Inflation and Social Pacts in Brazil and Mexico

Abstract

The politics of inflation in Latin AmericaIn recent years inflation has accelerated in Latin America to become a seemingly intractable problem. In many countries, even when high inflation or hyperinflation has been brought down, the inflationary ‘floor’ has remained high, with all the appearance of a series of upward and irreversible steps. The underlying average annual rate of inflation has tended to rise steadily, as can be seen in the table overleaf.The reasons for persisting high inflation and for the seeming inability of government policy to bring inflation down in a lasting manner are complex and controversial. Moreover, as a number of authors have noted,¹ the reasons for the failure of anti-inflationary policy are often, in some measure, political as well as purely economic. For one thing, inflation, and efforts to control inflation, involve a redistributive struggle the political costs of which the government may be unable or unwilling to bear. In addition, the government simply may not have the administrative capacity to implement certain measures effectively. For example, one way of restoring fiscal balance may be to increase taxes on wealth-holders, but this may not be a politically feasible option for many governments. Central governments may have limited control over the spending of regional and local governments, or over state-owned corporations, and may therefore have difficulty in controlling expenditure. Moreover, effective anti-inflationary policy may require political conditions that may simply not be present in many Latin American political systems. For example, in September 1989, towards the end of the Sarney government in Brazil, inflation was running at 38% per month.