An Overview of Contemporary Brazilian Economy
by Joao Sayad

Brazil covers an area in excess of 8.5 million km2with a population of 157 million people of which 70 million are economically active. In 1995 the nation's income per capita per annum was US$ 4,000 and its Gross National Product was US$ 600 billion making it the largest economy in Latin America and eighth in the world.
The history of the Brazilian economy during the colonial period was characterised by its specialisation in a variety of products which were of interest to the Portuguese. When colonisation began, production centred on the production of Brazil-wood; later, between the 16th and 17th centuries it concentrated on sugar-cane production whilst between the 17th and 19th centuries gold extraction was the main activity. As from the second half of the 19th century, Brazil became one of the world's major coffee producers.
The great depression of 1929 marked an important period in the Brazilian economy. The importance of coffee decreased perceptibly and the industrialisation process which had started previously became more significant due to the exchange rate devaluation and the setting up of a variable exchange rates policy.

The post-war period was marked by a rapid process of import replacement which began in the sector producing consumer goods and then moved vertically backwards as far as the production of capital goods and basic raw materials. This was especially noticeable during the last years of the military dictatorship imposed by the coup in 1964 and during the implementation of the Second National Development Plan, under the management of the president at that time, Ernesto Geisel (1974-79).

Today, Brazilian industry accounts for 20% of national production, agriculture for another 20% and the services sector, 60%. The majority of the Brazilian population is concentrated within urban areas, particularly in major cities. Brazil's urbanisation index is 75%, rising to 93% in some regions, as in the case of the state of Sao Paulo.
Inflation has been the most distinctive feature of the Brazilian and most of the other Latin American economies. Since 1948, when the Getulio Vargas Foundation began to calculate the general price indexes, Brazilian inflation has always been very high, always on the increase and most of the time reaching over two figures annually. Inflation accelerated rapidly during the 1960s starting at the end of the term of the government of Joao Goulart who succeeded President Janio Quadros who resigned following the implementation of an economic reform programme that removed import subsidy and devalued the currency by 100%. In 1964 the government was deposed by a military coup and a series of new reforms were implemented. Amongst the most important of these reforms was the autonomy given to state companies which then became organised by sector: electrical, with Eletrobras; iron and steel, with Siderbras; oil and petrochemicals, with Petrobras, and communications with Telebras.

The military government imposed a rigid wages policy that brought down the inflation rate and created a legislation that enabled the price-level restatement of taxes and of financial assets and finally, after 1967, mini devaluations of the exchange rate. The Brazilian economy became highly indexed with falling inflation rates thanks to wages and labour union control.
With the 1974 oil crisis, inflation rose once again and the military government announced the start of the open policy process. The second oil shock in 1979 and the foreign debt crisis in 1982 marked the beginning of a very difficult period for the Brazilian economy, with the interruption of foreign loans and with an increase in the inflation rate to unheard of levels, even for Brazil.

In 1985, with the end of the military government and of the wages law, workers began to demand ever more frequent wage adjustments, with immediate repercussions on the inflation rate. After 1986, Brazil tried various economic stabilisation programmes. The first of these, the Cruzado Plan (1986), abolished the price-level restatement and indexation, freezing prices. The Plan failed and other attempts followed: the Bresser Plan in 1987; the Summer Plan in 1988, and the Collor Plan in 1990. The latter differed from the others in terms of the seizure of 80% of financial assets, including demand deposits, leading the country to a recession process, as well as beginning a process to reduce import tariffs.

In March 1994 Brazil's foreign debt was renegotiated within the re-negotiation framework used for other Latin American countries. July of that same year saw the launch of the Real Plan which with the freeing up of prices, brought down the inflation rate and reduced the trade tariffs still further. The exchange rate was fixed at constant nominal values and there was a definite drop in inflation. After many years of clear trade surpluses, the Brazilian economy began to move into deficit.
In terms of inflation, the Brazilian economy underwent a radical change after the Real Plan. In terms of growth, the strategy adopted by the Real Plan and the actual growth rate of the world economies are less promising.

The administration of President Fernando Henrique Cardoso, which took office in 1995, has the main objective of passing a large collection of reforms of the 1988 Federal Constitution through the National Congress. The aim is to prepare and adapt the Brazilian Constitution to current conditions within the world economy, taking into account the high level of capital mobility, the rapid growth in foreign investment, market deregulation and in particular, increased flexibility of the rules governing labour contracting. The most notable reforms have been the end of monopolies in areas such as oil and telecommunications.

The present government has been extremely speedy and efficient in the privatisation strategy. The entire national iron and steel sector is now in the hands of private enterprise, together with the petrochemicals and fertilisers sector. The electricity sector in the area of distribution and regional generating has been completely privatised, with the exception of the major hydroelectric plants, such as Furnas, CESP plants, state, and the Sao Francisco Hydroelectric Power Central Stations, among the most representative names. The entire telecommunications sector - Telebras and the various state telephone companies, both the fixed and mobile telephony - was privatised in the second half of 1998. Thus, privatisation is no longer a priority in the government's strategy, since it has practically been completely implemented.

The Brazilian population has increased more slowly since the mid 1970s and is starting to show a higher average age. Brazil's welfare system is organised on the basis of the distribution system by which contributions from active workers finance the retirement of those no longer working. This system becomes non-viable from a financial point of view when the average age of the population increases. In Brazil the problem is made worse because retirement is awarded according to length of service (30 years for women and 35 for men) and includes several privileges for special categories - teachers and judges, for example. In addition, Social Welfare is a very large and centralised system, subject to serious administrative errors, corruption and a high rate of tax evasion. The financial deficit of retirement is currently low but there are indications that it could be potentially large in the future. This area has also been going through a restructuring process.

The Brazilian economy has a high growth potential and a considerable consumer market even taking account of income distribution which, according to 1995 data and focusing on just six of Brazil's nine metropolitan regions, has resulted in the 20% better off in those regions receiving 63% of income, whilst the 50% worst off get just 12%. According to other indicators and with research into world living conditions, carried out by the UN in 1996, the average income of the best off 10% of the population is around 30 times greater than the average income of the 40% worst off. In other countries, where income is more evenly distributed, the better off earn on average ten times more than the worst off.

Investment in the manufacture of cars, TVs and other electronic equipment, cable TV, subscriber TV, beer and soft drinks, cement and other products for the domestic market, has been climbing rapidly since 1994 - which demonstrates private sector expectations in relation to the good performance of the economy and in particular, growth in the domestic market which was so badly affected by the instability that prevailed in the country since the mid 1980s.
In January 1999, after losing a large volume of exchange reserves since the Russian crisis of October, 1998, the Central Bank abandoned the fixed exchange rate system that could vary within the bands, which represented a serious threat to the Country's stability. The rate of exchange devaluated in the first two months in nearly 60% and then retracted to a devaluation of approximately 30% with relation to the 1998 final fixed exchange rate. Results have been surprisingly positive - the inflation rate has increased, but much less than everybody had expected. International financial flows have also rapidly reconciled. And the recession forecast as a result of the devaluation is less than everybody had feared. The Brazilian economy remained free of an obstacle that hindered exports and investment in the production of exportables and importables, and that worried all analysts, without affecting the stability of the currency value and the health of the financial system.
As from now, economic long-term growth depends on the performance of the economy's different sectors. Brazil has one of the most diversified and complete industrial infrastructures in Latin America and even in the entire Southern Hemisphere. It has, therefore, enormous growth potential taking into account experience, company culture and the size of its market.

With relation to agriculture, a similar kind of observation may be made. Agriculture has succeeded in occupying land that in the past has been considered as being unproductive - the Cerrado (scrubland) - by means of the refinement of varieties developed in Brazilian laboratories and specially adapted to the region. It has also demonstrated dynamism and initiative by introducing new crops such as soya, sugar, oranges and other fruit, as well as new varieties of coffee, Brazil's traditional product. In terms of productivity and flexibility, Brazilian agriculture is of high quality and led by farmers and businessmen who are very different from the stereotype of the old colonel which characterized Brazilian agriculture during the first half of the 20th century.
Meanwhile, agrarian reform remains a major problem when considering income distribution, the concentrated distribution of land ownership and the exaggerated growth of the major Brazilian cities. The "Movimento dos Sem Terra" (Uprising of the Landless) comprises a large contingent of rural workers and unemployed that threatens rural property and is apparently not satisfied with the dispossession and distribution, increasing the discontentment of an important segment of the Brazilian population with relation to growth style.

The most relevant long-term issue relates to the anticipated results of the new model of world growth. When applied to Brazil, the results noted in the world economy since the early 1980s indicate that the new model has generated economies that on the one hand have a low inflation rate but on the other, have a slow rate of growth and high unemployment level.

For countries like Brazil, which at the outset have a high level of0 structural unemployment, a concentrated income distribution combined with a low level of school attendance and a low average income, the expectation of repeating this performance pattern (low inflation and high unemployment) represents a serious threat. More than that, it is a non-viable alternative, both economically and politically.

This is the real challenge facing Brazil - and it gets worse when we remember that the country will be, as it has to be, firmly inserted in the international financial markets. There are no alternative policies available apart from major investment in the social area and public investment in infrastructure and technology.

The marked financial imbalance found in the public sector in Brazil, resulting from the policy strategy of a fixed exchange rate and high interest rates, is preventing these investments from being made in the volume and time necessary to create a promising outlook for the long-term situation. On the other hand, unlike other countries, the new life and political organisation in Brazil, with widespread freedom of expression and political representation, cancel out the risk of the existence of pockets of dissatisfaction or revolt that the nation's difficult social position might suggest.

Perhaps this is Brazil's most positive and promising feature. A nation with an Iberian heritage and an authoritarian culture, with a highly unstable political past, that holds prosperity and liberty as its most important aspirations. These features lead to the conclusion that Brazilian society as well as its economy are going through a period of great transformation that is both promising and yet difficult to achieve.

Additional information may be obtained in sites such as the following:
http://www.fazenda.gov.br
http://www.mdic.gov.br/
http://www.bndes.gov.br/
http://www1.bcb.gov.br/
http://www.ipea.gov.br/
http://www.mpo.gov.br/