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Short economic history of Brazil

1. Development of Brazil (1948 - 1984)

The development of the Brazil occurred mainly from 1948 to 1980 in two singular political periods : a democratic experience from 1945-1963 and a military government from 1964 to 1985. The development of the Brazilian economy has been mainly obtained through an industrialization model of intense substitution of imports, together with several programs for developing exports. As a result of this policy, the Brazilian economy experienced rapid growth and considerable diversification. From 1948 to 1980 the Brazilian economy increased at an average rate of 7,5%. Over this period, only during 4 years, the Brazilian economy did not increase by at least 4%.

1.1 Import-Substitution Industrialization (1945-1964)

The postwar period to 1962 was a phase of intense import substitution, especially of consumer goods. Foreign-exchange controls were used to protect selected segments of domestic industry.

The model of industrialization by substitution of imports was promoted by the CEPAL as an alternative model for developing countries and was characterized by three main factors:
- A direct involvement of the government in the development of the country as well as in certain key sectors such as industry of minerals, energy, infrastructure and transport.
- High protection of national industry with several barriers to importation
- Favourable conditions of credit for national projects financed by the increase of the external debt of the country.

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 (GDP) exceeded 7 percent.

1.2 Stagnation (1962-1967)

the Brazilian economy lost much of its dynamism between 1962 and 1967. However several important reforms were implemented during this period:

Creation of the FGTS "Fundo de garantia por tempo de serviço" (severance fund) to implement additional flexibility with labour force
Tax reform
Reform of financial system and creation of the Central Bank (BACEN) in 1964

1.3 Spectacular Growth "milagre" (1968-73)

The Brazilian economy has known a spectacular growth between 1968 and 1973 with an average annual growth rate of the gross domestic product (GDP) of approximately 11 percent. The external sector contributed substantially to growth. There was a significant growth in exports, especially of manufactured goods and commodities during this period. There was also an increased demand for automobiles, durable and luxury goods, resulting from credit plans created for consumers. In the 1968-73 period, personal income became more concentrated and regional disparities became greater.

1.4 Growth with Debt, 1974-80

In the early 1970s, the performance of the export sector was affected by an overvalued currency. With the trade balance under pressure, the two oil shocks of 1973 and 1979 led to a higher import bill and induced inflation within the country. In 1979 the second oil shock nearly doubled the price of imported oil to Brazil, generating significant inflation within the country. At that time the production of Brazilian oil represented only around 20% of the Brazilian consumption. Despite the two oil oil shocks that occured 1973 and in 1979, the Brazilian economy maintained an average growth rate of 7% per year from 1974 to 1980, but together with the development of inflation and external debt. In 1980, the country had a significant dependence to imported oil as well as to equipment and machinery imported.

2. Stagnation, inflation, and crisis (1981-1994)

The increased of interest rates resulting from the two oil shocks of 1973 and 1979 increased the size of the foreign debt during this period. At the beginning of the 1980s, the foreign-debt problem led to the introduction of a program having the objective of generating trade surpluses in order to service the foreign debt. During the second half of the 1980s, the debt and inflation were the two main economic problems of Brazil. It became clear that a large-scale fiscal reform, enabling non-inflationary financing of the public sector, was needed to control inflation and to restore the public sector's capacity to invest.

The 1980s became known as the "lost decade" as a result of the stagnation, the development of incontrolled inflation and the increase of the external debt. In addtion to that, President Collor de Mello was impeached in September 1992 on charges of corruption. A new stabilization plan was needed.

3. The origins of stabilization (The Real Plan of 1994)

On July 1, 1994, Brazil implemented a successful economic stabilization programs to end inflation. The Real Plan 1994 was probably the most successful stabilization plan in Brazil's history, as all programs failed in combating infltaion from 1964 to 1994. Prior to the launching of the Real Plan, inflation was running at the astonishing rate of 7000% per year in Brazil. The new currency, the "Real" (R$ or BRL), introduced expectations for stability by reducing the devaluation rates in comparison to the USD. The official economic policy consisted of controlling the exchange rate, which should be kept within an interval ("banda cambial") previously determined by the Brazilian Central Bank. Such intervals were periodically devaluated based on the inflation rate.

The Real Plan succeeded in its objective of ending decades of hyperinflation and macroeconomic uncertainty. By the end of 1996, inflation approached an annual rate of less than 20 percent. Although some observers characterized the Real Plan as a form of "dollarization" of the Brazilian economy.

In February 1999 as a result of the financial crises that hit Asian and Russian markets and the permanent need of foreign capital, which was no longer available, it became clear for the Brazilian Central Bank (BACEN) that it was not possible to maintain its exchange rate strategy. Therefore, the Brazilian Central Bank allowed the exchange rate to fluctuate on the basis of demand and supply. Taking into account that, at that moment, the demand for dollars was higher than the supply, the Brazilian exchange rate suffered high devaluations reaching the value of R$ 2.25 for US$ 1.00. At that moment, economists were expecting the return of inflation and a deep depression, which would reduce the Brazilian GDP. In order to hinder such economic downfall, the government substituted the president of the Brazilian Central Bank, increased the interest rate, so as to attract foreign investors and influence the Congress's decision in favor of several measures aiming to reduce the public deficit. Contrasting with pessimistic opinions, the market believed that the re indexation (which would mean the return of inflation) was not anymore a risk.

4. Recent refoms

In the last years, several important reforms have been implemented in the Brazilian economy:

Stability of prices (inflation is controlled since 2003)
Reform of foreign investment rules
Privatisation program (end of monopoles)
Modernisation of the financial and banking system
Negotiations and reduction of public debt
Fiscal discipline (Law on fiscal responsibility)

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