Brazilian Economy
Brazil earned the reputation of being a
"miracle economy" in the late 1960s when
double-digit annual growth rates
were recorded and the structure of the economy
underwent rapid change. Since
1981, however, Brazil’s economic performance has
been poor in comparison to
its potential. The country’s dramatic reduction in
output growth, which
averaged an annual GDP growth of only 1.5 percent over
1980-93, reflected
its inability to respond to the events of the late 1970s and
1980s. Some
events that took place during this period were: the oil shock,
increases in
real interest rates, the debt crisis, and the resulting cutoff of
foreign
credit and foreign direct investment. These shocks, in combination with
poor
management of public finances and heavy state intervention, resulted in
large
fiscal deficits at state and federal levels. Even if the fiscal deficits
were
reduced after 1990, deviating policies generalized indexation, and
exchange
rate management contributed to keeping inflation high and
increasing. Monthly
inflation skyrocketed from 3 percent in the late 1970s to
50 percent in
mid-1994. The country’s income distribution, already poor,
worsened
drastically in the 1980s. Against these conditions, the success of
the Real
Stabilization Plan in effect since mid-1994, which has reduced
inflation to an
annualized rate of about 15 percent, stand out noticeably.
Growth rates were
satisfactory in 1994 and 1995 at 5.8 and 4.2 percent,
respectively (Page 45-47).
From Portugal’s discovery in 1500 until the
late 1930s, the economy relied on
the production of primary products, such as
sugar cane for exports. Portugal
subjected it to a strict enforced colonial
pact, or imperial mercantile policy,
which for three centuries heavily
restricted development. The colonial phase
left strong marks on the country’s
economy and society, lasting long after
independence in 1882. Significant
changes began occurring only late in the
eighteenth 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 it into a modern, semi-industrialized economy. These
transformations
were particularly strong 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,
the country 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
transformations came about rapidly after World War II. In the
1940s, only 31.3
percent of its 41.2 million inhabitants resided in towns and
cities. By 1991 its
population had reached 146.9 million and 75.5 percent
lived in cities, therefore
creating two of the world’s largest metropolitan
centers – Sao Paulo and Rio
de Janeiro. The rate of population growth
decreased for about 3 percent annually
in the transition. By mid-1999 it had
an estimated population of 166 million
(Levine 200). The share of its 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
demanding, part is modern and
vigorous. 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. Its GNP per capita in 1999
was of $4,750 per year. 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, it 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 yearly into fuels, lubricants,
propane gas,
and a wide range of petrochemicals. Besides, Brazil has at least
161,500
kilometers of paved roads and more 63 million megawatts of installed
electric
power capacity (Becker 88-90). Even with these figures, the economy
cannot be
considered developed. While 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 the country’s extreme unequal distribution of wealth,
income,
and opportunity. Regardless of impressive rise in economic growth and
output,
the number of poor has increased sharply. Most of the poor are
concentrated in
the rural areas of 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 its developmental
pattern. Since early 1994 it has implemented a
successful stabilization program,
the Real Plan, named after the new currency
introduced in mid-1994. Inflation
was contained at less than 70 percent in
1995. The program was based on an
initial adjustment, a nominal exchange rate
anchor, and tight monetary policy.
An external debt restructuring
agreement with commercial creditors was reached
before the beginning of the
stabilization plan. The Real Plan started with the
real at equality with the
dollar. There was no law fixing the parity but the
central bank undertook to
support the domestic currency at this level. No limit
was placed on currency
appreciation, and capital inflows drove the real to
appreciate by over 15
percent. Since March 1995, as a result of trade deficits
and international
capital instability, the exchange rate policy has been
modified to a managed
climb and the currency has been allowed to depreciate
against the dollar.
Monetary policy has been gradually relaxed following a fall
in output growth
after the first quarter of 1995. This stresses the policy of
gradual
depreciation and shows clearly that the authorities did not attach
any
special importance to dollar equality. The authorities had targeted a
positive
balance in the operational account of the consolidated public sector
budgeted in
1995, but the final result was an estimated operational
deficit of 5 percent of
GDP. This was caused by a substantial rise in
federal and state wage bills and
high interest payments on the public debt
(DuQuette 40). Expansion of 3.9% in
2000 (compared with 0.8% in 1999)
will be led by exports and private investment.
This will more than offset
another year of public-sector austerity. Also, a
recovery in wages, declining
interest rates and an expansion of bank credit will
encourage private
consumption, alough this will lag behind the other drivers
of growth.
Industrial production grew in February for the fifth time in seven
months,
the first time Brazil has posted such a broad expansion since late
1997
(LaitnFocus) Public debt growth accelerated after mid-1995 due to the
need to
stabilize short-term capital inflows drawn by high domestic interest
rates. This
policy together with the need to extend central bank credit to
the financial
sector to help troubled banks has also led to a growing
quasi-fiscal deficit.
The Real's value has held well below its weakest
point early in 1999 (around R2:
$1), ending 1999 at R1.79: $1. Although debt
repayments are forecast to be
higher in the second half of the year, overall
trends in the balance of
payments, including healthy foreign investment
inflows, should strengthen the
Real further. We forecast a year-end
exchange rate of around R1.71: $1(World
Bank Group). CONCLUSION The
economic experience of the 1980s served as a
contribution to Brazil.
Government is much less likely to be seen as a solution,
and many more
Brazilians see the public sector as the problem. The somewhat
tiresome debate
between the monetarists and the structuralists that dominated
discussions of
inflation in the 1970s has been superseded by recognition that
more supply
growth does have a close relation to inflation, but that the
essential
problem is the fiscal deficit that drives the money supply process.
The
external shocks of the 1980s have also shown Brazilians that their
country
cannot be isolated from the rest of the world. By the early 1990s,
Brazil was on
the path to becoming more open to trade than it had been for
several decades.
Despite the loss of Brazilians access to world capital
markets in the early
1980s, external capital was beginning to return to
Brazil by the early 1990s.
Brazilians also learned that price
stabilization is not easy and that"magic" solutions centered on price freezes do
not work without the more
difficult fiscal adjustments that appear from a
political agreement. That the
early 1990s had not created general agreement,
even though political leaders and
economists admitted that fiscal adjustment
was necessary for macroeconomics
stability. The failure of successive
stabilization plans that ignored the
underlying fiscal disequilibrium also
forced long-term costs, because the
credibility of government economics
policies was hurt. The fall of Collor de
Mello government in 1992 under
changes of enormous corruption and the
economically unrealistic terms of the
1988 constitution have made the job of
recovering government credibility even
harder (Stephan 210). For Brazil to
return to the kind of economic growth
that many of its people once considered as
their birthright, a lot of changes
must take place. First, the public sector
deficit must be lessen
significantly. This can be done in a variety of ways
without putting heavy
costs in Brazilian society. Privatization of economically
inefficient state
companies is one way, and in the first half of the 1990s some
progress was
made in that area. The complex system of tax and credit subsidies
that was
created in past decades suggests many opportunities for some sort of
reform,
which would also lower the fiscal deficit. Secondly, Brazil recent
moves
toward becoming a more open economy offer the hope that it can achieve
some sort
of economic efficiency and make sure that its resources flow into
certain areas
where Brazil has a strong international position. Also, cease
the protection of
certain sectors that have only cost the Brazilian
consumers. Opening their
market to the world will contribute to the economic
welfare of the country.
Finally, Brazil can be become an economically
prosperous country if it can
address the inequalities of the distribution of
income. To help the ones who are
not privileged, the country must focus on
education and provide other basic
services to this class. Without great
efforts to try to even out this problem,
the government may find it harder to
govern and may reduce the hopes for
successful and sustainable price
stabilization, because of their fiscal
disequilibrium (Tulchin 90-100).
Brazil, Economic Indicators, 1995 – 2000 1995
1996 1997 1998 1999 2000
Real Sector GDP (real annual %-change) 4.2 2.7 3.6 -0.1
0.8 3.1 Q1 2000
Industry (real annual %-change) 1.8 1.7 3.9 -2.1 -0.7 6.7
Apr-00
Unemployment (%) 4.7 5.5 5.7 7.7 7.6 7.8 Apr-00 Fiscal Balance (%
of GDP) -4.9
-3.8 -4.3 -7.6 -5.6 - 1999 Monetary Sector Money (annual
variation of M1 in %)
25.1 4.6 58.9 7.1 22.7 16.5 Apr-00 Money (annual
variation of M3 in %) 45.4 39.8
25.5 20.0 27.6 29.0 Apr-00 Inflation
(CPI, annual variation in %) 22.0 9.1 4.3
2.5 8.4 5.4 Apr-00 Inflation
(PPI, annual variation in %) 6.4 8.1 7.8 0.6 28.9
17.0 Apr-00 Interest
Rate (SELIC rate in %) 38.9 23.9 42.0 31.2 19.0 18.5 May-00
Markets Stock
Market (ytd in US$-terms in %) - 31.6 20.2 -43.0 66.9 -11.4
31-May-00
Stock Market (Bovespa ytd in %) -1.3 63.8 44.8 -33.5 151.9
-12.5
31-May-00 Bond Market (EMBI Plus var. in %) 21.2 34.6 12.6 -15.4
40.7 -0.3
31-May-00 Bond Market (C-Bond over UST) - 531 539 1,124 640 785
31-May-00
External Sector Exchange Rate (Real/US$) 0.973 1.039 1.116
1.208 1.789 1.827
May-00 Balance of Payments (US$ m) 13,480 9,017 -7,845
-17,285 -10,759 -10,194
Apr-00 Current Account Balance (US$ m) -17,972
-23,136 -30,916 -33,611 -24,375
-3,078 Apr-00 Trade Balance (US$ m) -3,466
-5,554 -6,757 -6,593 -1,206 -133
May-00 Exports (US$ m) 46,506 47,747
52,990 51,140 48,011 51,165 May-00 Imports
(US$ m) 49,972 53,301 59,747
57,733 49,218 51,298 May-00 Int. Reserves (US$ m)
51,840 60,110 52,173
44,556 36,342 28,581 May-00 Int. Reserves (months of
imports) 12.4 13.5 10.5
9.3 8.9 7.0 May-00 External Debt (US$ m) 159,398 180,003
193,698 235,082
236,945 242,511 Mar-00 Ratings Sov. Rating Moody's - - - B2 B2
B2
31-May-00 Sov. Rating S & P - - - BB- B+ B+ 31-May-00 Sov. Rating Fitch
-
- - B+ B B 31-May-00 Sov. Rating DCR - - - BB- BB- BB- 31-May-00 ©
Copyright
LatinFocus 2000 Last updated on 06 June
2000
Bibliography
Page, Joseph A. The Brazilians. New York, NY:
Addison Wesley Longman Inc.,
1996. Levine, Robert M., and John J.
Crocitti. The Brazil Reader: History,
Culture, Politics. Durham, NC: Duke
University Press, 1999. Becker, Bertha K.,
and Claudio A.G. Egler. Brazil: A
New Regional Power in the World Economy.
Cambridge: Cambridge University
Press, 1992. Tulchin, Joseph S., and Warner
Baer. Brazil and the
Challenge of Economic Reform. Washington, D.C.: Woodrow
Wilson Center
Press, 1997. DuQuette, Michel. Building New Democracies: Economic
and Social
Reform in Brazil, Chile, and Mexico. Toronto, Canada: University
of
Toronto Press, 1999. Stephan, Alfred C. Authoritarian Brazil: Origins,
Policies,
and Future. New Haven, CT: Yale University Press, 1993.
"LatinFocus." Brazil
Homepage: Economic Indicators, Forecasts, Briefing,
Calendar, and the Most
Essential Links to Government. 2000 Online.
Internet. Available
http://www.latin-focus.com/countries/brazil/brazil.htm
"World Bank
Group." Brazil. 2000 Online. Internet. Available http://www.worldbank.org/