The Brazilian economy, 1928-1945

This paper is the first draft of section 2 of a long chapter on The Economy of Brazil, 1928-1980 to be included in volume 11 of the Cambridge History of Latin America edited by Leslie Bethell. The 1928-1980 chapter shall include a first section on structural change between 1928 and 1980. The three following sections will cover economic policy in a chronological perspective covering 1928-1945, 1945-1964 and 1964-1980. The striking feature of the Brazilian economy during the first Vargas period was its ability to recover quite rapidly from the consequences of the ‘great depression’. To the conventional expenditure-switching policies related to a massive devaluation of the mil-réis must be added the reinforcing effects of exchange and import controls. But the important role of previously installed capacity in explaining the timing and strength of recovery underlines the limits of structural change which occurred in the 1930’s. The structural characteristics of Brazilian trade, and more specifically the trade surplus with the United States, increased Brazil’s bargaining power in the 1930’s as, especially after the United States commitment to multilateralism after 1934, there was a marked unwillingness by the United States to use its commercial leverage to constrain Brazil to adopt specific policies which would favour US interests. Brazil exploited this advantage in relation to many aspects of its policies. Perhaps the most important was the ambiguity of its stance on compensation trade with Germany. There was much of a snowball effect in the position concerning the Brazilian foreign debt contracted during the Old Republic. It was an achievement to reach a permanent agreement with creditors in 1943, even if this was eased by the artificial accumulation of reserves which resulted from the constraints on imports. The 1930-45 period was of important innovation in the field of rent-seeking in addition to coffee support and high tariff. The economics of the foreign exchange wedge between export and import rates became a vital aspect of economic policy in Brazil at least until the mid-1960’s. The proliferation of normative sectoral agencies, many of them with ample regulatory mandate, created important sources of inefficiency. But in many instances the government opted for public ownership because there was no interest by the private sector. Macroeconomic policy, which had been under reasonable control for most of Vargas’ first period, deteriorated considerably in the last years of the war with a high rate of inflation and a grotesquely overvalued exchange rate.