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Brazil - The 1981-89 Period
The 1981-84 Period
In 1979 a second oil
shock nearly doubled the price of imported oil to Brazil and
lowered the terms of trade further. The rise in world interest rates
increased sharply Brazil's balance of payments problem and the size
of the foreign debt. Nevertheless, the government continued borrowing,
mainly to face an increasing debt burden, while it tried vainly
to maintain the high-growth strategy. At the beginning of the 1980s,
however, the foreign-debt problem became acute, leading to the introduction
of a program to generate growing trade surpluses in order to service
the foreign debt. The program was achieved by reducing growth and,
with it, imports, and by expanding exports.
As a result, in 1981 real GDP declined by 4.4 percent. The 1982
Mexican debt crisis ended Brazil's access to international financial
markets, increasing the pressure for economic adjustment.
The austerity program imposed by the International Monetary Fund
(IMF--see Glossary) in late 1979 continued until 1984, but substantial
trade surpluses were obtained only from 1983 on, largely as a delayed
result of the import-substitution industrialization programs of
the 1970s and the reduction in imports brought about by economic
decline. The austerity program enabled Brazil to meet interest payments
on the debt, but at the price of economic decline and increasing
inflation.
Inflation accelerated as a result of a combination of factors:
the exchange-rate devaluations of the austerity program, a growing
public deficit, and an increasing indexation (see
Glossary) of financial balances, wages, and other values for
inflation. The first two factors are classical causes of inflation;
the last became an important mechanism for propagating inflation
and in preventing the usual instruments of inflation control from
operating.
By the mid-1980s, domestic debt nearly displaced foreign debt as
Brazil's main economic problem. During the high-growth 1970s, a
significant portion of foreign borrowing had been by state enterprises,
which were the main actors in the import-substitution industrialization
strategy. Initially, they borrowed to finance their investments.
However, toward the end of the decade, with the acute shortage of
foreign exchange, the government forced state enterprises to borrow
unnecessarily, increasing their indebtedness markedly. Their situation
worsened with the sharp rise in international interest rates in
the late 1970s, the devaluations of the austerity program, and the
decreasing real prices of goods and services provided by the public
enterprises stemming from price controls. Because the state enterprises
were not allowed to go bankrupt, their debt burden was transferred
gradually to the government, further increasing the public debt.
This, and a growing disorganization of the public sector, transformed
the public debt into a major economic problem. By the mid-1980s,
the financial burden stemming from the debt was contributing decisively
to its rapid expansion.
The 1985-89 Period
During the second half of the 1980s, it became increasingly clear
that a large-scale fiscal reform, one that enabled noninflationary
financing of the public sector, was needed not only to control inflation
but also to restore the public sector's capacity to invest. Both
were essential for an economic recovery. However, political obstacles
prevented the reform from materializing. And, because inflation
had become the most visible symptom of the public-sector disequilibrium,
there were several attempts to bring inflation under control through
what came to be known as "heterodox economic shocks."
The period saw three such shocks: the Cruzado Plan (1986), the
Bresser Plan (1987), and the Summer Plan (1989).
The objective of the Cruzado Plan was to eliminate inflation with
a dramatic blow. Between 1980 and 1985, the rise in the GPI had
escalated from 86.3 percent to 248.5 percent annually. Early in
1986, the situation became desperate, prodding the implementation
of the plan. Its main measures were a general price freeze, a wage
readjustment and freeze, readjustment and freeze on rents and mortgage
payments, a ban on indexation, and a freeze on the exchange
rate.
The plan's immediate results were spectacular: the monthly rate
of inflation fell close to zero, economic growth surged upward,
and the foreign accounts remained under control. However, by the
end of 1986 the plan was in trouble. The wage adjustments were too
large, increasing aggregate demand excessively and creating inflationary
pressures. Moreover, the price freeze was maintained for too long,
creating distortions and leading to shortages of a growing number
of products. The plan could have been rescued if adjustments had
been made at crucial moments. Instead, inflation accelerated again,
and there was a return of indexation.
The two other stabilization plans amounted to renewed attempts
at bringing inflation down from very high levels. It was soon clear
that without a thorough reform of the public sector, controlling
inflation would be impossible. Both plans introduced a price freeze
and eliminated indexation, but there were differences between them,
and with the Cruzado Plan. Neither was able to address the public-sector
disequilibrium effectively. The objective of the Summer Plan, for
instance, was mainly to avoid hyperinflation in an election year.
In fact, the public-sector disequilibrium became virtually locked
in as a result of the 1988 constitution, which created advantages
for various segments of society without indicating how these advantages
would be paid for. Moreover, it transferred large portions of the
tax revenues from the federal government to state and municipal
governments, without requiring them to provide additional public
services. With less revenue and more responsibility, the federal
accounts experienced growing deficits. In addition, several subsidies
were locked into the legislation. These factors and the financial
burden of the public debt meant growing problems of public finance.
The 1980s ended with high and accelerating inflation and a stagnant
economy, which never recovered after the demise of the Cruzado Plan.
The public debt was enormous, and the government was required to
pay very high interest rates to persuade the public to continue
to buy government debt instruments (see also Trade
Policies).
Data as of April 1997
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