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Brazil: Economy

Page history last edited by Brian D Butler 1 year, 5 months ago

 

see also: emerging markets, and Brazil

 

 

 

Related pages from GloboTrends

 

 

Business Guide

 

Investing in Brazil

 

Industry Guides

 

Macroeconomic Guide

 

Brazil Regional Guides

 

Agricultural Investing

 

Green investing

 

Culture & Investing opportunities

 

Companies in Brazil

 

Economic Development

 

Import Export

 

 

 

 

 

 

 

 

Table of Contents:


 

 

 

Optimism:

 

Brazil as the land of optimism:  even in2009, with global economy in slowdown, According to IBOPE, a pollster, 74% of Brazilians expect this year to be better than last.

 

 

 

 

 

Data:

Brazil Macro economic data:  click here

 

Brazil interest rates :

 

Target Rate (Selic Rate), COPOM   GDP nominal   CPI and PPI  
Money Supply   Balance of Payments - Monthly   IP  
International Reserves (total of   Balance of payments - Quarterly   Population  
GDP real index   Unemployment   Brazil Government Debt  

 

 

 

 

BM&F - Brazil Mercantile & Futures Exchange, (Bolsa de Mercadorias & Futuros)

Agricultural Products / Commodities
  BG2 .. Live cattle . 14582 BGI .. Live cattle . 25966 CN2 .. Corn . 7468 CNI .. Corn . 11892 IC2 .. Arabica Coffee . 7274
ICF .. Arabica Coffee . 11972 IS2 .. Crystal Sugar . 3566 ISU .. Crystal Sugar . 7336 SO2 .. Soybean . 9048 SOJ .. Soybean . 12228
AL2 .. Anhydrous Alcohol . 4478 ALA .. Anhydrous Fuel Alcohol . 9336 BZ2 .. Feeder cattle . 2642 BZE .. Feeder cattle . 5140 CO2 .. Cotton . 4336
COT .. Cotton . 5568 WBG .. Live cattle futures . 598 WCF .. Arabica coffee futures . 92    
Metals (gold)
  OZ1 .. Gold 250g. . 2136 OZ2 .. Odd-lot gold spot . 0      
Sovereign Debt Instruments
  B34 .. Global 2034 . 1208 B40 .. Global 2040 . 2346 T10 .. US T-Note 10 anos . 774 A18 .. A-Bond 2018 . 410 B09 .. Global 2009 . 252
B10 .. Global 2010 . 22 B11 .. Global 2011 . 82 B12 .. Global 2012 . 20 B13 .. Global 2013 . 104 B14 .. Global 2014 . 96
B15 .. Global 2015 . 256 B19 .. Global 2019 . 1234 B20 .. Global 2020 . 20 B24 .. Global 2024 . 20 B25 .. Global 2025 . 20
B27 .. Global 2027 . 220 B30 .. Global 2030 . 20 B37 .. Global 2037 . 140 BCB .. C-Bond . 920 VID .. IDI INDEX . 0
Interest Rates
  DAP .. D x IPCA spread . 2380 DDI .. ID x U.S. Dollar spread . 62222 DI1 .. 1-Day ID . 56360 FRC .. FRA on the ID x U.S. Dollar spread . 59682 DDM .. ID x IGP-M spread . 2110
DI2 .. 1-Day ID . 52 SCC .. ID x US Dollar Swap with reset . 0 VF1 .. VF1 Volatility . 0 VF3 .. VF3 Volatility . 0  
Indices
  IAP .. IPCA . 2347 IND .. Ibovespa . 10234 WIN .. Ibovespa . 1910 BRI .. IBrX-50 . 1982 IDI .. IDI Index . 0
Foreign Exchange / Currency
  DOL .. Commercial U.S. Dollar . 39370 EUR .. Euro . 5164 WDL .. Mini U.S. Dollar . 2258 FRP .. Forward Points on US Dollar Futures . 0 USD .. Spot US Dollar . 0
VTC .. U.S. Dollar Volatility . 0        
Swaps
  D11 .. 1day Interbank Deposits - type 1 series . 0 D12 .. 1dy Intrbnk Depsts type 2 . 0 D13 .. 1dy Intrbnk Depsts type 3 . 0 D14 .. 1dy Intrbnk Depsts type 4 . 0 SC3 .. Mini ID x US Dollar Swap with reset . 0
unsorted
  BC5 .. CDS BRAZIL 5 YEARS . 54 EN2 .. Ethanol . 3528 ETN .. Ethanol . 3530 IGM .. IGP-M . 554 Mini U.S. Dollar . 1098
Mini Ibovespa . 686 Soybean . 886 Conillon coffee . 168 FRA on ID X IGP-M spread . 128 EI-Bond . 8

 

 

Forecasts & analysis:

 

Which are the top analysts that cover Brazil?

 

see our list & reviews of Brazilian economy analysts

 

 

Banks that cover Brazil (2007 list)

  • ABN Amro Asset Management - Brazil 
  • Allianz Group 
  • Banco Bradesco 
  • Banco Safra
  • Banco Votorantim 
  • BBVA 
  • Bear Stearns 
  • BNP Paribas 
  • Citigroup Global Markets Inc. 
  • Deutsche Bank 
  • Goldman Sachs 
  • HSBC 
  • ING
  • IPEA 
  • Itaú-Corretora
  • JPMorgan 
  • LCA Consultores 
  • Merrill Lynch 
  • Morgan Stanley 
  • Santander Banespa Group 
  • UBS 
  • Unibanco

 

Top Individual analysts:

  • need list...(please let us know if you know...)

 

 

 

Brazilian Economy:

 

Brazil has seen more than a decade of financial stability, steady if unspectacular growth and a sharp fall in unemployment.

 

 

Entrepreneurship in Brazil

 

See our discussion on Entrepreneurship in Brazil

 

 

Growth & Expectations

 

According to research from Bain & Euromonitor... the expected annual consumption in Brazil should grow from 780 billion dollars in 2007 to over 1 trillion in 2012, and increase of 220 billion dollars

 

 

Demographic shifts

 

Increasing population size:

 

Expectation are that Brazil will increase from 190 million to over 250 million by 2050.

read more in our discussion on Brazil demographics  including classification of Brazilian social classes A&B, C,  D&E

 

 

Consumer Classes in Brazil change

 

According to research conducted by Bain (consulting) and Euromonitor, the Brazilian economy can be divided into three distinct sections.  At the top of the consumer pyramid, are classes A&B which combined constitutes 15% of the Brazilian population (2007).  In the middle is class C with 46% in 2007, up from just 34% in 2005.  And, below are classes D&E which constitutes 39% in 2007, down from 51% in 2005.

 

Rise in Purchasing power of lower/ middle class

 

As of 2007, 13m families benefiting from the Bolsa Família, a plan that makes welfare payments dependent on children attending schools and clinics.  This is one example is the regional Economic Development boom that is planned between 2008-2010 in the Brazilian NE state of Pernambuco.  As a result of rising incomes, available credit, the "Bolsa Familia" program, and of the strengthening currency (vs the weak dollar), suddenly Brazilian consumers are feeling wealthy as never before, and they are buying cars, and commercial goods like never before.   In response, you see massive developments in and around the port of Suape, such as the massive wheat mill from Bunge, or the auto distributors, oil refineries, ship building, steel mills, etc.  (see more in our coverage of Pernambuco).   See more in our discusson: Rise of purchasing power in emerging markets

 

Shift out of poverty:  no fewer than 6m Brazilians moving out of poverty in 2006 alone.  See our discussion on Brazil demographics

 

Consumption habits of the new "consumers":

 

As Brazilians move above the "poverty line", and enter the group of consumers often targeted by retailers...the question is "what kinds of goods will they want"?  A recent McKinsey survey suggests that more than 60 percent of this group’s higher incomes would be devoted to more and better food. By contrast, the average consumer elsewhere in the world spends roughly 60 percent of any additional income on nonfood items such as consumer electronics, clothing, and entertainment.

 

 

Increased Minimum wage in Brazil:

 

Rise in minimum wages:  as of 2008, there has been 50 per cent plus increase in the minimum wage since 2004.  This has increased purchasing power, and consumerism in Brazil.

 

More Credit available:

 

In recent years, credit has become much more widely available, with loans rising from the equivalent of 22 per cent of economic output in 2004 to 36 per cent this year.  Although the average income of (wage group) "C's" is only R$1,200, the widespread availability of credit has transformed living standards.  Poorer Brazilians – like Ms Silva, who opened a bank account only two years ago – have suddenly been presented with a range of offers to borrow money. Televisions, DVDs, refrigerators and other white goods, computers and cars are available on credit and although rates are relatively high, repayment periods are long.

 

Expansion of the "Formal Economy"

 

In Brazil, some estimate that the "informal economy" takes up to 80% of all retail sales. In addition, estimates ar that the informal economy generates nearly 40 percent of the total national income

 

But, in recent years, Brazil has witnessed a stunning expansion in formal employment.  Why?  We see three main reasons:  (1). Improved tax collection, (2) expansion in public-sector employment, and (3) a desire to regularise their affairs with the tax authorities in order to access capital more easily.

 

 

The problems of the informal economy:

 

Companies that compete "formally" have an unfair dis-advantage to ther "informal" competitors.  The informal guys dont pay taxes, nor are they subject to the same regulations on hiring, firing, etc.  This puts the formal guys at a big disadvantage, and leads to a major incentive not to formalize your operations.  Some estimate that informal players have up to a 5% advantage in operating margins over formal competitors (which can be the difference between continuing operations and bankruptcy). 

 

The trouble is that informal companies are less efficient than formal ones, they cant tap into capital to grow.   In fact, there is a dis-incentive to grow because of their desire to stay "below the radar".  If they get too big, then they might attract authorities, so the incentive is not to grow.

 

For the economy as a whole, the trouble with having 80% of the retail companies not paying taxes...is that the tax burdon is then unfairly heavy on the few that do choose to pay their taxes.  If only a few people pay, then the % rate that they pay must be higer if the government is going to collect enough money to offer basic services.  For this reason, the tax rate is extremely high...which only leads to more incentive to avoid paying taxes in the first place!

 

Why is there such a large informal economy ?

 

Brazil's onerous bureaucracy is partly to blame: burdensome regulations, high taxes, and weak enforcement conspire to encourage evasion because the benefits outweigh the relatively small possibility and cost of being caught.

 

 

Read more

see also our discussion on : 

 

 

 

Major trends in Brazilian consumer market:

 

  1. Increased number of women in the marketplace.  The percentage of women active in the economy in Brazil has increased from 41.4% in 1999 to 43.8% in 2006, and is expected to continue increasing to 45% by 2010.   The 3.2% increase in women in the marketplace is compared to just a 1.7% increase in men.  In addition, the money available to spend for women increased 7.1% vs just 2.6% for men (from 200-06)
    • market opportunities:  soaps, sun protectors, appliances, beauty, baby products, checking accounts, more...
  2. More couples without children:  there is a trend for young couples to postpone having children till later.  First spending money on travel and enjoyment.  The estimated number of couples without children in Brazil has increased from 5.2 million in 1996 to 8.6 million in 2006, and is expected to increase up to 16 million by 2016.
    • market opportunities:  increased demand for e-commerce, credit, ready to eat meals, furniture, decoration
  3. Increased number of singles living away from their parents.   In order to understand this trend, you first must understand the cultural tendency for Brazilians to live with their parents until they are married.   This is a very well documented historical difference between Brazil and the USA.  But, what is changing is that as young people find better jobs, and delay marrying, they are also leaving home and living alone more frequently in Brazil.  This has a huge impact on they types of products that are sold in mass in Brazil.  According to Euromonitor (and Bain) research, the number of singles living alone in Brazil increased from just 3.2 million in 1996 to 6 million in 2006, and is expected to increase further to 12 million by  2016.
    • market opportunities:  more broadband internet, iPods, cellphones, beer, automotive electronics
  4. Aging population of consumers:  Brazil is traditionally thought of as a very young nation, but expectations are that this will change soon, as Brazilian consumers will start to move into middle age.  In addition to having more elderly Brazilians, the expectation is that they will live longer lives.  The population over 60 was just 14.1 million in 2000, but is expected to swell to over 41 million by 2030.   Also, the age group from 40-60 is expected to also grow from 32 million in 2000 to over 60 million in 2030.   With more purchasing power on average, this class of consumers is one to watch
    • market opportunities:  wine, travel, beauty products, etc
  5. Faster growth of consumption in midsize and large cities (250,000 to 500,000 and 500,000-plus inhabitants, respectively), at the expense of the largest ones (São Paulo, Rio de Janeiro, Porto Alegre, and Belo Horizonte).

 

 

 

 

How history of inflation affects consumer behavior in Brazil (compared to the USA):

 

01/02/2009: "In Brazil, there is a recent history of inflation, and the memory of bank-account wealth being wiped out.  So when talk of looming crisis appears in the news, Brazilians do the opposite of Americans and spend rather than save.  While Americans seem to get shell-shocked and retreat from making purchases, Brazilians who have lived through multiple bouts with inflation, go out and spend spend spend. This fear of saving due to a history of hyper-inflation is a clear indicator of why Latin America has historically lower savings rates than in other developing nations (especially in Asia)."

 

 

 

 

 

Sectors of Brazilian Economy

 

1.  Infrastructure

 

After decades of underinvestment, Brazil is ready for infrastructure investment.   As a result of budget problems in the past, Brazil was forced to skimp on infrastructure investments.  But, with recent success in turning the budget around (see our discussion below on Brazil macroeconomic profile), it is clearly the time to invest in Brazils infrastructure.   From electric power to transportation to housing, the needs are huge.

 

Electrical generation:  Some estimates are that generating capacity must rise by more than 40 percent during the next ten years. Large projects are in the works, such as the Belo Monte (in northern Brazil) and the Madeira River Hydro-electric Complex, but much more is needed

 

Electrical Distribution and transmission:   operations must be revamped to meet service benchmarks and also expanded to support rising generation capacity

 

Housing:  The need for new housing has been estimated at about 15 percent of the existing stock, or seven million additional units. A multitude of existing ones lack basic services: only 65 percent have access to sewage systems, and 15 percent are without running water. Regulatory uncertainty, however, remains a major obstacle to both private- and public-sector investment in housing.

 

Transportation:  Government statistics indicate that less than 30 percent of Brazil’s extensive road network (72,000 kilometers, or about 45,000 miles) is in adequate condition and that more than 40 percent of it urgently needs renovation. Canal and rail systems, besides requiring modernization and mending, are neither broad nor reliable enough to become useful alternatives.

 

Barriers to infrastructure investment:

 

Barriers include financial, environmental, and regulatory constraints. The cost of capital is a crucial element in making projects economically sound. Progress in regulation has been irregular: the telecom sector enjoys a stable regulatory environment and a well-functioning government agency, but sanitation, for example, still awaits the issuance of clear rules for private investment.

 

Opportunities in infrastructure projects:

 

With a renewed emphasis on improving infrastructure, Brazilian companies that service this sector should thrive. Building, construction and materials providers should be well positioned.

 

Foreign private investors should look for new legislation governing private-public partnerships, and watch for opportunities in this sector.  Private roads, ports, etc all have the potential for success, but care needs to be exerted in managing the government partnerships.   Regulatory changes can create opportunities as well as threats in this sector.   Before entering this market, make sure you have a team with excellent regulatory -negotiating skills, and political background.

 

 

2.  Basic Materials / commodities

 

Brazil has become a major source internationally for basic materials, whether agricultural, mineral or otherwise.  Big exports include beef, coffee, oranges, soy, sugar cane, aluminum and alumina, copper, iron ore, nickel, pulp, steel and much more...

 

The local market for these commodies is growing, but the main emphasis in the past has been on export markets, especially to Asia (China).  But, the local market pays a healthy premium over international prices, and demand is growing quickly, so there is potential of this market in the future.

 

Competing in Brazil

 

Foreign corporations looking to compete in Brazilian basic materials (commodities) market have found success by partnering with local player, rather than trying to enter alone and competing head-to-head with the local groups.  This is largely due to the fact that there has recently been local consolidation of the industry.

 

Challenges for local Brazilian companies:

 

managerial and technical talent are the major bottleneck for local Brazilian companies looking to compete globally

 

 

3.  Consumer goods / Retail

 

The two major factors driving this sector are the availability of credit, and the rise of purchasing power of the middle class. 

 

Consumer Credit:

 

Consumer credit has increased by more than 26 percent annually during the past six years, with no significant rise in delinquency. That increase has been fostered by banking legislation that lets financial institutions extend loans to corporate employees with minimal risk because monthly interest and principal payments can now be deducted directly from paychecks.

 

Consumer credit-related debt levels, currently 5.4 percent of GDP, are below those in countries such as Chile (7 percent of GDP) and Spain (7.5 percent).

 

 

 

4.  Banking

 

read more in GloboTrends discussion: Banks in Brazil

 

Brazil recetly achieved "investment grade status", which should help banks extend credit to consumers and private enterprises more freely.  Some experts expect the mortgage market to flourish.  Areas such as insurance and long-term investment remain underdeveloped.   Segments such as asset management, derivatives, underwriting, and M&A advisory services could be expected to emerge as well.

 

Market entry strategy alternative for the multinationals might be to participate in the eventual privatization of the remaining state-owned banks or to enter into a partnership with a dominant domestic bank whose controlling shareholder (typically a family) seeks liquidity and diversification.

 

Despite the general improvement in financing conditions, credit for Brazil’s middle-market companies, small businesses, and individuals remains among the most expensive in the world.

 

 

 

5.  More Hot Sectors - industries that should benefit from demographic trends:

 

  • Automobiles:  2.5 million units sold in 2007.  Expect 60% growth till 2016
  • Bottled water:  $1.1 billion dollars sold in 2007.  Expect 82% growth till 2012
  • Televisions
  • Toys:  $800 million dollars sold in 2007.  Expect 50% growth till 2012
  • Frozen food: $1.4 billion dollars sold in 2007.  Expect 50% growth till 2012.
  • Alcohol drinks: $7.9 billion dollars sold in 2007.  Expect 43% growth till 2012
  • Perfumes:  $3.3 billion dollars sold in 2007.  Expect 24% growth till 2012.
  • Computers:  $15.1 billion dollars sold in 2007.  Expect 23% growth till 2012.
  • Appliances: $5.8 billion dollars sold in 2007.  Expect 36% growth till 2012.
  • Banking accounts:  103 million accounts open in 2007.  Expect 46% growth till 2012.
  • e-commerce: $6.4 billion reais spent online in 2007.   Expect 145% till 2010.
  • credit (to consumers):  $250 billion reais in credit offered in 2007.  Expect growth of 60% till 2012.
  • Furniture & Decoration:  R$17.5 billion reais spent in 2007.  Expect 23% growth till 2012.
  • Internet Broadband connections:  just 8 million connections in 2007.  Expect 30 million by 2012 (275% growth)
  • Portable music players:  $99 million dollars spent in 2007.  Expect 105% growth till 2012.
  • Cell phones:  $3.2 billion dollars spent in 2007.  Expect 69% growth till 2012.
  • Beer:  $4.4 billion dollars spent in 2007.  Expect growth of 55% till 2012
  • Travel - air:  there were 50 million air trips taken in 2007.  Expect 100% growth till 2012.  (need extra infrastructure, planes, etc!)
  • Wine:  $1.9 billion dollars spent in 2007.  Expect growth of 32% till 2012.

 

Source:  Exame, 04/2008

 

 

 

Brazil macroeconomic profile

 

for economic data, see: Brazil macroeconomic profile and see the FT.com profile on Brazil 

 

 

Brazil's natural resources:

 

natural resources—high-quality deposits of bauxite, iron ore, natural gas, nickel, oil—and excellent conditions for forestry and agriculture

 

Underlying the boom is the high global demand for Brazil's vast natural resources. The country is the planet's top exporter of beef, chicken, ethanol, iron ore, sugar, coffee and orange juice. Brazil comes a close second to the United States for soy exports.

 

Two major offshore finds by state-run Petroleo Brasileiro SA in the last three months could turn Brazil into an oil and natural gas exporter and a prospective member of the Organization of Petroleum Exporting Countries.

 

Latin America's largest economy is in the midst of a prolonged boom due to high global demand for from Brazilian ethanol, iron ore and agricultural products. Gross domestic product will expand at least 5 percent annually through 2010, Lula predicted

 

 

But, currency appreciation (from agri-business) harms the industrial sector.

 

the phenomenon is called the "dutch disease", and is what happens when there is a boom in agriculture or natural resources which causes the currency to appreciate, which harms the countries industrial sector.

 

 

 

Access to Capital: challenges for local companies

 

Corporate success, limited to the members of an exclusive club—a handful of family-owned conglomerates, large state-owned enterprises, and a few multinationals—required access to private or internal capital markets and exceptional know-how in a tightly regulated environment.

 

Running a national surplus rather than a deficit is important, because it eases competition in the capital markets for limited resources, much of which was going to fund the national deficit.

 

High local interest rates:

 

While still very high at around 15%, the good news is that this seems "cheap" in comparison to the near 40 % which was typical at the height of the 1998 financial crisis. 

 

Over this time period, Brazil’s risk premium fell to around 200 basis points (from more than 1,000) over US Treasuries

 

Growing market for corporate bonds (debt market)

 

Local issuance of corporate debt has reached 74.7 billion reais in 2006,against only 7.4 billion reais in 2001.

 

 

Equity market grows with new rules

 

In response to criticism over a lack of good corporate governance, Brazil responded in 2000 with the introduction of Novo Mercado, a special-listing segment of the existing São Paulo Stock Exchange (Bovespa). Novo Mercado’s higher corporate-governance standards allow only a single class of share structures and require a higher level of disclosure. Reactions to the initiative were positive, prompting a wave of new issues.

 

Secutitization of mortgages and other debt instruments

 

One of the more significant developments in Latin America is the development of "securitization" of debts (such as mortgages), or the repackaging of debt into securities.  This has allowed a more liquid market for raising money.   The menu of financing alternatives has broadened to include instruments such as the securitization notes Banco Itaú recently issued and securities with longer maturities.  Instruments such as these are only now being offered in Brazil under reasonable terms and conditions.

 

 

 

 

 

Foreign Trade:

 

Reduction of Protectionism, reduction of tariffs

 

In the past, Brazil has relied on erecting walls around its economy in order to protect its local industries from foreign competition.  Policies such as (ISI) Import substitution industrialization were put in place, but have recently been rejected in favor of more open, and competitive markets.  This has allowed foreign firms to compete within Brazil more effectively, and has increased pressure on local Brazilian firms to modernize, improve management skills, innovate,  and to increase operational efficiency.

 

Trade pacts important for Brazil

 

1.  Mercosur (Mercosul)

 

The Camex (Câmara de Comércio Exterior - Exterior Chamber of Commerce) inside announced the reduction of the tax of importation for 328 machines and equipment and of four good of computer science and telecommunications of the rule of former-tariff. The former-tariff one is a norm that allows the reduction of costs for purchase of some products that are not produced in Brazil. In the case of the machines, the average reduction of the TEC (Tarifa Externa Comum do MercosulCommon External Tariff of the Mercosul) is of 14% for 2%. For the other goods, it is of 20% for 2%.

 

2. FTA with Israel:

 

See article here: http://www.brasilemb.org/index.php?option=com_content&task=view&id=248&Itemid=160

 

 

Recommendations for Growth

 

What does Brazil need to do?  A recent McKinsey report lays out 5 step plan:

 

"Brazil must tackle its huge informal economy, which distorts competition; reduce high levels of government consumption, which keep the cost of capital high; improve the inefficient judicial system and other public services; and develop an adequate infrastructure. The fifth priority is to create a nationwide commitment to a long-term economic vision and to ways of implementing these measures.

 

read the full report here:  http://www.mckinseyquarterly.com/Five_priorities_for_Brazils_economy_1962_abstract

 

 

Brazil IT market:

 

Check this video out: http://www.youtube.com/watch?v=6YY3-vM6R4I

It positions Brazil as a top IT destination and is definitely a very good source of info.

You can also find some relevant data at www.brasscom.org.br

 

 

 

 

 

External Links

 

U.S. Commercial Service -São Paulo, www2.focusbrazil.org.br, (English and Portuguese versions)

Rua Thomas Deloney, 381- Chácara Santo Antonio, 04710-110 - São Paulo, Brazil

Mailing address: Rua Henri Dunant, 700 - Chácara Santo Antonio, 04709-110 - São Paulo, Brazil

Tel: 55-11-5186-7440; Fax: 55-11-5186-7399; Renato.Sabaine@mail.doc.gov

There also also branches in Rio de Janeiro, Brasilia, Belo Horizonte and Porto Alegre. See website for contact info.

 

American Chamber of Commerce São Paulo, www.amcham.com.br

Rua da Paz 1431 CEP 04713-001 - São Paulo SP, Brazil

Tel: 55-11-5180-3804; Fax: 55-11-5180-3777; business@amcham.com.br.

There are also branches in Belo Horizonte, Brasília, Campinas, Curitiba, Goiânia, Porto Alegre, and Recife. See website for contact info.

 

The Economist, www.economist.com, is a British weekly newsmagazine reporting on the global economy, politics etc. The Country Briefings, compiled for 60 countries by the Economist Intelligence Unit, provides extensive economic and political data, as well as links to articles. Take a look at the Brazil Country Briefing.

 

BOVESPA, São Paulo Stock Exchange, www.bovespa.com.br (English version available)

 

 

 

Links External: Brazil economy links

 

Economy, Business, & Finance:

 

 

 

 

 

How To Build Your Labor
Force in Brazil
How To Search for
Management Talent in Brazil

How To Choose your
Office in Brazil

How To Protect
People and Property in Brazil

How To Choose your
Logistical / Industrial
Facility in Brazil

How To Import
Into Brasil

How To Obtain Visas
for Brazil

How To Manage Corporate
Taxes in Brazil

 

 

 

 

 

 

Funding Social Programs

 

Feb 2008, Lula announced $6.4 billion in new funding for social programs to target 24 million people, including 1 million small farmers, in nearly 1,000 towns across the country in 2008.

 

 

 

 

History of the Brazilian Economy

 

http://en.wikipedia.org/wiki/Economic_history_of_Brazil

 

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

 

From Portugal's discovery of Brazil in 1500 until the late 1930s, the market elements of 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 widely adopted. By the late 19th century, the economy began to grow at fast rates. Important structural transformations began only in the 1930s, when important 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 a stagnated economy. By 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. However these statistics have been subject to considerable distortion, since very small settlements are now considered to be urban areas, while in the 1940s only significantly large towns were counted in the statistics, other alternative methods of estimating urban population suggest a significantly smaller urbanization occurred during the period. 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 1980this 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 greatly raised the country's 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 slave labor for wage labor after 1870 (slavery was abolished in 1888) 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 semi-autonomous 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 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 home-buyers 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 semi-processed 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 semi-processed 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 importscitation needed. 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 semi-processed) 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 country has imposed a moratorium on its foreign debt service in 20 February 1987.

 

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 called Plano Real 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.

 

 

1994-2002

 

The Plano Real, instituted in the spring of 1994, sought to break inflationary expectations 1 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 Real Plan successfully eliminated inflation, after many failed attempts to control it. Almost 25 million people turned into consumers "overnight".

 

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.

 

 

 

 

 

 

the "Plano Real"

 

http://en.wikipedia.org/wiki/Plano_Real

 

The Plano Real (Portuguese, Real Plan) was a set of measures taken to stabilize the Brazilian economy in early 1994, under the direction of Fernando Henrique Cardoso as the Minister of Finance, during the presidency of Itamar Franco. 1

 

Its architects include, among many others, Pérsio Arida, André Lara Resende, Edmar Bacha, Gustavo Franco, Pedro Malan, Winston Fritsch and Francisco Pinto. 2

 

According to economic academics, one of the causes of inflation in Brazil was the inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local Currency to the U.S. dollar. Plano Real then created a non-monetary Currency, the Unidade Real de Valor ("URV") which value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reais increased nominally every day.

 

The Plano Real based its actions on an analysis of the root causes of inflation in the post-military dictatorship Brazil that concluded that there was both an issue of fiscal policy and severe, widespread inertial inflation.

 

The Plano Real or Real Plan intended to stabilize the domestic Currency in nominal terms after a string of failed plans to control inflation. It created the Unidade Real de Valor (Real Unit of Value), which served as a key step to the implementation of the current Currency, the real.

 

The Plano Real introduced a new Currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.

 

The real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January Brazilian Currency crisis, when the Real suffered a maxi-devaluation, and fluctuated wildly. Following this period (1994-1999) of a quasi-fixed exchange rate, an inflation-targeting policy was instituted by new central bank president Arminio Fraga, which effectively meant that the fixed-exchange period was over. However, the Currency was never truly "free," being more accurately described as a managed or "dirty" float, with frequent central bank interventions to manipulate its dollar price.

 

It also was characterized by a strong focus on the management of the balance of payments, at first by setting the real at a very high value relative to the U.S. dollar and later (late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local Currency bond markets, financing Brazilian expenditures.

 

The Plano Real partly incorporated policies and ideas from the Washington Consensus.

 

 

 

 

 

 

 

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