Has Brazil followed India’s Political Economic path to Progress since 1950: A Comparative Study

IMG_4794Institutions and Geography change slowly. Moderate changes in country specific circumstances produce discontinuous changes in economic performances. This is a comparative study of the economy of Brazil with India from the period 1947 uptil now. Since the economic model followed by Brazil has similarities with India and the opening up of the economies of both the countries in 1990 & 1991 respectively yielded a similar kind of growth the comparison done by Colonel Sudhir Nair reveals an interesting insight.


Post 1945

Import Substitution Industrialization

This period saw a multi-party democracy up to the time of 1964. India too saw a multi-party democracy from 1947 onwards although no worthwhile opposition existed till the 1960s. Brazil adopted a policy of Import Substitution Industrialization (ISI) 1. This policy was considered as a remedy to reduce mass poverty. The Brazilian economist Celso Furtado2 was a strong proponent of this idea. Brazil was successful to an extent in implementing the ISI policy. By early 1960s the domestic industry in Brazil supplied 98% of its consumer goods3. The period between 1960 and 1980, saw an increase in life expectancy from 52 to 64 years.

A closer study of the ISI in Brazil reveals a planned implementation in four broad phases4. The initial phase between 1945 and 62 was a period of intense ISI activities especially with consumer goods. There was a stagnation noticed in the period 1962-67. However the period of 1968-73 saw rapid industrial expansion and modernization (a parallel to this kind of policy implementation and development can also be seen during this time period with India). Brazil saw a sharp rise in inflation in the period 1945-53 and also saw a sluggish domestic market. This led to a balance of payment crisis due to more imports than exports. The Brazilian government now went in for priority imports of essential goods and inputs like fuel and machinery. The government discouraged imports of consumer goods. Further the government adopted an explicit policy of ISI. This clamping down on the policy of ISI can be seen in the light of government’s interventionist policies which have been followed in India and China too, whenever the government felt that such kind of measures were needed. However even such an intervention did not yield the desired result of improving the exports. The government in 1953 went in for multiple-exchange rate system5.

The period between 1957 and 61 saw the Brazilian government introducing the Tariff Law of 1957, which was to increase and solidify the protection extended to domestic industries, considered basic for growth, notably automotive, cement, steel, aluminum, cellulose, heavy machinery and chemical industries ( India too at this time was doing heavy capital investment in heavy industries like cement, steel etc.). The ISI policy saw the average annual rate of growth of the country exceeding 7% (agriculture touching 9%). By 1960s Brazil had a fairly diversified industrial structure minus the vertical integration of industries. However the time period of 1949- 60 also saw a sharp decline in the share of non-durable goods industries from 60% to 43% and an increase in durable goods from 6% to 18%. The measures taken to mitigate the balance of payment problems through ISI failed in the longer run. The ISI program of Brazil also gave rise to regional disparities, a social problem which could have been avoided through early prediction. In India, too, the ISI program did give rise to regional disparities in economic growth. Although many economists have criticized the ISI model adopted by India, Brazil and other Latin American countries since it led to economic stagnation, primarily, by shortage of forex. Countries which followed alternative policies subsequently demonstrated that a FOREX shortage was a barrier to growth only within the context of the protectionist policies adopted and was not inherently a barrier to the development process itself.

A few interesting facts in the period of ISI – the value of Import of goods and services as a percentage of GDP which was at 6.6% in 1948-49 reduced to 5.6%6 (CEPAL, 1968). It is interesting to see the decrease in imports as a percentage of total supplies by categories for Brazil in the period 1949-64. The Table-1 given below shows a quick data on the reduction in imports.

Table 1

Year               Consumer goods              Intermediate goods     Capital goods


 1949                           9.0                                           25.9                               63.7

1955                           2.9                                           17.9                               43.2

1959                           1.9                                           11.7                               32.9

1964                           1.3                                           6.6                                  9.8


 Source: Little, Scitovsky and Scott, Industry and trade, pg 66

This period of ISI in Brazil led to three main problems- A rapidly rising population growth wanted more food. This demand for increasing agriculture products was met by Brazil by new lands placed under agriculture rather than increase in per hectare production of agriculture. There was a precarious rural-urban transportation system which was leading to a loss of 20% agricultural roducts7 (estimated).

The rise of relative food prices led to social tensions. The other major problem were the rise on inflation and accentuation of inequalities – the unequal distribution of the benefits from growth on a regional, sectoral and income group basis- which was producing increasing socio-political pressures for remedial actions (This period of 1949-60 also saw a tremendous pressure on national government of India due to refugee influx, uncontrolled population growth, demand–supply gap in agriculture production and heavy capital investment in domestic industries).

Brazilian economy in 1960s and 70s

The political situation in Brazil in 1961 saw the resignation of the then President Janio Quadros. Within this period, the growth rate of GDP @ 10.3% fell to nearly half in 1962. It further deteriorated to 1.5% in 1963 and 2.4% in 1964. The 1960s was the period of structural reforms. The new government, post Quadros was overthrown in 1964. With political uncertainties, foreign and domestic investments declined from 1961 onwards. (It is an interesting period to be compared with the Indian state. India was at war with China in 1962 and with Pakistan in 1965. Further the charismatic leadership of Nehru ended in 1964 followed by the untimely demise of Mr. Lal Bahadur Shastri in 1965. India too felt a leadership crisis and policy crisis from 1962 onwards till 1966 until Mrs. Indira Gandhi emerged on the national front)

The problem of leadership crisis capsuled with ISI, income became more concentrated than before and the new industries did not create sufficient employment for the rapidly growing urban population. In 1964, policy makers in Brazil emphasized on stabilization and structural reforms in the financial markets. There was curtailment of government expenditures in a number of sector, increased tax revenues as a result of improvements in the tax collection mechanism tightening of credit and a squeeze on wage sector. Price distortions were eliminated, public utility rates were raised sharply. Such measures led to the gradual reduction in government subsidies. This also led to decline in government deficit to 43% of GDP. The inflation was also brought down to a manageable level.

This period saw the modernization and strengthening of capital markets, which were deemed essential for sustained growth in the economy. Brazil carried out indexing on financial instruments- the principal and interest on debt instruments were readjusted in accordance with the rate of inflation. It was applied to government bonds initially however were extended to all financial instruments. The capital market law of 1965 gave an institutional setting for strengthening and increasing the use of the stock market and encouraged the establishment of investment banks to underwrite new issues. New credit mechanisms were also developed to increase demand of investors and consumers for the output of Brazil’s growing industrial capacity. Many special funds were created in order to finance small scale industries. The period 1964-74 saw increasing use of tax incentives to influence the allocation of resources among regions and sectors. These tax incentives were used by the government to develop the backward areas of Brazil – the northeast region for example (a development agency by the name of SUDENE was created for the same). Such a mechanism was further extended to the Amazon region to stimulate exports, tourism, reforestation and the stock market. This period also saw the government closely doing sectoral studies in coordination with US Agency for International development, the World Bank and the Inter-American Development Bank. These studies were being carried out to design and guide the expansion of power, transport, heavy industries and urban infrastructure. The government at this time was also planning to exit the field of steel, mining and petrochemicals so as to have more private participation.

To achieve more stability to the exporters the government abolished state export taxes simplification of administrative procedures for exporters, introduction of tax incentives and subsidized credit. Also small devaluation to the currency (Cruzeiro) was carried to for keeping the exchange rate from becoming a political issue.

The turbulence of post 1961 of Brazil led to a stagflation situation until 1968. The Brazilian economy annual growth rate which averaged @ 3.7% in 1962-67 surged to 11.3% in the period 1968-74. It is interesting to note that the post 1964 policies raised the import coefficient to 14% in 1974 (Import/GDP ratio) whereas the ISI policies of 1950s had decreased this factor. The growth since 1968 was due to the impact of the government program. The development and growth in Brazil however resulted in uneven distribution– there was an increase in the concentration and distribution of income. The top 5% increased its income concentration from 27.4% in1960 to 36.3% in 1970. This situation led to some economists comment, “Belgium in India” situation – a population of about 22 million with a per capita income of about US$1,200 while 85 million receive incomes below US$300.(this was a situation akin in India where the wealth was concentrated among the few. This period in India also saw the institutional building efforts. Foreign aid to India from USA almost stopped 1965 Indo-Pak was. Indian currency was devalued and the further drought in 1966 again resulted in devaluation of the rupee. However the Indian economy grew at an average rate of only about 3.1% from 1951 to 1979. A point to be noted here is that from the time of independence the Indian political class had a leftist leaning- resulted in five year plans and establishment of planning commissions). Brazil always believed in growth oriented strategies which never had much of leftist economic planning. While banking reforms took place in Brazil, Indian government nationalized 14 major private banks in 1969. Also the Banking companies act was passed in August 1969. Further nationalization of banks in India was done I 1980.

The period from 1970s to 1985 can be seen as the period of the real impact of global economic forces on Brazil. We can also call this period as the period of military dictatorship that ruled the country for 20 years, headed by five different generals- Huberto Catello Branco, Arur Costa de Silva, Emilio Medici, Ernesto Beisel and Joan Figueiredo. The period also saw economic growth, large international loans, and inflation, left win guerrilla activities.

The fist effect of international financial influence came in the form of oil shock in late 1973. In March 1974 there was a change in government. The new government under President Ernesto Beisel tried to bridge the gap between the “Haves” and “Have nots”. The economic growth was pushed through the second National development plan (PND II 1975-79). It consisted of huge investments to have import substitutions of basic industrial outputs (steel, copper, aluminum, fertilizers and petrochemicals) and capital goods, expand infrastructures such as hydro and nuclear power, transport and communications. While investments in economic infrastructure and steel remained with the government, capital goods investment was carried out by the private sector, with support from the development Banks (BNDES). The effect of the policy can be seen in the following table-2. There was an overall reduction in import and increase in domestic production

Table 2          Import/Domestic production ratio 1973-81


                                     1973                                       1978                           1981

Paper                          0.22                                        0.10                            0.08

Steel                            0.25                                        0.06                            0.05

Fertilizer                    2.68                                        1.30                            0.85

Capital goods            0.66                                        0.55                            0.40


 Source: An economic and political perspective on Brazil by Albert Fishlow

This period also saw heavy borrowing by Brazil form international financial institutions. It grew from US$3.1 billion in 1967 to US$6.2 billion in 1973, an average yearly rate of 12.2%. The huge increase in current account deficit (CAD), after 1973 led to a steep increase in external debt. Much of the foreign borrowing was done by the public sector – public enterprises, state government and various public agencies. This resulted in an increase in the share of public debt from 51.7% in 1973 to 63.3% in 1978. The year 1979 witnessed the second oil shock. At this point of time Brazil was transiting from a military rule to democracy. Further, most of the external borrowings done were on floating interest rates, which ensure further squeezing of the economy with rising interest rates. The currency stayed overvalued in this period. Agricultural output suffered in 1978 and 1979. In December 1979, the government was forced to take some hard measures to save the economy – it devalued the currency by 30%, substantial increases in prices of public services, elimination of export subsidies and many other tax incentives. However the inflation galloped beyond 100% within a year. The government now slashed its public expenditures by 8% (from the originally announce 15%). Wages were cut, readjusted on the basis of 110/100/80% of the cost of living increase for various wage categories. Inflation however diluted the real purchasing power. Within a year the government was forced to roll back many a decision taken. However growth picked up again.

Macroeconomic policies underwent a change in the second half of 1980s. The government tried to carry out an austerity program by itself without imposition from an external agency like IMP. The measures taken were to reduce the aggregate demand. However certain measures taken to reallocate resources to priority sectors (agriculture and exports) by administrative measures backfired. The government finally ran out of money supply and approached IMF in December 1982. IMF dictated austerity measures were carried out in 1983 and 1984. It included raising of real exchange rate, reduction of domestic demand, investment and public expenditure, increasing tax rates. The IMF-Brazil relationship was not an easy one9. The economy started recovering in 1984. In 1985 Brazil finally returned to democracy. However the continuous devaluation of the Brazilian currency also resulted in changing its currency into five different ones in 20 years.

During the second half of the 1980s it became increasingly clear that a large scale fiscal reform was needed to control inflation and restore public sector’s capacity to invest. All the reforms adopted were to correct immediate crisis and did not have long term plans.

The Reforms stage of 1990 and ahead

A high level team was put in place to develop a stabilization plan and a program called Plano real was introduced in three stages. A new currency, the Brazilian real was pegged to the dollar. Economists saw merit in the program; Brazil received a loan of US$41.5 billion from IMF in 1998. Subsequently the currency was devalued and no longer pegged against dollar.

The currency was allowed to float and the Central bank was told to target inflation. A requirement to run a primary surplus was introduced in 1999 and the Brazilian government has hit the target for every year since then (which impressed the IMF). Rating agencies upgraded the country’s investment index.

Ever since the opening up of economy based on the advice of IMF and free trade agreements with Colombia, Ecuador, Venezuela, Peru, Chile, and Bolivia; Brazil realized its dream as a leading economic nation in South America. It also successfully negotiated free trade with Mexico and Canada and is now in the process with EU. Today Brazil is a member of many international economic treaties. It shows a market comparison in growth prospects with India in agriculture, industry and service sectors. However Brazil has experienced extreme macro-economic volatility over the recent years leading to an outcry to impeach the present President Mrs. Dilma Rouseff.

The country has a large regional and population disparity similar to India. As per The Economist10 “Brazil’s emergence has been steady not sudden. When all options were exhausted, it settled on a sensible set of economic policies. The economy was thrown open to foreign trade and investment and many state industries were privatized. Brazil today has produced some world class companies like Petrobras, Embraer, Vale and Gerdau. Just as it would be a mistake to underestimate the new Brazil, so it would to glow over its weakness……. Its take-off is all the more admirable because it has achieved through reforms and democratic consensus building (A la India), if only China could say the same.”

Comments

Brazil is characterized by large and well developed agricultural, mining, manufacturing and service sectors. It has improved its macro-economic stability. It has stark similarities of growth with India from the 1950s up to now. Both countries went in for ISI, government controlled public sectors with huge capital investments. Both countries tried to avoid external debt situations till the 1990s. However both countries went in for economic openness with IMF imposed conditions. Both countries experienced development.

The internal institutional, structural and financial improvements and adjustments have ensured economic stability in the country. Specific country data statistics is not given out since it’s available in open source and too big to be discussed in this paper.

Conclusion

Any country which has to achieve economic growth has to adopt internal policies which are specific to the country (may change within regions of the country). These policies generally guide the nation on the broad path of development. Endogenous factors, institutions and geography play a dynamic and important role in any country’s development. The increased connect of economies in the globalized world and the increasing influence of international institutions on a nation’s policies dictate the country’s integration into global economy. Brazil, India and China are examples of the same. The forms of government practices are immaterial to any country’s economic well-being. Economic templates like institutional development, sound government policies in sync with local conditions and integrating the same into international policies will ensure a stable long term economic growth and stability for developing and least developed countries.

Colonel Sudhir Nair is a serving Army officer having keen interests in Counter insurgency, Intelligence based operations in conflict ridden areas, International relations and International economics. He is presently pursuing MA DLB at JSIA, O. P. Jindal Global University.

Bibliography

  1. Import substitute industrialization (ISI) is a trade and economic policy which advocates replacing foreign imports with domestic production. ISI is based on the idea that local production of industrialized goods will reduce the dependency on same type of foreign products.
  1. Celso Monteiro Furtado was a Brazilian economist. He believed in economic development through government intervention. At a later stage, he served as the Minister of Planning and Minister of Culture. He also served as Director of Brazilian Development Bank.
  1. Import substitute industrialization, Notes on Latin America, Wikipedia.
  1. Country study profiles by USA on Brazil (countrystudies.us/brazil/62.htm)
  1. Multiple exchange rate system – here, we have both fixed and floating exchange rates in the market. However the market is divided into many different segments, each with its own foreign exchange rate. Thus importers of certain goods ‘essential’ to the economy may have a preferential exchange rate while importers of ‘non-essential’ or luxury good may have discouraging exchange rate- Reem Heakal, Investopedia
  1. Natural Resources in Latin American development (Baltimore, 1970), p 20, Joseph Brum Wald and Philip Musgrave
  1. The Brazilian Economy: Growth and development, Google books, pp 67, Werner Baer
  1. –do- Pp 91
  1. As per Dias Carneiro: “These painful negotiations leading to letter of intent between the government and IMP illustrates the difficulties involved in adapting the orthodox recipes of the fund to a developing economy which were highly indexed, where the government was responsible for one-third to one-half of total investments and for the intermediation of a large proportion of private investments through the administration of forced savings fund”
  1. “Brazil takes off”- The Economist magazine dated Nov 12, 2009

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