Brazil, Though Struggling, Proves
        Surprisingly Resilient

        By SIMON ROMERO

            SAO PAULO, Brazil -- When the price of imported
            wheat rose more than 50 percent earlier this year,
        Lawrence Pih, the president of Brazil's largest flour
        mill, anticipated the worst.

        "We expected many of our clients
        to go bankrupt so we prepared
        ourselves legally to get anything
        we could from them, like
        machinery," said Pih, whose
        company, Moinho Pacifico, caters
        to a range of companies from the
        corner bakery to large food
        processors. To his surprise,
        clients have shown unexpected
        willingness and creativity to
        negotiate ways out of such
        outcomes.

        In March, Pih, a naturalized
        Brazilian from Shanghai, took
        legal action to recoup losses
        against only seven insolvent
        bakeries, fewer than he had
        expected.

        In fact, Brazil has had far fewer
        bankruptcies and business
        closures than analysts expected,
        even as the country struggles with
        its deepest recession since the
        early 1990s. In Sao Paulo, the
        nerve center of the economy, there
        were 1,035 court-ordered requests
        in March to close companies, in a
        process similar to U.S.
        bankruptcy. That's up only slightly from 982 in the same
        month last year, said the Sao Paulo Commercial
        Association, a trade group. In March 1996, the number
        totaled a record 1,455.

        These figures, combined with other data on inflation,
        foreign trade and industrial production, produce a
        picture of the Brazilian economy a lot less bleak than
        that painted by economists a month ago, when the
        country was ostracized after the chaotic devaluation of
        the currency, the real. Now, instead of cautioning
        investors of the possibility of a domestic debt default,
        economists are working to convince people that a
        recovery could be swifter and stronger than initially
        thought.

        For instance, after shrinking at a 3 percent rate in the
        first quarter compared with the last quarter of 1998, the
        gross domestic product should grow by half a percent
        in the second quarter and by as much as 2 percent in the
        fourth quarter of this year, said Alexandre Azara, an
        economist at Banco BBA Creditanstalt.

        As predictions of a return to hyperinflation and of an
        exchange rate spinning out of control have given way to
        slower price increases and a strengthening real,
        Brazilian stock and bond markets have responded with
        rallies over the last several weeks unmatched by
        markets anywhere else.

        Explanations vary for this turnaround in mood, which is
        rooted in better-than-expected economic indicators.
        Emilio Alfieri, the economist for the Sao Paulo
        Commercial Association, said many companies had
        been made resilient by a history of recessions that have
        winnowed the weaklings and made survivors wary of
        taking on risky levels of debt.

        "Unlike the Southeast Asians, we're used to repeated,
        traumatic recessions and high interest rates," Alfieri
        said. "Surviving these crises has resulted in Darwinian
        selection."

        To be sure, the recession of 1999 comes after a year in
        which the economy barely grew. This recession is the
        fourth large contraction in Brazil since the early 1980s.

        One other perspective on why Brazilian companies
        have survived this latest bout with a rough economy
        may have to do with what is known in Portuguese as the
        "jeito" (pronounced JAY-too), a term that describes the
        ability of Brazilians to find clever solutions to legal,
        bureaucratic or financial quagmires.

        "The jeito provides more space for negotiating," said
        Roberto da Matta, an anthropologist at the University of
        Notre Dame who is considered an authority on the
        subject. "It is a bridge between two worlds, one in
        which old ways and common sense hold sway and
        another in which the new framework of society isn't just
        or rational." Held virtually as a national characteristic
        in Brazil, a country with a large and intricate
        bureaucracy, the jeito, or its diminutive "jeitinho," is
        now being employed by many companies as their only
        means of survival.

        For instance, Pih, the president of the flour mill, cited
        the example of a jeito in which his company, because of
        the tough economic climate for many of his clients,
        allows them up to 28 days to pay for bread that would
        otherwise be sold on a cash basis. By sometimes
        stretching out the payment period by an additional
        week, a decision taken on a case-by-case basis, his
        company in effect extends an interest-free loan to
        customers. Smaller, cash-strapped companies can use
        this time to cover immediate expenses while companies
        in a more comfortable position could use the money for
        other purposes -- such as investing in high-yield
        government bonds.

        Although complicated, this scheme has its advantages.
        Pih's company keeps most of its clients, and thanks to
        the higher price of wheat, its revenue is expected to
        increase this year in local currency terms to about 130
        million reals, or about $76 million, from 100 million
        reals last year.

        In the end, the brunt of such an operation could fall on
        the government, which has to pay high interest on the
        notes purchased by some of Pih's savvy clients. A
        larger debt load, in turn, fuels concern over the growth
        of the government's budget deficit. The failure by
        authorities to cut spending at the end of 1997 was cited
        by critics of government policy as a leading reason for
        the attack by speculators on Brazil's currency, which
        culminated in the January devaluation.

        Since then, the government has been forced to
        renegotiate with the International Monetary Fund to
        obtain new loans of $9.8 billion to help strengthen
        confidence in the country's finances. The first $4.9
        billion installment of these loans was approved last
        week.

        Whether Brazil can make progress in narrowing its
        budget deficit will be watched closely. Even
        government officials have expressed some surprise at
        the improving signals of Brazil's economy, while
        cautiously warning that much hard work lies ahead in
        trimming spending. So far, the government has won
        approval in Congress for a tax on financial
        transactions, which will provide more revenue, while
        other watered-down changes will provide additional
        relief.

        However, the impact of the currency devaluation has
        worried economists, with some expecting the deficit,
        including interest payments, to reach more than 13
        percent of gross domestic product in January and
        perhaps 14 percent in February and March, compared
        with 8 percent at the end of 1998.