II. THE GOVERNMENT ACTIONS

II.1 Assuring Stability and Desindexation of the Economy

The economic growth, without which it is impossible to generate jobs, demands stability of prices. For this reason, the Government has been adopting firm measures to consolidate the success of the Real Plan. The several reforms that the National Congress has been examining, aim at providing the country with an institutional atmosphere that favors a lasting economic growth in a non-inflationary context. In particular, what is being emphasized is the necessity of eliminating public deficit by the solving of the fiscal issue. This will remove the weight of the stabilization program from the monetary and foreign exchange policies.

The continuity of the privatization program shall alleviate the problems of financing the public sector and provide the economy with greater efficiency. The success of the reforms shall create the conditions for the Brazilian economy to improve its performance and obtain the advantages of the process of competitive globalization.

The Desindexation Provisional Measure, published in 1995, had the objective of removing from the labor market a perverse mechanism, by which the past inflation was projected into the future, thus perpetuating, by inertia, the elevation of prices.

The readjustment of nominal wages can derive from the government wage policy, from the negotiation between capital and labor or still from a combination of both of them. Until recently, the most important factor of growth in nominal wages in Brazil was the wage readjustment policy, predominantly based on indexation by past inflation. The country is leaving this scenario towards a model of free negotiation.

The model of readjustment of the nominal wages in Brazil was based:

• on an industry that was oligopolistic and protected by high trade barriers;
• on wage policies that experienced various forms of indexation; and
• on monopoly of labor unions.

The indexation and the joint action between the oligopolies and the union monopoly created the necessary conditions for the propagation of inflation, whose origins can be found in the crisis of financing the public sector.

The combination of wage policy, closed oligopoly and union monopoly was at the root of the wage-price spiral. The automatic readjustment of wages were repassed to the prices, leading to downfalls in the real income, which was temporarily readjusted by the indexation rule, elevating costs, that were transferred to the prices, and so on. In this manner, a perverse cycle was generated that almost led the country to hyperinflation, to distortions in the relative prices, to increasing impoverishment of the social groups that couldn't defend themselves from the inflation tax and to the increase of inequality in income distribution.

The model is changing, with the perception that no rule of indexation is capable of assuring victory in the race between wages and prices. Some of the reasons for this are: the economy is more open, making the oligopolies more competitive, what inhibits the repassing of wage readjustments to the prices; the recent Provisional Measure to end indexation closed an era of automatic wage readjustments; a consensus that it is necessary to break with the monopoly of union representation is being formed; and free negotiation is becoming a more efficient mechanism for solving wage conflicts.

Furthermore, an understanding that the level of real wage is a consequence of price levels generated by the economy, of the increase in employment derived from economic growth and the productivity gains, besides the importance of the bargaining power in the determination of nominal wages, is being consolidated. Therefore, what improves the wages' purchasing power is the price stability, the greater job offer and the workers'access to productivity gains.