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Between and , the average annual rate of growth of real GDP reached 6.


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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 s, 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 mids. Another feature of the —80 period was an acceleration of inflation.

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Between and , the rate of inflation had declined steadily, but afterward the trend was reversed. From The effect of the —85 period's industrialization on the balance of trade was significant. In the share of manufactures processed and semi-processed of total exports reached 66 percent, and between —75 and —83 the share of basic input imports in total imports declined from The recession and stagnation of the early s had a role in reducing imports. However, import substitution was also important, as demonstrated by the few years of the s that experienced a significant growth in GDP while the trade surplus was maintained.

Between and , the GDP increased at an average annual rate of only 2. Gross investment, as a proportion of GDP, fell from 21 to 16 percent, in part as a result of the fiscal crisis and the loss of public-sector investment capacity. The decline also reflected growing uncertainties regarding the future of the economy. The s became known as the "lost decade," and its problems spilled over into the s. Despite the stagnation of the —92 period, inflation remained a major problem see stagflation. In 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 sharply increased 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 s, 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 real GDP declined by 4.

Causes of recession

The Mexican debt crisis ended Brazil's access to international financial markets, increasing the pressure for economic adjustment. Some unorthodox economists like Stephen Kanitz attribute the debt crisis not to the high Brazilian level of indebtedness nor to the disorganization of the country's economy.

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They say that the cause of the crisis was rather a minor error in the U. The austerity program imposed by the International Monetary Fund in late continued until , but substantial trade surpluses were obtained only from on, largely as a delayed result of the import substitution industrialization programs of the s 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 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 hyperinflation and in preventing the usual instruments of inflation control from operating. By the mids, domestic debt nearly displaced foreign debt as Brazil's main economic problem. During the high-growth s, 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.

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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 s, 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.


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  • This, and a growing disorganization of the public sector, transformed the public debt into a major economic problem. By the mids, the financial burden stemming from the debt was contributing decisively to its rapid expansion. During the second half of the s, 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.

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    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 objective of the Cruzado Plan was to eliminate inflation with a dramatic blow. Between and , the rise in the CPI had escalated from Early in , 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 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 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.

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    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 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.

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    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. Another major obstacle during the s was Brazil's protectionist policy of severely restricting imports of foreign computer hardware and software to protect and nurture Brazil's domestic computer industry which was but one manifestation of the country's long-term policy of import substitution industrialization.

    Although this policy was superficially successful, the federal government failed to fund the basic research that was essential to the success of computer industries in the United States, Europe, and Japan. Brazilian computer users in this era frequently paid two or three times the international market price for unreliable, poorly designed domestic clones of foreign computer designs, [3] since domestic manufacturers lacked the well-trained engineers and basic research necessary to develop their own indigenous innovations, let alone build brilliant new designs from scratch.

    By the time the policy was rescinded in , it had failed in the sense that Brazil's domestic computer manufacturers were still unable to make advanced computer products suitable for export to other countries, [4] and had severely limited the modernization and computerization of Brazil's economy. In other words, by , the electronic office was still science fiction as far as most Brazilians were concerned and they were still doing business exclusively through labor-intensive paper-based processes. This meant their productivity was far lower than people in countries who had already been using computers for one or two decades, and who had, for example, already made the transition from typing and re-typing drafts of documents on manual typewriters to simply entering print commands into word processors.

    The s 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. The first post-military-regime president elected by popular suffrage, Fernando Collor de Mello —92 , was sworn into office in March Facing imminent hyperinflation and a virtually bankrupt public sector, the new administration introduced a stabilization plan, together with a set of reforms, aimed at removing restrictions on free enterprise, increasing competition, privatizing public enterprises, and boosting productivity.

    Heralded as a definitive blow to inflation, the stabilization plan was drastic.

    click It imposed an eighteen-month freeze on all but a small portion of the private sector's financial assets, froze prices, and again abolished indexation. The new administration also introduced provisional taxes to deal with the fiscal crisis, and took steps to reform the public sector by closing several public agencies and dismissing public servants. However, few of the new administration's programs succeeded. Major difficulties with the stabilization and reform programs were caused in part by the superficial nature of many of the administration's actions and by its inability to secure political support.