67054 - World Bank Documents

I This report is restricted to use within the Bank. I

No. E 131tV

RESTRICTED

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT ON THE ECONOMY OF BRAZIL

Econonlic Department

Prepared by: N. B. Parker

January 5, 1951

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1mAZ1L -.-.- . .--...-

ESSENTIAL S~TISTICS!l Area

Population (1950)

Currency~

lJnit Parity

National Inco~~ 1949 Income p~ . .b. :lad

Trade I IifPor.~L19.!±.q) Export s .tl~4g)

External D80'\; Outstanding June J 950 Undisbursed, :Eu0.T;c;ank Undisbursed) IBBlCi Peak Service (1952)

Net Gold and Excharge Reserves December 1938 December 1946 Decembe.r 1948 December 1950 (Approx5 lIlately)

Federal Finance Revenue s 19L~3 Revenue s 1949

Money Su~p1y (1946 - 100) December19~~0 December 1948 Decemb8r 1949 August 1950

Cost of Li ving (l~~·S ;; 100) 1940 1948 1949 1950 (Octocer)

3~29 million square miles

49/16 million

cruzeiro 18;. 50 cr'u.zeiros per dollar

US$ 7. 5 ~- 8 .. 0 billion US$ 150

US$ 1115 million US$ 1086 million

US$ 583 million (inc1udir.g undisbursed) US$ 39 mill5.on US$ 1+3 mill j,on US$ L~7 Q 4 million

US$ 54 million US$ 724 million US$ 667 million US$ 525 million

US$ 8L~8 million. Sunlus uS$ 0,,2 million US$ 968 million Defjci t US$ 152 million

28 120 142 159

38 130 130 ] 14-2

---------------.--"-------Y Cruzeiros converted at 18e50 cruzeiros per dollar.

?J Traction loan at 10/31/50; Paulo Afor.so loan at 8/'5:/50.

CON~NTS

Sl.Jl.VID-MffiY • ~ • • • • • • .• 0 • • • · . . . . . . . . . , . . . . . I . BA,CKGROUIID

1~ 2 ..

History and Government c • • • • • • • , •

Geography, Resources and Population ••••••• · . .

i

1 1

II. NA.TIONlili INCOlvlE ANJ) CAPITAL FOBtIATIOiJ • • • • • • 0 • • • • •• 4

III. PROLUGTIOH, PO~B A:.~D TBAESPORT

1. Produ~tion

~~~ Agt"icul ture · · · · · · · Ind'J.stry · , · " · . · · · · · · · · · · · 2" Fuel and Power · · · · · • · · · · · · 0 · ~ Transportat ion · · · · · ..,' · · · · · IV. BALAHCE Oir PAYl1~T3 POSITION

10 Foreign T=ade. 0 • • • • • " • • e. •

2. Foreign Investment o. C • • · . -3. Gold and E.."{change Holdings · . . , . . v. INTEBlJhL FINANCE . . . . . . . . . . . . . . . . . . . . ~ . .

1. Problems ( a) Agricul ture · · · .. · · • (b) TrE4~sportation • · · · · ~C) Fuel , • • • • • · · • · · e

d) Power . · · · · · • · · · · · e) Development Financing • • · · 6 • · • · · · • · 2~ Previous Government Developme~t and Policies · • 30 Programming; The Salte Plan · · · · · · • • · · · • 0 ·

8 12 15 16

19 23 25

27

36 37 38 39 .39 41 43

1. Brazil is the largest and most populous country ~ .. n South An:erica.

Politically, Brazil has a history of exceptional stability and democratic

orientation. In October 1950, Getulio Vargas was e:i.ected Presiden't for a

five-year term beginni~1g January 31, 1951, to succeed General Eurico Gasr:ar

Dutra.

2,. Relatively unreliable national income data indicate that national

income amounts to $135-$150 per capita. Income is unevenly distributed among

both regional and economic groups;> In Southe:rn Brazil average per capi ta in-

comes considerably exceed those earned elsewhere in the country. Agricul-

tural incomes, though in the aggregate representing the largest component of

national income, are indi viciually the lo~lest in any economic sector. Private

savings amount to around. 1070 of the national income, and taxes to about another

Investment since the war has shown a shift from t~e private to the pub-

lic sector and aL increasing trend to constructive purposes.

3. Agriculture, which employs the bulk of the labor force, t;.as

shov.n little progress, pa.rticularly in the production of foodstuffs for

dooestic consumption. A general decline in the productivity of land has not

been offset by a rise in labor prodactivity. The result has been a relative

lowering in the purchasing power of the ag):"icultural p0pulation. Tr.is situa-

tion has become the subject of increasing public and private con~erno

Limited. improvement has already resulted from the rise in world prices of

coffee, cotton and cacao, and core generalized improvement, is expected from

- i ...

the Government t s pres~nt agricu.l tural development program.

4. Industrial production during the last ten years has shoi~!n large

(volume) increases over a wide range of cownodities. This is especially true

of the basic industries - power, steel and cement. Ar>proaching self­

sufficiency in these areas has been attended by substantial. growth in derived

and associated industries; and completion of a projected alkali plffilt will

pro\ide the fo~ndation for a domestic chemical industry which will fill a

conspicuous gap in the present ind'llstrial organizati.)n" However, it should

be noted that continued substitution of domestic production for forr.ler im­

ports r..as been achieved at the expense of a considerable rise in the indus-

trial cost structure which may be expected to persist until such time as the

dOille~tic supply becomes sufficient to bring aboat cor.~eti~ive price reduction.

5. A fundamcntal weakness in Brazil t s de~Cilopment is the lr;:.ck of a

depend.b.ble source of fuel. T.7ood now accounts for sorr.ething more th£'~ 50tb of

total energy consumed. Proven reserves of both coal and. petruleurn are inade­

quate for prospective requirements, and although it is cO~lfiiently believed

in Brazil that large-scale petrolellll deposits exist there, srpallaffort has

been. mcde as yet to explore and exploit them. In the meantime the l)urden of

liquid fuel imports is mounting rapidly. In response to tr~s situation a

substitute for otber forms of fuel has been sought in hydro-electric po~er,

the potentialities of wlnch are very large, though not well located •

. 6. Brazill s transportation system is anteql~ated 3Ild in disrepair,

presenting a major obstacle to the growth of the internel market upon which

industry will be ipcreasingly dependent. Transport is presently viewed by

.... ii -

t

the authorities as BTazills primary development problem and large budgetary

and ex-tra-budgetary outlays are being allocated to rehab iIi tation and exten­

sion of the system. However, until more definite conclusions are reached in

regard to future fuel supplie$, it is difficult to see how an overall tr~s­

port at ion program can be successfluly de~eloped.

7. Brazill s balance of payments position, being heavily dependent

upon foreign ~arkets~ was traditionally pre~~rious. U~der the double impact,

in 1929-1930~ of the breakdown of the United Sta:es markets both for coffee

and for Brazilian dollar bonds, the balance of payments structure collapsed.

This situation TIas parti811y repaired by the conditions which prevaile& dur­

ing the war years ~ Trade was further improved by t:1e rapid rise iil coffee

prices in 1949-1950 ,,:,rhich restored Brazil to a probably better foreign trade

posi tion than tl"1..at of the 1920' s, and enabled the li'luic.iat:"on of a lar6e

short-term ccmmercial debt accumu~ated in 1947-1949.

8, :Buture export prospects for the major exports - coffee, cotton

and cacao, which account for around 755b of the totaJ- - appear favorab:"e and

the terms of trade haV€l largel;l recovered from the losses suffered after

1930. Concurrently, effective techniques have been developed to control im­

ports, The major foreign tT,ade problem appears to be the possible groning

difficul ty in obtaining ilu,!ort s from abroad; this c auld result in a resur­

gence of the si tuation created by similar conditions durlng the last war.

9. Brazills foreign indebtedness pos~tion has greatly changed since

the 1930' s~ Whereas in 1930 the funded debt represented about two-trdrds of

total foreign investi!lent in Brazil and direct inv€stm~nt the remainc.er i T.he

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funded debt now represents about 20% and direct investment around 5~~, the

balance being accounted :,for by loans from Eximbai1k and !BED. ~'1nual fixed

carrying charges in 1930 approximated $100 million; in 1951 they ure e:;~pected

to approximate $46 million.. This appears to represent a substantial ameliora­

t ion not only in the pr esen t balance of payments situation. but in i.t s ability ~

to absorb unexpected Fese~v~ in the future.

10. lrazil emerged from the war period wi th net gold and eXCh8..Dge

reserves of around $725 million, including about $350 million in gold and

more than $200 in blocked sterling. At th~ end of 1950, after liquida:cion of

more tr.an $2CO million of short-term dollar commercial arrears and util;i.za-

tion of about two-thirds of the blocked sterling, the net position was about

$525 million, including gold in the amount of $317 million. Cormlltuents

against present holdings are believed to cor~~ise about $50 million in COill-

mercial and dividend arrears and $100 million for currency backip~.

11. .Althougb ii1flation in a mild form is a secular condition in

Brazil, the violent ir..flationary experience of the early 1940ls was a special

phenomenon induced by the last war. The chief persistent cause of inflation

has been Government deficit financing. No repetition of the vlartime infla .... ·

tion is expected. barring a return of the wartime international couaitions;

but a tendency for prices to rise 5%-107b per year is eXllected to continue un-

less considerable changes occur in the fiscal-monetary organization. ~he

existing institutional structure is not equ.ip!1ed to deal with the existing

and prospective sources of inflation, and presently envisaged banking reforms

will require time and experimentation before their effectiveness can be deter-

mined. Under these circumstances, a determination to balance the federal

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and state budgets would be the most salutary policy that could be adopted.

12. The most insistent problems pr~sently obstructing Brazil's de­

velopmen.t appear to be:

(1) The need to increase the productivity of both agricultural land

and agricul tural labor in order to inc::ease the total production and tee

purchasing power of the agricultural population.

(2) A ~ore exact determination of the actual resources of liquid

fuels., so that firm decisions may be reached an'i action ini tiated in re­

gard to an economically sound program for the development of aVBilable

fuel and power resources 0

(3) A rapid improvement of the transportation s~y-stem9 in oJ~der to in­

crease the degree of integration within the economy, reduce present pro­

duction costs and expa~d the effective internal market.

(4) Fiscal and monet.ary reforms to enable the financing of develop...,.

~ent with a ~nimum of inflationary aggravation of the eAisting high

cost/price structure of the nrazilian economy~

13. Government development policy in the past has tended to be

piecemeal, paternalistic and strongly protective. In generill this policy was

less effect~ve as a stifu~.US to development than as a shelter for i~effic:ent

methods and high prices and profits.

14. In 1950, a basic cievelopment program, known as the Salte Plat'l,

was inaugurated to ::>rovide for coordinated development in the fields of pub­

lic health, production of foodstuffs, transportation, and fuel and power. The

program would extend over a period of five years, at a total cost of about

-v-

$1.100 million, of which the foreign exchange component is ~xpected to repre-

-; 1 . sent 2a;;.--25~o. More than one--half of thi,:;; .program is allocated to rehabilita-

ticn and extension of th~ transportation syste~, witn hydro-electric power

development receiving the next largest allocations~ and only relatively snall

amounts allocated to exploration and exploi tation of liquid fuel potentiali­

ties. As presented by the Government., the Salte Plap. purports to be non·-

inflationary, but on the basis of past e;>..-perience ap.d present prospects it

may be feared that the Sal te Plan cannot avoid coinciding ,vi th, even if it

is not the direct cause of, a considerable degree of i~flation, unless fis-

cal and monetary meas~res are ta~en srecifically to offset the additional in~

flatiopar~7 :pressures VJhich will accorny.;any ito

.... vi

REP.ORT ON THE ECO~OMli OF BRAZIL

I • BACKGROUND

10 JIistory and Government

Brazil was discovered by the Portuguese in 1500, declared, her inder;

pendence of Portugal in 1822, and after sixty-five years of constittJ.tional

monarchy, formed a federal republic on the model of the United states in

1889. In ,1930, this was superseded by a generally benigl di(;tatol"snip under

Getw.io Vargas which lasted until 1945.

The present gove=nmental st~~cture, created by the socially-conscious

Constitution of 1946, is a representative federal union of twenty states, one

federal district and t:r~ee :federal terri torie>3. T!le President, Vice ..... President,

and parts of the Senate and House of RepresEntatives are elected every five

years, and the President is forbidden by the Constitution to succeed himself.

~the current administration of General Eurico Gaspar Dutra, thou.gh basically

conservative, has laid increasing stress upon bocial welfare and polit~cal

decentralization.

The sta"ces and local units have their own elected governments and

partially independent sources of revenue.

On October 3, 1950, in nationwide and orderly elections, Getulio

Vargas was elected President to succeed Gel-lera! Dutra, whoo e term of office

expire s January 31, 1951.

2) wog~hy'? R~~<?~rces and Population - ; ... -

Essentic,lll~T a great plateau, Brazil is the fourth largest country in

;-.2-

the wo,rld. It include's almost 50% of the South Junerican continent and is

contiguous to all the other countries of South America except Ecuador and

Ch~le, Although not beset by the mountain ranges which disjoint the eeono .....

mies of many other Latin American cour~tries. B:razil, by virtue of its size

and its varied climate and terrain-, in fact comprises s~veral geographicallY'

·and economically diverse regions mhose integration is still in the prelimi~ _~J

nary stag9so Tlle major inland waterways have limited value as channels of

internal communioat'ion and ~conomic activity because for the most part the~r

do not flow directly to the sea, and to complicate matters further many of

the rivers drop off the platea~ in a series of waterfalls.

M0st of Brazills growth and development to date has taken place within ~5-j';

the. ,East and South'reg5J<lms which 'togetherre:present abo\lt 1§%. of B:re,zil t s total

ar.ea..). in 1947 t about 'lCf,:b of the pOl;uJ.ation, 901b of installed electric

power, 907b of ir .. dustriel production and 857b of agricultural production were

aocounted ~or by these areas.

The natural resources of Brazil, though as yet only cursorily ex-

plored, do not appear to be exceptionally abuudant or well. l.ocated economi-

cally. Usable land is limited by t.ropical forests, a.ricLitYll and the ap-

parent absence of naturally fertile soil over large areaS. Mineral resources

sui table for normal qompetiti ve exploitation on a cOlfJInercial scale ht3-ve thus

far been restricted mainly to iron and manga~ese deposits of central Brazil.

y For offioial statistioal purposes, the following regions are separb.tely distinguished: North (Amazonas, Para.)) Northeast (Maranhao, Piaui, Cgara. Rio Grande do -Norte, Par8iba, PernanibuCo, AJ,.agoas), East (Sergipe,. Babia, Minas Gerais, Espiritu Santo~ Rio de Janeiro, Distrito F$deral), SO~lth, (Sao l?aulo, Parana, Santa Catarina, Bio Grande do SuI), W'est Cen­tr:.§.l (Matto Grosso, Goias)"

-3-

Coal resources are poor; petroleun1 deposits on a large scale have not yet been

proven~ fi1d other minerals l~ve either ~ot yet been discovered or have been

exploitable only under cor..ditions of i.nternationaJ. crisis? it being otl1erVlise

more eec nomical to import than to produce them. Forest resources cu'e lsx6e

and diverse, but in the main r~ve not yet found large peace-time foreign mar­

kets o

Brazil's populQ.tion is estlmated at about 50 million, ~.Ti th an a7erage

" popu1ation densit.y of 14 to 15 persons per square mile. The present rate of

population incre'ase of about 2% per year has prevailed over F.i€f7e;t'al de~ades

and indicates that the population may be expected to reach around 60 million

in 1960 a"rld 30 million in 19750 The level of literacy among the population

above eighteen years of age, as estimated b~r the Census of 1940 p was about

40%, but has Qoubtless increased materially since then as a result of per-

si stent gOV6;i."nmdntal educat j,onal prosra.lllS. The standard of living 0: the me-S8

of the population is ex.tremely low, out ~t is generally considered that under

conditions of adequate no-q.rishment~ edu,cation and training, the Brazilian

workman has proved .b..imself to be intelligent, adept and cependable ~

II. lJATIOEAL INCCI"iE AND CAPI~EAL FOHVL.~TION

No defini ti ve IlieaSUrem€I1 t of Brazil t s national income has yet been

made, but preliminary studie~ now being conducted by the United iJa.tions and

the Brazilian authorities indicate that per capi ta i~bme. iR. ]ra5,;il i:a

1949 probably averaged arouno. $150. This is somewhat le~s than per capit·a in-

come in Chi~e and. slightly l!es~ than that in Colomoia; on the basj..s of COID-

parative figures recently released by the United Nations it is app:.·:-;{imeytely

at the level of per capita income in ~ugoslaviaG

In t~1e following tab1~lat ion a tentative breakdo'NIl of the United

Nations prelioinary estimates for 194", by occnpations, is cOITIJ.:Jared "ri til the

occl1.pational di stributio!l of the labor force ellgaged outside of ~1ousehold

occupation in I940~

Per cent contribution Occupation Occupation to national income, 1947 1940

--~-----'---"'--m '~---~T2)-'

Ratio (2) { (1)

Agri cuI tUre ~ . . . . .. '. . . . . . . ... 36:rB 67.5 0.5 E.A't ract i ve industries ....... 205 2~8 O~9 lvlanuf ac turing ....... 0 ••••••• 20·9 10.0 2.1 Trade ..... ~ . f ••••••••••••••• 12.1 5·3 2·3 Banking finance and in-

surallce .... , .•........... 0 1 .. 4 0 .. 4 3.5 Transportation and com~

3Q4 mur.l.ication~ ...... 0 0 ••••••• 7.7 203 Government services (includ-

ing military) ••.•.•.....•• 10,,1 304 3.0 Profes8ions.~ •............. ~ 405 0.8 5.6 O~her services ....... , ...... 400 6,,4 0.6

Total ........... , .....• 100.0 100.0 .-----

These b:ceakdovms ~}"i~ld several sil.o.ii'icant obse::'Vations. The first

- 4 -

-5-

if the very heavy concentration of emploJlment in agriculture and the 'i;ride

discrepancy between the percent of national incame derived from agr~cu2.ture

and the proportion of lebor force employed. this points either to a large

amount of concealed unemployment in agriculture, or a disturoing lac:: 0:: soil

fertility, or to institutional factors preventing a more effective ut:'lization

of the resources presently combined in agricultural production. l"fi th average

net: earning3 in agriculture apparently ranging frcm one-half to one-,tenth

of earnings elsewhere in the economy, the standard o~ living for the b'ulc

of Brazil t s population must be considerably below that of the averatsp. for

the country. To the extent that agricultural income is not hibhly con-

centrated there will be little of it available in the form of savings for

developmental investment; to the extent that aGricultural income in fact is

concentrated, the low standard of living of most of the population is further

emphasized.

Significant, also, is the relative contribution of agric;llture

and manufacturing to the national inccme. This comparison strongly suggests

that, despite a widespread belief to the contrary in Brazil, agr:'cu:_tul"e

is still the most important segrnent of 'Srazil t s economy. Lny al:!..ovrance TJ:d.c:l

may be made for the presumably increased relative importa~c6 of m~nufac-

turing between 1947 and 19~9 must in large roeaf'ure have been offset by the

rise in coffee and cotton prices in late 1949 and 1950. If high co:fee

prices continue, it is possible that there will be new investment in agri-

culture which may in turn tend further to influence national income ciistri-

bution and to restore the monocultural imbalance existing Lefore 1930, when

coffee was still "King. II ~/

l./ Between 1940 and 1?49 seme further redistribution of per capita ~nccme undoubtedly occurred in consequence of industrial grovrth. j,'hough visi­ble wage rates probably only barely matched increases in the cost 0:

-6-

A rough breakdown of the 1947 national income by regions, shows an

e~ected heavy concentration in the South and East, amounting to about 85%

of the total cowpared with a 7(fjb concentration of populatj'l1'J

North Northeast East Soutb T7'est

2.4 11.8 48.2 1.8

The higher li\ing standard in the S,outh explains not only the frequently ob-

serv'ed tendency for inter-regional migratio:l. in that direction and the com-

plaint that those regions are being taxed to support the rest cf the country,

but also the Government1s efforts to increase econom:.c and especially non-

agricultural activity in other parts of the country_

Infonnation on tile amount of savings and how savings are used.. is even

more sketchy than the information on rlational income. According to rough

estimates from a number of Gources, the general level or private sa~n~gs

during postTIar years 118.S ep}?roximated l07c-155~ of national incon:e. Concern-

ing capital formation, the only av&ilable study is that of the Joint

Brazilian-U.S. Technical COL1mission, for t~e year 1947t ~hen the aftermatn

of the 1;lartirue infla~tion was still in effect. In that year, tte Commission

found that about 4070 of savings went into speculative buildin5t) ::;rohably less

than 1(51) into factory const::uction and. a l£lrge part of the remainder into

irrq)orts, especially of luxury durable goods. Subsequent to 1947, there has

been a sl1ift of investment from the private to the public sector and a

living, invisible benefits arising from social security, paid holidays, general year-end bonuses and severance pay increases real i~dustrial wages considerably and furtr.er wic.ened the gap bet\~!een industrial and agricultural ~ages and reol income. In 1950, this trend was sOI:levlhat reversed as co:fee p!'ice increases see~ed through to growers an.i t:leir labor force.

-7-

greater uti.lization of private savings for factory construction and repairs.

Chief reasons for this shift are a 50j j increase in GovernTUent expendi tux'es

together VJith the Government! a restrictive import policies and the great 1/

availability of imported and domestic inwlstrial goods.- SiffiUltffileously,

exportersi investment in inventories increased because the unwillin~ness of

expcrters to reduce high prices possible during r:artime, put many commodi ~ies

at a disadvant ase in the face of rener/ed inte~national competi tiono :CUrIng

the past year there has unJ.oubtedl~y· been an increase of pr:'vate investrr.ent

in agriculture (particularly coffee culture) and of public i~vesthlent in

power, transportation, petroleum and refining eq .. lipwent.

It is belie~.Ted that gror·s capital formatioI: is about 15% of national in­cOILe, of whicn about one-third result s from Governnent outlays at all levels.

III. P . ..iOIDCTION, POW~q A:JD TBfuJSPORT

10 Production

Production estimates based on official data indicate tr.Iat total pro­

duction (at 1~39 prices) increased about 5056, which compares with a popula­

tion growth of about 20'10 between 1940 and 1:;l.j·9. The volume of agricultn.ral

production went up 30~b-407b, and its value, adjusted for cost-of-living

changes in Brazil, increased about 35;~45%. Industrial production (at lS39

prices) rose Go-;S-'{Ojb; total power consU!':led increased about lOO)b and. j,nstc!l:':"ed

electric capacity atout 51~. In the major eco1:omic ar'e;as, transportation

alone fai:t.ed to regi ster cOilllllensurate groVlth~

These figures reflect a decided stift during this pcrioi fron agri­

cultural to industrial production, and. wi th:n industry from light manufac­

tures to heavy indust:-ial production. Incrl:8sed ou.tput v'as particulnrly

marked in steel} cement and power. The s12rpest red.uction took :place in the

co:t'ee industry.

Product ion for export has been virtaall;)T limi ted to agricultural

products. ~\:cept duripg the war, ,]hen l3razilien textiles found a reudy mar­

ket because of lack of con:pet i tion, ir:.dustrial product s I-J.ave been too high

priced to conpete in intern:::'ttior .. al n:a:rkets. :.:inerel eX.florts are still reJ.a­

ti vel;;- insignificant, except for iron are, wrJ.ich shows a steady thouc.;;h clow

increase.

( a) Agricul ture

Agriculture, including stock raising and forest nro~ucts, makes the

- 8 -

-9-

largest contribution to national income of any economic sector and eIlll)loys

more tha"1 t:OJo of ti1e labor force not engaged in hGuseholci employment; it \llSO

provides tJ:;.e bulk of export s (some 801~) upon which any :uture development

plans mst be predi~ated. Although y>roductior.L data indicate tr.tat volume of

output has slightly exceeded rate of population growth, indexes based on ti.Lose

dat a show a slight secular dO~~JnVJard trend in average yield.

Bre..zil has the largest cattle POpulC;ition in South .L1.merica, erd a l'

growing industry based. 011 forest product s t ~ but Brazilian agricnl ture is

basically a cro~raising agricultureo The pre-eminence of crop production

is indicated by the relative values of agricul':"ura1t/ pastoral and foces';:; p:co­

duction, wilich for the year 1947 VIere e3tilllated respectively) at a;"101.4t 29

billion~ 6 billion and 2 billion cruzeiros.

Agricultural cro;s include most of the staples common to a teffiperate

climate as '~Jell as tropical fruits, fibers, and beverages, In terms of 11re-

sent low levels of nu.trition, Brazil is virtually self-suffic:'ent in p.::od",;_c-

tion of fcodstuff~, except for wheat, 1K1hich is p!'esently the object of a

production c~aign aj,med at decreasing the dependence upon ilT!forts~ Brazil

is the world's largest producer of coffee, second largest procucer of cacao

and a major proQucer of rice 9 corn, and long and short staple cotton. Eight

crops, three basically for export ,51 and five basically for dOhlBstic con-31

sumption., ~ have consi stently represented more than 90ib of total area cul ti-

vated and 80% or more of total value of prodllction. Agricultural exports

Y Parana pine, rubber, yerba mate, carnauba wax, an.d various ojlseeds.

gj Coffee, cotton, cacao.

1I Beans, corn, man~OCt rice and su~ar.

- 10 -

include coffee, cacao and cotton in significant quantities, and varying p

though lesser, quantities of rice, manioc flour. f~its, ~obacco, corn, sugar

and beans.

Prior to 1930, coffee rep:resented 357b-40~b of total area. cu:' ti vated

and value of agricul turaJ production. Thereafter, as a result of over pro-

duction and th8 collapse of coffee markets abroad, this ratio decreased ccn­

sideratly. During the period 1940-1948, it represented less than 2G)J of ~otal

agricul tural production, while on the 0 theJ.~ hand" cotton output increased

rapidly in anstler to a shift in world d.emand away from the Uni ted States mar-

ket c Most of the diversification v.'nich took place in BrazilTs agricull;u-ral

pat tern d1.'ring the 1930 'i S lat'gely reflected tile substi tl).tio!l of cotton for

coffee, and al1 increasing sUDstitution of other foodstuffs, inc;luding im-

porteet wheat, for corn in the domest ic diet.

The extent of arable land in Brazil is not known~ According to the

1940 census data, less than 3/J of the countr'J t s total area was under cul ti-

vation~ indicatin,; an average of five to ten acres of cul ti vated land per

1/ unit of agricultural labor.- In general, land. ownersi.lip is highly concen-

trated, though cOllsiJerably less so than for;nerly. ~he existing average

holding of the sI118l1 farzner in Er4~.zil a}1pears not. to be econ0mic froD the

point of viev] ei ther of optimum agricultural :9roduction or of ol)timum utili-

zation of population resources. HO'VJ IIr..lch publicly olr'ned land is availabie

for homesteading is not sho\~:n by the available data. According to the 191.;.0

census, there is very little public lan~, but it is probable that a good deal

may be included in large areas not no~.r farmed v:lu.ch ese&ped the census.

1/ The 1940 census, {D'r1eVer, covered only about 2516 of Brazil's total area p

-11-

Production methods in agriculture are in gene:!:'al rud.imentary and

destructive. The inability of the small farmer to obtain sufficient land of

suitable fertility has either left him VlJithout capital for improveIJ.lent of his

the cost of fa·l"tj labor low 8.tl'd inducing the large drvner ·to apply labor rather

than capital to his land. The large otmer, especia11~r the coffee proJucer,

in a speculatl- e pursuit for :ertility without cost i has cO:lti:luo1J.sly mov.::;d

from old to new lands, taldng "~'i th him 1:'..i s laborers and :nis iTh.1eri t.eJ. prfJ ... "i.d.c-

tion methods.

The result has been the persis.lvence of han.1 methods of cul. tivation,

the extension of e~osion or soil-exhaustion, the :uovement of the abricuitural

center of gravity fu.rt~1er and farther 111est, a growing l~eritf3ge of exhausted

and abandoned land, and the secularly ded ining index of yiGld referred to

earliercY

Agricul tural credit is '~rery di:Eficul t for the small farmer to obtain.

The banking system is organized on a strictly currmercial basis, and is not

adapted to extension of long-te~m crtdit except to t~e possessor of capital~

The small farmer for the mos'~ part is ctependent for credit upon the middlemen

to whom he sells his produce (frequently on a basi.s of post .... harve3t low

prices) and to rvhom he pays a rate of interest ~hich reportedly may r1.4'1 as

high as J:f;& •

J).:arketing facilities :'J.Ol'cover are slow and cumbersome, and costly, botIl in terms of movement and spoilage. This is a reflection of ina.iequate facilities of agricul 'Cu.ral cl~edit and trans:portationj under cond.itions existing in Brazil~ both of these are probably unavo:dable fu~ction3 of the Government"

- 12-

Recogni tion of the conditions outlined above is growing, and increas-

ing attention is being focl.:fcd on the need for better agricultural methods,

eql.lipment and credi t. 1·Iet;hods are being stuiied ~'"1der Government auspices

for protecting existing crop land and for redeemine;; abe..ndoned land. Greater

use and production of fertilizers is being planned, and mechani~~tion is

being widel~T and somewhat indiscriminately fostered as a means of increasin6

production and reducing costs. Among the cr.l8.nges contemplated in a major re-

organization of the banking system now under ~onsideration by the Consress

is the establisf.1Il1ent of a rural banle to provide agricultural credit facLi.i-

ties. In tne meantime, agricultural costs and prices are hi~lf risinb' a~d

unstable, with a profit component expected to be not less than 4o-~.

(b) Industry

Previous to 1940 t industry was limited chiefly to mamfacturing :ood-

stuffs, weari~g apparel, fUlni ture and light metals by elementary processes;

to small-scale production of steel and lubber; and to manufacturing by foreign-

owned assembly plants of durable conS"l.lmer goods built of imported parts. l\{uch

of the ra~ materials for these manufacturing processes was also iroported~

Stimulated by war demands, appreciable progress has been made towaras

solid industrial growth since 1940. The core of this progress was an increase

of about 300;# in the production of steel, of more than 551b in installed

electric capacity, of 65~ in coal product~on and of nearly 7~S in the produc­

tion of cement. This basic development was accompanied by the appearance of

Resul ting in large part from the inauguration of the Volta Redonda plant in 1946 which bas doubled steel production and under the recent credits authorized by the l:ximbank is expected to make possible considerable fur­ther expansion Volta Redonda operates largely on the basis of its o~n coke production; most of the rest of the industry depends on charcoal.

- 13 -

relatively large-scale paper, lumber, rLlbber and phar~aceutical industries,

and a sufficient eA-pansion of cotton teztLLes to permit sizeable ex,ports dur­

ing the war years. At the end of 1949, Brazil Was prouuctng about 70']{; of

steel consurnpt ionlJ 751b of cement consuraption, 75:~ of paper cor ... sWuption, about

8570 (b~y value) of drug and pharmaceutical Con8UJ.l1i"'tion, and more than l007b of

both textile and. iron ore consumption. Small surpluses of the latter tv-;o are

being exported.

The growth in heavy industry brought an increasing,ly rapid exter~sion

of rnanuiactuI'ing :pro~esses, to include domestic production of structural

steel as vlell as many types of comparativel~/ hca~.- m€chanical and. e:"ec~r.l.cal

equipment. In the near future, Brazil expects to be virtually sel:-snfficient

in the production of cement ELT1d most forms of steel. .h.n alkali industry 2nd

dOlllestic proces sing of petroleum products are in "';he late planning stabes;

prodaction of al:<alis wi~l provide the founJatio!l for a chemical inc..u str~le

Ferti:"izer ffild non-ferrous metal i~1ust~ies are in ~ess aQvfulced plar41ing

stages.

Th2se developments \'7ill provide Brazil, fl~om the strictly tec::_~:~ ';.<L

point of view., with a tecbnological basis for continued industrial developrcent 0

They will. not i honever, of themselves provide a solution to ccrolla:r:y T,roblems

of mass pur::haslng pov:er~ sui table fuel availabili ties, and comparflti ve costs

which t{t"e IIk'1jor elements in a smooth, rapid. aJ.1d advantageous econo:nic aevelop­

ment.

The distriotltion of industrial ,roduction in 1949 compared '~li th 1939

shows an increabing t rena. to concentre.t ion in the South (primarily in Sao

Paulo and. Rio Grano.t: do Sul) at the expense of all other areas, although tile

- 14-

-Yeal' North Nort:least iast South No:;:th -----------1939 1.1 8 .. 2 3209 57.2 0 .. 6 1949 0 .. 6 7.0 29,,5 62.6 0·3

----figures conceal a considerable growth in Llinas Gel'ais. This ~ ..

concenl.lra~~on

is logical rather than surprising, since the South, along with I':~inas Jerais,

holds most of the thus-f~r discovered natural wealth of the countl~, as we:l

as most of its population, its external ecoi",omies 9 a."1d its en~repren.e1.~sl:ip~

Accurate data on worker productivity in Brazilian industry are not

available:l It may be presumed, however i that proi.ucti vi ty is still rela­

tively loV'l, although it Tlrooably has increased considerably sinc'8 1940 as a

resilt of more advanced production tec~niques, gro~ing external economies

a:r;,d the introduction of worker-training prog:rams by both the GoVe.cUIDGllt end

industry itself 0 That it is substantially higher than produc~ivity in agri-

culture appears to be clear from the comperative eanlings observed earlier

in connection wit.h agric·llture.

I:ll::~stricl profit levels are high. AV3rage net profits in i.no.1.ls"try

tend to be 207b to 30% of invested capi tal and in trade 307"& to 507b; a prc:~i t

to tb.e individual :firm of less than 405'b is considered low. This refl.ects

what ti1e Joint Brazilian.-U 0 S. Tech..l1ical COIllh1i ssion referred to as a })revail-

ing ":b..igh Ul'1it pl"c:it mentality, If a mentality which is at once a cs;~se and an

outcome of sl1eculaijion; abetted by the peculiar le€;al provisions surround.ing

Brazilian corporc:te strLlcture a.~d financing. It deters domest~c investll1ent

in public utilities and.. other fixed. inte:r:'est inst:rLUuents, haffipers the growth

of an internal illaSS market, and limi ts inno\Tation in the larger sense of the

word.. Within lim.i.cb, it is probably subject to rr.ociification through re::>;rnt

.... 15 -

affecting the laws guiding corporate finance and the financial max'ket s in

general.

2~ Fuel and Power

Brazil currently depends OIl wood for 50% or wore of total energy

consumed. From 19)40 to 1949, the conQumption of fuel and power, exclusive

of wood, is estimated to have incl"'eased about 110%. Power derived from coal

increased about 1~;6; from diesel and fuel oils y 160%; from gasoline 29C(~, and

f:rom bydro-electric installations 9 about 5~b. The relative CD ntribution to

power consumption of major power sources t exclusive of '!tlood, in 1949 p com­

pared with the situation in 1920 and 1940, vvas rou.gbly as follows~

Coal ... * ir ••• (I •••••••••• .t' " •• CI ••••••••••••

Diesel and. fuel oils Q •••••••••••• , ••••• ,

Gaaoline ........................ , ••..... Hydro. • • . . • • '. • • '. • '" • • • • • • • • • • . " • . • • . • • • • 0

h3% .J ,

27 7

13

30~ 31 14 26

14% 36 23 27

---.,.-..-----~·-----_.__·-·.,....i --'--"'-"""--~-----"'---- -.--.~-

These data indicate ttat not only is the d6mruld for fuel and power ris~ng

sharply~ but that there is a strong fJOVement from coal to other sources of

d ." 1 t 1· . d fIT 1040] . l' t. d b t ~a')./ energy an. part1c1..u...ar y 0 lqUl lIe s. .Ln :; _.II raZl lmpor Je . a au J ,/0-2/

of ti.1e coal consumed and virtually all of the liquid fuels.- Measures were

taken in 1949 to reduQe import costs by acquiring shipping sufficient to

transport the country's liquid fuel requirements, and refining equipment to

har-dle about 50)0 of domest ic needs.

Brazil is not, hOTIever, 'l;vithout fuel resources $ Kn01'ln coal re$erves

On the basis of ~aloric content~

Fuel imports i4.i ::.949 amounted to slightly more than 10% of total il!lport values.

- 16 -

are believed to be sufficient to operate the steel industry and the transpor­

tation system in case of necessity, but it is cheaper to import coal because

of the high costs of mining, partly caused by inadequate transportation facili .....

ties" Petroleum reserves are being explored and exploited, but current ,ro­

duction is insignificant in relation to prospective requirements. Prelimi­

nary study is also being devoted to what are reported as large-scale shale

deposi ts in central Brazil. tlood reserves p though abundant in the a~gregate,

are becoming increasingly costly to exploit as the cutting areas are I:ioved

further away from centers of co nsumption and re.il ro ads "

In the absence of suitable domestic coal and petroleum, Brazil has

turned to hydro-electricity as a basic source of power. Its potentialities

are excellent in every respect ~e.pt, loca:!.iim., :ffietabliehed citiEJS end in.clll.stX·.ies

tend. to be' situated a. cansa.die.rable· distanee from prospec;t.i ve large· ... ~cale hyGh"o···

electric installations. In spite of this bandicap, it maybe e~~ected that

industrial use of hydroelectric power will expand. As a source of motive

power1 however, in a country of the size and population distribution of

Brazi~t hydro presents problems of investment and inflexibility which may be

found to be intractable if large-scale development should be considered.

3. Transp~rtation

By comparison '.vith the indu.strial sector of the economy, Brazil's

transportation facilities have developed sl~lly. Between 1935 and 1948, rail­

way mileage increased only 7%, and locomotives 23%, though freight movements

are reported to have increased 75)b to 100%0 In 1947, Brazil had had ap-pro:xi­

mately 22,000 miles of railroads, or about 6 .. 6 miles of railroad per 1,000

~quare miles of territory, compared l~~th 12.6 miles for Canada, 16.2 for

\

- 17 -

Mexico, 23.9 for Argentina and 75.1 for the United States.

The Brazilian railroads are an unintegrated system made up of a series

of regional networks o The bulk of the mileage is divided about evenly between

the East and South, and as yet there is no through Ir-~ ,cO"nhection hom. SOlltb to

North. There are five different gauges of track. Roadbed and trackage is, in

general, badly engineereQ. and run downy and the greater part of the rolling-

stock is more than twenty ..... fi ve years old a 1':ost of the system is d.irectly or

indirectly o1J!m.ed by the Federal Gove:;:nment, but admini stration is uncoo~ii­

nated. The railroads have been operating increasingly in the red since 19116.,U

The cost of modernizing the railway system is variously estimated in 13:;:'azil

at betvieen ¥250 and. $1,000 million.

Accurate data on :highway mileage are not availahle, but it is esti-

mated that all types of roads totEll less than 200,OnO miles, compared wi th

more than 3 million miles in the United States. In l.9}+9~ it was reported

that Brazil had less tban I,COO miles of paved roads, (the United States then

had around. 225, 000 miles). An increase of ovel 2C01b in the number of regis­

tered trucks between 1935 and 1948 indicates a substantial growth in highv1ay

freight movements p

Highway transport is excellent f~r ~ co~ntry with problems of size,

topography and population distl~:ibution like those of Brazil. Althougl'l such

development cannot be expected to substi t:.lte for, or replace t the ra.ilway in

long hauls of high-bulk, low-value cQmmo~ities, its flexibility, spe~d and

r€?lati vely small initial investment gi. ves it a strong advantage for medium

hauls. In relation to long ha~ls, moreover, it can tremendously extend the

The aggregate deficit, IDU. ch of it pa:;r'"able by. t1J..51 Government t amou.n. ted to +.l. billion cruzeiro~ in 1949, equl7alent to 2C1o of ~ggregate railway ek-penditures and to ~o of the total f~deral deficit for that year.

- 18 -

lateral band of coverage of the railway and thereby multiply the usefulness

of the latter. During recent years, the growth of highway transpol"tation has

been fostered by a special fund Ylhich exists outside the federal budget, This

fund is made up of all taxes on liquid fuels and is usable only for highway 1/

construction.-

p.~7J In spite of the recent growth in hi@.~ transporta.tion, the existing

distribution of paid freight movements among various types of carriers was

roughly as follows, and indicates that Brazil's number one transportation

problem still lies with the railroadso

.~

Railroads Trucks Cabotage

7%

Inland ~aterways

3%

~ir

The prob'.em of rehabilitation. enlargement and coordination of trans-

portation facilities is a longst~ding subject of study by the Government.

Its most recent consideration and forrnll.lation, thO'.lgh in "lhat degree of de-

tail is unknown. appears in the Salte Plan, which allocates approximately

$700 million, or more than 50% of total projected outlays, to the transport

sector over a period of five years; 35% of the 5070 is for the railroads,

Y The income of tni s fupd exceeded $60 million in 1949.

- 18 -

later.aJ band of coverage of the rail~ay and thereby multiply the usefulness

of the latter. During recent yeal's, the growth of highway transpor-tation nas

been fostered by a special fund \"1hich exists outside the federal budget. This

fund is made u.p of all taxes on liquid fuels and is usable only for hlE;!lway

1/ construction.-

In spite of the recent growth in high transportation, the existing

distribution of paid freight movements among various types of carriers \'1]as

roughly as follows, and indicates that Brazil t s number one transporta':vion

problem still lies with the railroads o

Railroads Trucks Cabotage

7C1 ;0

Inland ~7aterways

3%

~ir

The prob'.em of rehabi:itation. enlargement and coordination of trans-

portation facilities is a longstanding subject of study by the C~vernBent.

Its mos"t recent consideration and forrruJ .. ation, thOllgh in r!hat degree of de-

tail is unlmoWD., apuears in the Sal te Plan, which allocates approxin:ately

$700 million, or more than 507; of total projected outlays, to the transport

sector over a period of five years; 35% of the 5010 is for the railroads.

Y The income of t,ru s fund exceeded $60 million in 1949.

IV. PALAHCE OF PAYlvQl1TS POSITION

Brazil, being a debtor nation, has traditionally had to balance a

deficit on current lnvisible account with a surplus on trade account and in-

vestment from abroad. How difficult this process was can be meaSQred by the

secular decline in the exchange rate of the currency unitt which lost more

than 85% of its dollar value between 1891 and 1940.

1. Foreign Trade

Foreign trade represents probably lcf~15% of Brazil's national in­

come .• f:} Brazil's typical foreign trade pattern was an overall surplus (aver ..

aging about $75 mi~lion annually over the period 1920-1949), consisting of a

surplus with the United States and a deficit with the rest of the v:orld.El Major trading partners before World War II were the United States, the Uni ted

Kingdom. Germany. France 8l."1d Argentina. Germany's important pcsi tiOil was a

recent outcome of Nazi trade policies; that of the United Kingdom grew out of

the collapse of coffee and the growing importance of cot ton among Brazil t s

exports after 1930. On the impo~:·t side Argentina was always important as a

source of wheat. In recent years, the Dutch .Antilles have figp.red increasingly

asa source of petroleum.

The traditional export-import formula of an exchange of foodstuffs

and raw materials for consumer goods has undergone important changes in the

last ten years. lmports have been modified by the industrial developments

outlined above, coming increasingly to consist of capital and durable consumer

--~------~--------- i I

f:} Imports tend to represent 25r~3CJ% of total available goods.

El Present cru.z8iro values are converted at the par value rate of 18.50 per dollar. In view of ~ black maxket rate of 30-35 per dollar, the par value .ratE; probably ov"brstates somewhat the dollar equ.i~alent of present crnzeiro value 2 .•

-19 ~

I

- 20 -

goods and raw materials, like petroleum. Exports underwent a fundamental

moaification after 1930. Prior to that year, coffee represented 60-75%

of export values. From 1929 to 1931, the New York spot price 0: coffee

fell almost 60%, and not only coffee but the entire structure of the economy

was depressed. Cotton, stimulated by United States export policies, came

forvlard to tal~e up some of the slack and the relative position of coffee

gradually fell to 30-35% of eXIJOrts at the turn of the forties. After tile

·,far, greatly expanded world demand and reduced Brazilian production ena1)led

coffee to regain part of its former export pre-eminence. The recent rise in

coffee ~rices restored coffee to its old pcsition of Ifld.ng rr and raised the

export position of coffee to 58~ of total eADort value in 1949 and to more

than 60% in the first half of 1950. In 19l.9, the second and third most

linportant exports, cotton and cacao, accounted for approximatelJ~ 10% and 5%,

respectively, of total exports. lhe next three largest exports,' pine lumber,

hides and rice accounted together for a further 6% of the total,

The war and postwar conditions created serious distortions in Brazilvs

foreign trade. For strategic reasons, foreign demand for normally unimport­

ant exports, as well as the basic ones, was urgent and prices rose rapidly.

Since shipping and supply shortages limited imports to absolute necessi t:.es

and eliminated or materially reduced Brazil's European markets, the United

states increased its relative share of Brazil's exports and became the source

of more than half of Brazil's total imports. Although Brazil's holdings

of gold and foreign exchanf:e increased tremendously, demand for imports

of all sorts was building up at an equally fast rat~.

-21-

The conclusion of the war unloosed the accumnlated import demands for

goods which were mostly available only in the United States. su that in 1947

and 1948 Brazil llad a large deficit on current account ~ith the United states,~ By the summer of 19).+9, the short-term commercial credits o\-;ed to the United

States reached a peak of over $200 million, and as a result a foreign exchange

budget and drastic import commodity controls were instituted by the Brazilian

authorities to conserve dollars. Shortly after these controls were elaborated,

coffee prices went up and the combination b:-ought about a trade surplus wi th

the United States of about $73 million in 19t!-9, enabling the an.tnorities to

bring the so-called "dollar backlog" under . ntrol. By September 1950, the

baCklog had been liquidated, and a start was made on the liquidation of about

$25 million of accumulated. profits and dividends, which enjoy a lower exchange

priority than imports.

The import commodity controls were intended to form one blade of a

scissors mechanism designed to bring Brazil's total trade into balance. The

other blade consisted of a series of bi-lateral trade agreem~ts with Brazil's

major non-American trading partners, desigp.ed to su.bstitute Eu.ropean goods

for those previously purchased in the Uniteu States e The bilateral Trade

Agreements also enabled BraZil to sell cor . .modities previously faring badly

in the international market.

The devaluation of &ropean currencies in September 1949 had only

slightly affected Brazil.?J Because of her gro~'ing dependence on coffee ex-

ports, and the success which had previously been achieved in selling major

exports for dollars in non-dollar market s, the Brazilian authorities determined

:J ).fo~re t1:a.n offset in 1~4B by a surplus ni th the rest of the vmrld .. ~

sJ ~he exports involvedIt though re~ionally important, represe:lted only Joe,%-15% of the to.tal,

- 22-

not to devalue. This decision further increased Brazilian prices in soft

currency markets, making exports to those markets still more difficult.

Because of this, and of Brazil's inability to meet some of her bi-lateral

commodity commitments, the normal trade deficit with soft-currency countries

was aggravated, and the result was an overall trade deficit for 1949 in

spite of the surplus with the United states.

In the first half of 1950, stiffening foreign resistance to the ~igh

I prices of rainor exports (eog. lumber, rice, oilseeds, textiles) and to ~razil'c

policy of expecting dollar pa:vments in non-dollar markets induced a trend

to straight barter deals, conducted by the Brazilian :importer and sU.t)e:::,vised

by Bl'azilian Government authorities. Such deals have been esti1:1ated at as

much as 20% of total imports, and the premium on import prices resultin~ from

them at about 30%. This premium is tantamount to an export subsidy financed

by a virtual tax on specified imports.

Owing to the Korean war, Brazil will probably find a ready mnrket,

in the near ~utllre at any rate, for her major ex?ort products -- coffee,

cotton and cacao. Industrial commodities, because of their comparatively

higi1 prices, will probably prove difficult to export except under conditions

of acute inter-national crisis or unless subsidized. The proSDect for so~e .. ~

other exports, e.g., hides, lumber, forest products and rice, has improved

somewhat since a year ago and may improve more, In addition, exports of a

strictly strategic nature may be expected to revive.

It is probable that in the longer run many imports presently deemed

essential will gradually be repl&ced by domestically produced substitutes.

Brazil CUT'J,W. t,1y bc'lstl however, two imports of' critical :i.mportance, vvhea t and

- 23 -

petroleum, each of which in 1949 represented something more than 10; of

total imports. A present program aimed at self-sufficiency in w:leat

production may be successful, but it is h:i.ghly unlikely that 3ra~il ';;ill

be indeper:dent of petroleum imports for a long 1':hile, at If: ~,st, unless large

new sources are discovered or substitutes are d.eveloped. l'1oreover, Brazil

is a developing cOlmtry and it is most probable that many new commodities

will have to be imported to supply the needs of an expanding economy.

The possibility of increasing difficulty in obtaining equipment both

from the U .. S. and T-:U!'c·pe cannot be overlooked. Such an eventuality v.rould have

serious effects for Brazil's development program and probably for the

internal ~rice structure as well •.

c:..Zie future trade pattern is not clear, but the present trend, otller

things being equal, seems to be in the direction of an attempt at generally

balanced bilateral trade, "Ii th the :Jni ted States supplying a larger share of

Brazil f s imports than before the . ~2.J:". The terms of trade which feli sharply

after 1930, recovered substantially durin:: t~e Ga.;iy fort.ies under the pressure

of war needs abroad and ceiling prices in the United states, and were

bene~ited further by the rise in coffee prices o There seems no reason now

to fo~esee a serious decline in the terns of traue in the near future,

despite some increase in prices abroad~

2. Foreign Investment

roreigr. investment in Brazil has undergone radical changes since

1930. Previous to that time, the bulk of forei6l!1 Dorr'owing VIas in the form

of foreign bonds, mainly sterling, dollar Clnd French franc, which in 1932

- 24 -

amounted to close to $1,000 million. The annual service payments on this

debt 'lJW6re about. ilOO million. The bonded debt represented an estimated

60-65% of total foreign investment; the balance was in the fOlm of direct

investment. There was no foreign institutional indebtedness.

Follovring the depression of 1929-1932 no ne'1 Brazilian bonds were

sold abroads and in 1943-1944 by agreement between Brazil and the bondholders,

all outstanding foreign bonds were subjected to a major adjustment v:hich

reduced substantially both principal and annual ~lortization and interest.

In June, 19:;0 the cutstanding bonded debt amounted to about ~>345 million,

on which the esti.'Uatea service in 1951 "fill be about $26 million. The bonded

debt is f3stima ted currently to represent 20-25% of tota~ foreign in:rrestmc!1t

in Brazil.

Since 1940, Exinbank has made loans and credits to Brazil, the net

outstanding tota.l of which is nOVi about $140 million. These, added to the

IERD loans and sundry United states Goverru~e~t agency loans, bring the total

of foreign institutional lending to Brazil to about $238 million.

Brazil's total outstand~g foreign fixed-interest indebtedness thus

amounts to around $583 million. Annual amortization and interest due on this

indebtedness is estimated at ~~46 million for 1951, falling to about ~28

million by 1960, and to about ~5 million b~r 1975.

Foreign direct investment, recently est~Jated officially at about

t850 million, now represents approYimately 60% of total foreign investment

in Brazil. otner estimates, however, suggest that the total ~ay be closer

to $J.,OOO million. This investment amounts to about one-third of total Frivate

I

investment in Brazil and represents some 367 foreign companies, the largest of

which is Br.azilian Traction. The United States component in Brazil's foreign

investment total amounts to $400-$450 million. The sharp reversal in the rela-

tive importance of direct and fixed-interest foreign investments which bas

taken place in Brazil over the last two decades has probably on bale~ce in~

creased the utility of foreign investment of Brazil while at the same time

rendering foreign investment service payments a less ri~d item in the balance

of ptyments.

Since 1945. net new foreign investment, mostly U. S. and including re­

inves'tments of profits~ has averaged around $65 million annually. Over the

last year, rLUTIOrS have circulated of sizeable movements, current or prospec-

tive, of European, especially Italian, capital to Brazil. A recent statement

of President-elect Vargas indicates that he is desirous of encouraging foreign

investment, especially Americarl, '~roviding it comes to collaborate in the

development of our basic industries and by creetion of new ones, with the utili­

zation of the national reserves of ra~ materials, such as, to cite a few,

ni trogen, alkalis, caustic soda and paper. If

Negotiations are under way between the Brazilian and United. States

Governments regarding measures designed to encourage a greater flow of American

capi tal into Brazil through the provision of assurances and guarantees by both

gover~ents and the elimination of certain ta,."{. burdens.

In 1949 t~~sfer payments on accoLL~t of direct investment totalled

about $43 million, exclusive of more than $35 million of earnings reinvested

in Brazil. There exists a backlog or around $20 milli0n of dollar earnings

waiting to be transferred. and a probably somev.hat smaller amount of sterling.

3. Gold and Exchange Holdings _ .... ~ ___ ~ .. ~:..w~~ • ....--,..~

Tne movements of gold and exchange holdipgs emphasize the significance

of the events outlined in the previous s'ection. They illustrate clearly

- 26 -

the improvement which has taken place in the balance of payments position.

Gross holdings fell from around $165 million in 1929 to less than

$50 million after 1930 and by 1937 had recovered to only $54 million. At

the end of 1946 gross holdings had risen to $800 million and by the end of

1947 they reached a peak of ~~325 million. Of this amount, gold represented

about ~~350 mj 11ion, blocked sterling almost $200 million, and other bloc!{ed

or compensated currencies a further $25-50 million.

In 1948, $35 million in gold was 'transferred to the ~1F, and ~~26

million in sterling was used to acquire British railroad holdings. In 19l~q,

better than $50 million of blocked sterling was used to amort:i.ze sterling

bonds; French franc and Czechoslovakian compensation balances were used for

purchases of petrolemn refinery equipment; while current balances of sterling,

Belgian francs and Swedish kroner were largely depleted in the effort to

conserve dollars. In 1949 and 1950, upvJard of $200 million was applied to

the dollar commercial backlog. Total holdings fell from the high rnark of

1947 (which hovre V'er did not reflect current l~abili ties) to $ 750 million

at the end fif 1949 and $567 in Hay, 1950. In June 1950, holdings rose again

to $621 million, ana since June it is believed that holdings have continued

to increase under the stimulus of rising coffee exports to the United states

in the second half of 1950.

c$'.::f;t .;) Thil ty-fiV"€ million dollars was drawn from the n~1F in 1949

and has not yet been repaid, but on the other hand the present reserve

position is, after outlays, probably in excess of ~~300 million on account

of the dollar backlog, extraordinary debt arnortiza.tion and capital equip-

ment purchases in Europe indicated above. It is probable that on the whole,

the present position is better than at any time since 1946r~/

?:.! It may be noted that present goid--hClarng~~out $317 miiiTon are largely unencumbered.,

V. INTERNAL FIlJANCE

Brazil's internal financial e~~erience since 1940 has been less

happy than her balance of payments situation, for during the years 1940-19~·6,

Brazil underwent a violent inflation. Currency in circulation increased

about 250>;6 in chose years, and total money supply about 300';&; the annual

average increase in circulating currency was about 40% and in total !honey

supply about 50~b. Some part of the increase in the money supply was the nor­

mal result of increased economic activity, the vegetative growth of the popu~

lation, and the in~luaion into the money econo~ of portions of the COur.tl~'S

area and population not previously included. It is estimatei" .. that perhaps a

5% annual increase in the money supply can be absorbed in this way. That the

actual increase in the money supply exceeded the normal re~lirements of growth

was indioated by an extraordinary rise in the cost of living. On the basis

of data 'V'lhich probably underestimate the actual conditions, the cost of li v­

ing rose around 160?~ fron 1940 to 19tt6, an average increase of more than 2570

a year, compared with a secular increase of around 5~ per year for the two

preceding decadF;s, and of about 10% for the years since 1946.

Inflation in Brazil is a phenomenon of long history, and the secular

rise in the cost of living referred to above is significant since it appears

to imp] y that an inflation of around 5~b a year has been regarded as normal

in Brazil and, on the basis of past experience, is taken for granted. The

most persistent cause of this long .... run inflat ion 'l.'7as probably Government

defici ts o These were largely the product Of inadequate budget coo:tdination,

~ 27 -

- 28 -

administration and control, though in recent years, Government deficits have

been caused more and more by Government development of utilities and simiJ,.ar

services ~lllch private capital in Brazil either cannot or will not undertake.

The tax system is cumbersome, inelastic, regressive and widely evaded. The

income tax was only effeeti vely j ntroduced du:-ing the war, and tben was de-

signed largely to offset the los s of revenue from imports 0 Direct taxation

of agriculture incomes is still mainly nominal, and Brazil's.most produ.ctive

source of revenue continues to be the consumption (sales) t~~.

Balance of :r;ayments surpluses have been recurrent in Brazil f s r.ds...,.

tory, but the secular decline of the exchange rate is wi tn-ess that su.rpluses

as such were not traditionally an actively persistent or burden30me infla-

t ionary factor. However, the drastic devaluations caused by the sud.den col-

lapse of export markets. not infrequently attended by equally abrupt cessa-

tion of the net foreign. invEJstment ~nhich [lad been a mainvin of the precarious

inten1ational payments balance, had the effect of creating direct and imrue-

diate inflationary pressures through increased inventory credits to both ex-

porters and importers.

ExpanSion of bank credit, except on a fe~T explosive occasions, has

bee.n a relatively passive factor in Brazil t s inflationary process. The mone-

tary st~cture was loosely organized, traditionally conservative and geared

strictly to commercial banking. There was no coherent exercise of central

banking functions, 1/ nor investment, farm mortgage or farm credit insti tu­

tions as such. Not until 1945 was any attempt made at overall monetary

Currency is issued by "the Federal Treasury in response to requests by the Banco do BraQil and against rediscountable paper.

- 29 -

coordination and supervision.~ and even the supervisory body then established

exerted only a quallfied control over currency issue and no more than advisory

and admoni tional supervision over savings banks and pension institutions. so

that the sUYJervisory agencyf s ability to integrate and di reot the several.

sources of savings has been relatively ephemeral. It has had, moreover, lit-

tIe, if any, power in respect to the existing security markets.. As a conse-

quenee of these facts, as well as of others of a psychoJ,.ogical and tradi-

tional nature, such as th~ high rate of profits, inter~st rates in Brazil.

have traditionally been high, and short-term commercial and speculative enter""""

pri se has been more attractive to private ini tiati ve than long-term inv8stmfnt,

with the exception of real estate.

The inflationar,y experience of 1940-1946 was historically exc8ption~

in that, as a consequence of the peculiar cond.itions created by the war, bal-

ance of payments SUI1>l"lSeS, Government defici t financing and bank crem t ex­

pansion were all co.-ex~stent. 51 !Che relative contri but ion of these factors

to the money supp} y is illustrated in the following tabulation q

INCREA.SES$ 19).t-1-1946 INCLVSlVE (billions of cruzeiros)

Net goJ,.d Federal End of Money and budget period, supply exchange de;ficits

1940-46 35,,1 13 f1 5y 8 0 3 1946-49 13,,8 - .7 Z03 1/ To November 30, 1949

.

_.-Com. bank lop.ns

.~---.--.- '--. 29.4 12.2

Y The Su.perinten.dency of Money and Credit, a Monetary Eoard, compri sing the heads of the chief monetary and fi scal agencies of the Government and the Bank of Brazil, and created to supervise the bankiI")g structure pending es ..... tablisbment of Central Ru.ral and Investment Banks, the enabling legi sla?"" tion for which has been before Congress for almost three years,

g/ !n the period ~946-1949 relatively ~arge and widespread increases in wages

- 30 -

From 1940 to 1946 ~he increa~e of gross gold and exohange holdings

from $62 million to $800 million provid~d a major source, if not the sp e al'he ad ,

of the inflationary proces$~ Some m~asu.res designed to contro+ the inflation.

including suspension of restriQtions on remittances and dividends and the ~e~

quirement that export proceeds be partly accepted in the :form of treasury

bills, were adopted by the Government in an effor~ to counteract or sterilize

part of the net inflow. The partial natu.re of such measures t as well as inef,...

fective administration in large part nullified their purpose~

Deficit financing during the war exerted a constant thrust against

money supplies and prices at both the feder~ and the sta~e and local govern­

ment l.evel.r<.Y The increased Federal Government deficits mainly stemmed from

the war effort; those of the state and local governments partly from expanded

costs ar.d services, partly from the inflexibility in revenue sources" AnJ.'1ua).

expenditures, at all levels, rose about 300% from 1940 to 1946. Though

changes were lliade both in the tax and the rate structures t revenues VI€re con-

sistently unable to keep pace with expenditures, On the part of both federal

and state governments attempts were made to finance deficits by vo~untary

bond purchases, and failing this "by compulsory bond purchp.ses, with the re-:

sul t that mapy of the bonds came to the banks at large discounts~ In the

end, the Federal Government financed most of its wartime deficit with note

issues, and the state governments some part at least of theirs at the balli~s.

ruld salaries to industrial and federal personnel reflected in bank loans was added to the other sources of inflationary pressure"

Y Federal expenditures QJnounted in 1949 'GO about $1.1 b:l.llion. 01' around :}..216 of estimated national incomE? Combined state and local un,i t expen\ii tures totalled about $O~95 billion.

- 31 -

The expanded money incomes created by the rapid growth of the money

supply coincided wi th an ab rt..lpt suspension of impo rt s of many consumer goods ..

Although the duration of this suspensioll could not be knOV-TIl, it waS not ex­

pected to be brief. The implicit promise of steadily risipg prices offered

multipl~ opportunities for quick and certain profits. The result t"Tas a

spect11ati ve boorno

The banking syst~m and,. the monetary authorities for their part did

little to restrain the inflationary pressures and in fact actively contri­

buted to them. Although some expansion of credi t on the basis of export sur­

pluses and GoVernIJ,lent deficits was to be expected, there seems to be evidence

of spontar.eous and speculative credit inflation on the part of t:le banking

system, including the Bank of Brazil, the s(3,vings banks and the social security

institutes. The war years also witnessed the apIBarance of a large number

of small banks primarily tn~erested in speculation~ The monetary authorities

failed to take necessary precautionary measures until 1945- In that yeax and

sub sequ.ently at tel1J.pt s were made to place a damper on the secondary inflat ionary

forces, bU,t effective cor~trol "'as only achieved after the war vThen tihe contri­

buting forces had largely 1Horn themselves out.

One significant result of the wartime inflation was a weake:ling of

the bond market in general and the lPederal Government bond market in particu­

lar" Wi th speculative and cor.1f.lercial activi ties willing to pay l05~ or more

for money because of prospective profits or capital gains 1 the security of

Gover.rnuent or other fixed-interest securities increasinsiY became an insuf­

ficient incentive to offset their relatt vely 10',\1 rate of nominal yield. Since

1946 the increase in the amount of donestic funded debt voluntarily held by

t

- 32-

the public has been negligible. In 1949 the effective yield on 5% Federcal

Government bonds varied between 6 .. 7570 and 7 .5ay~; and the yield on most state

bonds was even higher. This si t'.lation, which has already seriously restricted

the Government I s fiscal 8_ctivi ties, rromi ses to be evan more of a handicap in

regard to the financing of its development plans.

After ~946 strenuous efforts were introduced by the monetary authori­

ties to bring the inflationary momentum under control, and between 1946 and

191~'9 currency in circulation increased only about 65b per year, ar.d the total

money supply about lD;b" In t:lese e:Z'forts the autr.orities v'ere aided by t~le

reneTIed availab iIi ty of imports which placed the balance of payment s in defi­

ci t and thereby reiieved the inflationary pressill.'e from this source. Some

part of imports during thisperioa., those cc .;prising the bacir.log, were not

currently ::laid for by the importer ei t~ler in excb.ange or in cruzeiros to pur­

chase exe hange. t;ihi1e this position obtair .. ed these ir~1ports occasionea no

decrease of money supply, but their introiuction tad so~e reaction upon com­

modity prices. I ... rnid-J..949 importers were ret:luired to deposit cruzeiros with

the Banco do Brasil in purctase of exchange asair-st their outstanding remit­

tances, so that subsequent liquLiation of the exchange backlog was yri thout

further influence upon u.oluestic inoney supply.

In 1950 a mild. repeti tion of the tJ;artime situation occu::rei when the

cruzeiro proceeds of expanded dollar earnings from coffee were not specifi­

cally taxed on the one han..l. t ar.d on the other v:ere nov converted into addi­

tional import s. The dollars were used to 1iq~id.ate the dollar bac~05t ond

the cluzeiros were 18ft to augment the mcney supply in this period. Ir- the

immediate future it mDY be e."<.pected that the increase in coffee prices flill

- 33 -

cOtltinue to be inflationary sin ce the agriculturDl incomes increasingly re-

cei ving the benefit of the high coffee prices are virtually tax free. In the

more distant future, considering the eXisting Governmental development plans

and Government trade and exchange controls, it is not expected that over31l

balance of payments surpluses Viill aga~,n figure as an important in:la~ione.r.f

force, except in the event that an aggravation of the present international

crisis finds the Government unprepared to combat a renewal of wartime co~d.i-

tions in which incoPle from export s expands at the same time that availab:e

imports contract.

As the focal point of the Government's pos'twar an~i-inf1ationarJ pro-

gram, the federal budget was brought into balcllce in 1947 and 1548 for the

first time in twenty years, though the state and local Government buJ.gets

continued to be in deficit. In 1549 and 1950, nowever , ep~arged Federal

Government outlays t primarily resulting frou. the Go~err.ment 1 s determination

to una.ertake developmental projects deemed necessa=y, brou~ht 3.bo:l.t a return Y .

to deficit financlng and the necessit.! of new curreLcy issues. Present 1n-

dications suggest tl~t only by dint of drastic efforts will it be practicab:e

to balance the federal budget in toe near future. Inv"estment ctU''':'ently com­

prises about 251b of federal budget expenditures, and sin~e the defjcit in

1949 was 16% of revenues, it may be said to have resulted from federal in-

vestment outlays rather than from deficit upon c ..... rrent revenues and e:Tendi-

tures.

The Federal budget sllowed a su.rpl':ls of 460 zrd.llion cruzeiro s irJ. 1947 and 4 nrl.lli 'Jll in 1948, followed in 194~ bi a d.efici t of 2.810 million. A deficit (If up to 5,CCO million is expected in 1950 and preliminary budget estimates for 1951 indicate a budgeted deficit of 1,866 million cruzeiros.

- 34-

In 1946-1947 a sweeping reorganization of the banking system was

drawn up and introduced into the Congress where it is still under study. This

refonn would integrate the monetary structure by the creation of a. central

bank with considerable powers, and would enlarge the areas of effective cre­

di t operation through specialized institutions devoted to investment and to

rural and mort,gage credi t. It is believed in Brazil that such a reform ':muld

bring substantial improvem.ent in the organi z8.tion and orientation of both pub­

lic and private savings, though the possibility of intensification of exist­

ing pressures through over-e:AJ)ansion of credi tis recogni zed, as well as the

need for complementary fiscal r~forms! In the absence of the controls en­

visaged in the proposed reorganization it was mainiy the banking system ~Nhich

by extension of new credits to importers and for export inventory support in

1947 and 1948 kept a str0ng deflationary trend from attending the Government 1 s

policy of budget and currency restraint and thet'eby contrib'Qted to the need

for new currency issues in 1949 and a renewed rise in prices o

In the light of all the foregoing observattons, and apart from the

possibility of a renewal of acute international crisis, it is not believed

that a fresh outbreak of inflation on the order of the recent w~~time exper­

ience is imminent, since most of the factors which fostered that situation

either are no longer present or are subject to controls previously non-existent.

If serious foreign supply shortnges should develop, nowever, concurrently with

rising demands abroad, a recurrence of conditions similar to those which pre­

vailed during the war might arise. Under those c~rcumstances the great prob,...

lem facing the authori ties would b~ a plethora. rather than a shortage of dol­

lars, and the question of whether the public without the stimulus of eX];.licit

- 35-

hostilities could be induced to accept the rigorous controls necessary to

prevent a sharp rise in prices.

On the other hand, it is diffic"tit to see how an inflation of 55';-1D;b

a year can be avoided unless measures be taken to prevent large Government

(Federal, state and municipal) deficits Vl~llch feed the fear of furt~~er infla­

tion, stimulate speculati8n, keep interest rates high and depress the Govern­

men t bond marke t .

If Brazil's future develorment is to be carried out most rapidly and

with ~cudmum benefit to the entire economy, so~e modification in the existing

fiscal-monetary o=gar-ization is desirable. In the forefront of these ooJifi­

cations is the desirability of restraining inflation by all practicable means.

To implement and/or stl.!."?Dlement this central :!,)tIOose increased centraliza~ion

of the financial structure, greater integ=ation ani direction of the eY.isting

sources of savings, and modernization of the existing tax structure, v.'ould

be necessary_ It \,;ruld also be a.e3iral~le to divert for developmental pur­

poses some of the wlr..dfcll profits rresently accruing to coffee anu cotton

growers, as a result of rapidly rising prices abroad before they are dis­

sipated in a further rise of dooestic prices. At the present juncture it is

believed that the most salutary step which could be taken v/ould be adop".iion

of a firm policy of balanced budgets. That step, once token, would result in,

or facilitate, mos\\ of the other changes iniicated above.

VI. DEVELOPMENT PROBLEHS, POLICIES, AND FROGRAIIS

1. Problems

The foregoing survey has revealed certain basic problems in :3razilts

development, the solution of vrhich "viII necessarily be long-range', but the

existence of which greatly influences shorter-term difficulties. The

following recapi tula'tion suggests some solutions which today appear to be

possible and desirable. Each, however, would require further thorough and

detailed technical and e'conomic studYe

( a ) Agriculture

Increase of agricultural efficiency ",viII be a continuinE probl81n

throughout development, since the manpower required for expansion of

manufacturing and services can come only from present agricu:ture. If

rural output is not to fal~, the productivity of. remaining agricultural

l-abor must rise, as manpower shifts out of at,;ricul ture. Failure ~1ere would

mean a fall of a~ricultural export volumes and/or an increase of fGod

imports with balance of payments pressures increasing to the point at whic~

non-rural investment and further urban output growth was gravely ha~pered.

T1"at an increase of rural productivi'tY in Brazil is technically

possible seems undoubted. Its final accomplish.:nent, however, will be dif­

ficult and its quiok accomplishment may be impossible. In the e:~ort sector,

advance will involve change of traditional cultivation practices on large

holdings presently relying upon cheap labor; increase of domestic food output

will depend largely upon change of the practices of small holders, a difficult

- 36 ..

- 37 -

matter in any country.

The traditional solution in Brazil has been movement to nerr lands

vlhose natural fertility temporarily restores productivity. l"llis, hO':Jever,

is becoMinc decreas;.ngly valid; the problem is now one of the productivity

of labor no less than of land, and sui table new land in any way becoming

increasingly scarce, particularlJr in rp.lation to a rapidly increasing

population. The limits of agricultural migration are coming into sight,

""i th increasingly ej\:pensive investment in interior transport beinG required

to ~aintain the process in the meantime.

The present and expected situation in i.'act requires the continuous

and ma.ximum Jjoss~ble increase of rural labor productivity in areas presently

cultivated, together with steady expansion into suitable new areas of i1;1proved

acricultural practices rather than transplantation of old practices accompanied

by land abandonment. The rural economy may thon be able to expand both food

and export production at a rate supporting an increasing standard of life ~or

a rrow:i.nF population. 'Ihe increased rural incomes will themselves provide

en:1cr,ced purchasin~r po.,·!er and. thereby enlarge the internal market for

domestic mar.ufactures.

(b) Transportation

Transportation in the minimal form of farm-to-market roads is

essential to the expansion of an internal market for both rural and urban

products. Improved roads are necessary to enable industry to develop in

terms of technologically optimQ~-size units and to avoid an aggravation of

present regionalistic tendencies through unnecessary reg~onal duplication of

- 38 -

production facilities.

Proper solution of the transportation problem will involve cteber­

mination of the best distribution of available funds among railway, hl~ h ... -vay

and waterway facilities, and between the initiation of n~v, and im~rovffinent

of old, facilities, Decisions on these matters depend upon topography and

population d.l.stribution, fllel availabilities, 8.nd the direction of agri­

cuI tural development, whether by expansion into new land or by restore t::"on

of old land.

(c) Fuel

From the point of view of industry as well as transportation

the problem of fuel availability is crucial. In a country of Brazill s size

and topography, the suprly of petroleum products will pa~a11el, if not

condition, deve:opment; if these products must continue to be inport~d, the~r

will place a growing burden on the balance of pa;yinen ts Hhich in tme \;i11

have the effect of forcing a contraction of other imports and of :"nd'lci:1g a

tempo of import-substitution more rapid t1:~an economic desirabili t:'l J

based on comparative costs would warrant.

The fuel problem in Brazil is closel:t tied up with the present

uncertainty about local petroleum supplies. Brazil is genera,lly beliEved

to have large potential availabilities of petroleum. 'Ihe problem is: "':;ho

shall make the tremendous investment necessary to explore and exploit them?

To date the Brazilian authorities have not taken a definite stand on t:1.i.s

question. On the one hand, they have found themselves unable or unwilling

to offer the concessions which would induce foreign cf-pi tal to undertake

such a project; on the other hand, they have failed to undertake the task

- 39 -

wholeheartedly themselves a

In view of the dependence of transportation develorment upon fuel

availabilities, and of a.:ricul tural and industrial development upon trans-

portation, it would seem that finding out whether Brazil does or does not

possess adequate pet~oleum reserves should be given a very high priority~

(d) Power

In the meant:line, the possibilities of a through-going substitution

of hydro-electricity for petroleum as a motive power are being optimistically

entertained by the autho~ities. Preliminary engineering opinion suggests

that such an undertaking vIOuld in'!olve tre~end01.ls initial investment, as

compared with petroleum exploration; hydro development contains an element of

security not obtainin[ in the other case, but the massiveness of the

required investment would place drastic restrictions on other forms of

conco::litantly desirable investment. roreover, as noted earlier, in a

country as large and unpopulated as Brazil, an almost total dependence on

hydro-electricity would hamper the transportation s;.rstem•

(e) Developnent Financing i

The probleo which underlies all others is that of financing develop-

ment needs.

In one respect, this problem is measurably easier than it was even

ten years ago. The f~ct that many of the major raw materials of development

are now produced domestically means that although exports will continue to

call at least the tempo of the tune of development, development need no

longer ceme to a standstill at every dovmward trend in the balance of

-·40 -

payments. Existing exch~ge and commodity import controls, furthel~ore,

allow the Government greater leeway than formerly in the rationing of

exchange between invi.sible payments and import,s; and amonc imports, betvieen

consumer and capital goods.

The partial relief from the earlier heavy depe~ldence on the balance

of payments, however, has been replaced by a greater dependence upon

domeatic savings and the mechanisms for collecting them and util~zing

th($ most economically. This new problem Ylill increasingly involve the

necessity of containing inflation in order that speculation shall lose its

present appeal, and that a Government bond market may ir..creasingly serve

as a depusitory of public savings and instrument of social benefit\:' 70

these ends, reforms will be desirable in the existing ta:{ st:':'uctl~rfa, the

existing mone-hary controls, tbe present application of social security

funds, existing !Jlethods of administration at all Go-rrernmental lev-els.) and

the legal provision surrolhl1c:ing private corporate fil1ance~ Such reforms have

already been given at least p~'elimi:1ar~r study and recommendation by the

Joint Brazilian-U&)S~ Technical Commission.

In order that the most desirable use of available development re­

sources shall be ensured, an overall developnen~ committee could be cr~ated

to screen, coordinate and oversee all public investment invo].vin~ federal

participation, whether wholly domestically financed, 01 financed partially

by foreign investment. Such 8. step would tend to !Jin.:!.r.tlze the 'wastefulness

inherent in ad hoc invest:nent decislons b:v~ m0re ':)r l.Z~f·~ compe'~:~!1g ,genci~s;

would permi t de-ve!opl\ent:~.l al.l.Jcatj.:..ns to bo aG::;~ f:: .. ..;t: ):1. a UY}.ifOl'ID; rat·ional

and overall, ratner th~n on a regior~al or na:-'ro:'f e:oncinic area, basis; and

would reduce the possibility of the sum of the separate investment decisions

- 41 -

exceeding the investment capacities of the economy. Given the proper

au thori ty and liaison vri th other Government agencies I such a committee

would materially help development to be more truly balanced and generally

beneficial than can be the case under present conditions.

2. Previous Government Development and policies

Conscious developmental policies, and even programs, are not sowe-

thing novel in Brazil. They may probably be considered to have been a

product of the coincidence of the cof£ee collapse and Getulio Vargas'

rise to power after 1929. Such policies have had greater and lesser degrees

of economic coverage; in general they have contained a considerable content

of protection, and until recently vrere more or· less inti..lJlatel~r associated

with nationalism co Setween 1939 and 1946, extra-hudget pu1)lic 1ftJol'ks procrams 1/

of minor proportions l':ere in effect.-

For the most part, however, those earlier programs were piece-

meal affairs and had ~ittle of coordj.nation ana overall approach. itather,

they were ad hoc attempts desi.gned either to meet specific geoE;raphical

emergencies, as for instance the extend~d droubht conditions in the north-

east; or they took the fom. of tr:Ting to alleviate temporary or accunl'llated

distress in limited SEctors of the economy -- eOb-' ~offee, cotton, te.:;:tiles,

lunber and rubber.

The Covernment, at various levels!! has persistently att0mpted to

help solve ~ajor problems facGd by' abric~lture~ Fede~dl and state rovern-

ments have est~blished statio~s for study and exreriQentution and for pro-

ductio~ of new seed strains. Co~od~ty institutes have been authorized or

]:/ After 1946, all. budgetary outlays were unified.

42 -

established to stabilize production of the major commodities, and accUI:lula­

ted stocks of agricul+,ural commodities have been financed by the Govern":lent.

Taxation has been virtually withheld from fann incomes, and Government

agencies have taken tentative measures to assist the farmer with agricul­

tural credit. In the case of Yvheat and rubber, active subsidies have been

maintained to support or expand production.

Government assistance to industry has probably exceeded that to

agricul ture. Direct aid has been extended to numerous industries in the

form of tax exemption, and increasingly in recent years active fj.nancial

participation has taken place, eug., in the power, steel, coal and al~(alis

industries. Indirect assistance through the tariff and discriminato~f

taxation has been widely applied and consti tutiona.l restrictions have been

applied to large areas of economic acti vi t~r, like mining, petroleum,

comrr~unications and public utili ties. During the past years, the same policy

is apparently being applied through the ne1i'Tly developed controls over

commodity imports"

Although in regard to basic industry, the Government's efforts

have bee~l of appreciable benefit, never-cheless in a broad sense the effect of

the Government's protective develofmental policies in the past has lar~ely

been to free the economy from foreign competition, to support the marginal

produ~er and to sustain a high domestic cost structure.

At!. the present time, the broad policy appears to be one \·:hich :ays

heavy emphasis on self-sufficiency on the one hand, and aims on the other to

protect all segments of the economy from makinE a loss, even at the expense

of pricing Brazil out of intefnational markets.

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3. ~8nuning : 'Ihe Sal te Plan

Although in the past no overall development programming a.gency

has existed, a recent Brazilian-U.S. agreement created a Joint Conwission

for Economic Development which has not yet commenced work c In the meantjJne,

an overall development program was drawn up by the Government in 1947-48

and was passed by the Congress in May 1950 0 This program was the Salte Plan.

It is a fiV'e-year program, involv;i.ng expenditures equivalent to a billion

dollars (currently the amount of one year's federal budget in Brazi~) during

the period 1950-5L for Public HeaJ, th, Foodstuffs, Tre.nsport and power.

It was the result of extended study of the overall needs of the country by

Government experts which was subsequently subjected to two years of crit::'cal

analysis by the congress, as well as to analysis by the former Joint Brazilian­

U "S. Technical COITunission CI Integrated into tl1e program are the present povver

projects of Brazilian Traction and ,I\merican and Foreign Pov.rer, as 'nell as

the anticipated operations of the special Highway Fund. 11he plan, furthennore,

looks fOI'v'Tard to considerable mnounts of resultant private investment, sub­

structures for which will appear as the Plan progresses. In its over~.ll

approa.ch, the Salte Plan corresponds closely to the summary of major develop­

ment needs outlined above ,.;i th, ho".;·ever, considerable difference in Emphasis

as to the relative importance of immediate development of fuels.

The foreign exchange component of the Plan is not kI'loYJl1 in detail,

but is esti.;r.ated to' represent around 25% of the totals most o·f this, however

reflecting -the foreign-financed "power frojE:cts and pu.rcba~e af transportation

and petroleum-refining equipment. It '.Tas believed by the framers of the

program that the projected foreign excha.nge outlays would be more than

recouped by the savings which would result from reduced ~nport values

following increased domestic wheat production and petroleum refining o

The outlays for the several sectors into which the Plan is divid.ed

are shown in the accompanying tabulation in dollars and percentages:

.ANTICIPATED F'EDERJl.L GOVFBNr[.NT OUTLAYS OVER FIVE-YEAR PERIOD

- . ..,.....--_ ...• Hillion . dollars . '.- Pel~-:" cent-

Pu~lic health ....... • • • • • • • • • • • • • • • • • • • • • • • • Foodst1lffs (I • " " •••••• " • • • • • • • • • • • • • •• • • • " • • "

Transport •• " •• " •• • • • • • • • • • • • • • • • • • • • • • • .. • • • Povver .... co ••• , , •• ' •• " • • " • • • • • • • • • • • • , • • • • .. • • •

Revolving fund for equipment purchases

Interest and sundry ........................ Outlays in 1949 "."o~e ••••• , •• ·.oce •• e ••••• '

Five-Yea,r Cos·t 1950-1954 • " •••• '1)' .• ',; ..... Q •

144 149 608 174

13.3 13~? 57.0 16.0

100,,0

. ____ -.-....-------,i~,--·---~-------.........,.-----....-.i-' --.-, ... -.--~--.-....-.-.--

On the assumption that the percentage allocations reflect a priority

sense, it is clear that Brazilian planners believe transportation to be the

number one need t.o vThich dorn~stic public resources should be devoted. By

the same token, it appears that petroleum exploration and drilling,

included in the Power Sector and accounting for about 6% of overa.ll outlays,

is considered by the Government either as of secondary importance or perhaps

as an object of future international coope~ation.

The second largest outlay is for pOYver, thoUgh the greater part of

this represents e:xpendi tures of Brazilian Traction and Arnerican and Foreign

Powers. The most important Government outlays are for ~aulo Aff.'onso, as

- 45 -

well as aid to state electrification l!rograms in Rio e·rande do SuI

and Sao Paulo. Expenditures for agriculture (foodstuffs) a:re m.ainly for

experimental worle, seed improvement and storage facilities.

;::::::;::===::::;::::===============:.::=======:::::::==::::::====:::=;=-==-;~ .~::-==-----=--.-rlotal

Outlay ~':ii:r~

Period

1950 1951 1952 1953 1954

Total 1950-54

Outlays 1949

OVerall

Source of Funds Budgetary~propriations Credit Operations Ordina::-'Y Special - Sal te Plan :cxcharige

budget constitutional Bonds borrowings sources ~/ from Bank

of Brazil

1900 2200 2400 2550 2600 58)'~

11650

1300

340 310 335 365

7%

1350

----------------lOCO 1000 1000 lOCO lCOO

25%

50eo

500 450 400 350 3CO 10%

2:0CO

cruzeiros

3400 3990 4110 5235 4265 1CO%

2GCCO

1300

total 12950 l350 5000 2000 21300

];/ Included in the buc1eet but expended in ac.;cordance with specia.l con­stitutional provisions.

The projected i'inancing of tte Salte Ilan, $UJ!1.r:arizec in tte

preceding t$.ble, indicates that over the life of th0 plan 58% of the

necessary funds are eXIJected to come from the ordinary bu~; get, 25:~ from the

sale of 7tf" l5-year internal bonds J 1(% f:,.,.;cm t:le use of.' foreign exchange

held in compensation accounts in the Bank of Brazil and the balance from

revenues earmRrked" under provisions of tlre Constitution of 19L.6, for

development in specified areas. HOllleVer J it is provided in the enabling

- 46-

legislation that, in the event that the internal bonds cannot in an:,;" g':'ven

year be sold up to the qnota scheduled for tha.t :,"ear, the fresident- .

may borrow abroo.d up to one-half 0 r the year I s qaota.

The authors of the Salta Plan have asserted that it will net

be inflationary; since mcreover it ~ill in the main use ~~skilled or

newly-trained !1ersonnel and need not be eXi~ected to call .Lor capital

imports needed elsew!lere in the eConOf.iY; it shculd net :.:terfere with

private investment except in the E'vent of .a drastic rise in taxes b~" f".~t:10(!S

wh:i_ch woul: reduce the level of private savint:s. The non-in~·}_atio .. :r.,'"

claims of its llutl:.ors -:(Quld in ::ar~e rteG,SUl"e be true i~ d\1rir:g; t~lt~ cl)';.J'se

of the pl'cgra:l, the federal buc1ge+ c~n be. bal·-need ~Ul(i if in-:.er:lal bO~lds

can be sold. Ho"mver J at trlis jUHC+l~re nc':' th.er v1' tht)£E: eve.lt.ua: i ::':.es

appears likely, at least in the ear!:! :,;'ears of the 1'irot:ra~. 'I:1F~ bu.t!eet)

which went badl~T out of balance in 1?J.9 t"nc 1s l:'.a:)le to an 8ven

larger deficit in 1?5C, is 8X:~CSAd to nl'eSf .. ures in the Conrrclss that do

not premise the p!~obabi lit:" of F:r'oxi":late bal'1nC{3 excej,)t in thp event 0;

cor.siderable refoms of t!le tax stru('tJre. .Lhe ~'alte T'lan, as the mart,il'}al

inf'rement, may be viewed as thf cruse of t}..c> I-roba,;)le imb,\'larlce. ' ... ·he

present zi tuation of the :1f)vern:1cnt bond :iar~~ets for its part holds little

promise for intert.al debt vpel"'at1.cns on a voluntar:l basis, of t~le '''iaG:''~ tude

envisioned, unless subntantial C:ian~~"s ere intro<:uced lnto the oricnt(~tion,

structure ar!d administrr.tion of the bankil1C nnd cr(H~it system.

:.oreover, it is to be noted that even thcuBh the :,urely ::1o~(.:tary

causes of i~flatlcn 1'l'ere t:~pt to a mini~u.,., t!1are would probabl:f be SOT.1e

I

- 47 -

infla tionary impact owing to the diversion of real r.csources ~ror.l the.).!'

present to new uses~ unless either the extent of concealed unem~lc~rr.nEnt is

comparatively high or the rate of productivit:! in('rease in the deprived

areas were to be in proportion to the rate of resource diversion.

Analysis of desirable reforms in most of these connections,

and resultant recommendations, were put forv:ard in the Report of th,r­

JoInt Brazilian-U.S. Technical COrn:lissiol:1" ,As a result of tho recc!J.t

publication of that Report in Portuguese, its findine:s are receivin':

increasing study and attention and already sor!le iP1plemerrtation in Braz~.l.