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; 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 raising were developed for local consumption. Small factories, basically in the textile sector, started to appear in the mid 19th century.

Brazil gained prestige and progress under the reign of Pedro II. The Emperor introduced new ideas and made several reforms, opening up Brazil to the international economic system. The Emperor had to face, however, major social and economic challenges during this period. Despite an increasing urbanization and the rising of a new urban middle-class, the large rural landowners still held the real political power, since they remained unchallenged as the most important economic activity, and were rather insulated from the anti-slavery movement of the time. On the other hand, the abolitionist movement was gaining supporters rapidly, and social demands on various issues were also being debated. Pedro II found himself at the center of these tensions, leading, eventually, to the abolition of slavery in 1888, but also to the replacement of the monarchy by a republican regime in 1889. The collapse of the slave economy and the political institutional shift caused severe disruption to the economy. 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.

In the 20th century, Brazil vigorously attempted to diversify the country’s production base and to reduce the economy’s dependence on agricultural exports. For this purpose, after the 1930s, several nationalistic policies were implemented and the state gained control of key sectors in the economy. In the 1940s, the first steel factory was built in the state of Rio de Janeiro in Volta Redonda, with U.S. Eximbank financing. The leadership of the state was also crucial in introducing other new industrial sectors, leading to the expansion of important sectors of the economy from the 1950s to the 1970s, such as the automobile industry and the petrochemicals, as well as to the initiation and completion of large infrastructure projects.

During the 1970s, Brazil, like many other countries in Latin America, absorbed excessive liquidity from North-American, 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 GDP increased at an annual average rate of 14 percent between 1970 and 1980, despite the impact of the world oil crisis of the 1970s.

During the 1980s, Brazil’s economic growth slowed down, due to a worldwide recession and to the high price of oil. Moreover, although Brazil had the world’s 10th largest GDP in the early 1980s, its foreign debt ranked as the largest among developing countries. Brazil was forced into strict economic adjustments 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. Simultaneously, the country was facing an acceleration of inflation, reaching triple-digit figures. Despite several attempts to control inflation and stabilize the economy, in 1987 the government suspended Brazilian interest payments on foreign commercial debt.

The 1980s crisis signaled the exhaustion of Brazil’s “import substitution industrialization” (ISI) model and it contributed to the opening up of the country’s economy. [ISI is a policy which protects domestic industry by raising prohibitive tariffs on imports.] In the early 1990s, 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 goals were quickly achieved. In four years, almost all non-tariff barriers were eliminated and, most significantly, Brazil became one of the very few countries in the world which does not impose quotas on its imports. Furthermore, import tariffs were drastically reduced, reaching an average of 12 percent in 2002. 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, however, with the launching of the Real Plan in July 1994.

The Real Plan ended with almost three decades of high inflation and introduced a new currency unit – the Real, without the need for freezing wages or confiscating bank deposits. Consequently, the Brazilian economy started to grow again. According to the Brazilian Economic Research Institute Foundation, the accumulated inflation in the four years preceding the Plan had reached 3,500 percent and, in the year immediately before, it peaked at 5,200 percent. By May 1999, the Brazilian economy was deflating at 0.24 percent. The results in terms of economic growth were unquestionable: the GDP real growth rate stroke 17 percent between 1994 and 1997; the GDP per capita increased at an annual average of 1.9 per cent, and from May 1996 onwards the minimum wage surpassed the cost of the basic basket of products.

Privatization of state-owned enterprises received a strong thrust from the Cardoso government, involving financial institutions, manufacturers, mining companies, including some major steel producers, the Companhia Vale do Rio Doce (Rio Doce Valley Company), Brazil’s giant mining and shipping conglomerate, and a minority part of the oil company (Petrobrás) This process became a magnet for foreign direct investment (FDI). From an annual average of US$ 1.2 billion between 1992 and 1993, FDI reached US$ 21.6 billion in 1997-1998.

Brazil’s economic recovery was accompanied by a closer integration with its neighbors’ economies. On March 26, 1991, Brazil, Argentina, Paraguay and Uruguay signed the Treaty of Asunción, creating the Common Market of the South (MERCOSUL). The trade pact took effect as a customs union and a partial free-trade zone on January 1995. MERCOSUL’s main objective is to create a common market among its members, allowing for the free movement of goods, services, capital and labor. The four countries agreed upon a Common External Tariff (CET), which ranges from zero to 20 percent (2000-2001: average CET was 11 percent). The trade between Brazil and the MERCOSUL countries increased drastically between 1990 and 1999, reaching 14 percent of the Brazilian foreign trade. During this period, the intra-regional exports increased 413 percent and the imports 190 percent.

Brazil is also a signatory of other trade treaties, such as the agreements promoted by the World Trade Organization (founding member), and several other preferential trade agreements with Latin American countries, signed either bilaterally (Cuba, Andean Community) or through MERCOSUL (Chile, Bolivia, Peru). At the hemispheric level, the Free Trade Area of the Americas is under negotiation, and its conclusion has been scheduled for December, 2004.

Statistical Overview

By 2002, Brazil reached a GDP of US$ 470 billion. Brazil’s economy continues to diversify and to show signs of dynamism. Industrial production is responsible for 36 percent of economic output, agriculture for 8 percent, and services account for 56 percent (2001 estimate). Export promotion has been one of the key elements of Brazil’s trade policy, and also reflects the country’s economic dynamism. Brazil is the world’s largest exporter of several agricultural products, such as soybean, coffee, orange juice, beef, poultry and sugar, and is also a large exporter of manufactures – the exports to Canada and the United States are mostly manufactures (66% and 75%, respectively). Brazil’s imports are heavily weighted towards foods and fuels.

Agriculture

From the earliest years of the colonial era, agriculture has held center stage in Brazil’s economy. Plantation agriculture was the country’s link to the world economy. The agrarian economy was based on large holdings dedicated to a single export crop and dependent on slave labor for its production. Beginning with sugar cultivation in the 16th century, the country’s economic trends have been susceptible to a series of boom-bust agricultural cycles. Cotton, cocoa, rubber and coffee followed sugar.

The 1970s saw a general rise in the number of agricultural products exported. Soybeans outpaced Brazil’s traditional agricultural earners – coffee, cocoa, and sugar. The volume, value, and variety of semi-processed and manufactured agricultural products increased substantially, largely as a result of the government’s rural credit policy. With this measure, the agricultural sector was modernized, adopting new technologies and modern business decision making techniques.

Agriculture in the 1980s continued to play a significant role in the country’s economy, although the rural credit, as well as governmental investment, were drastically reduced due to the State’s fiscal crisis. The agriculture sector was able, nevertheless, to have a positive performance in the decade. Between 1980 and 1993 farm output grew between 3.4 percent and 4 percent per annum. With the opening of the agriculture sector to the international markets, the government introduced the Guaranteed Minimum Prices Policy, which succeeded in preserving income in the agricultural sector.

During the 1990s, the Brazilian agricultural sector was affected not only by domestic economic policies, but also by the creation of the World Trade Organization. Domestically, since 1995 agricultural policies combined the use of economic instruments, such as the rural credit and programs to support trade, with structural instruments such as agricultural and livestock research. These policies increased not only the productivity, but strengthened Brazilian agribusiness. On the international trade front, after the Uruguay Round, Brazilian agricultural exports increased by 37.35 percent (non-agricultural exports rose by 42.4 percent).With the Asian crisis at the end of the decade, both exports contracted, but agricultural exports were hit harder: a decrease of 3.8 percent, against less than 1.6 percent in the non-agricultural exports. In 1999 exports started a quick recovery.

At the beginning of the 21st century agriculture is still a strategic sector for the Brazilian economy. Brazil is still the world’s leading producer of coffee. About one third of the world’s oranges are grown in Brazil, making it the first world’s supplier. Brazil is also a leading grower of beans (namely soybean), corn, cocoa, bananas and rice. The various programs undertaken in the last two decades to promote diversification of crops have borne impressive results. The production of grains has grown consistently, including wheat, rice, corn, and particularly soybeans. Forest products, especially rubber (once a vital element in Brazilian exports), as well as Brazil nuts, cashews, waxes, and fibers, now come mostly from cultivated plantations and no longer from wild forest trees as in earlier days. Thanks to its wide climatic range, Brazil produces almost every kind of fruit, from tropical varieties in the North (various nuts and avocados) to an enormous output of citrus fruit and grapes in the temperate regions of the South. Brazil ranked second among beef production countries worldwide and its herd is the second largest in the world. The overwhelming majority of cattle – around 80 percent – are raised for beef. Dairy herds account for the remaining 20 percent.

Agro-industry is one of the main segments of the Brazilian economy. Recent estimates show that it accounts for 12 percent of GDP. During the 1970s, agro-industry contributed with 70 percent of total exports; in 2002, this share was around 40 percent. It was the robust growth in the agricultural output that helped Brazil to avoid recession during the energy crisis of 2001. At its front end, the agro-industry is closely related to the packaging industry and to agro-industrial processing, whilst upstream, it has links with the raw materials industries producing pesticides, fertilizers, animal feeds, veterinary products, and agricultural equipment. This segment also includes energy production by means of biomass, an area in which Brazil leads the world. It is estimated that the agro-industry represents, broadly speaking, more than 30 percent of the Brazilian economy.