The crucial case, among the world's debtor countries, is Brazil. If Brazil can maintain its solvency and work its way back to steady economic growth, it will have set the pattern for the other debtors. If it fails, it is very likely that other failures will follow. The only other country owing as much money is Mexico, which enjoys large oil revenues. There are many countries with poorer prospects than Brazil, but they all owe much less. That's why Brazil is now the test of any strategy for debt management.
The International Monetary Fund has worked out an agreement with Brazil under which it and the commercial banks will provide additional credit while Brazil adjusts. But Brazil's part of the bargain is to adjust rapidly, and some Brazilians have objected that the reduction is too sudden and too harsh. The alternative, unfortunately, is not a gentler adjustment. That would require a larger flow of new lending to Brazil, and that won't happen.
It is useful for Brazilians to remind themselves that the IMF is not their adversary. It is essentially a middleman, allocating loans from a stream that has diminished sharply over the past year. The amount that it has promised Brazil already strains the upper limit of the range that it will probably be able to deliver. The alternative to the present IMF program for Brazil is not an easier one, financed by more foreign loans, but fewer loans and a far greater risk of financial collapse.
The chief reason for the enormous inflation rate in Brazil is the indexation of wages. Indexation is very popular, and a lot of politicians there are apprehensive about limiting it as the IMF agreement requires. But that's a reform that Brazil--and not only Brazil--ought to carry through as a matter of basic social equity. Indexing is very cozy for people who keep their jobs. But it means that when a recession arrives and income falls, the full brunt of it falls on the the unemployment rate.
Brazil is now in the third year of a recession, and income has fallen by 10 percent since 1980. The key question is how fast the Brazilian economy can be turned toward growth again. It can probably be done rather quickly, but it will require three conditions. It will require economic policy changes in Brazil, beginning with reduced indexation. It will require Americans to hold off the protectionists and keep their markets open to Brazilian exports, as President Reagan promised on Tuesday. And it will require the U.S. Congress to pass the legislation expanding American support for the IMF, without which economic hardship in Brazil and many other places will become extremely and unnecessarily severe.