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This article provides information about “How Industrialisation accelerated the Economic Development?”
The industrialisation process from the 1950s to the 1970s led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, and steel, as well as to the initiation and completion of large infrastructure projects.
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In the decades after World War II, the annual Gross National Product (GNP) growth rate for Brazil was among the highest in the world, averaging 7.4% upto 1974. During the 1970s Brazil, like many other countries in Latin America, absorbed excessive liquidity from US, European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment.
The result of this capital infusion was impressive: Brazil’s Gross Domestic Product (GDP) increased at an average rate of 8.5% per annum from 1970 to 1980 despite the impact of the 1970’s world oil crisis. Per capita income rose fourfold during the decade, reaching US$ 2,200 in 1980.
In the early 1980s, however, the significant rise in US interest rates began to affect international capital markets, ending the favourable conditions to foreign indebtedness that existed until then. A substantial increase in interest rates in the world economy forced Brazil, as well as other Latin American countries, to implement strict economic adjustments that led to negative growth rates. The suspension of capital inflows reduced Brazil’s capacity to invest. The debt burden affected public finances and contributed to an acceleration of inflation.
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In the second half of the 1980s, a series of stringent measures was adopted aimed at monetary stabilisation. These included ending indexation (a policy of adjusting wages and contracts according to inflation), and the freezing of all prices. In 1987, the government suspended interest payments on foreign commercial debt until a debt rescheduling agreement with creditors could be reached. Although such measures failed to bring about the desired results, Brazil’s overall economic output by the end of the 1980s continued to grow, providing enough surpluses in the trade balance to cover servicing of the debt.
On the one hand, the 1980s crisis signaled the exhaustion of Brazil’s “import substitution” model (a policy that nurtured Brazilian industry by prohibiting the purchase of certain manufactures abroad) on the other it contributed to the opening up of the country’s economy. In the early 1990’s Brazil was engaged in a series of far-reaching economic reforms. They encompassed trade liberalisation, deregulation, privatisation, and the establishment of a legal and structural framework to promote foreign investment. Economic reforms continued through the 1990s and included such measures as the abolition of state monopolies, reduction or elimination of trade barriers in goods and services as well as of subsidies, in line with Brazil’s obligations as a member of the World Trade Organisation.
In 1994, after several frustrated attempts to bring down inflation, the Brazilian government introduced the “Real Plan”, a successful stabilisation plan that replaced the currency then in use with the Real. The main features of the Real Plan were: (a) a gradual approach to monetary reform; (b) the “de-indexation” of the economy through the use of the URV; and (c) the appreciation of the currency, which was pegged to the dollar, although on the basis of a much more flexible exchange rate mechanism than a currency board, as the one contained in the “convertibility” plan in Argentina. In brief, the Real Plan combined a domestic, monetary anchor with an external one.
These anchors were controlled by higher interest rates and appreciated exchange rates. Later a very gradual path of depreciation of the currency was engineered to stimulate economic activity in line with the requirements of price stability and international competition. Consequently, the Plan successfully resulted in a rapid and sustained decrease of the inflation rate. The restoration of the value of the currency and the return to economic growth brought about an increase in the purchasing power of the lower layers of the population and a significant reduction in poverty.
The lower classes, which previously had no financial protection against strong indexation, have experienced important improvements in their way of life. From 1980 to 1993 the average real rate of growth of the economy was 2.1 % per annum. For most of the period from 1994 to 1997, the real growth rate was kept between 3% and 6%. In early 2001 it was just over 4%. Market liberalisation and economic stabilisation have significantly enhanced Brazil’s growth prospects. Brazil’s trade has almost doubled since 1990, from U.S. $50 billion to an estimated U.S.$ 100 billion in 1996.
The United States represents about 20% of that trade, and ran small trade surpluses in 1995 and 1996 after many years of deficits with Brazil. Foreign direct investment has increased from less than U.S. $ 1 billion in 1993 to an estimated U.S.$7 billion in 1996. The United States is the largest foreign investor in Brazil, accounting for almost U.S.S20 billion, or 34% of total foreign investment. Ongoing and upcoming privatisation in the telecommunication, energy and mining sectors of Brazil planned for 1997 and 1998 is of major interest to U.S. companies.