Latin Nations Grapple With Soaring Inflation

SANTIAGO, CHILE —  The dramatic acceleration of prices in some debt-ridden Latin American countries has introduced a new cause for fear in the region--hyperinflation.

In 1988, four Latin American countries--Brazil, Argentina, Peru and Nicaragua--were the only examples in the world of three-digit inflation. This year further price explosions drove the annual inflation rate in all four countries to more than 1,000%.

In Argentina, hyperinflation forced President Raul Alfonsin to turn over the government to the elected Peronist opposition five months ahead of schedule. In Brazil and Peru the incumbent presidents, Jose Sarney and Alan Garcia, are barely hanging on to their jobs. Economic collapse in Nicaragua, hastened by the U.S.-backed Contra war, is forcing the Sandinistas to hold a power-sharing election in February.

The efforts to identify the monetary viruses at work in hyperinflation, and the possible remedies, have produced a number of recent seminars, including an international conference staged in Sao Paulo, Brazil, by the Fernand Braudel Institute of World Economics.

The root cause for Latin America’s inflation, according to the analysts who met in Sao Paulo, has been the “populist temptation” to try to satisfy the demands of poor people without taxing the rich. Such populist spending beyond revenues leads to budget deficits, growing debt and eventually currency devaluation.

“There has been a political preference to spend anything to keep the slums from exploding, as they did in Caracas early this year,” said Jeffrey Sachs, a Harvard economics professor. Sachs, in addition to working with several Latin American governments, is advising Poland’s new Solidarity government on establishing a free market.

The best example of how to halt inflation in Latin America is probably Bolivia, where the annual rate had reached more than 10,000% when President Victor Paz Estenssoro took office in August, 1985. Inflation during the past year has been less than 20%.

Gonzalo Sanchez de Lozada, who put together Bolivia’s anti-inflationary plan as Paz’s minister of planning, said the key to success was eliminating budget deficits by increasing taxes and cutting subsidies, letting prices go free and “making the free market your shield.”

“We did this not on the basis of liberal economic theories, but because it was the only way for democracy to survive in Bolivia,” said Sanchez de Lozada, who had the highest popular vote for president in a national election this year, but lost in a congressional runoff to Jaime Paz Zamora.

Chile offers another example of a country that had a 500% inflation rate in 1974, the year after the military, with CIA backing, overthrew the left-wing government of Salvador Allende. Chile now has steady annual growth of 5% with inflation at about 20% a year. In the process, foreign debt has been reduced by nearly $5 billion by conversion of bank obligations into investments.

Equally important, Chile’s economic stability has led to a democratic opening, in which the military dictator, Gen. Augusto Pinochet, was defeated last year in a plebiscite designed to keep him in power. A moderate opposition candidate, Patricio Aylwin, seems likely to win a presidential election in December. If the opposition wins, the successful, exportoriented economic policy will probably remain.

Under its new Peronist president, Carlos Saul Menem, Argentina has abandoned the “populist” option and chosen an austerity line to halt hyperinflation. The initial result has been relief from spiraling price increases, but Menem has to persuade organized labor that wage increases have to be deferred until stability is achieved. For this, economic growth has to be restored, mainly by private initiative.

According to Harvard’s Sachs and other analysts, an essential element for stability with growth is increased revenues through taxes on the huge sheltered incomes of Latin America’s wealthy elites. Sachs also counsels his Latin American fans to suspend payments on the region’s $350-billion debt until foreign bankers become more willing to reduce debt payments. That could trigger a counterreaction, however.

If Latin American debtor countries impose unilateral restrictions on debt payments, the banks are ready. They have already increased reserves for payment suspensions and they can cut off, or increase the cost of, lines of credit for trade that are essential for exports by Latin American countries.

“Sachs is right in saying the banks don’t need the money, because they have built up reserves, but we do need new money,” said Jesus Silva Herzog, former finance minister of Mexico, which has become the first Latin American debtor to get a deal from the banks that may reduce its payments.

In Brazil, nothing more than a balancing act, to avoid an inflationary explosion, is expected until Sarney hands over the presidency in March, following November elections.

Sarney’s successor--polls now indicate it will be Fernando Collor de Melo, a 39-year-old state governor with a vague liberal platform--the new president will have to adopt radical reforms. Brazil’s inflation rate in August was 29.34% for the month alone. That is flirting with hyperinflation, which some now see as the unattractive “exterminating angel” of populist policies that pay political dividends only in the short run.

For the health of Latin America’s democracies, the Bolivian austerity line is clearly sounder than Peru’s bankrupt populism. Peru’s inflation in August reached an annual level of 5,000%, the highest in the world this year.