Is Brazil's Economy Coming Back to Life?

By Sweetwood, Diane M. | Multinational Business Review, Spring 2002 | Go to article overview

Is Brazil's Economy Coming Back to Life?


Sweetwood, Diane M., Multinational Business Review


For the past three decades, Brazil has been pummeled with financial difficulty. Brazil's economy experienced Incredible inflation rates up to 3000%, causing the nation to fan Into enormous foreign debt This manuscript examines the causes of the Brazilian financial crisis, including the monetization of the public sector's fiscal deficit, and both fiscal and Balance of Payment weaknesses. The Real Plan Is illustrated as the successful stabilization program to end inflation, along with the intervention of the IMF. These attempts have enabled Brazil to set up policies to control Inflation, thus encouraging employment and economic growth. Ultimately, these policies are making Brazil's financial future a path of recovery rather than a continued path of destruction.

Brazil, a third world country, is the world's fifth largest nation in physical size, and has the ninth largest economy. It seems more like a continent than a country and occupies nearly half the land mass of South America. It is known for being the world's largest tropical country, being the only Portuguese-Speaking Latin American country, one of the world's largest exporters of agricultural products, and also for its incredibly high interest rates.

Surprisingly, Brazil has experienced one of the highest growth rates among capitalist economies in the 1900's, particularly between the early 1950's through the mid 1990's, despite a crisis that lasted most of the 1980's and early 90's. The yearly GDP growth rates have averaged 7.15% in the fifties, 6.12% in the sixties, 8.84% in the seventies, 2.93% in the eighties, and 1.6% from 1990-1995. In comparison, the United States has averaged a 3% growth rate from 1960-1992. (Randall, 1999).

The main cause for this incredible growth was industry and prevailing technology. Most of the industrial growth occurred in the area of transport equipment, pharmaceuticals, tobacco, printing and publishing, chemicals, beverages and rubber. The yearly average growth rate for the industrial sector over the past 40 years is 8.5%. The automobile industry was also a significant contributor to the nation's growth. This occurred primarily during the chaos of inflation and was aided by tax breaks, ending of banned imports, and the re-launching of the Volkswagen Beetle. Brazil's automobile industry overtook Italy and Mexico in 1993 to become the tenth largest producer of cars in the world. (Library of Congress, 1997).

Brazil's major trading partners are the United States, Germany, Switzerland, Japan, the United Kingdom, France, Argentina, Mexico, and Canada. Despite its vast resources, uncharacteristic growth and technological advancements, Brazil's economy still struggles. It entered a recession in 1989 and experienced exponential inflation rates that grew as high as 3000%. With so many positives on its side, how did Brazil's economy sink so low? The following sections will discuss the causes of Brazil's incredible financial crisis, the policies that helped to stabilize the economy, the current financial situation in Brazil, and its link to the United States.

CAUSES

Inflation

In the 1980's, Brazilians were convinced that the enormous foreign debt was at the heart of their economic difficulties. However, ten years later other nations who were in the same debt position managed to reduce inflation to manageable levels and to grow again. Brazil did not, and thus it became obvious that some of Brazil's economic issues were internal.

The root of Brazil's inflation problem is the monetization of the public sector's fiscal deficit. When debts are not financed by borrowing either from abroad or domestically, they must be covered by the creation of money. This caused a huge surge in the inflation rate between 1977-1994. It is important for non-Brazilians to grasp the significance of double-digit inflation for forty years, with triple and even quadruple inflation in the 1980s. By the late 1980s, annual rates of inflation were almost meaningless, and Brazilians characterized inflation by its monthly rate, which in the early 1990s was over 35 percent. …

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