is likely to
happen any time soon. Even if government officials agreed that the Real is still
overvalued, currency devaluation could trigger a financial crisis and a return to
inflation, which would derail Cardoso’s re-election plans.

As far as the budget deficit is concerned, the government seems to be moving towards a
more lenient fiscal stance because of the upcoming elections. Comfortable with the
country’s reserves, but pressed by Lula’s performance on the polls, the government decided
to give a 28.86% pay raise to all federal employees and to revoke a 12% budget cut in
federal expenditures which had been decided after the Asian crisis.

The ongoing privatization program, especially its latest deal—the Telebrás
auction (see related story)—is giving the government some space to breathe in face of
the worrisome fiscal deficit. If elected, though, FHC had better start thinking about
other ways to pay for his pre-election generosity.

Real Big
Business

On July 29, the Brazilian government sold the Telebrás system, its most lucrative
enterprise, in an auction considered to be the second largest privatization in the history
of the telecommunications sector worldwide. The entire Telebrás system sold for $19
billion, $7.3 billion more than the established minimum price of $11.7 billion.

Seventy six national and foreign companies registered to participate in the ambitious
privatization deal, including telecom heavyweights Sprint, MCI, Telefónica de España,
Telecom Italia and Japanese NTT, to name a few.

At the end of the auction, which lasted only four hours, Telefónica de España came
out as the big winner after acquiring Telesp (from the state of São Paulo), Brazil’s
largest fixed-line telephone operator, and by participating in several other winning
consortia. Altogether, the consortia in which Telefónica participated paid $6.4 billion
for three telecom companies, including Tele Leste Celular, the cellular market covering
the states of Bahia and Sergipe. This amount represented 35% of the auction’s total
receipts.

According to Juan Villalonga, Telefónica’s president, the company’s aggressive
participation in the Telebrás privatization deal is justified by the economic importance
of Brazil, which represents one third of the Iberian-American market. Moreover, the
Spanish company is determined to be a leader in the Latin America telecommunications
sector, in which Telefónica is already one of the major investors. Its participation in
the market includes holding of 45% of Chilean CTC’s shares, 31% of the Peruvian telecom
and 25% of the Argentinean system.

Another winning bidder in Telebrás’ auction was Telecom Italia, which was Telefónica
de España’s main competitor in the bid for Telesp’s control. In spite of losing the
battle, the consortia in which the Italian enterprise participated acquired three
companies for a total of $2.9 billion—16% of the auction’s receipts.

On another front, American MCI beat out rival Sprint for control of long-distance
carrier Embratel after a dogged dispute that ended in ten minutes of intense verbal
bidding exchanges. The acquisition of Embratel now represents MCI’s largest operation
outside the United States.

Just as with the privatization of mining giant Companhia Vale do Rio Doce (CVRD) last
year, the Brazilian government faced another avalanche of lawsuits and court injunctions
trying to suspend Telebrás’ auction. In anticipation of the judicial battle that would
inevitably ensue, the government put together a team of 400 top-notch lawyers to work on
overturning the injunctions.

Street demonstrations also took place in several major Brazilian cities, but these were
far fewer than the protests that erupted against CVRD’s privatization. Among the threats
from anti-privatization factions, there was an anonymous phone call to Embratel alleging
that a bomb had been planted in its headquarters in Rio de Janeiro, which proved to be a
hoax.

One of the main reasons behind the government’s decision to privatize Telebrás was the
company’s failure to meet the demand of Brazilians waiting for a telephone line. In state
capitals such as Rio de Janeiro and São Paulo, people often have to wait up to two years
just to have a new line installed. There are currently 17 million Brazilians waiting for a
conventional line and some other 7 million waiting for a cellular line. As increasing
numbers of Brazilians are buying personal computers and logging on the Internet, the
demand will continue to rise in the following years.

The government predicts that within four years, 22 out of 100 Brazilians will have
fixed phone lines, double the current line/person ratio of 11 to 100. In the year 2007,
this ratio is expected to increase to 30 : 100, and 9 out of 100 inhabitants will have a
cellular line by then.

Apart from the painful wait for a line, which should be reduced to one week by the year
2005, Brazilians are also hopeful that Telebrás’ privatization will bring about lower
rates and greatly improve the quality of the precarious telephone connections. In Rio de
Janeiro, frustration with Telerj, the local phone company, runs so high that it led one of
its subscribers to create the Eu Odeio a Telerj (I Hate Telerj) Web
site—http://www.pagebuilder.com.br/odeioatelerj/welcome.htm—where Cariocas (Rio’s
natives) could vent their anger against the company. Their tales, complaints and diatribes
range from the bizarre to the ridiculous.

Telebrás privatization has restructured the system, which used to consist of Embratel
and 26 other companies (one for each state, with the exception for Tocantins state) into
12 separate enterprises: 8 cellular companies, 3 conventional line operators and Embratel.

The Real’s
New Faces

After four years in the making, 85,500 new coins were issued by the Brazilian
government, the first batch in a process that will ultimately replace over 5 billion coins
currently in circulation in Brazil.

The exact cost of the whole operation is unknown, but it is estimated that $48.6
million alone were spent by the Brazilian mint to import the Canadian equipment used in
the coins’ manufacturing. An additional $2.5 million were spent by Central Bank—with
financial help from state-owned Banco do Brasil (Bank of Brazil) and Caixa Econômica
Federal (Federal Savings Bank)—on the promotional campaign that preceded the
launching of the new coins. Another $256 million will be spent on this project over the
next five years.

Unlike the old stainless steel coins, the new ones are made out of nickel, copper and
brass, and come in different shapes and colors. According to Brazilian officials, since
the Real has become the nation’s new currency, the population has expressed a wish for
coins in varied shapes and colors. However, opponents of the project argue that such
spending is a frivolous waste of money, considering the urgent financial needs of social
areas such as health and education.

The new family of coins is designed around the theme of Brazil’s history, which is
portrayed on the coins. So, the 1-cent coins have the figure of Pedro Álvares Cabral
(Brazil’s official discoverer) stamped on them. The 5-cent coins have Independence martyr
Tiradentes on them. The-10 cent coin shows emperor Pedro I—an allusion to the
country’s monarchy era—and the 25-cent coin bears a likeness of Marshal Deodoro da
Fonseca, representing the implementation of the Republic in Brazil. On the 50-cent coins,
an image of Baron of Rio Branco and a map of Brazil pay tribute to a historic figure who
played a major role in the peaceful negotiations to establish the country’s borders. The
Republic emblem, which is currently stamped on the 1-real coins (one real was worth 0.8532
cents in mid-August), will remain unchanged.

Marta Alvim is a Brazilian journalist, freelance translator and interpreter.
You can reach her at mltdalvim@yahoo.com

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