Under the Southern Cross: The Role of ‘Monetary Adjustment’ in Brazil’s Economic Miracle

Abstract

Indexing probably will become Buzz Word Number 1 in the United States this year. Articles on the system have appeared in recent editions of Newsweek, The New York Times, Money Manager and The Wall Street Journal. Professor Milton Friedman advocated the process for this country and subsequently was spiritedly denounced for it by Barron's. In any case, like wage and price controls, it is such a good example of the economics of desperation that it has a reasonable chance of being seriously considered as a solution to our inflation problem. Indexing, which the Brazilians term Adjustment, is essentially an attempt to live with inflation, rather than fight it. Over the past year the author has been corresponding with the Banco do Brazil, the Brazilian-American Chamber of Commerce, the Stock Exchanges of Rio de Janeiro and Sao Paulo and any American banks located in Brazil in an effort to explore that country's experience with the system. Now that we are quoting double-digit rates of inflation in the United States-rates formerly attributable only to the so-called banana republics-it will be valuable to examine Brazil's experience with indexing before considering it for this country. To date we haven't had to contend with triple-digit inflation, such as the 709 per cent increase in consumer prices in Chile over the past year, but according to the July 1974 issue of--lnternational Monetary Statistics, Honduras, El Salvador and Venezuela have significantly lower rates than we do, and until recently, Brazil, Peru and Ecuador reported similar ones. Our Consumer Price Index figures for the second quarter this year came in somewhat below the 14.5 per cent annual rate of gain shown for the first quarter. For the half, consumer prices were rising at a 12.4 per cent annual rate, and end of June prices were 11.1 per cent above the June 1973 level. Projections of significantly lower rates during the latter part of this year are already being hedged because of expected gains in food prices, plus a potential natural disaster-''dust-bowl drought in the grain belt-another example of counting chickens before they hatch. Over the last year or so, however, a variety of circumstances-including simultaneous 'economic expansion and rising standards of living, selected natural disasters, expansive monetary policies, floating exchange rates and the quadrupling of oil prices-have made inflation a worldwide problem, particularly for the industrialized nations (see Table 1).