Countries of the World/COUNTRYS.BIN/dp/0050/00502.txt

Text File | 1991-06-24 | 28KB | 426 lines

$Unique_ID{COW00502}
$Pretitle{220}
$Title{Brazil
Chapter 3F.   Government Policy}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{percent
credit
agricultural
government
farmers
exports
loans
prices
1970s
land}
$Date{1982}
$Log{}
Country:     Brazil
Book:        Brazil, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 3F.   Government Policy

     Throughout the 1950s and the early 1960s, agriculture was handicapped by
a variety of policies designed to encourage import substitution and
industrialization. Both the overvalued exchange rate and direct controls to
ensure food supplies to domestic markets affected farmers adversely. Real
spending on agricultural research declined; policymakers made only ineffective
efforts to stabilize farm prices. The highway system was expanded into the
interior-a move that generally aided farmers. Modest sums were allocated to
agricultural credit, and fertilizer use was subsidized. Agricultural exports
received some preference. Overall, however, the government relied on Brazil's
extensive frontier to increase agricultural production. After 1964 the
military regime liberalized trade policy, eased price controls, and instituted
currency exchange reforms. The moves came in the midst of rising world prices
for some of Brazil's export crops, chiefly soybeans. At the same time,
policies favoring manufactured exports gave rise to a number of
export-oriented industries specializing in processing agricultural products.

     After the 1973 oil crisis the country faced a worsening balance of
payments coupled with growing inflation (see Growth and Structure of the
Economy, this ch.). The combination generated mixed policy results for
farmers. There was an increase in agricultural price controls in an effort to
hold down the cost of living in urban areas. At the same time, policymakers
continued to subsidize manufactured exports. By the early 1980s a number of
trends combined to make the government increasingly aware of agriculture's
importance. Poor harvests in 1978 and 1979, fears of protectionist policies
against Brazilian manufactured exports on the part of the industrialized
world, the spiraling external debt, and the costly oil import bill all
underscored the salience of agriculture to Brazil's continued economic growth.
The regime increasingly counted on that sector to augment the domestic food
supply (and thus cut inflation) and to contribute to exports (and so limit the
balance of payments deficit). By the same token, policymakers hoped that the
sugar alcohol program would reduce dependence on imported oil. Finally, the
Second National Development Plan (1980-85) emphasized agriculture's
significance in creating new jobs and alleviating poverty.

     Since the mid-1960s credit has been the government's principal policy
instrument in dealing with the agricultural sector. The Agricultural Credit
Law 4829 (1965) was designed to help finance production and marketing costs,
spur capital formation, give incentives to the adoption of improved
technology, and enhance the small- to mid-sized producer's position in the
marketplace. Implicitly, the legislation attempted to redress the imbalance
created by the policies of the 1950s that penalized agriculture. It was an
effort to compensate farmers for the price and currency controls aimed at
encouraging industrialization at the expense of agriculture. The notion was
that subsidized credit would indemnify farmers the price they paid for the
overvalued cruzeiro and the increased costs they faced through import
substitution, i.e., buying higher priced Brazilian manufactures rather than
cheaper foreign imports.

     Cheap agricultural credit subsidized farmers' purchases of a variety of
improved inputs; fertilizer, tractors, and improved seeds were the most
prominent. All of these were the subject of import-substitution policies in
the 1960s and 1970s, so agricultural credit has helped farmers absorb the
higher cost of domestically produced products. Fertilizer was a partial
exception; although domestic prices have been higher than the world market,
domestic prices have generally lagged behind the prices farmers received for
their crops, and fertilizer became relatively cheaper. In the mid-1970s,
however, fertilizer prices rose significantly, and the government responded
with a 40 percent subsidy. The number of tractors and the use of fertilizer
grew sharply in the 1960s and 1970s. The stock of tractors increased 11
percent annually (1960-77), and fertilizer use, roughly 20 percent (1965-79).
Farmers' use of improved seeds has been limited to a few crops, mainly
soybeans, wheat, and cotton, followed by lesser amounts of rice and corn.

     Nominal interest rates for agricultural loans were lower than those of
other forms of credit. In the 1970s, especially, they ran well below the rate
of inflation, and farmers enjoyed negative real rates of interest. Small
loans, in theory targeted to small farmers, ran 1 to 2 percent less than
the rates for large loans. A variety of incentives and controls encouraged the
flow of credit to the agricultural sector despite the low interest rates. A
certain percentage of commercial banks' sight deposits was earmarked for
agriculture. A substantial portion came from federal budgetary transfers. The
Bank of Brazil was slated for Cr$1.7 trillion in credits, the Central Bank for
another Cr$200 billion, and commercial banks for Cr$600 billion (see Banking
and Monetary Policy, this ch.).

     The supply of credit to farmers grew dramatically in the 1970s (see table
21, Appendix). Credit expanded some fivefold, while agricultural production
grew roughly two and one-half times. In 1975, a peak year, credit was greater
than the net value of agricultural production. Loans dropped slightly in real
terms in 1977-a combination of high inflation and monetary policies limiting
the supply of money. Livestock credit took most of the loss. Credit rose
again in 1978: livestock producers recouped their losses while crop producers
suffered. In 1979 the regime exempted production credit from restriction.
Nonetheless, inflation continued to take a substantial bite out of farmers'
credit cruzeiros. In 1981 credit in real terms was scarcely more than
two-thirds its 1975 value. In 1982 the government allocated Cr$2.5 trillion,
an increase of more than 60 percent over the nominal value of 1981
agricultural loans. Most observers, however, anticipated a decline in real
value once inflation's toll was tallied.

     Interest rates for agricultural credit were set well below market rates.
In 1979, a year in which the inflation rate was in excess of 75 percent,
production loans cost farmers 13 to 15 percent; investment loans, 13 to 21
percent; and the much used storage loans, 15 to 18 percent. Beginning in 1980
the government made sporadic attempts to bring the cost of agricultural credit
more in line with the market. There was a halfhearted effort at indexing that
brought the nominal rate on some loans to 36 percent when the annual inflation
rate was around 100 percent. The regime eventually dropped indexing in favor
of a general rise in nominal interest rates and a series of changes in the
amount of financing available to individual producers. On the 1982 crop the
nominal interest rates were in the range of 35 percent in the Northeast and
North and 45 percent in the rest of the country. Large producers were able to
finance up to half their production costs (down from 60 percent), and medium
producers could underwrite up to 70 percent of their costs (a decline from 80
percent). Small farmers continued to be eligible for 100-percent financing.

     In late 1982 there were limited national data indicating which farms get
these bargain loans. A study in the early 1970s by the United States Agency
for International Development (AID) found that small producers were
disadvantaged in the grab for credit. It was not only a matter of their
rel