The Economy
Historical Perspective

Brazil's economic history is marked by a succession of cycles, each of them based on the exploitation of a single export commodity: timber (brazilwood) in the first years of colonization; sugar cane in the 16th and 17th centuries; precious metals (gold and silver) and gems (diamonds and emeralds) in the 18th century; and finally, after a series of inland expeditions, coffee in the 19th and beginning of the 20th centuries. Slave labor was used for production, a situation that would continue until the last quarter of the 19th century. Paralleling these cycles, small scale agriculture and cattle tailing were developed for local consumption.

Small factories, basically textile factories, started to pop up in the mid 19th century. Under Emperor Pedro II new technologies were introduced, the fledgling industrial base was enlarged, and modern financial practices were adopted. With the collapse of the slave economy (it was cheaper to pay wages to new immigrants than to maintain slaves), the abolition of slavery in 1888, and the replacement of the monarchy by the republican regime in 1889, Brazil's economy suffered severe disruption. The endeavors by the first republican governments to stabilize the financial environment and revitalize production had barely succeeded when the worldwide effects of the 1929 depression forced the country into new readjustments.

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

The industrialization process from the 1950's to the 1970's led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, all steel, as well as to the initiation and completion of large infrastructure projects. In the decades after World War II, the annual Gross National Product (GNP growth rate for :Brazil was among the highest in the world averaging, until 1974, 7.4 percent.

During the 1970's Brazil, like many other countries in Latin America, absorbed excessive liquidity from U.S., European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment. The result of this capital infusion was impressive: Brazil's Gross Domestic Product (GDP) increased at an average rate of 8. percent per annum from 1970 to 1980 despite the impact of the 1970's world oil crisis. Per capita income rose fourfold during the decade, to US $2,200 in 1980.

In the early 1980's. however, a sudden, substantial increase in interest rates in the world economy coinciding with lower commodity prices precipitated Latin America's debt crisis. Brazil was forced into strict economic adjustment which brought about negative growth rates. The unexpected suspension of capital inflows reduced Brazil's capacity to invest. The burden of its debt affected public finances and contributed to an acceleration of inflation. In 1987, the government suspended Brazilian interest payments on foreign commercial debt.

The 1980's crisis signaled the exhaustion of Brazil's import substitution" model and
it contributed to the opening up of the country's economy. ("import substitution" is
a policy that nurtures local industry by prohibiting the purchase of certain manufactures abroad.) In the early 1990's, Brazil's economic policies were centered on economic stabilization, opening up the economy to international trade and investment, and normalizing relations with the international financial community. The latter two were quickly achieved: Import tariffs were reduced (the average is now 12 percent), and quantitative restrictions were eliminated, making Brazil one of the very few countries in the world that does not impose quotas on its imports.

In 1992, Brazil reached an agreement with both public and commercial creditors to reschedule its foreign debt payments, exchanging old debt for new bonds. This rescheduling marked Brazil's return to the international financial markets. The turning point in the stabilization process came with the launching of the Real Plan in June 1994. (Brazil's new unit of currency is the Real, pronounced ree-ál.) The Real Plan has three main objectives: (1) keeping inflation under control; (2) obtaining a steady and substantial reduction of social imbalances; and (3) achieving long-term sustainable growth of GDP, investment, employment and productivity. In 1998, price increases have been the lower in four decades, around 2 percent, down from more than 2,100 percent in 1993 before the launching of the Plan. Since inflation constitutes a form of tax on the poor, price stabilization represented a significant redistribution of income in favor of the most needy. In the period 1995- 97 cumulative GDP growth was 17 percent, na average of 4 percent per year, while per capita income average growth was 2.6 percent. The increase of industrial productivity, which has averaged 7 percent a year in the 1990’s, is very important to ensure sustained growth in the future. Since the implementation of the Plan, net flows of direct foreign investment have jumped tem-fold, from US $2.2 billion in 1994 to over US $22 billion in 1998.

With a GDP of US $800 billion in 1997, the Brazilian economy is dynamic and diversified. In 1997 industry was responsible for 36 percent of economic output, agriculture for 14 percent, and services accounted for 50 percent. The performance of exports, among other areas, reflects the dynamism of the country’s economy. From 1992 to 1997 Brazilian exports have increased from US $35.7 billion to US $53 billion. Over 70 percent of these exports are manufactured goods. The European Union absorbs 31 percent of Brazilian exports, the United States 20 percent, the Southern Commom Market (MERCOSUL) 10 percent, Asia absorbs 12 percent, Latin America (non-MERCOSUL) 10 percent, and the remaining exports are distributed over a variety of smaller markets.

MERCOSUL

On March 26, 1991, the Southern Common Market (MERCOSUL) was created when Brazil, Argentina, Paraguay, and Uruguay signed the Treaty of Asunción. The trade pact took effect as a customs union and partial free-trade zone on January 1, 1995.The aim of MERCOSUL is to allow for the free movement of capital, labor, and services among the four countries. Since 1991, trade among the MERCOSUL countries has more than tripled. Brazil’s trade with the MERCOSUL countries reached US $18.7 billion in 1997, up from US $3.6 billion in 1990.

Statistical Overview

During the last fifty years, the distribution of the Brazilian population by age groups has shifted. The fraction under 14 years of age has fallen from 43 percent to 31 percent, while the fraction over 60 years of age has risen from four percent to 7.3 percent. Life expectancy at birth has increased rom 46 years in 1950 to 67 years. The literacy rate was 50 percent in 1950. Today it is 84 percent.The Brazilian workforce totaled an estimated 72 million, or 46 percent of the population in 1996.Overall, the workforce expanded at an average annual rate of 3.2 percent
during the 1980’s. Currently the workforce is expanding at a rate roughly equal to the population growth rate. Women account for 35 percent of the total Brazilian workforce, up from 28 percent in 1980.

The basic sanitation system in Brazil has improved substantially in the past 25 years. In 1995, 73 percent of households were served by a sewage system of some kind; 96 percent of households had potable water and 88 percent of all households were connected to the electric power grid. There are approximately one installed telephone and one automobile for every ten Brazilians. Production and sales of home appliances and consumer electronics increased significantly between 1994 and 1996, with growth averaging about 20 percent per year. In 1996 sales were up 81 percent compared to 1993. This extraordinary performance is attributed to increased disposable income and to wider consumer credit availability – factors that resulted from the implementation of the Real Plan. For the first time low-income families became consumers of color televisions and electrical appliances. By 1997, however, the cycle of growth in home appliances had run its course and the industry is expected to expand far more slowly in the coming years. Going into the 21st century, Brazil is the eighth largest economy in the world.

Source: Embassy of Brazil (www.brasilemb.org; www.brazilembassyinindia.com)