Living with inflation -- Brazilian style;

              LIVING WITH INFLATION-BRAZILIAN
STYLE
By CHRISTOPHER H. ROBINSON
Director, International Accounting and Auditing
Touche Ross International
Public accounting has been doubly caught by the dra­matic
increase in inflation in most industrialized countries.
In addition to the economic impact on incomes and liv­ing
standards, serious professional issues are raised. How,
we are asking ourselves, can our clients' financial report­ing
be made more useful during an inflationary period,
and how else can we help clients develop information for
making economic decisions?
While inflation may not be here to stay at its current
rate, it is hard to see how it will decrease rapidly or dis­appear
entirely. We have been living with inflation for
many years, tending to ignore it. It may be useful to take
a look at how another country has made substantial eco­nomic
progress during a highly inflationary period. Is
there anything in its experience which could help those
of us who are new to high rates of inflation?
Recently I lived in Brazil for two and a half years, and
I found its "inflation survival kit" to be an interesting pack­age
with good ideas. This experience with economic deci­sion-
making and financial reporting in an environment of
high inflation suggests new approaches to this worldwide
problem.
I should emphasize that Brazil enjoyed record economic
expansion during my time there—this was before the oil
crisis—and that from the middle 1960s until 1973 the rate
of inflation fell steadily as the economy continued to
strengthen. It is too early to say what the full impact of
the oil problem, renewed inflation, or a general world
recession might be on Brazil, and whether the successes
of the past can be repeated. But business and the man in
the street did survive and thrive with inflation, which has
been well over 20 percent in their period of growth; and
their techniques for dealing with it are worth studying.
Unique conditions, of course, influence the approaches
which can be taken to inflation. The recent growth of the
Brazilian economy has been most notable in the indus­trial
sector, although it is still a heavily agricultural nation.
Furthermore, the government either controls or has the
power to control prices and wages. Another aspect is that
the government is not subject to being voted out of office.
This means it can exercise its authority free from the self-interest
lobbies which have a significant influence in many
industrialized countries.
The government has helped to generate Brazil's grow­ing
economy through: (1) encouraging both foreign and
domestic investments by means of tax and financial incen­tives,
(2) honoring foreign capital and income repatriation
policies, and (3) using natural and human resources effec­tively.
Equally important are the government's monetary
policies, and it is these that are the most interesting and
relevant.
The totally demoralizing effect that inflation has on
business and on individuals prompted the Brazilian gov­ernment
to develop a system of monetary correction—the
idea being to protect investor's funds and personal sav­ings
from erosion. Essentially, monetary correction takes
two forms: first, there is what I call "cash flow" monetary
correction; secondly, there is an accounting adjustment
for changes in the purchasing power of the cruzeiro—the
local currency unit—with tax benefits.
Cash Flow Monetary Correction
Cash flow is the key to survival in inflationary conditions,
but one of the first effects of the recent high inflation in
the USA has been the reduction of cash flow. In the in­dustrialized
economies, it is common for businesses and
individuals to incur long-term debt at fixed interest rates.
As inflation increases, however, terms become shorter and
rates higher.
In Brazil, it is unusual to have domestic debt longer than
two years. All long-term interest rates for domestic loans
have some variable factor, called monetary correction,
built in to adjust for the effects of inflation. The adjust­ment
is usually based on the index the government uses
to monetarily correct government bonds. Although bor­rowers
may be uncomfortable with what are effectively
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