Brazil Economic Policy

Brazil Economic and Financial Policy in the 1980’s

South America

In the seventies in Brazil there was a rapid economic development: in this period the average annual rate of growth of the GDP was in fact equal to about 8%. The maintenance of high growth rates was favored by expansive financial policies and by the strong recourse to foreign debt. However, these policies have caused growing imbalances: in 1980 the inflation rate reached 83%, while the current account deficit was about 13 billion dollars. For Brazil 2016, please check

This situation changed radically in the early 1980s. In particular, the charges relating to the service of the external debt that had been accumulated in previous years have constrained economic policies and the development process. In the period 1981-82 there was a worsening of the international situation, with the stagnation of world demand and the rapid increase in international interest rates, which exacerbated Brazil’s balance of payments problems. In 1982, the ratio of interest payments on external debt to exports of goods and services rose to 25 per cent, while the current account deficit increased to $ 16 billion. Furthermore, since the onset of the ” debt crisis ” in the second half of 1982, Brazil

To address these problems, the country has adopted a consolidation program agreed with the International Monetary Fund (IMF). In this context, between 1982 and 1984 the general government deficit in relation to GDP was reduced from 8 to less than 3% and the current account balance was brought into balance. The adoption of this program also allowed the country to reschedule its external debt and to obtain new financing. However, due in part to the widespread indexation mechanisms existing in the Brazilian economy, no positive results were obtained on the inflation front, which continued to rise, reaching 200% in 1984.

In 1985, the effort to achieve reorganization eased. Thanks to expansionary fiscal policies and an increase of around 6% in real wages, there was a strong growth in economic activity which was however accompanied by a further increase in inflation. In order to reduce the rate of inflation without compromising economic growth, the Cruzado Plan was adopted in February 1986 which was based on a price freeze and the suspension for one year of most indexation mechanisms. A new monetary unit was also introduced, the cruzado. In the first months of implementation, this plan gave positive results.

However, the insufficient degree of tightening of financial policies and the sharp increase in wages granted at the same time as the price freeze caused an excessive growth in domestic demand and a rapid deterioration in the balance of payments which led, in February 1987, to the suspension of payments. payments relating to the service of foreign debt to commercial banks. During the period of the Cruzado Plan, strong inflationary tensions also accumulated due to the progressive dismantling of the price freeze: in 1987 inflation reached 230% and there was a slowdown in economic growth.

The economic policies implemented in the three-year period 1988-90 have not succeeded in modifying the previous negative trends. GDP grew very little (+ 3.6% in 1989); the inflation rate continued to rise (+ 3904% at the beginning of 1990). Furthermore, the defense of the cruzado caused a sharp reduction in foreign exchange reserves, forcing the Brazil to stop, in July 1989, the payment of interest on foreign debt. At the end of 1990, the central bank, changing course from the past, favored a strong devaluation to support exports.

Brazil Economic Policy