Brazil in the Mid 1990s

By Brazzil Magazine

In the mid-1990s Brazil had a population of 156 million and a gross domestic product
(GDP) estimated at US$676 billion in 1995, placing its economy among the nine largest
economies in the world. The per capita GDP was estimated at a little over US$3,000. Within
the Third World Brazil is among the most industrialized countries, with industry’s share
having fluctuated between the low and high thirties, as against only about 10% for
agriculture. Although it is a market economy, the state has played an unusually large
role, as both a policymaker and a direct participant in economic activities. In 1985, a
survey of the 8,094 largest firms revealed that the share of net assets of state
enterprises was 48%, while the share of private Brazilian firms stood at 43% and of
multinationals at 9%. And in 1990, just prior to the introduction of the privatization
process, another survey examined the 20 largest firms by sectors and found that state
firms had the following percentage of total sales: public utilities, 100%; steel, 67%;
chemicals and petrochemicals, 67%; mining, 60%; transport services, 35%; gasoline
distribution, 32% (Melhores e Maiores, Exame, August 1991).

Despite the rapid growth of nontraditional exports and recent effort toward
internationalization, Brazil’s economy remains relatively closed, with external trade
(exports plus imports) amounting to less than 14% of GDP in the early 1990s.

Growth Record

Brazil has experienced one of the highest growth rates among capitalist economies in
the twentieth century. This observation is particularly true for the period ranging from
the early 1950s to the mid-1990s, despite the crisis that lasted throughout most of the
1980s (the so-called lost decade) and into the early 1990s. A first assessment of the
country’s economic performance in the period can be made by noting that the yearly GDP
growth rates averaged 7.15% in the fifties, 6.12% in the sixties, 8.84% in the seventies,
2.93% in the eighties, and 1.60% in the years 1990-95. For a comparative vision, one
should note that the United States economy grew at a yearly average rate of 3% in the
period 1960-92.

It will be noted that the high yearly growth rates of the 1950s and 1960s took place
with relatively low investment/GDP ratios, when compared with the 1970s and 1980s. This
may have been due to the lower capital intensity of the prevailing technology and also due
to the great emphasis on the promotion of industrial sectors with low capital/output
ratios. In the 1970s and 1980s, the higher investment/GDP ratios reflect an emphasis on
industries with greater capital-intensive technologies (such as capital goods production)
and a large amount of investment in infrastructure projects (such as the world’s largest
hydroelectric dam at Itaipu), which use up a huge amount of capital relative to short-term
output. Also to be noted is the decline of investments in the 1980s and early 1990s, which
is even clearer when measured in constant 1980 prices. This reflects the crisis of the
1980s and early 1990s. (…)

Besides the rapid increase in the national product, one should also note the structural
changes that occurred in the economy during the growth process. Industry was the motor of
growth and the centerpiece of all development strategies implemented throughout the
period. Industrial production grew at a yearly average rate of 6.89% during the four
decades but 8.5% if the lost decade is excluded. For the period as a whole, the yearly
average growth rates of agriculture and services were 4.27% and 6.83%, respectively. As a
result, the share of industry in GDP rose from about 24.14% in 1950 to 34.2% in 1990,
after having reached 40.58% in 1980. Agriculture’s share dropped from 24.28% to 9.26% in
forty years, while the service sector’s share rose from 51.58% to 56.54% . It should be
emphasized that besides showing the fastest growth rates, the industrial sector became the
main determinant of the economy’s dynamism, triggering both the upturns and the downturns
of the growth cycles.

Structural changes also took place within Brazil’s industry. The ISI (import
substitution industrialization) process led to a greater diversification of the sector,
both horizontally (industries in different sectors) and vertically (industries related to
each other as suppliers or customers), producing not only various types of consumption
goods, but capital goods and basic industrial inputs as well. For instance, machinery
production increased 205% in the seventies, electrical equipment, 223%, and chemicals,
163%. The share of the machinery subsector in industrial production rose from 2.2% in 1949
to 12.5% in 1992; the share of electrical equipment went from 1.7% to 6.8% in the same
period. Some of the early dominant industries of the first half of the twentieth century
had their relative importance decreased. For example, the textile industry’s share of
industrial output declined from 20.1% in 1949 to 4.6% in 1992, and the food and beverage
products’ share declined from 24% to 15.7% in the same period.

Another characteristic of Brazil’s industry that has emerged over the decades is its
high degree of concentration. In the 1980s the share of the eight largest firms in total
sales was 62% in transport equipment, 64% in pharmaceuticals, 100% in tobacco, 60% in
printing and publishing, 72% in chemicals, 54% in beverages, and 81% in rubber. The
average for industry as a whole was 52%.

There were also notable changes in Brazil’s employment structure. The share of
agriculture in total employment declined from 62% in 1950 to a little less than 23% in
1990, and that of services increased from 25% to 54% in the same period. Industry’s share
in total employment rose to a much smaller extent than its share in GDP; in 1950 it
amounted to 13%, rising to 23% in 1990.

Accompanying the changes in the production structure of the country was the
diversification of the commodity composition of exports. This was especially the case
after the first intensive import substitution industrialization, from the late sixties on.
The basic idea of ISI was to produce domestically goods that were being imported, thus
stimulating the economy. In 1950 the share of traditional export products (coffee, sugar,
cotton, cocoa) was about 80%, while the share of manufactured products was about 13%; by
1992 the share of industrial products had risen to 66.7%, while the traditional exports’
share had fallen to 5.2%. In addition, it should be noted that Brazil also diversified its
agricultural exports. For instance, soybean and orange juice, which were almost
nonexistent in Brazil’s exports in the early 1970s, accounted for 7.3% of total exports
each (totaling 14.6%) in the 1990s.


Prior to the 1930s, Brazil was a primary exporting economy. Its major export products
were coffee, sugar, cocoa, cotton, and, for a short period, rubber. Although some
manufacturing industries made their appearance from the 1890s on, industry was not a
leading sector. Coffee exports were the engine of growth throughout most of the nineteenth
century. Also, as in the latter part of the nineteenth century the coffee economy had
shifted from the state of Rio de Janeiro to the state of São Paulo, so the economic
center of the country gradually shifted to that region, where it has remained until the
present day. The secondary effects of the São Paulo coffee economy—employment of
free immigrant labor, foreign investment in infrastructure, capital accumulation of coffee
growers, and some derived growth of industry—were to deepen regional dualism between
the dynamic Center-South and the rest of Brazil (especially taking into account the

The Great Depression of the 1930s had a severely negative effect on Brazil’s exports,
whose value fell from US$445.9 million in 1929 to US$180.6 million in 1932. The price of
coffee in 1931 was at one third of the average price in the years 1925-29. In addition to
the decline of export receipts, the entrance of foreign capital had come to almost a
complete halt by 1932. The decline of export earnings and the large amounts of foreign
exchange needed to finance the country’s external debt, not counting the remittances of
the profits of private entities, forced the government to take some drastic actions. In
August 1931, it suspended part of the foreign debt payments and introduced foreign
exchange and other direct controls of imports. Combined with a devaluation of the
currency, which increased the price of imports, these controls caused a decline of imports
from US$416.6 million in 1929 to US$108.1 million in 1932.

Since at the beginning of the depression coffee accounted for 71% of total exports, and
exports, in turn, stood at about 10% of GDP, the government’s main concern was to support
the coffee sector. The steep decline of world demand for coffee brought along by the
depression also coincided with a huge coffee output, which was the result of plantings
that had taken place in the 1920s. In order to protect the coffee sector, and thus the
economy, from the full impact of the decline of world coffee markets and prices, the
federal government, through the National Coffee Council, bought all coffee, destroying
large quantities that could not be stored. Government protection of the coffee sector also
included measures to help debt-plagued agricultural producers by having the government pay
off the debt, thus creating new money and enabling the debtor to postpone payments.

The curtailment of imports and the continued domestic demand resulting from the income
generated by the coffee support program caused shortages of manufactured goods and a
consequent rise in their relative prices. This acted as a catalyst for a spurt of
industrial production. In fact, the growth was so pronounced that industry for the first
time became the economy’s leading sector, responsible for an early general recovery from
the impact of the World Depression. By 1931 industrial production had fully recovered from
a decline that started in 1928, and in the following years it more than doubled.
Especially noteworthy by 1939 was the rapid growth of production of such sectors as
textiles (147% larger than in 1929), metal products (almost three times larger than in
1929), and paper products (almost seven times larger than in 1929).

World War II caused shortages of imported manufactured goods, which acted again as a
stimulant to more intensive domestic production. But the war prevented a concerted
development effort, as there was little investment in new productive capacity. Output
increased mainly through a more intensive utilization of existing capacity. Thus, at the
end of the war, Brazil’s industrial capacity was obsolete, and transportation
infrastructure was inadequate and badly deteriorated.

Since the wartime years made it possible for Brazil to earn a substantial amount of
foreign exchange, the country found itself with a substantial amount of reserves at the
end of the war. This made it possible in the early years after World War II for
policymakers to decrease barriers to imports. However, trade liberalization was
short-lived. The overvalued exchange rate established in 1945 and maintained fixed until
1953, a 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.

Fearing a negative impact on inflation and having a pessimistic outlook on the future
of Brazil’s exports, the government, instead of devaluing the cruzeiro, decided to
deal with the crisis with exchange controls. In 1950 a system of licensing was
established, giving priority to the importation of essential goods and inputs, fuels, and
machinery and discouraging that of consumer goods. These policies had the
effect—initially unanticipated—of providing protection to the existing consumer
goods industry.

Starting in the early 1950s, Brazil’s policymakers adopted import substitution
industrialization as the country’s main development strategy. In the initial stages of
ISI, exports were almost totally neglected, while from the mid-1960s on it was accompanied
by simultaneous efforts to diversify exports.

Industrialization Policies

Two distinctive phases can be observed when analyzing Brazil’s economic policies
between 1950 and 1994. Economic growth, in general, and industrialization, in particular,
were the main goals of policymakers until the 1980s. Thereafter, all efforts were
concentrated on attacking the balance of payments crisis (early 1980s) and the
inflationary process. In this section we focus on the growth strategies implemented in the
period, leaving the stabilization policies to be discussed separately.

As already mentioned, from the early 1950s on Brazil’s policymakers adopted import
substitution industrialization (ISI) as the country’s main development strategy. They had
come to the conclusion that the only hope for rapid growth was to change the structure of
the economy through ISI. This was achieved through (1) protection of the domestic market
through tariffs, exchange controls, and import licensing; (2) the attraction of foreign
direct investment through various incentives; (3) the creation of state enterprises in
basic industries and public utilities; (4) the creation of a development bank (Banco
Nacional de Desenvolvimento Econômico, BNDE) that, in the absence of an adequate capital
market, provided long-term investment capital to both state and domestic private
enterprises, often at subsidized interest rates; (5) the direct promotion of specific

The 1950s began with a more relaxed fiscal and monetary policy, compared to the
austerity years of the late 1940s. The exchange rate appreciated in real terms (i.e., the
exchange rate remained fixed, while the domestic price level increased, thus making
imported goods increasingly cheaper in cruzeiros), while import controls on
consumption goods (especially consumer durables) were instituted. The combination of these
measures with easy credit policies reduced investment costs and improved the prospective
returns, stimulating investment and the importation of capital goods. The latter was
further facilitated by increased revenues from coffee exports at the time. As a result of
these policies, the rate of investment increased substantially, rising from 12% of GDP in
1950 to an average of 15.2% in the following four years, and the economy expanded by 47%
in the first half of the 1950s.

In the second half of the 1950s a number of specific programs were introduced in order
to better control the direction of the industrialization process, to remove bottlenecks,
and to promote the vertical integration of a number of industries. Special attention was
given to industries considered basic for growth, such as the automotive, cement, steel ,
aluminum, cellulose, heavy machinery, and chemicals industries. The administration of the
exchange rate, tariffs, and other import controls was used to stimulate these industries.
For instance, foreign companies in such sectors as those mentioned above were given the
privilege of importing machinery without foreign exchange cover. Without this privilege,
foreign investors would have had to send dollars to Brazil at the free market rate and
with the cruzeiros bought they would have had to repurchase dollars in the auction
market at a higher price. Also, the special Tariff Law of 1957 expanded protection of
favored industries with tariffs as high as 60, 80, and 150%.

The government announced a very ambitious program of public investments in
infrastructure, especially electricity generation and transportation. Illustrating the
increasing participation of the public sector of the economy, the share of government
expenditures in the national product went up from 19% in 1952 to 23.7% in 1956. Private
investments were favored by facilitated access to internal and external credit, and
expansionary monetary and fiscal policies completed the stimulation of the economy. Among
the most impressive results of this phase were industry’s growth rate of 16.8% in 1958 and
the 10.8% GDP growth for the same year. Investment went up for four consecutive years,
from 15.2% of GDP in the first half of the decade to 18% in 1959.

The ISI strategy also left and even created a number of problems. The type of growth
that occurred resulted in a substantial increase of imports, notably of industrial inputs
and capital goods, and the foreign exchange policies of the period resulted in an
inadequate growth of exports (no efforts were made to diversify them). The balance of
trade deficits in the second half of the 1950s were financed by a substantial influx of
foreign capital, both in the form of direct investments and in the form of loans. By the
beginning of the 1960s Brazil’s foreign debt amounted to more than 2 billion dollars. A
large proportion of the latter was short term, and both the interest and, amortization
payments, combined with profit remittances of foreign firms, produced increasing balance
of payments difficulties.

Stagnation and Rapid Growth, 1960-74

The first half of this period was characterized by economic stagnation while in the
second half Brazil experienced the highest yearly growth rates ever achieved. The
stagnation has been attributed to the end of the initial ISI cycle, to the imbalances it
had created, to inflationary distortions, and to political instability. The subsequent
boom was the result of structural changes brought about by military governments within a
favorable international setting.

The above-mentioned period of stagnation occurred after a decade of prosperity. The GDP
growth rate in 1963 was below 1%, and the inflationary impact of the policies adopted in
the previous years started to be felt. The main explanations for the crisis were the
completion of another stage of the ISI process and the resultant higher level of capital
intensity of the domestic industry, which would inhibit new investments; low incentives to
invest as a consequence of existing excess capacity and political instability; and
insufficient domestic demand resulting from a highly concentrated income distribution.

In 1964 military forces took over Brazil’s administration. Its first economic team
believed that the main elements impeding growth were high inflation and an unfavorable
balance of payments. Inflation, in turn, was considered to be caused by the public
deficit, which was around 4% of GDP, the expansionary credit policies implemented in the
late fifties, and the wage increases above productivity gains. In accordance with this
diagnosis, economic policy until 1967 concentrated on reducing the deficit (which declined
to 1.1% in 1966); controlling monetary expansion; and implementing a new formula to
determine wage adjustments. The balance of payments problems were tackled by a reform and
simplification of the foreign exchange system, with the introduction of a mechanism of
periodic devaluations of the cruzeiro, taking into account inflation, and by
stimulating a greater internationalizing of the economy by increasing exports and
attracting foreign capital. Public investments were also expanded to improve the country’s
basic infrastructure and modernize and expand state-owned basic industries.

These policies succeeded in reducing inflation and attracting foreign capital,
predominantly in the form of foreign loans. The adjustment was considered completed for
the most part, and the economic team that took over in 1967 initiated a new development
strategy. The remaining inflation was considered to be of a cost-push type, and the
austerity policies were replaced by price controls. Interest rates were reduced, various
forms of subsidies and tax incentives to encourage diverse types of investments (in
backward regions, in sectors whose development was considered essential) were implemented,
and measures to modernize capital markets were introduced. The resulting recovery of
private investment was accompanied by an increase in public investments, especially in
infrastructure (road building, power generation, telecommunications, etc.). Quite notable
during this period was the expansion of such state enterprises as Petrobrás and Companhia
Vale do Rio Doce. The former, founded in 1952, began with a monopoly in oil exploration.
It expanded its activities into refining and various types of petrochemicals through the
foundation of a number of subsidiaries. Vale do Rio Doce, which was founded in the 1940s
to export iron ore, expanded into other types of mining activities, steel mills, and
various types of forest products. Foreign investment also increased significantly,
responding to a more favorable legislation on dividend repatriation, the existence of a
well-defined growth strategy, and the country’s political stability.

These measures, together with the rapid expansion of the world economy, helped to bring
about a time of very rapid growth between 1968 and 1974, during which the yearly growth
rate of GDP was 11.1%, with industry expanding at over 13% a year. Its leading sectors
consisted of consumer durables, transportation equipment, steel, cement, and electricity
generation. The period also witnessed a rapid increase in demand for automobiles, luxury
goods, and upscale housing, which was brought about by a rapid growth of upper-strata
income and by credit schemes created by the capital market reform.

As a result of the post-1964 policies, external trade expanded substantially faster
than the economy as a whole. There was a significant growth of exports, especially of
manufactured products, but imports grew considerably faster, rapidly increasing the trade
deficit. This did not present a problem, however, since there were massive inflows of
capital, and the balance of payments showed surpluses.

In the 1968-74 period the concentration of personal income worsened and the regional
disparities became larger. Industrial expansion took place more vigorously in Brazil’s
Center-South, the region that has benefited most from the ISI 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. This enabled the
region to take advantage of the opportunities and incentives offered by the military
regime. Although there was a special regional development strategy for the poor Northeast
of the country, it promoted a distorted industrialization that benefited only a few of
that region’s large cities; its linkages with the Center-South were stronger than those
within the region.

Debt-Led Growth, 1974-80

The late-1973 oil shock (which quadrupled the price of oil) hit Brazil very hard as the
country was importing more than 80% of its oil needs at the time. Contrary to most
countries, Brazil did not accept the conventional thought that it would have to face a
slowdown of economic activity as a response to the oil shock. In fact, Brazil’s response
to the international crisis was to implement an ambitious program of investments and to
reinforce the economic policy instruments used to stimulate ISI.

Import substitution was promoted in basic industrial sectors like steel, aluminum,
fertilizers, and petrochemicals. More intensive efforts were made in oil exploration both
by Petrobrás and through risk contracts with foreign oil multinationals. In addition,
Brazil engaged in a vast program to substitute alcohol for gasoline. Large public
investments were also made to expand the country’s economic infrastructure and to promote
and further diversify exports. Besides the usual fiscal incentives and market protection
through import controls, private investments were stimulated by subsidized credit and
faster capital depreciation rates. Due to these policies, Brazil was able to maintain a
high growth rate, the annual real GDP and industrial growth rates in the 1974-80 period
being 6.9% and 7.2%, respectively.

Although the goal of these investments was to reduce imports, their immediate growth
impact resulted in a higher quantum of imports (especially of capital goods). In addition,
the rising value of imports was also attributable to the higher prices of imported oil.
The resulting large deficit in the current account balance, which rose from US$1.7 billion
in 1973 to US$12.8 billion in 1980, forced the country to borrow heavily in the
international financial market. This borrowing was facilitated by the glut of
petrodollars, which international banks were eager to lend. Policymakers expected that the
combined effect of import substitution and export expansion would eventually bring about
trade surpluses needed to service and repay the debt. By the end of the decade, however,
interest rates rose dramatically (most of Brazil’s external debt was on a flexible
interest rate basis), forcing the country to borrow more just to meet its debt service
obligations. As a consequence, the foreign debt rose from US$6.4 billion in 1973 to US$54
billion in 1980. The situation was worsened by the Mexican foreign debt moratorium of
August 1982, which resulted in the closure of the international credit market to most
Latin American countries, including Brazil, and the debt crisis became the major concern
of Brazil’s government.

In the same period Brazil experienced an acceleration of inflation and a steady
worsening of its public finances. Not only were revenues decreasing because of the many
tax incentives, but government expenditures were also rising rapidly due to many subsidies
(especially to public service state firms whose prices were not allowed to rise with
increased costs and whose resulting deficits had to be covered by government subsidies),
the high level of public investments, and the rising domestic and foreign debt servicing
obligations. While between 1968 and 1973 the rate of inflation had steadily declined, the
trend was reversed from 1974 on. Yearly price increases rose from 16.2% in 1973 to 110.2%
in 1980.

Stagnation, inflation, and Crisis, 1981-92

Throughout the 1980s and early 1990s Brazil suffered from both inflation and economic
stagnation. This contrasts with most advanced industrial economies, where long periods of
stagnation have usually been accompanied by either no or very low rates of price
increases. Brazil’s stagflation comes as no surprise to the observer since both inflation
and stagnation can be interpreted as different manifestations of the same imbalance.

The Fiscal and Monetary Crisis

Over many years Brazil’s public sector experienced chronic budget deficits that were
financed by increases in the indexed domestic debt. The problem in the 1980s was the
gradual decline of the government’s credibility with the public: there was increasing
doubt about the government’s capacity to service the debt and eventually to repay the
principal. This gradual loss of credibility required the shortening of the terms of
financing, reaching a point at which most of the debt had to be refinanced daily through
the overnight market. Extremely high real interest rates were also required to roll over
the debt, which substantially increased the government’s financial expenditures. This
created a vicious cycle of rising debt leading to rising deficit leading to further
increases in the debt.

Besides the negative impact on the budget, the debt had an additional perverse effect
on monetary control due to the characteristics of its financing. On top of the short terms
and high rates, the government was forced to offer an extra attraction to financial
institutions that acted as intermediaries in the sale of public bonds. The Central Bank
was committed to repurchase from these institutions those bonds that did not find buyers
in the market. This hindered the control over monetary policy, as net withdrawals of funds
from the overnight market implied automatic increases in the money supply.

The large fiscal deficit, debt, and high interest rates also had a profound impact on
resource allocation and economic growth. There was an increasing allocation of credit to
the government, as the financial system became less and less an intermediator of resources
to the private sector and increasingly a facilitator of the transfer of savings to the
public sector. For instance, in 1980 the private sector received 74% of total credit, the
rest going to the public sector. In 1990 this composition had changed significantly, as
the private sector received only 47% and the public sector, 53%. The rising amount of
funds placed in the financial rather than in the productive sector implied a decline in
economic activity. In the years 1981-90 the average growth rate of the financial sector
was 5% per year, which was double the growth rate of the GDP. As a result, the share of
the financial sector in the GDP rose from 8.56% in 1980 to more than 19% in 1989.

Excerpted from The Political Economy of Latin America
in the Postwar Period, edited by Laura Randall, University of Texas Press, Austin,
1997, 329 pp

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The Political Economy
of Latin America in the Postwar Period

edited by Laura Randall
329 pp

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