$Unique_ID{COW00503} $Pretitle{220} $Title{Brazil Chapter 3G. Banking and Monetary Policy} $Subtitle{} $Author{Darrel R. Eglin} $Affiliation{HQ, Department of the Army} $Subject{percent bank brazil billion credit foreign exports inflation financial imports} $Date{1982} $Log{Port of Santos*0050301.scf } Country: Brazil Book: Brazil, A Country Study Author: Darrel R. Eglin Affiliation: HQ, Department of the Army Date: 1982 Chapter 3G. Banking and Monetary Policy Brazil's financial system expanded and broadened with the rapid growth of the economy after 1920; through its effective mobilization of domestic and foreign resources, it contributed to the rapid growth. The economy's protracted and substantial inflation, however, led some observers to hypothesize that price instability favored the high rates of economic growth. Chronic inflation was endemic. Domestic prices rose continuously after 1933. Since 1950 the annual rate of inflation has ranged between a low of 11 percent in 1952 and 110 percent in 1980. Inflation was relatively moderate, averaging 17 percent a year until 1958, after which it began to soar, fueled in part by large public sector deficits arising mainly from transportation subsidies. Reforms in the period 1964-67 obviously did not correct the problems. Some economists contended that the changes, which created a highly unusual financial system, were a fundamental cause of the inflation raging in the early 1980s. Banking The banking system of the early 1980s dated from the reforms introduced shortly after the military coup of 1964. In December 1964 the National Monetary Council (Conselho Monetario Nacional-CMN) was established to formulate the country's credit, monetary, and foreign exchange policies, replacing an earlier policy body. The CMN was headed by the minister of finance, and its members initially were other economic ministers and the heads of major government banks. By the early 1980s the council had been enlarged to 21 members, including more than one-third from the private sector. The CMN issued annual monetary budgets setting forth changes in major money variables expected in the coming year. The same law that established the CMN also created the Central Bank of Brazil, which assumed functions previously spread between the Bank of Brazil and other government financial agencies. The Central Bank was governed by a board of directors appointed by CMN. The powers of the Central Bank included issuance of currency as authorized by CMN; control of money; acceptance of deposits from banks, both required and voluntary; rediscounting; control of credit; control of foreign capital; and purchase and sale of securities issued by itself, the federal government, and federal enterprises. It also supervised other banks and administered several Special Funds created by the federal government. The Central Bank was under the Ministry of Finance, and its president was a member of CMN. Its independence was restricted. The Bank of Brazil, created in 1808, was the country's largest bank, and by some measures it was the largest commercial bank in the world. In the early 1980s the federal government owned 75 percent of its shares; other investors, including private concerns, owned the remainder. Its shares were actively traded on the stock exchange. It had an extensive branch network in Brazil and abroad. The Bank of Brazil functioned partly as a commercial bank, accepting deposits from and making loans to the public, and as the financial agent of the national treasury, it received tax receipts. It made payments and transfers under the federal budget, paid the public debt, enforced minimum prices for farm products, provided the bulk of rural credit, carried out foreign exchange and trade controls, served as a check clearinghouse, received deposits of government agencies, and held voluntary reserves of the commercial banking system. The bank also administered some of the Special Funds. The law establishing the Central Bank did not clearly define the relative autonomy and limits of action between it and the Bank of Brazil. In addition, the latter was designated executive agent for the Central Bank. A special account was established between them that became a means of transferring Central Bank funds on a large scale to the Bank of Brazil for lending through government programs. In effect there was a sharing of monetary authority between the two banks. The Central Bank lacked the independence to control many variables granted many central banks. The source of funds for the Central Bank and the Bank of Brazil was large and varied. Deposits of other banks, compulsory and voluntary, were kept with them. Until 1980 proceeds of the sale of new federal debt, which was growing although the federal budget showed a surplus after 1972, accrued to the two banks and not to the treasury. In addition, funds were received from the treasury as transfers and from proceeds and taxes collected for the many Special Funds created under various government programs. In 1979 there were more than 200 Special Funds of varying importance. The Bank of Brazil also held deposits of the public as part of its commercial banking, but the importance of these deposits declined as a source of funds in the 1970s. The National Economic and Social Development Bank (Banco Nacional do Desenvolvimento Economico e Social-BNDES) was the primary source of long-term industrial financing. It was created in 1952 (as the BNDE) as an autonomous federal bank to encourage domestic manufacturing, especially heavy industry and projects in the North and Northeast. In 1967 it became a mixed corporation with private investors. Loans and equity investments went to both the public and the private sectors. In 1978 the bank had four almost completely owned subsidiaries and worked through 51 other development and investment banks acting as agents. Sources of funds included certain earmarked tax receipts, the resources of one of the Special Funds, allocations from the federal budget, and borrowing through the issuance of bonds, some of which were sold in foreign countries. Between 1964 and 1966 a system to finance housing was established. It consisted of a bank to act as central bank for the system, the federal savings bank, five state savings banks, and a number of credit societies and private savings and loan associations. The system's main source of funds included the proceeds of an important Special Fund as well as savings deposits of numerous individuals. In 1978 the number of dwellings financed by the system totalled 340,000 and accounted for 22 percent of all loans to the private sector. The system produced net savings that were channeled to the Central Bank and the Bank of Brazil for lending through the purchase of government securities. There were a large number of additional banks, including a few federal (largely regional), several state, and many private. State banks engaged in commercial, investment, and/or development banking. Private financial institutions were specialized, usually conducting commercial banking, investment banking (largely working capital), finance companies (for consumer durables), and insurance companies. A number of foreign banks conducted commercial operations in the country. The number of commercial banks and branches proliferated in the 1950s and 1960s. Policies in the 1970s favored consolidation, and the number of commercial banks, both public and private, shrank through mergers and otherwise. A conglomeration process also occurred in which large financial companies often included a commercial and an investment bank, a finance company, an insurance business, a foreign trade company, and institutions to channel investments into projects where there were incentives, such as in the Amazon and the Northeast. Ties between financial and industrial conglomerates developed. The concentration in the 1970s suggested to some observers a decline in competitiveness in financial activities and perhaps some misallocation of scarce resources. Another important measure initiated after the military coup was monetary correction or indexing. Indexed treasury bonds were introduced, the values of which were periodically adjusted for changes in wholesale prices, to restore confidence in the atrophied capital markets and to permit funding of fiscal deficits without expanding the money supply. Monetary correction was applied to taxes in order to halt the benefit of late tax payments in an inflationary situation and to avoid the tax increase arising from the escalation of prices. Monetary correction spread to numerous additional elements, such as wages, savings accounts, and some loans. The theory of indexing was to provide a complete, automatic, and objective adjustment of the values of approved assets for past inflation. In practice, the indexing formula became subject to manipulation for policy purposes. The periodicity of adjustment was altered for different conditions and goals. The formula was changed to include official projections of future inflation. Officials made other changes. Between 1972 and 1978 indexed treasury bonds lost 17 percent of their value because of the formulas used. In 1978 monetary correction understated inflation by 6 percent. In 1980 the authorities announced that monetary correction would amount to only 45 percent regardless of the rate of inflation, which turned out to be 110 percent. The preannounced limits on monetary correction were dropped in 1981 after the failure of the previous year. The changes in indexing have had uneven impacts over time on various economic activities. Between 1966 and 1970 three compulsory savings funds were established. Their intent varied, but in general they forced savings from which employees could draw for various purposes. In a sense they provided supplemental benefits in case of unemployment, sickness and, particularly, retirement. The funding varied considerably but usually consisted of payments by employers based on payroll, sales, and other formulas. The federal housing bank, the federal savings bank, and the Bank of Brazil each administered one of the funds. The funds were charged with dual responsibilities-to the worker owning the account and to national development-an apparent conflict. These funds grew substantially during the 1970s, in 1978 amounting to nearly one-fifth of the country's total financial assets and one-tenth of GDP. The accounts in the funds were indexed and earned low fixed interest. Passbook savings accounts, limited to individuals, were an important source of investable funds. These accounts were indexed and earned 6 percent a year. A very large number of families held such accounts. About 70 percent of the accounts were in federal or state savings banks, and 30 percent were held in private savings and loan institutions that were part of the housing finance system. The reforms since 1964 have had the effect, perhaps unintended, of increasing the importance of the public sector in the financial system while reducing the funds available for lending at market rates by both private and public sector banks. At the beginning of 1979 outstanding loans to the private sector were Cr$2.1 trillion (approximately US $100 billion). Direct lending by the Central Bank, the Bank of Brazil, and the housing finance systems-the first-stage institutions-amounted to 30 percent, and they provided an additional 21 percent to other institutions for further lending, thus accounting for 51 percent of the funds for loans to the private sector and 44 percent of the funds lent by other institutions. Virtually all long-term lending, except for housing by private savings and loan institutions, was controlled by the first-stage public banks. The government has long used credit incentives to promote economic activity in certain sectors and geographical areas. After 1964 many credit incentives were added, and the responsibilities of specific banks further narrowed the distribution of credit. By the late 1970s nearly all of the direct and indirect lending by first-stage institutions was directed toward specific sectors and purposes, including 95 percent of their lending to commercial banks. Most of the direct lending was at nominal interest rates that amounted to a subsidy. The first-stage institutions provided the major source for credit subsidies. In the late 1970s commercial banks had to earmark 27 percent of demand deposits for loans at subsidized rates to agriculture and small-and medium-scale industries. The reforms and other measures produced a handicapped financial system for the efficient mobilization of scarce financial resources and for effective control of money variables. The Central Bank and the Bank of Brazil became the major sources of funds that were lent under selective credit programs and often at subsidized rates. In effect, commercial banks largely became retailers of funds from first-stage institutions. A major segmentation of financial markets occurred. A declining portion of funds was available for lending at interest rates set in an open market. The interest rates set in the open market increased, making borrowing more costly to the few that had to rely on this kind of credit and adding to the inflow of foreign funds, which increased the foreign debt. As inflation increased, it became more imperative for business to obtain subsidized loans. The use of subsidized loans increased, fueling inflation. The subsidies were financed primarily by the Central Bank and the Bank of Brazil through the monetary budget rather than appearing as a fiscal or budget deficit, which would be the case in most countries. These two institutions had conflicts of responsibilities in their sharing of monetary authority. Their responsibility for control of credit clashed with their responsibilities to provide open-ended credit for several programs. In the 1970s subsidized credit went largely to agriculture, which was given increasing priority after the first oil crisis, and to a lesser extent to manufactured exports and industry. Rural credit, the bulk provided by the Bank of Brazil, increased 4.5 times between 1969 and 1976 while agricultural production approximately doubled (see Government Policy, this ch.). In the years 1975-77 agricultural credit amounted to approximately the value of agricultural output. Some critics contended that one-fifth to one-third of agricultural credit was diverted to other uses. The subsidy in the interest rate was large; rates averaged a negative 40 percent in 1978. The subsidy increased with the rise of inflation in 1979 and 1980. By 1979 the total subsidy involved in credit to agriculture and other sectors was estimated at about 10 percent of GDP. Policies After 1974 and particularly after 1976, the monetary authorities applied a contractionary money policy to restrain aggregate demand. Limiting monetary growth proved exceedingly difficult. Conventional tools restricted commercial credit. Between 1974 and 1978 compulsory reserve requirements increased from 15 percent to 32 percent of demand deposits. At the end of 1978 only 40 percent of demand deposits in commercial banks were available for unrestricted lending. Officials attempted to sterilize the expanding money base caused by capital inflows and increasing subsidized credit. The effect, however, was to limit the funds for unrestricted lending and to raise market interest rates, sucking in additional foreign capital. Control of credit creation by federal financial institutions proved elusive. The Bank of Brazil was the largest source of credit expansion, largely resulting from extension of subsidized rural credit but also including loans to industry and to stimulate exports. As the rate of inflation increased after 1973, the value of repayments shrank, requiring increasing credit just to maintain the real level of lending programs. The subsidy in nominal interest rates of official lending also increased with inflation. In 1979 a change of strategy was announced to combat rising inflation, which amounted to 43 percent in 1978. A temporary freeze was placed on retail prices, the liquidity of the commercial banking system was decreased sharply (thereby raising market interest rates), and restrictions were imposed on the inflow of foreign funds. Lending by the Bank of Brazil to agriculture increased, partly because all limits on production credits were removed. A small increase was made in the subsidized interest rates for agriculture. In August wage adjustments were changed from annual to twice yearly, based on a new consumer price index (INPC) computed by the government statistical agency. Adjustments were above the rate of inflation for low-wage workers and less for higher paid employees. In September ceilings were placed on commercial interest rates, which reduced real returns. The shift of the public away from savings and holding financial assets accelerated; they turned toward real property, consumption, and hoarding of goods. Commercial credit was rationed by banks, not by cost; big firms with financial ties appeared to be favored. Conditions deteriorated, and inflation for 1979 was 80 percent. In December 1979 a sweeping package of economic measures was announced, which came to be called the "Christmas package." The objective was to encourage capital inflows to the private sector and to rationalize trade and interest rate policies. The cruzeiro was devalued by 30 percent to make up for a lag in mini-devaluations. Interest rates on official lending became subject to partial indexing, increasing borrowing costs, and reducing implicit subsidies. Controls on foreign capital were removed. For 1980 the monetary budget projected monetary expansion at 50 percent, close to the inflation target of 45 percent. Officials pledged to control credit expansion. Important institutional changes were made. The voluntary reserves of commercial banks deposited with the Bank of Brazil were transferred to the Central Bank, significantly reducing the former's resources for autonomous lending. Agricultural lending still had no limit, but excess lending to agriculture had to be compensated by lower lending to other sectors to maintain overall credit targets. The shift of reserves provided the Central Bank direct control over credit expansion by private banks. Banks were required to report activities weekly to the Central Bank to permit it to make timely adjustments in the money supply. In January 1980 the government announced that monetary correction would be limited to 45 percent and devaluations to 40 percent regardless of the amount of inflation, which was rising monthly. The intent was to break inflationary expectations. A consequence was to undo the attempt to adjust interest rates upward for administered credit programs. The unlinking of these rates to changing prices again made them nominal rates. The limits on monetary and exchange corrections appeared to stimulate rather than dampen demand, partly the result of the continuing shift by individuals and institutions away from financial assets toward real property and consumption. Inflation rose to 110 percent in 1980. In late 1980 and early 1981 the government reversed many of the policies of the previous two years. Full monetary and exchange corrections were restored for 1981. Interest rates on commercial loans were freed. Working capital loan rose to 150 percent a year at one point but eased back to about 125 percent. A restrictive monetary policy slowed credit expansion. Some progress was made toward consolidating the monetary and fiscal budgets, and the public sector deficit was reduced to 6.2 of GDP compared with 9.1 percent in 1980. The reduction was mainly achieved by cuts in direct and indirect subsidies in the monetary budget and less spending by public sector enterprises. The country dropped into a severe recession, and inflation fell to 95 percent in 1981. By 1982 some of the expansionary bias in the financial system had been removed. Policymakers had more current information and control of fiscal and financial institutions. It was not clear whether enough changes had been made to cure the country's chronic inflation, however. The Bank of Brazil still retained access to Central Bank resources through its special account. Authorities continued to focus on outstanding credit balances rather than interest rates in administrative credit programs, the latter causing greater subsidization in periods of growing inflation. The Central Bank did not appear to have the independence that some economists believed necessary before inflation could be controlled. Foreign Trade Throughout the country's long history of development, foreign trade has played a critical role. In 1981 exports amounted to only 8 percent of GDP, and imports just slightly less. The large domestic market and the variety of economic activities dwarfed those associated with foreign trade. Nonetheless, the goods imported were almost all essential to the functioning of the economy. Exports were imperative to continue payments on foreign loans needed to further economic development. The low ratio of foreign trade to national output belied its pivotal position. The population and its prosperity remained as critically linked to world markets in the 1980s as the 1580s. Economic development and diversity had not eliminated dependence on the rest of the world. Officials recognized foreign trade's key role. More mechanisms existed to influence the flow of international goods and payments than were applied in other sectors. High tariffs and numerous additional barriers, including federal trading companies and banking regulations requiring prepayment of deposits for imports, controlled the influx of foreign goods. Controls changed frequently. After 1974 the general policy was to restrict imports as the balance of payments constraint became more severe, although liberal treatment was accorded priority imports. Exports were encouraged under a variety of programs with a multitude of acronyms. The extensive export incentives caused significant revenue losses to the budget and to the added burden of subsidized credit in the financial system. The December 1979 Christmas package had devalued the cruzeiro by about 30 percent to reduce its overvaluation. To prevent windfall profits to producers, an ad valorem tax of up to 15 percent was levied on basic agricultural exports, such as coffee and soybean products. Soybean exporters resisted by withholding their products, and the tax was withdrawn by mid-1980. The Christmas package eliminated most tax subsidies for manufactured exports and prior deposits for imports. The "law of similars," which protected domestic products from similar imported ones, was abolished. Other measures were included. The package had been drafted for gradual implementation but was introduced quickly because of deterioration in the balance of payments caused in part by oil price increases. The overall intent of the package was to liberalize the foreign trade regime somewhat and to return to the more outward orientation of the economy of the early 1970s. In the early 1980s officials announced a 40 percent ceiling on exchange-rate devaluation during the year regardless of the amount of inflation. The monetary correction for inflation was also divorced from actual price movements (see Policies, this ch.). The ceiling on exchange rate adjustment was necessary to sustain the required capital inflow after the maxi-devaluation, but because inflation was 110 percent compared with the exchange adjustment of 40 percent, the currency became overvalued, thereby hurting exports. In 1981 officials returned to full adjustment of the exchange rate to inflation through mini-devaluations. Some export subsidies were restored, particularly those that committed industries to long-term export goals (especially the automobile and other consumer durable industries). Also in 1981 export financing was exempted from credit limits, subsidized credits for export production were made available, and controls over imports were tightened. Imports In 1981 imports amounted to US $22.1 billion. Fuel, essentially crude oil but including some coal, cost US $11 billion, almost half of total imports. Imports of intermediate materials other than fuels amounted to US $5.7 billion; capital equipment and materials, US $4 billion; and consumer and miscellaneous goods, US $1.4 billion. In 1980 imports were US $23 billion and in 1979 were US $18.1 billion. In the latter year, imports of consumer goods were primarily wheat and cooking oils and fats; imports of intermediate materials were largely chemicals, metals, and a variety of other products, including fertilizers and plastics; capital goods imports were essentially machinery because the bulk of transportation equipment was produced domestically (see table 23, Appendix). In 1980 petroleum imports amounted to US10.2 billion, compared with US $4.5 billion in 1978. The source of imports was strongly influenced by oil purchases. In 1980 Iraq ranked second (US $2.8 billion) as the source of total imports, Saudi Arabia third (US $2.1 billion), Kuwait seventh (US $776 million), Iran ninth (US $734 million), and Venezuela eleventh (US $570 million). The war between Iraq and Iran forced Brazil to scurry for a variety of sources of crude oil in 1981 and 1982. The United States has long been Brazil's major source of imports, accounting for 18 percent in 1980 (US $4.1 billion). Other major sources of imports in 1980 were West Germany (US $1.6 billion), Japan (US $1.1 billion), Canada (US $814 million), Argentina (US $757 million), and France (US $665 million). Exports In the 1970s the need to expand exports became even greater in order to pay for oil price increases and the growing debt service. Exports rose from US $2.7 billion in 1970 to US $23.3 billion in 1981, an average increase of over 21 percent a year. Even in the recession year of 1981 exports increased by nearly 16 percent compared with 32 percent in 1980. Most of the expansion during the 1970s came in manufactured goods, which rose from US $366 million in 1970 to US $6.1 billion in 1979 (an increase of nearly 37 percent a year). In 1979 exports of agricultural products were 40 percent of the total, manufactured goods slightly over 40 percent, minerals 9 percent, and semiprocessed and miscellaneous items accounted for the remainder. Some classifications placed manufactured exports above 50 percent because of the processing of various agricultural and mineral products. Coffee, including beans and instant, remained the country's largest export, accounting for 15 percent of total exports compared with over 73 percent in the 1950s. Soybeans, including meal and oil, were the other major agricultural export (see table 24, Appendix). Iron ore and pellets accounted for most of the mineral exports. Exports of manufactured goods included a wide range of products, of which automobiles and trucks were the most important. In 1980 exports of military equipment exceeded US $1 billion and were projected to reach US $2 billion in 1983 (see Defense Industry, ch. 5). By the late 1970s Brazilian construction firms were engaged in large projects in developing countries, particularly in Africa and the Middle East (see Foreign Relations, ch. 4). During the 1970s Brazil greatly increased the number of countries it traded with, as new markets were sought for the growing exports of manufactured products. About 26 percent of Brazil's exports in 1979 went to a large group of countries, mostly developing nations. Nonetheless, Brazil's exports remained heavily concentrated among industrialized countries. In 1979 the United States was the largest market (US $2.9 billion), followed by West Germany (US $1.1 billion), Japan (US $887 million), and the Netherlands (US $782 million). In fact, in that year the United States, Canada, Western Europe, and Japan (comprising most of the membership of the Organization for Economic Co-operation and Development-OECD) purchased 60 percent of Brazil's exports. Among Brazil's 10 largest export markets, only Argentina (US $718 million), Chile (US $363 million), and Poland (US $434 million) were not OECD members. In 1979 the Soviet Union bought US $226 million of Brazil's exports. [See Port of Santos: Port of Santos. Courtesy WORLD BANK PHOTO/Tomas Sennett] Balance of Payments Brazil often has had balance of payments difficulties. All too frequently since the 1800s, difficulties stemmed from a large foreign debt incurred to avoid domestic adjustments. The pattern was similar during the 1970s but not identical. In the past the fundamental problem was the collapse of the foreign price for an export commodity on which the country was overly dependent. In the 1970s the huge price increases for crude oil sharply shifted Brazil's terms of trade for the worse. Exports exhibited strong growth and diversity. The government took numerous steps to curtail imports and to make major adjustments in the economy. Foreign borrowing increased, however, to maintain relatively high rates of economic growth and to facilitate structural changes in the economy. By the early 1980s the country again faced serious balance of payments constraints; international bankers were worried about repayments and slowed further loans, while export markets were becoming more protectionist because of a worldwide recession. Officials usually desired more exports than imports because of the normal outflow of payments on service accounts. The trade balance in 1970 showed an excess of exports over imports of US $232 million. In 1974 the trade balance turned sharply negative by US $4.7 billion. Restriction of imports and the growth of exports had reduced the imbalance to a negative US $2.8 billion by 1980. In 1981 an export surplus of US $1.2 billion was achieved because of government policies that further restricted imports, encouraged exports, and induced a domestic recession. Meanwhile, foreign indebtedness had been increasing. The gross external medium- and long-term indebtedness rose from US $5.3 billion in 1970 to US $53.8 billion in 1980. Interest payments expanded quickly on this mounting debt, from US $234 million in 1970, to US $6 billion in 1980, and US $9.2 billion in 1981. Largely because of growing interest and oil payments, Brazil's current account balance deteriorated from a deficit of US $1.7 billion in 1973 to US $7.1 billion in 1974. By 1980 the current account deficit exceeded US $12 billion (see table 25, Appendix). Brazil's economy and current account remained very sensitive to crude oil prices and international interest rates. The world monetary system was crumbling in the early 1970s when the first oil crisis came. The international financial system was suddenly flooded with petrodollars, i.e., the excess liquid assets of the main oil exporters, largely in the Middle East. The international banking community began recycling the petrodollars through loans. The quick increase in liquidity relaxed bankers' usual caution-too much so, according to critics. By the early 1980s a few jolts had shaken world bankers, and they began to reexamine their exposure in various countries. In 1981 and 1982 Poland, Mexico, and Argentina, all large borrowers, came close to defaulting on their international obligations. Poland was behind on payments when a new schedule was negotiated. Other countries also had to reschedule their debts. Mexico, which surpassed Brazil as the largest Third World debtor, in 1982 had to impose drastic emergency measures to retain control of its international financial situation. Brazil easily borrowed abroad in the 1970s because of the high liquidity in the international financial system. Credits were obtained for numerous eco omic projects from suppliers and from international bankers seeking financial returns. Brazil even was able to provide some aid and credit to other developing countries. In some years Brazil's capital inflow was higher than needed to balance foreign currency payments, allowing a buildup of reserves. Brazil's high credit standing permitted officials to negotiate long-term repayment schedules rather than have a large part of the debt on short-term. Nonetheless, a day of reckoning was approaching, and the second oil crisis, of 1979-80, speeded it up. High international interest rates in the early 1980s further hastened the day. Each year, more had to be borrowed just to meet payments on earlier loans unless Brazil suddenly developed new earning power for foreign currencies, which had not happened by late 1982. After the mid-1970s officials slowly restrained new and stretched out in-progress development projects to lessen the need for foreign borrowing. Even so, in 1980 net interest payments were US $6 billion, and amortization of principal was almost US $7 billion. That year debt service amounted to 65 percent of earnings from exports, and debt service and oil imports exceeded total commodity exports. In 1981 Brazil's new medium- and long-term borrowing was above US $17 billion, and net interest payments amounted to US $9.2 billion. The total medium- and long-term external debt stood at US $61.4 billion at the end of 1981. In 1982 the international banking community turned more cautious toward Brazil. By mid-year, arranging the remaining credits to balance international payments had become extremely difficult. By late in the year, Brazil was reportedly in desperate straits, although the information was fragmentary and consisted mostly of newspaper articles. Government authorities ceased publishing the status of the country's international reserves, which by November reportedly were less than one month's imports, or in the neighborhood of US $1 to 2 billion. Late in the year the country also sold gold to obtain foreign currencies. The short-term debt was unknown, but bankers suggested figures in the range of US $11 to US $18 billion. Some bankers related Brazil's rapid increase of short-term debt to that of Mexico before its crisis. Rumors abounded late in the year that Brazil was negotiating a large credit from the IMF and perhaps the United States. Although the severity of the situation was not known, Brazil was in serious financial difficulty. Brazil's immediate future was one of austerity, largely because of balance of payments difficulties. How austere depended in part on the deterioration in the balance of payments and the country's debt profile during 1982. Even before mid-1982 officials indicated substantial planned cuts in imports, public sector expenditures, and growth rates to meet scheduled debt service through the mid-1980s. If the situation were as bad as news accounts reported in late 1982, the next several years would probably be a period of very low growth, severe pressure on wages, elimination of subsidies and a straining to export as much as possible. How labor and other elements in the society would react to austerity and the movement toward democracy in the political system remained a major question. * * * Much has been written on Brazil's economy; it is an interesting and challenging subject for economists. Celso Furtado's The Economic Growth of Brazil and Werner Baer's Industrialization and Economic Development in Brazil provide valuable background material. William Tyler's The Brazilian Industrial Economy and John Dickenson's Brazil supply data and text covering varying portions of the 1970s with particular emphasis on industrialization. Mario Henrique Simonsen, a former planning minister, has written an unusually informative, brief survey of the period since the 1950s, emphasizing the financial system, "Brazil-Economic Outlook-Prospects for the Eighties." Doing Business in and with Brazil by Paul Garland provides valuable material on the various government entities and descriptions of the many incentive and other programs. The Financial Times (London) usually publishes annually (often in November) a several-page survey of Brazil. The United States Department of Commerce's Foreign Economic Trends and Their Implications for the United States: Brazil provides important current statistics and information on recent policy measures. Of course, the Brazilian government's annual statistical yearbook, Anuario Estatistico do Brasil, supplies a mass of statistics, although not all figures are as up-to-date as one would like. Edward Schuh's The Development of Brazilian Agriculture describes that sector at about 1970; Solon Barraclough's Agrarian Structure in Latin America, though limited to the 1960s in most of its data, remains useful. Caio Prado's The Colonial Background of Modern Brazil and Furtado's The Economic Growth of Brazil provide excellent background reading on agricultural development. The publications of the Foreign Agricultural Service of the United States Department of Agriculture deal with current agricultural production, trade, and policy issues. For information on government agricultural policy, the reader might consult Richard Meyer et al.'s "Rural Capital Markets and Small Farmers in Brazil, 1960-1972," Paulo de Araujo and Meyer's "Agricultural Credit Policy in Brazil," and William Saint's "Farming for Energy." Albert Berry and William Cline, in Agrarian Structure and Productivity in Developing Countries, have a useful section on landholding and productivity in Brazil. Manuel Correia de Andrade's The Land and People of Northeast Brazil, updated and translated into English, is a detailed portrait of agriculture in the country's poorest region. The Agricultural Economy of Northeast Brazil, by Gary Kutcher and Pasquale Scandizzo, is likewise valuable. (For further information and complete citations, see Bibliography.)