Fiscal policy and stabilization in Brazil

The theoretical basis for the"heterodox shocks"recently implemented in Argentina and Brazil is that chronic inflation is essentially inertial - the product of staggered prices and wage adjustments. The underlying assumption is that the economic process is a cooperative game. Without legal and other forms of coercion, however, individuals tend to cheat - to fix their prices above average to start with. A basic flaw of the"heterodox"stabilization programs was to assume that stabilizing the price level was a precondition for fiscal equilibrium and eventual fiscal reform - instead of the reverse. The fiscal austerity promised after stabilization was never accomplished - blocked by bureaucrats and special interest groups interested in maintaining the status quo. The challenge in these countries is to devise economic programs that could make long-term stabilization programs viable and politically acceptable.