Inflation in Brazil

Inflation in Brazil

Brazil, the largest country in South America and the fifth largest country in the world, has an economy that has been one of boom and bust. Its development has been determined in succession by the world demand for sugarcane, rubber, and coffee. The country began a drive to develop its vast resources and to industrialize. Nevertheless, Brazil is still a primarily an agricultural country, with severe economic problems.

From Portugal's discovery in 1500 until the late 1930s the economy relied on the production of primary products, such as sugar cane for exports. Portugal's colonial phase left strong marks of the country's economy and society, through the late 1800s. After the late 1800s, many significant and structural transformations took place, changing Brazil's economy into a more modernized industrial economy. These transformations were particularly strong up until the economy experienced difficulties. However, the country still had the potential to regain its former dynamism. In the mid-1990s it had a large and quite diversified economy, but one with considerable structural, as well as short-term problems.

Brazil has experienced one of the highest growths rated among capitalist economies in the twentieth century. This observation is particularly true for the period ranging from the early1950s to the mid-1990s, despite the crisis that lasted throughout most of the eighties (called the 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 percent in the fifties, 6.12 percent in the sixties, 8.84 percent in the seventies, 2.93 percent in the eighties, and 1.60 percent in the years 1990-95. For a comparison, one should note that the United States economy grew at a yearly average rate of 3 percent in the period 1960-92.

Throughout the 1980s and the early 1900s, Brazil suffered from both inflation and economic stagnation. This contrasts with most advanced industrial economics, 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 since both the inflation and stagnation can be interpreted as different manifestations of the same disproportion. Since 1981, Brazil's economic performance has been poor in comparison to its potential. The country's dramatic reduction in output growth, which averaged an annual GDP growth of only 1.5 percent over 1980-93 reflected its inability to respond to the events of the late 1970s and 1980s. Some events that took place were: the debt crisis, the oil shock, increases in real interest rates, and the resulting cutoff of foreign credit and foreign direct investment. These shocks, in combination with poor management of public finances and heavy state intervention, resulted in large fiscal deficits at the state and federal levels. Even if the fiscal deficits were reduced after 1990, deviating policies generalized indexation, and exchange rate management contributed to keeping inflation high and increasing. Monthly inflation skyrocketed from 3 percent in the late 1970s to 59 percent in the mid-1994.

In the 1970s and 1980s, the higher investments/GDP ratios reflect an emphasis on industries with the greater capital-intensive technologies (such as capital goods production) and a large amount of investment in infrastructure projects, which use up a huge amount of capital relative short-term output. Also to be noted is the decline of investments in the 1980s and the early 1990s, which is even clearer when measured in constant 1980 prices.

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 total sales was 62 percent in transport equipment, 64 percent in pharmaceuticals, 100 percent in tobacco, 60 percent in printing and publishing, 72 percent in chemicals, 54 percent in beverages, and 81 percent in rubber. The average for the industry as a whole was 52 percent.

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 percent of total credit, the rest going to the public sector. In 1990 this composition had changed significantly, as the private sector received only 47 percent and the public sector, 53 percent. 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 percent 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 percent in 1980 to more than 19 percent in 1989.

The country's income distribution, already poor worsened drastically in the 1980s. 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