Brazil - Import-Substitution Industrialization, 1945-64
Import-Substitution Industrialization, 1945-64
A review of the evolution and structural changes of the industrial
sector since the end of World War II reveals four broad periods.
The postwar period to 1962 was a phase of intense import substitution,
especially of consumer goods, with basic industries growing at significant
but lower rates. The 1968 to 1973 period was one of very rapid industrial
expansion and modernization (between 1962 and 1967, the industrial
sector stagnated as a result of adverse macroeconomic conditions).
The 1974 to 1985 phase was highlighted by import substitution of
basic inputs and capital goods and by the expansion of manufactured
goods exports. The period since 1987 has been a time of considerable
At the end of World War II, political and economic liberalism were
reintroduced in Brazil.
Getúlio Dorneles Vargas (president, 1930-45, 1951-54)
was overthrown, democratic rule was reestablished, and the foreign-exchange
reserves accumulated during the war made possible a reduction of
trade restrictions. However, trade liberalization was short-lived.
The overvalued foreign-exchange rate, established in 1945, remained
fixed until 1953. This, combined with persistent inflation and a
repressed demand, meant sharp increases in imports and a sluggish
performance of exports, which soon led again to a balance of payments
(see Glossary) crisis.
Pessimistic about the future of Brazil's
exports, the government feared that the crisis would have a
negative impact on inflation. Consequently, instead of devaluing
, it decided to deal with the crisis through exchange controls.
In 1951 the newly elected government of Getúlio
Vargas enforced a recently established system of import licensing,
giving priority to
imports of essential goods and inputs (fuels and machinery)
and discouraging imports of consumer goods. These policies had the
unanticipated effect of providing protection to the consumer goods
industry. Early in the 1950s, however, convinced that the only hope
for rapid growth was to change the structure of the Brazilian economy,
the government adopted an explicit policy of import-substitution
industrialization. An important instrument of this policy was the
use of foreign-exchange controls to protect selected segments of
domestic industry and to facilitate the importation of equipment
and inputs for them.
However, the move to fixed exchange
rates together with import licensing drastically curtailed exports,
and the balance of payments problem became acute. The system became
nearly unmanageable, and in 1953 a more flexible, multiple-exchange-rate
system was introduced. Under the latter, imports considered essential
were brought in at a favored rate; imports of goods that could be
supplied domestically faced high rates and were allotted small portions
of the available foreign exchange. Similarly, some exports were
stimulated with a higher exchange rate than those of traditional
exports. This system continued to be the main instrument for the
promotion of import-substitution industrialization, but the performance
of the export sector improved only modestly.
Between 1957 and 1961, the government made several changes in the
exchange-control system, most of which were attempts at reducing
its awkwardness or at improving its performance with the advance
of import-substitution industrialization. For this same purpose,
the government also introduced several complementary measures, including
enacting the Tariff Law of 1957, increasing and solidifying the
protection extended to domestic industries, and offering strong
inducements to direct foreign investment.
In the second half of the 1950s, the government enacted a series
of special programs intended to better orient the industrialization
process, to remove bottlenecks, and to promote vertical integration
in certain industries. The government gave special attention to
industries considered basic for growth, notably the automotive,
cement, steel, aluminum, cellulose, heavy machinery, and chemical
As a result of import-substitution industrialization, the Brazilian
economy experienced rapid growth and considerable diversification.
Between 1950 and 1961, the average annual rate of growth of the
gross domestic product (GDP--see Glossary) exceeded 7 percent (see
table 4, Appendix). Industry was the engine of growth. It had an
average annual growth rate of over 9 percent between 1950 and 1961,
compared with 4.5 percent for agriculture. In addition, the structure
of the manufacturing sector experienced considerable change. Traditional
industries, such as textiles, food products, and clothing, declined,
while the transport equipment, machinery, electric equipment and
appliances, and chemical industries expanded.
However, the strategy also left a legacy of problems and distortions.
The growth it promoted resulted in a substantial increase in imports,
notably of inputs and machinery, and the foreign-exchange policies
of the period meant inadequate export growth. Moreover, a large
influx of foreign capital in the 1950s resulted in a large foreign
Import-substitution industrialization can be assessed according
to the contribution to value added by four main industrial subsectors:
nondurable consumer goods, durable consumer goods, intermediate
goods, and capital goods. Using data from the industrial censuses,
the share of these groups in value added between 1949 and 1960 shows
a considerable decline in the share of the nondurable goods industries,
from nearly 60 percent to less than 43 percent, and a sharp increase
in that of durable goods, from nearly 6 percent to more than 18
percent. The intermediate and capital goods groups experienced moderate
increases, from 32 to 36 percent and from 2.2 to 3.2 percent, respectively.
A representative component of the nondurable group is the textile
industry, the leading sector before World War II. Between 1949 and
1960, its share in the value added by industry as a whole experienced
a sharp decline, from 20.1 percent to 11.6 percent. In the durable
goods group, the component with the most significant change was
the transport equipment sector (automobiles
and trucks), which increased from 2.3 percent to 10.5 percent.
The lower increases in the shares of the intermediate and capital
goods industries reflect the lesser priority attributed to them
by the import-substitution industrialization strategy. In the early
1960s, Brazil already had a fairly diversified industrial structure,
but one in which vertical integration was only beginning. Thus,
instead of alleviating the balance of payments problems, import
substitution increased them dramatically.
Data as of April 1997