Richard Melson

September 2006

Brazil Economy

Economic History of Brazil

The Economic history of Brazil covers various economic events and traces the changes in the Brazilian economy of the course of the history of Brazil

From Portugal's discovery of Brazil in 1500 until the late 1930s, the Brazilian economy relied on the production of primary products for exports. Portugal subjected Brazil to a sternly enforced colonial pact, or imperial mercantile policy, which for three centuries heavily curbed development. The colonial phase left strong imprints on the country's economy and society, lasting long after independence in 1822. Measurable changes began occurring only late in the 19th century, when slavery was eliminated and wage labor was adopted. Important structural transformations began only in the 1930s, when the first steps were taken to change Brazil into a modern, semi-industrialized economy.

These transformations were particularly intense between 1950 and 1981, when the growth rates of the economy remained quite high and a diversified manufacturing base was established. However, since the early 1980s the economy has experienced substantial difficulties, including slow growth and stagnation. Nevertheless, Brazil still has the potential to regain its former dynamism. In the mid-1990s, it had a large and quite diversified economy, but one with considerable structural, as well as short-term, problems.

Socioeconomic transformation took place rapidly after World War II. In the 1940s, only 31.3 percent of Brazil's 41.2 million inhabitants resided in towns and cities; by 1991, of the country's 146.9 million inhabitants 75.5 percent lived in cities, and Brazil had two of the world's largest metropolitan centers--São Paulo and Rio de Janeiro. The rate of population growth decreased from about 3 percent annually in the 1950s and 1960s to 1.9 percent annually in the 1980-91 period, indicating that Brazil was in a demographic transition. By mid-1997 Brazil had an estimated population of 159.9 million.

The share of the primary sector in the gross national product declined from 28 percent in 1947 to 11 percent in 1992. Despite this reduction, the agricultural sector remains important. Although part of it is primitive and intensive, part is modern and dynamic. Brazil remains one of the world's largest exporters of agricultural products.

In the same 1947-92 period, the contribution of industry to GNP increased from less than 20 percent to 39 percent. The industrial sector produces a wide range of products for the domestic market and for export, including consumer goods, intermediate goods, and capital goods. By the early 1990s, Brazil was producing about 1 million motor vehicles annually and about 32,000 units of motor-driven farming machines. On an annual basis, it was also producing 1.8 million tons of fertilizers, 4.7 million tons of cardboard and paper, 20 million tons of steel, 26 million tons of cement, 3.5 million television sets, and 3 million refrigerators. In addition, about 70 million cubic meters of petroleum were being processed annually into fuels, lubricants, propane gas, and a wide range of petrochemicals. Furthermore, Brazil has at least 161,500 kilometers of paved roads and more than 63 million megawatts of installed electric power capacity.

Despite these figures, the economy cannot be considered developed. Although the economic changes since 1947 raised the country's per capita income above US$2,000 in 1980, per capita income in 1995 was still only US$4,630. Growth and structural change have not altered significantly Brazil's extremely unequal distribution of wealth, income, and opportunity. Despite impressive increments in economic growth and output, the number of poor has risen sharply. Most of the poor are concentrated in the rural areas of Brazil's Northeast (Nordeste) Region, or in the country's large cities or metropolitan areas. The economic and political troubles of the 1980s and early 1990s have only complicated the task of correcting the country's development pattern.

Colonial period

Portugal's exploitation of Brazil stemmed from the European commercial expansion of the fifteenth and sixteenth centuries. Blocked from the lucrative hinterland trade with the Far East, which was dominated by Italian cities, Portugal began in the early fifteenth century to search for other routes to the sources of goods valued in European markets. Portugal discovered the maritime passage to the East Indies around the southern tip of Africa and established a network of trade outposts throughout Africa and Asia. After the discovery of America, it competed with Spain in occupying the New World.

Initially, the Portuguese did not find mineral riches in their American colony, but they never lost the hope of someday finding such riches there. Meanwhile, in order to settle and defend the colony from European intruders, the Portuguese established a pioneer colonial enterprise: the production of sugar in the Northeast. Beginning in about 1531, cattle began arriving in Brazil, and a cattle industry developed rapidly in response to the needs of the sugar industry for transportation and food for workers. The discovery of precious metals in the colony's Center-South (Centro-Sul), a relatively undefined region encompassing the present-day Southeast (Sudeste) and South (Sul) regions, came only in the eighteenth century.

Sugar cycle, 1540-1640

By the mid-sixteenth century, Portugal had succeeded in establishing a sugar economy in parts of the colony's northeastern coast. Sugar production, the first large-scale colonial agricultural enterprise, was made possible by a series of favorable conditions. Portugal had the agricultural and manufacturing know-how from its Atlantic islands and manufactured its own equipment for extracting sugar from sugarcane. Furthermore, being involved in the African slave trade, it had access to the necessary manpower. Finally, Portugal relied on the commercial skills of the Dutch and financing from Holland to enable a rapid penetration of sugar in Europe's markets.

Until the early seventeenth century, the Portuguese and the Dutch held a virtual monopoly on sugar exports to Europe. However, between 1580 and 1640 Portugal was incorporated into Spain, a country at war with Holland. The Dutch occupied Brazil's sugar area in the Northeast from 1630 to 1654, establishing direct control of the world's sugar supply. When the Dutch were driven out in 1654, they had acquired the technical and organizational know-how for sugar production. Their involvement in the expansion of sugar in the Caribbean contributed to the downfall of the Portuguese monopoly.

The Caribbean sugar boom brought about a steady decline in world sugar prices. Unable to compete, Brazilian sugar exports, which had peaked by the mid-seventeenth century, declined sharply. Between the fourth quarter of the seventeenth century and the early eighteenth century, Portugal had difficulties in maintaining its American colony. The downfall of sugar revealed a fragile colonial economy, which had no commodity to replace sugar. Paradoxically, however, the period of stagnation induced the settlement of substantial portions of the colony's territory. With the decline of sugar, the cattle sector, which had evolved to supply the sugar economy with animals for transport, meat, and hides, assimilated part of the resources made idle, becoming a subsistence economy. Because of extensive cattle production methods, large areas in the colony's interior were settled.

Realizing that it could maintain Brazil only if precious minerals were discovered, Portugal increased its exploratory efforts in the late seventeenth century. As a result, early in the eighteenth century gold and other precious minerals were found. The largest concentration of this gold was in the Southeastern Highlands, mainly in what is now Minas Gerais State.

Eighteenth-century gold rush

As a result of the mineral discoveries, settlers flocked to the gold region, and growing numbers of slaves were transferred from the sugar areas and brought in from Africa. Gold mining was mainly alluvial panning, a labor-intensive activity. The extraction of gold increased rapidly until the 1750s when gold exports peaked. After the gold deposits became depleted and exports declined sharply in the last quarter of the eighteenth century, the Brazilian economy entered another long period of stagnation.

The gold surge did not establish a basis for economic expansion after the depletion of the mines. The economic regression was especially bad because of the restrictions Portugal had imposed on the establishment of manufacturing in the colony. However, the gold rush had an important impact in shaping Brazil's territory. First, the various exploratory expeditions led to the incorporation of large areas originally belonging to Spain. In addition, the demand for food and animals for transportation and meat had major repercussions outside the mining region. The mines were located in inhospitable, mountainous terrain, and the movement of goods to and from the mines depended heavily on mules. Agricultural activities were expanded elsewhere in order to feed the miners. Thus, the gold rush brought about the occupation of, and interaction among, different geographical areas. Moreover, the colony's economic and administrative center of gravity moved to the Southeast Region. Gold was shipped through ports in or near Rio de Janeiro, prompting the transfer of the colonial administration from the Bahian town of Salvador to Rio de Janeiro.

The difficult period resulting from the depletion of the mines lasted well into the second quarter of the nineteenth century. The mainstays of the economy were in decline, and the colony fell into a state of depression and decadence. In the late eighteenth century, Brazil experienced a brief surge in cotton exports to Britain, as the American Revolution disrupted American trade temporarily; however, Brazilian cotton lost its place in the world market by the early nineteenth century.

The economy at independence, 1822

Despite Brazil's economic troubles, the early nineteenth century was a period of change. First, the Napoleonic Wars forced the Portuguese royal family to flee to Brazil in 1808, and for a short period the colony became the seat of the Portuguese empire. Moreover, in 1808 Britain persuaded Portugal to open the colony to trade with the rest of the world, and Portugal rescinded its prohibition against manufacturing. These events paved the way for Brazil's independence on September 7, 1822.

Brazil's early years as an independent nation were extremely difficult. Exports remained low, and the domestic economy was depressed. The only segment that expanded was the subsistence economy. Resources (land, slaves, and transport animals) made idle by the decline of the export economy were absorbed into mostly self-consumption activities.

Coffee economy, 1840-1930

The impact of coffee on the Brazilian economy was much stronger than that of sugar and gold. When the coffee surge began, Brazil was already free from the limitations of colonialism. Moreover, the substitution of wage labor for slave labor after 1870 meant an increase in efficiency and the formation of a domestic market for wage goods. Finally, the greater complexity of coffee production and trade established important sectorial linkages within the Brazilian economy.

Coffee was introduced in Brazil early in the eighteenth century, but initially it was planted only for domestic use. It took the high world prices of the late 1820s and early 1830s to turn coffee into a major export item. During the initial phase, production was concentrated in the mountainous region near Rio de Janeiro. This area was highly suitable for coffee cultivation, and it had access to fairly abundant slave labor. Moreover, the coffee could be transported easily on mule trains or on animal-drawn carts over short distances to the ports.

An entrepreneurial class established in Rio de Janeiro during the mining surge was able to induce the government to help create basic conditions for the expansion of coffee, such as removing transportation and labor bottlenecks. From the area near Rio de Janeiro, coffee production moved along the Paraíba Valley toward São Paulo State, which later became Brazil's largest exporting region. Coffee was cultivated with primitive techniques and with no regard to land conservation. Land was abundant, and production could expand easily through the incorporation of new areas. However, it soon became necessary to ease two basic constraints: the lack of transportation and the shortage of labor.

The cultivation of coffee farther away from ports required the construction of railroads, first around Rio de Janeiro and into the Paraíba Valley, and later into the fertile highlands of São Paulo. In 1860 Brazil had only 223 kilometers of railroads; by 1885 this total had increased to 6,930 kilometers. The main rail link between São Paulo's eastern highlands and the ocean port of Santos allowed for a rapid expansion of coffee into the center and northwest of the state.

After the initial coffee expansion, the availability of slaves dwindled, and further cultivation required additional slaves. However, by 1840 Brazil was already under pressure to abolish slavery, and a series of decrees were introduced, making it increasingly difficult to supply the new coffee areas with servile labor. In the 1870s, the shortage of labor became critical, leading to the gradual incorporation of free immigrant labor. The coffee expansion in the west-northwest of São Paulo State after 1880 was made possible largely by immigrant labor. In 1880 São Paulo produced 1.2 million 60-kilogram coffee bags, or 25 percent of Brazil's total; by 1888 this proportion had jumped to 40 percent (2.6 million bags); and by 1902, to 60 percent (8 million bags). In turn, between 1884 and 1890 some 201,000 immigrants had entered São Paulo State, and this total jumped to more than 733,000 between 1891 and 1900. Slavery was abolished in 1888.

The Brazilian economy grew considerably in the second half of the nineteenth century. Coffee was the mainstay of the economy, accounting for 63 percent of the country's exports in 1891. However, sugar, cotton, tobacco, cocoa, and, at the turn of the century, rubber were also important. During the first three decades of the twentieth century, the Brazilian economy went through periods of growth but also difficulties caused in part by World War I, the Great Depression, and an increasing trend toward coffee overproduction. The four-year gap between the time a coffee tree is planted and the time of the first harvest magnified cyclical fluctuations in coffee prices, which in turn led to the increasing use of government price supports during periods of excess production. The price supports induced an exaggerated expansion of coffee cultivation in São Paulo, culminating in the huge overproduction of the early 1930s.

The 1840 to 1930 period also saw an appreciable but irregular expansion of light industries, notably textiles, clothing, food products, beverages, and tobacco. This expansion was induced by the growth in income, by the availability of foreign exchange, by fiscal policies, and by external events, such as World War I. Other important factors were the expansion of transportation, the installed capacity of electric energy, increased urbanization, and the formation of a dynamic entrepreneurial class. However, the manufacturing growth of the period did not generate significant structural transformations.

Economic growth in the nineteenth century was not shared equally by the regions. Development and growth were concentrated in the Southeast. The South Region also achieved considerable development based on coffee and other agricultural products. The Amazon Basin experienced a meteoric rise and fall of incomes from rubber exports. The Northeast continued to stagnate, with its population living close to the subsistence level.

Sweeping changes, 1930-45

The decade of the 1930s was a period of interrelated political and economic changes. The decade started with the 1930 revolution, which abolished the Old Republic (1889-1930), a federation of semiautonomous states. After a transitional period in which centralizing elements struggled with the old oligarchies for control, a coup in 1937 established the New State (Estado Novo) dictatorship (1937-45).

To a large extent, the revolution of 1930 reflected a dissatisfaction with the political control exercised by the old oligarchies. The political unrest of the first half of the 1930s and the 1937 coup were influenced strongly by the onset of economic problems in 1930. The coffee economy suffered from a severe decline in world demand caused by the Great Depression and an excess capacity of coffee production created in the 1920s. As a result, the price of coffee fell sharply and remained at very low levels. Brazil's terms of trade deteriorated significantly. These events, and a large foreign debt, led to an external crisis that took almost a decade to resolve.

The external difficulties had far-reaching consequences. The government was forced to suspend part of the country's debt payments and eventually to impose exchange controls. Excess coffee production led to increasing interventions in the coffee market. The state programs to support coffee prices went bankrupt in 1930. To avoid further decreases in coffee prices, the central government bought huge amounts of coffee, which was then destroyed. Central government intervention provided support to the coffee sector and, through its linkages, to the rest of the economy.

Despite the economic difficulties, the income maintenance scheme of the coffee support program, coupled with the implicit protection provided by the external crisis, was responsible for greater industrial growth. Initially, this growth was based on increased utilization of the productive capacity and later on moderate spurts of investment. The initial import-substitution industrialization that occurred especially during World War I did not lead to industrialization; it became a process of industrialization only in the 1930s.

The 1930s also saw a change in the role of government. Until then, the state acted primarily in response to the demands of the export sector. During the first half of the decade, it was forced to interfere swiftly in an attempt to control the external crisis and to avoid the collapse of the coffee economy; government leaders hoped that the crisis would pass soon and that another export boom would occur. However, with the magnitude and duration of the crisis it became clear that Brazil could no longer rely solely on exports of primary goods and that it was necessary to promote economic diversification. During the Estado Novo, the government made initial attempts at economic planning, and in the late 1930s began to establish the first large government enterprise, an integrated steel mill.

The World War II period saw mixed achievements. By the late 1930s, coffee production capacity had been reduced drastically, the worst of the external crisis had passed, and the Brazilian economy was ready to grow. However, the war interfered with development efforts. Output increased mainly through better utilization of the existing capacity but, except for the steel mill, there was little industrial and infrastructure investment. Thus, at the end of the war Brazil's industrial capacity was obsolete and the transportation infrastructure was inadequate and badly deteriorated.

Import-substitution industrialization, 1945-64

A review of the evolution and structural changes of the industrial sector since the end of World War II reveals four broad periods. The postwar period to 1962 was a phase of intense import substitution, especially of consumer goods, with basic industries growing at significant but lower rates. The 1968 to 1973 period was one of very rapid industrial expansion and modernization (between 1962 and 1967, the industrial sector stagnated as a result of adverse macroeconomic conditions). The 1974 to 1985 phase was highlighted by import substitution of basic inputs and capital goods and by the expansion of manufactured goods exports. The period since 1987 has been a time of considerable difficulties.

At the end of World War II, political and economic liberalism were reintroduced in Brazil. Getúlio Dorneles Vargas (president, 1930-45, 1951-54) was overthrown, democratic rule was reestablished, and the foreign-exchange reserves accumulated during the war made possible a reduction of trade restrictions. However, trade liberalization was short-lived. The overvalued foreign-exchange rate, established in 1945, remained fixed until 1953. This, combined with persistent inflation and a repressed demand, meant sharp increases in imports and a sluggish performance of exports, which soon led again to a balance of payments crisis.

Pessimistic about the future of Brazil's exports, the government feared that the crisis would have a negative impact on inflation. Consequently, instead of devaluing the cruzeiro, it decided to deal with the crisis through exchange controls. In 1951 the newly elected government of Getúlio Vargas enforced a recently established system of import licensing, giving priority to imports of essential goods and inputs (fuels and machinery) and discouraging imports of consumer goods. These policies had the unanticipated effect of providing protection to the consumer goods industry. Early in the 1950s, however, convinced that the only hope for rapid growth was to change the structure of the Brazilian economy, the government adopted an explicit policy of import-substitution industrialization. An important instrument of this policy was the use of foreign-exchange controls to protect selected segments of domestic industry and to facilitate the importation of equipment and inputs for them.

However, the move to fixed exchange rates together with import licensing drastically curtailed exports, and the balance of payments problem became acute. The system became nearly unmanageable, and in 1953 a more flexible, multiple-exchange-rate system was introduced. Under the latter, imports considered essential were brought in at a favored rate; imports of goods that could be supplied domestically faced high rates and were allotted small portions of the available foreign exchange. Similarly, some exports were stimulated with a higher exchange rate than those of traditional exports. This system continued to be the main instrument for the promotion of import-substitution industrialization, but the performance of the export sector improved only modestly.

Between 1957 and 1961, the government made several changes in the exchange-control system, most of which were attempts at reducing its awkwardness or at improving its performance with the advance of import-substitution industrialization. For this same purpose, the government also introduced several complementary measures, including enacting the Tariff Law of 1957, increasing and solidifying the protection extended to domestic industries, and offering strong inducements to direct foreign investment.

In the second half of the 1950s, the government enacted a series of special programs intended to better orient the industrialization process, to remove bottlenecks, and to promote vertical integration (see Glossary) in certain industries. The government gave special attention to industries considered basic for growth, notably the automotive, cement, steel, aluminum, cellulose, heavy machinery, and chemical industries.

As a result of import-substitution industrialization, the Brazilian economy experienced rapid growth and considerable diversification. Between 1950 and 1961, the average annual rate of growth of the gross domestic product exceeded 7 percent. Industry was the engine of growth. It had an average annual growth rate of over 9 percent between 1950 and 1961, compared with 4.5 percent for agriculture. In addition, the structure of the manufacturing sector experienced considerable change. Traditional industries, such as textiles, food products, and clothing, declined, while the transport equipment, machinery, electric equipment and appliances, and chemical industries expanded.

However, the strategy also left a legacy of problems and distortions. The growth it promoted resulted in a substantial increase in imports, notably of inputs and machinery, and the foreign-exchange policies of the period meant inadequate export growth. Moreover, a large influx of foreign capital in the 1950s resulted in a large foreign debt.

Import-substitution industrialization can be assessed according to the contribution to value added by four main industrial subsectors: nondurable consumer goods, durable consumer goods, intermediate goods, and capital goods. Using data from the industrial censuses, the share of these groups in value added between 1949 and 1960 shows a considerable decline in the share of the nondurable goods industries, from nearly 60 percent to less than 43 percent, and a sharp increase in that of durable goods, from nearly 6 percent to more than 18 percent. The intermediate and capital goods groups experienced moderate increases, from 32 to 36 percent and from 2.2 to 3.2 percent, respectively.

A representative component of the nondurable group is the textile industry, the leading sector before World War II. Between 1949 and 1960, its share in the value added by industry as a whole experienced a sharp decline, from 20.1 percent to 11.6 percent. In the durable goods group, the component with the most significant change was the transport equipment sector (automobiles and trucks), which increased from 2.3 percent to 10.5 percent.

The lower increases in the shares of the intermediate and capital goods industries reflect the lesser priority attributed to them by the import-substitution industrialization strategy. In the early 1960s, Brazil already had a fairly diversified industrial structure, but one in which vertical integration was only beginning. Thus, instead of alleviating the balance of payments problems, import substitution increased them dramatically.

Stagnation and spectacular growth, 1962-80

Stagnation, 1962-67

As a result of the problems associated with import-substitution industrialization and the reforms introduced by the military regime after March 1964, the Brazilian economy lost much of its dynamism between 1962 and 1967. The average rate of growth of GDP in the period declined to 4.0 percent and that of industry to 3.9 percent. In part, stagnation resulted from distortions caused by the strategy. Moreover, political troubles negatively affected expectations and precluded the formation of a coalition to back the introduction of tough measures to control inflation and the balance of payments crisis. Political troubles also hindered the removal of obstacles to growth.

The 1964 coup dealt with the political obstacles by forcefully restraining opposition to the military agenda of change. With the objective of transforming Brazil into a modern capitalist economy and a military power, the regime implemented a series of reforms aimed at reducing inflation, at removing some of the distortions of import-substitution industrialization, and at modernizing capital markets. The regime gradually introduced incentives to direct investment, domestic and foreign, and tackled balance of payments problems by reforming and simplifying the foreign-exchange system. In addition, the regime introduced a mechanism of periodic devaluations of the cruzeiro, taking into account inflation. Finally, the military government adopted measures to attract foreign capital and to promote exports. It took steps to expand public investment to improve the country's infrastructure and later to develop state-owned basic industries.

Spectacular growth, 1968-73

The post-1964 reforms and other policies of the military government, together with the state of the world economy, created conditions for very rapid growth between 1968 and 1973. In that period, the average annual rate of growth of GDP jumped to 11.1 percent, led by industry with a 13.1 percent average. Within industry, the leading sectors were consumer durables, transportation equipment, and basic industries, such as steel, cement, and electricity generation.

As a result of the post-1964 policies, external trade expanded substantially faster than the economy as a whole. There was a significant growth in exports, especially manufactured goods, but also commodities. Yet, imports grew considerably faster, rapidly increasing the trade deficit. This did not present a problem, however, because massive inflows of capital resulted in balance of payments surpluses.

The external sector contributed substantially to high growth rates, as did the rapid expansion of investment, including a growing share of public investment and investment by state-controlled enterprises. In addition, increased demand for automobiles, durable and luxury goods, and housing resulted from a rapid growth in income for the upper income strata and from credit plans created for consumers and homebuyers by the capital-market reforms.

The industrial sector generally experienced not only rapid growth but also considerable modernization. As a result, imports of capital goods and basic and semiprocessed inputs increased sharply. The share of intermediate goods imports in total imports increased from 31.0 percent in the 1960-62 period to 42.7 percent in 1972, and that of capital goods, from 29.0 to 42.2 percent. The total value of imports rose from US$1.3 billion to US$4.4 billion.

A comparison of the 1960 and the 1975 shares of the various industrial sectors in total value added by industry reveals a continuation in the relative decline of nondurable industries, notably textiles, food products, and beverages, and an increase in machinery, from 3.2 to 10.3 percent. The relative shares of most of the remaining industries, however, did not change significantly in the period.

As a result of the period's outward-looking development strategy, Brazil's industrial exports increased from US$1.4 billion in 1963 to US$6.2 billion in 1973. The composition of exports shows that whereas in 1963 processed and semiprocessed manufactured exports accounted for only 5 percent of total exports, in 1974 their share had reached 29 percent.

In the 1968-73 period, personal income became more concentrated and regional disparities became greater. Industrial expansion took place more vigorously in the Center-South Region, which had benefited most from the import-substitution industrialization strategy. Its per capita income considerably exceeded the national average, its infrastructure was more developed, and it had an adequate supply of skilled workers and professionals. The region was therefore able to take advantage of the opportunities and incentives offered by the military regime. Although a special regional development strategy existed for the Northeast, it promoted a distorted industrialization that benefited only a few of that region's large cities; the Northeast's linkages with the Center-South were stronger than its linkages within the region. The combination of a harsh climate, a highly concentrated land-tenure system, and an elite that consistently resisted meaningful change prevented the Northeast from developing effectively.

Growth with debt, 1974-80

Brazil suffered drastic reductions in its terms of trade as a result of the 1973 oil shock. In the early 1970s, the performance of the export sector was undermined by an overvalued currency. With the trade balance under pressure, the oil shock led to a sharply higher import bill. Under such circumstances, a prudent course of action would have been to devalue the cruzeiro and to adopt growth-reducing policies in order to contain imports. However, Brazil opted to continue a high-growth policy. Furthermore, it adopted renewed strategies of import-substitution industrialization and of economic diversification. In the mid-1970s, the regime began implementing a development plan aimed at increasing self-sufficiency in many sectors and creating new comparative advantages. Its main components were to promote import substitution of basic industrial inputs (steel, aluminum, fertilizers, petrochemicals), to make large investments in the expansion of the economic infrastructure, and to promote exports.

This strategy was effective in promoting growth, but it also raised Brazil's import requirements markedly, increasing the already large current-account deficit. The current account was financed by running up the foreign debt. The expectation was that the combined effects of import-substitution industrialization and export expansion eventually would bring about growing trade surpluses, allowing the service and repayment of the foreign debt.

Thus, despite the world recession resulting from other countries' adjustments to the oil shock, Brazil was able to maintain a high growth rate. Between 1974 and 1980, the average annual rate of growth of real GDP reached 6.9 percent and that of industry, 7.2 percent. However, the current-account deficit increased from US$1.7 billion in 1973 to US$12.8 billion in 1980. The foreign debt rose from US$6.4 billion in 1963 to nearly US$54 billion in 1980.

Brazil was able to raise its foreign debt because, at the time, the international financial system was awash in petrodollars and was eagerly offering low-interest loans. By the end of the 1970s, however, the foreign debt had reached high levels. Additionally, the marked increase of international interest rates raised the debt service, forcing the country to borrow more only to meet interest payments. Productive capacity, exports, and the substitution of imports in various sectors expanded and became more diversified. However, the expected impacts on Brazil's current account were not to materialize until the mid-1980s.

Another feature of the 1974-80 period was an acceleration of inflation. Between 1968 and 1974, the rate of inflation had declined steadily, but afterward the trend was reversed. From 16.2 percent a year in 1973, the growth rate of the general price index increased to 110.2 percent a year by 1980.

Stagnation, inflation, and crisis, 1981-94

The effect of the 1974-85 period's industrialization on the balance of trade was significant. The balance of trade moved from an average deficit of US$3.4 billion in the 1974-76 period to an average surplus of US$10.7 billion in the 1983-85 period. In 1985 the share of manufactures (processed and semiprocessed) of total exports reached 66 percent, and between 1971-75 and 1978-83 the share of basic input imports in total imports declined from 32.3 percent to 19.2 percent. The recession and stagnation of the early 1980s had a role in reducing imports. However, import substitution was also important, as demonstrated by the few years of the 1980s that experienced a significant growth in GDP while the trade surplus was maintained.

Between 1981 and 1992, the GDP increased at an average annual rate of only 1.4 percent and per capita income declined 6 percent. Gross investment, as a proportion of GDP, fell from 21 to 16 percent, in part as a result of the fiscal crisis and the loss of public-sector investment capacity. The decline also reflected growing uncertainties regarding the future of the economy. The 1980s became known as the "lost decade," and its problems spilled over into the 1990s. Despite the stagnation of the 1981-92 period, inflation remained a major problem (see stagflation). It sometimes reached very high rates, prompting the implementation of short-lived shock-stabilization programs.

1981-84 period

In 1979 a second oil shock nearly doubled the price of imported oil to Brazil and lowered the terms of trade further. The rise in world interest rates increased sharply Brazil's balance of payments problem and the size of the foreign debt. Nevertheless, the government continued borrowing, mainly to face an increasing debt burden, while it tried vainly to maintain the high-growth strategy. At the beginning of the 1980s, however, the foreign-debt problem became acute, leading to the introduction of a program to generate growing trade surpluses in order to service the foreign debt. The program was achieved by reducing growth and, with it, imports, and by expanding exports. As a result, in 1981 real GDP declined by 4.4 percent. The 1982 Mexican debt crisis ended Brazil's access to international financial markets, increasing the pressure for economic adjustment.

The austerity program imposed by the International Monetary Fund in late 1979 continued until 1984, but substantial trade surpluses were obtained only from 1983 on, largely as a delayed result of the import-substitution industrialization programs of the 1970s and the reduction in imports brought about by economic decline. The austerity program enabled Brazil to meet interest payments on the debt, but at the price of economic decline and increasing inflation.

Inflation accelerated as a result of a combination of factors: the exchange-rate devaluations of the austerity program, a growing public deficit, and an increasing indexation of financial balances, wages, and other values for inflation. The first two factors are classical causes of inflation; the last became an important mechanism for propagating inflation and in preventing the usual instruments of inflation control from operating.

By the mid-1980s, domestic debt nearly displaced foreign debt as Brazil's main economic problem. During the high-growth 1970s, a significant portion of foreign borrowing had been by state enterprises, which were the main actors in the import-substitution industrialization strategy. Initially, they borrowed to finance their investments. However, toward the end of the decade, with the acute shortage of foreign exchange, the government forced state enterprises to borrow unnecessarily, increasing their indebtedness markedly. Their situation worsened with the sharp rise in international interest rates in the late 1970s, the devaluations of the austerity program, and the decreasing real prices of goods and services provided by the public enterprises stemming from price controls. Because the state enterprises were not allowed to go bankrupt, their debt burden was transferred gradually to the government, further increasing the public debt. This, and a growing disorganization of the public sector, transformed the public debt into a major economic problem. By the mid-1980s, the financial burden stemming from the debt was contributing decisively to its rapid expansion.

1985-89 period

During the second half of the 1980s, it became increasingly clear that a large-scale fiscal reform, one that enabled noninflationary financing of the public sector, was needed not only to control inflation but also to restore the public sector's capacity to invest. Both were essential for an economic recovery. However, political obstacles prevented the reform from materializing. And, because inflation had become the most visible symptom of the public-sector disequilibrium, there were several attempts to bring inflation under control through what came to be known as "heterodox economic shocks." The period saw three such shocks: the Cruzado Plan (1986), the Bresser Plan (1987), and the Summer Plan (1989).

The objective of the Cruzado Plan was to eliminate inflation with a dramatic blow. Between 1980 and 1985, the rise in the GPI had escalated from 86.3 percent to 248.5 percent annually. Early in 1986, the situation became desperate, prodding the implementation of the plan. Its main measures were a general price freeze, a wage readjustment and freeze, readjustment and freeze on rents and mortgage payments, a ban on indexation, and a freeze on the exchange rate.

The plan's immediate results were spectacular: the monthly rate of inflation fell close to zero, economic growth surged upward, and the foreign accounts remained under control. However, by the end of 1986 the plan was in trouble. The wage adjustments were too large, increasing aggregate demand excessively and creating inflationary pressures. Moreover, the price freeze was maintained for too long, creating distortions and leading to shortages of a growing number of products. The plan could have been rescued if adjustments had been made at crucial moments. Instead, inflation accelerated again, and there was a return of indexation.

The two other stabilization plans amounted to renewed attempts at bringing inflation down from very high levels. It was soon clear that without a thorough reform of the public sector, controlling inflation would be impossible. Both plans introduced a price freeze and eliminated indexation, but there were differences between them, and with the Cruzado Plan. Neither was able to address the public-sector disequilibrium effectively. The objective of the Summer Plan, for instance, was mainly to avoid hyperinflation in an election year.

In fact, the public-sector disequilibrium became virtually locked in as a result of the 1988 constitution, which created advantages for various segments of society without indicating how these advantages would be paid for. Moreover, it transferred large portions of the tax revenues from the federal government to state and municipal governments, without requiring them to provide additional public services. With less revenue and more responsibility, the federal accounts experienced growing deficits. In addition, several subsidies were locked into the legislation. These factors and the financial burden of the public debt meant growing problems of public finance.

The 1980s ended with high and accelerating inflation and a stagnant economy, which never recovered after the demise of the Cruzado Plan. The public debt was enormous, and the government was required to pay very high interest rates to persuade the public to continue to buy government debt instruments.

1990-94 period

The first post-military-regime president elected by popular suffrage, Fernando Collor de Mello (1990-92), was sworn into office in March 1990. Facing imminent hyperinflation and a virtually bankrupt public sector, the new administration introduced a stabilization plan, together with a set of reforms, aimed at removing restrictions on free enterprise, increasing competition, privatizing public enterprises, and boosting productivity.

Heralded as a definitive blow to inflation, the stabilization plan was drastic. It imposed an eighteen-month freeze on all but a small portion of the private sector's financial assets, froze prices, and again abolished indexation. The new administration also introduced provisional taxes to deal with the fiscal crisis, and took steps to reform the public sector by closing several public agencies and dismissing public servants. These measures were expected not only to swiftly reduce inflation but also to lower inflationary expectations.

However, few of the new administration's programs succeeded. Major difficulties with the stabilization and reform programs were caused in part by the superficial nature of many of the administration's actions and by its inability to secure political support. Moreover, the stabilization plan failed because of management errors coupled with defensive actions by segments of society that would be most directly hurt by the plan.

After falling more than 80 percent in March 1990, the GPI's monthly rate of growth began increasing again. The best that could be achieved was to stabilize the GPI at a high and slowly rising level. In January 1991, it rose by 19.9 percent, reaching 32 percent a month by July 1993. Simultaneously, political instability increased sharply, with negative impacts on the economy. The real GDP declined 4.0 percent in 1990, increased only 1.1 percent in 1991, and again declined 0.9 percent in 1992 (see table 7, Appendix).

President Collor de Mello was impeached in September 1992 on charges of corruption. Vice President Itamar Franco was sworn in as president (1992-94), but he had to grapple to form a stable cabinet and to gather political support. The weakness of the interim administration prevented it from tackling inflation effectively. In 1993 the economy grew again, but with inflation rates higher than 30 percent a month, the chances of a durable recovery appeared to be very slim. At the end of the year, it was widely acknowledged that without serious fiscal reform, inflation would remain high and the economy would not sustain growth. This acknowledgment and the pressure of rapidly accelerating inflation finally jolted the government into action. The president appointed a determined minister of finance, Fernando Henrique Cardoso, and a high-level team was put in place to develop a new stabilization plan. Implemented early in 1994, the plan met little public resistance because it was discussed widely and it avoided price freezes.

The stabilization program had three stages: the introduction of an equilibrium budget mandated by the National Congress (Congresso Nacional; hereafter, Congress); a process of general indexation (prices, wages, taxes, contracts, and financial assets); and the introduction of a new currency, the Brazilian real, pegged to the dollar. The legally enforced balanced budget would remove expectations regarding inflationary behavior by the public sector. By allowing a realignment of relative prices, general indexation would pave the way for monetary reform. Once this realignment was achieved, the new currency would be introduced, accompanied by appropriate policies (especially the control of expenditures through high interest rates and the liberalization of trade to increase competition and thus prevent speculative behavior).

By the end of the first quarter of 1994, the second stage of the stabilization plan was being implemented. Economists of different schools of thought considered the plan sound and technically consistent.

Economy of Brazil

Economy of Brazil

Currency

1 Real (R$, BRL) = 100 centavos

Fiscal year

Calendar year

Trade organisations

WTO and SACN

Statistics

GDP ranking

9th (List of countries by GDP (PPP))

GDP

$1.556 trillion (2004 est.)

GDP growth

2.3% (2005)

GDP per capita

$8,400 (2004 est.)

GDP by sector

agriculture (10.1%), industry (38.6%), services (51.3%) (2004 est.)

Inflation

3.74% (2006 est.)

Pop below poverty line

20% ~40 million people

Labour force

92.860.128 (2004) (50% of pop.)

Labour force by occupation

agriculture (20%), industry (14%), services (66%) (2003 est.)

Unemployment

10.1% (2005 est.)

Main industries

textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment

Trading Partners

Exports

$128 billion f.o.b. (2006)

Main partners

U.S. 19.2%, Argentina 8.4%, China 5.8%, Netherlands 4.5%, Germany 4.2% (2005)

Imports

$73,545 billion f.o.b. (2006)

Main Partners

U.S. 17.5%, Argentina 8.5%, Germany 8.4%, China 7.3%, Japan 4.6% (2005)

Public finances

Public debt

R$1020 billion (feb 2006)

External debt

US$170.3 billion (mar 2006 est.)

Revenues

$140.6 billion (2004)

Expenses

$172.4 billion (2004)

Economic aid

$30 billion (2002)

 

According to the CIA World Factbook, Brazil has the ninth largest economy in the world at purchasing power parity as of 2006. Brazil has a diversified middle income economy with wide variations in levels of development. Most large industry is concentrated in the south and south east. The north east is traditionally the poorest part of Brazil, but it is beginning to attract new investment. Brazil embarked on a successful economic stabilization program, the Real Plan (named for the new currency, the real; plural: reais) in July 1994. Inflation, which had reached an annual level of nearly 5,000% at the end of 1993, fell sharply, reaching a low of 2.5% in 1998; it was 6% in 2000. Brazil successfully shifted from an essentially fixed exchange rate regime to a floating regime in January 1999.

Macro-economic trend

This is a chart of trend of gross domestic product of Brazil at market prices estimated by the International Monetary Fund with figures in millions of ruling currency.

Year

Gross Domestic Product

US Dollar Exchange1

1980

7,846,331

52.69 Second Cruzeiros

1985

1,436,276,926

6,197.34 Second Cruzeiros

1990

31,759,773

68.30 Third Cruzeiros

1995

646,192

0.91 Reals

2000

1,101,253

1.83 Reals

2005

1,930,335

2.43 Reals

Note 1: Lawrence H. Officer, "Exchange rate between the United States dollar and forty other countries, 1913 -1999." Economic History Services, EH.Net, 2002.

URL: http://eh.net/hmit/exchangerates/

For purchasing power parity comparisons, the U.S. Dollar is exchanged at 1.24 Reals only.

The Cardoso administration introduced to Congress a series of constitutional reform proposals to replace a state-dominated economy with a market-oriented one and to restructure all levels of government on a sound fiscal basis. Congress has approved several amendments to open the economy to greater private sector participation, including the involvement of foreign investors. By the end of 2003, Brazil's privatization program, which included the sale of steel and telecommunications firms, had generated proceeds of more than $90 billion. Passage of the Fiscal Responsibility Law in mid-2000 improved fiscal discipline at all three levels - federal, state, and municipal - and all three branches of government. Some measures have been adopted to address large deficits in Brazil's pension programs, but more remains to be done. Tax reform - simplification - has been under debate for over 2 years, but there has not yet been sufficient closure for final legislative action. Despite fiscal austerity, the administration has acknowledged the need to invest more in education and health to redress social inequity.

Market opening and economic stabilization have significantly enhanced Brazil's growth prospects. Brazil's trade has almost doubled since 1990. U.S. direct foreign investment has increased from less than $19 billion in 1994 to an estimated $35 billion through 2000. The United States is the largest foreign investor in Brazil. Upcoming privatizations in the power and banking sectors will likely elicit strong interest from U.S. firms.

Agriculture and forestry

Brazil is endowed with vast agricultural resources. There are two distinct agricultural areas. The first, comprised of the southern one-half to two-thirds of the country, has a semi-temperate climate and higher rainfall, the better soils, higher technology and input use, adequate infrastructure, and more experienced farmers. It produces most of Brazil's grains and oilseeds and export crops. The other, located in the drought-ridden northeast region and in the Amazon basin, lacks well-distributed rainfall, good soil, adequate infrastructure, and sufficient development capital. Although mostly occupied by subsistence farmers, the latter regions are increasingly important as exporters of forest products, cocoa, and tropical fruits. Central Brazil contains substantial areas of grassland with only scattered trees. The Brazilian grasslands are less fertile than those of North America and are generally more suited for grazing.

During the dictatorship period, agriculture was neglected and exploited as a means of resources for the industry sector and cheap food for the urban population. Until late 1980s export and prices were controlled, with quotas on exports. This has changed since the early 1990s.

Brazilian agriculture is well diversified, and the country is largely self-sufficient in food. Agriculture accounts for 8% of the country's GDP, and employs about one-quarter of the labor force in more than 6 million agricultural enterprises. Brazil is the world's largest producer of sugarcane and coffee, and a net exporter of cocoa, soybeans, orange juice, tobacco, forest products, and other tropical fruits and nuts. Livestock production is important in many parts of the country, with rapid growth in the poultry, pork, and milk industries reflecting changes in consumer tastes. On a value basis, production is 60% field crop and 40% livestock. Brazil is a net exporter of agricultural and food products, which account for about 35% of the country's exports.

Half of Brazil is covered by forests, with the largest rain forest in the world located in the Amazon Basin. Recent migrations into the Amazon and largescale burning of forest areas have placed the international spotlight on the country and damaged Brazil's image. The government has reduced incentives for such activity and is beginning to implement an ambitious environmental plan - and has just adopted an Environmental Crimes Law that requires serious penalties for infractions.

Industry

Brazil has the most advanced industrial sector in Latin America. Accounting for one-third of GDP, Brazil's diverse industries range from automobiles, steel and petrochemicals to computers, aircraft, and consumer durables. With the increased economic stability provided by the Plano Real, Brazilian and multinational businesses have invested heavily in new equipment and technology, a large proportion of which has been purchased from U.S. firms.

Brazil has a diverse and sophisticated services industry as well. During the early 1990s, the banking sector accounted for as much as 16% of GDP. Although undergoing a major overhaul, Brazil's financial services industry provides local businesses with a wide range of products and is attracting numerous new entrants, including U.S. financial firms. The São Paulo and Rio de Janeiro stock exchanges are undergoing a consolidation and the reinsurance sector is about to be privatized.

The Brazilian government has undertaken an ambitious program to reduce dependence on imported oil. Imports previously accounted for more than 70% of the country's oil needs but now account for about 33%. Brazil is one of the world's leading producers of hydroelectric power, with a current capacity of about 58,000 megawatts. Existing hydroelectric power provides 92% of the nation's electricity. Two large hydroelectric projects, the 12,600 megawatt Itaipu Dam on the Paraná River--the world's largest dam--and the Tucurui Dam in Para in northern Brazil, are in operation. Brazil's first commercial nuclear reactor, Angra I, located near Rio de Janeiro, has been in operation for more than 10 years. Angra II is under construction and, after years of delays, is about to come on line. An Angra III is planned. The three reactors would have combined capacity of 3,000 megawatts when completed.

Proven mineral resources are extensive. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals are exploited. High-quality cooking-grade coal required in the steel industry is in short supply.

As of 31 December 2005, there were an estimated 3,304,000 broadband lines in Brazil. [1] Over 95% of the broadband lines were via DSL and the rest via cable modems.

Economy - overview

Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other Latin America countries and is expanding its presence in world markets. In the late 80s and early 90s, high inflation hindered economic activity and investment. The Plano Real, instituted in the spring of 1994, sought to break inflationary expectations by pegging the real to the U.S. dollar. Inflation was brought down to single digit annual figures, but not fast enough to avoid substantial real exchange rate appreciation during the transition phase of the Real Plan. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community's renewed interest in Brazilian markets as inflation rates stabilized and memories of the debt crisis of the 1980s faded. The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil's debt to GDP ratio of 48% for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency. The economy grew 4.4% in 2000, but problems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, leftist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. During his first year as president, in 2003, President da Silva decided to take an austere approach to the economy by controlling inflation and seeking current account surpluses in order to meet Brazil's debt obligations. This strategy caused a GDP decrease during 2003, but helped the country to attain robust GDP growth of 5.2% during 2004. The country paid off its IMF debt pre-schedule on December 29 (2.04 billion) and December 30 (13.46 billion), 2005.

For several decades, Brazilian development was based on an import substitution strategy. The main economic problem in the 1980s was enormous inflation.

In 1990, after a few years of an informal and slow opening of the economy, the country has made some dramatic changes, strongly reducing the import tariff and emphasizing the need for quality (read ISO 9000 series adoption).

In 1994, the Real Plan successfully eliminated inflation, after many failed attempts to control it. As a result, Brazilian purchasing power has dramatically improved. Almost 25 million people turned into consumers "overnight". Consumer good imports have grown very fast in recent years. Companies, realizing the business opportunities, increased their investment in Brazil and slowly the import pattern has changed from consumer goods into machinery and other capital goods.

Other statistics

Investment (gross fixed): 19.8% of GDP (2004 est.)

Household income or consumption by percentage share:

Distribution of family income - Gini index: 60.7 (1998)

Agriculture - products: coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef

Industrial production growth rate: 6% (2004 est.)

Electricity:

Electricity - production by source:

Oil:

Natural gas:

Current account balance: $8 billion (2004 est.)

Exports - commodities: transport equipment, iron ore, soybeans, footwear, coffee, autos

Imports - commodities: machinery, electrical and transport equipment, chemical products, oil

Reserves of foreign exchange & gold: $52.94 billion (2004 est.)

Exchange rates: reals per U.S. dollar - 2.167 (2006), 2.303 (2005), 2.9249 (2004), 3.0771 (2003), 2.9208 (2002), 2.3577 (2001), 1.8301 (2000)

Lists

External links

"The Informality Trap: Tax Evasion, Finance, and Productivity in Brazil"

Brazil Economic History

September 3, 2006