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Tel: +(9661) 4880018/25

Fax: +(9661) 4881073

P.O. Box 94348,

Riyadh 11693

Kingdom of Saudi Arabia

 

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The Economy   

Brazil covers an area in excess of 8.5 million km2 with a population of 184 million people. In 2006 the nation's Gross National Product was US$ 882 billion, making it the largest economy in Latin America and eighth in the world.

 

The history of the Brazilian economy during the colonial period was characterized by its specialization in a variety of products, which were of interest to the Portuguese. At the start of colonization, production centered on the production of Brazil-wood; later, between the 16th and 17th centuries it concentrated on sugar-cane production, whilst between the 17th and 19th centuries gold extraction was the main activity. From the second half of the 19th centurion, Brazil became one of the world's major coffee producers.

 The great depression of 1929 marked an important period in the Brazilian economy. The importance of coffee decreased perceptibly and the process of industrialization, which had started previously, became more significant as a result of the devaluation of the exchange rate and the establishment of a variable exchange rates policy.

The post-war period was marked by a rapid process of import replacement, which began in the sector producing consumer goods, and then moved vertically backwards until arriving at the production of capital goods and basic raw materials. This was especially noticeable during the last years of the military dictatorship imposed by the coup in 1964 and during the implementation of the Second National Development Plan, under the management of the president at that time, Ernesto Geisel (1974-79).

The paper industry is one of the

 mainstays of the Brazilian economy

Today, Brazilian industry accounts for 20% of national production, agriculture for another 20% and the services sector for 60%. The majority of the Brazilian population is concentrated within urban areas, particularly in major cities. Brazil's urbanization index (GD2) is 75%, rising to 93% in some regions, as in the case of the state of São Paulo.

Inflation has been the most distinctive feature of the Brazilian economy. Since 1948, when the Getúlio Vargas Foundation began to calculate the general price indexes, Brazilian inflation has always been very high, always on the increase and most of the time climbing above more than two figures annually. Inflation accelerated rapidly during the 1960s starting at the end of the term of the government of João Goulart, who succeeded President Jânio Quadros, who resigned following the implementation of an economic reform program that removed the import subsidy and devalued the currency by 100%. In 1964 the government was deposed by a military coup and a series of new reforms were implemented. Amongst the most important of these reforms was the giving of autonomy to state companies which then became organized by sector: electrical, with Eletrobrás; iron and steel, with Siderbrás; oil and petrochemicals, with Petrobrás, and communications, with Telebrás.

The military government imposed a rigid wages policy that brought down the rate of inflation and created legislation that enabled the adjustment of taxes, financial assets and finally, after 1967, mini devaluations of the exchange rate. The Brazilian economy became highly indexed with falling rates of inflation thanks to wages and labors union control.

With the 1974 oil crisis, inflation rose once again and the military government announced the start of the open policy process. The second oil shock in 1979 and the foreign debt crisis in 1982 marked the beginning of a very difficult period for the Brazilian economy, with the interruption of foreign loans and an increase in the inflation rate to levels unheard of, even for Brazil.

In 1985, with the end of the military government and the ending of the wages law, workers began to demand ever more frequent wage adjustments, with immediate repercussions on the rate of inflation. After 1986, Brazil tried various economic stabilization programs. The first of these, the Cruzado Plan (1986), abolished the indexation system and established a general price freeze. The Plan failed and other attempts followed the Bresser Plan in 1987; the Summer Plan in 1988, and the Collor Plan in 1990. The latter differed from the others in terms of the seizure of 80% of financial assets, including demand deposits, putting the country on course for recession at the same time as starting the process to reduce import tariffs.

In March 1994, Brazil's foreign debt was renegotiated within the framework of renegotiation used for other Latin American countries. July of that same year saw the launch of the Real Plan, which, with the freeing up of prices, brought down the rate of inflation and reduced trade tariffs still further. The exchange rate was fixed at constant nominal values and there was a definite fall in inflation. After many years of clear trade surpluses, the Brazilian economy began to move into deficit.

In terms of combating inflation, prospects for the Brazilian economy are extremely favorable. In terms of growth, the strategy adopted by the Real Plan and the actual growth rate of the world's economies are less promising.

The administration of President Fernando Henrique Cardoso, which took office in 1995, has the main objective of passing a large collection of reforms of the 1988 Federal Constitution through the National Congress. The aim is to prepare and adapt the Brazilian Constitution to present conditions within the world economy,

Containers depot in the port of   Manaus, in the state of Amazonas: a significant portion of the local production leaves the region by

way of sea lanes.

taking into account the high level of capital mobility, the rapid growth in foreign investment, market deregulation and, in particular, increased flexibility of the rules governing the contracting of labor. Amongst the reforms, the ending of monopolies in areas such as oil and telecommunications has been the most notable.

The present government has been achieving success in relation to the privatization program. The entire national iron and steel sector is now in the hands of private enterprise, together with the petrochemicals and fertilizers sector. The electricity sector is highly attractive to investors and is now sufficiently mature and solid to be transferred to the private sector. It consists of major hydroelectric plants and a good transmission and distribution system. The electricity sector privatizations began with one of Brazil's largest companies, Light, in Rio de Janeiro.

The Brazilian population has increased more slowly since the mid 1970s and is starting to show a higher average age. Brazil's welfare system is organized on the basis of the distribution system by which contributions from active workers finance the retirement of those no longer working. This system becomes non-viable from a financial point of view when the average age of the population increases. In Brazil the problem is made worse by the fact that retirement is awarded according to length of service (30 years for women and 35 for men) and includes several privileges for special categories - teachers and judges, for example. In addition, Social Welfare is a system that is very large and centralized and which is subject to serious administrative errors, corruption and a high rate of tax dodging. The financial deficit of retirement is currently low but there are indications that it could be potentially large in the future. This area has also been going through a restructuring process.

The Brazilian economy has a high growth potential and a considerable consumer market even taking account of income distribution which, according to 1995 data and focusing on just six of Brazil's nine metropolitan regions, has resulted in the 20% better off in those regions receiving 63% of income, whilst the 50% worst off get just 12%. According to other indicators and research into world living conditions, carried out by the UN in 1996, the average income of the best off 10% of the population is around 30 times greater than the average income of the 40% worst off. In other countries, where income is more evenly distributed, the better off earn on average ten times more than the worst off.

Investment in the manufacture of cars, TVs and other electronic equipment, cable TV, subscriber TV, beer and soft drinks, cement and other products for the domestic market, has been climbing rapidly since 1994 - which demonstrates private sector expectations in relation to the good performance of the economy and in particular, growth in the domestic market which was so badly affected by the instability that prevailed in the country since the mid 1980s.

On the other hand, Brazil's stability and its low rate of inflation depend, as in other Latin American countries, on the rigidity of the nominal exchange rate, which is approximately R$ 1 to one US dollar. The recovery of growth in the Brazilian economy without the return of rampant inflation depends, therefore, on a good performance by exports. After the Real Plan, it could be said that the pace of growth without inflation in the Brazilian economy has come about as a result of the speed at which exports have increased. The economy's present dilemma is how to increase exports without devaluing the exchange rate.

The long-term problems are of a different nature. Brazil has one of the most diversified and complete industrial infrastructures in Latin America and even in the entire Southern Hemisphere. It has, therefore, enormous growth potential taking into account experience, company culture and the size of its market.

In relation to agriculture, a similar type of observation may be made. Agriculture has succeeded in occupying land that in the past has been considered as being unproductive - the Cerrado(AB8) (scrubland) for example - by means of the refinement of varieties developed in Brazilian laboratories and specially adapted to the region. It has also demonstrated dynamism and initiative by introducing new crops such as soya, sugar, oranges and other fruit, as well as new varieties of coffee, Brazil's traditional product. In terms of productivity and flexibility, Brazilian agriculture is of high quality and led by farmers and businesspersons who are very different from the stereotype of the old colonel, which characterized Brazilian agriculture during the first half of the 20th century.

Meanwhile, agrarian reform remains a major problem when considering income distribution, the concentrated distribution of land ownership and the exaggerated growth of major Brazilian cities.

The most relevant long-term issue relates to the anticipated results of the new model of world growth. When applied to Brazil, the results noted in the world economy since the early 1980s indicate that the new model has generated economies that on the one hand have a low rate of inflation but on the other, have a slow rate of growth and high unemployment level.

For countries like Brazil, which at the outset have a high level of structural unemployment, a concentrated income distribution combined with a low level of school attendance and a low average income, the expectation of repeating this performance pattern (low inflation and high unemployment) represents a serious threat. More than that, it is a non-viable alternative, both economically and politically.

This is the real challenge facing Brazil - and it gets worse when we remember that the country will be, as it has to be, firmly implanted in the international financial markets. There are no alternative policies available apart from major investment in the social area and public investment in infrastructure and technology.

The marked financial imbalance found in the public sector in Brazil is preventing these investments from being made in the volume and time necessary to create a promising outlook for the long-term situation. On the other hand, unlike in other countries, the new life and political organization in Brazil, with widespread freedom of expression and political representation, cancel out the risk of the existence of pockets of dissatisfaction or revolt that the nation's difficult social position might suggest.

Perhaps this is Brazil's most positive and promising feature. A nation with an Iberian heritage and an authoritarian culture, with a highly unstable political past, that holds prosperity and liberty as its most important aspirations. These features lead to the conclusion that Brazilian society as well as its economy are going through a period of great transformation that is both promising and yet difficult to achieve.

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