BRAZILIAN ECONOMY and RESOURCES

Beginning in the 50s Brazil embarqued on a plan of diversification, moving from an agricultural based economy to an industrial one with a strong presence in agriculture, mining, services, energy production and even hign tech development. This was often accomplished by heavy handed federal government programs that had little regard for efficiency and market response. Foreign investment also played a key role, as multinational corporations moved in to take advantage of the size and potential of the market. These ambicious programs, together with subsidized prices, a bloated public sector and unbalanced pension sytem caused a cronic inflationary situation and cycle of monetary reform "packages" that has chacterized the country for the last five decades.

The latest stabilization plan, called the Plano Real (Real Plan), instituted in mid-1994, has probably been the most successful. The high inflation rates which had disrupted economic activity and discouraged foreign investment, have been brought inflation under control, well almost. Consumer prices in Brazil increased by less than 5% in 1997 compared to more than 1,000% in 1994. At the same time, GDP growth slowed from 5.7% in 1994 to about 3.0% in 1997 due to tighter credit.

The strong currency, another cornerstone of the Real Plan, together with a more liberal import policy, has encouraged imports contributing to a growing trade deficit. Brazil's larger economy allowed it to weather the fallout from the 1995 Mexican peso crisis relatively well. responding to Brazils economic policy and free-market reforms, foreign investment has flowed in, helping support Brazil through financial crisis in late 1997 in the wake of the Asian financial crisis.

President Cardoso remains committed to defending the Real Plan, but he faces several key challenges domestically and abroad. His package of fiscal reforms requiring constitutional amendments has progressed slowly through the Brazilian congress. At the same time, the government continues to run huge deficits. Due to domestic politics and economic reality, Cardoso's government has little room to maneuver in its attempt to control spending and keep interest and exchange rates at reasonable levels. The big question is how to reconcile the contraditory pressures to estimulate growth, control inflation, meet pressing social needs and keep public sector, industry giants, financial markets, and foreign investors happy, at the same time. The fact is that unless the country's fiscal and current account deficits are brought under control, inflation will return with a vengence and the people will continue to suffer the uncertainties of an economic downturn. Of course, foreign investors to not like instability, so investments will dry up or leave in search of better markets.

The Cycles of Growth

• timber (brazilwood) in the early 1500's;
• sugarcane, from the mid 16th through the 17th century;
• gold, and other precious metals, and gems (mostly diamonds and emeralds) in the 18th century;
• rubber, in the Amazon, in the early 20th century, until the dastardly English stole the plant and took it to far east (Revenge for Agent Palheta?),
• coffee in the 19th and until the mid 20th century.

Economic History

English influence on the Brazilian economy started at the beginning of the 17th century. English traders spread throughout Brazilian cities, especially Rio de Janeiro, Recife and Salvador. By the middle of the l9th century, imports were completely dependent on England. The English also dominated other sections of the Economy, such as banking, foreign lending (House of Rotschilds), an almost complete control of the railways and eletric utilities, as well as ocean-going shipping.

At the end of the 19th century however, the United States took the lead in the Brazilian export market at the expense of the English. Nevertheless, it was only the war of 1914-1918 which saw the replacement of English domination by the USA, as a result of the withdrawal of England in consequence of the First World War. The endeavors by the first republican governments to stabilize the financial environment and revitalise production had barely succeeded when the worldwide effects of the 1929 depression forced the country into new readjustments.

A first surge of industrialization took place during the years of World War I, but it was only from the 1930's onwards that Brazil reached a level of modern economic performance. In the 1940's, the first steel plant was built in the state of Rio de Janeiro at Volta Redonda with US Eximbank financing.

The industrialisation process from the 1950's to the 1970's led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, and steel, as well as to the initiation and completion of large infrastructure projects. In the decades after World War II, the annual Gross National Product (GNP) growth rate for Brazil was among the highest in the world averaging, until 1974, 7.4 percent. During the 1970's Brazil, like many other countries in Latin America, absorbed excessive liquidity from U.S., European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment. The result of this capital infusion was impressive: Brazil's Gross Domestic Product (GDP) increased at an average rate of 8.5 percent per annum from 1970 to 1980 despite the impact of the 1970's world oil crisis. Per capita income rose fourfold during the decade to a level of US $2,200 in 1980.

In the early 1980's, however, a sudden, substantial increase in interest rates in the world economy precipitated Latin America's debt crisis. Brazil was forced into strict economic adjustments which brought about negative growth rates. The unexpected suspension of capital inflows reduced Brazil's capacity to invest. The burden of its debt affected public finances and contributed to an acceleration of inflation. In the second half of the 1980's, a series of stringent measures was adopted aimed at monetary stabilization. These included ending indexation (a policy of adjusting wages and contracts according to inflation), and the freezing of all prices. In 1987, the government suspended interest payments on foreign commercial debt until a debt rescheduling agreement with creditors could be reached. Although such measures failed to bring about the desired results, Brazil's overall economic output by the end of the 1980's continued to grow, providing enough surpluses in the trade balance to cover servicing of the debt.

The 1980's crisis signalled the exhaustion of Brazil's "import substitution" model (a policy that nurtured Brazilian industry by prohibiting the purchase of certain manufactures abroad) and it contributed to the opening up of the country's economy. In the early l990's Brazil was engaged in a series of far-reaching economic reforms. They encompassed a strict fiscal policy, tax reform, trade liberalization, deregulation, privatization, and the establishment of a legal and structural framework to attract and increase foreign investment. A wholly new economic agenda began to lead governmental action. Privatization accelerated, especially in two important sectors - steel and fertilisers. The country's revenue, as of 1993, is largely directed to debt reduction. As a result of trade reforms, Brazil has become one of the most open economies in the world with no quantitative restrictions to imports. The average tariff came down from 32 percent in 1990 to 14 percent as of July, 1993. Since 1991, foreign capital has again started to flow into the country. Foreign direct investment in 1992 reached US $3.2 billion, the highest since the early 1980's. Deregulation is evidenced by the liberalization of financial policies, by the abolishment of a programme that reserved the Brazilian market for Brazilian electronics and software, and by the privatization of many ports.

With a GDP of US $508.6 billion in 1993, the Brazilian economy is dynamic and diversified. In 1994, industry was responsible for 38.1 percent of economic output, agriculture for 10.0 percent, and services accounted for 51.9 percent. The dynamism of the country's economy is reflected in, among other areas, foreign trade and in the performance of exports. From 1988 to 1992 Brazilian exports have earned, on average, in excess of US $33 billion. Over 60 percent of these exports are manufactured goods. The trade surplus reached US $13 billion in 1993. The European Community absorbs almost 26 percent of Brazilian exports, North America around 22 percent (the U.S. is the largest individual trading partner), Asia absorbs 16 percent, MERCOSUL 14 percent, rest of ALADI 10 percent, Middle East 4 percent, and the remaining exports are distributed over a variety of smaller markets.

Natural Resources

BASIC STATISTICS:

INDUSTRY, AGRICULTURE, ENERGY

Electricity-consumption per capita: 1,878 kWh (1995)
Agriculture-products: coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef
Exports:
total value: $53 billion (f.o.b., 1997)
commodities: iron ore, soybean bran, orange juice, footwear, coffee, motor vehicle parts partners: EU 28%, Latin America 23%, US 20%, Argentina 12% (1996)
Imports:
total value: $61.4 billion (f.o.b., 1997)
commodities: crude oil, capital goods, chemical products, foodstuffs, coal
partners: EU 26%, US 22%, Argentina 13%, Japan 5% (1996)
External Foreign Debt: $192.9 billion (Yuck!)