THE BRAZILIANIZATION OF AMERICA Rocketing debt, appalling schools, poor and dangerous inner cities . . . The unsettling comparison isn't so far-fetched.
By JOHN GRAY JOHN GRAY is a fellow of Jesus College, Oxford University. He is also Stranahan Distinguished Research Fellow at the Social Philosophy and Policy Center at Bowling Green State University in Ohio.

(FORTUNE Magazine) – A specter is haunting America in the Nineties: the specter of debt. A mountain of unsustainable debt threatens to transform the U.S. from a global into a regional power, to trigger large-scale and unilateral American disarmament, and to initiate an absolute decline in American living standards. Apocalyptic? Unthinkable? Yes, until recently. But now America may be on the brink of becoming the next Brazil. To be sure, this is a worst-case scenario -- most likely. What makes it so frightening is that it could result from current policy. Government need not commit any egregious new blunders. Policy need only continue on its present unsteady course. The most visible manifestation of the American debt phenomenon is the S&L crisis, which daily becomes more ominous. A recent estimate in the Stanford Law and Policy Review puts the cost of the bailout at more than $1.3 trillion over 40 years -- an enormous number reflecting the fact that the program will be financed with 30- and 40-year bonds. But the S&L scandal may not be the most serious threat to the economy and America's standing in the world. The federal government is more deeply in debt than many people realize, with an exposure (according to a study by the Heritage Foundation) of nearly $6 trillion, including all the mortgages, student loans, pensions, and other obligations that the government guarantees. In the private sector, U.S. companies on average pay around 50 cents per dollar of pretax earnings just to meet their interest bills, compared with 30 cents in 1980 and 10 cents in the Sixties. Most disturbingly, commercial banks' solvency in many regions is perhaps being undermined by falling property values. The S&L debacle may be only a prelude to a far larger crisis in American financial institutions -- a sobering thought. THE SUSTAINABILITY of American debt at present and predicted levels is made no easier by rapid shifts under way in global trade and capital flows. A rise in world interest rates, coming as a side effect of German reunification, would put highly leveraged American companies in a perilous position and increase the risk of recession. If market reform is successful in Eastern Europe, Japanese capital may be diverted there from the U.S. Already the flow of Japanese capital to the U.S. is decreasing, with Japan's Pacific Rim trade growing at least four times faster than its trade with the U.S. < Just as America's debt mushrooms, the prospect is emerging that the capitalist economies will be segmented into three principal blocs by the late Nineties: a European bloc of perhaps 500 million people, whose dominant power will be Germany; a yen-dominated bloc encompassing Australia, New Zealand, Southeast Asia, and parts of Latin America, of as yet unknown proportions; and an American bloc including Canada and possibly Mexico. Of the three, the American would probably be the smallest and least endowed with capital. The likely political response to these developments would be a reversion to the American tradition of isolationism and protectionism. Reason: In democracies this often seems the easiest option, one that enables politicians to address the perception of a nation being unfairly victimized. The possibility of isolationism is already evidenced in the debt-driven policy of deep cuts in defense spending. This is a scenario for Brazilianization -- for relative economic decline turning into absolute decline, political as well as economic, as weakening economic performance and unsustainable debt deprive the U.S. of its leading role in the world. How? The federal deficit already constrains policy in every branch of government. For example, it inhibits effective action in an area that is rightly the serious concern of the business community: the level of educational achievement in American schools. Yes, the U.S. already spends more per student than almost any other country -- with results that by any international standard are close to disastrous. But being forced to scale back is not likely to improve matters. THE CUTTING EDGE of Brazilianization, however, is in the big American cities. The nation's huge debt has left them unable to renew themselves through needed investment in infrastructure and services. Because of high rates of intravenous drug use, HIV infection is spreading disproportionately quickly among the urban underclass. The U.S. capital is probably the least safe of any in the world, apart from cities in the grip of civil war. This combination of unsustainable debt, declining educational standards, Third World conditions, and the breakdown of civilized life in the cities creates the prospect of Brazilianization. Friends of the U.S. and of the democratic capitalism that America has pioneered are bound to take the worst-case scenario seriously, if only to try to contrive workable responses. The first of these must surely be a policy on the deficit. Nothing workable will be popular. Indeed, if the U.S. is to be Brazilianized, it is partly because budgetary policy rests with a Congress that is Balkanized -- fragmented into warring interest groups. Among the most sensible policies: reform of deposit insurance by substantially lowering the sum insured, which would discipline savings institutions (a tepid version of which Treasury Secretary Brady recently proposed); a gasoline tax, which would raise vast revenues while reducing U.S. dependence on foreign oil; and the abolition or drastic reduction of capital gains taxes as a vital means of accelerating the growth of wealth. Taken together, these could do much to defuse the debt threat. Market competition in schooling via a voucher system -- a policy thoroughly consistent with American values and traditions -- also merits consideration. What is most needed for the health of American society, business, and government is not, in the end, any one of these specific policies, since each is a matter of legitimate debate. It is some kind of comprehensive long-term policy made up of these or other elements, prudently and judiciously developed. That is what the U.S. most clearly lacks. If such a policy is not forthcoming, then we face the prospect of the world's greatest democracy drifting rudderless on a course of decline that may prove irreversible.