Brazil - Growth with Debt, 1974-80
Growth with Debt, 1974-80
Brazil suffered drastic reductions in its terms of trade as a result
of the 1973 oil shock. In the early 1970s, the performance of the
export sector was undermined by an overvalued currency. With the
trade balance under pressure, the oil shock led to a sharply higher
import bill. Under such circumstances, a prudent course of action
would have been to devalue the cruzeiro and to adopt growth-reducing
policies in order to contain imports. However, Brazil opted to continue
a high-growth policy. Furthermore, it adopted renewed strategies
of import-substitution industrialization and of economic diversification.
In the mid-1970s, the regime began implementing a development plan
aimed at increasing self-sufficiency in many sectors and creating
new comparative advantages (see Glossary). Its main components were
to promote import substitution of basic industrial inputs (steel,
aluminum, fertilizers, petrochemicals), to make large investments
in the expansion of the economic infrastructure, and to promote
This strategy was effective in promoting growth, but it also raised
Brazil's import requirements markedly, increasing the already large
current-account deficit. The current account (see Glossary) was
financed by running up the foreign debt. The expectation was that
the combined effects of import-substitution industrialization and
export expansion eventually would bring about growing trade surpluses,
allowing the service and repayment of the foreign debt.
Thus, despite the world recession resulting from other countries'
adjustments to the oil shock, Brazil was able to maintain a high
growth rate. Between 1974 and 1980, the average annual rate of growth
of real GDP reached 6.9 percent and that of industry, 7.2 percent.
However, the current-account deficit increased from US$1.7 billion
in 1973 to US$12.8 billion in 1980 (see table 5, Appendix). The
foreign debt rose from US$6.4 billion in 1963 to nearly US$54 billion
Brazil was able to raise its foreign debt because, at the time,
the international financial system was awash in petrodollars and
was eagerly offering low-interest loans. By the end of the 1970s,
however, the foreign debt had reached high levels. Additionally,
the marked increase of international
interest rates raised the debt service , forcing the country
to borrow more only to meet interest payments . Productive capacity,
exports, and the substitution of imports in various sectors expanded
and became more diversified. However, the expected impacts on Brazil's
current account were not to materialize until the mid-1980s.
Another feature of the 1974-80 period was an acceleration of inflation.
Between 1968 and 1974, the rate of inflation had declined steadily,
but afterward the trend was reversed. From 16.2 percent a year in
1973, the growth rate of the general price index (GPI--see
Glossary) increased to 110.2 percent a year by 1980.
Data as of April 1997