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$Unique_ID{bob00137}
$Pretitle{}
$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{}
Title:       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.

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.)