Brazil since 1980 (The World Since 1980)

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BRAZIL SINCE 1980 This is a general survey of Brazilian society and of the Brazilian economy and political system since 1980. It describes the basic changes occurring as Brazil was transformed from a predominantly rural and closed economy under military rule into a modern democratic, industrial, and urbanized society, with an extraordinary, world-class commercial agriculture in the past sixty years. In this period, Brazil changed from a premodern high fertility and mortality society to a modern low fertility and mortality one, the economy approached hyperinflation many times, and it abandoned a policy of protected industrialization to an economy opened to world trade. The advances and the failures of these changes are examined for the impact on questions of growth and equality. The book is designed as a basic introduction to contemporary Brazil from a recent historical perspective and is one of the first such comprehensive surveys of recent Brazilian history and development in any language. Francisco Vidal Luna is Professor of Economics, University of S˜ao Paulo, and the Secretary of Planning and Budget of the Municipality of S˜ao Paulo. He has written extensively on Brazilian economic history and the Brazilian economy, and he is coauthor, with Herbert S. Klein, of Slavery and the Economy of S˜ao Paulo, 1750–1850 (2003). Herbert S. Klein is the Gouverneur Morris Professor Emeritus, Columbia University, and is currently Director of the Center for Latin American Studies, Professor of History, and Research Fellow at the Hoover Institution, Stanford University. He is the author of numerous books, including The Atlantic Slave Trade (Cambridge, 1999), A Concise History of Bolivia (Cambridge, 2003), and A Population History of the United States (Cambridge, 2004).

THE WORLD Since 1980 This new series is designed to examine politics, economics, and social change in important countries and regions over the past two and a half decades. No prior background knowledge of a given country will be required by readers. The books will be written by leading social scientists. Volumes in preparation Britain Since 1980; Roger Middleton France Since 1980; Timothy Smith India Since 1980; Sumit Ganguly Israel Since 1980; Guy Ben-Porat, Schlomo Mizrachi, Ayre Naor, and Erez Tzfadia Japan Since 1980; Thomas Cargill and Takayuki Sakamoto Mexico Since 1980; Stephen Haber, Herbert S. Klein, Noel Maurer, Kevin J. Middlebrook Russia Since 1980; Steven Rosefielde and Stefan Hedlund The United States Since 1980; Dean Baker

BRAZIL Since 1980

Francisco Vidal Luna University of S˜ao Paulo

Herbert S. Klein Stanford University

   Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge  , UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521820448 © Francisco Vidal Luna and Herbert S. Klein 2006 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2006 - -

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Contents

Abbreviations

page xi

Introduction

1

1

Political Evolution

6

2

The Economy

37

3

Financial Sector

78

4

Agriculture

101

5

Industry and Mining

136

6

Demographic Change in Brazil Since 1980

158

7

Education, Social Welfare, and Health Care

182

8

Inequality: Class, Residence, and Race

209

Conclusion

236

Appendix

243

Bibliography

253

Index

265

ix

Abbreviations

AGF ARENA BCB BNB BNDES

BNH CAP CAPES

CEME CMN CNI CNPq CUT

Aquisic¸o˜es do Governo Federal (Government Stock Purchase Program) Alianc¸a Renovadora Nacional (Renovating National Alliance) Banco Central do Brasil (Central Bank of Brazil) Banco do Nordeste do Brasil (Northeast Bank of Brazil) Banco Nacional de Desenvolvimento Econˆomico e Social (National Bank for Economic and Social Development) Banco Nacional da Habitac¸a˜ o (National Housing Bank) Caixa de Aposentadoria e Pens˜oes (Retirement and Pensions Fund) Coordenac¸a˜ o de Aperfeic¸oamento de Pessoal de N´ıvel Superior (Coordination of Training of Persons at University Level) Central de Medicamentos (Medicines Central) Conselho Monet´ario Nacional (National Monetary Board) Confederac¸a˜ o Nacional da Ind´ustria (National Confederation of Industry) Conselho Nacional de Pesquisas (National Research Council) ´ Central Unica dos Trabalhadores (Worker Union Federation)

xi

xii CVM DGSP DNER DSNP EAP EGF EMBRAPA FGC FGTS FGV FUNRURAL GINI GNP IAA IAP IBC IBGE IDB IDE IMF INAMPS

Abbreviations Comiss˜ao de Valˆores Mobili´arios (Securities Exchange Commission) Directoria Geral de Sa´ude P´ublica (Directory of Public Health) Departamento Nacional de Endemias Rurais (National Department of Rural Epidemic Diseases) Departamento Nacional de Sa´ude P´ublica (National Department of Public Health) Economically Active Population Empr´estimos do Govˆerno Federal (Government Storage Loan) Empresa Brasileira de Pesquisa Agropecu´aria (Brazilian Agricultural Research Agency) Fundo Garantidor de Cr´editos (Fund to Guarantee Deposits – FDIC-type of institution) Fundo de Garantia por Tempo de Servic¸o (Guaranteed Fund for Length of Service) Fundac¸a˜ o Get´ulio Vargas (Get´ulio Vargas Foundation) Fundo de Assistˆencia ao Trabalhador Rural (Rural Retirement Fund) Index of Inequality Gross National Product Instituto de Ac¸u´ car e do Alcool (Sugar and Alcohol Institute) Instituto de Aposentadoria e Pens˜ao (Institutes of Pensions and Retirements) Instituto Brasilero do Caf´e (Brazilian Coffee Institute) Instituto Brasileiro de Geografia e Estat´ıstica (Brazilian Institute of Geography and Statistics) Interamerican Development Bank Investimento Direto Estrangeiro (Direct Foreign Investment) International Monetary Fund Instituto Nacional de Assistˆencia M´edica da Previdˆencia Social (National Institute for Social Security and Medical Assistance)

Abbreviations INPS INSS IPEA LTN MDB MERCOSUL MST NGO OECD ORTN PAEG PDS PDT PETROBRAS PFL PGPM PIS/PASEP

PMDB PNAD PND

xiii

Instituto Nacional de Previdˆencia Social (National Social Security Institute) Instituto Nacional de Seguro Social (National Institute of Social Insurance) Instituto de Planejamento Econˆomico e Social (Economic and Social Planning Institute) Letra do Tesouro Nacional (Federal Treasury Bills) Movimento Democr´atico Brasileiro (Brazilian Democratic Movement) Mercado Comum do Sul (Common Market for Argentina, Brazil, Uruguay, and Paraguay) Movimento dos trabalhadores rurais sem terra (Landless Movement) Nongovernmental Organization Organization for Economic Cooperation and Development Obrigac¸o˜es Reajust´aveis do Tesouro Nacional (Adjustable Obligations of the National Treasury) Plano de Ac¸a˜ o Econˆomica do Govˆerno (Plan of Economic Action) Partido Democr´atico Social (Social Democratic Party) Partido Democr´atico Trabalhista (Democratic Labor Party) Petr´oleo Brasileiro S.A. Partido da Frente Liberal (Liberal Front Party) Pol´ıtica de Garantia de Prec¸os M´ınimos (Minimum Prices Warranty Policy) Programa de Integrac¸a˜ o Social e de Formac¸a˜ o do Patrimˆonio do Servidor (Financial Fund for Unemployment Insurance) Partido do Movimento Democr´atico Brasileiro (Party of the Brazilian Democratic Movement) Pesquisa Nacional por Amostra de Domic´ılios (National Household Survey) Plano Nacional de Desenvolvimento (National Development Plan)

xiv PNUD PRN PROALCOOL PROER

PROES

PSD PSP PT PTB RGPS SENAI SNI SUDENE

SUMOC SUS UDN UNDP URV

Abbreviations UNDP, United Nations Development Program Partido da Reconstruc¸a˜ o Nacional (Party of National Reconstruction) Programa Nacional do Alcool (National Alcohol Program) Programa de Reestruturac¸a˜ o e Fortalecimento do Sistema Financeiro (Program to Stimulate the Restructuring and Strengthening of the National Financial System) Programa de Est´ımulo a` Reduc¸a˜ o do Setor P´ublico no Sistema Financeiro (Program to Stimulate the Reduction of the Public Sector in the Financial System) Partido Social Democr´atico (Social Democratic Party) Partido Social Progressista (Social Progressive Party) Partido dos Trabalhadores (Workers Party) Partido Trabalhista Brasileiro (Brazilian Workers Party) Regime Geral de Previdˆencia Social (General Regime for Social Security) Servic¸o Nacional de Aprendizagem Industrial (National Industrial Training Service) Servic¸o Nacional de Informac¸o˜es (National Information Service) Superintendˆencia do Desenvolvimento do Nordeste (Superintendency for Development of the Northeast) Superintendˆencia da Moeda e do Cr´edito (Superintendency of Money and Credit) ´ Sistema Unico de Sa´ude (Unified Health System) Uni˜ao Democr´atica Nacional (National Democratic Union) United Nations Development Program Unidade Real de Valor (Real Unit of Value) Parties

Introduction

Brazil today is the fifth largest nation in the world in terms of population and the size of its territory. It has the most advanced industrial base in Latin America and has become one of the world’s most important agricultural producers. Much of what Brazil is today is the result of major transformations that have occurred only in the past quarter century. In 1980, it ranked poorly even among most Latin American countries in terms of the health and education of its population, it contained one of the region’s poorest and most backward rural sectors, and it maintained a large but closed economy. Its primary exports were unprocessed raw materials, its industries, although quite important, produced only for the national market, and its political institutions were extremely fragile after passing through one of the longest periods of military rule in Latin American history. In the past quarter century, Brazil has undergone profound social, economic, and political changes. For the first time in its Republican history, it has established a vibrant and functioning democratic system, free from military tutelage and the populist politicians who had created such profound instability in the previous century of republican rule. It was in this period that Brazil fortified its position in the world economy by becoming one of the largest international exporters of numerous agricultural products on the level of Canada, the United States, and Australia. This was also to be an epochal period of change when the Brazilian economy was finally opened up to the world economy for the first time in some fifty years. Although the period of protection had led to world leadership growth rates in the previous decades and had helped create a vibrant industrial sector second to none in Latin America, the oil crises and world depression of the late 1970s set the stage for a profound transformation in industrial and economic 1

2

Brazil Since 1980

policies. In response to the sharp declines in previously record growth rates, Brazil, along with many of the other developing countries of the world, adopted free trade in the hopes of reviving growth. All this began in 1990; it has become a part of public policy for both progressive and conservative governments since then and has led to major changes in industrial ownership and in the nature of the national economy. The period since 1980 also was one in which Brazil completed the demographic transition of its population from a high fertility society with an extraordinarily rapid growth of its population to one of rapidly declining fertility and slowing growth. Coupled with long-term trends in declining mortality, this would bring the Brazilian population up to first-world standards of longevity. With industrial growth, a profound agricultural transformation, and long-term trends in urbanization, Brazil by 2005 had become one of the more urbanized and economically advanced of the developing societies in the world with a first-world mining and agricultural base. It also began to deal systematically with its basic social problems and, from the mid-twentieth century onward has invested heavily in education and public health. Today, Brazil on many indices has moved into the upper ranks of the world’s developing countries in terms of health and education, finally reducing what had been until now one of the worst records in terms of literacy, even within Latin America. What these changes have been, how they were accomplished, and what their impact is today on this continental society are the basic themes of this study. We try to explain in detail the factors behind each of these major developments, the context in which they occurred, and their consequences, both positive and negative. Our object is thus to provide the reader with a basic understanding of what Brazil has become in the world today. Our survey begins with the most important single change that has occurred in the past quarter century, which is the establishment for the first time in Republican history of a viable democratic regime. To show how this has occurred, we examine the evolution of Brazil’s political structure from the time of independence in 1822, through the empire, and into the republic in 1889. The so-called Old Republic, the Vargas period, and the long post-1945 period of instability and military intervention set the background for the slow and painful emergence of a new political system. With a relatively open party structure – which some have labeled weak parties – there has emerged a democratic regime that was able to resolve cases of death and impeachment of

Introduction

3

presidents in office within a civilian constitutional framework. It also was able to carry out massive elections with no serious disruptions and brought to power traditional, progressive, and even radical presidents and parties, representing a gamut of classes, groups, and regions. The traditional elite rejection of democratic politics has slowly disappeared from the national political scene and the army has been controlled for the first time since the end of the empire. We then examine the complex changes that accompanied the rapid expansion of the Brazilian economy from the arrival of the military regimes in the mid-1960s to the current period of relative growth. In this period, an effective national market was created and fully supplied by a protected industrial sector, with a result of sometimes extraordinary growth. But the price of this was a dependence on foreign capital for growth and an eventually uncontrollable inflation. Creating a national financial market and dealing with inflation became the key issues for all the governments of the period from the 1960s to the present. The harsh military regimes did effectively modernize the financial sector, but this still did not resolve the question of public debt and increasing sensitivity of the Brazilian economy to world economic conditions. The extraordinary industrial base was constructed by both public and private capital but at a high cost to the efficiency of the Brazilian economy. Finally, in 1990, the Brazilian economy was rapidly, and some might say brutally, opened up to the world economy, which has made for major changes in ownership and the loss of certain industrial sectors, followed by an expansion of industrial Brazil into the world market. We then explore how these economic and financial reforms changed the one sector of the economy that was the most traditional and, in effect, one of the most important sectors in the nation – agriculture. In the period from roughly the 1970s to today, Brazil, the sleeping giant in world economic terms, has emerged as one of the great granaries of the world economy. How and why this occurred is the theme of our study of agriculture. Finally, we treat the profound transformation that Brazilian industry has undergone in the past quarter century. Already a well-established but highly protected sector of the national economy by the 1980s and the largest such industrial structure in all of Latin America, Brazilian industry in the period we are studying has experienced a fourfold shock of deregulation, privatization, the abolition of tariff walls, and a long overvalued currency. It also has been forced to compete directly in the international market. The

4

Brazil Since 1980

result has been a leaner but far more competitive sector, which has slowly emerged from the most difficult transition in its history. This increased industrial efficiency has had a particularly severe impact on the labor market and has been one of the more important factors influencing the increase in unemployment in the principal urban centers as well as the increase of the offer of employment of worse quality in the area of services that grew, in large part, in the informal sector. As was to be expected, the modernization of the national economy in the past fifteen years has had a profound impact on the population of Brazil. In 1980, Brazil was only a moderately urban society and has now become a society in which 80 percent of the population resides in urban areas. The migration from rural to urban and from poor regions to rich ones has led to a major change in the distribution, as well as the quality, of the population, as the majority of the people have finally gained access to hospitals, schools, and other facilities previously denied to them. Better health and education have resulted from this migration, however chaotic its impact has been on the expansion of urban poverty. Brazil has improved its previously dismal record as being one of the more backward nations, even within the Americas, for literacy and average years of schooling attained by its citizens. At the same time, the government has become ever more committed to providing basic health and education to the population, both effectively through massive capital inputs into these sectors, as well as enshrining these ideas in the new socially conscious constitution of 1988. The creation of a national health system, the modernizing and expansion of the pension system, as well as federal efforts to equalize state education systems, in this recent period have all become important features of national policy of whatever government is in power. In response to many of these changes, the national population has gone through the classic stages of a modern demographic transition. From the extraordinarily high rates of fertility and mortality, which were still evident in 1980, Brazil has moved to modern first-world rates as the population now experiences ever-declining levels of mortality and fertility. The result has been a very rapid rise in life expectancy and a rapid decline in population growth from some 3 percent per annum in the 1970s to just over 1 percent today. As in most of the modern world, Brazil is slowly moving toward below replacement fertility, with the result that its population is progressively aging, and its dependency ratios are also on the rise.

Introduction

5

But these changes have not been uniform across classes, races, and regions. Although the gaps between rich and poor regions may have narrowed they still exist. We will try to both examine and explain these differences and their potential for change. We also show how the various regions have changed in this period through the massive out migration from the Northeast and the expansion of both older urban centers, as well as the rise of new wealthy agricultural regions of the West. But for all the economic, social, and demographic changes that have occurred since 1980, class structures have remained surprisingly rigid. The growth of all incomes in this period has not proceeded at a similar rate, and Brazil today remains among the most unequal societies on the face of the earth. Why growth and change have not led to decreasing inequality is an extremely important and unresolved issue, which we examine in our last chapter. In undertaking this study we have had the sustained support of the Hoover Institution of Stanford University, and we would like to thank both John Raisian and Richard Sousa of this institution for their encouragement and help. We owe a special debt to Iraci Nero de Costa and Frank Smith for reading and critiquing the manuscript and to Matiko Kume Vidal and Judith Claire Heiser Schiffner for their constant encouragement from the beginning of our joint effort.

1 Political Evolution

Brazil went from being a colony to an empire in 1822 with relatively less conflict than occurred for most of the countries of Latin America in the nineteenth century. From 1822 to 1889, a legitimate monarchy governed the country and brought an unusual level of political stability. But the transition from empire to republic was not an easy one, and from 1889 to the present Brazil passed through several periods of centralizing and decentralizing regimes and slowly and hesitatingly moved from an oligarchic and limited democratic republic to a full democracy. But that long process from 1889 to the present was broken by military coups and military interventions and a political party system that was fragmented and incapable of sustaining and developing a viable political elite. It was the shock of a long and ruthless military dictatorship that finally created a climate of political compromise and democratic commitment that has enabled Brazil to emerge as a very powerful and well-structured democratic state in the past quarter century. A recent commentator, when analyzing the 1998 election results, declared that they showed the strengthening of democracy in Brazil. But he said that perhaps it might never be possible to know if the new Brazilian democracy would pass through the final test, which would be the acceptance of Lula’s victory and that of the Labor Party.1 Four years later, Lula won the elections in a climate of total peace and assumed the government. At no time was the election outcome questioned or was there any risk of a setback in the democratic process. 1

Leslie Bethel. Brasil: “Pol´ıtica no Brasil: de eleic¸o˜ es sem democracia a` democracia sem cidadania,” in Leslie Bethel, ed., Fardo do passado, promessa do futuro (Rio de Janeiro: Civilizac¸a˜ o Brasileira, 2002), pp. 9–43.

6

Political Evolution

7

Since Fernando Collor de Mello’s election in 1989, four presidents have been elected through direct voting – without the typical traumas that had been traditional in presidential successions – which was an impressive progress for a country with a republican political history like that of Brazil. Between 1930 and 1985, only four presidents were elected through direct voting and only two concluded their mandate – one of them, Juscelino Kubitschek, under constant threat of a military coup. During this time, there were two long authoritarian periods, the longest one from 1964 to 1985, was a government totally controlled by the military. Brazil has a long electoral history but little democratic tradition. Since the time of the Empire, periodic elections have taken place, but usually with little representation and usually with manipulated results. During the period of the Empire, there was a parliamentary system with elections. Although property qualifications existed for voters and officeholders, literacy was not an issue and, in fact, a fairly large sector of the male population voted. Despite a liberal ideology, political power was concentrated in the office of the emperor, who used his “Moderating Power” to create a powerful centralized state. The ministry responded to him, and the fear of a dismantling of the national state, and the slavery issue justified the centralization of power and the maintenance of Monarchy. Only after 1870 did effective criticism to the system emerge, with some declaring themselves republicans, and others demanding liberal reforms, such as increasing the right of suffrage and abolishing slavery.2 In 1881 an important electoral reform took place, the repercussions of which would be felt for over a century. Several restrictions to the right of suffrage were eliminated, modifications were made in the income criteria, and direct elections were established for the first time, but the right to vote of illiterates – representing 80 percent of the population – was eliminated. This measure actually restricted the percentage of people capable of voting, in contrast to trends in other slowly evolving democratic states in Europe. Although high rates of illiteracy defined a Brazilian society during most of the twentieth century, the literacy restriction on voting would only be abolished in 1985, demonstrating the conservative character and indifference to basic popular education of the Brazilian elite. 2

The abolition of slavery only occurred in 1888, which was late by the standards of the other American countries.

Brazil Since 1980

8

Percentage of Total Population Voting

60 51.5 50

50

51.6

40

30

20

18.1 13.4

15.9 15.2

10 2.2 2.8

3.5

5.4 1.4

3.1 2.3 1.4

1.4

2.8

2.1

0 1894

1902 1898

1910 1906

1918 1914

1922 1919

1930 1923

1950 1945

1960 1955

1994 1969

1998

Graph 1.1. Proportion of the Total Population Participating in a Presidential Election, Brazil 1894–1998 Source: Jairo Nicolau. “A participac¸a˜ o eleitoral no Brasil” (Working Paper, Oxford, 2002), p. 23.

In opposition to the Empire’s centralism, a clearly decentralizing constitution was approved with the fall of Monarchy and the implementation of the Republic in 1889.3 Power was transferred to regional oligarchies; elections became an important focus of power and were freely manipulated to meet the interests of groups in power. Elections were organized around essentially local state based parties. During the Old Republic, from 1889 to 1930, the number of voters was reduced further; with only some 2 percent of the population voting for President of the Republic, and with the vote still being open and subject to widespread fraud (see Graph 1.1).4 In 1930, as a response to the world economic crisis that seriously affected Brazil, the power of the regional oligarchies, led by S˜ao Paulo and Minas Gerais, was broken. Get´ulio Vargas, former Finance 3 4

In Brazil, after its independence in 1822, there was instituted a monarchy, which was maintained until 1889, when it was replaced by a republic. Jairo Nicolau, “A participac¸a˜ o eleitoral no Brasil” (Working Paper, Oxford, 2002). p. 23. On the political evolution of Brazil, see Simon Schwartzman, Bases do Autoritarismo Brasileiro (Rio de Janeiro: Campus, 1982); Jos´e Murilo de Carvalho, Cidadania no Brasil: O longo Caminho (Rio de Janeiro: Civilizac¸a˜ o Brasileira, 2003); Florestan Fernandes, A revoluc¸a˜ o Burguesa no Brasil (Rio de Janeiro: Guanabara, 1987); Raymundo Faoro, Os Donos do Poder (Porto Alegre: Editora Globo, 1975).

Political Evolution

9

Minister and the defeated candidate in the 1929 presidential elections, took power by carrying out a coup supported by elites in various Brazilian states. Although he initially tried to maintain the democratic process, Vargas moved toward an ever more authoritarian position, which culminated with the establishment of the Estado Novo (New State) in 1937. Vargas then established a right-wing dictatorship similar to the European Fascist models abolishing the existing parties and abandoning parliamentary government. There was political repression, with imprisonments, tortures, and deportation of political leaders. In the Fascist manner, a mass communication structure was created and censorship imposed through a new Press and Propaganda Department. With the hardening of the regime, military influence over the government also increased. Vargas governed between 1930 and 1935 as Interim President, after closing local legislatures and dismissing state governors. He centralized power and named interventors to govern each state. In 1933 he allowed elections for a National Constituent Assembly that approved a constitution in mid-1934 and elected Get´ulio Vargas president with a mandate to 1938. The constitution strengthened central power and had a distinct corporate flavor. It was proposed that the next presidential candidate in 1938 would be chosen through direct elections, with universal, secret balloting. But, as the new election date approached, Vargas abandoned elections, justifying his actions by stressing the danger of subversion from the right and the left. The government intensified its repressive mechanisms and, in 1937, closed Congress and installed a dictatorship, which lasted to 1945, when Vargas was deposed by the military. During the Vargas period, the new power structure no longer represented the old oligarchies and the powerful groups involved in the coffee economy. New interest groups such as industrial leaders, technocrats, military officers, and newly emerging regional elites started to participate more actively in the power structure. But these regional elites now had far less power after Vargas implemented a strong federal government structure. The Vargas era, which thus lasted from 1930 to 1945, also deeply marked the whole second half of the twentieth century with its economic policies through its initiation of an active state intervention in the economy, both in terms of regulation and in terms of direct investment in the productive sector. Vargas believed that industrialization was critical to the country’s future and could only be implemented through strong state support in the form of incentives,

10

Brazil Since 1980

subsidies, tariff protection, credits, and direct investments. Industrialization now became a national state objective. In addition to meeting the interests of industry leaders per se, this policy was seen by the military as a way of modernization the armed forces. During the Vargas era, and thanks to Brazil’s support of the Allies in World War II, the U.S. Eximbank supported the establishment of a large state-owned steel company. Other large projects also were implemented, which had a major impact on the modernization of the Brazilian economy. This period also was outstanding in the establishment of public regulatory agencies to control vital sectors of the economy such as coffee, sugar, and alcohol, steel, water, and energy. Vargas also established a professional federal civil service to provide rationality and technical criteria in the federal public administration. But he also suppressed the autonomy of the urban labor unions that until then were quite strong, and at the same time implemented advanced labor legislation and reorganized the unions so that they were tightly linked to the public sector and eventually were coopted and controlled by the state. This was clearly part of the corporate model typical of the Fascist regimes. This robust and centralizing state structure, investing both in infrastructure and in several productive sectors of the economy, was the legacy of the Vargas Era and became a basic feature of the interventionist style Brazilian state, which remained the norm until the beginning of the 1990s.5 The Estado Novo began to falter by the early 1940s, and opposition, although often violently suppressed, was growing. There also was increasing military unrest, and the officers, many of whom were fighting on the side of the Allies in Italy, soon forced Vargas to promise to end the authoritarian regime after the end of World War II. At the beginning of 1945, Vargas agreed to set elections for the end of the year for the president and a constituent assembly, with elections for governors to take place in the following year. He also declared that he would not be candidate in the elections. With the promise of the return to democratic politics and formal elections, three new parties were now formed that would dominate national politics until the military coup of 1964. One of them, the National Democratic Union (UDN), had a typically urban base and 5

For the Vargas period, see Boris Fausto, A Revoluc¸a˜ o de 1930 (S˜ao Paulo: Editora Brasiliense, 1972); Sonia Draibe, Rumos e Metamorfoses. Estado e Industrializac¸a˜ o no Brasil: 1930/1960 (Rio de Janeiro: Paz e Terra, 1985); Maria do Carmo Campello de Souza, Estado e Partidos Pol´ıticos no Brasil 1930 a 1964 (S˜ao Paulo: Alfa-Omega, 1990); Thomas Skidmore, Brasil: de Get´ulio a Castelo (Rio de Janeiro: Paz e Terra, 2003).

Political Evolution

11

contained the more conservative liberal forces, and was distanced from the government. The other, the Social Democratic Party (PSD), represented the support base of the Vargas government, including the remaining state interventors. Here, rural landowners and part of the industrial entrepreneurship also found representation. Vargas worked to create another party, which was called the Brazilian Workers Party (PTB), through which he intended to control the action of workers via the unions created in the Vargas period and controlled by the State. Both the PSD and the UDN named military candidates for the upcoming elections. General Dutra, was proposed by the PSD with the support of the PTB and Brigadier Eduardo Gomes, represented the UDN. What was unusual about these three parties was not only their selection of military candidates, but also the fact that for the first time in Brazil these were truly national parties as opposed to those that had existed before the Vargas period. Previous political parties were local state organizations and relied on interstate coalitions to develop national candidates. In spite of his commitment to the electoral process, there was much distrust of Vargas’s intentions. This distrust was based on the development, just before the elections, of a new so-called queremista movement, which called for Vargas to remain in power, a movement led by labor forces with communist support. This movement created major tension within both the political elite and the military, and as a result Vargas was overthrown by the military in October 1945 a short time before elections.

The Period of Fragile Democracy 1945–1964 In 1946 a new constitution was approved reestablishing democratic institutions and individual rights. As the overthrow of Vargas had not represented an effective rupture with the basic ideas and actions of his long regime, there was an accommodation of groups in power without significant modifications and without much participation of the popular masses. Although the new constitution recovered some autonomy for the states to meet regional interests, the centralized structure of power and the powerful federal institutions that had been the hallmark of the Vargas period were maintained. Dutra, who had been Vargas’s Minister of War, was the first president elected through direct and universal elections, but without the participation of illiterates. The PSD,

12

Brazil Since 1980

a party formed by members directly involved in Vargas’s government, won the election, supported by the PTB, which brought in the support of the trade unions to the government. The election of General Dutra, a person with no charisma, demonstrated the power of the official party machine and the prestige of Vargas himself who, despite his overthrow, was elected senator or deputy in several states in the same national elections. The UDN, which contained Vargas’s political enemies and most of the military who carried out the anti-Vargas coup, had hoped to assume power with the election. But they were defeated in this and most of the subsequent elections in which they participated. This would be a party whose failure to achieve power democratically would eventually encourage it to advocate military interventions. The Dutra government would prove to be a deeply conservative one. The labor movement was repressed and countless unions suffered intervention; the Communist Party, which had been authorized to function with the other political parties, was harshly persecuted and made illegal in 1947. On the international scene, the emergence of the Cold War led to a strong alignment with the United States, causing the break of diplomatic relations with the Soviet Union. Finally, Dutra isolated himself from groups with had strong links to Vargas, particularly the PTB. But the next presidential election brought Get´ulio Vargas back to power despite all the attempts to reduce his influence by the Dutra administration. Vargas had spent the time out of office reorganizing his political forces and adopted a clear populist position, with strong overtones of nationalism and a pro-labor stance. He launched himself as candidate with the support of the PTB and of a new Social Progressive Party PSP (Partido Social Progressista) that had emerged in S˜ao Paulo under the direction of Adhemar de Barros, who was a typical representative of the new populist politics that was being consolidated in the country. The PSD, that had been created by Vargas and had been part of the Dutra administration, split and one wing supported the Vargas’s candidacy. The UDN, the firm enemy of Vargas, launched its own candidate, the same military officer that had already been defeated by General Dutra. There was tacit consent on the military side not to oppose the Vargas candidacy. Vargas was elected with 49 percent of the votes and was declared the winner. The UDN objected and declared that Vargas had not obtained an absolute majority but failed to persuade the country.

Political Evolution

13

When Vargas took office, he tried to maintain the government industrialization program and otherwise proposed a rather conservative program. But he would eventually face serious political and social problems and had to deal with an increasingly severe inflation. There also were enormous difficulties in foreign affairs as the Cold War created major problems for Brazil. At the beginning of his mandate, friendly relations with the United States were maintained and he was even able to implement a major investment program managed by the Brazil–U.S. Mixed Commission (Comiss˜ao Mista Brasil Estados Unidos) and financed by the U.S. Eximbank. But political changes inside the United States paralyzed this important program that not only had helped finance major public projects but also was important in enabling Brazil to reach equilibrium in its balance of payments. During this same period, Brazil experienced problems in coffee exports after a severe crop loss forced international prices to rise, which resulted in a boycott by American consumers. Also, a powerful labor movement finally escaped the government’s political control and began to pressure the administration. Vargas, who had begun his administration in a conservative manner, soon began to adopt a more aggressive and nationalist stance, He reorganized his administration and brought in the future president Jo˜ao Goulart – a young politician closely tied to the trade union movement. The government also enacted legislation hostile to new foreign investment. During the new mandate Vargas strengthened entities that were critical to the industrialization policy and created several institutions that still play a fundamental role in the economy, such as the National Economic Development Bank (Banco Nacional de Desenvolvimento Econˆomico), a fundamental entity in mobilizing financial resources for large public and private projects in the productive or infrastructure areas; Petrobr´as, which for decades has held the monopoly of oil extraction and turned Brazil into a selfsufficient oil producer; and Eletrobr´as, the holding company responsible for large electricity industry investment projects. In 1953, to meet worker demands, the government granted a 100 percent increase in the minimum wage, despite the opposition of his Finance Minister. By these actions, the government gradually lost its more traditional political base and suffered increasing political opposition. There also were problems with corruption and favoritism. Inquiries regarding an attempt against the life of main opposition leader, suggested involvement of people close to Get´ulio Vargas. With increasing opposition and the growing possibility of a military intervention, Get´ulio Vargas

14

Brazil Since 1980

committed suicide. This gesture had immediate political consequences in that it generated an anticoup reaction and the popular support for the continuity of the democratic process. After a complicated transition and under the permanent risk of a military coup, Juscelino Kubitschek, a political leader from Minas Gerais, was elected president with the support of the same Vargas coalition that had already won the other two post-1945 elections, the PSD and PTB. The UDN, which had lost the elections again, as usual questioned Juscelino’s victory claiming the need for an absolute majority. There was in fact an attempt by the Air Force to carry out a coup, but Kubitschek was installed. But this growing military opposition remained a permanent threat throughout his entire mandate. This opposition was especially directed against his vice president, Jo˜ao Goulart, who represented the PTB. But Kubitscheck was a skilled politician and, despite the fragility of the political climate, he was capable of carrying through an effective government and peacefully conclude his mandate, a rare phenomenon in Brazilian politics. During his government, the most coherent industrialization program ever implemented was established and the new capital city of Bras´ılia was built, both as a means of promoting the development of the country’s interior and as an attempt to remove the federal government from the control of the powerful southern states. He also tried to reduce the famous regional disparities in Brazil by creating SUDENE (Superintendˆencia de Desenvolvimento do Nordeste), a regional development agency presided over by the economist Celso Furtado. Not only did Kubitschek create numerous autonomous government agencies to oversee and invest in the economy, but also he promoted the entry of foreign capital into the productive sector, which was looked on suspiciously by the left and nationalists who were his political base. But his ambitious program led the government to spend beyond its means, generated inflationary pressure. At the end of his mandate he tried, unsuccessfully, to put into effect a stabilization plan that was to be supported by the IMF. But despite long negotiations with this international agency, the program was never implemented. Despite its economic problems, the government was considered an extraordinary success and Juscelino’s succession occurred peacefully.6 With the government support, a PSD–PTB coalition was again constructed for the 6

On the government of Kubitschek, see Maria Victoria de Mesquita Benevides, O governo Kubitschek (Rio de Janeiro: Paz e Terra, 1976).

Political Evolution

15

elections, and it launched General Lott as its candidate. He had been Juscelino’s Minister of War and a fundamental figure in controlling the military. His candidacy reflected the dependence of the survival of civil government on the continued support of the military establishment. Another candidate was Jˆanio Quadros, who had made a meteoric career in S˜ao Paulo. Elected city councilman in 1948, he eventually became mayor of S˜ao Paulo and governor in 1954. Quadros launched his presidential candidacy with a small party with no significant representation. With great popular charisma, he introduced himself as a moralist who would sweep out government corruption, making the broom his campaign symbol. He had made his career in S˜ao Paulo politics in a personal manner, without having a solid supporting party base. Although he represented groups and ideas not associated with the UDN, his conservative populist stance was congenial to them and they supported his candidacy in the hopes of finally achieving power. Quadros’s victory was a surprising election result, but the electoral legislation at the time permitted independent candidates for the vice presidential position, and Jo˜ao Goulart, the vice presidential candidate of the government coalition, won the election. There could have been no more different political leaders than Quadros and Goulart, and their election to office would bode ill for the democratic survival of the political system. Jˆanio Quadros marked his short administration with unpredictable acts and a heterodox governing style. He concentrated on absolutely irrelevant moral issues in government, and though an essentially conservative anticommunist leader with major support from the UDN, he confronted the North American government by receiving Che Guevara and awarding him a medal. He also adopted an independent international position, improving relations with socialist countries such as China and Russia. He did, however, implement some important economic measures and discussed the implementation of a stabilization plan to restrain the fiscal deficit and the increasing inflation. But his manner of acting and his management skills showed his lack of preparation for such an important position, which demanded high levels of political talents for conciliation and negotiation. In August 1961, after just eight months of government, he unexpectedly – and without any logical explanation – resigned the presidency. He asserted that unnamed forces had made him take this action. Some analysts understand that this was an unsuccessful move to generate popular support and force the National Congress to increase his powers. If this had

16

Brazil Since 1980

been his purpose, it failed, because Congress promptly accepted his resignation and declared the presidency vacant. The door was opened to an institutional crisis.7

The Authoritarian Period 1964–1985 When Jˆanio Quadros resigned, the office should have been automatically transferred to Vice President Jo˜ao Goulart, at that moment on an official visit to China. But his installation was vigorously opposed by most conservative political elements and above all by the military. This created a major institutional crisis, which could only be resolved through the approval of a constitutional amendment to abolish the presidential regime and the creation of a parliamentary system. Jo˜ao Goulart would be allowed to take office as president, but executive functions would be transferred to a prime minister. For this position, the choice was Tancredo Neves, a conservative politician, with good relations with the military and who twenty years later would himself be elected president of the republic. The resolution of the crisis was precarious as the opposition to Goulart remained strong and he in turn pushed to recover his presidential powers. A plebiscite approving a return to a presidential system was approved in January 1963, and in that same month, Jo˜ao Goulart assumed these traditional presidential powers. Political conflicts became sharper as Goulart pushed his left position and at the same time the economic situation was unsustainable with low growth and an accelerated inflation. Foreign investments stopped. There was increasing commitment of major civilian elites and military groups with the support of the United States to a military intervention to depose Goulart, who in turn was acting in a politically reckless manner, going against even the opinions of his closest collaborators. He made inflamed speeches as a way to press Congress to approve essentially reformist measures. When he attacked the military hierarchy by appearing at a rally organized by dissident sergeants he precipitated the coup d’´etat, which took place on April 1, 1964. Both Goulart and the forces that had overthrown him expected major 7

For the period of democratic transition, see Maria do Carmo Campello de Souza, Estado e Partidos Pol´ıticos; Skidmore, Brasil: de Get´ulio a Castelo; Thomas Skidmore, Politics in Brazil: An Experiment in Democracy 1930–1964 (Oxford: Oxford University Press, 1969); Francisco Weffort, O populismo na pol´ıtica brasileira (Rio de Janeiro: Paz e Terra, 1978); Moniz Bandeira, O governo Jo˜ao Goulart (Rio de Janeiro: Paz e Terra, 1977).

Political Evolution

17

popular resistance or opposition from troops loyal to the president. But this did not occur. On April 9, the new Military regime decreed the first of a long list of institutional acts that moved the country away from a democratic position toward an authoritarian regime. It granted Congress the power to elect the new president of the Republic and Congress then indicated General Castello Branco, one of the main leaders of the coup as president. Instead of turning to their civilian allies in the UDN, the military for the first time decided to develop their own political project under full military control. They would remain in power for twenty years. Repression became the norm and thousands of people were arrested, including dissident officers. The government was particularly hard on leaders of urban and rural worker movements. The northeastern peasant leagues were disbanded and their leaders were imprisoned. During the military government, censorship, repression, imprisonments, and torture became generalized practices.8 But the military regimes that governed Brazil in this period of authoritarian government showed odd characteristics. On the one hand, it was repressive and ferociously anticommunist and committed to the Cold War as a staunch U.S. ally. On the other hand it also was committed to a powerful centralized state with the dominance of the federal executive branch, limiting the power of other branches of the central government as well as the states and municipalities. At the same time, it tried to maintain elections and kept Congress functioning. But the powers of Congress were much reduced and its membership was controlled through expulsion from Congress of a large number of left and centralist politicians whose political rights were revoked. The military did not represent a homogeneous group. There were divisions between the more nationalists, and more authoritarian types. 8

There is a large literature on the military period. A general vision of the period can be obtained in the following works: Thomas Skidmore, Brasil: De Castelo a Tancredo (Rio de Janeiro: Paz e Terra, 1988), and his essay “Politics and Economic Policy Making in Authoritatian Brazil, 1937–1971,” in Alfred Stepan, ed., Authoritarian Brazil (New Haven: Yale University Press, 1976); Philippe C. Schmitter. “The ‘Portugalization’of Brazil?” in Stepan, Authoritarian Brazil; Juan J. Linz. “The Future of an Authoritarian Situation or the Institutionalization of an Authoritarian Regime: The Case of Brazil,” in Stepan, ed., Authoritarian Brazil; Bolivar Lamounier. “O “Brasil autorit´ario” revisitado: o impacto das eleic¸oes sobre a ditadura,” in Alfred Stepan, ed., Democratizando o Brasil (Rio de Janeiro: Paz e Terra, 1985); Alfred Stepan, “As prerrogativas militares nos regimes p´os – autorit´arios: Brasil, Argentina, Uruguai e Espanha,” in Stepan, ed., Democratizando o Brasil; Thomas Skidmore, The Politics of Military Rule in Brazil, 1964–1985 (New York: Oxford University Press, 1988); Maria Helena Moreira Alves, Estado e Oposic¸a˜ o no Brasil, 1964–1984 (Petr´opolis: Vozes, 1984).

18

Brazil Since 1980

For some, repression, censorship, and torture were extreme means only to be used as a last resource, but for others they were a fundamental instrument needed to destroy the left. The government itself lost control of repression and torture, and these became a part of the system at the local level. The difference between the different military groups showed up with higher intensity in the presidential succession process – another peculiar feature of Brazilian dictatorship. Fearing the emergence of a powerful personalistic regime under a caudillo who would perpetuate himself in office, the military establishment committed itself to fixed presidential terms and formal “elections.” During the entire military period, a form of presidential elections was carried out by Congress, which confirmed the prior selection of the military establishment. Internal conflicts, in the choice of new presidents, were kept under military control. Different groups alternated in power but always required a consensus in the military to maintain itself in power. In the twenty years of military government, there was initially a clear trend to increasing repression. In the first years of the Castello Branco administration, the military maintained relative democratic freedom and the expectation of a rapid return to civilian government. Castello Branco himself was a leader of the moderate military group that believed it would be possible to return power to civilians as soon as subversives were eliminated and populist politicians expelled from the political scene. It was the same vision of the civilian leaderships represented by the UDN, which had played an active role in the military coup and now represented its parliamentary base. Initially, Castello assumed power for the duration of the Goulart mandate that would finish at the end of 1965. Under the pressure of the hard-line officers, however, Castello agreed to extend his mandate until March 1967.9 In November 1965, elections for state governors took place, still with the old political party structure intact. In two of the most important states, opposition politicians from the hated PSD were elected. The government’s reaction was to decree a new Institutional Act that modified the party system and the entire electoral process. In the future elections for president and governors, the vote would be indirect. In addition, the old parties were abolished and a new system of only two legal parties (one for the government and another for the opposition) was created eliminating the party structure that had survived for twenty years. Arena (Alianc¸a Renovadora Nacional) and the MDB (Movimento Democr´atico Brasileiro) were established, with 9

Lira Neto, Castelo: A marcha para a Ditadura (S˜ao Paulo: Contexto, 2004).

Political Evolution

19

the former government party gathering together members of the old UDN, and the MDB representing the opposition. Given the military commitment to a long term in office, some of the old UND leaders such as Carlos Lacerda, who had taken part in all the rebellions to depose Vargas and Goulart and had tried to depose Juscelino, joined the opposition. In March 1967, General Costa e Silva assumed the presidency. A hard-line military officer and one of the leaders of the coup against Goulart, he had been Minister of War during Castello Branco’s mandate and overcame the opposition of the moderates in Castello’s entourage. Relations between government and civil society continued tense, with major student and worker popular manifestations. Two strikes took place, one in Osasco (S˜ao Paulo) and another in Contagem (Minas Gerais), and both were severely repressed. The regime was further hardened by Institutional Act No. 5, which consolidated the dictatorship and would usher in one of the most repressive and bitter periods in Brazilian history. The military now stressed the doctrine of “National Security,” the Cold War ideology being pushed by Washington in all the Americas, but that evolved with some unique Brazilian aspects developed in the Superior War College (Escola Superior de Guerra (ESG). This “National Security Doctrine” guided the activities of the SNI (Servic¸o Nacional de Informac¸o˜ es) and of the repressive organs of the State and was reinforced by military courts, which now dealt with all so-called political crimes. Congress was closed, and severe censorship was imposed that even covered all types of artistic expression. Politicians were impeached, civil servants dismissed, and teachers expelled. Exile was the destiny of thousands of Brazilians, including the future president Fernando Henrique Cardoso. Civil rights were abolished. The emergence of urban terrorist movements and rural guerrillas were a consequence of this repressive regime. Despite the low risk of these armed oppositions to the regime, such acts further justified the repressive mechanism put in place by the military and further justified their campaign against “communism” and subversion.10 10

The journalist Elio Gaspari is writing a series of books on the military period that represents the most general vision we have of the military period. His work is based on interviews and private archives of some of the most important figures in the military regime. See Elio Gaspari, A Ditadura Envergonhada (S˜ao Paulo: Companhia das Letras, 2002), A Ditadura Escancarada (S˜ao Paulo: Companhia das Letras, 2002), A Ditadura Encurralada (S˜ao Paulo: Companhia das Letras, 2004), and A ditadura Derrotada (S˜ao Paulo: Companhia das Letras, 2003).

20

Brazil Since 1980

In 1969 President Costa e Silva suffered a heart attack, and instead of being replaced by his civilian vice president, the military changed the rules and imposed General Em´ılio Garrastazu Medici as President to rule for five years. To give the election process more legitimacy, Congress, which had remained closed since Institutional Act No. 5, was reopened and was asked to elect the president indicated by the Junta Militar. President Medici’s term would be the most closed and repressive of the military regimes. He governed from October 1969 to March 1974. These would be the years of major euphoria in economy, with high growth rates. Although it was also a period of increasing income concentration, high growth created a better standard of living for the middle class and the creation of new jobs incorporated vast new contingents of the population into the formal labor market. These results gave the government a relatively popular acceptance despite its ferocious censorship, repression and constant violation of individual rights. In contrast to other military presidential periods, the Medici administration used mass communication intensively to sell the image that Brazil was a rapidly progressing country that was quickly becoming a world power. Despite the relative success of the hard-liners, the Medici government in turn was replaced by General Ernesto Geisel, who represented the moderate group of Castello Branco. When he took office, he committed his administration to a return to civilian government. It is evident that this turn toward a democratic solution by elements of the Brazilian military had to do with three basic developments – two within the military and the third externally. The increasing corruption of the officer class in the government, and the growing pay inequalities evolving for those junior officers working in the civilian federal agencies clearly angered more traditional officers who saw both the basic integrity of the military, as well as its traditional hierarchical arrangements of power and prestige being threatened. Externally, there was a change in U.S. government policy, which reduced support for the Brazilian regime. Between the Vietnam War and the Watergate scandal of the Nixon years, the hold of the Cold War ideology was slowly being challenged in the United States, and Washington leaders were now less willing to support or even tolerate the military regimes erected with its support throughout Latin America in the previous decades. This new shift was fully realized with the election of Jimmy Carter to the U.S. presidency in 1976. Geisel proposed an “opening” (abertura) of a process to return to democratic government, which however

Political Evolution

21

would be slow, gradual, and secure. But the military hard-liners did not accept any move toward the regime’s liberalization and the government lost control of its organs of repression. Despite censorship, serious corruption cases also were soon discussed. Although Geisel wished for a gradual return to barracks, he could not confront the more radical officers for fear of losing control of the process. Moreover, in the economic area he would face a more delicate situation, as a consequence of the first oil shock in 1973. Maintaining high growth levels was essential to make his gradual “opening” policy feasible. His government would be marked by progresses and setbacks. Some put in doubt the possibility of implementing a true democracy with free elections and real democratic competition. Many believed that a system with a strong authoritarian structure would be institutionalized such as then existed in Portugal.11 There were debates about the viability of a multiparty system, a two-party system, or even of the possibility of establishing a single party system. The strength of the official party, which counted on the intimidation of voters, changes in election rules, and the silencing of the opposition leadership, suggested to many that the regime was heading toward a one party solution. The results of the 1970 elections seemed to indicate this track. But the situation changed in 1974 when the opposition won large majorities in the elections for federal congress and the state assemblies. The election was a surprise because the government believed its party would win; the election result demonstrated the unqualified popular opposition to the regime. Even when Geisel started the transition to democracy, it was difficult to forecast the future of democracy in Brazil, because the transition that started in 1974 with President Geisel’s inauguration did not end until 1985. The frequent setbacks that occurred put in doubt the viability of the process underway. The result of the conflict between moderate and hard-line officers would become very important to the “abertura” process and to its final format. In spite of these setbacks, the political opposition controlled itself and supported the moderate officers in this conflict. In spite of General Geisel’s commitment, torture continued and was clearly out of his control, causing deaths that would have strong negative impact on national and international public opinion. At a certain moment it became necessary to take on the risk of dismissing the Minister of War in order to put an end to the 11

There is an interesting debate about the military regime and its future institutionalization in Stepan, ed., Authoritarian Brazil.

22

Brazil Since 1980

insubordination of these extreme military and antidemocratic paramilitary groups. The confrontations with the military hard-liners and the necessity to maintain the electoral process in turn led to delays in the opening process. In 1976 municipal elections took place in which the government systematically favored its own candidates, but the results brought the victory of the opposition in the main capital cities. The middle class was clearly against the regime despite all the economic growth that had occurred, and even leading entrepreneurial groups were beginning to manifest their dissatisfaction. In 1977, the government responded to this opposition victory and increasing civilian pressure by moving to indirect elections to prevent the opposition from gaining power, which was an arbitrary modification of the electoral rules. The imposed rules aimed only and exclusively at guaranteeing the government party’s victory in the next election. Governors would be elected via indirect voting, and a third of the senate would be chosen through the same system. These two measures guaranteed that ARENA (the government party) would have a majority in Congress and that the election of governors would be controlled by the federal government. In addition, the military modified the representation in the Chamber of Deputies, distorting the proportionality between deputies and their state population. The minimum number of Deputies elected by small states was raised and a maximum limit per state imposed, thus reducing the representation of large states. This created a fundamental regional distortion in Congress, which persists today – the representation of the northern and northeastern states is proportionally much higher than the representation of the more modern and wealthier center-south states. The new electoral law also restricted the opposition’s access to the media. The mandate of the next presidential term also was extended to six years, and other harsher measures were introduced, from censorship of imported publications, repression of student meetings, to the expulsion of the leader of the opposition in the Chamber of Deputies. But there also were more positive developments. President Geisel, before concluding his mandate, abolished Institutional Act No. 5,12 the key legislation underlying the authoritarian regime. Habeas corpus was reestablished, prior censorship terminated, and the judiciary recovered its independence. Modifications also occurred in the National 12

Institution Act No. 5, the most authoritarian legal measures of the military dictatorship, was promulgated on December 13, 1968, and went into force on December 31, 1978.

Political Evolution

23

Security Law making it less encompassing. Finally, he revoked the banishment acts for most of the people who had suffered such arbitrary measures. The revival of an autonomous labor movement is another important development that occurred in the Geisel period. From the first days of the authoritarian regime, the military had maintained the urban and rural unions under tight government control, intervening in most unions, and expelling most of their active leadership. In the urban area, the trade unions’ structure set up in the Vargas period remained rather stable, giving the State great power to manipulate the unions through the use of the “pelegos” (professional trade union leaders linked to the government). In rural areas, the very active peasant leagues that existed before the military regimes were destroyed. But in the Geisel period there was an emergence of new union leadership in both the rural and urban areas. In rural areas, new peasant groups were formed free of government intervention and closely associated with the Roman Catholic Church. In the urban area, new independent leadership emerged within trade unions, and after years of immobility there now occurred the first strikes. Ten years after the violent repression of the Osasco and Contagem strikes, the automobile workers from S˜ao Paulo’s ABC region went on strike. The head of the strike movement was Luiz In´acio da Silva, (known as “Lula”), at that time a trade union leader and today Brazil’s president.13 To avoid violent confrontations, the workers adopted peaceful tactics and negotiated directly with employers. The employees accepted the negotiations and settled the strike. At the same time, the strike and its resolution were seen as a major step in the return to a democratic society and was supported by large sectors of civil society, particularly the Catholic Church, which was very active in the whole process of democratization. In fact, the cardinal archbishop of S˜ao Paulo’s was a fundamental actor in the mobilization against torture and the demand for democratic government.14 The Brazilian church, traditionally conservative, would change profoundly. An important part of the hierarchy allied 13

14

The strikes of the metalurgical workers at Osasco, S˜ao Paulo, and at Contagem in Minas Gerais, both in 1968, were the last ones after the military coup of 1964. Ten years later, in 1978, the strike movements began again in the industrial areas of the metropolitan region of S˜ao Paulo. The archdioceses of S˜ao Paulo became an important center of opposition to the military regime, defending human rights, and condemning political persecutions and torture. It also played a key in the organization of new union movements that developed in the region.

24

Brazil Since 1980

itself with the theology of liberation or supported democratic movements. Clearly the definitive shift of American foreign policy under Carter after 1976 provided the fundamental context in which all this change could occur. Carter’s Human Rights policies led to the total abandonment of support for the regimes that the United States had helped establish in the 1960s, and led to the slow return of democratic rule to most of the societies of Latin America in the 1970s and early 1980s. Thus, the external U.S. support for the Brazilian hard-liners in the military evaporated and Geisel was able to maintain the moderate line in the choice of his successor. In 1978, the military leadership accepted General Jo˜ao Baptista Figueiredo, then head of the National Information Service, to be the president. This election represented the ultimate defeat of the hard-liners in the military. On March 1979 President Figueiredo took office, committed to continue the opening process. He was determined to transfer his mandate to a civilian successor, but within a complex process of political negotiations and in the context of a period of economic crisis. As we will see in the chapter on economics, starting from the first oil crisis in 1973, the military regimes had chosen a heterodox (or nonrecessionary) economic adjustment, promoting a strong investment program with foreign funding that completed the industrialization process and made the country less dependent on foreign resources. The price to be paid was the public sector’s financial exhaustion and an expansion of foreign indebtedness. The second oil crisis in 1979, and the widespread debt crisis of the emerging countries which resulted from this crisis, made such a program no longer viable. Figueiredo’s government faced the need of a brutal recessive adjustment, without foreign support. In addition, the deterioration of economy caused the complete deterioration of the political scene. Nonetheless, the path to democratization was maintained, under strong and constant political pressure of the civil society. Figueiredo extended the Geisel amnesty program, abolishing the banishment acts of most political prisoners submitted to such a penalty. But the civilian opposition wanted a broad, general, and unrestricted amnesty. This was finally achieved in 1979, with the government restoring political rights of all those affected by previous exclusion acts. In spite of critics who fought the granting of amnesty as well to the military for their acts of repression and torture, this amnesty act represented a great progress in the democratization movement and

Political Evolution

25

was considered a major accomplishment for the government. Amnesty allowed the return of traditional politicians, including active members of Goulart’s government. The political scene now became more complex. But there also were setbacks. In 1979, Lula, then president of the S˜ao Bernardo’s metallurgy trade union, promoted a new strike that was violently repressed. Hundreds of workers, including Lula, were imprisoned, and this led to the government intervention in the union. The original strategy of the government had been to create two parties, with the idea that the military could maintain its power base both in the military period and even in a democratic period with free elections. But its party, ARENA, showed little political popularity from the beginning. ARENA’s majority was only possible by changing election rules so that they benefited the government party and by systematically eliminating opposition politicians. In direct and free elections, the opposition seemed to be able to take control. Given this situation, military leaders decided to support a multiparty solution instead, hoping to split the opposition into many smaller parties, and this actually occurred. Several opposition parties were formed, but the old unified opposition MDB party also survived as the PMDB (Partido do Movimento Democr´atico Brasileiro). Among the various parties created, was the Worker Party the PT (Partido dos Trabalhadores). It was formed by the new authentic trade union leaderships, under its leader Luiz In´acio da Silva, and included left intellectuals and segments of the urban middle class. The PT was an unusual creation as it had a coherent organization, ideology, and leadership. The other parties, including the PMDB, were more like opposition fronts than organically structured parties. ARENA, the government party, remained unified, but it changed its name to the PDS (Partido Democr´atico Social) All these changes were opposed by the far right groups. In 1980, they tried to create a climate of terror, which culminated with an accidental explosion of a bomb placed in a Rio de Janeiro entertainment center. An army captain and a sergeant were involved, and although the government did not arrest anyone for these actions, the extreme nature of this activity finally forced the army to crack down on its most extreme elements. In 1982 direct elections for state governors took place. Opposition parties achieved a great victory, particularly the MDB, which started to govern some of the most important states. In addition to the regime’s political deterioration, the deep economic crisis further harmed the government, and popular protest now became the norm as the

26

Brazil Since 1980

government permitted mass demonstrations. The most important of these movements was the massive mobilization of civil society and opposition parties in favor of direct elections to choose the next president of the Republic. Congress was presented with a project to change the constitution and establish direct election for the presidency. Great assemblies took place in almost all states culminating with the S˜ao Paulo manifestation that gathered more than one million people. In spite of that, indirect elections were maintained. But the elections were still a surprise to the military The PDS, the government party, split when choosing its candidate. One of the candidates, the official one was a reserve colonel and a Figueiredo minister. But another civilian candidate emerged: Paulo Maluf, a politician who had come to power in S˜ao Paulo under the protection of the military regime and had been both mayor and governor. Well known for his less than scrupulous methods and for his high levels of corruption, Maluf was able to gather a large sector of the party to support him. Although the elections would be indirect, with an already known electoral college that counted with the majority of the official party, the division of the PDS allowed the opposition to win. The PMDB candidate, the governor of Minas Gerais Tancredo Neves, was a respected politician, and known for his moderation and political abilities. Jos´e Sarney, a traditional government-based politician who had already been ARENA’s president but was against Maluf’s candidacy, became the opposition’s candidate for vice president. An alliance of forces was established, with a majority in the electoral college voting for the Tancredo-Sarney ticket. The civilian opposition had reached the government before it had been forecasted, irritating a segment of the military leaders. They had expected the slow transition to continue. It had started in Geisel’s government, had been extended during the six years of Figueiredo’s government; and they had expected that the new president would be one of their own so that they could remain in power for another six years. Some hard-line military officers showed their dissatisfaction and put in risk the inauguration of the new president. But they were defeated. But this transition would yet show surprises. The day before the inauguration on March 14, 1985, Tancredo Neves fell ill and underwent surgery, impeding his taking office. There was an emergency meeting with the main political leaderships. For some, the appropriate constitutional track would be the installation of the president of the Chamber of Deputies, who would wait for the elected president’s

Political Evolution

27

recovery, or would call for new elections in case the elected president would be unable to take office. But this offered too many risks, especially given the continued importance of the military. The option was to make the vice president take office temporarily as president, which in fact was the position of Ulisses Guimar˜aes, then the president of the Federal Chamber of Deputies and a leader of the main opposition party, the PMDB. Although Figueiredo refused to take part in the official transfer, Sarney was inaugurated as temporary president and one month later took office when president-elect Tancredo Neves died.

The Consolidation of Democracy Jos´e Sarney’s presidency represents an irony in history, as it installed in office a traditional pro-government politician rather than the leader of the democratic opposition. But Sarney well understood his rather unusual position and kept the ministers that Tancredo Neves had already named and decided to base his political support on the PMDB’s parliamentary majority. Sarney’s government would be marked by this particular political balance. In moments of crisis, the legitimacy of his installation was questioned and he was forced to manage a country in deep economic crisis, which only worsened during his administration. However, his administration undoubtedly represented a major development in the final consolidation of the democratic process. One may say that the long transition, started during Geisel’s government and continued during Figueiredo’s, would be completed in the Sarney period. As soon as he assumed office, Sarney tried to implement new measures to liberalize the regime. The first issue was to replace the constitutional changes made by the military regimes, which had stressed both centralization and extreme authoritarian. There was thus an immediate demand for a new more democratic constitution. This led to a debate about whether the new constitution should be carried out by a newly elected constitutional convention – the position of the left parties – or by the current Congress. More conservative groups and the president wanted the Congress that was to be elected at the end of 1986 to write the new constitution. It was believed that a congress with constituency power would be more conservative than a group that would only elaborate the constitution and would then be dissolved, which would be less predictable in its decisions and probably more representative of civil

28

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society and more radical. The most conservative position, supported by President Sarney, won. The constitution approved in 1988 has been criticized for various reasons. It is overlong and very meticulous. The pressure of special interest groups led to unusual amendments not relevant to a constitution, which in fact should have been treated in ordinary legislation. But a politically weak government allowed these groups to influence the final document. The new constitution proposed fiscal decentralization. States and municipalities gained income from the government, without a transfer of accountability, creating new financial commitments and mandatory resource allocation. Budgets thus became more rigid and at the same time it became more difficult to balance government accounts. Several public monopolies were enshrined in the constitution and the document also had a distinctly nationalist tone. On the other hand, the constitution of 1988 was seen as one of the most advanced in terms of social and political rights, including those for minorities. One of the biggest changes was the extension of the right to vote for illiterates and the reduction of the voting age to sixteen years. Elections for president were now made by direct voting in a two-stage process if a majority was not obtained on the first vote. The system of government to be established also was one of the most intensely discussed topics at this time. Main opposition leaders preferred a parliamentary system of government, which was reflected in several norms of the approved constitution. But they were defeated when the theme was finally decided and the presidential system was maintained. They did manage to approve a plebiscite that would be realized in five years’ time to decide between the parliamentary and presidential options, but when the plebiscite was held in 2003, the presidential system was selected. The duration of the president’s mandate was a theme of particular conflict, discussed between government and the PMDB and left parties. When President Sarney assumed office, legislation forecasted a six-year mandate, but as soon as he took office, he proposed reducing the mandate to five years. But the Congress–Constitution Assembly pushed for a four-year mandate. This generated strong presidential opposition, and was finally resolved when Sarney’s five-year rule was approved following much political negotiation. The Sarney period also saw a major evolution of the political parties, which became more complex because of the simplifying of the process of party formation. The PMDB, the major party by the end of the authoritarian period, was really a coalition group covering a wide

Political Evolution

29

ideological range. It now lost a part of its membership to the more politically coherent Brazilian Social Democratic Party PSDB (Partido da Social Democracia Brasileira), which was a new party that assumed a center-left position. The old PDS, which had sustained the military regime, also was split, and a large section formed the Liberal Front Party, or PFL (Partido da Frente Liberal), which became the leading center right party, Finally, the PT experienced very rapid growth and soon became the main opposition party. It was a left-wing party, identified with labor issues and with a significant middle-class representation. Throughout the years it also became an important representative of the workers in the public bureaucracy. Another party on the left created in this period was the Democratic Labor Party, the PDT (Partido Democr´atico Trabalhista), which revived the old PTB of Get´ulio Vargas and was led by Leonel Brizola, one of the most feared politicians during the military regime. The brother-in-law of the deposed president, Jo˜ao Goulart, Brizola was governor of the State of Rio Grande do Sul at the time of the military coup and had attempted to set up an armed opposition to the military takeover. When the banishment acts of thousands of Brazilians were canceled, Brizola was one of the few initially exempted from amnesty. Part of the military opposition with regard to direct elections to succeed President Figueiredo was related to the possibility of a Brizola victory in the election of 1984. Although this did not occur, he did become governor of Rio de Janeiro in a landslide victory. Countless other parties on the right and left also emerged at this time, often created by splinter groups from the existing parties. Finally, the Brazilian Communist Party was legalized.15 One of the characteristics of the Brazilian party system is its fragility in terms of party loyalty, with frequent party changes, even including politicians with a legislative mandate or in an executive office. Coalitions do not always reflect an ideological coherence, particularly those that give political support to the executive in power. It might be the case that governance is enhanced by this party fragility, given the country’s political instability and institutional fragility. The executive usually achieves the necessary majority for the government stability

15

Lourdes Sola, ed., O Estado e a Transic¸a˜ o: Pol´ıtica e Economia na Nova Rep´ubica (S˜ao Paulo: V´ertice, 1988); Maria do Carmo Campello de Souza. “A Nova Rep´ublica sob a espada de Dˆamocles,” in Stepan, ed., Democratizando o Brasil; Stepan, “As prerrogativas militares nos regimes p´os-autorit´arios”; Rachel Meneguello, Partidos e Governos no Brasil Contemporˆaneo (1985–1997) (Rio de Janeiro: Paz e Terra, 1998).

30

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through this relative party instability. Perhaps this process would not make sense in a parliamentary system, in which political reorganizations are easily accomplished without institutional crises. Another characteristic of the Brazilian party system is the creation of new parties or the utilization of small local parties to support the emergence of new political leaders that could not find space in the major parties. The election to succeed Jos´e Sarney would eventually be an example of this type of development. The election of 1990 was to be the first direct election since that of 1960 and occurred during a major economic crisis with inflation closing in on the hyperinflation level of 50 percent price increases per month. By the end of its term, Sarney’s government had little political or popular support because of this crisis. The left parties came to the election with two important representatives, Brizola and Lula, both of whom frightened the elite and middle classes. In opinion polls, these two candidates stood out as favorites, surpassing highly prestigious politicians and representatives of the major parties, such as Ulisses Guimar˜aes (PMDB), Mario Covas (PSDB), and Aureliano Chaves (PFL). During the year of elections a new name emerged, that of a young politician who had been the governor of the small and poor northeastern state of Alagoas, and who had launched his name through an unknown National Reconstruction Party, the PRN (Partido da Reconstruc¸a˜ o Nacional). It is believed that initially he had launched his name to become a possible vice presidential candidate in one of the major parties. But like Jˆanio Quadros, thirty years before, he became a popular figure with the same type of populist, moralistic, and essentially rightist platform. He proposed putting an end to government corruption and attacked the “maraj´as” (or public employees with high wages). When the polls showed his increasing popularity, the political right came to his aid. In the first election turn, Collor won with 29 percent of the votes, followed by Lula (16 percent) and Brizola, with 15 percent. The candidates of the large parties such as the PMDB, PSDB, PDS, and PFL were overwhelmingly defeated. In the second turn with just the two leading candidates from the first term competing, Collor beat Lula with a rabid antileft campaign. Collor began his government with a highly unusual and quite authoritarian economic shock, which involved the freezing of personal financial assets kept in the banking system. The justification offered for this extraordinary action was the need to reduce the immense liquidity in the market, as in this extreme inflationary economy all financial

Political Evolution

31

applications, including the public debt, were very short term and in fact occurred on almost a daily basis. Collor also inaugurated the liberal discourse in Brazil known as the “Washington Consensus” and took the first measures toward the opening of the market to international competition, the promotion of foreign investments and finally the privatization of the economy and the liquidation of the government monopolies in production of goods and services. Given that a small party had been his base and that he gained the election because of the fear of the supposedly radical Lula, he owed nothing to any major political or economic groups and felt empowered to make fundamental changes in the economy. But his political isolation, his authoritarian governing style, and the economy’s continued deterioration, added to clear evidence of massive personal corruption, led to formal impeachment of the president. The anti-Collor campaign called forth mass popular demonstrations; nevertheless, the impeachment took place within constitutional rules and without an institutional crisis, a key indicator of the maturation of the political scene. In December 1992, Collor’s vice president, Itamar Franco, was named as the new president of the Republic. For a second time in two consecutive terms a vice president would succeed to the presidency. A senator and PMDB governor of Minas Gerais, Franco had abandoned his party to join Fernando Collor’s candidacy. When he took office, a broad party agreement was established to sustain the government so as to avoid an institutional crisis. A conservative and nationalist politician, Franco received the country in severe economic crisis and one that was well into a process of a economic liberalization. In May 1993, Fernando Henrique Cardoso, a PSDB senator and then Minister of Foreign Affairs, assumed the Ministry of Finance. In December 1993, the Plano Real was adopted under his direction. This turned out to be the most successful post-1950 plan for the stability of economy and the resolution of the structural inflation that was so fundamental a part of the growth of the Brazilian economy. Economic liberalization measures were increased, including the privatization of such important state owned companies as the National Steel Company (Companhia Sider´urgica Nacional) one of the symbols of state capitalism that survived since the Vargas years. Ironies of destiny, both Itamar Franco, an obstinate nationalist and advocate of public monopolies, and Fernando Henrique Cardoso, a well-known dependency theorist and left intellectual, ended up by promoting privatizations and the liberalization of the national economy.

32

Brazil Since 1980

The success of the Plan Real suddenly placed Fernando Henrique Cardoso in a presidential candidacy and, in the election of 1994, he was presented as the leading figure to oppose Lula, the perennial candidate of the PT. Fernando Henrique Cardoso and his party, the PSDB, represented social democracy in Brazil, but they pragmatically allied themselves to the PFL, the center-right party, which indicated the vice president. Fernando Henrique Cardoso was elected in the first turn with 54 percent of votes, whereas Lula obtained 27 percent and Brizola obtained only 3 percent of the votes. Once elected, Fernando Henrique Cardoso focused on the consolidation of the Stability Plan while implementing a broad program of neoliberal reforms, which represented a rupture with the strong state model that had risen with Get´ulio Vargas and was stressed in the military period. This dismantling of the interventionist state, initiated in Collor’s administration and continued in a modest form during Itamar Franco’s government, now became a full-fledged and consistent program in the government of Fernando Henrique Cardoso. Cardoso completed the transformation of the Brazilian state from an active agent in the national productive structure to a regulatory state which left production to the private sector. In addition to its regulating role, the Brazilian state would henceforth limit its actions to typical state responsibilities in the areas of security, justice, education, and health. In spite of the strong left-wing opposition of Lula’s PT and Brizola’s PDT, the government managed to build a large parliamentary majority that allowed the implementation of most of the desired reforms, many of which required constitutional amendments with the necessity of two votes supported by a three-fifths majority of both houses of Congress. The government base had the votes, although lack of party cohesion forced concessions and favors to members of parliament or special interest groups. In the economic arena, reforms targeted the complete implementation of a market economy and the reduction of state intervention. Therefore, state monopolies in oil, electric power, telecommunications, and coastal shipping were broken. Moreover, Cardoso tried to implement a broad social security and public administration reform program. Although these became topics of serious discussions, some reforms were not implemented as a result of PT opposition. There also was much talk of political reform, especially in relation to the overrepresentation of the smaller and less popular states, but again little could be accomplished. With the maximum of seventy deputies for any state

Political Evolution

33

in the lower house, the vote of an elector of a small state is worth fifteen times the vote of a S˜ao Paulo elector. This strong distortion was introduced by President Geisel in one of his authoritarian acts and was not changed in the 1988 constitution because the congressional composition already reflected such disparity and made it impossible to build a majority to alter such disposition that favored a large number of small states. The Cardoso government also did little in the labor and trade union arenas, where basic norms created in the Vargas period still prevail. Another important issue that was difficult to implement and was systematically discussed was tax reform. The necessity to balance the public accounts had led to an irrational fiscal system that overburdens production and encourages regional disputes. There was fear that any broad tax system reform might harm the federal government, as it would be captive of regional interest groups in congress, and thus no major changes were implemented. The judiciary is another area that was part of the agenda of postponed reforms. This still remains a fundamental issue, for the system as it currently stands does not fully and effectively protect property rights in the society, is slow to resolve problems, and is biased in its decisions. These are probably the most important themes that were part of Fernando Henrique Cardoso government’s reform agenda, but the implementation of these reforms became politically unfeasible in his two terms. Much of this failure also was a result of the insistence of the president that he be allowed to run for the second term. The administration wasted much of its energy, political capital, and credibility to approve a constitutional amendment that allowed the reelection of executive offices at the three levels of government. This modification benefited Fernando Henrique Cardoso, and counted with the support of the States’ representatives, because it also allowed the reelection of governors then in office. Although there had been considerable discussion in Brazil since the Sarney years about whether the term of the president should be either four or six years, there was general agreement on the question of no reelection no matter what the extent of the presidential mandate. This consensus was broken by Cardoso. In the election of 1998, Fernando Henrique won again in the first turn, with 53 percent of votes, with Lula’s vote now rising to 32 percent of the total. Fernando Henrique won with the same coalition of his first election, his PSDB, and the conservative PFL. In his second mandate he continued his reform program, but difficulties in the international

34

Brazil Since 1980

economy led to a restrictive economic policy, with low growth rates and a major increase of unemployment. By the end of his second term, FHC’s political prestige was low. Although his second government carried out important reforms of the federal administration and promoted economic stability, he had exhausted much of his prestige in the campaign for reelection and he was incapable of developing new social policies or pushing for growth. Lula presented himself again as candidate for the presidency. It was his fourth attempt at the presidency, and this time he won. As usual, he had the advantage in the election polls. It was believed, however, that Fernando Henrique Cardoso support and that of his political allies would enable their candidate to win. But the general exhaustion of second Cardoso government, and a split between the PSDB and the PFL, whose coalition had made the two previous victories feasible, created electoral difficulties. There also was a major transformation in the PT’s electoral discourse, and for the first time it accepted a party coalition, choosing for its partner the PL, a center-right party that named the vice presidential candidate. PT’s traditional theses were abandoned and Lula introduced himself as a candidate to continue reforms, to maintain economic stability, and one who finally accepted the maintenance of the IMF agreement. There would be no breach of contracts or discontinuity in economic policy. He presented himself and his party as one more committed to social issues. The official candidate was Jos´e Serra, the Minister of Planning and of Health in Fernando Henrique Cardoso’s administration. A very well prepared and respected politician, Serra was not capable of presenting a platform to differentiate him from the Cardoso government. In the first turn Lula obtained 46 percent of the votes, against 23 percent for Serra, but in the second turn Lula won with 61 percent of the votes. The election of Lula represented a major breakthrough in national politics. Also, most unusual, was the fact that Lula was the first modern Brazilian president without a formal secondary education or university title. His language and style were a reflection of his origin as northeastern migrant to S˜ao Paulo. As for his party, it, too, was unique to Brazilian politics. Although subject to much internal conflict, the PT was the most ideologically coherent and modern national party in Brazil at the time of the election. With its coming to power, however, the party has slowly moved toward a more normal Brazilian entity, with many defections from its ranks as it tried to reduce its radical program in order to gain the government and maintain its international status.

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Feared internationally as a potentially revolutionary government, the PT has proven even more conservative economically than its predecessors, much to the delight of the international financial community. At the same time, it began to work on many of the social and political reforms that had been discussed but not implemented under the Cardoso governments. Major changes were finally brought to the social security system, and against the opposition of its traditional supporters among government workers, it has forced them to become a paying part of the system. But the Labor Party as a governing party soon ran into serious difficulties. The PT lacked a professional class of experienced government administrators, despite their long history of successes at the municipal and state level, and were less successful in implementing policy than in reforming the laws. There were numerous ministerial turnovers and, thus, difficulties in establishing a coherent administrative policy. But, even more important, the party virtually collapsed in 2005 because of a massive corruption scandal. Although the party had as one of its platforms a claim to being of the highest ethical and moral standards, it has systematically used state funds to buy opposition political support from its earliest days in local government. Rather than playing the democratic game, the party has paid monthly fees to opposition politicians to support its programs. That systematic and pervasive corruption eventually involved not only the extraction of government funds and private money from special interest groups to support electoral campaigns, and purchase opposition votes, but also, as was inevitable, it has involved traditional personal corruption as well. Within a space of a few months in mid-2005, almost all of the leadership of the party was caught up in these corruption scandals and forced from the government, and the party has seriously fractured as a result. This crisis has meant that what all had thought was a guaranteed reelection for Lula, who has retained some of his popularity, has turned the presidential elections of 2006 into an open contest. It also has put into question the very survival of the PT as an expressive force in Brazilian politics, which in turn will seriously affect the national political scene. In its opposition period, the party played a fundamental role in counterbalancing the traditional and conservative forces which dominated Brazilian politics. But its failure at the national level has shown that the party lacks a coherent political project and the leadership has distanced itself from its more radical base. The alienation of that base, at the same time, has exacerbated traditional divisions

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within the party and may lead to its destruction as an effective entity. At this point is unclear how the party will progress in the next two years and what will be its resolution, if any, to this crisis. But at the same time it should be stressed that the Lula government has consistently and effectively carried out the economic policies of the previous Cardoso administration and that this crisis has not seriously affected the democratic system. Clearly the worst political crisis to affect Brazil since the end of military rule, the corruption scandals of the party have not led to any collapse of democratic institutions or the emergence of antidemocratic forces.

2 The Economy

The Antecedents The Brazilian economy experienced growth for the first seventy years of the twentieth century. Initially sustained by the exportation of coffee and later by a process of induced industrialization through the substitution of imports, the country created an ample and complex industrial structure without parallel in Latin America. By the late 1970s, Brazil had established an industrial structure that included an important capital goods sector. The continental size of the country created a market of a scale sufficient to sustain not only a consumer durable goods industry but also one that could produce both basic inputs and finished capital goods. This long process of growth was broken by a series of external crises that affected Brazil and the majority of the developing countries at the end of the decade of the 1970s. The crisis began to unfold with the first oil shock of 1973, was reenforced by the second one of 1979, and was followed by the External Debt Crisis of the 1980s. These shocks, for both Brazil and the rest of Latin America, broke their long trend of growth in the twentieth century. In the case of Brazil, the average rate of growth, which had been 5.7 percent per annum by the last years of the 1970s, dropped to 2.1 percent in the last twenty years of the century. This later rate of growth was insufficient to maintain the well-being of a still poor country, with great social and income inequalities and with a population growing at 1.7 percent annually. The post-1970s crisis was also accompanied in Brazil by a seemingly uncontrollable inflation and an ever increasing public debt. This process of accelerated growth for eighty years and stagnation for the last two decades occurred, as we have seen, in an ambience of strong political instability. The country began the century with a 37

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new Republican government, which until the 1920s was controlled by local elites and an oligarchy based on the coffee economy. Beginning with the international crisis of the 1930s, the structure of political power became more complex, with a greater participation of new economic elites, which were less tied to the traditional coffee sector. Under Vargas, Kubitscheck,1 and again under the nationalist military regimes of 1964–1985, Brazil developed a complex economic policy that stressed the forced growth of the industrial sector. The military also would carry out a modernization of the financial sector. Castello Branco, the first president of the military regime, assumed power in April 1964 with the country in a deep recession and experiencing growing inflation. The government analysis of the crisis was laid out in the so-called Plan of Economic Action [Plano de Ac¸a˜ o Econˆomica do Governo (PAEG)].2 The plan identified a series of what it claimed were distortions in the structure of the economy that were induced by a distributive crisis. This was defined as the excess aggregate demand on the productive sector due to elevated public sector deficits financed by the emission of money, by the expansion of excess credit in the private sector, and by strong wage pressures. These 1

2

Among the numerous studies on the economy of the period prior to the golpe militar, see Sonia Draibe, Rumos e Metamorfoses: Estado e Industrializac¸a˜ o no Brasil: 1930/1960 (Rio de Janeiro: Paz e Terra, 1985); Carlos Lessa, Quinze anos de Pol´ıtica Econˆomica (Campinas: Cadernos Unicamp, no. 4, 1975); Maria Victoria de Mesquita Benevides, O governo Kubitschek (Rio de Janeiro: Paz e Terra, 1976); Maria da Conceic¸a˜ o Tavares, “Auge e decl´ınio do processo de substituic¸a˜ o,” in Maria da Conceic¸a˜ o Tavares, ed., Da substituic¸a˜ o de importac¸o˜es ao capitalismo financeiro (Rio de Janeiro: Zahar, 1972); Albert Hirsmann, “The Political Economy of Import Substitution Industrialization in Latin America,” The Quarterly Journal of Economics, vol. 82 (Feb. 1968). Albert Fishlow, “Origens e Consequˆencias da Substituic¸a˜ o de Importac¸o˜ es no Brasil,” in Flavio Versiani and Jos´e Roberto Mendonc¸a de Barros, eds., Formac¸a˜ o Econˆomica do Brasil: A experiˆencia de industrializac¸a˜ o (S˜ao Paulo: Anpec/Saraiva, 1976); Annibal Villanova Villela and Wilson Suzigan, Pol´ıtica do governo e crescimento da economia brasileira, 1889– 1945 (Rio de Janeiro: Ipea, 1973); Pedro Mallan. “Relac¸o˜ es econˆomicas internacionais do Brasil, 1945–1964,” in Boris Fausto, ed., Hist´oria Geral da Civilizac¸a˜ o Brasileira (S˜ao Paulo: Difel, 1977, tomo III, vol. 1), pp. 31–106; Roberto Macedo, “Plano Trienal de Desenvolvimento Econˆomico,” in Celso Lafer, ed., Planejamento no Brasil (S˜ao Paulo: Perspectiva, 1970); Antonio Barros de Castro, Sete Ensaios sobre a Economia Brasileira (S˜ao Paulo: Forense, 1969); Marcelo de Paiva Abreu, “Inflac¸a˜ o, Estagnac¸a˜ o e Ruptura: 1961–1964,” in Marcelo de Paiva Abreu, ed., A Ordem no Progresso (Rio de Janeiro: Campus, 1990), pp. 197–231; Luiz Orenstein and Antonio Claudio Sochaczewski. “Democracia com Desenvolvimento: 1956– 1961,” in Paiva Abreu, A Ordem no Progresso, pp. 171–195; Jos´e Serra, “Ciclos e Mudanc¸as Estruturais na Economia Brasileira do P´os-Guerra,” in Luiz Gonzaga de Mello Belluzzo and Renata Coutinho, eds., Desenvolvimento Capitalista no Brasil. Ensaios sobre a Crise (S˜ao Paulo: Brasiliense, 1981). Celso Martone. “O Plano de Ac¸a˜ o Econˆomica,” in Lafer, ed., Planejamento no Brasil.

The Economy

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three components created a pressure on demand that could not be met by producers, and this “distribution crisis” provoked inflation that was structurally uncontrollable. In the vision of those responsible for the government economic policy, the recuperation of the economy could occur by reducing the public deficit, controlling credit of the private sector, and limiting the increase in salaries. They also suggested that the price distortions and other problems in the economy were a result of an inadequate fiscal structure and a rudimentary financial system, and that a modernization of these sectors was necessary in order for growth to be reinitiated. With this analysis, the government put into practice a program of stabilization and reforms, which also had the effect of reenforcing the authoritarian regime. The government reforms were successful in the fiscal area, creating new taxes and the institution of a system of monetary correction for inflation. This “indexation” was first put into effect as a correction to taxes collected and it greatly aided the national treasury in an economy suffering high inflation. Indexation was next applied to the Federal Public Deficit, allowing the sale of public bonds of both short- and long-term maturity for the first time. Indexation explains how Brazil was able to create a relatively sophisticated capital market from the 1970s onward, although inflation never completely disappeared. If this was a positive result of the creation of monetary correction, the experience of the 1980s and 1990s showed that indexation prevented the control of inflation itself. But these fiscal reforms strongly reduced the public deficit and allowed it to be financed by the sale of government bonds rather than by the previous policy of emission of money.3 Various changes also occurred in the labor sector. A new law on wages was one of the most important of these changes, due to its immediate impact on the growth of salaries and on income distribution. Until this new law was enacted, wages had been adjusted annually to compensate for the year’s actual inflation. The new law corrected 3

Andr´e Lara Rezende, “Estabilizac¸a˜ o e Reforma,” in Paiva Abreu; Mario Henrique Simonsen and Roberto Campos, A Nova Economia Brasileira (Rio de Janeiro: Jos´e Olympio, 1979); Celso Furtado, Um Projeto para o Brasil (Rio de Janeiro: Saga, 1968); Albert Fishlow, “Algumas Reflex˜oes sobre a Pol´ıtica Brasileira ap´os 1964,” Estudos CEBRAP, no. 6 (Jan./Mar. 1974); Mario Henrique Simonsen, Inflac¸a˜ o, Gradualismo x Tratamento de Choque (Rio de Janeiro: Apec, 1970); Albert Fishlow, “A distribuic¸a˜ o de renda no Brasil,” in R. Tolipan and A. C. Tinelli, eds., A controv´ersia sobre a distribuic¸a˜ o de renda e desenvolvimento (Rio de Janeiro: Zahar, 1975).

Brazil Since 1980

40 Index 140 130 120 110 100 90 80 70 1960

1961

1962

1963

1964

1965

1966

1967

1968

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1976

1977

Graph 2.1. Index of Minimum Real Salary (1964 = 100) Source: IPEADATA, Sal´ario m´ınimo real – Mensal – R$ valor real – GAC12 SALMINRE12

salaries on a formula that took into account past inflation as well as an estimate of inflation in the coming twelve months. Because it was traditional to underestimate future inflation, the new wage law caused a systematic loss of real wages for the workers, with negative distributive effects. This deliberate reduction of real wages, called the “wage squeeze,” did restrain both aggregate demand and the costs of labor for private enterprise. The law was put into effect under a strongly repressive regime, which included control over union activities, and it provoked a significant reduction in real wages and represented one of the principal causes for the success of the stabilization program. The average annual minimum wage, for example, went from 100 in 1964 to 82 in 1967 (see Graph 2.1). Such a brutal measure could not have occurred in a democratic regime with a free union movement.4 Along with fiscal and monetary control, the government promoted an ample process of correction of prices of goods and public services, including abolishing rent controls. These policies of price liberalization, of course, limited the impact of its policy of monetary, fiscal control, and wage reductions on controlling inflation. But even with these 4

IPEA (Instituto de Pesquisa Econˆomica Aplicada) is an important research group controlled by the federal government. In addition to a series of excellent studies, which can be found on the Internet, it maintains a Web site where innumerable economic and social data series on Brazil can be found: http://www.ipeadata.gov.br/

The Economy

41

counterproductive actions, there is no denying that the government succeeded in reducing inflation. In the city of Rio de Janeiro, prices to consumers, which rose to 91 percent in 1964, fell to 30 percent in 1967. Despite excess industrial capacity, the restrictive credit policies led to a fall of industrial activity of 4.7 percent in 1965. The Gross National Product rose, however, because of the excellent year that agriculture was experiencing, and by the next year the gross national product grew at 6.7 percent because of a strong industrial recuperation, this despite a severe decline in agriculture in this new year. The government of Castello Branco created the Central Bank of Brazil (Banco Central do Brasil ). In the same period came a new financial system for housing, through the creation of the National Housing Bank (Banco Nacional da Habitac¸a˜ o), which established an ample system of financial agents in this sector. The funds for housing in turn were generated through a national system of forced savings. Until 1963 employees who were laid off were compensated by being paid one month’s salary for each year of employment. After ten years of service, it was more difficult to dismiss them, as double compensation was required from the company. This system tended to limit labor mobility. The government abolished the entire arrangement and created instead the Guaranteed Fund for Time of Service (Fundo de Garantia por Tempo de Servic¸o). Through this system, which remains in place today, the companies deposited monthly a fixed percentage of the worker’s salary in a bank account in the name of the worker. Workers could then withdraw these sums in the case of dismissal by their employers. These deposits also could be used by the employee in special situations, such as their purchase of a home or as their retirement income. Although the new system promoted easier control over labor by employers, the Fund was an important instrument of long-term savings for workers, and its resources represented the principal source of funds for housing and sanitation construction. When General Costa e Silva, took office as president in 1967, the economy showed signs of recession because of the salary squeeze and the restrictive measures to contain inflation which were taken at the end of the Castello Branco regime. Industry, for example, which showed an extraordinary growth of 11.7 percent in 1966, now slowed to a growth rate of just 2.2 percent in the following year.5 But the 5

Data obtained at IPEADATA. IBGE/SCN: PIB da ind´ustria de transformac¸a˜ o, valor adicionado, valor real anual.

42

Brazil Since 1980

authoritarian regime needed political legitimacy and the only practical way to obtain that was through economic growth. This need for growth became the fundamental objective of the Costa e Silva regime and its successor government of General Medici. This was the most repressive and authoritarian period of the military era, which extended from 1967 to 1973, and was also to be the period of the so-called Economic Miracle because of the high rates of economic growth achieved. The new government named Antˆonio Delfim Netto as Minister of Economy and he directed all his efforts at increasing growth by taking advantage of the process of stabilization and reforms carried out by the previous administration, combining this with traditional incentives and subsidies to jump-start the process, and take advantage of the enormous idle capacity of the productive sector and of favorable conditions in the international market. The government immediately inaugurated an expansionist policy but at the same time put in place a system of control and administration of prices. It created a major system of subsidies for determined areas of the economy, especially for the export sector and agriculture. In the case of agriculture, along with direct incentives, Delfim Netto created a sophisticated system of subsidized credit, which permitted the rapid growth of this sector. The subsidization of agriculture was designed to reduce food costs. Thus began an important integration of industry and agriculture, with the latter also representing an important market for national industry. In the export sector, the government initiated a system to stimulate manufactures, which until then had had little importance in Brazilian exports. Besides abundant credit, subsidies, and fiscal advantages, the export sector now counted with a realistic exchange rate. The government now maintained a relatively stable exchange rate through a system of periodic mini devaluations tied to the differentials between the internal and external rates of inflation, which guaranteed exporters some protection against major changes in local and international prices. Delfim Netto created a system of voluntary and forced savings and directed much of these savings into new economic activity. Fiscal incentives for the capital market were granted, as this was seen as a fundamental instrument to mobilize the savings necessary to promote growth. The federal government, in addition to administering credit, incentives, and subsidies to stimulate and direct private investment into high priority areas, also was active in promoting public enterprises to invest in areas of infrastructure. The relatively comfortable situation

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of the state finances permitted the administration to participate in a major way in the new investments needed by the expanding economy. Through its control and administration of prices, through its extensive system of incentives and subsidies, and by its direct action through the state enterprises, the government began to exercise immense control over both the public and private decisions in the economic area. Few private projects were begun in Brazil without the approval of some public institution, either for obtaining credit, authorization to import goods, or some other type of subsidy. Also, few products escaped formal price controls. Finally, the state was the grand producer of energy, steel, minerals, fuels, fertilizers, and chemical products among other products, and it also controlled port services, telecommunications, railroads; as well as exercising a fundamental role in the system of credit. Despite the persistence of inflation, indexation permitted the government to create a sophisticated system of finance for long-term investments in housing and sanitation through the mobilization of both voluntary and forced savings, as in the case of the cited “Guaranteed Fund for Time of Service.” This ambitious activity formed part of a larger public works program by the government and the state enterprises, expanding employment in this sector and incorporating new workers within the formal sector of the economy. In the industrial area there was a strong expansion in the production of durable consumer goods, caused as much by the expansion of the consumer market – especially as a result of the growth of the middle class – as by the creation of a new system of consumer credit, which permitted the sale of a wide range of products, including automobiles. Although there was a rapid growth in the number of salaried workers through the expansion of employment, the maintenance of the salary squeeze and the repression of organized labor also kept salaries low. The real value of the minimum salary actually declined by 34 percent between April 1964 and April 1973.6 There are no reliable statistics by which to calculate the median real salary in the formal sector of the economy. If we take the employment in just the industrial sector for which we have reliable data and utilize a reliable deflator, we find either stability or even a fall of median real salaries in this sector, despite the exceptional growth of productivity. There was some serious growth in income of specialized workers and in administrative staff in the 6

Data obtained at IPEADATA. Sal´ario M´ınimo real, mensal, R$ valor real. Also see Gr´afico 1.

Brazil Since 1980

44 Percentage Change in PIB

Per Capita Income in US$

15

$3,500 $3,000

10

$2,500 5 $2,000 0 $1,500 -5

$1,000 $500

-10 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 GDP Variation

GDP per Capita

Graph 2.2. Variation in GDP and GDP per Capita, 1958–1983 Fuente: IPEADATA,PIB – var. real anual – Anual – (% a.a) – IBGE SCN/Anual – Scn PIBG; PIB per capita (prec¸os 2004) – Anual – US$ valor real – IPEA – GAC-PIBCAP

economy as a whole. This probably occurred in the industrial sector as well, which meant that less specialized workers in this sector probably experienced a fall in real median wages in this period. National product grew at an average annual rate of 10 percent between 1967 and 1973 and the industrial sector showed an ever higher rate of growth.7 The economy was modernized and this explosive growth led to the incorporation of new workers into the formal labor market and the consolidation of a middle class of consumers. Aside from the success of the economic policy adopted internally, the country also benefited from a period of strong international growth that saw most of the countries of Latin America expanding at a very high average rate of growth (see Graph 2.2). There are two fundamental criticisms of the economic policies carried out by the government in this period. Growth was accompanied by a process of income concentration that occurred for a variety of reasons, most particularly because of the restrictive salary policy adopted by the government that prevented the gains to productivity obtained by the new economy from being transferred to the workers. Most of 7

Data obtained at IPEADATA. IBGE/SCN. PIB, variac¸a˜ o real anual e PIB da ind´ustria de transformac¸a˜ o, valor adicionado, valor real anual.

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45

the gains were appropriated in the form of profits, which furthered the profound unequal distribution of income within Brazilian society.8 The process of increasing external debt represented the other negative aspect of the growth policy of the military regime of this period. Brazilian economic crises are traditionally generated in the external area. At the beginning of the Costa e Silva government, the country was vulnerable to such a crisis because of the low level of existing reserves. This explains why the government greatly stimulated exports and opened the country to foreign capital, both in terms of direct investments and loans. Because of their lower costs and longer repayment schedules compared to the local lending market, there was a great increase in private financing from abroad. This policy of relying on private international credit fundamentally changed the structure of the external Brazilian debt. Until then, this debt was based on official sources of credit and obtained at fixed rates. The new debt modality, which included financing of the state industries, was based on private international banking, with fluctuating interest rates and relatively elevated costs compared to those charged by the previously dominant international agencies. The increase of the external debt, its greater costs, and its floating interest rates made the country more vulnerable to future changes in the international scene. And, already in the 1970s, despite the accelerated growth of the advanced economies, there were signs of deterioration in the international economy with growing inflation and currency exchange fluctuations, which affected even the richest countries. The first petroleum shock in 1973 was a very clear signal of the next crisis, which would manifest itself in the decade of the 1980s.

8

In this period, there was an extensive debate over the question of income concentration. The government affirmed that the high level of inequality of income distribution was a transitory phenomenon caused by the growth process, whereas economists held different opinions. Some argued that there were structural reasons for this distorted distribution and it would not be eliminated with growth, others blamed the government’s repressive salary policy as the cause for this concentration. On this theme, see Carlos G. Langoni, Distribuic¸a˜ o de renda e desenvolvimento econˆomico no Brasil (Rio de Janeiro: Express˜ao e Cultura, 1973); Albert Fishlow, “Brasilian size distribuition of income,” American Economic Review (vol. 2, no. 62); Edmar Bacha e L. Taylor. “Brazilian income distribution in the 1960s: ‘Facts’, Model Results and the Controversy,” in Taylor et al., eds., Models of growth and distribution for Brasil (New York: Oxford University Press, 1980); Lauro R. A. Ramos and Jos´e Guilherme Almeida Reis, “Distribuic¸a˜ o da renda: aspectos te´oricos e o debate no Brasil,” in Jos´e Marcio Camargo and Fabio Giambiagi, eds., Distribuic¸a˜ o de renda no Brasil (Rio de Janeiro: Paz e Terra, 2000), pp. 21–45.

46

Brazil Since 1980

This era of the “economic miracle” occurred at the most reactionary period of the military regime. At a time when it was gagging the political opposition and the press, and controlling the unions, the only aim of the government was to show growth at any cost. Criticism was unacceptable, even impartial criticism that pointed to errors in economic policies. Even academic debate was muted and kept off the media by the regime. Authoritarianism permeated all levels of government, as the administration put into place a wide range of public investments in the productive sector, with incentives and subsidies to the private sector, and the manipulation of major sources of long- and short-term credit, control over prices and wages, and administration of the exchange rate. The distortions in the economy increased and the society, if anything, became more unjust through an economic policy that was increasing wealth concentration. The authoritarianism of the economic policy can be seen in the manipulation that occurred in the index of inflation in the crisis year of 1973, which it estimated at a totally unrealistic rate of just 12.6 percent. Subsequent studies estimated the real rate at 22.5 percent.9 In 1974 General Ernesto Geisel assumed the government, and, as we have noted, he represented a new more liberal wing of the military. His fundamental object was to open the political system, and to legitimate this opening he needed to show growth. Plans of recessive economic stabilization would therefore not be politically acceptable. The petroleum shock of 1973 profoundly affected the country, which depended on this form of fuel and imported 73 percent of its consumption. The trade balance, relatively stable until 1973, in the following year showed a deficit of just under $5 billion, with exports on the order of $8 billion. Obviously, this was an exceptional deficit given the size of Brazilian overseas trade and was explained in large part 9

There were intense debates both for and against the model of growth and its consequences adopted in this period of the “economic miracle.” Some of the principal works produced at the time on this debate included Antonio Delfim Netto, “An´alise do Comportamento Recente da Economia Brasileira: Diagn´ostico” (S˜ao Paulo: mimeo, 1967); Simonsen, Inflac¸a˜ o, Gradualistmo x Tratamento de Choque; Celso Furtado, An´alise do Modelo Brasileiro (Rio de Janeiro: Civilizac¸a˜ o Brasileira, 1972); Regis Bonelli e Pedro Malan, “Os limites do Poss´ıvel: notas sobre Balanc¸o de Pagamento e Ind´ustria nos ano 70,” Pesquisa e Planejamento Econˆomico (vol. 6, no. 2, 1976); Maria da Conceic¸a˜ o Tavares and Jos´e Serra, “Mais al´em da estagnac¸a˜ o,” in Maria da Conceic¸a˜ o Tavares, Da substituic¸a˜ o de importac¸o˜es ao capitalismo financeiro (Rio de Janeiro: Zahar, 1972); Maria da Conceic¸a˜ o Tavares, “Sistema Financeiro e o Ciclo de Expans˜ao Recente,” in Luiz Gonzaga de Mello Belluzzo and Renata Coutinho, eds., Desenvolvimento Capitalista no Brasil: Ensaios sobre a Crise (S˜ao Paulo: Brasiliense, 1981); Luiz Aranha Correa do Lago, “A retomada do crescimento e as distorc¸o˜ es do ‘milagre’: 1967–1973, ” in A Ordem no Progresso (Rio de Janeiro: Campus, 1990), pp. 233–294.

The Economy

47

8

Billions of $US

6

4

2

0

-2

-4

-6 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983

Graph 2.3. Balance of Trade of Brazil, 1964–1983 Source: IPEADATA Balanc¸a comercial – (FOB) – saldo – Anual – US$(milh˜oes) – BCB Boletim/BP – Bpn SBC

by the importation of around $3 billion in petroleum and derivatives, generating a deficit in the external accounts of over 6 percent of GDP Inflation meanwhile reached 30 percent, clearly retaking its ascendant trajectory (see Graph 2.3). The majority of countries affected by the oil crisis adopted recessionary programs, trying to restrain internal demand and adjust their economies to a new situation of costly energy. These importing countries also had to transfer an important part of their income to the petroleum exporting countries. The Brazilian government followed an alternative route, energizing the economy and developing an ambitious program of investments aimed at increasing the internal offer of capital goods and basic consumption items, thus reducing dependency on imports. The abundance of external capital generated by the recycling of resources created by the petroleum exporting countries permitted Brazil to follow such a trajectory through an ample system of international loans, but at the cost of a growing internal and external debt, accelerating inflation, and a progressive liquidation of the financial capacity of the state (see Graph 2.4). The Second National Development Plan (II PND), which set out these investment programs, led to major advances in the productive base of the country, which would now create a complex capital goods

Brazil Since 1980

48 100 90 80

Billions of $US

70 60 50 40 30 20 10 0 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983

Graph 2.4. Foreign Debt of Brazil, 1964–1983 Source: IPEADATA D´ıvida externa – Anual – US$(milh˜oes) – BCB Boletim/BP – Bm DEXTEI

sector and a large basic inputs sector. This not only permitted the country to substitute imports but also to export surplus production in many areas. The Second National Plan estimated a very optimistic economic trajectory of growth, despite the international economic scene. Some sectors in fact did well, such as paper and cellulose, which now became important items in the gamut of Brazilian exports. However, in many cases there was a delay in the establishment of the more grandiose projects, and there were errors of evaluation of both the internal economy and the future comportment of the international economy. Typical of the disasters were the costly and inefficient nuclear energy program, railroad construction, and new steel mills. Without public criticism or opposition, there was no critical voice to challenge these badly conceived projects.10 By the end of the Geisel government in 1979, the country had suffered a profound transformation in its economy; but it remained 10

On the period of Geisel, see Antonio Barros de Castro and Francisco Eduardo Pires de Souza, A economia brasileira em marcha forc¸ada (Rio de Janeiro: Paz e Terra, 1985); Dion´ısio Dias Carneiro, “Crise e Esperanc¸a: 1974–1980,” in A Ordem no Progresso (Rio de Janeiro: Campus, 1990), pp. 295–322; Rog´erio Weneck, Empresas Estatais e Pol´ıtica Macroeconomica (Rio de Janeiro: Campus, 1987).

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49

financially vulnerable. Government support effectively completed the process of import substitution, giving the Brazilian industrial core a totally integrated structure, even with an important new capital goods sector. The country now contained one of the largest and most integrated and complex industrial sectors of any developing country. But, in this period, the country had suffered simultaneously the impact of the increase of oil prices, the acceleration of international interest rates, as well as the slow growth of world exports. The world’s economies at this time were in the process of readjusting to the new international reality of expensive energy, and thus reduced their international trade. The Brazilian option of maintaining the level of economic activity, which was defined by an annual growth rate greater than 6 percent during this period, led to a high deficit in current transactions, which were financed by a still abundant external resources. There was an extraordinary increase in the Brazilian external debt, which multiplied itself by four, going from 17 percent of the GNP to accounting for 27 percent of GNP. International interest rates reached more than 10 percent in 1979 and continued to increase in the following years affecting the larger part of the Brazilian foreign debt, which was built on fluctuating interest rates. For that reason, the annual costs of interest of the external debt, which was under US$1 billion in 1973, surpassed US$5 billion in 1979 and would double again in 1981. In this last year, the interests paid on the external debt represented half of the value of all Brazilian exports. The stage was then set for an external Brazilian crisis in the context of a deteriorating international financial market. Furthermore, the deterioration of the internal public accounts and the shock of prices caused by the rise of oil prices, forced an increase of prices even in the wealthy countries; so national inflation once again tended to increase, surpassing 50 percent per annum in 1979 (see Graph 2.5).

The Debt Crisis and the Adjustment Process to the 1980s The country was extremely vulnerable in terms of its internal and international debt, with growing inflation, weakened public finances, and quickly faced a second oil shock, which occurred in 1979, the last year of the Geisel government. Unlike the shock of the first oil crisis, at the end of the 1970s there was a decrease in capital available for indebted countries, which increasingly had problems in renewing

50

Brazil Since 1980

Percentage Real Annual Change 200

150

100

50

0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983

Graph 2.5. Variation in the Cost of Living in the city of S˜ao Paulo, 1960–1984 Source: IPEADATA, PIB – var. real anual – Anual – (% a.a.) – IBGE SCN/Anual – Scn PIBG

their existing loans. The new administration initially formulated an austerity plan, directed by the Economics Minister Mario Henrique Simonsen. The lack of immediate results, especially in relation to the containment of inflation, and the political difficulties related to the progress of the democratization, however, made the new government abandon the austerity plan. Instead, the military brought back Antˆonio Delfim Netto, the mastermind behind the “the Brazilian Miracle.” It was hoped that he could resolve the issue by putting into practice an unorthodox program that ignored the crisis and tried to overcome the inflationary problem through growth. In December 1979, Delfim Netto promoted a devaluation of 30 percent and immediately preset the exchange rate and monetary correction of the year of 1980 at 45 percent and 40 percent respectively, as a way to control inflation. There was quick and important growth, but inflation soon reached a new level of 100 percent and the deficit in current accounts surpassed 5 percent and reserves were reduced by $3 billion. Thus, at the end of 1980, the government was forced to make another radical change in its economic policy, following the traditional pattern of reduction of internal consumption as a way to resolve the balance of payment crisis. Brazil was not the only country to adopt

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51

such an orthodox measure. The second shock of the oil crisis and the rise of international interest rates profoundly altered the global situation, affecting all indebted countries. With the Mexican Debt Crisis in 1982, this situation became clear with a majority of the peripheral countries showing a deterioration of their external accounts and even led to serious consequences for the economies of the wealthier countries. Recession occurred in most countries, trade was diminished between countries, and credit was reduced dramatically in the international financial markets, particularly for these indebted countries. The large international banks saw their asset affected, as the majority had significant amounts of credit granted to countries that faced difficulties in honoring their loan agreements. This was the beginning of the world “External Debt Crisis,” which would extend through the 1980s and would affect virtually every Latin American country who were obliged to restructure their external debt. It was a long period of low growth, with very high social and political costs to the majority of these countries. In this decade, there was a break from a long process of growth that these countries had experienced for most of the second half of the twentieth century. The International Monetary Fund (IMF) began to assume a fundamental role in the adjustment process of the majority of the indebted countries. Those countries that received help of the IMF to restructure their debt with private banks had to negotiate recessionary adjustment plans with the organization. The logic behind these adjustment programs was the same for all the countries and was based on the principal that their debt crises was provoked by excess internal spending, which provoked the deficit in current transactions and external debt. The plan was to carry out adjustment of the balance of payments through the reduction of internal consumption, especially through reductions in public spending. The fundamental variable was called the Public Sector Borrowing Requirement. Debtor countries needed a surplus in their balance of trade in order to pay the interest on their external loans and if possible amortize the principle. To make this plan feasible, it was necessary to force a dramatic decrease in internal consumption through recessionary actions carried out via restrictive monetary policy (controlling credit expansion, particularly to the public sector, and the increase of interest rates), along with cuts in public spending, and the reduction in consumer demand, through increased taxes on available income and the control of salaries. This would result in a balance in the public accounts, because of cuts in spending, as well

52

Brazil Since 1980

as the elimination of subsidies and incentives of any kind. Finally, a harsh devaluation of the exchange rate should be promoted to stimulate exports. The recession and devaluation of the currency should generate a large commercial surplus, allowing the country to totally or partially meet its international debts. At the end of 1980, after the disastrous unorthodox experience, and still without sponsorship from the IMF, the country tried to adjust the economy through a drastically restrictive policy, in order to reduce internal demand, and to allow the balance of external accounts while also containing inflationary rates. Banking credit was reduced; real interest rates were imposed and public investments were restricted. Numerous subsidies were extinguished; more restrictive laws were implemented on salary corrections, reducing even more the real value of wages. These measures created a deep recession, with a decrease of 4.3 percent in the GDP, the first such negative growth rate in the post–World War II period. The commercial balance became positive once more, presenting a surplus of more than a billion dollars, but the balance of payments was still strongly affected by interest payments of $10 billion, an excessive amount given that the country only exported $23 billion. In 1982, interest payments consumed $12 billion and exports were reduced to $20 billion, in the face of the global recession and the diminished ability of various countries to import. The deficit in current transactions reached 6 percent of the GDP, and Brazil’s available reserves were depleted, making the country in effect insolvent. The Mexican Crisis in August 1982 exposed clearly the severity of the situation. The international banks closed their doors to Brazil. They demanded that Brazil sign a formal agreement with the IMF to monitor its economic performance. Brazil signed this deal on November 20, five days after important elections. Even though the government denied its negotiations with the IMF and tried to hide the truth, the crisis was evident and the opposition obtained exceptional victories in the elections, taking control of practically all the large Brazilian states. In February 1983, Brazil signed a agreement with its creditor banks, but the economic situation continued to deteriorate, since the lack of reserves made the country delay its repayments. Furthermore, it was difficult to maintain the agreements signed with the IMF. The program demanded a severe retrenchment for the Brazilian economy, which was already in recession. The strong inflation and indexation made it virtually impossible to fulfill the IMF requirements in terms of the limits on inflation and the public deficit. There was a

The Economy

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succession of letters of intentions, some seven in two years, with the wearing-out of relations between the economic authorities and the IMF. There was the need to deepen the recession, even approving a more severely restrictive wage law. In February 1983, there was a new 30 percent devaluation undertaken and in that year production fell 2.9 percent. But, thanks to the diminished internal consumption and the devaluation, the commercial balance reached $6 billion of surplus and the deficit in current transactions was reduced to 3.5 percent of GDP. Initially, the restrictive internal measures and devaluation, along with favorable international conditions, helped Brazil. There was a fall in the price of oil and the lowering of international interest rates that were factors that contributed to the adjustment of the balance of payments and helped accomplish the goals agreed to with the IMF. The favorable foreign results repeated themselves in 1984, and GNP grew by a very substantial 5.4 percent. But inflation reached a new high, surpassing 200 percent a year.11 This adjustment process had serious consequences on the internal economic structure. Inflation maintained a soaring trajectory, reaching unbearable levels, regardless of the generalized indexation process. In an attempt to contain the inflation, salaries were corrected less efficiently, normally causing additional cuts in real wages every time there was acceleration in the inflation rate. In an attempt to contain the inflation spiral, it was common practice to contain the readjustments of public tariffs, causing serious problems of financing for companies that supplied these services and the deterioration of the public accounts. Furthermore, with the difficulty of financing themselves in the international market, the Brazilian public sector started to compete for credit in the internal credit market with the private sector, thus increasing even more the internal interest rates and making the financing of the public debt even more expensive. In this adjustment process, in correcting the external imbalance an internal one was provoked. With the rise of interest rates and the deterioration of public 11

On the crisis and process of adjustment, see Dion´ısio Dias Carneiro and Eduardo Modiano. “Ajuste externo e desequil´ıbrio interno: 1980–1894,” in A Ordem no Progresso, pp. 323–346; Mario Henrique Simonsen, “Inflac¸a˜ o Brasileira: lic¸o˜ es e perspectivas,” Revista Brasileira de Economia, vol.5, no. 4, (out-dez. 1985), pp. 15–31; Winston Fritsch, “A crise cambial de 1982–83 no Brasil: origens e respostas,” in C. A. Plastino and R. Bouzas, eds., A Am´erica Latina e a crise Internacional (Rio de Janeiro: Graal, 1988); Rog´erio Weneck, “Poupanca Estatal, D´ıvida Externa e Crise Financeira do Setor P´ublico,” Pesquisa e Planejamento Econˆomico, 16(3) (Dec. 1986).

54

Brazil Since 1980

accounts, the productive investment in the country was dramatically reduced. It is also worth remembering that the great part of the foreign debt was then the responsibility of the public sector. To meet the obligations of the foreign debt, the country started to generate a significant commercial surplus. However, these surpluses were generated by the private sector. The public sector needed to buy foreign currency to attend to its international obligations or increase its reserves and in this process it generated even greater internal public debt. It was simply exchanging the foreign debt for the internal one. These obligations grow in the internal public sector, normally with short-term financial instruments and high interest rates. The government tried to cut costs, most commonly in investments, as its public debt rose.12 The other relevant aspect to the crisis of the 1980s was inflation. Usually policies that reduced internal consumption were efficient in containing inflationary pressures. However, the Brazilian example appeared to suggest that there was a component of inflationary inertia and that the conventional methods were not effective in an economy that had such a high degree of indexation. In the first half of the 1980s, the first suggestions of alternative policies to fight the inflation began to emerge.13 These studies formed the background for the “Plan Cruzado” of 1986, which lasted until 1994, when inflation was finally brought under control with the “Plan Real.” There was a succession of plans, the great majority based upon theories unheard of in the economic literature. March 1985 marked the end of the authoritarian period, with the handing over of the government to President Jos´e Sarney, the first civilian president after more than two decades of military government. Even though there was some recovery in 1984 that continued in 1985, the economy was still in serious condition. The negotiations with the IMF had reached a standstill. The 7th Letter of Intentions was being negotiated, but it was not possible to approve it before the inauguration of the new president. The IMF probably wanted assurances from the new administration in respect to its economic policy, but the new government believed it was not politically correct to negotiate 12 13

Rog´erio Werneck. “Poupanc¸a Estatal, D´ıvida Externa e Crise Financeira do Setor P´ublico,” Pesquisa e Planejamento Econˆomico, 16(3) (Dec. 1986). See Persio Arida and Andr´e Lara Resende, “Inertial Inflation and Monetary Reform in Brazil,” in J. Williamson, ed., Inflation and Indexation: Argentina Brazil and Israel (Cambridge, MA: MIT Press, 1985); Francisco L. Lopes, O choque Heterodoxo: Combate a` inflac¸a˜ o e reforma monet´aria (Rio de Janeiro: Campus, 1986).

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a new deal with the IMF, especially given the enormous surplus in the commercial accounts that in 1985 reached $12 billion. But the general situation of the economy was critical. Inflation in 1985 was 12 percent a month. The foreign debt reached US$105 billion and there was an obligation for interest payments of US$11 billions in 1985. Public finance was in disarray and both the government and the state companies were equally in a difficult economic position with large debts and little available income or credits to pay for them. When the economist Jo˜ao Sayad was invited by the president-elect Tancredo Neves to take over the Planning Ministry, he suggested implementation of an unorthodox plan following the ideas of various Brazilian economists who understood that the orthodox methods of fighting inflation with monetary control and cuts in public spending did not work in a highly indexed economy. It only provoked recession and unemployment without an effective reduction in inflation. These economists argued that even with a return to normal conditions of supply and demand, inflationary memory constitutes the main source of inflation. The present inflation was being caused by the past inflation, brought on by the generalized indexing as a form of eliminating inflation, and Sayad suggested that new policies be adopted to eliminate the inertia of inflation. There were two alternatives proposed: one suggested the total elimination of indexing; the other introduced a complete indexation in the economy, including an indexed currency, which ultimately was the same thing as ending indexation. The Sayad proposal was not accepted by Tancredo Neves but eventually was accepted by Sarney, his successor. When Sarney took over the presidency, inflation had reached the level of 12 percent a month. The new Finance Minister Dornelles and the team of the Central Bank formulated a strategy of stabilization based on maintaining the high interest rates and controlling public prices and tariffs. An open conflict occurred between Dornelles and Sayad, and Sayad felt this policy would only result in the further deterioration of public accounts and a return of high inflation once normal conditions had returned. This occurred in August 1985, when inflation reached 14 percent after a few months of artificial retractions because of the delay in the correction of various fundamental prices. Meanwhile, the public service sector was suffering great loses with the delay in price adjustments, and the government was hemorrhaging from interest payments. The recession and the inflationary peak led to the dismissal of the Finance Minister and a new team was put into

56

Brazil Since 1980

place at both the Ministry of Finance and the Central Bank that were in sympathy with Sayad’s proposals. At the beginning of 1986, various events contributed to the government decision to carry out a significant monetary reform. In January, inflation had reached a new high of 17 percent a month. The labor unions pressed for more frequent corrections than the current semester revision, and were studying the possibility of a trimester correction arrangement. The Chamber of Deputies proposed a monthly correction of salaries. More realistic salary corrections, either by trimesters or monthly, however justified for the workers and the economy as a whole, would fatally raise inflation to a new high level. This would have increased income inequality and created unbearable political costs in this transition period to a democratic regime. If the authoritarian regime could shut off the opposition and administer a strong salary gag, the new regime could not ignore the political and social pressures demanding real wage adjustments. These facts led to the monetary reform of February 28. The Monetary Reform, known as the Plan Cruzado, changed the national monetary regime and froze all prices on February 27, 1986. Salaries were converted according to the real wage averages of the last six months, and, as compensation, there was an additional 8 percent added to salaries. In the case of the minimum wage, the calculation process was similar, in that the additional value was of 15 percent. The adjustment process would be neutral if future inflation would be zero, but there would be loss in inflation that occurred after the plan.14 A similar averaging adjustment process was used with prices and rents, which also were to have periodic readjustments after an initial period of freezing of all prices. The plan was an immediate success. Inflation was reduced dramatically, and there was strong popular support for the freezing of prices. So popular was the price freezing part of the decree, a lastminute addition to the reform, that it became impossible to eliminate it. Like other plans of this type that were introduced in Brazil, there was a rapid expansion in demand, with the growth of production and employment. The abrupt fall in inflation had a very positive effect on increasing income and consumption of the poorer classes who were always less able to protect themselves from the effects of inflation. Also, 14

An explanation on the rules of conversion of salaries can be found in Eduardo Modiano, “A ´ Opera dos trˆes Cruzados: 1985–1989,” in A Ordem no Progresso, pp. 347–386.

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there was an increase in real wages of 8 percent (and of 15 percent for those receiving a minimum wages). There was a rapid monetary expansion with the end of the inflationary tax over the possession of cash, and the illusory by drastic reductions in the high nominal interest rates. Furthermore, the freezing itself stimulated speculation with products and stocks, because it was clear that at some future time prices would be liberated and interest rates were unrealistically cheap. Therefore, ironically, the initial success of the Plan Cruzado was the principal cause for its later failure. Internal demand grew strongly, putting pressure on productive capacity. Soon, problems appeared. Excess demand led to the end of restocking, the lack of products, and the breaking of price limits. At the same time, increased internal consumption led to a negative commercial balance. The surplus in accounts, which had been greater than a billion dollars monthly until 1986, was reversed and transformed into deficit in October of that year. In July, there was the first attempt to reduce demand, but the measures taken were very mild and did not resolve the situation. In October, faced with the deterioration of the commercial balance, a small variation in the exchange rate was made, and it was announced that other occasional devaluations would occur. After the general elections of November 1986, new adjustment measures were taken to contain demand and improve public finances, with price readjustments even in public services. The inflationary effects of these measures were immediate; the inflation that had been maintained relatively low through 1986, jumped to 7 percent in December and 12 percent in January. In effect, the Plan Cruzado came to an end by the beginning of the new year. At the beginning of 1987, faced with external difficulties and with the foreign capital market closed to Latin American countries, Brazil was obliged to suspend debt payments and renegotiate its foreign loans.15

15

There is an extensive literature on the Cruzado Plan, which represents a theoretical innovation in the policies of combating inflation inertia. On this experience, see Eduardo Modiano, ´ “A Opera dos trˆes Cruzados: 1985–1989”; Jo˜ao Sayad, Planos Cruzado e Real: Acertos e desacertos (Rio de Janeiro: Ipea, Semin´arios Dimac no. 30, set. 2000); Maria Silva Bastos Marques, “O Plano Cruzado: Teoria e Pr´atica,” Revista de Economia Pol´ıtica, 8(3), (julho-setembro 1983); Luiz Carlos Bresser Pereira, “ Inflac¸a˜ o Inercial e o Plano Cruzado,” Revista de Economia Pol´ıtica 6(3) (julho-setembro 1986); Edmar Bacha. “Moeda, in´ercia e conflito: reflex˜oes sobre pol´ıtcas de estabilizac¸a˜ o no Brasil,” Pesquisa e Planejamento Econˆomico, v. 18 n. 1. (1988) pp. 1–16; J. M. Rego, Inflac¸a˜ o inercial, teorias sobre inflac¸a˜ o e o Plano Cruzado (Rio de Janeiro, Paz e Terra, 1986).

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Brazil Since 1980

Ten years later, the Plan Real, with a similar theoretical base as the Plan Cruzado and even using the same group of economists as its intellectual mentors, was successful in containing inflation. From this second experience, we can understand why the Plan Cruzado failed. In the first place, there was the problem of synchronicity in the readjustment of prices. Even with high inflation, if one imagines that the majority of prices were already adjusted daily, there is a problem of synchronicity of price readjustments, discrepancies, administered prices, periodically readjusted public tariffs, price tables that were periodically changed, contracts, and so on. In other words, no matter how large the inflation, there is not a total synchronicity in the economy, which is only truly obtained by hyperinflation. This was the reason why the Plan Real was implemented in two stages. First, they created a type of indexed money in which products could be exchanged. Second, when all prices were already in the indexed currency and therefore effectively in synchrony, the indexed currency would be transformed into the new currency and any type of indexation would be forbidden. This was the mechanics behind the Plan Real, an innovation to all previous plans implemented in Brazil and a plan that took advantage of all the previous experiences. Another fundamental issue was the climate in which this plan occurred. The Cruzado and other previous plans were carried out in unstable environments for Brazilian foreign accounts. Brazil began to fall behind its external compromises in 1983; in 1984 it made a restructuring agreement with the banks, without any access to their financial resources, leading the country to a moratorium in 1987. This same year, Finance Minister Bresser Pereira tried to begin negotiations of a process of securitization of the debt, but this was only achieved in November 1993, when an agreement was signed with more than eight hundred creditors. Only with this accord could the country return to the international credit market for funds. The implementation of stabilization plans such as the Cruzado or Real needed the support of a nominal anchor, which are relatively stable prices without automatic indexation. The lack of this secure international environment before the Plan Cruzado made wages a type of anchor because it was at most an imperfect price correction and it was the only factor available to avoid the path toward hyperinflation. More perfect periodic adjustments to salaries meant greater inflation rates. Imperfect corrections maintained the system of prices but at the cost of depressing real wages. This anchor was impossible to use to maintain the Plan Cruzado. The ideal was to use the exchange

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rate as the anchor, but that was impossible in an economy without external reserves, without access to the international financial market, and without capital mobility. In the case of the Plan Cruzado, the “freezing” of prices acted sometimes as the anchor, which only works for short periods. In the Plan Real, the exchange rate was the anchor to the plan.16 After the lack of success of the Plan Cruzado, inflation returned and continued its growth. The team involved in devising the Plan Cruzado quit between March and April 1987. Two additional plans with similar characteristics were attempted during Sarney’s government. One of them was implemented by Finance Minister Bresser Pereira in June 1987 and the other in January 1989, by Finance Minister Mailson da Nobrega. Even though these plans could have absorbed the experiences acquired from the Plan Cruzado, they had less success and no popular support.17 The results were similar; inflation was temporarily reduced and, when it returned, it returned to new higher levels. Their merit was to delay or avoid the hyperinflation, which effectively never occurred in Brazil. Even though the country had gone through long periods of high inflation, which reached average monthly rates superior to 30 percent per month in 1989, the situation never got out of control. Just as inflation returned, indexation mechanisms were reintroduced that allowed for a normal functioning of the economy, of the financial market, and operations between companies in normal transactions. The local currency was never substituted for another form of payment or for payments in dollars. The dollar was used as reference and served in bulk transactions in some markets, as, for example, in real estate. Salaries were normally fixed and paid in local currency, except for companies of medium and large sizes that eventually would fix the wages of part of their executives in dollars, but even in those cases wages were normally paid in local currency. As there was no free exchange in foreign currency, there existed a major “parallel” (or semilegal) exchange market. The instability of local currency and the economic uncertainty generated high spreads, which in some periods led to over 100 percent difference between official and parallel rates. 16

17

The ex-minister Jo˜ao Sayad, one of the implementers of the Plan Cruzado, has made an interesting comparison between this plan and the Plan Real. See Jo˜ao Sayad, Planos Cruzado e Real: Acertos e desacertos (Rio de Janeiro: Ipea, Semin´arios Dimac no. 30, set. 2000) ´ Eduardo Modiano, “A Opera dos trˆes Cruzados: 1985–1989.”

Brazil Since 1980

60 Percentage 90

Plan Real

80 70 60 50

Plan Verao 40

Plan Bresser

30 20

Plan Cruzeiro

10

19 85 19 03 85 19 05 85 19 07 85 19 09 85 19 11 86 19 01 86 19 03 86 19 05 86 19 07 86 19 09 86 19 11 87 19 01 87 19 03 87 19 05 87 19 07 87 19 09 87 19 11 88 19 01 88 19 03 88 19 05 88 19 07 88 19 09 88 19 11 89 19 01 89 19 03 89 19 05 89 19 07 89 19 09 89 19 11 90 19 01 90 19 03 90 02

0

Graph 2.6. Average Change in the Monthly Cost of Living Source: IPEADATA, Inflac¸a˜ o – IPCA – Mensal – (% a.m.) – IBGE Outras/SNIPC – Precos12 IPCAG12

Although the Sarney presidency was a political success, through its completion of the political opening, it did not resolve the problems of inflation and foreign indebtedness. During the period of the Plan Cruzado there was an effective gain in terms of income distribution among the poorer classes, along with a major growth in employment. There also was an increase in social spending in comparison to other recent periods. However, these gains were lost with the return of high inflation. The average real salary in the metropolitan area of S˜ao Paulo, after growing in 1985 and 1986, fell 20 percent from that year’s high in subsequent years and changed little until 1989. GNP, which had increased in the first two years of the Sarney period, showed a less than impressive performance in the following three years. Nevertheless, the rates of unemployment maintained a relatively low level in all this period. Inflation fluctuated according to the “flavors” of the plans, but always came back worse than ever, reaching monthly levels of 80 percent, by the end of the Sarney government (see Graph 2.6). Although Sarney left with the negotiations on the foreign debt still not resolved, foreign accounts reached $20 billion in 1988 and $16 billion in the following year. In these two years, even the current transactions account was positive. Through his entire term in office, the foreign debt was

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Average Change in GDP in Constant Dollars 10 9

9

8 7 6

6

5 4 3

3

2

2

2

1 0 1960s

1970s

1980s

1990s

2000s

Graph 2.7. Variation of Average GDP per Decade (in $US 2004) Source: IPEA – GAC PIBCAP

maintained at a relative stable level of around $115 billion and reserves rose to approximately $10 billion. In the 1980s, the country accumulated a positive trade balance of $86 billion but paid $94 billion in interest rates on the foreign debt. Otherwise, all reforms of this increasingly dysfunctional fiscal system were put on hold. It is usual to call the 1980s the “lost decade.” In fact, from the political point of view, there were enormous democratic advances. But from the economic point of view, the 1980s broke a long cycle of rapid growth that the country had experienced in the first seventy years of the century. In the 1980s, the economy presented an accumulated growth of a bit more than 30 percent, as against 130 percent growth overall in the previous decade. Brazil was not the only developing country to experience this mediocre economic performance in the 1980s. In this period, few countries in the region were able to balance their external accounts and restore their capacity for growth (see Graph 2.7).

The End of the Inflation and the Reforms of the 1990s The inauguration of Fernando Collor de Mello brought a fundamental change in Brazilian economic policy: first, by the arbitrary stabilization

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Brazil Since 1980

plan that he immediately implemented, and, second, by the commitment he made to a neoliberal ideology. This ideology came late to Brazil, even by Latin American standards. The neoliberal ideology appeared as a theoretical and political reaction to the Keynesian interventionism. It dictated the freedom of market and placed itself against the “State of Social Well-Being” that previously dominated economic and political thought. The State should not practice active policies but, rather, its economic priorities should be the defense of the currency, stability of prices, guaranteeing of contracts, and free competition. For neoliberals, inequality is a basic and necessary part of capitalism and should be preserved. In just a few years, neoliberal ideology gained political strength in the principal industrialized countries and quickly spread to the rest of the world. At the same time, new processes for production emerged, introduced with new technology and forms of administration. Management, production, and market were now seen as transcending traditional national borders, and were thought to be part of a process of globalization. The productive restructuring, the liberation from government control, and globalization make competition more fierce, not only in the market of goods but also in the labor market, increasing inequality, social exclusion, and job insecurity; this weakened the institutions, particularly those destined to social protections. Neoliberalism preached the end of any restrictions in the workplace and was hostile both to unions and state intervention. The neoliberal ideology expanded into the periphery states through the so-called Washington Consensus. Formulated by John Williamson in 1990, the neoliberal agenda to be implemented in the peripheral countries preached stabilization policies based on balanced budgets, and fiscal reforms and growth of taxes, support for property rights, privatization, deregulation; changes in the priority of public spending, with emphasis in health, education, and infrastructure. Growth and inequality were not discussed. These ideas began to guide the economic policies of the majority of emerging countries, including the Latin American ones. In Brazil, the neoliberal agenda appeared late. Even though it was discussed during the Sarney government, privatization only gained force during the presidency of Fernando Collor de Mello. It is not hard to understand the delay in the Brazilian case, in which the model of development had been based on a major participation of the public sector in the national economy, including the productive sector through state owned industries, and in which national industry was quite advanced compared to

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other emerging countries. This system was based on deep mutual interests between the public sector and the state bureaucracy, and between private national entrepreneurs and foreign capital, through a widely based system of public credit, administered prices, protective tariffs, and subsidies. Some productive sectors, even without any form of monopoly, were owned almost entirely by the public sector, as in the case of iron ore. Whole sectors were under the control of combined state–private and national–foreign companies, such as the petrochemical industry. There were public monopolies such as that of petroleum. The public sector was practically the only producer of electricity, and there was profound integration between national private and the foreign capital, as in the auto industry. From the time of the Geisel government, the Brazilian industrial sector was practically self-sufficient, closed to world markets; it also imported relatively few inputs and even produced capital goods on a major scale. Compared to the other Latin American countries, Brazil had a traditional entrepreneurial base, high earnings, and a deep managerial capacity. Furthermore, twenty years of authoritarian government left deep marks on the country in terms of weak parties and institutions, few civil society institutions, and fear of an institutional crisis. In this context, it was hardly possible that new ideas would come from the government. But the upset victory of the little-known Fernando Collor and the undoubted economic crisis allowed for a major new initiative. First came the confiscation of national bank accounts and, next, a campaign to privatize state enterprises. Although his authoritarian plan of stabilization failed, Collor successfully launched an ambitious neoliberal plan, which had two distinct parts: to open the economy by reducing tariffs drastically and effectively end protection to national industry; and to sell off the state companies. The two programs were only partially implemented during his mandate because his political failures weakened the impetus of these reforms. But precedence for such a neoliberal economic and ideological reform program was established in Brazil, and would slowly come to dominate government policy from the late 1990s onward, thus breaking with the traditions of the previous fifty years. The Itamar Franco government, which took office in September 1992, gave continuity to the liberalization and privatization process. Franco’s principal achievement was enacting the Plan Real, which, unlike the previous stabilization plans, was able to eliminate inflation. Initially, the government went through a succession of Finance

64

Brazil Since 1980

Ministers, until Fernando Henrique Cardoso accepted the post in May 1993. Inflation was then at 30 percent that month, and rising. The successful implementation of the Plan Real by Cardoso guaranteed his own election to the presidency in January 1995. The Plan Real occurred in three distinct stages. The first stage, announced in December 1993, consisted of a group of fiscal measures bringing an increase in taxes, more flexibility in budget management, and a reduction in the percentage of financial transfers the central government made to the states and municipalities. The implementers of the plan wanted to be absolutely sure of a fiscal balance before the final introduction of the plan. The inflation itself aided this aim, in that the so-called inflationary tax, brought in the majority of the contributions to the federal budget already indexed, whereas the government expenses were made in nominal terms. A budget supposedly balanced in this situation of high inflation could present unpleasant surprises if inflation stopped, but the administration was able to present a balanced budget in February 1994. The second stage occurred in March 1994, when inflation reached 42 percent. This second stage was the great innovation of the Plan Real, and it consisted in the introduction of an indexed currency. As stated earlier, one problem that occurred in the previous plans was the lack of synchronicity in the readjustments of prices. The Plan Real introduced an indexed currency, the Real Unit of Value (Unidade Real de Valor, or URV), whose daily oscillations would take into account the average of three price indexes. There were obligations and rules for the conversion of salaries, rents, and public tariffs into the URV. The other prices could be kept in the old currency, or fixed in the URV freely, and, if regulated by a contract, the value could be freely negotiated between the parties. This introduced a voluntary process into the majority of prices, but there was the need to create clear rules in special areas such as salaries. In this case, the criteria adopted was similar to the one used in the Plan Cruzado, with readjustments by the real value average, to be received in the following four months. From March 1994, all salaries were converted by the average fixed in URV, and were readjustable daily. The URV was in fact only a unit of value because the old currency was still being used. In the old currency, inflation was still high and even accelerating. However, the effects of the transformation of the prices to the URV still occurred in the old currency. In July 1994, after four months of transition, the URV was transformed into a new

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currency and given the name of the Real, with a rule of conversion of the URV to the Real at one to the U.S. dollar. Stage 2, in which the URV was allowed to adjust all the prices of the economy, set all the prices in synchrony, as if the country had gone through a hyperinflation without the country having actually experienced such a horrendous process. The relative prices were in the right position, even stabilizing the distribution question. None of the previous plans had managed this synchronization and, because of this, these plans had generated cost pressures over the other sectors of the economy. The stability reached by the Plan Real had as its base an exchange structure, an overvaluation of the Real, and a general openness of the economy. These were the three foundations of the program. The Plan Real had the possibility of using a variable exchange, without the need to freeze prices, as in the previous plans. Its success also was its principal source of criticism. From the beginning of the 1990s, a reversal occurred in the conditions of the international financial market, and there was now an abundance of financial resources. Furthermore, Brazil had secured its foreign debt, which allowed it to return to the international financial market and enjoy excellent credit terms with great liquidity and relatively low interest rates compared to the previous decade. This allowed for the implementation of the exchange base, which would have been impossible in the previous plans. The exchange rate could fluctuate freely in the sense of giving value to the Real, but, if the Real fell in relation to the dollar, the Central Bank would intervene in the market. That meant that it guaranteed a minimal quota to the Real, but it allowed for its value to increase. At the same time, there were real interest rates that were extremely high, which attracted foreign funds and increased the value of the national currency.18 The commercial opening, another basic element of the Plan Real, had a major impact on the Brazilian economy, which, until the end of the 1980s, was one of the most closed economies in the world. 18

After years of combating inflation by orthodox and heterodox methods, the Plan Real obtained effective results, and inflation has remained stable for ten years. Among the extensive literature in this subject are: Jo˜ao Sayad, Planos Cruzado e Real: Acertos e desacertos (Rio de Janeiro: Ipea, Semin´arios Dimac no. 30, set. 2000); Luiz Filgueiras, Hist´oria do Plano Real (S˜ao Paulo: Boitempo Editorial, 2000); Aloiso Mercadante, ed., O Brasil p´os Real: A pol´ıtica econˆomica em debate (Campinas: Unicamp, 1997); Fabio Giambiagi and Maur´ıcio Mesquita Moreira, A Economia Brasileira nos anos 90 (Rio de Janeiro: BNDES, 1990); Maria da Conceic¸a˜ o Tavares, Destruic¸a˜ o n˜ao criadora (Rio de Janeiro: Record, 1990); Gustavo Franco, O Plano Real e outros ensaios (Rio de Janeiro: Editora Francisco Alves, 1995).

66

Brazil Since 1980

At the end of that decade, there were two reforms that had reduced the average taxes over imported goods from 51 percent to 35 percent. At the beginning of the 1990s, there were new tariff reductions, whose average were gradually lowered until it reached 15 percent in 1993. One of the most highly protected of these industries was the computer industry. But, for all the government protection and support given to this industry, Brazilian manufacturers never attained international standards, and the ultimate result was technological backwardness in various productive sectors of the economy. In 1992, the protection of the computer market was finally eliminated and a year earlier, the Mercosul agreement had created a regional multinational market between Argentina, Brazil, Paraguay, and Uruguay, which led to further tariff reductions, and created another reduced tariff system among these countries. The rise of Mercosul undoubtedly created an important world free-trade zone and led to major growth of interAmerican trade in South America. But Mercosul has suffered periodic crises due to economic problems in individual countries. These crises of adjustment, particularly those affecting exchange rates, create disequilibriums and conflicts that require long negotiations to resolve. Thus, Mercosul, despite its growing importance even for Brazil, lives in a constant state of agitation and questioning, although trade has undoubtedly benefited overall from its existence and the volume of goods being traded has become significant to the Brazilian economy. The fast opening of the national economy and its exposure to international competition, at the same time as the overvalued exchange was being used as a base for the Plan Real, had a positive effect on the stability of prices. The imported goods or Brazilian commodities with international quotas had their prices contained or even reduced by competition. This helped the initial stage of the plan and may have been the necessary price to be paid for stability. The idea was to expose the Brazilian economy to international competition so as to have a modernizing impact on the Brazilian economy, and – above all – on Brazilian industry.19 Part of the economy was effectively modernized; however, another part of the productive sector simply disappeared once confronted with competition, especially as a result of the maintenance 19

Gustavo Franco, one of the principal implementers of the Plan Real, and later president of the Banco Central, has said that the competition would provoke a “creative destruction.” Tavares, criticizing the program, gave a new definition to the process as “noncreative destruction.” See Maria da Conceic¸a˜ o Tavares, Destruic¸a˜ o n˜ao criadora (Rio de Janeiro: Record, 1990).

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of the artificially overvalued national currency. There also was a process of denationalization of Brazilian companies, a reduction of jobs in industry, a greater foreign dependency by input components, capital goods, and, principally, in technology. Growth was stagnant and unemployment increased. The continuation of this type of policy was made possible only by the existence of a huge influx of foreign capital, which financed the commercial deficit and the deficit of current transactions. As with all other plans, there was an immediate consumer explosion as a result of both the elimination of the inflationary tax and the reduction of prices for both national and imported goods, stimulating spending, speculation with stocks, resulting in investment in goods and imported equipment. There also was the question of the monetary illusion. Even though the interest rates had been kept high, the sudden plunge of inflation created once again the monetary illusion of a fall in gains for small savings and Brazilians now preferred to spend money, rather than save since “savings now gained little.” Stabilization also stimulated the expansion of credit, both consumer and corporate. The level of activity accelerated, and the GDP that had already grown 4.9 percent in 1993 grew to 5.9 percent in 1994. The price to pay for all this was the reversal of the commercial balance. Kept above the 10 billion dollars mark between 1987 and 1994, it had turned negative from November of 1994, reaching deficits on the order of one billion dollars monthly in February and March of 1995. The exchange rate which had started at one Real equal to one Dollar increased in March to 0.83 Reais to the Dollar, or a gain of approximately 15 percent for the Real, even though there was a residual inflation in the consumer indexes superior to 20 percent as incorporated in salaries (see Graph 2.8). It was in this context of expansion and market opening, along with a growing dependence on international resources to close the foreign accounts, that the Mexican crisis occurred. The crisis was unleashed in December 1994 and even though the governmental authorities reassured everyone that the Brazilian situation was different, the flight of capital started causing a fall of reserves of about $10 billion between November 1994 and April 1995. Faced with this crisis, the government took a series of drastic measures. Interest rates were increased, reaching more than 60 percent per annum, which represented a real interest rate of over 40 percent. Even more critically, there was a drastic increase in compulsory bank reserves and a reduction in consumer credit. Taxes on

68

Brazil Since 1980

40 30

Billions of $US

20 10 0 -10 -20 -30 -40 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Commercial Balance

Current Transactions

Graph 2.8. Commercial and Current Transactions Balance of Brazil, 1990–2004 Source: IPEADATA, Balanc¸a comercial – (FOB) – saldo – Anual – US$(milh˜oes) – BCB Boletim/BP – Bpn SBC; and Transac¸o˜es correntes – saldo – Anual – US$(milh˜oes) – BCB Boletim/BP – Bpn STC

a number of consumer-imported goods were raised and quotas were imposed on the importation of automobiles. The exchange regime was altered to permit a gradual devaluation of the Real, although the Real still remained overvalued by as much as 20 percent. In the fiscal area, new cuts were made to the budget. All these measures dramatically restricted the liquidity of the economy and had a severe impact on economic activity. These measures caused a painful process of adjustments. Many companies went bankrupt, and even some large national banks, some already facing problems as a result of the adjustment they had to make because of the end of inflation, were affected. To avoid further bankruptcies in the financial sector, the government created a special program called PROER, or the “Program to Stimulate the Restructuring of the National Financial System.” The Central Bank could now intervene in the financial institutions with problems. It was one of the fundamental measures in the strengthening of the Brazilian financial sector that cushioned this sector from the successive international financial crises occurring in the world economy at this time, even in Brazil in 1999. What also helped the financial sector was the opening and consolidation of the market and the entrance of numerous foreign banks in the country.

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Industrial production, which had been growing until March at rates faster than the previous year, now fell and only stabilized at levels lower than those in 1994. In the same period, working hours dropped 10 percent, and real interest rates at the Bank of Brazil now passed 40 percent per annum. Both private companies and the government suffered from these high rates. In 1994, the public sector was able to generate an operational surplus, but in 1995 it started to show growing deficits and by 1998 the deficit reached 7.4 percent of GDP. But this policy had positive effects in Brazil’s foreign accounts. The reserves went up again as a result of foreign capital that was brought into the country both for investment and for short-term capital, taking advantage of the high internal interest rates. The pillars of the exchange were reaffirmed because the Real continued to be overvalued. Throughout 1995, it had not yet reached parity to the dollar as originally proposed in the Real Plan. This occurred in June 1996. The plan was a success. There was no doubt that inflation was contained. But, despite the generalized criticisms about the negative impact of an open economy and an overvalued currency, this strategy was maintained and reinforced as correct and adequate for Brazil at this time. This limited the growth of the country. The larger businesses and the multinationals were forced to obtain international sources for credit. Many businesses closed, and others were sold to foreigners or other stronger national groups. Others were able to modernize and face the competition, using a weak dollar to make their investments, importing the equipments they needed. In this period, because of the exchange rate being used, even companies in areas where Brazil was extremely competitive – for example, in cellulose – experienced lost exports. Exports were repressed and imports were stimulated. The commercial balance presented a growing deficit, reaching $6 billion in 1998; that same year, the deficit of current transactions reached a very high 4 percent of GDP. Regardless of the continued foreign vulnerability of Brazil, the government decided to stimulate the economy. With recuperation in the reserves, which were maintained between $55 and $60 billion, both interest rates and restrictions on credit were now reduced. This allowed for a slight recuperation of the economy, which was soon reflected in the commercial balance. Unemployment also showed a slight improvement. But in July 1997 the Asian Crisis occurred, a crisis that quickly swept through all emerging countries. There was another flight of capital, and reserves fell from $63 billion in August 1997 to $52 billion

70

Brazil Since 1980

in November that same year. The reaction of the government was the same. Interest rates were once again raised and a new group of fiscal measures was enacted. The interest rates that gradually had fallen to 20 percent annually rose to 42 percent in November 1997, a very high rate given that the variation in internal prices was only 5 percent that year. There was only a 10 percent of devaluation against an inflation measured by the cost of living index at 75 percent. It was indeed the wrong exchange rate for a time of crisis. Yet the government maintained this overvalued exchange rate regardless of the price this had in terms of lower production, lost jobs, and the deterioration of the external and public accounts. Despite the abundant resources gathered by the state through its privatization program, public accounts soon deteriorated because of the high interests rates maintained to attract foreign resources. It was a policy that compromised the future of the country. This policy also prevented any type of recuperation because it led to an even greater deterioration of the commercial balance and, therefore, of the external accounts. It was a vicious circle that needed to be dismantled in an orderly way or it would have led to a speculation crisis. But the government once again was unable to overcome the Asian Crisis. High interest rates and one more recession postponed the problem. The Russian Crisis that occurred in the second semester of 1998 brought another harsh blow to the country. International instability grew and the reaction of the Brazilian authorities remained the same: interest rates and taxes were raised and there was a reduction of public spending, all in agreement with the IMF. From 1998, thanks to reduction of government spending a small primary fiscal surplus was generated – although the government operational deficit was approximately 7 percent of GDP. But this package of measures was not enough to calm the market as Brazil was considered too vulnerable. From an internal point of view, it had accumulated an enormous debt, which the payment of interests requiring some $15 billion, which represented 30 percent of Brazilian exports. This was an accumulated debt caused by sustaining a clearly inadequate exchange rate. Furthermore, in 1998, the deficit even in current transactions reached 4.3 percent of GDP. All the international vulnerability indicators showed that the country found itself in a critical situation. The reserves that had reached their maximum amount of $70 billion in July 1998 started to fall quickly. In October that same year, these fell by 40 percent; yet the Real was still

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80

60

50

40

30

19

94

0 94 1 19 05 94 19 09 95 19 01 95 19 05 95 19 09 96 19 01 96 19 05 96 19 09 97 19 01 97 19 05 97 19 09 98 19 01 98 19 05 98 19 09 99 19 01 99 19 05 99 20 09 00 20 01 00 20 05 00 20 09 01 20 01 01 20 05 01 20 09 02 20 01 02 20 05 02 20 09 03 20 01 03 20 05 03 20 09 04 20 01 04 20 05 04 20 09 05 01

20 19

In US$ Billions

70

Month

Graph 2.9. Liquidity of Brazilian Dollar Reserves by Month, 1994–2005 (Conceito liquidez internaciona) Source: IPEADATA, Reservas internacionais – liquidez internacional – Mensal – US$(milh˜oes) – BCB Boletim/BP – Bm12 RESLIQ12

pegged at 1.18 to the dollar and was seriously overvalued. The financial opening that the country had promoted, which allowed relative mobility of capital and a cheap dollar, also allowed and stimulated the massive capital flight from the country (see Graph 2.9). The deepening of the crisis led to emergency aid from the IMF and the developed countries, which in turn led to fears of the risk that a Brazilian default could have on the international financial system. The aid agreement of December 1998 provided a credit to Brazil of $41.5 billion, in return for which Brazil was asked to control the public deficit, the deficit on current accounts, and also demanded the passage of fiscal legislation in Congress. In 1998 growth was zero, and unemployment increased again. But despite the many measures taken and the agreement with the fund, instability and the loss of the reserves continued. The crisis was now called the Brazilian crisis, and was a result of the refusal of the government to change its exchange policy. But in January 1999 it was forced to allow the exchange rate to float free, and the real immediately declined by over 60 percent to the dollar. The country was now free from the exchange anchor. An adequate measure at the time of the plans implantation, this overvalued currency eventually stopped growth, increased unemployment,

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Percentage 16 14 12 10 8 6 4

19

84 19 12 85 19 06 85 19 12 86 19 06 86 19 12 87 19 06 87 19 12 88 19 06 88 19 12 89 19 06 89 19 12 90 19 06 90 19 12 91 19 06 91 19 12 92 19 06 92 19 12 93 19 06 93 19 12 94 19 06 94 19 12 95 19 06 95 19 12 96 19 06 96 19 12 97 19 06 97 19 12 98 19 0 6 98 19 12 99 19 06 99 20 1 2 00 20 06 00 20 12 01 20 06 01 20 12 02 20 06 02 20 12 03 20 0 6 03 20 12 04 20 06 04 12

2

Graph 2.10. Change in Open Unemployment in Brazil (by Month), 1984–2005 Source: IPEADATA from Seade e Dieese/PED – Seade12 TDAGSP12

led to a deterioration of government finances and increased the foreign debt ultimately making the country economically vulnerable (see Graph 2.10). The privatization process carried out by Fernando Henrique Cardoso also needs to be studied. Brazilian industrialization was widely based on public investment not only for infrastructure but also for production in such sectors as steel, petroleum and its derivatives, energy, telecommunications, and aeronautics. Those were sectors that either demanded an amount of investment unavailable from the private capital market or were considered strategic and therefore public monopolies. Privatization began in 1981 with the creation of commission that had little practical effect until the end of the decade. The few privatizations were of failed public companies, and foreign investors were still not allowed to participate in the privatization process. But privatization became a priority in the governments of the 1990s with the creation of a formal program sent to Congress in March 1990. The “Banco Nacional de Desenvolvimento Econˆomico e Social” (National Bank for Economic and Social Development), which had already taken part in some of the early privatizations, would play a significant role in the process. The privatization program developed throughout the 1990s was considered one of the most effective in the world. Unfortunately, it presented problems in some sectors,

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Graph 2.11. Industrial Source of Funds Collected for Privatization Source: Armando Castelar Pinheiro. A experiˆencia Brasileira de Privatizac¸a˜ o: O que vem a seguir? (Rio de Janeiro, IPEA, Texto para discuss˜ao no. 87, 2002)

compromising economic growth or creating distortions that should have been avoided. The amount obtained with the sales of public companies in the period between 1990 and 2002 reached an extraordinary $87 billion. Furthermore, over $18 billion in public debts were transferred, adding up to $105 billion, with almost two-thirds of the sales occurring in the years 1997 and 1998. The Cardoso government encouraged the participation of foreign investors, and they were responsible for over 50 percent of acquisitions. The electrical power and telecommunications sectors accounted for about 30 percent of these sales, metal and mining another 8 percent, petroleum and gas some 6 percent, and the financial sector 5 percent. Sold were some classic symbols of Brazilian nationalism such as the “Cia Sider´urgica Nacional,” founded in the 1940s by Vargas, and the “Cia Vale do Rio Doce,” one of the world’s largest mining companies. The monopoly of petroleum exploration and of communications was broken in this period bringing immense political repercussions (see Graph 2.11).20 What is interesting is that pension funds, most of which were concentrated in the public sector, and which had their origins in the late 1970s and had grown to great 20

Lic´ınio Velasco, Jr., Privatizac¸a˜ o, Mitos e Falsas Percepc¸o˜es (Rio de Janeiro: BNDES); Armando Castelar Pinheiro, A experiˆencia Brasileira de Privatizac¸a˜ o: O que vem a seguir (Rio de Janeiro: IPEA, Texto para discuss˜ao no. 87, 2002).

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size in the mid-1990s, were used to help privatize public industries. An important part of privatization was accomplished with these pension funds in association with the private sector. This process was much criticized at the same, as these enterprises were privatized with pension funds controlled by other public enterprises not privatized such as Petrobr´as, Banco do Brasil, Banco Central, and the Caixa Economica Federal. As the privatization process occurred in a time of great fiscal difficulties and external vulnerability, the collection of income was fundamental for the state. This transition was very successful in some sectors, such as in the production of steel, but not for the public sector as a whole. Great investments were required in the Brazilian steel industry for its survival in competitive markets, and thus privatization was fundamental. Telecommunications also had successful privatizations as large sums were needed for the rapid technological change this sector experienced. The investment demands did not justify public control and private capital effectively modernized this sector with massive additional investment. Considering the difficulties that the sector went through worldwide, and the frustration of many of the projects implemented in Brazil, privatization in this sector did no harm to the economy. But privatization was problematic in the electric power sector. Here, the needed regulations, which had been properly enacted for the telecommunications sector, were not established before or after privatization. The country’s vulnerability imposed a rapid sale that would later be shown to be a disaster both economically and politically. Even today, regulations are yet to be established for this sector, and this climate of uncertainty has led to low investments by the private sector, whereas the public sector lacks the resources to replace them. Consequently, this sector has not grown sufficiently with the rest of the economy. In 2001, when the economy seemed to be headed to a slow but firm growth, this failure became evident in the need to ration energy because of lack of investment. Yet, before privatization, this sector had been well structured and committed to long-range planning and investment. This same exact experience, with the same negative results, occurred in the sanitation sector. For all the reforms, the 1990s was another lost decade in terms of growth. The GDP increased by only 30 percent in the decade, which represented a rate of only 2.2 percent a year. This was better than the 1.3 percent from the previous decade but far from the 7.1 percent per

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annum growth rates of the 1970s. The accumulated growth of both decades, 50 percent, was too low for the population increase of 37 percent in the same period. That represented a gross increase per capita of only 15 percent for a country whose population lives with poor health care, poor living standards and sanitary conditions, and with educational deficiencies. Although growth of the 1970s could probably not have been sustained at those extraordinarily high levels, this weak growth of the 1980s and 1990s, albeit positive, was still below that which might have occurred, given the major transformations occurring in Brazil. Moreover, Brazil was like almost all the other countries of Latin America that suffered low or stagnant growth in these two decades because of international conditions. Unemployment reached high numbers at the end of Cardoso administration, especially in the greater metropolitan regions. Despite the low economic growth and the increase in unemployment, caused by both government policies and international market conditions, there was undeniably an increase in the well-being of the poor in Brazil because of the major reduction in the previously high rates of inflation, since such high inflation rates had seriously reduced the income of this part of the national population. Furthermore, by the end of the Cardoso presidency, the foreign debt reached $226 billion, which represented a growth of over 40 percent in the eight years of his administration, and domestic debt was 35 percent of GDP.

A New Decade: The Left Wing Finally Takes Power The situation in Latin America became even more difficult after Argentina declared a moratorium on debt repayment in December of 2001. The financial markets became even more aggressive and capital became scarce for emerging economies. Brazil suffered a massive reduction in foreign credit even on its regular trade lines, usually the ones with the smallest risk and the greatest stability even in time of foreign turbulence. In this climate of slow growth and constant international economic shocks, the victory of Lula could have had a profound negative impact. Even though Lula had changed his economic proposals radically, the possibility of his victory alarmed the Brazilian business community and foreign investors and increased the turbulence in the financial market. This fear increased with the victory of Lula, despite his inauguration speech, which reaffirmed his

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economic moderation. The amount of foreign obligations, their short deadlines, and the situation on international markets could have led the country into a foreign crisis that would have consumed its reserves. Domestically, the dimension of public debt and its short-term deadlines also created a climate of fear. But the transition between election and inauguration was accomplished impeccably. The Finance Minister, a relatively unknown medical doctor, revealed himself to be skillful and competent. The choices of known financial market professionals for the Central Bank staff calmed the markets. The president himself reaffirmed his commitment to stability, ongoing contracts, and the nonbreaking of established rules. And so it was done. The new administration maintained the essentially conservative economic policy of its predecessor, perhaps even more conservatively than would have been adopted by the liberal candidate. The PT government reaffirmed the IMF agreement and increased the goal of a primary surplus of 4.25 percent, an absurdly high figure, which had been achieved not by the reduction in spending but by the increase in taxes. They maintained a strict monetary policy with high bank compulsory deposits and interest rates. The maintenance of this economic policy, however useful it might be for the present situation of the country, has constrained Brazil’s capacity for growth. Fortunately, the external scene has shown itself to be favorable. In spite of some turbulence in the markets, there is an abundant availability of external resources and this, along with the maintenance of the standard policies in the political economy, have both reduced Brazil’s risk and permitted it to capture resources on fairly favorable conditions. Equally, the major devaluation that occurred at the end of 2002 resulted in a strong stimulus to Brazilian exports, which also were aided by a long period of rising prices for the principal products exported by the country. The strong growth of exports occurred in all sectors of the economy, both industrial and agricultural, and permitted the nation to generate exceptional surpluses in its commercial balance of trade and reverse the previous deterioration in its external accounts. The surplus of $2 billion obtained in 2001 rose progressively in the past three years, reaching an exceptional result in 2004, when the surplus exceeded $33 billion. This surplus even permitted Brazil to reverse its negative position in its current account transactions, which had reached 4.5 percent of GDP in 2001, and now turned into a positive balance, which represented 2 percent of GDP. This external growth was probably the most positive thing

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that has occurred during the Lula administration to date. Meanwhile, the maintenance of a restrictive fiscal and monetary policy designed to control inflation limits the growth of the economy, which was not even worse thanks to the stimulation of the export sector. In the first two years of the Lula government, the GDP grew at a very modest rate in both 2002 and 2003 (or 1.9 percent and 0.5 percent, respectively). There was a major growth in this past year as a result of the effects of exports, but the unemployment rate is still quite high despite a slow reduction in 2004 and the beginning of 2005. The economic perspective of the country will depend essentially on the maintenance of favorable conditions in the world market. There has been an increase in the external competitiveness of Brazil’s exports but still without long-term consistency and it is dependent on world conditions, including external sources to finance this commerce. Moreover, the fluctuations that occur in the prices of the principal commodities excessively influence exports, just as the intense fluctuations in the national currency affect the competitives of local producers. Internally, the public deficit and a possible return of inflation are still questions that require the maintenance of restrictive policies and impede a solid trajectory of growth, which will increase employment and reduce the informal sector.

3 Financial Sector

Without question, among the most profound structural changes in the national economy in the past half century has been the creation of a national credit market. For all the early initial development of the financial sector, Brazil in the past quarter century has finally created one of the most sophisticated financial markets in any developing country in the world. It did so amid the shocks of hyperinflation, debt crises, moratoriums, and the entrance of foreign capital institutions. Also, much of the early restructuring of this financial market was at the cost of the public sector, which by the end of the twentieth century finally was able to remove itself from the highly costly subvention, leaving a strong system in place. Although profound problems remain with the ability of the financial sector to provide medium- and long-term private credit and the excessive spread that it obtained in its operations, the financial sector has emerged as a highly liquid, modernized, and technologically advanced system. When the military seized the government in 1964, the economic authorities identified limitations in the financial sector, which needed to be resolved for the implementation of the ambitious stability and growth program they wished to develop. There was a lack of effective management instruments for an appropriate monetary and credit policy. The legal structure was obsolete, the country lacked a Central Bank, and, in spite of the growing inflation, the usury laws still limited interest rates. Savers counted on a limited supply of financial asset options and rarely obtained effective interest revenues from their applications. The lack of a Central Bank meant that its functions were distributed among different organizations. There was a Superintendency of Money and Credit (SUMOC Superintendˆencia da Moeda e do 78

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Cr´edito) in charge of monetary policy and the Bank of Brazil, which, together with the Caixa de Amortizac¸a˜ o of the Ministry of Finance, was responsible for its execution, issuing the currency on the authorization of SUMOC. The Bank of Brazil acted as a monetary authority through several of its departments, as well as operating as a commercial bank. But this division of authority created serious problems for government policy. Confrontations between the Minister of Finance and the president of the Bank of Brazil are part of Brazilian political folklore. Because of the coexistence of inflation and ceilings on interest rates, the financial market was reduced to short-term bank credits, based on demand deposits. To capture these demand deposits, the major banks overexpanded their branches. In 1957, there were 393 banks, with over 4,000 agencies; in 1965 there were a hundred less banks, but the number of agencies had doubled. The expansion of the network in search for deposits took place with no concern for costs, because banks were able to squeeze profits from these short-term loans through devices such as credit opening fees, commissions, and the requirement of collaterals in the form of large deposits without remuneration. The main leading banks of the Brazilian financial sector in the 1970s and 1980s had already been created some twenty to thirty years earlier; these included banks such as the Banco da Lavoura de Minas Gerais (currently the Banco Real), the Banco Boavista, the Banco Brasileiro de Descontos (now Bradesco), the Banco Moreira Salles (currently the Unibanco), the Banco Nacional, the Banco Mercantil de S˜ao Paulo, and the Banco do Estado de S˜ao Paulo (Banespa). The Bank of Brazil, in addition to being a monetary authority, also was the country’s largest and most important commercial bank, accounting for approximately 40 percent of credits granted by the banking system.1 The public sector was very important in the banking market. Together, the federal and state banks accounted for more than half 1

Nelson Carvalheiro, “Bancos comerciais no Brasil – 1964/1976. Crescimento e concentrac¸a˜ o” (MA thesis, FEA-USP, 1982). On the same theme, also see S´ergio R. P. de Almeida, “Concentrac¸a˜ o de capital nos bancos comerciais brasileiros: 1964–1981” (MA thesis, Pontif´ıcia Universidade Cat´olica de S˜ao Paulo, 1983); Martus Tavares, O setor banc´ario brasileiro: Alguns aspectos do crescimento e da concentrac¸a˜ o (S˜ao Paulo: S´erie Ensaios econˆomicos; v. 51 FIPE/USP, 1985); Andr´e Franco Montoro Filho, Moeda e sistema financeiro no Brasil (Rio de Janeiro : IPEA/INPES, 1982); Carlos de Faro Passos, Estrutura Financeira e desenvolvimento: O caso do Brasil (S˜ao Paulo: Atlas, 1973); Antonio Claudio Sochaczewski, “Financial and Economic Development of Brazil, 1953–1968” (PhD thesis, London: London School of Economics and Political Science, 1980).

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of the country’s banking credits. There were other important public financial entities as well, including savings banks (called Caixas Econˆomicas), which took deposits through passbook savings accounts and operated housing projects. There also was the BNDES or National Economic Development Bank,2 created in 1952 to finance major projects implemented in the postwar period. Private investments, however, depended basically on the entrepreneurs own resources or shortterm loans. There also was no public debt market in the country for medium- and long-term bonds. In 1964 the first military government launched the current financial system. Within a few years, Brazil counted on a broad and sophisticated financial system, despite the return of the inflationary process. The creation of a Central Bank and the establishment of the monetary correction were the fundamental elements of the military reforms that totally modified the financial structure and practically implemented the capital market. Specialization was the concept adopted in the organization of the financial system. The functions of the commercial banks were redefined to focus on short term credits, whereas investment banks were created to operate in the medium and long term. The production of durable goods, automobiles, and home appliances would play a fundamental role in the planned growth model, and this needed a major consumer credit market to be operated through new credit and financing organizations. The government also encouraged the establishment of real estate credit societies and created a National Housing Bank (BNH – Banco Nacional da Habitac¸a˜ o) to provide credit for housing and sanitation. The capture of resources through savings accounts and the universal Guaranteed Fund for Time of Service (the FGTS or Fundo de Garantia por Tempo de Servic¸o) managed by BNH, represented the main sources of funds for this industry. The government also organized several other compulsory savings programs for the private sector workers (the PIS) and for public sector employees (the PASEP), which counted on compulsory contributions by the companies and public entities. Funds were managed by the public sector and could be withdrawn by beneficiaries in special situations, such as for the purchase of one’s own property and for retirement. In the voluntary saving deposit field, several incentives were created, including fiscal incentives for stock acquisition. 2

The BNDES began as a national development back, but in 1982 the “Social” suffix was added to its title, and it began to work as well in the area of social development.

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In the 1960s and 1970s, important transformations also took place in the stock market. Stock exchanges were reorganized, investment banks and brokerage societies were created, and a new and sophisticated regulation was implemented, which included the CVM (Comiss˜ao de Valores Mobili´arios) founded in 1976 with functions similar to the U.S. Securities and Exchange Commission. In the same year, corporation law was also modified and designed more in accordance to capital market demands, particularly in relation to minority stockholder rights. Tax incentives were created for companies and investors operating in the stock market. But, except for short periods of euphoria, the stock market has had little importance in the mobilization of resources to supply company capital needs. In Brazil, few are the companies that have shared capital control, and even when the company issues instruments in the market, it usually uses stock with no voting rights. The typical private company has its capital controlled either by a family or a limited group of owners that have more than 51 percent of the stock with voting rights. Only with the privatization of the state-owned companies in the 1990s did some companies start having shared stock control; the number of companies with professional management increased, and concern with corporate governance emerged. In Brazil, the public took little part in the stock market – individually or through stock mutual funds or pension funds. Pension funds appeared in 1977, but few private companies were interested in creating funds or offering complementary retirement plans for their employees. Only state-owned companies and some international corporations built complementary systems, which in the 1980s started becoming major stock market investors, also participating in the governing boards of great productive companies. With the opening of the financial sector to foreign capital in the 1990s, a significant amount of foreign capital flowed into the stock market, and volume and price fluctuations were influenced by the behavior of the international market. But, despite the growth and strengthening of the secondary stock market, the system was unable to generate a significant and stable resource flow of capital to private companies and ultimately had little impact in the construction of Brazilian industry. But, from the mid-1960s, there was a increasing segmentation and specialization in the capital market, which was much like the traditional American system. In a few years, there were a large number of financial entities in the market from Investment Banks and Real Estate

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Credit Societies to various Financing Societies and even stock brokers. This process allowed the quick expansion of the Brazilian financial market, particularly in the nonbanking segment. Between 1965 and 1973, total financial assets increased from 24 percent to 43 percent of GDP; loans to the private sector showed a similar raise, exceeding 50 percent in this last year. By contrast, monetary assets, which represented 86 percent of total financial assets, reduced its participation to 43 percent in the same period, despite its significant absolute growth. This drop in participation occurred because of the exponential growth of the nonfinancial asset market, which represented only 4 percent of GDP in 1965 and reached 25 percent in 1973. The monetary correction allowed the consolidation of this type of market, and some areas played a fundamental role in the economy’s fast growth. In the housing and sanitation sectors, the FGTS, as well as savings deposits and real estate bills, had assets that represented 16 percent of total nonmonetary assets in 1973. Another important segment was the financing of durable consumer goods, operated by the Credit and Financing Societies, whose sources were the Bills of Exchange, which corresponded to approximately a quarter of nonmonetary assets. Another important component of nonmonetary assets was the Federal Public Debt expressed in ORTN instruments (Obrigac¸o˜ es Reajust´aveis do Tesouro Nacional or Adjustable Obligations of the National Treasury), which included certificates issued with a fixed monetary correction clause, and the Federal Treasury Bills (LTN – Letra do Tesouro Nacional), created in 1970, negotiated with prefixed remuneration and more appropriate as a monetary policy instrument. The public debt market now become very important, enabling both deficit financing of the budget, and the Central Bank operation in the monetary market. The banks were great buyers of these assets, for their own capital and to fulfill the banking compulsory deposits incurred on demand deposits, which could usually be collected in the form of public debt certificates.3 Although the sector’s restructuring aimed at creating a long-term credit market, the result achieved was timid. Investment banks were not capable of creating the mechanisms necessary to make long-term loans feasible. Only the public sector, through the BNDE (the National Development Bank) and other federal and state development banks 3

Francisco Vidal Luna and Thomaz de Aquino Nogueira Neto, Correc¸a˜ o monet´aria e mercado de capitais: A experiˆencia Brasileira (S˜ao Paulo: Bolsa de Valˆores de S˜ao Paulo, 1978).

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and specialized institutions, carried through such operations, using public resources or compulsory funds. Until the 1980s, the Central Bank played an active role as an agent of development, transferring public resources or resources offered abroad from official development agencies. The reorganization resulted in monetary authority being transferred from the Bank of Brazil to the Central Bank, whereas the latter’s activities related to fostering industry and the federal public debt management were transferred to the National Treasury. In this period, international credit operations, which were usually less costly and with relatively longer terms, also gained importance. The largest companies and the international corporations were capable of operating directly with international banks, benefiting from lower costs and longer credit terms. The smaller national companies obtained these loans through transfers made by the domestic banking system, which obtained their funds abroad and made domestic loans at higher costs and shorter terms. This increasingly popular financing of both the private and public sectors explains an important part of the growing foreign debt and, as paradoxical as it may seem, also explains part of the domestic public debt. When the Central Bank bought foreign currency, monetary expansion occurred. This currency was later withdrawn from the market by selling public debt, thus increasing the State’s indebtedness in the local market to purchase these dollars. As the public debt cost more than the returns on the reserves owned by the Central Bank, the reserve accrual represented a fiscal burden to the Central Bank or Treasury. This policy of accumulating reserves through growing indebtedness was advocated by the economic authorities under the argument that although reserve accrual had a negative fiscal impact, it increased the country’s foreign credibility, allowing major foreign credit and lower costs. Unlike other countries that started practicing recessive policies as a way to face the first oil crisis, Brazil put in practice an ambitious program of basic infrastructure and important substitution investments through the borrowing of foreign resources. This program cost enormous deficits in current transactions. To stimulate the search for foreign resources, internal interest rates were raised significantly. As the State was the major investor, it also became the main foreign financing resources claimant. The private sector, in spite of more favorable foreign credit conditions, gradually reduced its liability in foreign currency, retracting its investments and avoiding exchange risk in a period of strong external imbalance.

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At the same time, state-owned companies were forced to accept real declines in their income from tariffs and prices, with the purpose of containing inflationary pressures while reducing their capacity of self-financing investments. It was a way to force them to look to the international market for resources to finance their investment projects. The government used state-owned companies with good credit ratings abroad to take foreign funds. This tariff and price policy represented a subsidy for the private sector, indebted state-owned companies, deteriorated public accounts and increased the foreign debt under public responsibility. Moreover, there was a mechanism that permitted the transfer of private external debt over to the account of the public sector. To stimulate foreign credit by the private sector, a kind of hedge was created to protect borrowers from exchange risk. Foreign currency debtors – financial and nonfinancial organizations – could deposit the value corresponding to their foreign debt in domestic currency at any moment in the Central Bank. The private debtor could thus anticipate his payment due to foreign creditors to the Central Bank who then assumed the responsibility for the debt vis-`a-vis the foreign creditor. Although the local company borrowed in the foreign capital makret, it received its funds in national currency. Because the enterprise had to repay in national currency, they ran the risk of the value of the loan being profoundly changed by currency fluctuations which raised the cost of the loan – which was still denominated in dollars or some other foreign currency. When a threat of devaluation of the national currency occurred, the borrowers quickly paid their debts to the Central Bank before the devaluation could seriously affect the total value of their loans. The private sector thus transferred the exchange risk to the Central Bank, particularly during periods of major exchange turbulence. This system accounted for more than 80 percent of the foreign debt. Other than the debt question, the government also faced the problem of resolving the indexing mechanism used to treat inflation. The functioning of this market began to have problems as inflation increased. When inflation reached very high levels, the disparity in the variation of thousands of prices in the economy increased. Too many prices were either above or below the average index, and with inflation reaching 30 percent a month, companies or sectors whose prices lagged behind could be seriously affected by the correction of their liabilities with an index that did not correspond to their variation

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of prices and revenue. They were unable to cope with these issues through monetary correction. Slowly during the 1980s and 1990s, the government took over part of the obligations of the indexation in many parts of the economy. The BNDE, which used compulsory savings funds, limited indexation to 20 percent no matter what actual rates might be, even if they went above this trend. The housing sector, which used indexed FGTS or savings account funds, started to correct the mortgage installments below inflation, accruing losses later assumed by the public sector. Agriculture received credit with negative rates. In the long run, part of the private sector indexation was assumed by the public sector. Some studies showed that the government operated with a negative spread, as it paid its debt with full monetary correction and high interest rates, whereas it managed a broad credit system with rates lower than its costs. It also was burdened when it financed international reserves with national debt at costs much above revenues obtained by the foreign application of reserves.4 By limiting the correction of the outstanding balance of the loans in different sectors of the economy, the government caused the exhaustion of resources available for new financing, as eventually occurred in the housing sector. For several years, it was possible to develop an ambitious sanitation and housing program, but by limiting correction of installments paid by lenders, this financing became negative and finally new undertakings became unfeasible. Because of the lack of credit, large-scale private housing construction was reduced, particularly for low-income families, which led to the dominance of individual family home construction of usually precarious dwellings, with no infrastructure, and dependent on the availability of one’s own savings. This deterioration of financing conditions for the sanitation and housing sector is probably one of the causes for the fast expansion of slums ( favelas) throughout Brazil. With the rise of inflation, consumer credit also was reduced considerably. Individuals who acquired a financed asset wished to know exactly how much they would have to pay for the loan. They feared their inability with their income, usually salaries, to handle the variable cost of loans with postfixed interest rates. This lack of balance between the supply of funds and the preference of lenders reduced the amount 4

Adroaldo Moura da Silva, Francisco Vidal Luna, and H´elio Nogueira da Cruz, Inflac¸a˜ o e Mercado de capitais: S˜ao Paulo (S˜ao Paulo: Bolsa de Valˆores de S˜ao Paulo, 1977).

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of loans in the consumer credit sector and reduced the length of such loans considerably. There was a market for prefixed ninety-day bonds, but there was no market for six- or twelve-month ones. Brazil became a country where even the purchase of a car was made with savings or short-term credit. And there never was a leasing market. The low growth and the increasing uncertainty in the national economy after 1980 displaced investment from productive applications to investment in risk-free and high-return financial markets. Capital was concentrated in short-term applications, which eventually had the public sector as borrower. The financial sector therefore grew during this period. Large conglomerates operated in all segments, taking advantage of the high interest rates and of opportunities with arbitration between different assets and indexes. And, when inflation accelerated, they expanded their appropriation to the inflationary tax obtained in demand deposits; they also achieved high results holding short-term funds in banks without interest through transactions carried out on behalf of third parties, such as receiving light bills, taxes, payment orders, or check clearing. These funds stayed in the bank for a period without remuneration, until they were deposited in the name of the beneficiary. Some taxes stayed in the banks for thirty days before being transferred to the public sector. It was the way to remunerate banks for services rendered. The government fostered the formation of large financial groups, created through mergers and acquisitions, usually under leadership of a commercial bank. Although the legal structure demanded specialization and segregation of each type of operation, the merger process allowed the consolidation of great financial conglomerates. These conglomerates in turn controlled many other financial entities and quickly achieved extensive operations in all the segments of the financial market. It was a distortion of the original concept and legal base of the financial laws, but it was believed that the legally isolated and specialized financial entities had little efficacy and that concentration would strengthen the sector and reduce operational costs and thus lead to the reduction of costs for borrowers. Typical of this concentration process was Bradesco, the largest private commercial bank, which took part directly or indirectly in more than thirty mergers. By 1980 its 1,247 agencies controlled 16 percent of the private banking system branches and accounted for 13 percent of deposits and 5 percent of loans. The four largest private banks accounted for 30 percent of deposits, the seven largest for 40 percent.

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In addition to the national private banks, there were seventeen foreign banks; several were among the twenty largest, including Citibank, Lar Brasileiro (Chase), Francˆes e Brasileiro (Banque Credit Lyonnais), and Sudameris (with Italian and French capital). There was also an important structure of state commercial banks that served as financial and operational support to their state governments. Some were quite large, such as BANESPA (the Banco do Estado de S˜ao Paulo); Brazil’s third largest bank by 1980, BANERJ (the Banco do Estado do Rio de Janeiro); and BANRISUL (the Banco do Estado do Rio Grande do Sul).5 The Brazilian financial sector represents a special case in the world for its capacity of survival and expansion in an inflationary environment. High inflation could affect bank operations negatively and provoke a crisis in the sector. But in Brazil the greater the inflation, the greater was the banks’ profitability. The Brazilian financial system was made feasible by the broad indexation, which allowed financial operations at real interest rates in spite of high inflation levels and uncertainty regarding the future, including the inflation rate per se. Operating in a market with high inflation, the financial market created new products and procedures to adopt itself to these special economic conditions and to attend to the needs of economic agents who themselves were trying to adapt themselves to the difficulties generated by inflation. With high inflation, economic agents rejected cash, including demand deposits, and tried to apply their resources to indexed assets, which preserved their value, at low risk and good liquidity. In Brazil, during the 1970s and 1980s, the open market was the principal means of application of liquid resources for all segments of the society. Financial institutions acquired short- and medium-term public debt certificates and financed them with resources from investors – individuals and corporations. These investors were offered daily liquidity, using longer-term certificates as warranty. As there was a clear disharmony between daily applications and medium-term certificates, the government offered immediate liquidity. This type of application replaced demand deposits. Thus, most of federal public debt, placed in the market with terms reaching five years, had daily liquidity, offered by 5

S´ergio R.P. de Almeida, “Concentrac¸a˜ o de capital nos bancos comerciais brasileiros: 1964– 1981” (MA thesis, Pontif´ıcia Universidade Cat´olica de S˜ao Paulo, 1983); Martus Tavares, O setor banc´ario brasileiro: Alguns aspectos do crescimento e da concentrac¸a˜ o (S˜ao Paulo: S´erie Ensaios econˆomicos; v. 51 FIPE/USP, 1985).

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the financial institution, with the backing of the Central Bank, which repurchased certificates in case of liquidity problems. Each institution was allowed to accomplish operations up to thirty times the value of its equity. It was a high-risk market for the financial institution, for it actually acquired a three- to five-year certificate, without owning the funds for such acquisition (thirty times above its shareholders equity), borrowing funds to finance the operation on a daily basis. If for one day it did not obtain the resources to continue financing the operation, it would not be able to pay back the previous day’s lender. Only with the support of the Central Bank was this market possible, highly profitable for financial institutions in general, such as banks and brokers. Another characteristic of Brazilian finance markets in this period of high inflation was the substitution of national currency by an indexed currency in most contracts. Contracts in foreign currency were forbidden, except those with a legitimate foreign link, such as exchange contracts, foreign currency financing, import or export agreements. The others were usually defined in an indexed currency, which usually was defined as a certain number of ORTN – or Adjustable National Treasury Obligations (Obrigac¸a˜ o Reajust´avel do Tesouro Nacional) or in local currency but corrected periodically by the ORTN or another index that reflected price variations. This allowed the economy to function even when daily inflation rose above 1 percent. When necessary, daily monetary correction of contracts was used. This system created various types of indexation and price structures. Brazilians lived as if several currencies existed simultaneously; risks were increased, often requiring the creation of a hedge against the lack of balance between two currencies, while allowing arbitration and speculation opportunities. Whoever would take the exchange risk could obtain extraordinary gains, through the difference between dollar costs and the local market remuneration at indexed local currency.6 The persistence of inflationary levels, still high by international standards, encouraged commercial banks to continue expanding their branch networks in search of demand deposits and floating funds, without much worry about the cost structure. It was the way in which banks appropriated part of society’s high inflationary tax. As most of this borrowing was at less than real costs, the higher the inflation, the higher the potential for earnings by applying these resources at 6

Jo˜ao Sayad and Francisco Vidal Luna, Pol´ıtica anti-inflacion´aria e o Plano Cruzado (S˜ao Paulo: Instituto Latino Americano – ILAM, 1987).

Financial Sector

89

positive real interest rates. This created a major competition among banks over the expansion of their networks. None of this frenzied activity created a long-term private credit market capable of financing productive investments, which still relied exclusively on public credit. In addition, with the creation of the public debt market, the government itself aggressively competed for these private savings using both medium- and long-term instruments at low risk, high liquidity, and totally indexed. The market preferred these instruments and mediumand long-term credits or securities issued by the private sector were discouraged. The high cost for the borrower was another characteristic of this financial system. Interest rates were typically high, remunerating lowrisk financial instruments, including bank bonds. The system also operated with extraordinary spreads. Studies conducted by the Central Bank show that there were several reasons for this situation. In addition to the uncertainty provoked by inflation, there was a major tax on loans and applications; the system operated with high operational costs; there were risks caused by an unsuitable legislation that overprotected the debtor; and the banking system operated with very high levels of profit. A 1983 survey on the profitability of the ten major Brazilian private commercial banks found an annual average rate of 21.4 percent for a period of 18 years, an exceptional rate under any aspect, in any economy or sector.7 An international study completed in 1981 showed that Brazilian banks occupied the first, third, and sixth place in the world ranking of most profitable banks.8 Thus, the economic deterioration that took place in the 1980s did not affect the Brazilian banking system, which maintained its high profitability. Some large banks did go broke in this period, but there was no systemic crisis as would occur in Argentina and Mexico.9 The critical period occurred during the implementation of the various economic plans, when inflation was reduced unexpectedly.10 High costs, along with the loss of the inflationary tax, affected the profitability of 7 8 9

10

Almeida, “Concentrac¸a˜ o de capital nos bancos comerciais brasileiros,” p. 174. Felipe Morris, M. Dorfman, J. P. Ortiz, and M. C. Franco, Latin America’s Banking Systems in the 1980s (World Bank Discussion Papers, Washington, DC: World Bank, 1990). There was a banking crisis in several countries of Latin America, such as Argentina, Bol´ıvia, Chile, Colombia, Ecuador, M´exico, and Uruguai. See Morris, Dorfman, Ortiz, and Franco, Latin America’s Banking Systems in the 1980s. Carlos Eduardo Carvalho, “Banco e inflac¸a˜ o no Brasil: da crise dos anos 1980 ao Plano Real,” paper given at the Anais do V Congresso Brasileiro de Hist´oria Econˆomica (2003); accessed: http://ideas.repec.org/p/abp/he2003/056.html

90

Brazil Since 1980

banks that were forced to reduce costs: branches were closed, technology investment was curtailed, and jobs were reduced. A study conducted by the National Census Bureau (IBGE, or the Brazilian Institute of Geography and Statistics) showed that in the early 1980s the financial sector’s participation in the GDP remained between 11 and 13 percent, and was reduced to 8.4 percent in 1986 during the Plan Cruzado. In 1989 the rate rose to 26 percent, then shrank to approximately 12 percent in the first half of the 1990s. These results show that the financial sector did extremely well in the era of high inflation.11 At the end of the 1980s, a critical change occurred in the legal structure of the financial markets. Legislation created in 1964 foresaw specialization per market segment, but reality had shown another path. Big financial conglomerates, fostered by the government, were established that acted in all areas usually under the direction of a commercial bank. Although these financial institutions were legally specialized enterprises, they acted in practically all branches of the financial market through the creation of innumerable financial entities, each in a specific sector of the market and all controlled through a central administration. In 1988 there was a major transformation in the organization of the financial system, which now allowed the same financial entity to act in all sectors of the economy through just a single organization. These were the so-called multiple banks which were authorized to operate in all market sectors, being limited by only their capital. Any financial entity – banking or not – could request from the Central Bank an authorization to change to a multiple bank, with the possibility of operating in the desired portfolios and open new branches if necessary. It was enough to comply with the minimum capital requirements. In five years, the number of private banks doubled to 244 in 1994. In the Collor election period, the uncertainty about the future of the country led to a crisis of confidence in the markets. Inflation reached extremely high levels and the principal adversary was Lula, candidate of the PT. The rollover of debt became more difficult and borrowers demanded shorter-term certificates. There was a flight of capital and the financial market offered almost total liquidity. The new government decided to reduce the system’s liquidity in an untimely and authoritarian manner by freezing all the country’s financial assets. 11

IBGE-ANDIMA, Sistema Financeiro: Uma an´alise a partir das Contas Nacionais, 1990–1995 (Rio de Janeiro: Andima, 1997); IBGE, Contas Consolidadas da Nac¸a˜ o 1980–1993 (Rio de Janeiro: IBGE, 1994).

Financial Sector

91

They also tried to reduce the liquidity of financial instruments in general. It abolished the open market, replaced it with fixed or variable income funds managed by financial institutions with withdrawal rules to limit the liquidity of the deposited funds. The alternative would be demand deposits, burdened by inflation. Funds became the great public debt owners and their management was gradually transferred to banks, eliminating other financial institutions from this market. In the last decade of the twentieth century, the financial system of Brazil suffered a double shock. The first was the opening of the economy and the government promotion of foreign competition. In Mexico, this type of opening of the financial markets destroyed the national banking system. The second was the end of hyperinflation with the Plan Real. In this respect, the previous shock, which the banks experienced during the Plan Cruzado, served as a warning to the sector, which led the banking system to promote structural modifications, with massive investments in technology and cost reductions. With the drop in inflation there was an almost complete loss of the inflationary tax, which was about 2 percent of GDP; it had risen to 4 percent in 1993 and now fell to only 0.1 percent in 1995. This affected the banking sector deeply and it lost an important source of revenue. But the inflationary tax loss was not the only problem faced by the banks. The Plan Real caused a widespread growth in all areas of economy. As in other stabilization plans, the decrease of inflation, when eliminating or reducing the inflationary tax, promoted a major gain of income, particularly to the poorest segment of the population, less protected against the effects of inflation.12 This rapid growth of domestic demand was followed by a 58 percent growth in bank credits, although the monetary authorities tried to control its expansion, with measures such as the increase of the compulsory bank deposits. Yields on these credit operations partly compensated for the loss of inflationary revenue. Moreover, an important reduction of administrative costs occurred and the banks started to charge service fees, which became one of the most important sources of revenue for retail banks. By the end of 2003, this revenue source totaled an equivalent of 90 percent of the labor costs of the banks. 12

Lu´ıs Ricardo Cavalcante, “Sistema Financeiro no Brasil: Uma breve an´alise e evoluc¸a˜ o,” An´alise & Dados (Salvador) v. 12, no. 3 (December 2002); and IBGE-ANDIMA, Sistema Financeiro.

92

Brazil Since 1980

With regard to cost adjustments, the largest impact unfortunately fell on employment. The banking sector, which employed more than eight hundred thousand people in 1988, gradually reduced its personnel by half by 1999. Aggressive automation policies, outsourcing, and new mergers explain part of this adjustment. Bank branches were relocated and restructured, but the number remained relatively stable. Private banks were the first to reduce personnel, but they eventually were followed by public banks, particularly the privatized ones. The BANESPA (Banco do Estado de S˜ao Paulo) was federalized and subsequently sold to Banco Santander, reduced its personnel by over a third between 1994 and 1997; the Bank of Brazil, not involved in any privatization process, also eliminated about forty thousand jobs. Outsourcing also was an important factor in the elimination of banking jobs and, as usual, new jobs in this sector were more precarious than those they replaced.13 The Central Bank was already trying to monitor the system, fearing a crisis because an uncontrolled increase in the number of banks had occurred, many with no credit tradition; moreover, several large traditional banks were showing serious structural problems that could be worsened with major credit competition. The same was taking place in some state banks, many weakened by the support they offered to local state governments. In 1994 the Central Bank tried to deal with the crisis by forcing local banks to comply with the Basel Agreement, which defined an international standard for banks, and increased minimum capital requirements for financial institutions. In addition to predictable factors – because of the fall of inflation and the expansion of credit operations – the country also was deeply affected by the Mexican crisis, which drastically reduced liquidity to emerging countries. As a reaction, a strongly restrictive monetary policy was adopted, increasing interest rates first to 20 percent and then reaching 65 percent a year. A compulsory deposit on credit operations also was created. The economy came to standstill and defaults increased, and all this was made worse by the lack of credit, the rise of interest rates, and the international competition that took place because of the government policy of overvaluing the local currency. The percentage of credit in nonperforming loans in commercial bank portfolios jumped from 5 percent in September 1994 to 15 percent 13

“Evoluc¸a˜ o Recente do Emprego no Brasil,” Dieese Linha Banc´arios, Belo Horizonte: Texto 02/98.

Financial Sector

93

in 1997. In addition, market liquidity was oriented to the most solid banks, such as the Bank of Brazil, the large national banks, and the foreign groups, thereby affecting the most fragile and problematic banks, or the small ones. In the second half of 1995, the Econˆomico and Nacional banks went bankrupt; both listed among the country’s ten major private banks. The fear of a widespread crisis in the financial sector forced the government to act promptly. It created both the PROER (Programa de Reestruturac¸a˜ o e Fortalecimento do Sistema Financeiro) and the PROES (Programa de Est´ımulo a` Reduc¸a˜ o do Setor P´ublico no Sistema Financeiro) to assist national public banks, particularly banks controlled by the states, and facilitated the increase of the presence of foreign banks. Although the Constitution of 1988 prohibited the introduction of new foreign banks in the national financial system, it authorized the president of the Republic to ignore this prohibition if he needed to meet international agreements and give reciprocity or act in the interest of the Brazilian government. During the 1990s, an ongoing liberalization process of capital movements and the entrance of foreign banks in the country were encouraged by the government. The process of financial liberalization, it was hoped, would promote an inflow of foreign capital. It also was expected that the entrance of foreign institutions would increase competition, enlarge credit supply, and reduce bank spread. In some cases, permission to enter the market was given to solve specific problems such as the privatization of state institutions or the purchase of private banks in financial distress, including those under Central Bank protection. In spite of favorable expectations in relation to the impact of foreign banks on banking competition, recent studies have shown that the market has become undoubtedly more solid, but there is to date little evidence of an increase in credit, the expansion of long-term funding, or the reduction of the bank spread.14

14

There is a large literature on the banking crisis of the middle of the 1990s and the government’s program of bank restructuring. See Geraldo Villar Sampaio Maia, Reestruturac¸a˜ o Banc´aria no Brasil: O Caso do Proer (Bras´ılia: Banco Central, Nota T´ecnica 38, 2003); Fernando Pimentel Puga, Sistema financeiro brasileiro: reestruturac¸a˜ o recente, comparac¸o˜es internacionais e vulnerabilidade a` crise cambial (Rio de Janeiro: BNDES, Textos para Discuss˜ao no. 68, 1999); Jos´e Roberto Mendonc¸a de Barros, and Mansueto Facundo de Almeida J´unior, An´alise do Ajuste do Sistema Financeiro no Brasil (Bras´ılia: Minist´erio da Fazenda, 1996); and Marcelo Davi Xavier da Silveira Datz, “Risco Sistˆemico e Regulac¸a˜ o Banc´aria no Brasil” (MA thesis Rio de Janeiro: Fundac¸a˜ o Get´ulio Vargas, 2002).

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Brazil Since 1980

PROER and PROES were two important programs that reduced the risk of a systemic sector crisis. PROER, created in 1995, assured financial assistance in the cases of stock transfer from institutions in crisis. When assuming an entity in distress, some banks received resources from bank reserves for the operational and managerial restructuring of the acquired bank and could chose the assets it was willing to take over. The rejected assets remained in the liquidation process promoted by the Central Bank. This program was complemented with measures that assured fiscal incentives to the purchasing bank. According to the Central Bank’s opinion, Proer was not put in place to rescue bankers but to guarantee the financial system’s stability, avoiding the liquidity or solvency problems of some financial institution that could cause a systemwide crisis. Seven operations were accomplished, three with large institutions: Banco Econˆomico, incorporated by Banco Bilbao Viscaya; Banco Nacional, incorporated by Unibanco; and Banco Bamerindus, whose control passed to HSBC. When the Plan Real was implemented, various public state banks were having serious problems, worsened by price stability and the elimination of floating funds. The situation became particularly serious – also in liquidity terms – with the crisis caused by the bankruptcy of the Econˆomico and Nacional banks, the deterioration of the foreign financial markets, and the rise of interest rates. In 1996, PROES was created, fostering the recovery, privatization or liquidation of banks controlled by state governments. Of the thirty-five existing state financial institutions, fourteen were privatized or federalized, ten liquidated, and five recovered. This program represented an important process of bank concentration, particularly from the regional point of view, for the banks that were liquidated or privatized were those with strong regional activity. Essentially two large national retail banks and two international banks acquired the privatized banks. In addition to operations supported by the two mentioned programs – PROER and PROES – the Central Bank undertook a series of interventions and liquidations involving 247 financial institutions, among which were 57 commercial banks; an impressive number given that there were some 216 banks in existence by the end of 1999.15 The process of liquidation, recuperation, and privatization of the state banks was accompanied by a program of adjustments in the public accounts of the states and municipalities. First, there was a consolidation of their 15

Sampaio Maia, Reestruturac¸a˜ o Banc´aria no Brasil.

Financial Sector

95

debts, which were now assumed by the Federal Treasury. Second, a legal structure was established that limited the expansion of their future debts, and established a fixed percentage of their receipts that went to pay off their debt to the Federal Treasury. The disappearance of the state banks and this extensive process of negotiation represented a key development in the adjustment of public finances in general. Thus, part of the public federal debt was caused by this consolidation, but, as we will see, another major part of the growth of that debt was caused by the elevated interest rates maintained in the domestic market.16 Simultaneously to these bank interventions by the government, an intense incorporation process occurred involving both national and international private banks, which profoundly modified the structure of the Brazilian banking system. Between 1998 and the beginning of 2004, sixty incorporations took place, also a significant number if we consider the approximately two hundred banks then existing. Most of the new incorporations or banks purchased were acquired by great national retail banks, such as Bradesco, Ita´u, and Unibanco, and only two foreign banks made significant and permanent purchases: Santander and ABN-Amro. Santander, HSBC, and ABN-Amro acquired large institutions, and today they are among the country’s six major banking entities, operating in the retail sector with a widespread net of branches. Other foreign groups were not successful in the attempt to enter retail banking and soon sold out. This was the case with the Spanish group Bilbao Biscaya and the Caixa Geral de Dep´ositos de Portugal, which sold the Excel-Econˆomico and Banco Bandeirantes, respectively. Foreign financial groups, already traditional in the country – including Citibank and the Bank of Boston – despite their declared interest, did not make any major bank purchases. The result of this new concentration was that medium-sized retail banks practically disappeared. In fact, the purchasing attraction lay essentially in the purchase of retail market share, cemented in the physical net of branches. There was an undeniable strengthening of the financial sector, as a result of the size of the groups that were built and the large share of foreign capital in the sector. 16

The growth of indebtedness could be credited to various causes. Elevated interest rates paid by the public sector, consolidation of the state and municipal debts, also the recognition of debts of the public sector that were never fully explained, such as debts to the sector of Mortgage Credit. For a recent analysis of this process, see Thorsten Beck, Juan Miguel Crivelli, and William Summerhill, “State Bank Transformation in Brazil – Choices and Consequences,” Journal of Banking & Finance Vol. 29 (2005), pp. 2223–2257.

Brazil Since 1980

96

60

57 50

43

Percentage

40

30

34

33 24

20

10

10 0 1988

Public Banks

2000

Private National Banks

Private Foreign Banks

Graph 3.1. Participation in the Totality of Financial Activities, by Type of Bank in 1988 and 2000

So successful was the government support and the expansion of the major banks that even during the 1999 crisis, when the country faced a serious foreign credit crisis that forced the devaluation of the currency and the need for IMF rescue funds, there was no risk for large Brazilian banks. The crisis affected small and medium-sized institutions that suffered intervention or were sold, but at no moment there was fear of systemic risk. Today, only 162 commercial banks exist in Brazil, of which 53 are foreign. However, the sector has a smaller number of financial groups, for although various financial entities acquired by larger groups maintained their judicial independence, they effectively incorporated into large conglomerates. After the intense process of incorporations, mergers, privatizations, and international purchases, the Brazilian banking market shows a particularly concentrated structure, with high foreign participation and a significant reduction of the public sector in this area through the privatization or liquidation of state banks. The public sector presently controls a quarter of the market. The national private banking sector accounts for about 43 percent and foreign banks are responsible for 33 percent of the national market (see Graph 3.1). The five major commercial banks – including the Bank of Brazil – control

Financial Sector

97

two-thirds of the market, in terms of employees, branches, total assets, shareholders equity, credit operations, bottom lines, and the management of third-party funds. This percentage rises to 80 percent when we consider the ten major banks. The Bank of Brazil, four private national banks, and five foreign banks were among the ten major banks. This demonstrates the importance of the international groups in the Brazilian banking industry. This also can be seen in the distribution of branches; three of the six major branch networks belong to international groups. In other words, for the first time, foreign banks are now significant in retail banking. In addition, there was a strengthening of the three major national banking groups, Bradesco, Ita´u, and Unibanco.17 This concentration process can be perverse for poorer regions, because it is there that the role of small and medium-sized regional and state banks had been more important. The roles played by the Bank of Brazil and Caixa Econˆomica Federal has become even more important. This concentration process has already been felt through the increase of the number of Brazilian municipalities that are not served by banks.18 Along with the government intervention to preserve the viability of the banking system, there also have been recent important regulatory changes in the national financial market. In 1995, the Fundo Garantidor de Cr´editos (an FDIC type of institution) was created with the objective of guaranteeing deposits in financial institutions in cases of intervention, liquidation, or bankruptcy, up to the maximum value of 20,000 Reais. Although this represents a relatively small value, it was enough to cover more than 90 percent of bank customers in 2001. In 1997 a new bank inspection office was established (Supervis˜ao Global Consolidada), which changed auditing from a mere formal procedure 17

18

Fernando Alberto Sampaio Rocha, Evoluc¸a˜ o da Concentrac¸a˜ o Banc´aria no Brasil, 1994–2000 (Notas T´ecnicas no. 11; Bras´ılia: Banco Central, 2002); Luisa Helena F. De S´a Cavalcante, O Impacto da entrada dos bancos estrangeiros na oferta de cr´edito dos bancos privados nacionais (Fortaleza: UFC/CAEN, 2002); Carlos Eduardo de Carvalho, Rog´erio Studart, and Antonio Jos´e Alves Jr., Desnacionalizac¸a˜ o do setor banc´ario e financiamento das empresas: A experiˆencia brasileira recente (Bras´ılia: IPEA, Texto para discuss˜ao no. 882, 2002). The importance and solidity of the three great public banks – the Banco do Brasil, the Caixa Econˆomica Federal, and the Banco Nacional de Desenvolvimento Econˆomico e Social, is a result of the role they played as auxiliary institutions of the federal public sector that operated through these banks and traditionally furnished them with public funds for their principal operations. In times of necessity, the federal government, as their principal owner, capitalized such banks.

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Brazil Since 1980

to a deep analysis of the bank’s risk exposure, involving asset quality, fund sources, liquidity, management quality, and so on. In 1997 the Credit Risk Center (Central de Risco de Cr´edito) was created, consolidating the system’s total loans per borrower, and this was open to financial institutions consultation with the customer’s authorization. In 1999, a significant modification in calculating the amount of reserves needed in case of credit loss was carried out, which took into account the future risk of operations instead of focusing exclusively on past default events. Each company making a loan was assigned a risk level and the bank was now required to keep a percentage of that loan as a contingent against default which was created from the moment of the granting of credit. In the past, only overdue operations required this provision. Several changes in capital demands were made associated with credit risks, exchange risk, unmatching term risks, and swap risks. This type of capital allocation, in line with the Basel Agreement, limited the leverage potential of the banks thus giving greater security to the financial system. Many fusions and incorporations of banks and financial institutions were motivated by these capital demands, practically eliminating most leveraged banks from the market. Another large transformation was the introduction of the new Brazilian payments system. The Central Bank took over the banks’ liquidation risks. When, at the end of the day, a financial institution showed insufficient reserves to liquidate its banking operations – which occurred through compensations between all operations of all banks – the Central Bank used the system’s normal liquidation process, delivering credit to financial institutions without liquidity. When the crisis was serious and an intervention or liquidation occurred, basically all the system’s loss was of the Central Bank. With the new system of payments, a positive reserve balance is demanded from banks at all times, instead of only at the end of the day. This is real-time banking liquidation, among the most modern worldwide. In spite of the efforts of the Central Bank, including incentives to bank concentration, gains to large-scale operations and opening the financial sector to international capital, Brazil still has some serious problems in the structure of its financial system. These include high spreads, incapacity to create financing mechanisms for medium- and long-term investments, and the general unwillingness of banks to make loans. The amount of loans in 2002 was only 24 percent of GDP and a significant share of these loans consisted of Foreign Loan Repass Obrigations (15 percent of the total), BNDES transfers and financings

Financial Sector

99

(23 percent), bank resources from mandatory real estate credit (6 percent), and rural credit applications (9 percent). Commercial bank credit represented less then half of total loans and only 10 percent of GDP; and in this loan tranche, there was a high concentration in short-term operations. Improvements – expected for credit conditions, facilitated by the entrance of foreign banks – have yet to occur. One also should consider the uncertainty of the Brazilian economy, which increases credit operation risks, particularly in the medium and long term. These uncertainties show up not only in credit quality but also in the constant legal and fiscal changes. This is true for the Plan Collor as well as in 1995, when compulsory deposits on term deposits and on credit operations were introduced. The loss of inflationary revenue that could have stimulated the search for credit revenues instead was compensated for by tariff charges and the results obtained with the public debt financing, a low risk and highly profitable operation. Banks, although little active in credit, have been capable of maintaining high profitability. No doubt, the high spread is a historical characteristic of the Brazilian financial market. Recent Central Bank studies show average spreads above 30 percent a year. Although the spread shows great variations by type of operation and borrower, in 1999 for example, an average total cost for borrowers of 83 percent was observed, when the basic interest rate was 21 percent. In that year, an incredible average spread of 62 percent was obtained. The study showed a breakdown of this spread: 22 percent was composed of administrative expenses of the banks, 14 percent taxes, 35 percent their defaults, and 29 percent represented the profit of the banks before the payment of taxes. Since that study, the Central Bank has tried to focus on reducing such percentages, with little success to date. Cost reduction and high profitability should occur through competition, particularly with the entrance of foreign banks and probable scale gains in the sector. There is as yet no evidence to show that these have resulted in any changes. The Central Bank tries to act in the spread originated from default. A positive aspect was the creation of the Credit Risk Center, which has improved the quality of information on corporate credit and a system for low value operations, particularly for individuals, is being implemented. Besides severe economic fluctuations, which affect the payment capacity of borrowers, another critical issue to explain the high default is the deficient legal structure and the difficulties for credit recovery. This difficulty of obtaining loan repayment increases the risk of credit operations and,

100

Brazil Since 1980

eventually, the costs of loans. Thus, the deficiencies of the legal system in part explain the elevated spread charged by the banking system.19 Despite all these long-term issues, what is impressive is that in spite of hyperinflation and severe economic recession, the Brazilian banking system and its financial institutions have survived. Without the traumas that overwhelmed other developing nations, some of which had to reconstruct their financial system, Brazil was able to structure a modern financial system with a solidity never previously achieved. 19

Eduardo Luis Lundberg, Juros e Spread Banc´ario no Brasil (Bras´ılia: Banco Central do Brasil, Outubro 1999); Pedro Fachada, Luiz Fernando Figueiredo, and Eduardo Lundeberg, Sistema Judicial e mercado de cr´edito no Brasil (Bras´ılia: Banco Central do Brasil, nota t´ecnica no. 35, 2003).

4 Agriculture

Brazilian agriculture represents perhaps the most important example of modernization in the country’s economy. In half a century, the country went from an archaic, concentrated, and low-productivity enterprise to a modern and competitive agricultural system, one that has successfully penetrated international markets. Its market participation is continually growing and today it is the world’s third largest exporter of agricultural products after the United States and the European Union.1 It also has become a leading player in international organizations, demanding a greater freedom of commerce to increase its exports, which have been limited by the agricultural protectionism of the developed countries. Brazil’s international levels of competitiveness is evident in products such as soybean, orange juice, meats, sugar, and cellulose, to name just a few of its important crops. In fact, for many of these crops, for example, coffee, sugar, orange juice, and unprocessed soybeans, it is the world’s largest exporter.2 Allied to agriculture, an industrial complex with great importance in the country’s industrial system was formed, supplying agriculture consumables and equipment for processing of these primary products. The estimate is that the agribusiness, which includes all the stages from planting to processing, represents more than 30 percent of the Brazilian GDP, accounts for more than a third of the existing jobs and about 40 percent of exports. It is a major component in Brazilian’s foreign trade and a major factor in its high commercial export surpluses. 1

2

ICONE (Instituto de Estudos do Com´ercio e Negociac¸o˜ es Internacionais, “Nota do Icone: Os Pa´ıses em desenvolvimento e os setores dinˆamicos do com´ercio mundial: falsos dilemas” (S˜ao Paulo, 25 de Junho de 2004), p. 2. Ibid.

101

102

Brazil Since 1980

Even in terms of productivity, Brazil is a world leader. It produces soybeans as efficiently as Argentina and the United States and makes sugar as economically as Australia. Some of these crops are traditional products that have been produced in Brazil since the colonial period and others are more recent acquisitions. Sugar, for instance, has been planted in Brazil since the early days of colonization, but it lost competitiveness in international markets in the nineteenth and early twentieth centuries. The move of the center of sugar production to the State of S˜ao Paulo in the mid-twentieth century, with plantations organized in highly fertile lands and with the latest advanced technology, allowed Brazil to recover its international leadership and market penetration. Along with the sugar complex, a new alcohol industry also was created, whose production supplies part of the liquid fuel demands of Brazil and is increasingly penetrating the international market as a clean source of automotive fuel. The development of its own unique sugar-producing technology has even allowed the country to become an exporter of sugar and alcohol processing equipment. Soybeans have a completely different evolution, because they are a recent product both in terms of planting and in terms of international exports. Brazil achieved this leadership position in the international market as a result of a long process of successful research, which developed plant varieties adapted to different regions of the country, including the Brazilian cerrado, an area of typical vegetation that covers a great part of central Brazil that had been previously considered unfavorable for commercial agriculture. It has now become one of the country’s main agricultural zones. By contrast, coffee, the nation’s most famous crop and until recently its main export, lost importance during this past century. It now represents little more than 2 percent of Brazilian exports, and is surpassed by other agricultural products such as soybeans, meats and sugar. Although the country is still the major world exporter of coffee, coffee has lost its old hegemony within the nation, and also not kept pace with other agricultural products in terms of productivity and quality. The modernization of agriculture took place with a still highly concentrated land structure, the inheritance of a colonial land ownership system. In contrast to most American countries, Brazil never experienced either true agrarian land reform in the twentieth century or provided free distribution of land in the nineteenth century. In Brazil, land traditionally represented power and was more of a reserve value than an actual production unit. Ownership and economic exploitation

Agriculture

103

were not usually associated. Unproductive latifundium and archaic labor relations prevailed until the middle of the last century. In the 1950s and 1960s, this poor land structure was one of the main obstacles to the country’s sustainable development, because it limited the expansion of productive forces and allowed the survival of a conservative rural elite. Land concentration, besides its socially perverse and politically conservative effects, hindered the modernization of agriculture and was incapable of providing an appropriate, stable, and low-cost supply of food for the domestic market. From the 1950s until the military coup of 1964 the solution to this problem was a proposed land reform.3 But the military governments ended the debate about land reform and instead began to stimulate the modernization of agriculture. Their aim was to create abundant food supply at low costs; liberate rural labor for urban industry; and create new international markets for agricultural production, thus using agriculture to generate the foreign currency needed for economic growth. Concentration in land ownership was maintained and the power of conservative rural elites was not challenged. Agriculture met these first objectives, but initially it lost relative importance in the economy as a result of the strong growth of the manufacturing industry and urban service sector. The rural areas lost population because of the attractiveness of urban jobs. But in the post-1980 period, agriculture modernized at a very rapid rate and this added to the rural exodus. An unexpected consequence of both this rural out-migration and agricultural modernization was

3

For the debates on the factors that influenced the evolution of Brazilian agriculture, see Jos´e Pastore e Guilherme L. Silva Dias, and Manoel C. Castro, “Condicionantes da produtividade da pesquisa agr´ıcola no Brasil,” Estudos Econˆomicos, vol. 6, no. 3 (1976), pp. 147–181; Charles Mueller and George Martine “Modernizac¸a˜ o agropecu´aria, emprego agr´ıcola e eˆ xodo rural no Brasil – a d´ecada de 1980,” Revista de Economia Pol´ıtica, vol. 17, no. 3 ( July/Sept., 1997), pp. 85–104; Rodolfo Hoffmann “Evoluc¸a˜ o da distribuic¸a˜ o da posse da terra no Brasil no per´ıodo 1960–80,” Reforma Agr´aria, vol. 12, no. 6 (Nov./Dec. 1982), pp. 17–34; Carlos Nayro Coelho. “70 anos de pol´ıtica agr´ıcola no Brasil, 1931–2001,” Revista de Pol´ıtica Agr´ıcola, vol. X, no. 3 ( july–sept. 2001); Fernando Homem de Melo, “Agricultura Brasileira. Incerteza e disponibilidade tecnol´ogica,” (Thesis of Livre Docencia, Universidad de S˜ao Paulo, 1978); Fernando Homem de Melo, “Padr˜oes de instabilidade entre culturas da agricultura brasileira,” PPE, vol. 8, no. 3 (Dec. 1979), pp. 819–844; Jos´e Roberto Mendonc¸a de Barros and D.H. Graham, “A agricultura brasileira e o problema da produc¸a˜ o de alimentos,” PPE, vol. 8, no. 3 (Dec. 1978), pp. 695–726; Affonso Celso Pastore, “A resposta da produc¸a˜ o agr´ıcola aos prec¸os no Brasil” (PhD thesis, Universidade de S˜ao Paulo, 1969); Alberto Passos Guimar˜aes. Quatro S´eculos de Latif´undio (Rio de Janeiro: Paz e Terra, 1977); and Ruy Muller Paiva. “Reflex˜oes sobre as tendˆencias da produc¸a˜ o, da produtividade e dos prec¸os do setor agr´ıcola no Brasil,” in F. S´a, ed., Agricultura subdesenvolvida (Petr´opoliz, Vozes, 1968).

104

Brazil Since 1980

a profound social and political transformation of the countryside that destroyed much of the old traditional elite, which had been based on land ownership, and this old political power structure survived only in the more backward regions of the Northeast of Brazil. Despite an impressive modernization, a dichotomy emerged in Brazilian agriculture, between a modern, competitive, capitalized agriculture and an obsolete one using outdated methods with low profitability, which absorbed an important part of the poorest segment of the population and was primarily concentrated in subsistence production. Moreover, despite modernization, a high concentration in land ownership persists, because of the survival of the unproductive latifundium in many regions and because of the large size of the most modern and competitive farms. In addition, in some areas of Brazil, as in the South and Northeast regions, extreme minifundium renders family agriculture unfeasible.

Brazilian Agriculture Modernization After the 1964 coup, the military regimes carried out transformations in several segments of the economy but tried to maintain stability in the rural areas by repressing popular protest movements, and by implementing a conservative modernization in agriculture, without changing either land ownership or rural labor relations. The new administration saw in agriculture one of the main sources of inflationary pressure because of its deficiencies in supplying the domestic market. Increasing food supply and reducing its costs were essential to contain urban salary pressures. In a less-developed country such as Brazil, with its low levels of average income and with a skewed income distribution, food was a basic element of the cost of living and, therefore, had a major impact on average salaries. Government policy in the military period was to contain wage increases and even reduce real income in an effort to both stabilize the economy and to help subsidize the expansion of the industrial sector. Military support for agricultural modernization involved several different activities. First, there was the supply of very cheap credit. The creation of the National Rural Credit System (or the SNCR, Sistema Nacional de Cr´edito Rural) in 1965 provided significant funds to agricultural producers and represented the principal government instrument used to stimulate agriculture. Along with government credit to

Agriculture

105

agriculture came guarantees of minimum price support for agricultural producers and also direct government purchases of buffer stocks of agricultural products, which were used to avoid dramatic price fluctuations for producers and consumers. Before planting, the government fixed minimum prices for the main agricultural products, particularly those destined for the domestic market. It financed the production and commercialization through the Federal Government Acquisitions Program (AGF) and through the Federal Government Loans (EGF). The first was a direct way of buying agricultural products and the second a type of loan, typically signed with an option that provided final sale to the federal government at the minimum price and was put into effect when the Minimum Price surpassed market prices. Until the 1980s, a major part of the cotton, rice, and soybean crops were financed through EGF instruments. Another important institution that the government created was the Brazilian Agriculture and Cattle Raising Research Organization (or EMBRAPA – Empresa Brasileira de Pesquisa Agropecu´aria). Founded in 1973, it provided critical basic research for Brazilian agriculture. Along with research and price supports came a complex rural credit system that was based on two basic sources of capital. The first came from the Banco do Brasil, through the so-called account movement (or Conta Movimento), which represented an automatic discount and gave this bank an effective power of emission. The other source of credit came from the commercial banks. These banks were required to apply a part of their demand deposits directly to agricultural credit. Credit subsidy came from the fixing of interest rates in nominal terms, usually below inflation rates, and increased when inflation rose. During the 1970s, the credit volume multiplied by four and reached its best year in 1979. The abundance of government credit and its negative costs to farmers provided the financing to modernize agriculture both in terms of equipment and of supplies. During the 1970s, an industrial complex also was built up within Brazil, which provided agricultural services (machines, equipment, fertilizers, and pesticides); and the demand generated by agricultural modernization represented an important element in explaining the fast industrial growth in that period. Between 1960 and 1980, the area planted in crops almost doubled, increasing from twenty-five million hectares to forty-seven million hectares, and was accompanied by greatly increased mechanization. The number of hectares per tractor was reduced from 410 hectares to just 99 hectares in the same period, a ratio that has remained

106

Brazil Since 1980

stable until today. The average consumption of fertilizers per hectare grew from 8.3 kg in 1964 to 27.8 kg in 1970 and 88 kg in 1980.4 Thus, the government provided three fundamental pro-agricultural policies: subsidized credit, minimum prices, and the purchase and regulation of buffer stocks of agriculture products. The market of agricultural products was thus strongly regulated, particularly in the domestic market, and domestic production also was protected with import tariffs and the need for import authorization, making the market practically closed to foreign agricultural products. The government was thus able both to guarantee steady income to farmers and price stability to consumers. The government further aided farmers by controlling the prices of goods they consumed and input costs to the agricultural sector. Even the products destined for the foreign market experienced strong government intervention. Besides the control of the exchange rate, a fundamental variable for exportable goods, norms were created to guide the exportations of agricultural products, in many cases through the action of important public organs, such as the of Sugar and Alcohol Institute (or Instituto do Ac¸u´ car e ´ do Alcool) and the Brazilian Coffee Institute (or Instituto Brasileiro do Caf´e).5 In the cases of sugar and alcohol, the government operated a complex system that controlled the production per mill, granted subsidies to compensate regional differences in productivity, and determined export quotas. Wheat was under another such complex system operated by the federal government, which made itself responsible for the product’s domestic and foreign purchases and controlled supplies to the mills installed in the country, also through a system of quotas. As local producers were not competitive, the government controlled imports, bought wheat at prices that reflected high domestic production costs, and sold the end product to consumers with subsidies, in order to avoid the impact such an important consumption item would have ultimately had on the basic price index.6 These support policies 4

5 6

There are good series of data on agriculture in the following Web sites: Minist´erio da Agricultura: http://www.agricultura.gov.br/; IBGE: Estat´ısticas do S´eculo XX: http://www.ibge. gov.br/; Banco Central do Brasil: http://www.bcb.gov.br/?RELRURAL; IPEADATA: Temas: Produc¸a˜ o: http://www.ipeadata.gov.br/ipeaweb.dll/ipeadata?523053171. Both of these institutions were closed in the early 1990s. On the transformations that were occurring then, see Guilherme Leite da Silva Dias and Cicely Moutinho Amaral, “Mudanc¸as estruturais na agricultura brasileira, 1980–1998,” in Renato Baumann, ed., Uma d´ecada de transic¸a˜ o (Rio de Janeiro, Campus/Cepal, 2000); Guilherme Delgado, “Expans˜ao e modernizac¸a˜ o do setor agropecu´ario no p´os-guerra: um estudo da reflex˜ao agr´aria,” Estudos Avanc¸ados/USP, vol. 15, no. 43 (Sept/Dec 2001), pp. 157–172;

Agriculture

107

stimulated the modernization of agriculture, in terms of machines, equipment, fertilizers, and pesticides, but it created distortions in the allocation of resources and discouraged the increase of productivity. In addition to the stimuli through credit and minimum compensating prices, the federal government implemented a major research program under the leadership of EMBRAPA that was critical to the ability of Brazilian agriculture to modernize. With its focus on agro business, its mission was to provide solutions for the development of agriculture by means of the generation, adaptation and transference of scientific knowledge and technologies.7 The sophisticated research of EMBRAPA is the best explanation for agricultural productivity gains that have been occurring in the last twenty years. Looking back, between 1960 and 1980, the performance of Brazilian agriculture can be considered as having been reasonably favorable, because it represented the first leap to modernity, with an increase in area and yield. The production of grains rose from twenty million tons in 1960 to fifty-two million in 1980, an exceptional increase of 5 percent a year. Although it had shown a major increase in planted area – from nineteen million hectares to thirty-eight million hectares – the increase in productivity allowed the crop output to multiply by 2.6 between 1960 and 1980, while the area sown to crops multiplied by 1.9 times (see Graph 4.1). Soybean production stands out among the new grains that were part of the agricultural modernization development. A crop whose planting was introduced at the end of the 1950s, it had already reached a production level of fifteen million tons in 1980, and was by then only outpaced by corn. Among other crops that began to be exported

7

Eliseu Alves, Dilema da pol´ıtica agr´ıcola brasileira: produtividade ou expans˜ao da a´ rea agricultavel (Bras´ılia: Embrapa, 1983); Fernando B. Homem de Melo, “Agricultura de exportac¸a˜ o e o problema da produc¸a˜ o de alimentos” (Texto para Discuss˜ao no. 30; S˜ao Paulo, FEAUSP, 1979); and Fernando B. Homem de Melo, “Composic¸a˜ o da produc¸a˜ o no processo de expans˜ao da fronteira agr´ıcola brasileira,” Revista de Economia Pol´ıtica, vol. 5, no. 1 ( jan./march 1985), pp. 86–111. Jos´e Garcia Gasques et al., “Desempenho e crescimento do agroneg´ocio no Brasil, “(Texto para discuss˜ao no. 1009; Bras´ılia: IPEA, February, 2004) and Eliseu Alves, Embrapa e a pesquisa agropecu´aria no Brasil (Bras´ılia: Embrapa, 1980). With thirty-seven research centers, and a presence in all the Brazilian states, EMBRAPA has as its objective not only applied research but also the diffusion of this research throughout Brazilian agriculture. The results obtained with the introduction of new seeds in various sectors, of increasing the productive capacity of the Cerrado region, and the increase in cattle productivity, are examples of the research results of the institution and its capacity to teach these new technologies to Brazilian farmers and ranchers.

Brazil Since 1980

140

45

120

40

100

35

80

30

60

25

40

20

20

15

0 10 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Production

Area

Graph 4.1. Grain Production in Brazil, 1961–2003 (area sown and grains produced) (wheat, cotton, peanuts, rice, beans, corn, soybeans) Source: IPEADATA: Temas: Produc¸a˜ o: Todas. S´eries de a´ rea colhida e produc¸a˜ o por produto.

in a major way in this period, the expansion of orange production is notable, because Brazil now assumed an important role in the international juice market. Sugar cane also showed strong growth, especially after pro-alcohol policy had been implemented in 1975, which was a program of substitution of gasoline with renewable fuel alcohol, a product of sugar cane production. Even a traditional crop such as wheat was transformed by the strong incentives granted by the government. With national production usually supplemented by imports, Brazilian production greatly increased both in terms of output and productivity through major government support. By the mid-1980s, national production finally supplied most of the national demand for the first time in the modern period. But other basic foodstuffs did not do as well. The production of corn and rice practically doubled in the period, but with little increase in productivity. Beans and manioc, both staple foods in the national diet, also did not increase productivity in this period, and production of both remained flat. Traditionally, most of Brazil’s population was in the rural areas, but an intense migratory process to the cities started in the middle of the last century, causing an annual 4.7 percent average increase of urban population between 1960 and 1980. In the same period, the rural population grew at modest rate of below 1 percent a year. By the

Millions of hectares

Millions of tons

108

Agriculture

109

beginning of the 1980s two-thirds of the population lived in urban areas, with the majority concentrated in large cities. This exodus of rural workers to often poor marginal urban work, although important for labor productivity in the rural area, added a major social problem for the nation.

The Crisis of the 1980s, Adjustments in Agriculture and Reforms As in all other sectors of the economy, agriculture also was affected by the crisis of the 1980s, which started with the jump in oil prices in 1979 and intensified with the Mexican debt crisis in 1982. The crisis resulted in the deterioration of state accounts, inflation accelerated, an external debt moratorium was decreed, and there was a decrease in economic activity. The need for internal and external adjustments resulted in the adoption of recessive policies, reinforced by the agreements with the International Monetary Fund (IMF), which resulted in adjustments that were to last for more than a decade. The rural credit supply, based on major public subsidies and on the use of funds derived from demand deposits, was dramatically reduced as public resources became scarce because of the need to reduce the public deficit. In 1984, the credit available for agriculture was only 37 percent of what it had been in 1979; in 1990, this fell to 22 percent of the 1979 figure (see Graph 4.2).8 Moreover, from the middle of the 1980s, rural loans were adjusted by monetary indexation, the cost of credit became positive and gradually as high as other market rates. Finally, the need to control inflation induced the government to permanently manipulate prices of domestic market products, particularly food, which was sometimes costly to producers. The minimum price policy, the government purchase of agricultural products and the controlled sale price policies in place were now aimed at the reduction of public expenditure and the control of inflation. Many of these policies had a negative impact on farmers but had little impact in controlling inflation, and the succession of recessive policies and heterodox plans in general also were ineffective in containing inflation. This rising inflation created 8

Anu´ario Estat´ıstico de Cr´edito Rural de 1999 (Bras´ılia, Banco Central do Brasil, 1999); Banco do Brasil, Diretoria de Agro-Neg´ocios, “Evoluc¸a˜ o Hist´orica do Cr´edito Rural,” Revista Pol´ıtica Agr´ıcola, vol. XII, no. 4 (out./nov./dez. 2004), pp. 10–17.

110

Brazil Since 1980

60

40

30

20

10

0 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Billiones of Reais

50

Graph 4.2. Evolution of Rural Credit, 1969–1999 (in 1999 Reais)

significant uncertainty and negatively affected agriculture, which operates with long production cycles. But there were counterpressures that would be of positive benefit to agriculture. In fact, the oil crisis, and its consequences for the country’s foreign accounts, which culminated with the 1987 moratorium, gave agriculture a new role, as the government promoted the substitution of petroleum by alcohol. Equally, the government, desperate for foreign exchange, promoted agricultural exports. Differentiated policies were created for products destined for foreign markets such as coffee, sugar, soybean, orange juice, peanuts, cocoa, cotton, and tobacco, and for those products destined for the domestic market such as rice, potato, beans, corn, manioc, tomatoes, and onions. The latter were protected against foreign competition, through tariffs and import quotas. Some of these crops, such as coffee and sugar, were still controlled through the government operated public entities such as the Sugar and Alcohol Institute and the Brazilian Coffee Institute. But even the internal market controls were soon challenged by the growing government deficit. As already noted, the wheat market had been one of the most regulated agricultural activities since 1967, when public control of its production, importation, industrialization, and

Agriculture

111

commercialization of the product was established. The maintenance of low prices for consumers also went to stimulate consumption. However, the cost of the consumer subsidy policy and the protection of incomes of producers overburdened public accounts. With the deterioration of public accounts, the pressure to abolish such subsidies grew, particularly from such international entities as the World Bank and the IMF. The importance of wheat in the basic diet and the potential political impact of moving to real prices postponed the decision of eliminating subsidies. But finally in 1987 consumer subsidies were eliminated and in 1990 a free market was implemented for all phases of the production and commercialization of wheat. Although in its protection period the productivity of Brazilian-produced wheat had increased, local production initially could not compete with foreign imports. In 1987 national production reached 6.2 million tons, meeting 90 percent of domestic consumption; in 1995 wheat output had been fallen to 1.4 million tons, and accounted for only 17 percent of the domestic market. Along with the impact on production, the withdrawal of consumer subsidies also affected domestic consumption, which remained practically stable at around six million tons per annum throughout the 1980s.9 With the oil crisis, an ambitious program known as Pro-´alcool was implemented, promoting the national production of ethyl alcohol to be used as an automotive fuel. Launched in 1975, the program was expanded in 1979, after the second oil crisis. Besides adding alcohol to all the gasoline sold in the country, the government provided incentives for the production of cars that were to be run exclusively with hydrated alcohol. Alcohol production goals were now defined, at 3 billion liters for the first phase and 7.7 billion in the second starting in 1979, and numerous fiscal incentives and government financed credit were made available to promote this program. Gasoline sold in the market contained 20 percent alcohol, and this was increased to 22 percent in 1980. The first vehicles introduced in the market that used only alcohol were merely adapted gasoline cars, but starting in the first years of the 1980s, completely new and quite efficient engines 9

Celio Alberto Cole, “A cadeia produtiva do trigo no Brasil. Contribuic¸a˜ o para gerac¸a˜ o de emprego e renda” (MA thesis, Porto Alegre, IEPE-UFRGS, 1998); J. F. Fernandes Filho, “A pol´ıtica brasileira de fomento a` produc¸a˜ o de trigo. 1930–1990,” in Anais do XXXIII Congresso Brasileiro de Economia Rural (Bras´ılia: Sober, 1995), vol. 1, pp. 443–474; Roque Silvestre Annes Tomasini and Ivo Ambrosi, “Aspectos econˆomicos da cultura do trigo,” Cadernos de Ciˆencia e Tecnologia, Bras´ılia, vol. 15, no. 2 (May-Aug. 1998), pp. 59–84.

112

Brazil Since 1980

created primarily for alcohol usage appeared. There was a policy that efficiently remunerated fuel alcohol producers and at the same time made alcohol competitive for the consumer. Although this program was expensive for the government, it was effective as the market moved almost exclusively to alcohol vehicles. By 1984, 95 percent of the cars manufactured in Brazil had alcohol engines. During the 1980s, there was much criticism of the program because of the costs involved and of the favoring of sugar cane production over other crops, especially those oriented toward the domestic market. Sugar cane for alcohol production was grown in the best soils of the country, and was a highly efficient and highly mechanized crop. A national technology of sugar cane processing was developed comparable to the best worldwide. With the subsequent decline in international oil prices, however, the program became too expensive, and alcohol could not compete with the lower fuel prices. In 1985 the program began to face a crisis, with a progressive decrease of alcohol car sales, and by the middle of the 1990s such sales disappeared. But the government still retained the requirement that regular fuel be mixed with alcohol. Today, the 25 percent alcohol mixture in gasoline sustains the program and it is now agreed that this practice has had a positive effect in reducing vehicle emissions.10 Thus, the 1980s were years of turbulence in agriculture, a consequence of the long economic crisis faced by the country. In that decade, the sector had an average growth rate of 3 percent per annum, which was above the GDP growth for the period. But it was an irregular performance, alternating positive years with zero or negative growth phases, with better performance in export crops than in basic foodstuffs produced for the national market. If we consider the country’s instability, its recessive policies, and the reductions in government fiscal incentives in the sector, particularly the loss of cheap and abundant subsidized credit, agricultural performance was better than might have been expected. The emerging of financing alternatives for the sector, involving other segments of agribusiness, represented a critical aspect 10

There exist three types of gasoline sold in Brazil today: Common, Common with Additives, and Premium. All three types, by law, must contain alcohol, from 20 to 25 percent depending on the availability of alcohol on the market. Today, the percentage of alcohol additive is 25 percent. On this program, see Fernando Homem de Melo and Eduardo Giannetti. Pro´alcool, energia e transportes (S˜ao Paulo: Fipe/Pioneira, 1981); Fernando Homem de Melo, O problema alimentar no Brasil (Rio de Janeiro: Paz e Terra, 1983); Jos´e Claudio Bittencourt Lopes, “O pro´alcool: uma avaliac¸a˜ o” (MA thesis, Vic¸osa, UFV, 1992).

Agriculture

113

in explaining the sector’s reasonable performance. Private equipment manufacturers and other suppliers to the farm market started to finance rural producers directly. There was a major financial and operational integration with the other end of the productive process, as the processing industries, wholesale and retail distribution channels – including supermarket chains – and the trading companies now replaced the government and the banks as the primary sources of credit for rural producers. The integration between agriculture production, its customers and suppliers, which started in the 1980s because of the sudden withdrawal of government supported credit in many areas, became the primary source of farm credit in the following decade, and remains today the credit system of Brazilian agribusiness. Along with this major shift in sources of credit, another crucial factor in promoting the agricultural revolution was the governmentsponsored research on agriculture and cattle raising. The activities of EMBRAPA represented one of the main factors in explaining the relative dynamism of Brazilian agriculture even during the crisis that devastated Brazil for more than fifteen years. In the last twenty years, there has been a persistent growth in productivity in all crops and the progressive expansion of the agricultural frontier especially due to the introduction of new seed varieties, which were compatible with Brazilian soil and climate conditions. In the 1980s, the exploration of the cerrado, in which several crops adapted very well to previously marginal lands, and particularly soybeans, began. The expansion of the agricultural frontier westward into virgin soils also had a positive impact, in that it allowed the utilization of new and highly productive areas. On the other hand it represented a burden to the state in terms of the need for investments in new infrastructure. To be efficiently exploited, these frontier areas needed massive investments in infrastructure and these funds were denied to the traditional areas of production. Despite progressive expansion of the agricultural frontier throughout the past twenty-five years, the itinerant character of Brazilian agriculture persists. The opening of new areas creates value in previously marginal areas, largely due to public investments that follow the expansion of agricultural borders. What can be considered the second phase of the modernization of Brazilian agriculture occurred in the 1980s, was the loss of government subsidies which finally forced the full integration of agriculture into the market. By the 1980s, Brazilian farmers reached a level of modernization and efficiency that enabled them to survive and prosper in the

114

Brazil Since 1980

market economy. It became necessary for the farming sector to make major adjustments to survive. Crops that were destined for foreign market, which still counted on government incentives in the period – including favorable exchange rates – initially showed better performance than crops destined for the internal market. Between 1980 and 1989, land productivity for export market crops increased 1.98 percent a year, compared to 1.18 percent for products destined to the domestic market. In its aggregate, agriculture showed a land productivity increase of 1.78 percent a year, a figure significantly above that obtained in the previous decade, which had been only 0.43 percent a year. The 1970s growth also had been very uneven, with domestic market oriented crops in fact having a negative evolution, and export oriented crops had seen an extraordinary grow of land productivity of 6.58 percent a year. From the middle of the 1980s, major debates began over the need or desirability of agricultural market liberalization and the reduction of government intervention to the sector. But the economic crisis of the period forced government retrenchment, whatever the specific debates, and whatever desires the government may have had, to control food prices or maintain incentives to producers. Moreover, the government also experienced strong pressures from the international organizations such as the IMF and World Bank to liberalize the national agricultural sector and open it to international competition. It also opposed all food subsidies. International agreements and loans with these entities imposed harsh conditions related to these issues. Between government budgetary crises, foreign pressures, and, finally, the maturation of the agricultural sector by the 1980s, the opening up of the rural markets began. Once started, this process was not reversed. This opening to the world market would be reinforced with the liberalization that swept the country in the 1990s under the Collor administration. Agricultural subsidies were greatly reduced. During 1987, the total subsidies granted to the sector had reached US$5.3 billion; two years later they were reduced to U$1 billion. From the total amount spent in 1987, more than $2 billion were for wheat; $1.5 billion were used in crop purchases of the Federal Government (the Aquisic¸o˜ es do Governo Federal AGF) and the creation of Buffer Stocks; the Sugar and Alcohol sector accounted for one billion dollars; subsidies to Rural Credit added another $700 million (see Graph 4.3). These values represented the effective subsidy, not the total amount of funds mobilized for those policies, which involved much

Agriculture

115

In millions of $US

2,500

2,000

1,500

1,000

500

0 1986 Wheat Rural Credit

1987 Regulating Stocks

1988 Federal Government Purchases

1989 Sugar & Alcohol

Graph 4.3. Estimates of Government Agricultural Subsidies, 1986–1989 Source: Jos´e Graziano da Silva, A nova dinˆamica da agricultura brasileira, p. 116.

higher amounts. After this date, most of these government funds were no longer available.11 Along with the end of subsidies came the equally important end of tariff protection for this industry. In 1988 a major tariff reduction was implemented and furthered in 1990 when all restrictions were removed from importations of agricultural products. The following year, the reform was completed with the establishment of a time period for tariff reduction and simplification of the tariff schedule. The average tariff would be reduced from 32 percent to 14 percent; the maximum tariff fell from 105 percent to 35 percent, and by the time the system was completely implemented, most products started to be taxed at only 10 percent. Cotton even went to a zero tariff because of the government’s desire to support the nation’s textile industry. The new tariff structure also included the fertilizers and other supplies used by agriculture. Those internally produced were protected with 10 percent tariffs on foreign products and all others could be imported at zero tariff. The machinery, equipment, and tractor industry – the least efficient sector of the new agricultural economy – was the most protected, and even this sector had its tariffs reduced to 20 percent on foreign imports. Between 1991 and 1992, the need for government licenses for the importation and exportation of agricultural products, 11

Jos´e Graziano da Silva, A nova dinˆamica da agricultura brasileira (Campinas: Unicamp-Instituto de Economia, 1996).

Brazil Since 1980

Percentage of Production

116 60 50

51 42

40

38 32.4

38 31

30

30

27

25 21

20

15.6

13

12

10

7.9

5.4

5

3

19.6

18.7

17.2

5

6.9

15

17

14.1

7

4.4

2

9.5

7 4 4

3 2.2 3.9

3 3 3.6

0

Percentage of Production

1975

1985

1987

1988

1989

1990

1.2

1991

3

1992

50 43.4

40 30

28.1

29.5

22.8

20 10 0

17.3 9.7

18.8 15.2 12

11

6 0

1.7 0.6

1975

5

4.8

1985

1987

Cotton Rice

7.9

6.6

1.5

0

3.8 0

0.2

1988

Edible Beans

0

0

1989

Corn

1.1 0 2

0

1990

0 0.4 0

1991

0

0.8 0.2 1.1 0

1992

Soybeans

Graph 4.4. (a) Government Storage Loans as Percentage of Production of Major Crops, Brazil, 1975–1992 (b) Government Stock Purchase as Percentage of Production of Major Crops, Brazil, 1975–1992 Source: World Bank, Brazil: The Management of Agriculture, Rural Development, and Natural Resources (2 vols., Washington, DC, 1994), I, p. 48.

as well as the taxes on the exportation of some products, also were eliminated. Even the sugar and alcohol sector, whose exports were regulated by a complex quota system, started to operate as free markets. The Minimum Prices Warranty Policy (PGPM) and the buffer stock operation would also be reformulated. As already noted, until the 1980s a major part of the cotton, rice, bean, corn, and soybean crops were financed through Federal Government Loans (EGF) and were acquired through the Federal Government Acquisitions Program (AGF) (see Graph 4.4). With the purchased products, the government built its buffer stocks, which it eventually made available when the need would arise to intervene in the market. But initially there were no clearly defined rules to guide such interventions. Within a few years, stocks were purchased by the government, and, given the lack of a clearly defined policy for stock sales, there was a basic uncertainty created in the market. Only in 1988, with the creation of the Stock Liquidation Price, was a clear rule defined to guide market

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interventions. A mobile price average for each product was calculated; when the market price surpassed the average by 15 percent, the government was forced to sell its stocks. In 1993, to reduce expenditures with the acquisition of products through EGF operations, and to transfer part of the obligation of the delivery of stocks to the private sector, an EGF price of liquidation also was created. In an EGF operation, when the liquidation price surpassed the market price, the producer had the right to sell his product in the market and the government paid the difference. Thus, the government now avoided having to buy crops directly or administrate these buffer stocks itself. Besides the fiscal and monetary benefits involved in the limitation of the buying of stocks, there also was the reduction of the costs of administering such stocks, which was usually implemented inefficiently. But the government was forced to make some compensation for its abandonment of agricultural support since there was a credit crunch in the rural economy as farmers were unable to honor their financial, and especially loan, commitments. After long negotiations and strong political pressure, the government renegotiated farmers’ debts in extremely favorable conditions for the producers. Domestic agricultural production, traditionally protected from free domestic or foreign competition, now felt the impact of market competition, which took place in a series of successive international crises, initiated by Mexico, followed by Asia, succeeded by Russia and completed by Brazil’s own foreign debt crisis in 1999. The government was forced to reduce the level of economic activity and maintain high interest rates. In this context, the stabilization of agricultural prices as a result of open competition played an important role in controlling potential inflation during this period. The relation between the minimum wage and the prices of food and beverages in the National Consumer Price Index (INPC) shows a favorable trend in favor of the minimum wage because of the stability of food prices. The value of the minimum wage, corrected by that price index, rose from 101 to 154 between 1994 and 2004. Another demonstration of the favorable performance of food and other components in the cost of living index can be seen in the relation between the prices of the food and beverage component in the National Consumer Price Index (INPC, or ´Indice Nacional de Prec¸os ao Consumidor), and the total variation of the INPC. Between 1994 and 2004, the food and beverage item showed an increase approximately 15 percent lower than the INPC.

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But agriculture overall did not suffer in this period, despite the stability of the prices for its output. The competition generated by the opening of the economy brought advantages for agriculture in terms of a decline in the costs of its supplies and equipment as well. This is seen in the favorable relation between the Received Price Index (IPR), which represented the evolution of the average prices received by farmers and the Paid Price Index (IPP), which represented the evolution of the average prices paid by farmers for their basic supplies. Comparing the period before and after the Plano Real, the price relation remained favorable to producers starting in 1994. During this period, before and after the Plano Real, there was a continuous improvement in Brazilian agriculture productivity. We use here the concept of total factor productivity, which represents the relation between all the agriculture and cattle raising output and the total input of consumables used in this sector. This indicator shows that between 1975 and 2002 there was an average annual productivity gain of 3.3 percent, an impressive result for a thirty-year period. The best performance phase started in 1990, when productivity rose more than 5 percent a year. For the period of 1975 to 2002, the decomposition of the indicator shows relatively similar results for labor, land, and capital productivity, with the best performance shown for land productivity at 3.8 percent a year, followed by labor productivity at 3.4 percent a year. According to an IPEA study,12 the growth of Brazilian agriculture productivity surpassed the total productivity of U.S. agriculture factors, which reached an annual average of 1.6 percent between 1990 and 1999, in contrast to the 3.3 percent a year in the Brazilian case.13 12 13

Jos´e Garcia Gasques et al., “Condicionantes da produtividade da agropecu´aria brasileira,” (Texto para Discuss˜ao no. 1017; Bras´ılia: IPEA, 2004), p. 22. For a discussion of the changes that occurred in agriculture in the 1990s, see Jos´e Garcia Gasques et al., “Desempenho e crescimento do agroneg´ocio no Brasil” (Texto para Discuss˜ao no. 1009; Bras´ıla: IPEA, 2004); Guilherme Leite da Silva Dias and Cicely Moutinho Amaral, “Mudanc¸as estruturais na agricultura brasileira, 1980–1998,” in Renato Baumann, ed., Uma d´ecada de transic¸a˜ o (Rio de Janeiro: Campus/Cepal, 2000); Gervazio Castro de Rezende, “A pol´ıtica de prec¸os m´ınimos e o desenvolvimento agr´ıcola da regi˜ao centro oeste” (Texto para Discuss˜ao no. 870; Bras´ılia: IPEA, 2002); Jos´e Garcia Gasques and Humberto Francisco Silva Spolador, “Taxas de juros de pol´ıticas de apoio interno a` agricultura” (Texto para Discuss˜ao no. 952: Bras´ılia: IPEA, 2003); Junia Cristina P.R. da Conceic¸a˜ o, “Pol´ıtica dos prec¸os m´ınimos e a pol´ıtica alimentar” (Texto para Discuss˜ao no. 993; Bras´ılia: IPEA, 2003); Jos´e Garcia Gasques and Carlos Monteiro Villa Verde, “Gastos p´ublicos na agricultura. Evoluc¸a˜ o e mudanc¸a” (Texto para Discuss˜ao no. 948; Bras´ıla: IPEA, 2003); Roberto Robrigues and Ivan Wedekin, “Uma estrat´egia para o agroneg´ocio brasileiro,” in Antonio Dias Leite and Jo˜ao Paulo do Reis Velloso. O novo governo e os desafios do desenvolvimento (Rio

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Current Structure of Brazilian Agriculture and Cattle Raising Agricultural activity represents today less than 10 percent of the Brazilian GDP, but it is a core element of a large agribusiness complex, responsible for more than 30 percent of the domestic product, and involves countless industrial and distribution sectors. Agribusiness can compete successfully in the international market because of its high crop productivity and sophisticated processing of raw materials. Brazil’s continental size and the progressive improvement in its indices of productivity places it in a leading position in Latin American and among the world’s leaders in agriculture. In the 2003–2004 harvest, Brazilian production of grains reached 120 million tons, with an annual growth in production of about 5.7 percent in the period 1991 to 2004, and a very impressive 9.4 percent in the most recent 2000-to2004 phase. To achieve such production, forty-seven million hectares of land were used, of which the biggest portion (45 percent) was occupied by soybean, followed by corn (27 percent) and rice (8 percent). Soybeans yielded fifty million tons. In area and in production, soybeans surpassed corn as the primary grain produced in the country. In addition to grains, there is a very significant planting of other crops such as oranges, coffee, and, above all, of sugar cane, whose production reached 352 million tons and occupies more than five million hectares. The value of sugar cane production is only surpassed by soybeans and it surpasses products such as coffee, oranges, and corn. The export dynamism of Brazil can be seen in relation to its participation in the world market in 2003. For example, the country ranked first in coffee; orange juice, sugar, and soybean exports accounted respectively for 29 percent of the total world market in sugar, coffee and poultry exports; 38 percent of soybeans; and an extraordinary 82 percent of orange juice.14 There also has been some significant change in crop output in the past decade. Traditionally, Brazil has not offered ideal conditions for wheat production, but its consumption and production were

14

de Janeiro, F´orum Nacional, 2002, pp. 549–570); Jos´e Eli da Veiga, “O Brasil rural ainda n˜ao encontrou seu eixo de desenvolvimento,” Estudos Avanc¸ados/USP, no. 43 (Sept./Dec. 2001); and Jos´e Graziano da Silva, “Velhos e novos mitos do rural brasileiro,” Estudos Avanc¸ados/USP, no. 43 (Sept./Dec. 2001). Instituto de Estudos do Com´ercio e Negociac¸o˜ e Internacionais: http://www.iconebrasil. org.br/EmCimadosFatos/UNCTAD20x%20ICONE.pdf.

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stimulated by major producer and consumer subsidies granted by the government in the 1980s. When the subsidies were eliminated and market competition was allowed, there was an abrupt drop in domestic production, which at that point could not compete with international producers. But new government research allowed significant productivity to occur in national wheat production, especially after the strong currency devaluation of 1999. Between the harvests of 2001– 2002 and 2002–2003, output of domestically produced wheat doubled and reached a yield of approximately six million tons, returning to the levels of production of the mid-1980s – or almost six times the low output reached in 1995. Production is concentrated in the states of Paran´a and Rio Grande do Sul, which account for approximately 90 percent of domestic production. Productivity shows a growing positive trend, with levels comparable to Argentine output in some regions, where average productivity stabilized around 2,500 kg/ha. In the last two Brazilian harvests, an average productivity of 2,300 kg/ha was obtained, a positive result for a product whose planting had been practically abandoned one decade before. Above all, soybean production and productivity have been growing systematically since the 1980s, especially after EMBRAPA research enabled soybean production to be established in the cerrado region, opening up a new and previously unexplored region to production. The crop subsequently expanded to other areas of the Brazilian territory, especially in recently occupied lands in the West, where productivity is usually higher because of virgin soils, and also in traditional areas such as Paran´a. Half of the 2003/2004 crop yield, estimated at fifty million tons, is grown in the two states of Mato Grosso and Paran´a. S˜ao Paulo, the state with the largest agricultural production in Brazil, accounts for only 4 percent of the crop. Productivity shows important variations among producers and regions; if we consider it in terms of states, Mato Grosso, a region of recent occupation and a major domestic producer, recently achieved an average productivity of 2,915 kg/ha; whereas Paran´a, a region of old occupation and the second largest producer, has an average of 2,550 kg/ha. Sugar cane, a traditional export crop since the colonial period, is still one of Brazil’s most important agricultural products, and it occupies some of the most productive lands. Of the five million hectares devoted to cane production, 60 percent is produced in the Southeast and 22 percent in the Northeast, with the Southeast accounting for almost 70 percent of the production due to its higher productivity. The State

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of S˜ao Paulo is the largest national sugar cane producer of its two main products, sugar and alcohol. Brazil is the world’s largest sugar cane producer followed by Australia and India. There are more than 300 sugar mills, of which 128 are in the State of S˜ao Paulo. Brazil has developed the full sugar cane agricultural and industrial processing cycle and has the world’s highest productivity for this crop. Although the country is the world’s largest coffee producer with a 28 percent participation in the international market and provides 43 percent of the entire world’s soluble coffee, the product has lost importance in the Brazilian economy and in its total of exports. It is surpassed by several products in terms of total production and value, such as sugar, soybeans, and corn; as well as within national exports where soybeans, meats and sugar surpass coffee in terms of relative importance. Cocoa was another traditional product in Brazilian exports, but the crop was devastated by an invasion of fungus (Pernicious Crinipellis) after 1989, a disease that affected all Latin American producers. Production was concentrated in the southern part of the state of Bahia and it is estimated that two hundred thousand people lost their jobs and more than two million were indirectly affected by the plague. In 1990, Brazilian cocoa and its derivates represented 11 percent of world exports; in 2000, they were down to just 5 percent of world exports, and made up just 0.2 percent of the value of Brazilian exports in that year. Another traditional crop that has been grown in Brazil since the colonial period are oranges, which recently have become one of Brazil’s most important export crops. Oranges, exported in the form of juice, has made rapid gains in the past few decades in the international market, and Brazil is today the major world exporter of orange juice, with an exceptional participation of 81 percent in world transactions. S˜ao Paulo is the great production center, and, together with sugar cane, oranges dominate that state’s agriculture. Tobacco also has become an important item in Brazilian exports. The south of the country is one of the few regions in the world that produces the blond Virginia type of tobacco, used in the production of cigarettes. Although tobacco suffers increasing world restrictions on consumption, the recent decline of tobacco production in Zimbabwe, another major world producer, has maintained the sector’s attractiveness. Different from other export-oriented plantings, tobacco is produced primarily in small family farms, with high technology, and its production is concentrated in delimited areas in the states of Paran´a, Santa Catarina, and Rio Grande do Sul, with these three states

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accounting for more than 90 percent of Brazilian output. In 2002, production reached 670 thousand tons and involved approximately 160 thousand small producers, on average farms of 20 hectares, of which tobacco was planted on only 2 hectares, the rest being devoted to mixed crops. Brazil is the world’s second largest tobacco producer, only surpassed by China, and leads the international market, with exports of some five hundred thousand tons. Cotton is also a traditional product of Brazilian agriculture, and supplies both the domestic and international markets. Although cultivated in various areas of the country, it is one of the northeast’s main economic activities, in which 2.3 million people were engaged in the planting of 3.5 million hectares of cotton. But there has been a recent crisis in national production. The bicudo, a pest that appeared in the beginning of the 1980s, practically decimated the production in some parts of the country, and the overvalued currency of the 1990s temporarily made cotton exports less competitive on the international market. In 1989, from a total production of about two million tons, Brazil exported 174 thousand tons of cotton. Five years later, production was reduced and the country had become an importer. To bypass the crisis, new varieties were planted and an intense campaign against the bicudo succeeded in eliminating this insect. Production recovered, new areas were opened to production, and new technology led to higher productivity, allowing not only Brazilian producers to supply the local market but also to recover exports. In 2003–2004, production reached two million tons, the fifth highest output in the world, enabling Brazil to export 450 thousand tons and placing Brazil once again among the world’s largest exporters. Corn, rice, beans, and manioc make up the traditional Brazilian diet, to which wheat was eventually added. The planting of these traditional crops is found throughout the country; and even here – at a pace slower than export crops – there has been a major improvement in output per land permitting a reduction in costs and ultimately of food prices to Brazilian consumers. Corn is the most important of these products, because it is used for both human consumption and is an essential element in animal feed. Brazil, with a production of about forty-two million tons year, is the world’s third largest producer, although far below corn output obtained in the United States. In recent years, there has been a major increase in the average productivity of the corn produced in Brazil, but as its planting occurs in every type of property, both in modern market oriented farms and in family farms

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using traditional and nonproductive methods, the average is a poor representation of the real situation of its production. Even when we compare state averages, which hide large variations, output ranges from 5,500 kg/ha in Mato Grosso and Paran´a, to just 1,100 kg/ha in the Northeast. Brazilian production traditionally was mostly absorbed by domestic consumption, but in the past few years exports have become significant. Also, corn is the fundamental product in animal feeds, and animals today are one of the main items in the country’s exports. Rice is another fundamental ingredient in the Brazilian diet. With a production of twelve million tons, it has remained steady for some years, with Brazilian output placing it in seventh position among the world’s major producers. Rice production successfully meets domestic consumption, and occasionally some is exported. Rio Grande do Sul, accounts for more than half of the country’s rice production, which is cultivated in highly productive lowlands, achieving six tons per hectare, twice the average productivity of the other areas of the country. Beans are another fundamental product in the Brazilian diet. Although there is an ongoing reduction in the national per capita consumption of beans, an important part of the Brazilian population consumes a daily diet of rice and beans, on occasion complemented by animal protein. Unlike rice, which is a relatively homogeneous product with an extensive international market that allows adjusting to fluctuations in domestic supply, there are difficulties in complementing the domestic supply of beans through imports. There are several types of beans that meet different regional habits and the same occurs in other producing countries. Bean production is very sensitive to climate variations. Brazil produces three bean crops a year, achieving a total production of approximately three million tons, which in general is sufficient to service the domestic market. The planting of beans traditionally occur in small farms using traditional methods, with low technology and reduced productivity; and a significant part of the harvest is consumed in the producing units themselves. Small fluctuations in each one of the crops can cause intense fluctuation in prices. In recent years, the share of technology-based production has increased, usually using irrigated areas. The gradual growth of the high technology areas splits the market into two types of producers: the traditional ones, usually family farms using low-productivity techniques, and the modern agriculturalists, with high productivity. Although there exist big productivity variations within each state, the simple comparison of the average productivity obtained in S˜ao Paulo, 1,820 kg/hec, and

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Paran´a 1,340 kg/hec, with the Northeast’s low average of 347 kg/ha, gives an idea of the disparity in productive levels. One of the country’s native crops and a fundamental nutrition base of the diet in the North and Northeastern regions since the first centuries of colonization is manioc. With production of approximately twenty-two million tons per annum, output has been stable for the last fifteen years, and the country is the world’s second largest producer and accounts for 13 percent of world production. Manioc is used in both human consumption and as animal feed and is even used in some industrial processes. But its production remains extremely rudimentary and represents an important source of income and nutrition for the poorest portion of the North and Northeastern population that consumes the product in the form of flour. Manioc plantings are spread throughout the country, but Par´a, Bahia, and Paran´a are the main producers, totaling together more than half of the production. North and Northeastern productivity is around 10 ton/ha, compared to approximately 18 ton/ha in other areas of the country, with these more efficient producers sending their output mostly to industrial processors. Manioc and beans, typical of the diet of low-income people, are usually replaced by other products when there is an increase in the individual family income, which may explain why there has been relatively little change in the volume of consumption and productivity in the planting of these two crops in the past thirty-five years. A traditional area of rural activity that has seen an explosive growth in the post-1980 period has been ranching and the raising of pigs and chickens. The breeding of cattle and swine was a traditional activity in the country from the beginnings of colonization. Cattle ranching was an extensive industry and swine breeding was quite rudimentary, based on poorly bred animals with low nutritional yield. In the last twenty years, a general transformation in all segments of cattle raising occurred, starting with the commercial production of chickens, later in swine breeding, and, finally, in the breeding of cattle. This increasing sophistication and productivity has allowed the industry to serve the domestic market with better quality and lower-cost products and to penetrate the international markets strongly. Today, Brazil is the world’s largest beef exporter, second in poultry, and fifth in pork exports. This is the result of intensive application of both technology and the sanitary certification of the exported products. The tradition of grass feeding, without use of animal components, represents a positive characteristic of the meat sector in Brazil, avoiding questions regarding

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diverse diseases that have affected the exports of countries relying on animal feeds. A continental country, with immense areas of pastures (an estimated 177 million hectares according to IBGE), the cattle industry had been primarily based on extensive type ranching until quite recently. But the increase in the last years in the value of lands in areas more densely occupied and with better communications and infrastructure discourages such traditional extensive cattle raising methods in these areas. The rising costs of land and the increasing demands of the internal and international markets have stimulated the modernization of beef cattle ranching. As with other crops, cattle ranching continues to be itinerant and still is expanding into the agricultural frontiers. In the 1980s, the areas undergoing occupation were the cerrados; in the following decade, cattle ranching reached areas of the Amazon region such as Acre, Rondˆonia, Mato Grosso, Par´a, Maranh˜ao, and Tocantins. Unfortunately, a significant part of the occupation of the Amazon frontier took place with unsuitable methods, with no environmental sustainability, and provoked environmental degradation. But outside of this extensive frontier ranching, the bulk of the industry has been modernized, from breeding in which Brazil has developed a major capacity to use genetic mapping, to the latest sanitary controls, and the result has been a massive increase in meat exports to the international market. Brazil has come to occupy a leading position in the international poultry market. Unlike the cattle industry, with its sectors of less efficient producers, modern commercial production prevails in the poultry sector, and it is highly technology intensive and competitive. Brazilian production also benefits from the domestic abundance of the main feed components, such as corn and soybeans. Integration is the usual form of production. In this system, thousands of small family producers are directly integrated to a great meat processing industrial complex. They are suppliers of poultry ready for slaughter, which acquire technical assistance, consumables, including day-old chicks from the integrating industrial complex. Producers are “partners” in the business. Poultry production counts on the most sophisticated current technology available, the same as used by other producing countries, including genetic development. Swine breeding is another highly technical segment of the meat agribusiness. Its structure is also based on the integration between family producers and an industrial complex. The small producer usually limits his expansion according to the balance between his own corn production and the

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swine feed demand. The producer controls the whole breeding process, including the reproduction phase, and sells the animal ready for slaughter, and buys his basic consumables from the integrator. Brazil’s recent performance in the livestock industry shows a clear trend toward the modernization of most of the productive processes, including both products destined for the domestic market as well as for those going into exports. But some domestic market production is still quite traditional and, thus, there are important regional differences in productivity in this sector, as we saw in corn and bean production. In the export-oriented ranches, the general characteristic is the use of modern methods, but this does not avoid the existence of big productivity differentials between regions and even among producers of the same regions. In the production of meats, high technology prevails in the poultry segment; it is less outstanding in the breeding of swine; and in the production of beef cattle, there is a great gap between intensive and extensive production, the latter being still important in Brazilian cattle raising. The production of paper and cellulose today represents an important sector of agribusiness in Brazil, which is gradually gaining importance on the international market. The great transformation of Brazilian production came through the introduction of the short fiber in the market, which was processed from the eucalyptus tree. The development of varieties of eucalyptus adapted to the conditions of the country and able to produce cellulose of excellent quality represented a milestone in the production of paper and cellulose in the country and permitted Brazil to place its products in the international market. The comparative advantage of Brazil is in the very rapid growing season for the trees, which mature in half the time of countries that compete with Brazil in this market. But this industry requires large investments with long maturation times. Thus, there has been a process of mergers and acquisitions of national companies so as to compete on the international market. The great difficulty for the national companies is the very high cost of capital in the local market, which reduces their world competitiveness. Also, Brasil is one of the lowest consumers of paper per capital for a paper and cellulose producing country, using just 40 kg per person, as against 200 kg per person consumed in the United States. Its educational backwardness and low per capita income explain this low paper consumption. On the other hand, the country has gained a significant role in international markets. Today it is the world’s seventh larger producer of cellulose and accounts for 4 percent

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of world production, far behind the United States and Canada, but it is first in the world in the production of short fiber cellulose, and is the leader in the market of cellulose produced by eucalyptus trees.15 Another general characteristic of Brazilian agriculture is the persistence of its mobility and the opening of new frontiers, which systematically provide new and initially highly productive lands, but demand heavy public investments in infrastructure. By contrast, good-quality lands with available infrastructure are abandoned or underutilized. Many of these are used as grazing areas for extensive cattle production. However, today Brazil is undoubtedly one of the few countries that still have virgin lands and expanding frontiers, and this should allow the increase of its relative position in the international agricultural and livestock markets. There is an interesting IPEA study analyzing the potential growth in the production of grains, based on the expansion of planted areas and productivity. The utilized area could go from the current forty-two million hectares to sixty-five million by incorporating lands on the agricultural frontier and by replacing grazing areas with grain production were appropriate. With regard to productivity, there could be an increase in the overall average of the main products at levels compatible with the technology used today in Brazil among more technology-based producers. In sum, grain production could grow extraordinarily by just utilizing the agricultural lands of good quality that exist on the agricultural frontier of the country, and by expanding the universe of farmers who adopted the modern technology already available in the Brazilian market. A new and now fundamental part of agriculture is, of course, the industrial sector, which supplies the machinery and inputs used by all branches of the industry as well as the entirely new wholesale and retail distribution network, which has arisen to service the domestic and international markets for agricultural products. In the past twenty years, Brazil’s successful agriculture segments – such as the sugar and alcohol complex, orange juice production, the complex of soybean and derivates, and the poultry and meat industries – can only be understood in an integrated analysis of the activity’s production and financing, taking into account all the elements of the production chain. Agribusiness represents approximately a third of the Brazilian GDP, and 15

Jos´e Mauro Metrau Carneiro da Cunha, A d´ecada de noventa. Mercado de Celulose (Rio de Janeiro: BNDES, 2001), and Antonio Carlos V. Valenc¸a, Papel e Celulose: Com´ercio Exterior (Rio de Janeiro: BNDES, Area de Operac¸o˜ es Industriais, 2002).

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plays a fundamental role in the composition of Brazil’s foreign trade. In 2003, agribusiness produced 40 percent of the country’s total exports, and the sector’s foreign trade balance (agribusiness exportations minus importation of consumable and equipment) surpassed the trade balance surplus of the nation, being, therefore, directly responsible for the recent excellent performance of Brazil’s trade balance. The success of Brazil’s ability finally to supply abundant and cheap foodstuffs for the internal market is a result of the persistent growth of agricultural productivity and to the process of integration between the producers and sophisticated food distribution networks that were formed in the past decade, the result in turn of an intense process of consolidation in this sector through mergers and acquisitions as well as the entrance of large international companies into this sector. This integration with these distribution networks led to better quality standardized products with competitive costs. This permitted rural producers to offer the consumers ever better products at continually falling prices, as these food supply groups operate under intense competition and low distribution costs. These food supply groups have recently fortified their networks and converted them into national distribution systems. Supermarkets operate more than seventy thousand self service units and employ more than seven hundred thousand workers. There is also a high level of concentration among these distribution groups, and just five major groups among the five hundred largest groups that operate in this area own a fourth of the markets and are responsible for more than half of the food sales, of sales space, of checkouts, and of employees. Of these five major groups, the leader is a traditional national company, but the others are controlled by large multinational corporations. The linking of producers with these distributors who work in the domestic market as well as the international trading companies has enabled the distributors to provide important financial support to the agricultural producers after the abrupt fall of government credit. The vertical integration of agribusiness has been fundamental in the strengthening of agriculture and has provided farmers with abundant and cheap credit.16 In the last few years, the issue of agrarian reform has reemerged, mainly for its distributive role. The increasing value of rural lands 16

Elizabeth M.M.Q. Farina e Rubens Nunes, “A evoluc¸a˜ o do sistema agroalimentar no Brasil e a reduc¸a˜ o de prec¸os para o consumidor: os efeitos da atuac¸a˜ o dos grandes compradores” (Texto para Discuss˜ao no. 970; Bras´ılia: IPEA, 2003).

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and the introduction of modern agricultural methods has made traditional family agriculture, with its low technological level, unfeasible. When the industrialization process lost its dynamism and urbanization reached its limits, the rural exodus became a serious social problem. And the theme of agrarian reform came back, now led by a new and important political entity: the organized movement of landless workers, which demands agrarian reform, seeking the division of unproductive latifundium and a land distribution to landless workers. The movement counted on a relative political support of the urban middle class, but it became very radical in its political practice. Although its radicalism has forced some specific government efforts at land confiscation, the movement has recently lost much of its urban political base, including its allies in the most progressive sectors. Under this pressure, however, an accelerated reform is taking place, but with few results, because the new settlements are not economically sustainable. There is a lack of financial and technological resources to sustain these new communities because they compete with modern commercial agriculture. Moreover, given the dynamics of competitive agriculture, even if the agrarian reform was carried out in an accelerated manner, it would not compensate for the yearly disappearance of small farmers, who sell their properties and leave the land or become new “landless workers.” There is an ambitious family agricultural support program in course, which perhaps will be able to contain this perverse vicious circle.17 Agriculture represents one of the parts of the Brazilian economy that has undergone the most transformation in the past forty years. Taking off from a distorted agricultural structure in which the unproductive latifundia estates predominated along with large areas of inefficient minifundia units, it has became a modern part of the national economy 17

There is an intense debate on this theme, and it is one of the most politicized such debates in the country. See Francisco Graziano, Qual reforma agr´aria? (S˜ao Paulo, Gerac¸a˜ o Editorial, 1996); Jos´e de Souza Martins, Reforma Agr´aria. O dialogo Imposs´ıvel. (S˜ao Paulo: EDUSP, 2000); and a series of articles published in a volume of the Ministry of Development, which include Jos´e Eli da Veiga, “Diretrizes para uma nova politica agr´aria,” in Reforma Agr´aria e Desenvolvimento Sustent´avel (Bras´ılia: Minist´erio do Desenvolvimento Agr´ario/NEAD, 2000), pp. 19–36; Jos´e Garcia Gasques and Carlos Monteiro Villa Verde, “A sustentabilidade financeira da reforma agr´aria no Brasil,” in ibid., pp. 111–126; Maria Beatriz de Albuquerque David, “Demandas por Pol´ıticas de Desenvolvimento Rural no Brasil,” ibid., pp. 67– 84); Afranio Garcia e Moacir Palmeira, “Transformac¸a˜ o Agr´aria,” in Ignacy Sachs, Jorge Wilheim, and Paulo S´ergio Pinheiro, eds., Brasil. Um s´eculo de transformac¸o˜es (S˜ao Paulo: Cia das Letras, 2001), pp. 38–77.

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and a fundamental engine for growth. Although these two types of units persist in the rural area, they no longer predominate and are even less evident in the dominant areas of commercial production. Brazilian agriculture today produces far more than it did forty years ago with far fewer workers and, overall, the rural area has seen a massive exodus of population in this period. So profound have been the transformations that Brazilian agriculture is today more than competitive with the world’s most advanced producers in a whole range of products. The elevated cost of traditional foodstuffs and the crises of scarcity that put pressure on prices and thus required permanent government intervention to avoid its impact on living costs are things of the past. The tremendous government role in agriculture, through minimum prices, research, regulating of stocks, provision of public credit, and subsidized inputs, along with control over foreign commerce, affected almost all sectors from wheat to sugar and coffee, and was fundamental in initially modernizing this sector. But today all this has been replaced by a free market, one open to and competitive on the international scene. This powerful government support in the 1970s allowed for a gradual transformation of agriculture in the country, which at the same time integrated itself into the industrial sphere through a process of consolidation. Thus, agriculture and its industrial allies formed an ever more modern agribusiness sector, which allowed it to survive and prosper even with the opening of the economy in the 1990s. By the first decade of the twenty-first century, Brazilian agriculture continued to integrate ample new sectors into this increasingly complex agribusiness, which includes not just machines and equipment but also very modern processes of sales and distribution both in Brazil and abroad. Today, modern networks for food distribution exist throughout the country, with both a high level of efficiency and low costs. Both in the national and international markets there has been a modernization in the production and sale of agricultural products, so profound that Brazil today represents one of the world’s most important agricultural nations and one of its most important granaries, a situation far removed from the largely inefficient and traditional agriculture of the mid-twentieth century. Just as in other advanced agricultural producers of the world, Brazil faces a major debate over the introduction of genetically modified seeds. This is a debate that involves agricultural producers, ecologists, research centers, and the multinationals of this sector that own the patents, and is a fierce debate that has still not been fully resolved.

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The great problems to resolve in rural Brazil no longer involve just agricultural production, but are those related to interethnic relations, ecology, and the social structure. Brazil is home to some 345,000 American Indians.18 These reservation Indians represent about 0.02 percent of the national population and are grouped in 506 recognized reservations, only half of which have been properly demarcated and surveyed, and they occupy something like 14 percent of the territory of the country. The size of these reservations is estimated to be greater than the combined land size of England and France. The reservation Indians are grouped into some 206 different peoples, representing something like 14 major language groups and 10 isolates. These Indian nations typically consist of societies of less than one thousand persons, although a few have up to twenty thousand to thirty thousand members, and they are to be found in almost every state of Brazil, although something like 60 percent are found in the Amazonian region. It is estimated that there are another fifty or so groups that have still not been contacted.19 Although the government has committed itself to defend these Indian societies since the 1930s, and specifically legitimated their lands in the Constitution of 1988, there is little question that these Indians have experienced every type of exploitation, as the agricultural frontier has progressively moved into the interior of the country. Exploited in the rubber boom of the pre-1914 period, devastated by the transAmazonian road construction projects of the military era, and facing invasions by cattle ranches and gold miners on a constant basis, the national Indian agency FUNAI (Fundac¸a˜ o Nacional do ´Indio) has barely been able to defend the Indian communities.20 But greater 18

19

20

There is some question about the total size of the population. The official government agency dealing in Indian affairs, FUNAI, estimates that there are another 100,000 to 190,000 Indians living outside the reservations (http://www.funai.gov.br/). But the national statistical institute in the census of 2000 lists some 734,000 Amerindians, of whom the largest concentration (some 16 percent) is found in the state of Amazonas. This was a self-designation in the census, which is complicated even further by the fact that the term pardo in the northeastern states is often used for Indians, and not for blacks. For a good contemporary survey of the situation of the Brazilian native Indian population and a guide to other sources, see M´ercio P. Gomes, The Indians and Brazil (Gainesville: University of Florida Press, 2000). Recent information is provided in a much-cited encyclopedia with periodic publication called Povos ind´ıgenas do Brasil, 1996–2000 (S˜ao Paulo: Instituto Socioambiental, 2000), edited by Carlos Alberto Ricardo. The standard history of these peoples is found in Manuela Carneiro da Cunha, ed., Hist´oria dos ´ındios no Brasil (S˜ao Paulo, Companhia das Letras, 1992). For a contemporary review of government Indian policies, see Alada Rita Ramos, Indigenism and ethnic politics in

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national attention to this issue in the twentieth century, increasing protective legislation, and, more importantly effective delivery of medical services and a serious commitment to the maintenance of Indian societies has finally stopped the decline of the Indian population and led to the slow but steady positive growth of their populations from census to census. This clearly does not mean that constant land conflict does not go on today; far from it, even in territories that have been completely demarcated and surveyed. Moreover, there is a constant debate about the willingness of each national government to continue with the surveying and demarcation of the rest of the officially recognized reservation areas. But the Indian nations have become more able to articulate their demands, and there are increasingly a large number of private groups that have emerged to defend the Indians. That there is an ongoing and conflictive relationship between Indian and non-Indian society, even under left-wing governments, is obvious, especially given the often lawless nature of the frontiers throughout Brazil. But from the 1930s to today, the official political line of recognizing the legitimacy of these societies has been progressively an accepted position and today there is no legal or political challenge to the legitimacy of these societies. Along with the Indian question, the expansion of the frontier also has involved the question of the ecological deterioration of the Amazonian rain forest and the Atlantic coastal forests (known as the Mata Atlˆantica), which cover 2.5 million square kilometers and extends through practically the entire coastal region of Brazil. Brazil is also home to the Pantanal, which is the world’s largest continental wetland, covering an area of 210,000 square kilometres, mostly in the states of Mato Grosso and Mato Grosso do Sul. Brazil, like all developing countries, initially had little interest in preserving these natural resources, which to many Brazilians seemed limitless. Only slowly, as agriculture was modernized, has modern preservation techniques of farming become the norm, and equally slowly a modern ecological preservation movement has grown as its forests, rivers, and beaches have become ever more polluted. Given the importance of Brazilian rain forests for world ecological conditions, there has been a major world interest expressed in recent years over Brazilian development and its Brazil (Madison: University of Wisconsin Press, 1998) and, for an historical survey, see Leandro Mendez Rocha, A pol´ıtica indigenista no Brasil, 1930–1967 (Goiania: Universidad Federal de Goi´as, 2003).

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impact on natural resources, which in turn has sparked an important conservation movement in Brazil and even a special Environmental ministry and a Green party. Although there is now a national concern with environment as strong in many ways as in the advanced nations of the world, Brazil still faces fundamental problems. To begin with, there are serious problems of control over indiscriminate development, which leads to pollution, deforestation, and a loss of soil quality, water resources, biodiversity decline and ultimately influences climate change. The massive move of the frontier west and north over the past century has had a dramatic role in promoting the progressive deforestation of Brazil, which of course has been ongoing since Portuguese colonization.21 However self-conscious Brazilians are of their environmental problems, change has been slow because of a weak policing system and an absence of fundamental resources. In many areas there is a lack of basic sanitation, or the most primitive kind, which can only lead to further pollution. Distorted tax systems promote deforestation and a general lawlessness in the forests of Brazil have allowed illegal miners and loggers to destroy vast territories and pollute enormous river resources. Nor is this simply a problem of the poor, as all classes are prone to exploit resources in an uncontrolled manner. Each ecosystem has been under constant stress as Brazil has developed dramatically in the second half of the twentieth century. The numbers are quite dramatic. At the height of the disforestation from the 1970s through the 1980s, the government has estimated that twenty-one thousand square kilometers of Amazonian rain forest was destroyed per year. This rate declined considerably in the 1990s, but in the first decade of the new century it increased steadily, reaching almost twenty-four thousand square kilometers (or roughly ten thousand square miles) of destruction in the year 2002–2003, and this increased again to an estimated twenty-six thousand square kilometers in 2003–2004.22 Along with the destruction of forests, is a massive loss of animal and botanical species, many of which were unique to Brazil. A massive effort of world governments, international and nongovernmental agencies have proposed a host of alternative exploitation 21 22

Shawn Miller, Fruitless Trees: Portuguese Conservation and Brazil’s Colonial Timber (Stanford, CA: Stanford University Press, 2000). These are official figures from PRODES, found at http://www.obt.inpe.br/prodes/ prodes 1988 2003.htm.

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methods of sustainable exploitation, but as yet this is only a minor movement and has not succeeded in becoming generalized throughout the region. Other regions also have suffered. Although the Pantanal has been only moderately developed because of its annual flooding and its recent growth as a zone for ecotourism (as it contains one of the greatest concentrations of fauna in the New World),23 its sandy soils are particularly prone not only to natural erosion but also erosion due to poor soil management practices, and the often indiscriminate use of agricultural chemicals. In the Atlantic coastal forests, indiscriminate development has led to wide stretches being destroyed and soil erosion has become a fundamental problem. Also, given the widespread lack of sewage treatment, most of the region’s rivers and many of its prime Atlantic beaches are polluted. It has been estimated by Brazilian environmental groups that only half the garbage produced is formally collected and that just 36 percent of this collected garbage is treated in some form before being deposited in rivers or land fills. Guanabara Bay, on which sits the city of Rio de Janeiro, for example, receives a daily input of five hundred tons of moderately treated sewage, fifty tons of nitrates and heavy metals from local industries, and three thousand tons of solid residues such as plastics and tins. In the Bahia of Todos os Santos off the city of Salvador, tons of industrial residues, half of them toxic, are deposited each year. Everywhere in Brazilian rivers and bays, mercury is a major problem.24 Added to all these problems, modern agricultural has brought a tremendous use of modern chemicals, which bleed into the water systems of Brazil. There also are other problems related to land use. Despite the undoubted revolution and modernization of agriculture with a consequent massive decline in rural populations, there also still exists serious conflicts between the landless and the large landowners, which also includes small farmers whose continually subdivided properties no longer supply them with a livelihood. This conflict creates uncertainty in the rural areas, and has provoked strong reactions from the most backward of the unproductive latifundia owners. The recent 23

24

The World Wildlife Fund estimates that the Pantanal has 190 different species of mammals, 50 of reptiles, 270 varieties of fish, and 658 bird species. See http://www.panda. org/about wwf/where we work/latin america and caribbean/where/brazil/pantanal/area/ species/index.cfm. See //www.ambientebrasil.com.br/composer.php3?base=./agua/doce/index.html& conteudo=./agua/doce/artigos/poluicao agua.html

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victory of the PT, which supported the landless worker movement (the MST or Movimento dos Trabalhadores Rurais sem Terra), did not resolve this problem, which still remains explosive. Moreover, the recent settlement of workers in seized properties has not resolved the problem, as the majority of these cases have left the newly landed with few resources to compete in the market, either in commercial or even traditional food crops. This social impasse has important political and socioeconomic aspects, but it probably will have little impact on the consolidation and strengthening of commercial agriculture in Brazil.

5 Industry and Mining

Industry and mining were among the sectors most influenced by the opening of the Brazilian economy that occurred after 1990. The dismantling of tariff protection had begun with the Collor regime and was further extended during the government of Fernando Henrique Cardoso, and was accompanied by the privatization of the majority of state industrial enterprises, including that of one of the greatest mining companies in the world. This combination of policies occurred in a very short period of time. It profoundly affected the industrial sector and provoked an intense modernization and denationalization of a very significant part of the industrial base, which became integrated into the productive processes of the great multinational corporations. Productivity undoubtedly grew, but at the cost of industrial employment. The export of industrial products expanded, but so did the ratio of imported goods used in the manufacturing sector. The size and sophistication of the industrial base allowed it to survive the dual shock of open competition and privatization, in contrast to the industrial decline that occurred in several Latin American countries.

Antecedents The beginnings of Brazilian industrialization can be found in the second quarter of the twentieth century. Essentially an agrarian economy until the crisis of the 1930s, the country entered the world market as a primary coffee producer. The dominant economic liberalism of the period fortified the raw materials exporters, and the central power of the state was controlled by groups related to the coffee economy and international commerce. In the individual states, political control was 136

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exercised by traditional oligarchies. The crisis of the 1930s broke the state alliances and substituted the old liberal state with a strong authoritarian, centralizing, and interventionist state. The regime headed by Get´ulio Vargas created a state structure that was maintained practically unaltered for half a century. Although industrial activity was present for meeting local production in many areas as far back as the late nineteenth century, the Vargas regime was the first Brazilian government to directly favor industrialization. Timidly at first, the state began to support industrial activity through public investments in both infrastructure and in basic industrial activity and through an ever more coherent policy of import substitution to foster local industrial growth in areas previously supplied by manufactured imports. It also took a far more aggressive stand toward subsoil minerals, reversing the privatization allowed in the first Republican government of 1891, and in 1931 it restored them as the property of the state to be administered only by the federal government. Although private mining still occurred under government licensing, this did not occur in petroleum – one of the classic nationalist issues throughout Latin America. Even before any petroleum was found in Brazil, the Brazilian political elite had declared its support of nationalization of these resources. In 1939 Vargas created a Conselho Nacional de Petr´oleo, which was granted monopoly rights over the production and refining of petroleum, and this remained the norm until the very end of the century.1 One of the characteristics of industrialization in Brazil was its concentration in the state of S˜ao Paulo. This was the state that was the heart of the coffee industry and was the center for a massive foreign immigration that replaced slaves in the coffee plantations after abolition in 1888. The availability of capital, of a large free labor pool, a developed infrastructure, and a vibrant local market can explain the expansion of industry and its concentration in the state of S˜ao Paulo, especially in the city of S˜ao Paulo, which even today is one of the greatest industrial centers of the world. It was the 1950s that finally saw the full implantation of the industrial import substitution model. In Vargas’s second term, a more organic process of industrialization was initiated with well-defined and wellarticulated projects. In 1952 the government presented its principal 1

Peter Seaborn Smith, Oil and politics in modern Brazil (Toronto: Macmillan of Canada, 1976); ˜ do petr´oleo no Brasil: and Jos´e Luciano de Mattos Dias and Maria Ana Quaglino, A Questao Uma hist´oria da Petrobr´as (Rio de Janeiro: CPDOC/SERINST, 1993).

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ideas in a general industrial plan, which called for major investments in infrastructure, as well as in basic and transformation industries. The active role of the state in this process defined the period, with the government creating formal institutions and planning processes by which to carry out its new industrial plan. There was also a coherent set of projects for both public and private inputs into the industrial process. During the second Vargas term, a National Economic Development Bank (Banco Nacional de Desenvolvimento Econˆomico), an institution fundamental to his whole process, was established. In 1953 Petrobr´as, the Brazilian National Oil Company, was created with a monopoly over exploration, refining, and distribution of petroleum. The Vargas administration also founded a series of long-term groups and institutions that effectively carried out these new industrial policies and that lasted to almost the end of the century.2 The next government, that of Juscelino Kubscheck, furthered this import substitution program. His government formulated a highly successful “Goals Plan” (Plano de Metas), which was a coherent program of public and private investments that profoundly altered the productive structure of the country. In contrast to the Vargas regime, it encouraged foreign investments, primarily in industry. The Brazilian automobile industry was born in this period through investments of the great multinational companies. The government operated a multiple exchange system, which although simplified in 1957, maintained distinctions between different types of imports, favoring the primary materials and capital goods essential for national industrial growth. Between 1957 and 1963 the economy grew at an annual rate of 8.2 percent, permitting an annual growth of 5.1 percent per capita. These were the golden years in the process of import substitution.3 The low growth and the political crises of the first years of the 1970s generated an ample debate over the exhaustion of the import substitution model, particularly in relation to the progressive “external 2

3

For the first phase of industrialization in Brazil, see Wilson Suzigan, Ind´ustria Brasileira, Origens e Desenvolvimento (S˜ao Paulo: Brasiliense, 1986); Wilson Cano, Ra´ızes da concentrac¸a˜ o industrial em S˜ao Paulo (S˜ao Paulo: Difel, 1977); Warren Dean, A industrializac¸a˜ o de S˜ao Paulo, 1880–1945 (S˜ao Paulo: Difel, 1971); Celso Furtado, Formac¸a˜ o econˆomica do Brasil (Rio de Janeiro: Fundo de Cultura, 1959). Roberto Simonsen, A evoluc¸a˜ o industrial do Brasil e outros estudos (S˜ao Paulo: Editora Nacional/Edusp, 1973) and S´ergio Silva, A expans˜ao cafeeira e origem da ind´ustria no Brasil (S˜ao Paulo: Alfa Omega, 1976). Maria Victoria de Mesquita Benevides, O governo Kubitschek (Rio de Janeiro: Paz e Terra, 1976); Luiz Orenstein and Antonio Claudio Sochaczewski, “Democracia com Desenvolvimento: 1956–1961,” in Paiva Abreu, A Ordem no Progresso, pp. 171–195.

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strangulation” of the sector. There was rigidity in the ability of local industry to continue to replace ever newer imported items. At the same time, there was much that needed to be imported and local industry could not export to pay for these imports, especially given the crisis in the balance of payments.4 But the military coup and the strengthening of the centralizing, authoritarian, and interventionist state led to an even greater emphasis on the important substitution model. The military regimes created new mechanisms to control public and private investments, developing a complex system of incentives that included a generous credit policy and massive investments in state enterprises, which controlled the principal segments of the economy, such as production of steel, the chemical industry, mining, the generation and transmission of energy, ports, and railroads. It retained state monopolies over communications and petroleum production. It even began to foster an aviation industry and in 1969 created a mixed state and private company, to produce airplanes, first for the airforce and, increasingly, for civil aviation. It also provided the only long-term credit available in the country and maintained a majority position in the system of commercial credit. Fiscal and bureaucratic mechanism regulated the principal international commercial transactions, protecting sectors deemed to be a priority. It generated a productive industrial base led by the public sector, totally regulated and protected from international competition. Even as the public sector expanded, there developed a strong private national and international participation in Brazil’s industrial process, sometimes even in combination with state enterprises in determined branches of industry, such as the petrochemical industry, divided between the public sector and both national and international private capital. Each segment of this tightly controlled industry held a third of the capital invested. The first oil crisis in the early 1970s actually encouraged the import substitution model. The military government’s defense against the

4

Maria da Conceic¸a˜ o Tavares, “Auge e decl´ınio do processo de substituic¸a˜ o,” in Maria da Conceic¸a˜ o Tavares, ed., Da substituic¸a˜ o de importac¸o˜es ao capitalismo financeiro (Rio de Janeiro: Zahar, 1972); Albert Hirsmann, “The Political Economy of Import Substitution Industrialization in Latin America,” The Quarterly of Economics, vol. 82 (Feb. 1968); Albert Fishlow, “Origens e Consequˆencias da Substituic¸a˜ o de Importac¸o˜ es no Brasil, ” in Flavio Versiani and Jos´e Roberto Mendonc¸a de Barros, eds., Formac¸a˜ o Econˆomica do Brasil: A experiˆencia de industrializac¸a˜ o (S˜ao Paulo: Anpec/Saraiva, 1976); Marcelo de Paiva Abreu, “Inflac¸a˜ o, estagnac¸a˜ o e ruptura: 1961–1964,” in Marcelo de Paiva Abreu, ed., A Ordem no Progresso (Rio de Janeiro: Campus, 1990), pp. 197–231.

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external crisis was an aggressive policy of state investments, which essentially completed the government’s massive intervention in industry with new funding in everything from basic consumables to complex capital goods industries. There was an ample integration of the productive sector, which in fact made the country practically self-sufficient from the industrial point of view. By the end of this long process, Brazil had one of the more extensive industrial structures in the world and was probably the industrial leader among the developing nations. A totally regulated economic sector, that was both self-sufficient and strongly protected from external competition, industry was even protected somewhat from internal competition through the state-defined “market reserves” in many areas of production. Quotas, incentives, and monopolies thus regulated even internal competition. The massive state intervention program had a positive impact: the industrial sector was greatly expanded, and the country was far less dependent on imports. But the “anticrisis” program heavily indebted Brazil to foreign capital and made it far more dependent on the international financial market, which was still open to Brazil in the process of adjustment to the first oil shock. It also had a negative impact on internal public accounts by increasing fiscal indebtedness and severely reducing the state capacity for investments. The second oil crisis and the subsequent external debt crisis profoundly altered the international economic scene, with serious consequences for the Brazilian economy as international resources were no longer made available to Brazil. These twin crises (both internal and external) negatively influenced the state interventionist model, which reached its crisis point in the government of General Geisel in the late 1970s. Public finances quickly deteriorated and prevented the state from intervening in the economy as it had been accustomed to doing. High inflation and the external debt moratorium were the results of this major spending program designed to compensate for the first oil crisis. Although other countries in the same period adopted recessive economic policies, Brazil had adopted a growth policy, believing it to be the best defense against an external crisis that they thought would be temporary. The 1980s marked a long transition between the traditional state interventionist model and the liberalism of the 1990s. It was a period marked by high and increasing inflation, which was little reduced by either orthodox or heterodox plans. The industrial sector remained unaltered, without great transformation in either its structure or size, but the public companies were progressively weakened by the

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government stabilization policies. Given the importance and size of these state companies, many of which provided vital services, the state could use them to reduce the impact of inflation by imposing on them unrealistic prices and tariffs, which did not allow them to even cover their costs. The control of state industrial prices helped control inflation, but it represented a subsidy to the private sector that both weakened these companies and increased state indebtedness. Unable to generate savings from their sales, these state enterprises were forced to resort to the international markets to obtain capital, thereby helping to balance foreign accounts by attracting foreign capital. Besides the question of controlled prices, many public enterprises faced serious administrative problems, which were aggravated by their financial conditions. This was the case with the steel industry, which needed strong government support and compulsory extension of its debt payments to the private and public sector. Already in the 1980s, these growing problems led to the first tentative steps to privatize some public companies. But these efforts were unsuccessful. However, fiscal constraints forced the abolition of incentives and subsidies even without the development of a liberal consensus opposed to the import substitution program. The already established structure survived despite the long and profound crisis that affected the country. But there were no advances in technology, or increases in productivity, or reduction of costs. The regulated system of prices transferred to the consumers the costs of the inefficiencies and lack of competition of the industrial sector. This was the scene at the end of the decade of the 1980s when liberalism spread throughout Latin America and was finally introduced into Brazil by the government of Fernando Collor. Although there were some industrial groups and entrepreneurs who supported these measures – largely ignorant of the impact they would have on the productive sectors – the majority of the private sector preferred the status quo.

Globalization and the Opening of the National Economy The structure of protection for the industrial sector, which had been maintained practically unaltered for thirty years, was about to change in 1990. Harsh import controls with high tariffs and a law of “Similar Nacional” product, which demanded verification that the imported product could not be furnished by a national producer, were important

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parts of this system. There was even a list of thirteen hundred products whose importation was prohibited (the so-called Annex C). Some exceptions were of course made for capital goods importations. At the end of the 1980s, there also were some minor alterations made in this protection scheme, but in essence the system preserved the basic structure that gave full protection against foreign competition. The Collor government changed all that and made liberal reforms in all sectors of the economy. The opening of the local market to international competition and globalization were fundamental parts of Collor’s government program. In the external sector the reforms were made rapidly and with great intensity. Import tariffs were dramatically reduced, the Annex C prohibitions were abolished along with numerous bureaucratic constraints on importers, along with all the special interest controls on importations. The program of reductions began with machine tools and other basic consumerables, and later was extended to consumer goods. In three years, commerce was completely opened to international trade.5 The liberal ideology, or “Washington Consensus” as it was sometimes called, was already well developed in the rest of Latin America before it established a beachhead in Brazil. This late arrival may have been due to the existence of an already large and sophisticated industrial structure, which did not exist anywhere else in Latin America. The ties of interest between an entrepreneurial state and its bureaucracy, with a strong private entrepreneurial sector, had allowed a large and complex industrial sector to survive even the crisis of the 1980s. But the overwhelming force of liberal ideology now sweeping the continent, along with the fiscal constraints on the state’s ability to further the old industrial system, weakened the strong opposition from the private sector to such liberal changes. The new liberalism attacked the import substitution model on several fronts. The old system, it was argued, based the industrial process on external technology, which in turn favored the sectors that intensively used capital and technology, both scarce factors in Brazil. 5

Marcos Flavio C. Rezende and Patr´ıcia Anderson, Mudanc¸as estruturais na ind´ustria brasileira de bens de capital (Texto para Discuss˜ao no. 658, Bras´ılia: IPEA, 1999); Jos´e Carlos Miranda, Abertura comercial, reestruturac¸a˜ o industrial e exportac¸o˜es brasileiras na d´ecada de 1990 (Texto para Discuss˜ao no. 829, Bras´ılia: IPEA, 1999); Jos´e Em´ılio Padovani Gonc¸alves, “Ind´ustria brasileira e transbordamentos de produtividade na ind´ustria brasileira, 1997–2000” (MA thesis, Campinas: Unicamp, 2003); Pol´ıtica industrial, acompanhamento e an´alise (Boletim no. 24, Bras´ılia: IPEA, 2004).

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In contrast, all these subsidies and incentives created an industrialization that had a low input of labor, the most abundant cheapest factor in Brazil. Only limited economies of scale were possible, especially when rivals competed for this limited market. The lack of access to the international market made the industrial enterprises much more vertically integrated than they might have been if they had recourse to the international market, but this self-sufficiency further reduced their competitive efficiency. It did not stimulate productivity or the competitiveness needed to expand industrial exports. This heavy protectionism generated a structure of costs incompatible with the reality of the international market. Protectionism and isolation from the international market created disincentives to technological innovation, economies of scale and reduction of costs. In some sectors, such as automobiles, local producers offered totally outdated products in relation to the international market. As President Collor declared shortly after assuming power, “Brazil does not produce cars, it produces carts.” The alternative approach seemed promising. It was hoped that the opening to the world market would promote productive integration between national and foreign industries, lead to improvement in technology, and increases in economies of scale and productivity. The increase in productivity would reduce costs, the benefits of which could be transferred to consumers. The integration of production with the world market would increase penetration of foreign products in the local market, including primary materials and components utilized in the productive process. At the same time, it would increase the ratio of industrial production that was exported. The liberal policy would be intensified in the government of Fernando Henrique Cardoso, especially after the creation of the Plan Real. Although this ambitious program of price stability would have at its base the increase in productivity and the reduction of costs, obtained through the opening to the world market and international competition, it also came with an overevaluation of the local currency. This overvaluation had a dramatic negative impact, exposing local producers to international competition at a distinct disadvantage. This exchange policy made imports far more competitive on the local market then they might have been with a properly valued currency and actually made international exports more difficult for national producers. Equally the dismantling of the protection and incentives system also was accompanied by an intense privatization of the state industrial system. Large productive sectors, such as the steel, petrochemical,

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and mining industries, which were under state control were privatized during the decade of the 1990s in one of the largest processes of privatization schemes then occurring in the world.6 One of the most important privatizations was the airplane manufacturer Embraer, which was a mixed private and public company founded in 1969, which was privatized in 1994. It is today the world’s fourth largest producer of commercial airplanes and the primary manufacturing exporting company in Brazil with 14,500 employees and a record of 3,600 planes delivered from its founding in 1969 until 2005.7 This privatization process also included a large part of public services such as electricity generation, communications, and transport. The globalization and open market policy of the government was accompanied by a financial liberalization as well, which promoted an intensive flow of external capital for all sectors of the economy, as much in the industrial as well as the financial sectors. International groups bought part of the privatized state enterprises, as well as large segments of national industry pertaining to private national owners. The role of foreign capital was increased in practically all sectors of the Brazilian economy, as much in industry, as in services, and even in financial services. In all sectors of the national economy, the changes were dramatic. Moreover their impact was made even more intense by the government’s maintenance of an overvalued national currency. A succession of external crises in the second half of the 1990s and the deterioration in the external accounts, especially in the growing deficit of the commercial balance of trade, clearly signaled the need for a change in monetary policy. But this overvalued currency was the anchor to the price stabilization plan and was not easily abandoned. It also was accompanied by high internal interest rates designed to capture speculative foreign capital, which also had a negative impact on domestic industrial production. Thus, negative monetary policies further exacerbated industrial adjustments to the new globalization era. Although increased efficiency and productivity occurred in industry, they came at a high cost. Many national companies collapsed and there was an intense process of denationalization of Brazilian industry. Entire sectors were eliminated, often substituted by imported products. But, in 6

7

Lic´ınio Velasco Junior, Privatizac¸a˜ o, Mitos e Falsas Percepc¸o˜es (Rio de Janeiro: BNDES); Armando Castelar Pinheiro, A experiˆencia Brasileira de Privatizac¸a˜ o: O que vem a seguir? (Texto para Discuss˜ao no. 87, Rio de Janeiro: IPEA, 2002). http://www.embraer.com.br/.

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spite of the profound transformations that the industrial sector suffered in this period, the dimensions of installed capacity and the sophistication of industrial production enabled local industry to survive in Brazil. Moreover, the country’s industrial base was in fact modernized, with some sectors even achieving international competitiveness. The desired integration with the world market thus occurred. The process of economic liberalization occurred in a period of low international growth, which in turn provoked in the first years of the decade the maintenance of high levels of inflation, which nearly reached hyperinflation rates. The Real Plan implemented between 1993 and 1994 was capable of countering the inflation but did not lead to a trajectory of stable economic growth. Between 1991 and 2003, the economy grew at just 2.3 percent per annum, and industry grew at an even more modest rate of 1.8 percent per annum. This weak performance of industry led to its relative reduction in importance in the national economy both in terms of production and employment. Industry, which had accounted for 45 percent of GNP in the 1980s, lost five percentage points in the 1990s. Given this weak showing of industry in the late 1990s and early part of the new century, the investments realized in the industrial sector had a largely defensive character, being concentrated on reducing costs and increasing productivity rather than in expanding output. There was no push to increase productive capacity. The industrial sector also became less integrated locally, at the same time as local production became much more integrated with foreign industrial activity. A study undertaken by the CNI8 shows relative stability in the stock of capital in Brazilian industry, with a strong drop until 1996 and a recuperation after that year. As to the productivity of industrial capital, the same study shows two entirely distinct phases: the first initiated in 1988 and extending to 1995 in which there was a steady increase in capital installed in industry, and in the second phase, which began in 1996, there was a reduction in productivity in the same area. This is explained by the low performance of industry despite investments in modernization (see Graph 5.1). The process of industrial modernization in this period especially affected employment. If there was a still relatively low productivity of capital in this sector, this was not the case with labor. The major 8

Renato Fonseca and Tereza Cristina M. Mendes, Produtividade do Capital na Ind´ustria Brasileira (Texto para Discuss˜ao no. 2, Bras´ılia: CNI, 2002).

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Index 180

170

160

150

140

130

120

110 1980

1982 1984 1986 1988 1990 1992 1994 1996 1998 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Stock of Capital

Productivity of Capital

Graph 5.1. Capital Stock and Capital Productivity in Brazilian Industry, 1980–1999 (1975=100) Source: Fonseca and Mendes, “Productividad,” 2002

investments in modernization were to reduce the input of labor in the industrial process. Between January 1991 and January 2004 there was a reduction of more than 30 percent in industrial employment, in spite of increased production, which led to an extraordinary jump in the productivity of labor, on the order of 64 percent (see Graph 5.2). This severe drop in industrial employment, although positive for industry, had sharp negative consequences for the economy as a whole, which was in fact in a low period of growth at this time. The most obvious impact was the decline of formal registered labor, with all the usual benefits, and the rise of employment in the informal sector, with all the usual negative connotations that this implied.9 This process of reduction in industrial employment was unequally spread through the regions of the country, with the greatest impact occurring in the most industrialized regions. Thus, industrial employment in the Northeast fell by just 19 percent, while in the industrial 9

In Brazil, the social taxes on salaries are very high, practically doubling the cost of labor, which has the effect of stimulation the contraction of workers who are not formally registered. Therefore, two labor markets exist. The first is made up of workers who have labor rights and contribute to their pensions. The other workers have no such rights and no pension arrangements and are thus part of the informal labor market.

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Index 160 150 140 130 120 110 100 90 80 70 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Employment

Productivity

Graph 5.2. Employment and Productivity of the Industrial Labor Force, 1984–2004 Source: IBGE Outras/PME – PME12 PRODIT12

heartland of the Southeast the decline was on the order of 35 percent. In the state of S˜ao Paulo alone, 39 percent of the industrial jobs disappeared. Only in the expanding zone of the Center West was there a serious growth in industrial employment, primarily in food processing. There also was some shift in manufacturing locations from the urban centers toward the interior of the states. In industrial employment, the state capitals, usually their largest urban centers, reduced their participation from 53 percent to 44 percent. This decentralization was especially evident in the heartland of Brazilian industry, the region of the Southeast, where industries went from 59 percent to 50 percent of all employment.10 S˜ao Paulo, the principal industrial center of the country, was particularly affected by decentralization, both in its urban share and in the value of industrial production within the state. Several factors explain this movement, among which was an active policy of the federal government to reduce industrial concentration, as well as local advantages in terms of a more abundant and cheaper labor force, state programs designed to attract industries through tax advantages, and other incentives. The automobile industry, for example, which 10

Jo˜ao Saboia, A Dinˆamica da Descentralizac¸a˜ o Industrial no Brasil (Texto para Discuss˜ao no. 452, Rio de Janeiro: IE-UFRJ, 2001).

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148 15

10

5

0

-5 1975/1980

1981/1990

Consumer Goods Durable Consumer Goods

1991/2000

Non-Durable Consumer Goods Intermediate Goods

2001/2003 Capital Goods

Graph 5.3. Average Annual Growth Rate in Manufacturing, 1975–2003 Source: IBGE Outras/PIM-PF – PIMPF12 QICND12 QIBI12

had been concentrated in the Greater S˜ao Paulo region, expanded into various states as well as the interior of the state of S˜ao Paulo. Nor were all industries affected equally by the fall in total capital and labor in industry. The worst experience was that in the important capital goods sector, which had virtually no growth between 1981 and 2003, primarily because of the strong retrenchment that occurred in the 1980s. Nondurable consumer goods also had a poor performance with a growth rate of less than 1 percent in this period. Durable consumer goods, however, expanded dramatically, especially in the decade of the 1990s. Intermediary goods also did well in the 1990s (see Graph 5.3). Another major change as a result of the opening up of the Brazilian economy has been a significant increase in the participation of imports in the industrial process. This was especially important after the establishment of the Plan Real. During this period, there has been a major increase in the importation of finished goods of all types, from consumer durables to capital goods. But there also has been a steady increase in industrial exports into the world market as well. This can be seen in the impressive growth in the coefficients of importation and exportation. The transformation industry in the prereform era was highly integrated and had a low coefficient of imports, that is, in the proportion of the value of imports in relation to the total local

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consumption. This coefficient was just 3.2 percent in 1990, but by 1998 it had reached 13.6 percent of the value of local consumption. But the devaluation that occurred in 1999 did alter the trajectory of this coefficient, which fell to 10.9 percent in 2003. This important change was due not only to the realistic reevaluation of the national currency at that time but also to increased investments in industries which supplied goods that had a high local demand and progressively replaced imported goods. Moreover, the impact of imports differed quite dramatically by industry. The greatest influence of new imports occurred in the sector of electronic equipment, which went from an import coefficient of 9.6 percent in 1990 to 60.9 percent in 2003, a trajectory that did not end with the currency devaluation of 1999. A similar long-time rise of imports occurred with the sector of electrical materials were imports progressively rose from supplying 6.5 percent of the national market, to a current 30.6 percent. An unusual area was that of automobiles, a market that had traditionally been completely supplied by national industry. In the initial opening period, there was a major growth of imports. In 1995, the government fearing trade imbalances imposed fiscal constraints on this development, instituting a so-called automotive regime, which emphasized the importation of parts and accessories for local assembly and penalized the importation of finished cars. Along with the devaluation of 1999, this act halted the rising importance of imports, which went from 0.2 percent in 1990 to 22.3 percent of the local market in 1998. By 2003, the ratio had dropped to 8.7 percent. The import of auto parts and accessories grew systematically until 1998 and then stabilized at 30 percent of local consumption. There also was a growth in exports of the local automobile industry, which went from a coefficient of exportations 7.3 percent to 15.4 percent between 1990 and 2003.11 It is worth noting that the greatest increase in exports occurred after 1999, with major growth occurring after that date. Here and in other sectors of industry, those industries with the highest ratio of imports also were those with the highest ratio of exports. This shows the growing importance of imports in the most competitive sectors of industry, which are those which were also increasing their exports. Industries with a high export and import coefficient were those involved in producing 11

Fernando J. Ribeiro and Henry Pourchat, “Participac¸o˜ es das Exportac¸o˜ es e Importac¸o˜ es na Economia Brasileira, Novas Estimativas para os Coeficientes de Orientac¸a˜ o Externa da Ind´ustria,” Revista Brasileira de Com´ercio Exterior, 81 (Oct./Dec. 2004).

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electronic equipment, automobiles and parts, all with coefficients greater than 30 percent. Not surprisingly, the greatest coefficient of exports was the shoe industry, which was a traditional Brazilian export industry, whose coefficient reached 63 percent. Other important exporting industries were vegetable oils, animal meats, and processors of vegetables and coffee, with this latter sector reaching a coefficient of 28.3 percent in 2003. One unusual industrial sector of national industry that differs from these increasingly multinational controlled industries has been sophisticated airplane manufacturing. EMBRAER is a Brazilian manufacturer that successfully competes on the international market and even delegates some of its manufacturing overseas, but it remains an exclusively Brazilian company. It is now one of the leading producers of mid-size and smaller jet airplanes in the world and its planes are well distributed in every major national market including the United States. Throughout the 1990s, there was a major foreign investment in Brazil. Parallel to the opening in industry, there also was an opening in the financial sector, all of which made capital movements far easier and more rapid, with the government trying to stimulate longterm investments, characterized as Direct Foreign Investment (Investimento Direto Estrangeiro, or IDE). World capital resources were initially abundant, and there was the further stimulus of the formation of Mercosul and increasing opportunities for exports in both new and old industries (such as steel, paper and cellulose, and products derived from agribusiness), all of which stimulated the entrance of a very significant amount of foreign capital, leading to a greater role for the multinational companies and foreign capital in general in the Brazilian industrial sector. Initially, economic instability and high levels of inflation inhibited capital flows despite the IDE initiative. In the first part of the 1990s, average annual imports of capital were in the 2.2 billion range, little different from the average of 1.6 billion in the 1980s. But after 1996 there was a profound change, with capital flows reaching $32.7 billion in the year 2000.12 There was a subsequent decline, particularly in the first year of the Lula presidency, when the flow dropped to $10.1 billion. But once confidence was restored through the conservative economic policies of the new regime, there was a 12

IPEADATA: Conta financeira – investimentos diretos – estrang. no pa´ıs – Anual – US$(milh˜oes) – BCB Boletim/BP – Bpn FINIDE.

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rapid recovery in foreign investments. It is worth noting that in the second administration of Fernando Henrique Cardoso, Brazil was the Latin American country that received the largest amount of foreign capital, superior to both Mexico and Argentina. Unfortunately, a large part of the foreign resources that entered the country did not go to new productive projects but, rather, purchased already existing enterprises, both public and private. Between 1995 and 1999, the majority of foreign resources (some 80 percent) went into the service sector and less than 20 percent went into industry. According to a study of IPEA, an ever-increasing share of foreign capital went toward mergers and acquisitions.13 This went from 10 percent of foreign investments in the two first years of the 1990s, to 50 percent in the last years of the decade, achieving extraordinarily high rates in given years, such as 1993 (94.7 percent) and 1998 (85.7 percent). This same study showed that despite massive infusions of foreign capital in the form of direct investments, the level of fixed capital in industry remained at historically low levels throughout the 1990s, never going above 18 percent of GNP. Between 1991 and 1999, there was a total of 1,149 purchases of enterprises. For the 516 for which detailed information exists, the total capital invested was $116 billion. The electrical energy sector was the leader in such foreign purchases, followed by telecommunications – both involving the sale of state enterprises. There also were significant investments in the food and drink, transport materials, chemical, petrochemical, steel, and metallurgy industries. All this explains how the ratio of foreign capital in the crude value of production went from 13.5 percent in 1995 to 24.6 percent in 1999. In terms of the total value of sales of industrial products, foreign participation went from 26.6 percent in 1996 to 41.8 percent in 2001. In some industries, this participation was even higher. In the automobile construction industry, their role in sales was 93.8 percent; and was high in electronic equipment (77.7 percent), in chemical products (67.9 percent), in processing of vegetable products (64.5 percent), in electronic materials (63.6 percent), and in nonferrous metals (61.8 percent). In some segments of these same industries, levels were even higher. Other industries, mostly those that were not technologically intensive, such as footwear, clothing, furniture and woods, textiles, slaughtering, 13

Jos´e Carlos Miranda, Abertura Comercial, Reestruturac¸a˜ o industrial e exportac¸o˜es brasileiras na d´ecada de 1990 (Texto para Discuss˜ao no. 829, Bras´ılia: IPEA, 2001).

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dairy products, and the sugar industries, had low levels of foreign investment.14 The opening of the economy, globalization, and privatization had dramatic effects on the structure of Brazilian industry, as it had in other economic sectors. Given the size and sophistication of the previously established industrial structure and the size of the domestic market, Brazilian industry was able to survive this triple shock and to modernize itself. Some sectors were reduced or even disappeared, others grew or were fortified. Foreign capital increased its participation in national industry and this industry increased its integration in the world market. But this was a difficult process that weakened the rhythm of industrial growth, caused industry to decline in relative share of PIB, and, even more seriously, led to a dramatic reduction in the level of industrial employment at the same time as there was an extraordinary increase in labor productivity. The process of industrial transformation is still ongoing and until recently was limited by a distorted foreign exchange policy, which had totally suppressed its ability to expand. Only since the devaluation of the Real in 1999 has industry finally been able to effectively enter into the world market.15

Mining Brazil’s mining, which was far less controlled by the state than industry, also experienced a major wave of privatization in the 1990s. Unlike most Latin American countries that maintained traditional control over natural resources from the colonial period, Brazil has experimented with both customary and Latin law precedents in dealing with its mineral resources. For most of its history, it adopted traditional Latin law precepts of guarding all subsoil rights – and, thus, mining – for the state, with the state renting out these resources to private entrepreneurs, But the new Republic in the Constitution of 1891 gave subsoil rights to the private owners of the land and allowed each 14

15

Andr´e Luiz Correa, “A internacionalizac¸a˜ o da ind´ustria brasileira e seus impactos sobre os coeficientes de pass-through no Brasil no per´ıodo 1996–2001,” ANPEC, Anais do XXXII Encontro Nacional de Economia, 2004. Part of the increase in the productivity of industrial labor could be false. Because much outsourcing of services has occurred, part of the reduction of workers in industry could be explained by these purchases of services previously computed in the industrial sector. But at the moment no reliable information exists on the importance of this outsourcing.

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state to make its own mining codes, Then, in 1934, Vargas returned all control over mining to the federal government and again declared subsoil rights to be the property of the state. But private mining was permitted on the payment of royalties and other taxes and only in the iron ore sector was a state company established in 1942, clearly because of its close association with a nationalized steel industry, which evolved from the early 1940s and depended on national raw materials. But the most important state company in mining, the Companhia Vale do Rio Doce (CVRD), was not a monopoly company, in contrast to the unique position of Petrobr´as in oil production and processing. Despite an attempt in the very nationalistic Constitution of 1988 to preserve national raw materials for state companies, by the late 1990s all mining and most of the petrochemical industry was being privatized. The CVRD, both the largest iron ore producer in the world, and in fact one of the largest mine companies in the world, although highly profitable, was still privatized. Even Petrobr´as – although not privatized – lost its monopoly position in the exploration and refining of petroleum. The CVRD was sold by the government in 1997, and Petrobr´as, which from its founding in 1953 retained a monopoly on exploration, extraction, and processing of gas and petroleum, lost its exclusive control over processing, and the petroleum market was opened up to foreign capital for the first time in Brazilian history in 1999. In 1995, Fernando Henrique Cardoso government eliminated public monopolies and the restrictions on foreign capital that were contained in the Constitution of 1988, including those related to mineral exploration.16 The continental dimensions of Brazil and its geological diversity place it among the world’s greatest potential mining centers. But despite its already important world position in terms of both proven reserves and production, it can be affirmed that the mineral exploitation of the country is still far below its effective potential. Economic instability, inadequate tax legislation, and the lack of investments in research and exploration are usually acknowledged as the principal impediments to investment in this sector. These factors could be altered by a greater economic stability, which reduces uncertainty and risk for the long-term investments typically needed in mining and exploration; 16

Jos´e Mendo Mizael de Souza, Ser´a que o Brasil acordar´a para a importˆancia da minerac¸a˜ o?. In Antonio Dias Leite and Jo˜ao Paulo dos Reis Velloso, eds., O novo governo e os desafios do desenvolvimento (Rio de Janeiro, Jos´e Olympio Editora, 2002), pp. 529–547.

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and by mining legislation, which eliminated restrictions on foreign capital. Today, Brazilian mining production represents 1.5 percent of GDP and industries of transformation of raw materials accounts for 5.3 percent of GDP. The current value of mine production puts Brazil in fourth place in the world, behind Canada, Australia, and South Africa. Although the State was the principal promoter of investments through credits, incentives, and various other supports, actual investment in mining was relatively modest and declined over time. Thus, between 1978 and 1985, annual investments in mining exploration averaged $134 million, of which 38 percent came from foreign companies. Between 1986 and 1989, average investment fell to $93 million, and after the enactment of the Constitution of 1988, the average investment fell to just $47 million between 1990 and 1994. Even gold exploration investments, which had been at $600 million per annum in the 1980s, dropped to half that rate in the early 1990s.17 The single most important mining company that was privatized was the CVRD – Companhia Vale do Rio Doce, which was not only the largest mining company in Brazil but also the largest producer of iron ore in the world. It also held important deposits of other minerals throughout the country and played a vital role in transport, including owning roads, railroads, ships, and even port facilities. Most importantly it was profitable and self-financing. Interestingly enough, despite the interest of various foreign companies, it was in fact sold to a consortium of national companies led by the Companhia Siderurgica Nacional, which itself had been a state-owned company that had only been privatized a few years earlier. Although there was considerable opposition to the privatization, the fact that the government kept a “golden share” in ownership, and that the majority interests were held by national companies made the sale of this highly profitable enterprise acceptable. Given its profitability and autonomy, its sale in fact could be considered more symbolic than economic, although of course the income from the sale was of considerable importance to the state finances in this time of crisis. The government obtained a little more than $3 billion, which thus valued the company as the third richest mining company in the world. With the sale of CVRD, the

17

BNDES: http://www.bndes.gov.br/conhecimento/bnset/bssetmin.pdf.

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state essentially retired from the mining sector, except for petroleum production.18 Currently, Brazil produces approximately seventy minerals, holding a major world position in some of them, as much in current production as in proven reserves. The country, for example, contains 97.5 percent of the world’s known reserves of Niobium, a metal that is used as an alloying agent, and combined with iron is found in rocket and jet engines and with tin and other metals has proven to have high superconductivity; it also occupies second place in the world in reserves of kaolin clays, tantalite, and natural graphite;third place in reserves of vermiculite; and fourth in world’s reserves of tin, and manganese. Brazil has the fourth largest reserves of iron ore (7 percent), and in fact produced 21 percent of the world’s iron ore.19 Iron ore is the single most important mining product and accounts for 65 percent of the total value of all minerals produced in Brazil.20 Although gold represents 14 percent of the value of Brazilian mineral production, Brazil is only a minor producer on the world scene, and accounts for just 2 percent of world output, compared to 19 percent for South Africa, the world’s leading producer.21 The mining exports in Brazil can be divided into two major groups: unprocessed minerals and semiprocessed and manufactured mineral products. In the value of the unprocessed minerals trade, Brazil imports ($5.9 million) almost as much as it exports (or $6.2 million also in 2003). In exports, iron ore accounts for 84 percent of the value of all unprocessed minerals, followed by kaolin (which accounts for 5 percent); while coal accounts for 44 percent of unprocessed mineral imports, followed by potassium (30 percent of value). The coal deposits in Brazil are of poor quality and useless for national steel production, which is the primary user of imported coal. Potassium is a fundamental element in the production of fertilizers, and the country is primarily dependent on imports to satisfy local production. As for semiprocessed metals, the two most important Brazilian exports are iron (48 percent of the value of such exports) and aluminum (19 percent). In turn, 18 19 20 21

http://jbonline.terra.com.br/jb/papel/economia/2005/03/03/joreco20050303001.html e o site http://www.cvrd.com.br/cvrd/cgi/cgilua.exe/sys/start.htm?sid=260. Sum´ario Mineral 2004. Bras´ılia, DNPM, vol. 24, 2004, pp. x and xi. Anu´ario Mineral Brasileiro. DNP, Bras´ılia, 2001: http://www.dnpm.gov.br/. Maria Lucia Amarante de Andrade, Luiz Maur´ıcio da Silva Cunha, and Guilherme Tavares Gandra. “Ouro: de lastro financeiro a commodity,” BNDES Setorial, no. 11, (Rio de Janeiro, March 2000), pp. 27–42.

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phosphate used in fertilizers is the most significant imported processed mineral, followed by iron, copper, and aluminum.22 The one area that has remained largely under state control has been petroleum production. But like Vale do Rio Doce in its days as a state company, Petrobr´as has been quite viable and has succeeded through massive investments in making Brazil virtually self-sufficient in oil production. Brazil suffered heavily because of its dependence on foreign oil in the 1970s, and this was a major impetus both for the development of alternative energy sources, such as the pro-alcohol program, as well as massive investments in petroleum exploration, which dramatically reduced Brazil’s dependence on external sources of energy. Much of this new production came from offshore wells, and in this type of activity Petrobr´as was in many areas a technological pioneer. In the late 1970s Brazil was able to satisfy only 20 percent of its petroleum needs through national sources. Today, with a daily production of 1.7 million barrels per day, it is virtually self-sufficient in petroleum.23 Brazil operates in the international petroleum and derivatives market in order to adjust its internal offerings and balance the structure of existing production. The only remaining problem in this area is in diesel oil, which is basic to the transport system, and for which there is still no substitute. But in gasoline engines, Brazil continues to be a pioneer in the use of mixed alcohol and gas engines, which both reduces pollution and petroleum usage. Since the late 1990s, it also has begun to compete with foreign companies even on the domestic market. Given the very recent changes in investment laws favoring foreign capital and the general opening up of the economy, the future of mineral production in Brazil should prove to be highly favorable. With the rising costs of raw materials on the world market; the increasing exhaustion of mineral deposits in the advanced industrial countries along with ever more stringent environmental controls; and the increasing need for such minerals in the rapidly expanding economies of China and India, there is now a massive investment available for mineral exploration and production in Brazil and other developing countries. Moreover, nationalist sentiment in relation to minerals, which had previously been significant in Brazil, has all but disappeared, 22 23

Sum´ario Mineral 2004. Bras´ılia DNPM, vol. 24, 2004, http://www.dnpm.gov.br/. The average production was 1.73 million/day in May of 2005, and it was expected that self-sufficiency would be reached by the end of that year.

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especially after the privatization of Vale do Rio Doce. The only exception to this change in sentiment is the issue of petroleum, which remains a major nationalist theme and in which state enterprise remains strong, even if not monopolistic. But given the success of Petrobr´as both nationally and internationally and the increasing importance of state-owned oil companies from Spain to China on the international scene, this has proved to be of little concern to foreign investors.

6 Demographic Change in Brazil Since 1980

As in most of Latin America by the middle of the twentieth century, Brazil was a predominantly rural society with high rates of mortality and fertility. The national population was young; a high ratio of infants died before their first year and a large number of children died before their fifth birthday, mostly from water-borne infectious diseases long reduced as killers in the industrial nations. Although a few large modern urban centers existed, the majority of the population lived in rural areas and they were ill-housed and lacked basic access to drinking water and sanitation. Most Brazilians did not have access to modern medical facilities. Brazil also was a nation not only divided between an advanced urban minority and a backward rural majority, but it was also profoundly divided by region, class, and race. The second most populous region was the poverty-stricken Northeast, which differed strikingly from the wealthier Central and Southern zones. The richer and better-educated members of the society tended to have the longest life expectancies and the best health, while whites in general did better than mulattos and they in turn did better than blacks. In 1950, for example, only 36 percent of the population resided in cities,1 only 49 percent of adults 15 years of age and older were literate,2 and the average life expectancy of persons born in that year 1

2

IBGE, Estat´ısticas do S´eculo XX (2003), table pop S2T01ab. Unfortunately, the definition of urban is based mainly on administrative status and not necessarily related to population size. See Committee on Population and Demography, Levels and Recent Trends in Fertility and Mortality in Brazil (Report No. 21; Washington, DC: National Academy Press, 1983), p. 15. Marcelo Medeiros Coelho de Souza, “O Analfabetismo no Brasil sob o enfoque demogr´afico” (Documento de Trabalho, No.639, Bras´ılia: IPEA, 1999), Table 1.

158

Demographic Change in Brazil Since 1980

159

was only 45 years of age.3 Fertility was very high in Brazil, with a crude birth rate of 44 births per thousand resident population and a total fertility rate of 6.2 children per women.4 Mortality also was high with a crude death rate of 15 deaths per 1,000 resident population and an infant mortality rate of 135 deaths of children under 1 years of age to 1,000 live births in that year.5 With this type of premodern and pretransition demographic structure, and will little international emigration or immigration, the natural growth rates of the population was quite high, and the average age of the population quite low. Although fertility had changed little in the decades preceding 1950, mortality was on a long-term downward trend. From the late nineteenth century, the urban campaigns of vaccination and water and sanitation improvements had led to a slow but steady decline in mortality rates beginning early in the century. In fact, this was the case for all of Latin America and there was an especially pronounced secular decline in mortality between 1930 and 1950.6 In Brazil, the crude death rate by the 1940s was in the low twenties per thousand resident population and, in turn, this rate dropped to just fourteen deaths per thousand population in the next decade and to just six per thousand population by 1980.7 Although infant mortality remained extraordinarily high, even it began to decline, going from well over two hundred deaths per thousand live births in the 1940s to just over one hundred deaths per thousand live births – still a very high figure – in 1970.8 It then dropped to fifty deaths by 1990 and to thirty-three deaths by 2001, a rate that unfortunately was still high by first world standards, where 3

4 5 6 7 8

Elza Berqu´o, “Demographic Evolution of the Brazilian Population in the Twentieth Century,” in Daniel Joseph Hogan, ed., Population Change in Brazil: Contemporary Perspectives (Campinas: NEPO/UNICAMP, 2001), Table 4, p.17. This 1950 life expectancy figure for Brazil was even a bit low by Latin American standards; see Eduardo E. Arriaga and Kingsley Davis, “The Pattern of Mortality Change in Latin America,” Demography 6:3 (August 1969), Table 3, p. 226. CELADE, Bolet´ın demogr´afico, xxxvii:73 (enero 2004), Tables 3, 4, pp. 18, 20. CELADE, Bolet´ın demogr´afico, xxxvii:73 (enero 2004), Tables 5, 6, 7, pp. 22, 24, 26. Arriaga and Davis, “The Pattern of Mortality Change in Latin America,” p. 226. Elza Berqu´o, “Demographic Evolution of the Brazilian Population in the Twentieth Century,” Table 3, p. 15. The only available infant mortality rates are for urban populations and these were clearly well below the national averages. In 1941 the urban infant mortality rate was 202 deaths per 1,000 live births, and in 1970 it was 109 deaths per 1,000 live births. See Elza S. Berqu´o and Candido Procopio F. de Camargo, eds., La population du Br´esil (Paris: UN/CICRED, 1974), Table 26, p. 52.

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160 140 120 100 80 60 40 20 0 1950-55 1960-65 1970-75 1980-85 1990-95 2000-05 1955-60 1965-70 1975-80 1985-90 1995-2000 2005-10

Latin America

Brazil

Graph 6.1. Estimated Infant Mortality in Brazil and Latin America, 1950–2010 ˜ XXXIV, No. 74 ( Julio 2004), table 6, Source: CELADE, Bolet´ın demogr´afico, ANO p. 24

it is currently between five and ten deaths per thousand live births.9 Despite this rapid decline, however, Brazil’s infant mortality rate was still higher than the average infant mortality rate for the region until the early twenty-first century (see Graph 6.1). Adult mortality followed more slowly the changes occurring in infant and child mortality in this period. Average life expectancy for both men and women rose some six years to fifty-one years of age in the 1960s but added only two more years in the 1970s. With the very rapid economic growth that occurred in the next decade, an impressive nine years of life were added in the 1980s. By 2002, a total of eighteen years was added to the 1960 rate, when life expectancy for both sexes finally reached seventy-one years of age.10 These average life expectancy figures after 1980 also reflected new and major improvements in the health of the elderly population, whereas most of the changes before that period had been improvements in the life of the youngest elements of the population. The size 9 10

For the 1990 to 2001 figures, see IBGE, “Indicadores demogr´aficos,” found at http://www. ibge.gov.br/. Elza Berqu´o, “Demographic Evolution of the Brazilian Population in the Twentieth Century,” Table 4, p.17, and IBGE, Diretoria de Pesquisas (DPE), Coordenac¸a˜ o de Populac¸a˜ o e Indicadores Sociais (COPIS), “T´abua Completa de Mortalidade – Ambos os sexos – 2002.”

Demographic Change in Brazil Since 1980 Heart disease Poorly diagnosed disease Accidents Cancer Respiratory diseases Endocrine, autoimmune, and other diseases Infectious and parasitic diseases Perinatal diseases Gastro-intrestinal diseases Diseases of the genito -urinary system

161

27.7% 17.1% 12.1% 10.9% 9.2% 5.3% 4.8% 4.3% 4.2% 1.4%

Graph 6.2. Ten Leading Causes of Deaths in Brazil in 1996, Percentage of All Deaths Source: IBGE, Estat´ısticas do S´eculo XX (2003), table saude s2t75–s2t75.3

of the elderly population, those over sixty years of age rose from 4 percent of the population in 1950 to 9 percent of the population by 2000.11 Also their expectation of life slowly increased, rising some six years for women over sixty years in the fifty years from 1950/55 to 2002, and just under four years for men over sixty – giving a total of 21.9 years more of life for women and 19.0 for men.12 Most of this improvement in life expectancy for all age groups was due to the decline of mortality for infectious diseases.13 Whereas infectious diseases were the prime killers at mid-century, by the end of the twentieth century they had been replaced by degenerative diseases.14 With this rise of heart disease and cancer as primary causes of death at the end of the century, and with infectious diseases no longer a significant element among the major killers, Brazil finally fell in line with the pattern common to the advanced industrial countries of the world since the beginning of the twentieth century (see Graphs 6.2 and 6.3). This also was reflected in changes in the age participation in total deaths. Whereas those under age fifteen made up an extraordinary 56 percent of deaths at mid-century, they represented only 16 11 12

13

14

IBGE, Estat´ısticas do S´eculo XX (2003), table pop S2T01ab. IBGE, DPE, COPIS, “T´abua Completa de Mortalidade – Ambos os sexos – 2002,” and those from 1950/55 come from (CEPAL/CELADE), Bolet´ın Demogr´afico No. 67 (enero del 2001). The 2001 estimates for CELADE are lower than the current 2002 IBGE calculations. For example, infectious diseases accounted for only 5 percent of the deaths in the state of S˜ao Paulo (and 7 percent of deaths among infants and children) in 2001. SEADE, Anu´ario Estat´ıstico do Estado de S˜ao Paulo – 2001 Quadro 25 accessed at http://www.seade. gov.br. Some 30 percent of the deaths in S˜ao Paulo state in 2001 were due to heart disease – the biggest killer, followed by cancers, which accounted for another 15 percent. SEADE, Anu´ario Estat´ıstico do Estado de S˜ao Paulo – 2001 Quadro 25.

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Diseases of heart 30% 23% Malignant neoplasms [Cancer] Cerebrovascular diseases 7% Chronic lower respiratory diseases 5% Unintentional injuries 4% Diabetes mellitus 3% Influenza and pneumonia 3% Alzheimer’s disease 2% Nephritis, nephrotic syndrome, and nephrosis 2% Septicemia 1%

Graph 6.3. Leading Causes of Death, United States, 2000 Source: Health, United States, 2002, p. 21

percent of all persons who died by the first decade of the twenty-first century.15 Although mortality was on the decline from the end of the nineteenth century and was declining more rapidly from the middle decades of the twentieth century, fertility did not follow this trend. In fact, fertility actually increased slightly until the mid-1960s due to declining rates of both mortality and morbidity. As occurred in many countries in Latin American, sterility rates for women declined and far higher numbers of women survived into their child-bearing years, with these improvements in health initially leading to higher rates of fertility. The result of this combination of high fertility and declining mortality led to a process of very rapid population growth in Brazil in the late twentieth century. In the 1920 to 1940 period, growth rates had been a relatively moderate 1.5 percent per annum. But in the next decade the rate of natural growth rose to 2.3 percent and in the 1960–1970 period rose to the quite impressive rate of 3 percent per annum.16 The result of this rapid growth was that the Brazilian population, which stood at 52 million in 1950, doubled to 104 million in 1974, just 24 years later. Another consequence of this rapid growth of the population meant that Brazil had an extraordinarily young population. In 1950 the median age of the population was eighteen years of age, and by 1965 at the height of the mid-century fertility boom, it dropped a full year to just seventeen years of age.17 15

16

17

CELADE, Estimaciones y Proyecciones de Poblaci´on, 1950–2050, Brasil, Populaci´on Total, Indicadores del crecimiento demogr´afico estimados y proyectados por quinquenios, 1950– 2050” accessed at http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm on April 10, 2004. Rates of growth calculated from mid-year population estimates of IBGE and found at IPEADATA: Populac¸a˜ o residente – 1◦ de julho – Anual – Pessoa – IBGE Outras/Pop – DEPIS POP. Calculated from tables presented in CELADE, Bolet´ın demogr´afico, No. 66, July 2000.

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163

If the high 3 percent rate of the 1960–1970 decade had continued, the 1974 population would have doubled again to 208 million by 1983. But by the last decade of the twentieth century the population growth was the lowest recorded for the twentieth century falling to 1.4 percent per annum and as of 2002 the population had only grown to just 173 million. The cause for this failure to double the population by the 1980s was due to the fact that fertility finally followed mortality and began to decline from the mid-1960s onward. Thus, Brazil, after a very rapid growth spurt of its population in the middle years of the twentieth century began to experience ever slower growth as it finally entered the classic phase of “demographic transition” from a high mortality and fertility nation to a modern posttransition low fertility and low mortality society. Although mortality had been on a long and slow declining trend throughout much of the twentieth century, this was not the case with fertility. By the middle of the twentieth century, Brazil was still experiencing quite high birth rates. Although a few urban elite groups were practicing birth control and had lower fertility than the national average, this was a group that exercised little influence over national trends. In 1950 the total number of children born to women in the 15–44 age group was a high of 6.2 children, and peaked at 6.3 children in the following decade. But by the 1965–1970 period, the trend was suddenly and irrevocably reversed. First slowly and then at an ever faster pace, the total fertility rate declined in Brazil, going to 5.8 children in 1970, dropping a full child to 4.4 children in 1980, and then fell by two full children in 2000 to just 2.3 children per women.18 One of the most obvious consequences of this abrupt change in fertility can be seen both in the rising median age of the population and the changing age distribution of the population from 1950 to 2000. By 1980 the median age had risen to 20.3 years, another 2.5 years was added by 1990, and at the end of the century the median age of the population was 25.8 years of age, fully 7 years older than the median age recorded in 1965.19 18 19

CELADE, Bolet´ın demogr´afico, xxxvii, no. 73 (enero 2004), cuadro 3, p. 18. CELADE, Estimaciones y Proyecciones de Poblaci´on, 1950–2050, Brasil, Populaci´on Total, “Brasil: Indicadores del crecimiento demogr´afico estimados y proyectados por quinquenios, 1950–2050” accessed April 10, 2004 at www.eclac.cl/celade/proyecciones/intentoBD2002.htm; Also see Merrick & Berqu´o, Determinants, p. 20, Table 2; and Joseph e. Potter, Carl P. Schmertmann, and Suzana M. Cavenaghi, “Fertility and Development: Evidence from Brazil,” Demography, 39: 4 (November 2002), p. 741. For 2001, see “Brasil em s´ıntesisIndicadores demogr´aficos” at http://www.ibge.gov.br/.

164

8%

5%

Men

0

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3%

5%

8%

10% 10%

8%

5%

Men

3%

0

3%

Women

Graph 6.4. Source: http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

3%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

10%

Age Pyramid of the Brazilian Population in 1960

Age Pyramid of the Brazilian Population in 1950

5%

8%

10%

Demographic Change in Brazil Since 1980

165

This also can be seen in the changing shape of the Brazilian age pyramids, which went from the classic perfect pyramid at mid-century, to an even more accentuated base in 1960. But afterward the decline in fertility led to a decrease in the base of younger population and an increase in the share of its population in the middle and later years. As the twentieth century was coming to an end, this base shrank even more and the other sectors increased their share. The result was the now-famous barrel style age structure that has become the norm in the advanced industrial societies and is typical of a posttransition society (see Graphs 6.4 through 6.6). The cause of this fertility decline was not due to any change in this period in the initiation of marriage, the percentage marrying or the withdrawal of fertile women from reproduction. The age of women marrying for the first time did not change until long after the fertility transition, nor did the number of women ever marrying or those remaining childless decline, nor did the ratio of births out of wedlock alter. Many of these factors, including the dissolution of unions, did change over time, but these transformations came well after the fall in fertility. The only change that did occur was the mass adoption of contraceptives, along with sterilizations in the second half of the decade of the 1960s.20 It was older women who most enthusiastically adopted the new contraceptive procedures, but no group of women were exempt, and every age group experienced fertility decline from the high in 1965 to a low in 2000. But the biggest drop in fertility occurred among older women. In fact, the relationship between age and decline in the age specific fertility was almost perfectly inverted, with the rate of decline highest in the older ages and slowing through the younger ages. The age specific birth rate among women fortyfive to forty-nine, for example, declined by 95 percent from 1960 to 2000, it declined 89 percent for women forty to forty-four years of age, dropping to an 80 percent and 71 percent in the next two age categories (thirty-five to thirty-nine and thirty to thirty-four, respectively), then to 61 percent in the twenty-five to twenty-nine age group, and dropping just 13 percent in the fifteen to nineteen age group (see Graph 6.7). So dramatic has been the decline of fertility in these older age groups that the ratio of total children born has been dramatically 20

Jos´e Miguel Guzm´an, “Introduction: Social Change and Fertility Decline in Latin America,” in Jose Miguel Guzm´an et al., The Fertility Transition in Latin America (Oxford: Clarendon Press, 1996), p. xxiii.

166

8%

5%

0

3%

5%

8% 10% 10% 8%

5%

3%

0

3%

Graph 6.5. Source: http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

3%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

10%

Age Pyramid of the Brazilian Population in 1980

Age Pyramid of the Brazilian Population in 1970

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

5%

8%

10%

8%

5%

Men

0

Women

3% 5%

8%

10%

10%

8%

5%

Men

3%

0

3%

Women

Graph 6.6. Source: http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

3%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

10%

Age Pyramid of the Brazilian Population in 2000

Age Pyramid of the Brazilian Population in 1990

167

5%

8%

10%

Brazil Since 1980

Total Births to Total Women in Age Group

168 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 15 - 19

20 - 24 1960 - 1965 1965 - 1970

25 - 29

30 - 34

1970 - 1975 1975 - 1980

35 - 39

1980 - 1985 1985 - 1990

40 - 44

45 - 49

1990 - 1995 1995 - 2000

Graph 6.7. Age-Specific Fertility Rates for Mothers, Brazil 1955–2000 Source: CELADE, “Brasil Tasas de fecundidad y distribuci´on relativa por edades, tasa global de fecundidad, y nacimientos anuales por edad de la madre seg´un quinquenios,” Quadro A found at http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

increasing for women under twenty-nine years of age who now account for 76 percent of all births, up from 62 percent of all births in 1950 – with mothers under the age of twenty-five going from producing just over a third of all children in 1950 to half of all births in 2000 (see Graph 6.8). What is extraordinary is that this change occurred within roughly the same five year period both in Brazil and most of the rest of Latin America (see Graph 6.9). Moreover, in contrast to this so-called demographic transition in Europe, which began when birth rates were much lower than mid-twentieth-century Latin American figures, the drop in Brazil and most Latin American countries began from quite high rates. In fact, these rates were the highest in the world at mid-century.21 In the case of Brazil, with its highly stratified and partially unarticulated society, the fall was not uniform across all regions and classes. Thus, each region of the country began to decline from different initial levels, but they all moved in the same direction. Given these initial rates of decline, the gap between regions did not change much over time. 21

Juan Chackiel and Susana Schkolnik, “Latin America: Overview of the Fertility Transition, 1950–1990,” in Jose Miguel Guzm´an et al., The Fertility Transition in Latin America (Oxford: Clarendon Press, 1996), p. 4.

Demographic Change in Brazil Since 1980

169

35 30

Percentage

25 20 15 10 5 0 15 - 19

20 - 24 1955 - 1960 1965 - 1970

25 - 29

30 - 34

1975 - 1980

35 - 39

1985 - 1990

40 - 44

45 - 49

1995 - 2000

Graph 6.8. Changing Relative Share of Participation of Total Fertility by Women in Varios Age Groups, 1955–2000 Source: CELADE, “Brasil Tasas de fecundidad y distribuci´on relativa por edades, tasa global de fecundidad, y nacimientos anuale por edad de la madre seg´un quinquenios,” Quadro A found at http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

Thus, in 1950, the difference between the highest fertility region and the lowest one was a third less; this increased slowly in the next few decades, but returned to a third less by 2000 between the North and 7.0

6.0

5.0

4.0

3.0

2.0 1950-55

1960-65 1955-60

1970-75 1965-70

1980- 85 1990-95 2000-05 1975-80 1985-90 1995-2000

América Latina

Brasil

Graph 6.9. Total Fertility Rate in Brazil and Latin America in General, 1950–2005 Source: CELADE, “Brasil Tasas de fecundidad y distribuci´on relativa por edades, tasa global de fecundidad, y nacimientos anuale por edad de la madre seg´un quinquenios,” Quadro A found at http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

170

Brazil Since 1980

the South East zone (or 3.2 children in the Northern region states to just the maintenance rate of 2.1 children in the Southeast). In general, fertility in every zone thus declined at roughly the same rate. It began in the more advanced regions of the countries and in the urban areas, and then progressively spread at an ever rapid pace to the rural areas and from the wealthier to the poorer populations. If contraceptive practices are the key factor explaining this decline, then the spread of these practices can only be due to the better integration of the nation. Some of this integration would occur as a result of the expansion of the market and others would occur through the migration of poorer rural peoples to the cities and from the poorest regions of the nation to the richest ones. The decline in mortality that was occurring in this period also was influenced by migration to the cities. By the mid-twentieth century, mortality was higher in the rural areas and in the poorer regions than in the cities and the richer regions. Thus, the pull of jobs available in the cities and in the richer zones along with educational opportunities and better social services all were factors that helped to push this massive late-twentieth-century migration in Brazil. The expulsion factor was, of course, the mechanization of agriculture and the decline of subsistence farming everywhere in Brazil. Although urban migration was a constant theme in Brazilian history, the process became far more rapid in the second half of the twentieth century. As late as 1960, the majority of the national population still resided in the rural areas. But, by 1970, over half of the population was finally listed as urban and this ratio rose steadily until it reached 80 percent of the national population by the census of 2000. It is estimated that in the twenty years from 1960 to 1980 some twenty-seven million rural Brazilians migrated to the cities.22 Until the 1990s, the states that had the biggest rural to urban migration were the South Central ones, as agriculture modernized faster there and the urban centers grew more rapidly than in most regions. The peak growth of most of the state capital cities was in the twenty-year period from 1950 through 1970, when growth often reached well over 5 percent per annum. Thus, in

22

ˆ Ana Am´elia Camarano and Ricardo Abramovay, “Exodo rural, envelhecimento e masculinizac¸a˜ o no Brasil: panorama dos u´ ltimos 50 anos” (Texto para Discuss˜ao no. 621; Rio de Janeiro: IPEA, 1998), p. 1. The authors point out that Brazil, like several other countries in Latin America, describes urban centers by administrative definition rather than size, which tends to underestimate the rural population. Ibid, p. 6.

Demographic Change in Brazil Since 1980

171

the 1950s, Belo Horizonte was growing at 6.8 percent per annum, and was still increasing its population at over 6 percent per annum in the next decade. S˜ao Paulo was growing at or above 5 percent per annum in these two decades, and even Curitiba hit 7 percent growth per annum in the first decade and almost 6 percent in the 1960s. Only Rio de Janeiro had a slower growth and was only growing at or above 3 percent per annum in these three decades. Brasilia, of course, had the most sensational growth, increasing its population by 14 percent per annum in the 1960s. The result was that all these cities – except Rio de Janeiro – more than doubled their populations in this twenty-year period. By the end of the century, there were twenty state capitals with populations over one million in their metropolitan districts alone. But by then all were growing at much more reduced rates as the movement from rural to urban had slowed down considerably in all states, and the norm – except for Manaus – was 2 percent per annum growth rates or less.23 By 2000, some eighty-four million Brazilians – or 49 percent of the national population – lived in cities with a population of fifty thousand persons or more.24 Although the growth of the population of the core cities slowed considerably after 1980 and sometimes even stagnated, there was new growth in their greater metropolitan areas, a phenomena occurring in most countries of Latin America at the end of the century.25 Thus, in 2000, there were now registered ten metropolitan areas in Brazil with a total population greater than two million people, with the leaders being S˜ao Paulo with eighteen million persons, Rio some eleven million, Belo Horizonte five million, and Porto Alegre 3.5 million persons. In all cases, the growth was now in the surrounding towns rather than in the core cities, which often now represented just half of the total greater metropolitan populations.26 The growth of the cities was through the migration of working age persons from the rural area, with a significant overrepresentation of

23 24 25

26

IBGE, Estat´ısticas do S´eculo XX (2003), Table pop S2T04. IBGE, Census 2000. Thus, for example, between 1991 and 2002 the municipality of Belo Horizonte grew at only 1.1 percent per annum, whereas the towns surrounding the city and now making up the greater metropolitan area grew at 1960s and 1970s rates of 4.4 percent per annum. In 1991 these towns made up just 41 percent of the metropolitan regional population and eleven years later they made up half of the metropolitan population. Fundac¸a˜ o Jo˜ao Pinheiro, Perfil Demogr´afico do Estado de Minas Gerais 2000 (Belo Horizonte, 2003.), Table 15, p. 24. Censo Demogr´afico 2000 – Resultados do universo, Table 411 – “Populac¸a˜ o residente, por grupos de idade, segundo as Regi˜oes Metropolitanas, a RIDE e os Munic´ıpios.”

172

Brazil Since 1980

women in the migration stream.27 The increasing market for domestic and factory work drew these women to the rapidly expanding cities. The result of this migration was that, by 2000, the sex ratio in the urban areas was 94 men per 100 women, whereas the ratio was 112 men per 100 women in the rural areas.28 It also can be seen in the age structures for these two differing populations in 1980 and 2000 (see Graphs 6.10 and 6.11), with the rural populations having a large base of younger persons and a more traditional age pyramid and the urban areas having a much smaller ratio of children and a higher proportion of working age adults. But urban growth was not evenly spread across the nation. The Northeastern region, for example, only reached over 50 percent urban in 1980, whereas the advanced states of the Southeastern region had achieved this percentage twenty years before. Moreover, by 2000, the states of the Northeastern region were still only 69 percent urban, compared to 91 percent urban in the Southeastern area.29 Not only did the rural population migrate in massive numbers to the cities to better their lives, making Brazil by the end of the century an overwhelmingly urban society, but also they migrated to new regions for the same reasons. By 1930 the international migrations, which had brought some 4.4 million European and Asian workers to Brazil, was slowing down considerably.30 Most of that migration came in the period from the 1880s to the 1920s and had gone first to the coffee fields of S˜ao Paulo and Paran´a, and then to the expanding cities of the region, above all S˜ao Paulo. But the continued economic growth of the Central and Southern states and the end of significant foreign immigration made these South Central regions zones of attraction for the poor of Northeastern Brazil. Already in the late 1920s, migration began on a steady basis from the northeast and this continued unabated for the next sixty years. By the period 1920–1940, S˜ao Paulo received 27

28 29 30

In the census of 2000, the peak age for migrants to the state of S˜ao Paulo was thirty to thirtyfour years and they were in their forties for the state of Rio de Janeiro – which has fewer of these migrants. IBGE, Censo Demogr´afico 2000: Migrac¸a˜ o e Deslocamento, Resultados da amostra (Rio de Janeiro, 2003), Graph 10. CELADE, Estimaciones y Proyecciones de Poblaci´on, 1950–2050, Brasil, Populaci´on Urbana y Rural, accessed at http://www.eclac.cl/celade/ proyecciones/intentoBD-2002.htm. IBGE, Estat´ısticas do S´eculo XX (2003), Table pop S2T03ab. 1872–1972 from Maria Stella Ferreira Levy, “O Papel da Migrac¸a˜ o Internacional na evoluc¸a˜ o da populac¸a˜ o brasileira (1872 a 1972),” Revista de Sa´ude P´ublica Vol. 8 (Supl.) (1974), [S˜ao Paulo] Table 1, pp. 71–73; data from 1820 to 1871 taken from Directoria Geral de Estatistica, Boletim Commemorativo da Exposic¸a˜ o Nacional de 1908 (Rio de Janeiro, 1908), pp. 82–85.

173

6%

4%

0

2%

Women

4%

6%

8%

8%

6%

4%

2%

Men

0

2%

Women

4%

Graph 6.10. Source: http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

Men

2%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

8%

Age Pyramid of the Urban Brazilian Population in 2000

Age Pyramid of the Urban Brazilian Population in 1980

6%

8%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

age

10%

8%

5%

0

Women

3% 5%

8%

10%

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

10%

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Men

3%

0

Women

3%

5%

Age Pyramid of the Rural Brazilian Population in 2000

Graph 6.11. Source: http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm, accessed April 8, 2004

Men

3%

Age Pyramid of the Rural Brazilian Population in 1980

174

8%

10%

Demographic Change in Brazil Since 1980

175

more internal immigrants than foreign-born ones.31 With each decade, the pace increased. Whereas a quarter of the growth of the state of S˜ao Paulo in the 1940s was accounted for by migrants coming from other states, this reached 30 percent of total growth in the next two decades and peaked in the 1970–1980 period, when 42 percent of the growth of the state population was accounted for by these internal migrants. But this was the peak period for S˜ao Paulo. Internal migration did not stop, but after 1980 the flow of interstate migrants was directed more toward the new agricultural lands of the west and north, which were slowly being opened up for exploitation by the end of the century. Thereafter, the importance of migrants in local paulista growth dropped to around 10 percent of the growth rate.32 The impact of this out-migration can be seen in the progressive decline of the Northeastern region in its importance within the national population. In the first national census of 1872, the Northeastern region was the single most populated region and accounted for just under half of the national population (or 47 percent), with the Southeastern states (Minas Gerais, Esp´ırito Santo, Rio de Janeiro, and S˜ao Paulo) just behind it. By 1920 the Southeastern region was now absorbing 47 percent of the population and the Northeast was down to 37 percent and would continue its steady decline to just 28 percent of the total national population by the census of 2000.33 In the decade of the 1960s, the Northeast lost 1.8 million persons to migration, and in the next decade 2.4 million more left than entered the region.34 Although the flow of migrants out of the northeast continued without interruption after 1980, the pattern was for a more dispersed migration, with migrants now heading west and north. This explains why the Center Western region increased is share of population from just 3 percent in 1950 to 7 percent in 2000, and the North went from 4 percent to 8 percent in the same period.35 31 32

33 34

35

Thomas W. Merrick and Douglas H. Graham, Population and Economic Development in Brazil, 1800 to the Present (Baltimore: Johns Hopkins University Press, 1979), Table VI-4, p. 125. Carlos Am´erico Pacheco et al., “An´alise demogr´afica do Estado de S˜ao Paulo,” in Carlos Am´erico Pacheco and Neide Patarra, eds., Dinˆamica demogr´afica regional e as novas quest˜oes populacionais no Brasil (Campinas: Instituto de Economia/UNICAMP, 2000), Table 4, p. 372. IBGE, Estat´ısticas do S´eculo XX, Table “pop S2T02ab.” Neide Patara, Rosana Baeninger, and Jos´e Marcos Pinto da Cunha, “Dinˆamica demogr´afica recente e a configurac¸a˜ o de novas quest˜oes populacionais,” in Carlos Am´erico Pacheco and Neide Patarra, eds., Dinˆamica demogr´afica regional e as novas quest˜oes populacionais no Brasil (Campinas: Instituto de Economia/UNICAMP, 2000), Tabela 12, p. 30. IBGE, Estat´ısticas do S´eculo XX, Table “pop S2T02ab.”

176

Brazil Since 1980

There also have been basic structural changes within the labor force. While total participation rates of the economically active population have remained steady in the past twenty years, and even slightly declined as the population urbanized (since rates in the rural areas are traditionally higher than the urban rates), the distribution and sex of that labor force have changed profoundly. Thus, female rates of participation in the labor force have been constantly increasing in the past twenty years, from an estimated ratio of 33.9 percent women of working age found in the labor force in 1980 to an EAP rate of 40.1 percent in 2000, whereas male ratios have held steady at 76 percent in the same period. Moreover, the rates for the urban women are always higher than for rural women (in 2000 urban women had an EAP of 41.3 percent and rural women just 39.4 percent).36 Corresponding to the increasing participation of women in the labor force has been a profound change in the structure of households and families that has been occurring in Brazil in the past quarter century. First of all, the legalization of divorce in 1977, and in the Constitution of 1988, clearly influenced the growth of female-headed households with families among the middle and upper classes, and has led to a higher ratio of the population not married. Although female-headed family groups were always common among the poor, the new laws had a major impact on the extending this system into all classes within Brazil and of promoting divorce. Between 1984 and 2001, the number of divorces granted by the state has grown by 9 percent per annum.37 There also was a growth in the number of persons legally separated – made a requirement of the 1988 constitution, which forced a oneto two-year separation before final divorce could be granted. But the ratio of divorces to separations has been steadily climbing and now final divorces make up 70 percent of the marriages being dissolved in the year 2002.38 Despite the increase of persons of all ages getting divorce, the median age of divorced persons has remained steady at thirty-five to thirty-nine years of age.39 Nor has the number of children affected 36

37 38

39

These are the refined EAP rates; see CELADE, Estimaciones y Proyecciones de Poblaci´on, 1950–2050, Brasil, Populaci´on econ´omicamente activa (PEA), Indicadores demogr´aficos de la PEA, at http://www.eclac.cl/celade/proyecciones/intentoBD-2002.htm. IBGE – Estat´ısticas do Registro Civil, Table 426. As could be expected, the mean age of persons separating for both sexes was three years less than those getting a final divorce. IBGE, Estat´ısticas do Registro Civil, vol. 29 (Rio de Janeiro: IBGE, 2002), Graph 14. IBGE – Estat´ısticas do Registro Civil, Table 426.

Demographic Change in Brazil Since 1980

177

by divorce changed dramatically, as consistently half of those filing for divorce over time have had only one child or none.40 Finally, it appears that after dramatic rises, divorce and separation rates have become fairly stable in the past decade. In 2001, the rates for legal separations among adults twenty years of age and over, was a 0.9 per thousand persons in this age category, a rate that had remained steady since 1994. In turn, the rate of divorce for this same age group slowly rose through the decade of the 1990s and reached 1.2 per thousand adults in 1999.41 As could be expected, these rates were much higher than the national norms in the Southeastern and Southern states, where both separation and divorce rates were 1.3 per thousand adults (Southeastern states) and 1.2 per thousand adults (Southern states) in 2001.42 The increasing importance of divorce and separation, has clearly led to changes in the sex of the heads of households. Thus, as late as 1991, only 18 percent of Brazilian multiple-person households were headed by a woman, a figure that was identical to that found in a survey of 1984.43 But in this last decade of the century this would change dramatically. It would rise to 25 percent of all households by 2000,44 and reached 28 percent by 2002.45 It also was evident from the developments in the major metropolitan regions that this trend was increasing. In such greater metropolitan areas as S˜ao Paulo, Rio de Janeiro, and Belo Horizonte, the rate of female-headed households was over 30 percent.46 In fact, there was a quite sharp difference between urban and rural rates. In the census of 2000, when national rates indicated that 25 percent of households were headed by women, the rate for urban areas was 27 percent for urban households with multiple residents, and just 13 percent for rural areas.47

40 41 42 43 44 45 46 47

IBGE – Estat´ısticas do Registro Civil, Table 723. IBGE, S´ıntese de Indicadores Sociais, 2002 (Estudos e Pesquisas Informac¸a˜ o Demogr´afica e Socioeconˆomica n´umero 11; Rio de Janeiro, 2003), p. 271. IBGE, S´ıntese de Indicadores Sociais, 2002 (Estudos e Pesquisas Informac¸a˜ o Demogr´afica e Socioeconˆomica n´umero 11; Rio de Janeiro, 2003), Tables 10.3 and 10.5, pp. 275, 277. IBGE, Estat´ısticas do S´eculo XX, Tabela “Populac¸a˜ o1986aeb-047.” In 1981, the figure was just 17 percent, IBGE. Estat´ısticas do S´eculo XX, Table “Populac¸a˜ o1984aeb-089.” IBGE, “Pessoas respons´aveis pelos Domic´ılios Particulares Permanentes,” accessed at http://www.sidra.ibge.gov.br/bda/popul/. PNAD 2002. S´ıntese de Indicadores (Rio de Janeiro: IGBE, 2003) p. 129, Graph 5.2. PNAD (Pesquisa nacional por amostra de domic´ılios) 2001: microdados. Rio de Janeiro: IBGE, 2002. 1 CD-ROM, Table 6.2 IBGE, Censo Demogr´afico de 2000, Resultados do Universo, Table 1490. Available from http://www.sidra.ibge.gov.br.

178

Brazil Since 1980

Clearly, like other advanced industrial societies undergoing increased secularization, the family organization of Brazil is profoundly changing, with more divorced persons among adults and an ever increasing number of multiperson and family households headed by women. There also has been a steady decline in the ratio of persons officially married, this of course almost a generation after the decline in fertility. In 1990, for example, there were 7.5 marriages per 1,000 resident population aged 15 years and older; this has declined to 5.7 marriages per thousand adults in 2002. Moreover, it was suggested that this decline would have been even more dramatic were it not for the church campaigns of the mid- to late 1990s to encourage mass marriages for persons living in free unions.48 Equally, as was occurring in all advanced industrial societies, the age of first marriage has been steadily rising. In 1991, women married at 23.7 years of age and by 2002 this had increased by three years to 26.7 years. Men marrying for the first time also rose by over three years, rising to 30.3 years of age in 2002 for first-time marriages compared to just 27.0 years in 1991.49 As a consequence of these changes in marriage, declining fertility, and increased urbanization, there also has been a profound decline in the average size of households and the number of children per household. Households averaged 4.2 persons in 1991 and nine years later this dropped to 3.7 persons nationally and even to 3.4 persons in the more advanced southern states.50 Moreover, the trend was for this decline to continue in coming decades. There was a perfect negative correlation between number of children per household (1.5 nationally) and family wealth, the poorer households having the largest average number of children (2.8) and the wealthiest the lowest number of children (0.8).51 As many studies have shown, patterns of family size and fertility spread from the urban and wealthiest sectors to the poorer 48

49 50 51

IBGE, Estat´ısticas do Registro Civil, 2002 (Rio de Janeiro: IBGE, volume 29), Graph 10 “Taxa de nupcialidade geral – Brasil – 1991–2002”; and IBGE, S´ıntese de Indicadores Sociais, 2002 (Estudos e Pesquisas Informac¸a˜ o Demogr´afica e Socioeconˆomica n´umero 11; Rio de Janeiro, 2003), pp. 269–270. IBGE, Estat´ısticas do Registro Civil, 2002 (Rio de Janeiro: IBGE, volume 29), n.p., Graph 12 – Idade m´edia ao casar – Brasil – 1991/2002. IBGE, “M´edia de moradores em Domic´ılios Particulares Permanentes,” accessed at http://www.sidra.ibge.gov.br/bda/popul/. PNAD 2001: microdados. Rio de Janeiro: IBGE, 2002. 1 CD-ROM, Table 6.9 – N´umero m´edio de filhos, na fam´ılia, residentes em domic´ılios particulares, por classes de rendimento mensal familiar per capita em sal´ario m´ınimo, segundo as Grandes Regi˜oes, Unidades da Federac¸a˜ o e Regi˜oes Metropolitanas – 2001.

Demographic Change in Brazil Since 1980

179

ones during the process of transition. Thus, it can be assumed that the trends evident since the 1970s will continue at the same pace from many years to come. As a government survey concluded in 2002: In the past two decades, the most significant change in the organization of the Brazilian family has been the rise of female headed households and the reduction in the average size of the nuclear family.52

Although less clear, an indicator of basic change and with relatively few historical data currently available, it would appear that there also has been an increase in the number of households formed by single persons. These “unipersonal” households, as the Brazilian census calls them, accounted for 9.2 percent of all surveyed households in 2001, with the metropolitan areas having rates higher than the national average.53 The age of these single-person households tended to be much older than the norm. Some 57 percent of the households contain persons fifty years or older and only 28 percent are headed by younger persons thirty-nine years of age and older,54 a figure not that different from the United States, where this phenomenon has became a major area of attention. The ratio of such households has been rising steadily in the United States and now represents 12.5 percent of all households.55 At this point, however, it is difficult to assess if this is a growing trend and if it reflects the recent changes in social organization of the family and rising ages of marriage. How unique or common have been all these changes in comparison to the other states of the region? Clearly, Brazil was an early entrant into fertility decline by the standards of the rest of the Americas. Ranked among the high fertility countries at mid-century, as were the majority of the nations of the hemisphere, Brazil was among the first to 52 53

54

55

IBGE, S´ıntese de Indicadores Sociais, 2002 (Estudos e Pesquisas Informac¸a˜ o Demogr´afica e Socioeconˆomica n´umero 11; Rio de Janeiro, 2003), p. 161. PNAD 2001: microdados. Rio de Janeiro: IBGE, 2002. 1 CD-ROM, Table 6.3 – Fam´ılias, total e sua respectiva distribuic¸a˜ o percentual, por tipo, segundo as Grandes Regi˜oes, Unidades da Federac¸a˜ o e Regi˜oes Metropolitanas – 2001.” PNAD 2001: microdados. Rio de Janeiro: IBGE, 2002. 1 CD-ROM, Table 6.12 – “Distribuic¸a˜ o percentual das unidades unipessoais, por grupos de idade da pessoa de referˆencia, segundo as Grandes Regi˜oes, Unidades da Federac¸a˜ o e Regi˜oes Metropolitanas – 2001.” U.S. Census Bureau, Statistical Abstract of the United States: 2002, Table 45, p. 46; also see Herbert S. Klein, A Population History of the United States (New York: Cambridge University Press, 2004), Ch. 7.

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Brazil Since 1980

experience fertility decline beginning in the second half of the 1960s. Although it was 4 percent above the region’s total fertility rate in 1960– 1965 and consistently above the average rate from at least the 1950s, by 1965–1970 it dropped to 4 percent below the regional rate, and, by the next quinquenium, it was 8 percent below the regional total fertility rate. By the period 1995–2000, Brazil’s 2.3 children total fertility rate was 15 percent below the average for Latin American countries. Brazil’s decline was so rapid that it quickly moved to a rate that placed it among the lowest fertility countries in the region, including such previously generally low fertility nations as Cuba, Uruguay, and Argentina. By the last five years of the century, only Cuba in fact had a lower total fertility rate.56 But in terms of the various indices of mortality, Brazil has not done as well. At mid-century, Brazil’s population had a life expectancy below the regional average and it ranked ninth in the hemisphere. Uruguayans, then the most long-lived of the Latin Americans in this period had on average 15.3 years more of life than the average Brazilian. By 1995–2000, Costa Ricans had replaced Uruguayans as the Latin American nation with the highest life expectancy, and they in turn lived, on average, 7.1 years more than the typical Brazilian. Although the spread between the best rates and those of Brazil had declined, the relative position had worsened. In 1995–2000 Brazil’s relative position had actually declined to twelfth place in life expectancy in the region.57 The same occurred with all the mortality estimates. At the end of the twentieth century, Brazil still had an infant mortality rate that placed it among the poorest and least developed countries of the region (in eleventh position), a level it had reached at mid-century. In 1950– 1955, Argentina had the lowest death rate for infants per 1,000 births that was just under half of the Brazilian rate. By 1995–2000, it was still the leader of the hemisphere and this time its rate was over half less that the Brazilian mortality rate of 42.2 infant deaths. Moreover, everyone had improved their health conditions in this period, so Brazil still ranked in the same place at the end of the century in relation to the other countries of Latin America.58 56 57 58

CEPAL, Bolet´ın Demogr´afico, no. 68 ( July 2001), Table 2, “Am´erica Latina: Tasas Globales de Fecundidad Estimadas y Proyectadas . . . ” CELADE, Bolet´ın Demogr´afico, no. 73 (Enero 2004), cuadro 5, p. 22. CEPAL, Bolet´ın Demogr´afico, no. 68 ( July 2001), cuadro 16.

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181

Clearly, despite the creation of a modern health system and the overwhelming urbanization of the Brazilian population in the past half century, the continued poverty and illiteracy of the Brazilian population today has meant that Brazil remains among the poorer and middle-rank countries in terms of its indices of mortality and probably of morbidity as well. Despite often heroic investments in health and public services in the past quarter century, Brazilian efforts in these areas has not exceeded the changes that have occurred in almost all of the other countries of the hemisphere, leaving Brazil relative to all other countries at about the same position as it was in 1950 – this despite its impressive economic and industrial growth compared to most countries of the region.

7 Education, Social Welfare, and Health Care

In few areas was Brazil so far behind the rest of the hemisphere and even comparable third world countries than in education and in few areas has more changed in the past quarter century. Brazil, for most of its imperial and Republican history, was a relatively backward nation in terms of providing public education for its population. Although the goals of a free primary education had been enunciated as early as the 1820s, the government made little effort to carry out this fundamental task. This failure was due to a series of factors, among which was an ongoing debate about whether the central government or the state and municipal regimes were primarily responsible for providing education. This resulted in few governments spending significant sums on education. The independent empire of Brazil inherited a colonial tradition that was antithetical to higher education and even to the printing of books. In the Spanish American empire, local universities were created in all the major capitals, and the printing of religious works, Indian grammars, and government documents was the norm from Mexico City to Lima from the sixteenth century onward. In contrast, the Portuguese colonial administration rejected the idea of creating local universities in its American colony and prohibited the printing of books altogether. The Portuguese crown primarily encouraged private religious primary and secondary education in the colonial period and forced the elite to return to Europe to get a higher degree at the major Portuguese universities. With the creation of an independent nation in the nineteenth century, this hostility toward public education began to change. Many of the local state and municipal governments now began to promote primary public education. In the 1830s and 1840s, the first teacher 182

Education, Social Welfare, and Health Care

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training schools were founded, and by mid-century a few public secondary schools were added to the expanding number of public primary schools. The elite, of course, continued to send their children to the small number of select private religious schools, which traditionally provided both primary and secondary education.1 The imperial government also recognized the need to create advanced professional schools and by the middle of the nineteenth century it had established engineering and medical academies.2 By the time of the creation of the Republic at the end of the nineteenth century, the situation was still rather precarious. The majority of the population was not enrolled in schools, the illiteracy rate was among the highest in the Americas, and there still existed no universities in the country. But slowly this pattern began to change and there was a quantitative increase in the number of children attending school. As late as 1871, there were 134,000 students, only 7 percent of whom were in secondary schools, and only 28 percent of whom were girls, for a population of over 10.1 million. This represented barely thirteen children matriculated in schools for every one thousand inhabitations.3 By 1889, the ratio was eighteen children per one thousand residents, by 1907 it was twenty-nine, and by 1920 it was forty-one children per one thousand residents. By this later date, there were fifty-nine thousand primary school teachers, compared to just four thousand in the 1870s.4 By 1940, eighty children per thousand were attending primary and secondary school, and by 1950 the figure finally reached 110 primary and secondary students per 1,000 resident population.5 Nevertheless, in that year, the total number of children attending school was only 6 million, of which 5.2 million were in the primary grades, only 390,000 were in secondary school, and just 84,000 were in higher education, this out of a population of 18.7 million persons.6 Clearly, although total enrollments of primary school children were increasing 1 2 3 4 5

6

Manuel Bergstrom Lourenc¸o Filho, Tendˆencias da educac¸a˜ o brasileira (2nd ed.; Bras´ılia: Inep/MEC, 2002), pp. 17–19. Simon Schwartzman, A Space for Science – The Development of the Scientific Community in Brazil (College Station: Pennsylvania State University Press, 1991), Ch. 3. Data from Relat´orio do Minist´erio dos Neg´ocios do Imp´erio 1871 Apresentado Em Maio De 1872, pp. 27–36. Lourenc¸o Filho, Tendˆencias da educac¸a˜ o brasileira, p. 25. Celso de Rui Beisegel, “Educac¸a˜ o e sociedade no Brasil ap´os 1830,” in S´ergio Buarque de Holanda, ed. Hist´oria geral da civilizac˜ao brasileira (3rd ed.; S˜ao Paulo: Difus˜ao Europ´eia do Livro, 1995), vol. 4, pp. 384, 386. IBGE, Estat´ısticas do S´eculo XX (2003), Table “Educac¸a˜ o1953aeb–2.”

184

Brazil Since 1980

rapidly and approaching well over two-thirds of the potential children eligible for school, by mid-century there was still the traditional blockage at the secondary school and higher education level, which was the preserve of a distinct minority. Only thirty-five of the original one thousand who entered primary school made it into secondary school and only ten of them finally made it into higher education – or just 1 percent of those who began their primary schooling. Equally the poor quality of primary education was such that the rate of retention was quite high and all the early grades were filled with students of older age cohorts.7 It has only been in the last quarter century that some of these problems have slowly begun to be resolved. To begin with, the high variation in ages of children entering first grade had begun to change for the better. Whereas in 1982 three-quarters of the entering class to all primary school grades were not the recommended age – still reflecting the catch-up in enrollments that were occurring throughout Brazil and the very high retention rates – by 1996 this had declined to 45 percent of the entering class.8 Second, more students were staying until the final four years of primary school. Whereas in 1976 the fifth to eighth grades (up to age fourteen) made up only 29 percent of a total primary school population, by 1998 their share had increased to 40 percent of the total of primary school population, and by 2003 it was 45 percent of the total primary school enrollment.9 There also was a steady decline in dropouts (to just 1 percent of the first-year class), and an increase to two-thirds on average passing from one grade to another over this same period. Finally, the net rates of primary school attendance, which is the ratio of children attending school to the total children in that age group, also was reaching a very high common national level after years of regional inequalities in the access to education – with the worst region (the Northeast) attaining a rate of 94.4 percent compared to the best rate – from the Southern region – which 7 8

9

IBGE, Estat´ısticas do S´eculo XX (2003), Tables “Educac¸a˜ o1983aeb 223 1a224”and “aeb 223 1a224- 1.” Jos´e Roberto Rus Perez, “Ensino Fundamental,” in Maria Helena Guimar˜aes de Castro and ´ Aurea Maria Queiroz Davanzo, eds., Situac¸a˜ o da Educac¸a˜ o B´asica no Brasil (Bras´ılia: INEP, 1999), Table 4, p. 79; and Graph 2, p. 75. Perez, “Ensino Fundamental,” Graph 2, p. 75 for 1975 figure; and Maria Helena Guimar˜aes de Castro, Educac¸a˜ o para o s´eculo XXI. O Desafio da Qualidade e da Eq¨uidade (Bras´ılia: INEP, 1999), p. 10; and the 2003 data taken INEP, EDUDATABRASIL (Sistema de Estat´ısticas Educacionais), “Matr´ıcula no Ensino Fundamental – Ano 2003,” accessed at http://www.edudatabrasil.inep.gov.br/index.htm.

Education, Social Welfare, and Health Care

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stood at 98.1 percent.10 How recent and revolutionary are all these changes and how far it has yet to go can be seen from the fact that in the census of 2000, only 15 percent of the population sixty years of age and older (making up some fourteen million persons) had completed eight years of primary education, whereas 54 percent of those who made up the age cohort of twenty- to twenty-four-year-olds (a cohort some fifteen million strong) finished the primary grades.11 Moreover, despite continuing national efforts, there are still wide variations in the delivery of education to the population in terms of residence, class, and race. Although rates of attendance are now little different regionally, there still remain fundamental differences among the regions in terms of the quality of the schools, their facilities, and their teachers. This is reflected in the fact that the ratio of students surviving to the upper grades is much lower for the Northeastern and Northern regions than for the rest of the country.12 In turn, these regional differences are expression of unequal opportunities for education related to class, color, and ethnicity. In the census of 2000, only 37 percent of the twenty- to twenty-four-year-olds in the Southeastern region did not complete primary school, whereas the ratio in the Northeast was 61 percent. In turn whites in the cohort of twenty- to twenty-four-year-olds in the Northeast and in the Southeastern region did better than pretos and pardos. Thus, in the Southern states of Rio de Janeiro, S˜ao Paulo, Minas, and Esp´ırito Santo, only 35 percent of the young twenty-year-old whites did not finish primary school versus over half of the colored who were unable to finish the first eight years of schooling (or 56 percent of the blacks twenty to twenty-four and 57 percent of the mulattos). In the Northeast, this same racial spread could be found with 51 percent of the whites twenty to twenty-four years of age not finishing versus some 68 percent and 65 percent for the blacks and mulattos. In all cases, Asians did better than anyone and Indians were usually at or above the level of blacks and mulattos.13 10 11 12

13

Castro, Educac¸a˜ o para o s´eculo XXI, p. 11. IBGE-SIDRA-Banco de Dados Agregados, accessed at http://www.sidra.ibge.gov.br/ bda/popul/default.asp on May 28, 2004. Thus, only 25 percent of the primary schools with more than one hundred students in the Northeast had libraries, and only 3 percent had science labs, this compared to the best zone – that of the Southern region where 75 percent of such schools had libraries and 30 percent had labs. Rus Perez, “Ensino Fundamental,” Table 17, p. 89. IBGE, Censo Demogr´afico – 2000 – Educac¸a˜ o, Resultados da Amostra (Bras´ılia, 2000), Tables 2.210 and 2.4.10.

186

Brazil Since 1980

Although the primary school population grew steadily from early in the twentieth century, it was only in the decades of the 1960s and the 1970s that there would finally occur a major expansion of the secondary school and higher education populations. In 1960, secondary school enrollments represented just 3.1 percent of all school enrollments – a figure not too different from the 1940s. But by 1974 secondary school students had more than doubled their importance to 8 percent of the total primary and secondary grades,14 and the three million students attending secondary school in 1981 represented 11 percent of all primary and secondary school students.15 By 2003 Brazilian secondary school enrollments (now tripped to nine million students) reached 21 percent of total enrollments of the two levels.16 To give some comparative sense of these numbers, secondary school enrollments in the United States reached 10.2 percent of the total primary-secondary school matriculations by 1919–1920, were 17 percent by 1929–1930 and were a steady 28 percent by the 1990s.17 Although this increasing importance of secondary school students suggests that Brazil is steadily approaching first world standards in secondary education, fundamental problems remain. As of 1998 only some 55 percent of children fifteen to seventeen years old were attending school – a major increase from earlier years but still low. Moreover, the age distortions were still quite important – although falling – and as of 1996, some 54 percent of students attending secondary schools were over seventeen years of age.18 But dropout rates were falling, retention rates in grades were declining, and graduation rates were rising – from 26 percent of secondary school students reaching that stage in 1985 to 43 percent in 1995.19 Unfortunately, much of this recent secondary school expansion has been at the cost of quality. The so-called massification, or percipitous 14 15 16 17

18

19

IBGE, Estat´ısticas do S´eculo XX (2003), Table educac¸a˜ o1977aeb 069 “Distribuic¸a˜ o da matr´ıcula no in´ıcio do ano, segundo n´ıveis de ensino, 1960–74.” IBGE, Estat´ısticas do S´eculo XX (2003), Tables, “Educac¸a˜ o1982m aeb 061 1” INEP, DATABRASIL, “Matr´ıcula no Ensino M´edio [and Ensino Findamental] – Ano 2003,” accessed at edudatabrasil Web site http://www.edudatabrasil.inep.gov.br/index.htm. U.S. Department of Education, NCES (National Center for Education Statistics), Digest of Educational Statistics, 2002, Table 36 “Historical summary of public elementary and secondary school statistics: 1869–1970 to 1999–2000.” Guiomar Namo de Mello, “O Ensino M´edio em N´umeros,” in Maria Helena Guimar˜aes de ´ Castro and Aurea Maria Queiroz Davanzo, eds., Situac¸a˜ o da Educac¸a˜ o B´asica no Brasil (Bras´ılia: INEP, 1999), Tables 1, 3, p. 103. Mello, “O Ensino M´edio em N´umeros,” Table 15, p. 109.

Education, Social Welfare, and Health Care

187

expansion, of secondary education has led to a major decline of the quality of the formally elite, but limited, public secondary schools. Equally, the concentration of the federal government on university growth from the 1960s onward also had distorted federal spending priorities and interests. Starting with the Constitution of 1988, attempts were finally made to reform the fiscal system. In the Constitution, not only was universal free primary and secondary public education declared a right of all citizens but the government now required that 25 percent that all state and municipal income had to be expended on education along with 18 percent by the federal government in support of state and municipal expenditures in this area. This was accomplished by setting up a fund – the FUNDEF, which collected 15 percent of the 25 percent from the taxes of the states and municipalities and redistributed them within each state according to the number of students in state and local public schools. There also was a federal compensation plan for states spending too little per student or per teacher. In the context of decentralization and the forcing of municipalities to take direct responsibility came federal transfers of income and a major federally supported drive to increase the education of teachers, force municipalities to spend their educational budgets on salaries, curriculum, and supplies, and concentrate on improving the quality of education, rather than just on investments in new physical plants. National assessments of primary education were now carried out, and the aim of the federal fundamental level educational policy was to guarantee that the poorer regions reached nationally defined standards in the quality of education, thereby aiming to reduce regional disparities.20 The growth of university level education, was, in contrast, already a major goal of the federal government at least since the Vargas era and especially from the 1960s and was primarily driven by federal government investments. In the 1930s there were new efforts made by the federal government to create a more modern educational establishment. An independent Ministry of Education was established under Vargas and, in the following decades, attempts were made to improve the postsecondary technical faculties.21 But the first modern university 20

21

On the 1990s reform in federal educational policies and funding, see Nely Caixeta, “Educac¸a˜ o,” in Bolivar Lamounier and Rubens Figueiredo, eds., A Era FHC, Um Balanc¸o (S˜ao Paulo: Cultura Editores, 2002), Ch. 15. Simon Schwartzman, Helena Maria Bousquet Bomeny, and Vanda Maria Ribeiro Costa, Tempos de Capanema (2nd ed., Rio de Janeiro: Fundac¸a˜ o Get´ulio Vargas e Editora Paz e Terra, 2000), Ch. 6.

188

Brazil Since 1980

was actually created by a state government, when in the 1930s the government of S˜ao Paulo, with the help of European academics, created the Universidade de S˜ao Paulo. But few states followed this example. In 1951 the federal government committed itself to actively supporting scientific research and created the CNPQ, or National Research Council (Conselho Nacional de Pesquisas) and shortly afterward it established CAPES (Coordenac¸a˜ o de Aperfeic¸oamento de Pessoal de N´ıvel Superior) to promote scientific education through fellowships given to Brazilians to study both at home and abroad.22 But it was not until the early 1960s that the federal government finally promoted the establishment of federal universities in all the states. In the 1960s came major university reform modeled on the modern North American universities led by the new University of Bras´ılia founded in 1962 and the federal University of Minas Gerais. Soon the federal government was promoting a major expansion of science and technology at both older technological institutes as well as at the universities, and the state of S˜ao Paulo decided to establish a science university at Campinas in 1962. In fact, until the 1990s, most of federal education monies were being spent on higher education at the expense of primary and secondary education. But these investments did turn Brazil into one of the few modern science centers in the developing world.23 They also dramatically increased the number and importance of students going on to higher education. In 1960, only 1.1 percent of all students – or 93.000 out of 8.8 million students – attended centers of higher education in Brazil. By 1981 there were 1.4 million students attending centers of higher education who accounted for 5 percent of the 28 million Brazilians who were then going to school, and by 2002 the total was 3.2 million in all types of higher education, or roughly 7 percent of all students enrolled.24 One final area of education, which was rather unique to Brazil, was the development in the past half century of private industry–sponsored technical education. Faced by municipal, state, and federal governments that were incapable of providing good technical education (and 22

23 24

The government estimates that “. . . of the more than 30,000 PhD’s active today in Brazil, at least 22,000 gained support for their education or research from the CNPq”; see http://www.cnpq.br/sobrecnpq/index.htm. Schwartzman, A Space for Science, Ch. 8. IBGE, Estat´ısticas do S´eculo XX (2003), Tables, “Educac¸a˜ o1982m aeb 061 1” for 1981 and, for 2002, INEP, EDUDATABRASIL, “Matr´ıculas na Educac¸a˜ o Superior – Ano 2002.” The total enrollments for primary and secondary grades used to get the percentage were from 2003. All these numbers were accessed at http://www.edudatabrasil.inep.gov.br/index.htm on May 28, 2004.

Education, Social Welfare, and Health Care

189

still, to this day, are deficient in this area) and influenced by the German system of apprenticeship training, Brazil’s industrialists established one of the world’s largest technical education programs in the 1940s to provide the skilled workers needed to man expanding industry. In 1942 the industrialists convinced the federal government to create a payroll tax to develop a school system administered by the private industrial associations in each state. This was called the National Industrial Training Service (or SENAI – Servic¸o Nacional de Aprendizagem Industrial), and along with SENAC (Servic¸o Nacional de Aprendizagem Comercial), which provided courses in commerce, it would enroll many thousands of students in short- and long-term technical and commercial courses and SENAI would even educate Lula a future president of the republic.25 All of these late-twentieth-century efforts to provide basic and advanced education in Brazil finally had its impact on the literacy of the national population. In the census of 1872, it was estimated that 84 percent of the population could not read and write, a figure almost identical to rate found in 1890.26 Even as late as 1950 over half of the population was illiterate, and in 1980 the almost nineteen million illiterates still made up a quarter of the national population.27 By that date Brazil found itself in the unenviable situation of ranking below Ecuador and just ahead of Bolivia in the lower ranks of the countries of Latin American in terms of its level of illiterates, a ranking that improved little by the year 2002 (see Graphs 7.1 and 7.2). Even in the best of circumstances, it was estimated that Brazil would not reach the literacy levels of 1990 Argentina until the year 2020.28 But in the past quarter century the ever-rising enrollments in schools everywhere has finally caused the both absolute and relative decline

25

26 27 28

On the origins of SENAI, see Barbara Weinstein, “The Industrialists, the State, and the Issues of Worker Training and Social Services in Brazil, 1930–50,” Hispanic American Historical Review, vol. 70, no. 3 (Aug. 1990), pp. 379–404. Also see her complete history, For Social Peace in Brazil: Industrialists and the Remaking of the Working Class in S˜ao Paulo, 1920–1964 (Chapel Hill: University of North Carolina Press, 1996). IBGE, Estat´ısticas do S´eculo XX (2003), Table pop 1936aeb-03. IBGE, Estat´ısticas do S´eculo XX (2003), Table pop S2T01ab. Marcelo Medeiros Coelho de Souza, “O Analfabetismo no Brasil sob o Enfoque Demogr´afico” (Texto para Discuss˜ao no. 639; Bras´ılia: IPEA, 1999), pp. 13, 17. Given the heavy investments in education in the last two decades throughout Latin America, the relative position of Brazil has changed little since 1990, as all countries significantly reduced their illiteracy rates in this period. In fact, by 2010 CEPAL estimates that Bolivia will have reduced its illiteracy level below that of Brazil. See CEPAL, Anuario estad´ıstico de Am´erica Latina y el Caribe 2003, Table 31, p. 33.

Brazil Since 1980

190 Haití Guatemala Nicaragua Honduras El Salvador Bolivia Dominican Republic Brazil Perú Ecuador México Colombia Venezuela Panamá Paraguay Chile Costa Rica Cuba Argentina Uruguay

69.1 46.2 41.8 39 33.8 30.9 26.2 25.4 20.2 18.1 17 15.6 15.1 14.3 14.1 8.5 8.3 7.9 6 5.3 0

20

40

60

80

100

Graph 7.1. Ratio of Illiteracy Among Adults Fifteen Years and Older in Latin America in 1980 Source: CEPAL, Anuario estad´ıstico de Am´erica Latina y el Caribe 2003, Cuadro 31, p. 33.

of illiterates. Whereas their numbers peaked at 29.5 million in 1991, by the census of 2000 they were down to 22.9 million (of the resident population five years of age and older) and their ratio in the total population declined from 23 percent to 15 percent of the population. At 50.2

Haití Nicaragua Guatemala Honduras El Salvador Bolivia Brazil Perú México Colombia Ecuador Panamá Venezuela Paraguay Rep. Dominicana Bahamas Costa Rica Chile Cuba Argentina Uruguay

33.5 31.5 25 21.3 14.6 13.1

0

10.1 8.8 8.4 8.4 8.1 7.5 6.7 6.2 4.6 4.4 4.2 3.3 3.2 2.4 5 10 15

20

25

30

35

40

45

50

55

Graph 7.2. Ratio of Illiteracy Among Adults Fifteen Years and Older in Latin America in 2000 Source: CEPAL, Anuario estad´ıstico de Am´erica Latina y el Caribe 2003, Cuadro 31, p. 33.

Education, Social Welfare, and Health Care

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the same time, the predominance of women among illiterates, which had been the traditional pattern, had finally disappeared, as women now were going to school in even large numbers than men. Thus, the sex ratio of illiterates was just 97 males per 100 females in 2000, the same as the overall population sex ratio in the census; moreover, the sex ratios of illiterates under forty years of age now showed much higher male than female ratios, reflecting their relative school attendance. As could be expected, the median age of the illiterate population is rising as more children go to school. Whereas the median age of illiterates over five years of age was in the twenty-five to twenty-nine years of age group in 1991, it was at the thirty-five to thirty-nine years of age cohort in 2000.29 But marked racial and regional variations in illiteracy still remain. In 2000 the ratio of whites illiterates was just 10 percent of the total white population five years of age and older, and that for Asians was just 6 percent of this age group. But black (pretos) illiterates were 21 percent of all pretos and 19 percent of all mulattos (pardos) five years of age and older.30 As for regional disparities, even in the census of 2000, over half of all illiterates over ten years of age, or some 53 percent, were to be found in the Northeast region, even though that region contained only 28 percent of the national population (see Graph 7.3). Illiterates in this region made up one-quarter of the total population and 15 percent in the North but only 10 percent or under in all the other regions.31 Although the trends were clearly toward conversion, the disparities in literacy by race, ethnicity, and region if not by sex remain impressive in Brazil and well reflect class boundaries, which overlap with race and residence.

Health and Welfare If Brazil has made major advances in education, it has only slowly and laboriously begun to provide the basic social services that a modern industrial society takes for granted in the twenty-first century. The 29 30 31

IBGE-SIDRA-Banco de Dados Agregados, accessed at http://www.sidra.ibge.gov.br/ bda/popul/default.asp on May 28, 2004. IBGE, Censo Demogr´afico – 2000 – Educac¸a˜ o, Resultados da Amostra (Bras´ılia, 2000), Tables 1.1 and 1.11. IBGE-SIDRA-Banco de Dados Agregados, accessed at http://www.sidra.ibge.gov.br/ bda/popul/default.asp on May 28, 2004.

Brazil Since 1980

192 35.0

32.8

Percentage of Illiterates

30.0

25.0

23.4 20.0

17.2

10.0

14.5

14.2

15.0

11.8

10.9

10.2

10.4

9.7 7.2

5.0

6.7

8.9 5.7

0.0 TOTAL

Northeast North

South Southeast 1992

Federal District Center West

2002

Graph 7.3. Rates of Illiteracy of Adults (People Fifteen Years of Age and Older) by Region, 1992, 2002 Source: IBGE data found at http://tabnet.datasus.gov.br/cgi/tabcgi.exe? idb2003/b01.def.

provision of unemployment insurance, pensions, workmen’s compensation, and health care are only now being addressed nationally in the past quarter century. As was the case with most of the countries in the Western Hemisphere, the first formal pension plans began with small groups of workers in well-defined industries in the 1920s and 1930s. Although limited private pension plans had existed for government workers from the colonial period, these so-called Montepio common to both Brazil and Spanish America were quite limited. The first expansion of this system came in 1923 when the railroad workers in the so-called El´oi Chaves law were allowed the right to have retirement and survivors pensions and medical benefits. In 1926 this right was extended to dock workers and continually extended to ever more groups of industry-specific workers in the following decades as more and more of these special CAPS – that is, Caixa de Aposentadoria e Pens˜oes (or Retirement and Pensions Fund) were created. In 1931 came a CAP for public service workers, and in 1932 mine workers joined them. These Funds were paid for by workers, employees, and the federal government, and contributions were compulsory.32 Then, 32

James Malloy, The Politics of Social Security in Brazil (Pittsburgh: University of Pittsburgh Press, 1979), pp. 40–50; and Celso Barroso Leite, “Da Lei El´oi Chaves ao Sinpas,” in Celso Barroso

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beginning under Vargas, many of these local Funds (caixas) were integrated into larger industry-wide systems under the title of “Institutos” (or Institutos de Aposentadoria e Pens˜oes) – the first being for maritime workers, followed by commercial and bank workers in 1934 and by industrial workers and transport workers in 1936 and 1938, respectively. By 1939 there were ninety-eight CAPs and five IAPs, all under the federal Ministry of Labor, with some 1.8 million insured workers.33 These industry-wide Institutes, which became training centers for a new group of professional technocrats, provided only limited and unequal coverage and several had difficulties managing their assets,34 and their coverage was still limited. By 1950 it was estimated that three million persons, representing only 21 percent of the economically active population, were served by these social security and health IAPs and CAPS and that they enrolled only about 7 percent of the total population. This coverage increased only modestly in the next decade, and as late as 1960 it was estimated that only 4.2 million persons were insured by these Funds and Institutes and they accounted for just 23 percent of the economically active population.35 This limited welfare system would change dramatically in the 1960s with the creation of the first national social security plan. In 1964 a Social Security Organic Law was finally approved under the Goulart government in an attempt to shore up the faltering IAP system, which was in serious financial and administrative crisis. Goulart also made the first serious gesture to insure rural workers with the creation of the FUNRURAL (Fundo de Assistˆencia ao Trabalhador Rural) in 1961. Initially, however, little was accomplished in this crucial area. Significant reform continued after the seizure of power by the military in April 1964. In fact, the conservative first labor minister and his chief of cabinet under the new military regime were well-known social insurance experts.36 In 1966 the individual IAPS and CAPS were

33 34

35 36

Leite, ed., Um s´eculo de Previdˆencia Social: Balanc¸o e perspectivas no Brasil e no Mundo (Rio de Janeiro: Zahar Editores, 1983), pp. 39–44. Malloy, The Politics of Social Security, pp. 67–68. Kaizˆo Iwakami Beltr˜ao, Sonoe Sugahara Pinheiro, and Francisco Eduardo Barreto de Oliveira, Population and Social Security in Brazil: An Analysis with Emphasis on Constitutional Changes (Texto para Discuss˜ao no. 862, Rio de Janeiro: IPEA, 2002), pp. 2–3; and Celso Barroso Leite, “Da Lei El´oi Chaves ao Sinpas,” in Celso Barroso Leite, ed., Um s´eculo de Previdˆencia Social: Balanc¸o e perspectivas no Brasil e no Mundo (Rio de Janeiro: Zahar Editores, 1983), pp. 39–44. Malloy, The Politics of Social Security, Tables 4.1 and 4.2, pp. 95, 102. Malloy, The Politics of Social Security, pp. 124–125.

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finally replaced by the INPS (National Social Security Institute), which placed the entire system on a sounder financial basis and that rapidly expanded the coverage to an ever-larger ratio of the national population. By 1968, two years after its founding, INPS, which was supposed to cover both employees and self-employed workers, was insuring 7.8 million persons.37 In the 1970s INPS systematically expanded its coverage of the work force even further and in 1971 it extended coverage to rural workers (making FUNRURAL an effective institution for the first time), and in 1972 it incorporated those working in domestic service. Inscription of insured workers now grew rapidly and by 1980 INPS had tripled the number of insured participants to twenty-four million Brazilians, three times the number originally insured in its first full year of operation.38 The new military government also created the Guaranteed Fund for Time of Service (Fundo de Garantia por Tempo de Servic¸o) in 1966. This new institution was funded by a payroll tax of 8 percent paid by the employers and was to be used as a type of unemployment insurance for any workers fired – under the now much looser forms of labor tenure being enacted – or could be used as a reserve fund for the worker for retirement or housing purchases. In fact, most of the monies collected went to the BNH or the National Housing Bank to promote a major expansion of home construction.39 Along with insuring pensions of various kinds, INPS and FUNRURAL also began providing health benefits through INAMPS (Instituto Nacional de Assistˆencia M´edica da Previdˆencia Social), and in 1974 came a new Ministry of Social Insurance and Social Assistance (Minist´erio da Previdˆencia e Assistˆencia Social), which incorporated all these various insurance, pension, and health delivery plans under one ministry until the end of the military era. In 1988, with the full return of democracy to Brazil, social welfare became an active area of government discussion, which resulted in major sections of the Constitution of 1988 being written in response to social welfare consideration. Not only was health declared a universal right in the Constitution, but so, too, was an integrated system of social insurance and social assistance. Now all federal government workers and all private workers were put into one system. Financing of the system was put on a more solid tax 37 38 39

IBGE, Estat´ısticas do S´eculo XX (2003), Table “Prev social19693aeb 02.” IBGE, Estat´ısticas do S´eculo XX (2003), Table “Prev social1983aeb 01.” Malloy, The Politics of Social Security, pp. 125–126.

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base, and the value of pensions was now pegged to inflation. Finally, pension rights were now made universal for all women and men in the rural areas, whether registered workers or not, and regardless of whether they had paid into any previous pension schemes. In 1991 these reforms were finally enacted into an organic social security law known as the RGPS (General Regime for Social Security). The assistance and insurance programs were reorganized into a new National Institute of Social Insurance (INSS), which replaced both the INPS and FUNRURAL and other separate sectors of social assistance, and also involved the transfer of all health activities to a separate Ministry of Health.40 By 2004 it was estimated that some forty-two million Brazilian workers (aged sixteen to fifty-nine) were contributing to the INSS and state and municipal pension systems (some 29.7 million through the RGPS, another 7.7 million rural workers covered by RGPS, and 4.8 million through state worker pension plans), and some twentytwo million persons were beneficiaries, although roughly twentyseven million active workers were still not covered.41 The new commitment to universal pensions for rural workers has had a profound impact on reducing indigence and poverty among the older populations and especially those situated in the rural area.42 Although these rural pensions were originally quite small – with some 85 percent of the rural population receiving below the minimum wage in 1985– they have progressively become ever more important. In the Constitution of 1988, the basic pension for rural retirees was 40

41

42

Beltr˜ao et al., “Population and Social Security in Brazil,” pp. 5–6. Although some countries in Latin America have adopted privatized pension plans following the Chilean model of 1981, most have opted, like Brazil, to put their plans on sounder actuarial and financial footing. So far, this has seemed a better alternative than creating privatized plans in societies prone to high inflation and with small and highly manipulated stock markets. Moreover, in the countries that have adopted national privatization, the number of persons covered by these pension plans have declined. See Fabio M. Betranou and Rafael Rofman, “Providing Social Security in a Context of Change: Experience and Challenges in Latin America,” International Social Security Review, vol. 55, no. 1 (2002), pp. 67–82. Informe de Prˆevidencia Social vol. 16, no. 5 (May 2004), pp. 1, 18. This growth of beneficiaries has been quite rapid. As of 1995, only some 15.7 million persons were obtaining benefits from the system, and by 2003 these had risen 40 percent to 21.7 million persons. Informe da Previdˆencia Social, vol. 16, no. 2 (February 2004), p. 1. By 1999 some 79 percent of Brazilians aged sixty years and older were receiving pensions. Helmut Schwarzer and Ana Carolina Querino, Benef´ıcios sociais e pobreza: Programas n˜ao contributivos da seguridade social brasileira (Texto para Discuss˜ao no. 929, Bras´ılia, IPEA 2002), p. 7.

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raised to the minimum wage, which is now the norm.43 It is estimated that such pensions for rural workers has not only reduced rural poverty but has also significantly reduced inequality in rural Brazil.44 Brazil, in fact, is among the most advanced countries in the developing world in reducing levels of poverty among its rural population.45 This rural pension system has proven to be a relatively modest cost to Brazil with very high social returns. The incorporation of all the private employee pension plans – all based on age and level of income schemes in which constant payments have been made for decades – also has not seriously affected the national social security system. But the incorporation of federal government workers into the national system has had profound negative effects. Traditionally retiring after years of service at full salary without having paid into a pension program, these workers were extremely costly to the new system. Their continued early retirement at full salary has led to profound distortions in the system, with poorer current workers subsidizing middle-class retirees. It was estimated that before the current reforms were enacted that less than 1 percent of the social security benefits went to the poorest 10 percent of the Brazilian population, whereas 50 percent went to the wealthiest 10 percent.46 Given the nonactuarial principles initially used for all these federal and state workers, Brazil has an unusually high ratio of pensioners to the age structure of the population, and has led experts to call Brazil a “Belmex” nation. The cost of pensions is today as high as that of Belgium but it has an age structure equal to Mexico. Thus, Brazil spends twice the ratio of its GDP on pensions than does Mexico, spending roughly the same ratio of GDP as Belgium. Yet both Mexico and Brazil have less than 10 percent of their population aged sixty and over, compared to Belgium, which had 22 percent of 43

44 45

46

Kaizˆo Iwakami Beltr˜ao and Sonoe Sugahara Pinheiro, “Brazilian population and the Social Security System: Reform Alternatives,” (Texto para Discuss˜ao no. 929, Rio de Janeiro: IPEA 2005) p. 6. It is estimated that in 2002 the distribution of income without pensions included would have been a GINI of 0.56. But with pensions this number dropped to 0.52. Ibid, p. 12. Some 35 percent of those receiving pensions in 2003 whose residence was known lived in the rural areas, a ratio higher than the actual distribution of total population. Informe de Previdˆencia Social, vol. 16, no. 2 (February 2004), p. 1. How unusual Brazil is in providing pensions for the elderly rural population, even by Latin American standards, can be seen in CELADE, Los adultos mayores en Am´erica Latina y el Caribe datos e indicadores (Bolet´ın Informativo, Edici´on Especial; Santiago de Chile, 2002), Graphs 8, 9,16, 18. Brazil: Critical Issues in Social Security (Washington, DC: World Bank, 2001), p. 3.

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its population listed in this age group in 2004.47 This means that Brazil is spending far too much on pensions given its current age structure. Much of this has to do with governments in the twentieth century granting state workers generous years of service (versus physical years of age) retirement plans, often with such workers not contributing anything into the pension system. Thus by 2000, the Ministry of Education reported that there were now some fifty-five thousand active university professors at the state and federal universities and twentythree thousand inactive ones. That is, 29 percent of the professors were retired but still on the university budget. Since they had not paid into any pension plan – like all other government workers until the late 1990s – it meant that their income came out of the regular university teaching staff budget. Clearly such an arrangement could not go on forever. In the late 1990s, the government finally forced all active government workers to pay into the pension system, and in 2003 the Lula government finally even forced retired state workers to pay into the national pension scheme. The government also required all state and municipal government workers to adopt standard payment plans for active and retired workers, and for new actuarial principles to be established for determining the period of retirement. It took another two years to finally bring all municipal, state, and federal employees – active and retired – into conformity with the national system. For the private and public workers in INSS the government has enacted provisions, which slowly phase in an effective actuarial arrangement for retirement, with the only exception being for primary and secondary school teachers. Thus it has totally moved from a “years of service” model and the possibility of quite early retirement to one based on “age of the worker.” Equally, all groups now have had limits placed on their retirement benefits, which are now no longer 100 percent of last salaries but are based on complex calculations of a set of years of income. Also no matter what the calculations, all groups of workers have now had absolute limits placed on their retirement incomes. In short, the pension system finally has been modernized after much political conflict and in the future will slowly see a decline in the spread between income and expenditures in social security. But, given the rights of already retired workers, the costs of the system today are extraordinarily high. It was estimated by a World Bank survey that “in 47

Direction Generale Statistique et Information Economique, Population et m´enages: Population totale et belge (Bruxelles, 2004), Table 00.04.

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1999, for the first time, government expenditures on social security on 21 million retirees exceeded its educational spending on 48 million students.”48 Moreover, this trend of increasing costs only continued as more people sought retirement under the old rules before the reforms could take affect. There was thus a surge in high-cost retirements in the late 1990s and first years of the twenty-first century. By the late 1990s, deficits already existed in the system between receipts and expenditures and they will continue to increase until the reforms are finally phased in. It was estimated in 2005 that the government was spending more on pensions than on salaries for active government workers – in fact, double the amount that salaries absorbed. In 2004, pensions took twelve times as much state funding as did education and five times as much as the state spent on health expenditures (R$166 billion reais versus R$14 billion for education and R$33 billion for health). The deficit of both public and private worker pension funds was then estimated to cost some US$25 billion.49 In 2004, income only covered 82 percent of the costs of the expenditures of the Social Security System, and the costs of the system amounted to 7 percent of GDP, with the deficit itself reaching well over 2 percent of GDP.50 It was estimated that for a few years more these costs would continue to increase until all the reforms were finally phased in for all workers. Although the PT, given its strong base in government worker organizations and unions, initially opposed pension reform during the period of the Fernando Henrique Cardoso government, when it came to power in 2003 it was forced to enact the same restrictions on years of service and limitations on time of retirement that they had opposed for almost a decade. They also forced retired public servants to contribute into the pension funds for the first time. Although it has taken a long and complex set of political struggles to finally reform the system, the INSS has been remarkably effective in expanding its coverage. By 2005 some twenty-three million Brazilians were receiving pensions or other support from the national social security system, of whom some seven million lived in the rural area. Each year, an estimated one to two million persons were being added

48 49

50

Brazil: Critical Issues in Social Security, p. 2. Estado de S˜ao Paulo, 21 marc¸o 2005, p. A7. It is worth stressing that the private work force was paying into a government-controlled pension fund through payroll takes long before the INSS was created. Boletim Estat´ıstico da Previdˆencia Social vol. 10, no. 1 ( January 2005), Table 1.

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to the benefits program.51 At the same time, the number of contributors has expanded. Moreover, there has been a steady increase in the number of contributors to both INSS and the state and municipal worker retirement plans. IPEA estimates that these have gone from thirty-eight million persons in 1988, the year of the constitution, to forty-six million in 2005.52 All this has meant that whatever the current distortion are within the system – which in fact should decline over time – Brazil finally has a national plan that reaches a large part of the aged population and almost all of the rural workers. Thus, for the first time, being elderly and of rural residence are no longer automatically correlated with poverty in Brazil. But there are still other external problems seriously affecting Brazil’s social security system. Brazil, like all Latin American countries, is faced by the problem of an expanding informal labor market sector and its impact on social security. The opening of the economy in the 1990s had a major impact on reducing the number of registered workers who were contributing to the system. While productivity of the registered workers increased dramatically, the numbers of workers with legal work cards, and therefore contributors to the social security system, have experienced a relative decline. By 2004 the total numbers of contributors to INSS were thirty-seven million persons out of an economically active population of eighty-eight million persons.53 Thus, there exists a large group of workers who are not contributors to the system. The crisis of the so-called informal market – a generalized crisis affecting all of Latin American in the lost decade of the 1990s, also had its impact on Brazil. Between 1985 and 2002, the number of registered workers in industry barely increased, going from 6.5 million workers to just 6.7 million workers in the latter year – or growing at less than 0.2 percent per annum.54 Overall, registered workers in this same period grew from 20.4 million to 28.7 million workers, but this growth barely kept up with the growth of the economically active population, which went from 55 million to 86 million workers in the same period. In 1985 there was 1 registered worker for every 2.7 workers in the country, and in 2002 the ratio was 1 registered worker for every 51 52 53 54

Boletim Estat´ıstico da Previdˆencia Social vol. 10, no. 1 ( January 2005), Table 10. IPEADATA, Contribuintes da previdˆencia social. Boletim Estat´ıstico da Previdˆencia Social vol. 10, no. 1 ( January 2005), Table 1. Rog´erio Nagamine Costanzi, “Evoluc¸a˜ o do emprego formal no Brasil (1985–2003) e implicac¸o˜ es para as pol´ıticas p´ublicas de gerac¸a˜ o de emprego e renda” (Texto para Discuss˜ao no. 1039, Bras´ılia: IPEA, 2004), p. 21.

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3 persons in the workforce.55 In the census of 2000, it was estimated that only 34 percent of the economically active population were registered workers. Thus the fortunes of the Brazilian economy in general have a direct impact on social security in terms of the number of active contributors to the system. Like all such universal insurance and pension systems in the developing world, the viability of the welfare structure depends fundamentally on the continued expansion of the economy and is extremely sensitive to changes in the status of the labor force. Aside from its creation of a national pension system in the last decade of the twentieth century, the government of Brazil in recent years has worked out a host of alternative programs to deal with its large mass of poor citizens. In September 2001, for example, the government of Fernando Henrique Cardoso launched the “Bolsa-Alimentac¸a˜ o” through the Ministry of Health. This was a financial subsidy directed toward pregnant women and children seven years of age or under and provided funds for nutrition. It is estimated that the government in its first years of operation granted such food funds to 3.5 million persons.56 Another crucial program developed by the Cardoso government was the “bolsa escola,” which grew out of a series of local programs designed to combat child labor and to help poor families keep their children in school. Launched in 2001, the “school scholarship” program provided families with a small scholarship for every child who they kept in school. This, like the food support program, eventually reached millions of families and had a major influence in increasing school enrollments of children everywhere in Brazil as well as reducing child labor. It is estimated that Bolsa-Escola reached 5.1 million poor families and subsidized 6.4 million students.57 Eventually all these separate programs were absorbed into Lula’s campaign against hunger, and were renamed the “bolsa fam´ılia.” After the first year of government, the program to combat hunger lost the critical importance that it had during the campaign. It should be noted that chronic hunger has ceased to be a significant problem in Brazil. The combination of high agricultural productivity and low food prices in the past quarter century have in fact eliminated endemic hunger In a 2003 survey of adult weights, IBGE found that only 4 percent of the 55 56 57

Costanzi, “Evoluc¸a˜ o do emprego formal no Brasil,” pp. 7, 25. http://www.brasil.gov.br/pl˙alimenta.htm. Andrea Rodrigues Ferro, “Avaliac¸a˜ o do impacto dos programas escolares no trabalho infantil no Brasil” (MA thesis: EDUSP, Piracicaba, 2003), p. 35.

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population over twenty years of age exhibited a weight deficit. As the IBGE reported, anything below 5 percent of the population is considered to be a normal population with no serious hunger problems.58 Other than these specialized programs to deal with severe poverty, the Brazilian state in the past quarter century also has created special programs to subsidize the wages of registered workers. In 1977, it established a subsidized meal program (vale refeic¸a˜ o) by requiring all employers to pay for one full meal for their workers per shift, the costs of which were reduced from their taxes. By the beginning of the twenty-first century, some 100,000 companies and 8.5 million workers were covered by this provision – with half obtaining their food in their local place of work and the others getting a “ticket” to purchase their meal in local restaurants. Then in 1985 was added a daily work transport payment, which was financed in the same way, and eventually has covered roughly the same number of companies and workers. These programs, added to the other social taxes on salaries, often doubles the effective salary of low-paid workers. This government subsidy, of course, also allows employers to pay relatively lower actual wages than might be the case if workers had to pay these costs themselves. Also, despite their undoubted importance for the economy as a whole, these supplementary payments are only for workers who are part of the formal labor market.

Health Policies In contrast to both educational and pension policy, which progressively moved from a decentralized toward a more centralized federal system in the course of the nineteenth and twentieth centuries, the history of public health in Brazil has moved in the opposite direction. From the beginning, public health was a central government concern, first with the ports and the imperial capital, then with the territories and finally with the states and municipalities. The fact that the early leaders of the sanitation movement were themselves Brazil’s leading scientists with close connections to the political elite helped in pushing public health 58

IBGE, Diretoria de Pesquisas, Coordenac¸a˜ o de ´Indices de Prec¸os, Pesquisa de Orc¸amentos Familiares 2002–2003 (POF 2002–2003). In fact, obesity was a far greater problem for the country, affecting some 11 percent of the population, with 41 percent being listed as overweight.

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issues to the forefront of concerns of the federal government. Brazil experienced a wave of epidemics, which swept through the nation in the second half of the nineteenth century. The epidemics of yellow fever in 1849 and of cholera in 1855–1856 brought a willingness on the part of the imperial and Republican governments to deal aggressively with public health and sanitation issues. In 1851 the government created an Imperial Council of Public Hygiene and in 1886 a more powerful General Inspectorship of Hygiene was created with control over port inspectors and state vital statistics.59 Even under the new Republic, which devolved most central government functions to the states, the federal government strengthened the national public health institutions. In 1902 Oswaldo Cruz, the leading scientist of his day, organized a campaign against yellow fever in the state of Rio de Janeiro and in 1904 he was made head of the national Directoria Geral de Sa´ude P´ublica. There soon followed national campaigns against yellow fever, bubonic plague, and smallpox, and a law forcing obligatory vaccination of the entire population against this classic disease.60 Then in the 1910s and 1920s the government supported the intervention of the Rockefeller Foundation in health and epidemic fighting campaigns in the northeastern states, and pressed for a national registration of diseases along with a host of other public health measures. In 1923, another leading scientist, Carlos Chagas (who helped identify Chargas disease), helped found a new DSNP, or Departamento Nacional de Sa´ude P´ublica. Under his direction, the national government promoted maternal and infant health, began work on industrial accidents and rural health, the registration of medicines, and a host of other public health activities.61 Finally, with the creation of the first pension and retirement groups in the 1920s there also developed a systematic movement for creating local clinics, which were tied to these new IAPs and Caixas de Aposentadorias. Many of these pension funds maintained hospitals and clinics and often provided better medical service for their members than was available from the local municipalities or other government agencies.62 59 60 61 62

John Allen Blount, “The Public Health Movement in S˜ao Paulo, Brazil . . . 1892–1918,” PhD, Tulane University, 1971, pp. 32–33. Jos´e Carlos de Souza Braga and S´ergio Goes de Paula, Sa´ude e previdˆencia: Estudos de pol´ıtica social (S˜ao Paulo: Cebes-Hucitec, 1981), p. 43. Braga and Paula, Sa´ude e previdˆencia, p. 46. Andr´e Cezar Medici, A dinˆamica do setor sa´ude no Brasil: Tranformac¸o˜es e tendˆencias nas d´ecadas de 80 e 90 (Santiago de Chile, CEPAL, 1997), pp. 24–25.

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The overthrow of the Old Republic by Vargas only strengthened the public health groups in the central government. In 1930 there was organized a separate Minist´erio da Educac¸a˜ o e Sa´ude, with a Departament of Health subdepartment. In 1934 this department was reorganized into a larger combined Departamento Nacional de Sa´ude e Assistˆencia M´edico-Social, which gathered together in one unit the various directories and services dealing with hospitals, ports, the federal district, and the numerous formal campaigns against specific diseases in given areas. These campaigns, which seem to have been quiescent in the 1930–1934 period, took on a new life once again in the post-1935 period, often with the help of the Rockefeller Foundation. In 1937 the federal public health subministry department assumed the role of coordinator of all the state and municipal health departments. There were also now the first systematic attempts to fund and develop rural health clinics. The federal government maintained its active role as the dominant player in national public health throughout the 1930s and 1940s, and in 1953 all of these efforts were finally coordinated into a separate full Ministry of Health. The new ministry assumed control over everything from health statistics to education of health care workers, from creating nursing schools and funding research institutes to evaluating the quality of medicines produced in the country. Then in 1956 the ministry established a major institution for rural health called the DNER, or the Departamento Nacional de Endemias Rurais. The new organization created clinics (postos sanit´arios) in all the municipalities directly under federal government control.63 Throughout the 1950s and 1960s, an ever larger share of the national budget was directed to health, although national coverage was still only modest given the needs of the society. From the 1940s onward, a continuous debate raged between the federalist and antifederalist, and between those stressing preventive medicine and those wanting to concentrate on the eradication of infectious diseases. This debate in many ways would not be resolved until the end of the twentieth century. But there also was a debate about whether the government should take away the medical activities of the pension funds and combine them into a national system, controlled of course by the federal government. But strong union opposition

63

Braga and Paula, Sa´ude e previdˆencia, pp. 54–62.

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prevented this from occurring until after the military overthrew the democratic government in 1964. Among the many structural reforms carried out by the military, the creation of the INPS (Instituto Nacional de Previdˆencia Social) in 1967 was the most important for public health as well as pension reasons. The INPS took over all the medical plans of the different official plans than in existence, which were divided by professional category of the private sector pension funds however funded and now provided medical assistance to all documented workers, along with the self-employed and professionals, all of whom were taxed for the service. In the early 1970s under the INPS was created the INAMPS (Instituto Nacional de Assistˆencia M´edica da Previdˆencia Social) to administer the health care system and CEME (Central de Medicamentos) to purchase, produce, and distribute medicines to all the institutions which INAMPS created to provide health care. Once in place, this system dominated national health care until the 1980s and INAMPS created regional Superintendˆencias throughout the country to administer their programs. Although the armed forces and public employees had their own hospitals and clinics, and many states and municipalities provided such service, the INAMPS was the dominant provider. By the late 1970s, an estimated 75 percent of the Brazilian population was covered by the clinics and hospitals of INAMPS and it was estimated that INAMPS controlled some 340,000 hospital beds throughout the country.64 The late 1970s and early 1980s was a period of consolidation and increasing efforts to universalize the national health care system. Among the initiatives that led to this change was the expansion of the FUNRURAL in the 1970s into health care for all rural workers, and the progressive incorporation of all the government employee and local hospital and clinic systems into the national network. This push toward universal services also was accompanied in the 1980s by a new emphasis on devolving some of the powers of the federal system to the states and municipalities.65 In 1983 INAMPS began to work out formal agreements with the various state and municipal health secretariats to provide local services with federal monetary support. At the same time, the regional “superintendencies” of INAMPS were melded into the state and municipal health secretariats. 64 65

Medici, A dinˆamica do setor sa´ude no Brasil, pp. 26–28. On these debates in the 1970s and 1980s, see Sarah Escorel, Reviravolta na sa´ude: origem e articulac¸a˜ o do movimento sanit´ario (Rio de Janeiro: Editora FIOCRUZ, 1998).

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All of these changes were incorporated into the Constitution of 1988, which guaranteed universal and free health care for all citizens. The Constitution also enshrined the newly dominant theme of decentralization of the health care system and added to it the idea that the system should incorporate local health councils, which would participate in the planning and administration of the system. All these changes were incorporated into a new system called SUS (or Sistema ´ Unico de Sa´ude), which now absorbed all the previous institutes and organizations. The aim of all these reforms was both to eliminate duplicate bureaucracies at all levels and to provide federal funding for local systems.66 But the political and economic crises of the early 1990s seriously reduced funding for the national health care system and delivery of that care declined. It remained for the Cardoso government to begin a major overhaul of the financing structure of this costly system through special taxation. The “municipalization” of SUS was carried out quite effectively, and by 2000 over fifty-three hundred of the fifty-seven hundred or so municipios in the country – containing 93 percent of the Brazilian population – were incorporated into SUS.67 Thus, by 2000 the whole health system had come full circle to return to a total “municipalization” of the system but now based on systematic federal funding dedicated to health support. The municipalities were now in charge of the hospitals, clinics, and medical personnel throughout the country, with the federal government maintaining standards, providing resources, and even organizing the teaching faculties. A good percentage of these municipalities also had local popular councils, which supported and advised the municipal system. Although funding of the system remains a major problem, there now appear to be health care facilities in all the municipalities of Brazil. The principle of decentralized control at the municipal level is also now accepted by all parties. The federal, state, and municipal governments are now fully committed by law to funding the system and the Ministry of Health and INAMPS guarantees the quality of the health care delivered and medicines used. In terms of basic delivery, the ratios have improved immeasurably. By 2001, only 5 percent of the mothers 66 67

Medici, A dinˆamica do setor sa´ude no Brasil, pp. 33–39. Andr´e Singer, “Sa´ude” in Bol´ıvar Lamounier and Rubens Figueredo, eds., A era FHC, um balanc¸o (S˜ao Paulo: Cultura Editores Associados, 2002), p. 516.

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giving birth in that year did not have prenatal consultations, and only 4 percent were not delivered in a hospital.68 But there also were some rather new and innovative programs also developed by the government health care system. In the 1990s, the government provided sustained and free health care for all those suffering from AIDS, in a program that was quite advanced by world standards. In 1996, the Government of Brazil began to freely distribute antiretroviral drugs for persons with HIV/AIDS and, in 2001, the government offerred free drugs to more than one hundred thousand patients.69 Although there are still major problems in Brazilian health care delivery, between SUS and private plans a large share of the population seems to be covered in some way. In a PNAD 2003 health survey it was estimated that some 140 million Brazilians (or 79 percent of the population) regularly had access to a health service, of which the most import were the local municipal “Postos de Sa´ude,” used by over half the population who had seen a doctor. Private physicians accounted for only 18 percent of the consults. It also was estimated that 63 percent of the population had consulted a doctor in the previous twelve months – up from 55 percent in 1998, and that for children under five years of age, 78 percent had visited a doctor in this period. For those over sixty-five, the figure was 80 percent. Even more impressive was the fact that 66 percent of women over forty had a breast examination, and 79 percent of women over twenty-four had a pap smear exam, whereas 84 percent of all Brazilians had seen a dentist at least once.70 Despite the fact that Brazil has experienced a mortality revolution in the past half century, and has greatly improved its delivery of health care, its demographic indices only place it in the middle of most Latin American countries, and still relatively far from the advanced industrial world. Whereas in 1991 Brazilians had a life expectancy some nine and a half years on average less than residents of the United States, by 68

69

70

Minist´erio da Sa´ude, SINASC (Sistema de Informac¸o˜ es sobre Nascimentos), found at DATASUS Web site at http://tabnet.datasus.gov.br/cgi/tabcgi.exe?sinasc/cnv/nvuf.def. Interestingly enough, in 1995 half the 2.8 million registered births gave no information on this item, whereas in 2001 only 5 percent of the 3.1 million births did not information on prenatal care. U.S., Agency for International Development, Bureau for Global Health, “COUNTRY PROFILE HIV/AIDS BRAZIL,” accessed at http://www.usaid.gov/our work/ global health/aids/Countries/lac/brazilbrief.pdf. IBGE, “Acesso e utilizac¸a˜ o de servic¸os de sa´ude – 2003,” Comunicac¸a˜ o Social 25 de maio de 2005, at http://www.ibge.gov.br/home/presidencia/noticias/noticia impressao.php?id noticia=370.

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Haití Bolivia Ecuador Guatemala Brasil Perú Paraguay Nicaragua República Dominicana Honduras México El Salvador Colombia Argentina Venezuela Panamá Uruguay Chile Costa Rica Cuba 0

5

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35

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65

Graph 7.4. Infant Mortality Rate in Latin America in 2000–2005 (deaths of children under 1 to 1,000 live births) Source: CEPAL,Anuario estad´ıstico de Am´erica Latina, 2002 (Santiago de Chile, 2003), Table 42, p. 50.

2002 the figure was still 8.2 years for both sexes.71 The current infant mortality of some thirty deaths per one thousand live births is still well over three times greater than such rates in the advanced industrial world. In 2002 Brazil ranked 114 among world nations in this index, along with El Salvador and Egypt.72 Moreover, it still ranked as one of the highest infant mortality nations even within Latin America (see Graph 7.4). But, finally, there has been a basic shift in the timing of these infant deaths, which went from primarily affecting older infants – 51 percent of whom died from 28 to 264 days after birth in 1990 – to being primarily deaths occurring in the first six days after birth in 2001 when some 51 percent died, compared to just 35 percent who died after 28 days. This is suggestive that diarrhea and other infant killers have finally been replaced by genetic and other birth disorders – the more typical pattern of the advanced industrial societies.73 71

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73

The average life expectancy in 2002 was 65.2 years for Brazilian men and 73.1 for Brazilian women. The overall national rate was thus 69.0. Taken from Table A11 in DATASUS and found at http://tabnet.datasus.gov.br/cgi/idb2003/a11t.htm. The U.S. data comes from US Census Bureau, Mini Historical Series, table HS-16, found at http://www.census.gov/statab/www/minihs.html. UN, Statistical Division, Millennium Indicator: “Infant mortality rate (0–1 year) per 1,000 live births (UNICEF estimates),” found at http://unstats.un.org/unsd/mi/mi series results.asp?rowID=562. The data on the total infant mortality rate is from the census and generated by IBGE and found at http://www.aleitamento.org.br/indicedeam/ mortalidade.html#INICIO. The breakdown of the infant mortality rate by days after birth is found in Table A9 from DATASUS at http://tabnet.datasus.gov.br/cgi/tabcgi.exe?idb2003/a09.def.

70

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Clearly, the evidence of health indicators would suggest that Brazil still has a long way to go in health care delivery. But what is impressive is that its public health system is now an advanced one reaching a significant ratio of the insured and uninsured population. After years of debate, there is now generalized agreement about how that health care is to be delivered, a consensus that has been formed over the past quarter century and that has survived major shifts in national political alliances. Clearly, in health care as in education, a combination of federal and local initiative has now become the prime system of state concerns for the well being of its citizens.

8 Inequality: Class, Residence, and Race

By whatever criteria used, Brazil is one of the most unjust societies in the world. This statement is even more true when we consider just the industrial countries. None of these countries presents indicators of inequality similar to Brazil. In 2001 the top 10 percent of the population controlled 50 percent of the wealth and the bottom 50 percent accounted for just 12 percent of all salaried income.1 How severe this distortion is can be seen from comparable data for Canada in 2000. There, the top 10 percent of the population accounted for only a quarter of the national wealth and the poorest 50 percent for 28 percent. In a typical Scandinavian country such as Sweden in 2000, the richest deciles controlled just 22 percent of the wealth and the poorest half accounted for 32 percent of wealth.2 Brazil by the usual GINI indices of inequality shows an index number in the upper 50s and lower 60s, compared to mid- to high 50s for most Latin American countries, and an index in the 30s to lower 40s for most advanced industrial countries.3 It has been estimated that by world standards Brazilian per capita income should result in a 10 percent ratio of poor in the national population. In fact, 34 percent of the Brazilian population was considered poor in 1999 – some fifty-four million persons, of 1

2

3

These numbers come from the latest world inequality data provided by the World Bank and the UN in the UNU/WIDER World Income Inequality Database (WIID), “World Income Inequality Database V 2.0a June 2005,” Table WID2a1 found at http://www.wider.unu.edu/wiid/wiid.htm. Ibid., table WID2a1. IPEA lists Brazil’s top 10 percent as owning 47 percent of total income in 1981 and 46 percent in 2002. IPEADATA, “Renda – parcela apropriada por 10% mais ricos – (% renda total). David de Ferranti, Guillermo E. Perry, Francisco Ferreira, Michael Walton Inequality in Latin America: Breaking with History? (Washington, DC: World Bank, 2004), Figure 2–3, p. 2–10 gives the latest Gini indices for Latin America.

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whom twenty-two million were considered indigent.4 Thus, Brazil exhibits very high indices of inequality and poverty even by Latin American standards, which in turn is the region of the world that has the greatest degree of inequality.5 It is not easy to understand the cause of this extraordinary disparity between Brazil and other countries of its size, type of organization, and even historical evolution. Since the 1970s, there has been an intense debate in the country about the cause for this concentration of wealth, and many have used accepted international models to study the question. But such instruments of analysis only permit us to understand the distribution of current income, and above all of salaries. In this area, of course, education proves to be the fundamental variable. But if the question of education is so fundamental in explaining current inequality, may we not ask another question, about why the distribution of education remains so unequal despite all the massive changes that have occurred. In fact, until the 1930s, the offer of an education was far more limited than today, and yet can we say that inequality was worse then than now? Why has it been that since then, despite major industrialization and the modernization of the economy, that there has not been a major improvement in the distribution of income and resources among the Brazilian population who now have obtained much higher levels of education?6 Although it may be impossible to provide a definitive answer to such questions, we can offer some considerations that may perhaps

4 5

6

Ricardo Henriques, “Desigualdade racial no Brasil: Evoluc¸a˜ o das condic¸o˜ es de vida na d´ecada de 90,” (Texto para Discuss˜ao, no. 807; Rio de Janeiro: IPEA, 2001), p. 9. As a recent World Bank study concluded, “According to household surveys, the richest 10 percent of individuals receive between 40 and 47 percent of total income in most Latin American societies, while the poorest 20 percent receive only 2–4 percent. These differences are substantially higher than in OECD countries, Eastern Europe, and most of Asia. Moreover, the most distinctive attribute of Latin American income inequality is the unusually large concentration of income at the very top of the distribution. . . . Even the most equal countries in Latin America (Costa Rica and Uruguay) have significantly higher levels of income inequality.” Ferranti et al, Inequality in Latin America, p. Summary-3. Recent data correlating income groups and years of schooling shows that Brazil has consistently improved for all age groups over time in average years of schooling even for the bottom deciles of income. Moreover, its overall GINI index between years of schooling and groups of income by 1990 finally declined below the Latin American average. Nevertheless, income inequality levels have changed little. For education and income distribution data, see Ferranti et al, Inequality in Latin America, Tables A22–A23 and A25 on pp. 419–20, 422. Also see the age breakdown in more detail in the supplementary educational/age and gini tables for this volume found at http://www.depeco.econo.unlp.edu.ar/cedlas/wb/.

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help to understand the characteristics that helped define the evolution of this country and contributed to this extraordinary inequality which exists today. In the first place, we know that until the beginning of the nineteenth century, land was given out in only great extensions and its possession represented a clear indication of power. In these large landholdings, there was an enormous disparity between their size and their level of effective economic occupation. Slaves also were the primary workers. At the margin of this universe of great estates was formed a world of small properties, many of which held only precarious title to the land, and the majority of men and women were subsistence agricultural producers. In the middle decades of the nineteenth century, when it was necessary to create alternative forms of labor to substitute for the slaves, there arrived European immigrants, and this led to an alteration in the rules of access to land. The colonial sesmaria forms of extensive land grants would be replaced by a modern land market. But the Land Law of 1850, which regulated this new form of access to land, made it difficult for immigrants to purchase property. These free workers were brought to serve as salaried workers in the existing commercial agriculture, especially in coffee, and not to become small independent farmers. There were such processes occurring in the south of the country, with a well-defined colonization policy based on the granting of small properties. In this southern region there arose a society with characteristics distinct from the other areas of Brazil. But this small farmer migration was limited, local, and constantly attacked by the large landed elite, who were more concerned with replacing slaves with free landless workers than promoting land sales to small farmers. Given the continental size of the country, the majority of the Brazilian territory consisted of empty unclaimed state lands, which were gradually appropriated by the great landowners, often in an illegal manner. There was never in Brazil a generalized distribution of land to small landowners who could effectively exploit the land, as would occur in the U.S. West, except with the southern agricultural colonies. Nor was there ever a violent or organized form of agrarian reform, or any abrupt break in the structure of power that profoundly altered the structure of land ownership. Even when the occupation of land was extended in the twentieth century and commercial agriculture expanded and became generalized throughout Brazil, the agrarian structure remained one of the most concentrated in the world. There is, of course, a modern agriculture sector in Brazil that probably has

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a structure of land ownership compatible with the type of modern farming and intensive ranching that is carried out in Brazil today. Here, land has a high price, and it is necessary to cultivate and maintain the land as a basic source of wealth, not as a reserve value. But there are still large areas little explored or used for extensive ranching, with low technology, extensive use of lands, or even large areas that are left fallow. This latter pattern occurs both on the frontiers and in areas destroyed by a predatory agriculture that has been practiced in Brazil since the colonial period. The Valley of Para´ıba, in the region between Rio de Janeiro and S˜ao Paulo, where coffee was concentrated for a good part of the nineteenth century, is an example of this process of degradation. Moreover, the existence of these latifundia, which still dominate the rural landscape, represents the least productive part of the agricultural sector. Government statistics show that 58 percent of agricultural production comes from properties with less than one hundred hectares,7 and that these small landowners represented 90 percent of the property owners and control 20 percent of all lands. Farms and ranches of more than one thousand hectares contribute only 12 percent of total agricultural production and represent just 1 percent of rural landowners. But they control 45 percent of all land. Other figures stress the inviability and wastefulness of these latifundia. For example, the IBGE has calculated that 70 percent of basic foodstuffs is produced by small farmers.8 Whereas most of the successful ranching is done in intensive and relatively small units, the latifundia engage in extensive ranching with relative poor quality control. Clearly, the soybean, orange, and other major export-oriented units are large agricultural plantations, but they are usually smaller than the typical latifundia and they operate on lands with such high costs that they use all their lands to the maximum, something that is antithetical to the typical latifundia of the north and frontiers. Slavery and its substitution by European immigrants is another process of colonization and economic exploitation that has left traces that are difficult to measure but worth discussing. Brazil was occupied and commercially exploited on the base of slave labor, which existed in all parts of the country, not only in the areas of commercial export 7 8

DIEESE, 1985 – IBGE. Maria do Socorro Quirino Escoda. “A determinac¸a˜ o social da fome e a intervenc¸a˜ o do estado,” (PhD thesis, UFRN, 1989), Ch. 2.

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agriculture and mining but also in production dedicated to the internal market. Small groups of free persons, especially blacks and mulattos, were inserted into the labor market. But free persons were concentrated in rudimentary agriculture, essentially dedicated to subsistence, selling, if possible, excess production only on the local markets. There was little economic integration among the various areas of occupied territory, since Brazil had only a precarious road network. With abolition of slavery in 1888, most of the slaves were incorporated into the labor market as wage workers. But initially the skilled occupations and the major commercial activities, especially in agriculture, went to the European immigrants who arrived in massive numbers in the last two decades of the nineteenth century. The free colored from the slave era remained at the lowest levels of the free labor market in the postslavery era for most of the first half of the twentieth century. Even the industrial process, which was firmly implanted by the 1930s, depended initially for a greater part of its labor force on European immigrant workers and their descendants, and only later on were native rural workers attracted to the urban centers. The major internal migration to the modernizing urban centers only occurred in the second half of the twentieth century. Moreover, it was a disorganized process that created pockets of poverty in the great cities and initially incorporated this labor in activities of less skill, mostly in civil construction. The great majority of those who arrived to these urban centers were little prepared for more complex and productive activities, especially in terms of their level of education. Their incorporation into the market would be complementary to the European immigrants and their descendants and to the traditional urban dwellers, both groups being more apt for functioning in a modern urban and industrial society and far better educated than the rural and northeastern migrants. This created a major social segmentation in the cities. There also were maintained traditional pockets of rural poverty that were marginalized from commercial agriculture. These landless rural workers or small farmers and squatters were basically without access to education or other services and infrastructures provided by the state, and were politically dominated by the latifundistas. Even those who had access to lands, legal or otherwise, could barely survive on the small plots and were as inefficient in these minifundium plots as were the latifundistas in their large estates. Government policy in many other areas has also been a factor in promoting inequality. As in most Latin American countries, Brazil

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has been incapable of seriously taxing the personal income of the wealthiest nonsalaried income groups and thus has few fiscal resources with which to compensate for structural inequalities in land and resource allocations in the market. In most of the advanced industrial economies, personal income tax makes up a substantial share of the government income and usually has a major redistributive effect. Thus, in OECD countries, the personal income tax accounts for 11 percent of GDP and accounts for around 28 percent of all tax revenues.9 In many of these countries, this tax revenue is rather systematically used to compensate for income inequality and these government transfers and taxes are major factors in reducing inequality as well as providing a common set of social and health resources to all its citizens. In most Latin American countries, these income taxes are charged only to salaried workers and they make up a much smaller share of total income. These governments tend to rely on regressive consumption taxes to fund their social policies, often thus furthering rather than reducing inequality. It was not until the middle of the twentieth century that the Brazilian government finally committed itself to public education for all its citizens, long after this had become the norm in most other Latin American countries. This policy explains in large part the extraordinarily high levels of illiteracy in the country even today. What little public education was available, however, was of a reasonable quality, and the poor as well as the middle classes that had access to public education usually benefited from a higher quality of teaching, especially in what were then elite public secondary schools. They then had a good chance of entering the free public universities and competing for jobs with the rich students who came from private schools. Paradoxically, the opening up of the public educational system to the entire population would eventually lead to even greater inequalities. From the 1970s on, there was undertaken a policy of universalization of basic education, which finally reached its goal of complete coverage by the last decade of the twentieth century. But the universalization did not signify equality of opportunity, since massification of primary and secondary education occurred at the cost of quality. This has created a bifurcated system in which the poor go to public primary and secondary schools and the rich send their children to high quality 9

Howard H. Zee, “Personal Income Tax Reform: Concepts, Issues, and Comparative Country Developments” (Washington, DC: IMF Working Paper, WP/05/87, 2005), p. 43.

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private primary and secondary schools. In turn, these better-educated private school graduates gain a disproportionate share of entrance, via difficult exams, into the free public universities, which are the best schools in the country. But the graduates of the public schools in the great majority do not obtain an education sufficient for them to pass the university entrance exams and most often end up paying for an inferior university education in poorly organized private faculties. Although there are some high-quality private institutes and university faculties, they in turn only take students who could pass the entrance examinations for the public universities. Public school graduates find themselves ill-prepared for the labor market as well, in contrast to those who go to the free public universities and special institutes. In short, the Brazilian education system, as it is now constituted, reinforces the process of concentration of wealth and increases inequality rather than reducing it. There are now quite distinct trajectories for the rich and the poor: the first receive an education comparable to first world standards; the later, despite their universal access to primary education, are marginalized by the quality of the teaching they receive. So poor is the quality of primary public education that many students who have attended the primary grades are still defined as functional illiterates. The process of induced industrialization, which occurred from the 1930s onward, profoundly altered the productive structure of the country, modernizing the economy and provoking a dramatic movement of the population to the urban centers. Today, all parts of the nation are integrated into a market economy, which without doubt was furthered by industrialization and the expansion of the modern labor market. For the population as a whole, income has risen dramatically as have all social indicators. But, despite all these changes, the structure of wealth concentration that marks the country as one of the most unjust in the world has not changed. Even in comparison with its peers in Latin America, Brazil stands out, despite the fact that their settlement patterns were similar to Brazil and their process of urbanization and industrialization shared many of the same features as those of Brazil. Clearly, the reforms made by the Kubitschek regime in the mid1950s to government industrial policy were fundamental in creating a modern national market. In just a few years a major automotive and durable consumer goods industry was established, which quickly supplied the basic needs of the internal market and supported the creation of a modern consumer market. This market needed a large sector of

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the population to have high income and this in turn was developed by these new industries that created a new laboring class with high paying jobs. Government policy supported both workers and industrialists in creating this modern market, but it tended to reinforce the process of concentration. The reason is that these benefits did not expand to the entire population and the growth of this sector was so rapid that it left behind large segments of the population. Given the size of Brazil, this nonmodern consuming population could still exist and might even expand without affecting the overall efficiency of the industrial sector. Given its continental size and large population, efficiencies of scale could be created on the basis of just the modern consuming sector. Bounteous subsidies were granted by the government to all segments involved in this process, whether producers or consumers. Traditional producers lost their priority. During the military period, especially in the 1970s, this process of creating a modern labor and consumer market was expanded even more as ever more workers were incorporated into the system. Without doubt, everyone benefited from these years of growth. But it was in this period that the national debate on the issue of the distribution of wealth in the country was initiated, which questioned the whole Brazilian model that relied on a restriction in salary growth to subsidize this expansion. Defenders of government policy argued that these policies had promoted major integration of new workers into the market economy and that the high income distortions were only transitory.10 It was held that the disequilibrium between the growing demand for highly qualified professionals, still scarce in the market, was cause for the high inequalities in the salary structure. This, it was held, would only be a transitory problem once there was an increase in the supply of more qualified workers. Opponents argued that this was not a transitory concentration provoked by distortions in the labor market but was the consequence of an economic policy implanted by the government especially in relation to the artificial control of wages carried out by the military even in years of extraordinary growth.11 The crisis of the 1980s, marked by low growth and high inflation, did not reduce these distortions in income. Absolute income per capita grew little in this period and there was no redistributive process. 10 11

Carlos Langoni, Distribuic¸a˜ o da renda e desenvolvimento econˆomico do Brasil (Rio de Janeiro: Express˜ao e Cultura, 1973). Albert Fishlow, “A. Distribuic¸a˜ o de renda no Brasil: Um novo exame,” Dados, no. 11 (1973).

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Inflation, in fact, was a perverse process that caused a deterioration in all incomes, but above all those of workers who had no effective mechanism in place to protect them from this inflation. Nonsalary income, particularly that which was related to the financial market, used indexation to protect their earnings. Even those who received very high salaries, could protect their savings in this manner. Thus, recession and high inflation were profoundly negative in the evolution of the absolute level of income and its distribution. In 1986, the first stabilization plan, which was capable of temporarily controlling inflation and promoting strong growth, occurred. Since this program lasted hardy one year, it was incapable of permanently reversing any distributive indicator, although it did temporarily reduce income inequalities. The stability created by the Plan Real of 1994 provided a breathing space for the poorest segments of the population. The end of inflation represented an end to the inflation tax that had consumed their income, and it now permitted a major increase in demand, particularly for the poorer segments of the societies, both in goods and food. However, two factors reversed this process. On the one hand was the instability of the international economy, which made the country more vulnerable to external crisis and a subsequent adoption of recessive measures in order to adjust the balance of payments. The other was the adoption of the liberal reforms of privatization and the opening up of the economy, which provoked major dislocations in industry and in the labor market. The majority of the companies modernized their processes and reduced their employees. In the jobs that remained, there was demand for higher qualification from the workers, and much of the newer employment that was created in this period went toward the lower end of the market. All this led to a major expansion of the informal sector and a growth of unemployment, and only reinforced the unjust distributive system. Recent studies with respect to income distribution show education as the fundamental factor in explaining the differences in income. There is usually a high correlation between the number of years of education and salaries. This fact is undeniable. But perhaps this is an incomplete reading of the nature of the distributive structure. If education alone is the single most important factor explaining inequality, then it would be enough to universalize education and increase the average years of schooling to reduce the extraordinary levels of inequality. Would this in fact be the case? In the past twenty-five years, the

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number of children in school has reached quite high levels and the average years of schooling have steadily increased, but there has been no change in terms of inequality in Brazil. For a limited demand of jobs of high quality, there is a limited offer of good professionals, almost all of whom were initially formed in private primary and secondary schools and who then went on to public universities or private universities of high quality. These rich students had privileged access to information and complementary education in such fundamental areas today as language skills. The high social and economic status of their parents also provides easier access into the labor market. The poor quality of education offered to the poor puts them at a disadvantage in the labor market. The education that they received does not prepare them for high quality positions in the formal labor market. Thus, the current education process in Brazil actually reinforces the existing social structure. Although education is normally a fundamental factor in social mobility, in the skewed structure of contemporary Brazilian education policies it is incapable of producing changes in the current rigid distributive structure. The question of inequality is also to be seen in terms of residence and race as well as class. Aside from the usual urban/rural dichotomies to be found in most developing countries, Brazil has also experienced strong regional disparities, which although common to even advanced industrial societies was especially pronounced in this continental country. It was even argued that Brazil in the 1980s was really two distinct countries, which economists called “Belindia.”12 The population inhabiting the Northeastern states had social and economic indices equivalent to India, while its population in the Southern and South Central regions had a standard of living comparable to Belgium. This unequal quality of life in the country can be seen in the regional disparities in life expectancy. In the 1970s, persons born in the poorest Central Northeastern region had an average expectation of life of 49 years of age for both sexes, an extraordinary 18.8 years lower than the average life expectancy in the healthiest southern states of Paran´a, Santa Catarina, and Rio Grande do Sul.13 In 1970, for example, the northeastern state of Rio Grande do Norte had an infant mortality 12 13

See Edmar Bacha and Herbert S. Klein, eds., Social Change in Brazil, 1945–1985: The Incomplete Transformation (Albuquerque: University of New Mexico Press, 1989). Charles Howard Wood, Jos´e Alberto M. de Carvalho, A Demografia da desigualdade no Brasil (Rio de Janeiro: IPEA, 1994), p. 115, Table 4.4.

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of 187 deaths per 1,000 live births, whereas the southern state of Rio Grande do Sul had less than half that mortality rate (or 81 deaths of infants less than 1 year of age to 1,000 live births).14 Although these very high rates dropped in all regions in the following decades, the gap remained the same between the advanced and the backward regions. In 2000, the infant mortality rate in the Northeast was still double the rate of the Southern region (or 44 deaths to 20 deaths per 1,000 births).15 Even as late as 2001, the ratio of infant deaths occurring in the 28- to 364-day period after birth (a key health indicator) was almost three times as high in the Northeast as in the South (or 17 percent of all infant deaths to 6 percent for the South).16 But continued increases in prenatal visits and postbirth vaccinations have brought the regional rates of the poorer states closer to those of the advanced states, which eventually should reduce this health disparities, at least in terms of the younger population.17 This disparity also appeared in the area of literacy. Even in 1999 the Northeastern region contained a startling 46 percent of persons fifteen years or older who were functionally illiterate, compared to only some 21 percent who were functional adult illiterates in the Southern region.18 Equally, the average years of schooling of adults in the Northeast was 2.3 years less than the 6.5 average years of adults over 10 years of age in the Southern region.19 As late as 1990, the Northeastern region registered only 75 percent of children 7– 9 years of age, compared to 91 percent in the South.20 Although this also was a gap that has been declining in recent decades, it still remained quite profound. Recently, crude enrollment rates of primary age school children have almost reached equality between these regions, which suggest that this gap will progressively disappear in the coming decades. In 1998, for example, the crude enrollment rate for primary education (the percentage of children attending school compared to the total children in the age group) was 92 percent in 14 15 16 17 18 19 20

IBGE, Estat´ısticas do S´eculo XX (2003), Table, Populac¸a˜ o1982aeb-049.1. IBGE, online Table 3 – Taxas de mortalidade infantil, segundo as Grandes Regi˜oes – 1990– 2000. DATASUS, http://tabnet.datasus.gov.br/cgi/idb2003/matriz.htm#mort, C tables. IBGE, Estat´ısticas do S´eculo XX (2003), table sa´ude s2t68; DATASUS http://tabnet. datasus.gov.br/cgi/idb2003/matriz.htm#mort, F tables. IBGE, Estat´ısticas do S´eculo XX (2003), table, educac¸a˜ o2000s2 aeb-82. IBGE, Estat´ısticas do S´eculo XX (2003), table, educac¸a˜ o2000s2-aeb-86. IBGE, Estat´ısticas do S´eculo XX (2003), table, Populac¸a˜ o1992aeb-055.1.

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the Northeastern region and 97 percent in the South.21 There are still major problems in school completion rates and the quality of schooling in the two regions is still quite different, with the state governments in the South spending more per primary school student than those of the Northeast. With higher than normal indices of poverty, the Northeast also had a much poorer quality of housing stock. This shows up in all the latest information on housing conditions in the most recent household surveys (PNAD). In the 2003 survey, for example, only 57 percent of the homes in the Northeast had adequate water supply compared to 81 percent in the Southern states. Only slightly over half the homes had adequate street lighting, versus 71 percent in the Southeastern region. Internal plumbing was indicated in 43 percent of the northeastern region’s homes, but accounted for 65 percent of those located in the Southeast. Only in adequate electrical supply were there close ratios – 83 percent had adequate electricity in their homes in the former zone and 93 percent in the latter. This ongoing poverty and failure to fully catch up to the rest of the nation made the Northeast a major exporter of population. Nor has the basic economic disparities underlying these regional differences changed greatly over time, at least for the Northeast. As of 1985, per capita GDP in the Northeastern region was just 35 percent of what it was in the richest zones of the country, and the gap remained constant until the latest estimates. As of 1996 it still stood at 34 percent of the per capital figure for the richest states.22 Although the Northeast contained 24 percent of the national population in the late 1990s, it accounted for just 13 percent of the PIB, and while its industrial participation was just 11 percent of national production, even in agricultural production it accounted for only 16 percent of the national output.23 On the other hand it accounted for 44 percent of the poor persons in the country. The Southern region contained only 15 percent of 21 22

23

Maria Helena Guimar˜aes de Castro, Educac¸a˜ o para o S´eculo xxi: o desafio da qualidade e da eq¨uidade (Bras´ılia: INEP/MEC, 1999), p. 11. Lena Lavinas, Eduardo Henrique Garcia, and Marcelo Rubens do Amaral, “Desigualdades Regionais e retomada do crescimento num quadro de Integrac¸a˜ o Econˆomica (Texto para Discuss˜ao no. 466; Rio de Janeiro: IPEA, 1997); Claudio Monteiro Considera, and M´erida Herasme Medina, “PIB por unidade da federac¸a˜ o: valores correntes e constantes – 1985/96” (Texto para Discuss˜ao no. 610; Rio de Janeiro: IPEA, 1998) Antonio Braz de Oliveira e Silva and M´erida Herasme Medina, “Produto Interno Bruto por Unidade da Federac¸a˜ o – 1985–1998” (Texto para Discuss˜ao no. 677; Bras´ılia: IPEA 1999)

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the national population but contained only 8 percent of those listed as being poor in Brazil.24 Over the past quarter century, some of the economic and social disparities have narrowed considerably, regional differences have shifted as well, and a somewhat more national norm has influenced most of the regions of the country. The result can be seen, for example, in life expectancy, with the gap between the healthiest and least healthy regions (Northeast and South) has fallen to just 5.2 years of life at birth. But there was still some startling variations, with women in the Northeast living on average 6.1 years less than their peers in the Southern states.25 Moreover, the rural populations, although an increasingly declining share of populations in each region, had not closed the gap in the period since 1970, with the disparities between the regions remaining strong. At the same time, however, the fertility differences that had been quite marked by region are progressively disappearing. Overall, the total or global fertility rate between the Southern and Northeastern regions in just the period from 1980 to 2000 has dropped in half from 2.5 children difference to just 0.4 children per woman.26 Although all regions have dramatically improved in the course of the past quarter center, the formerly less developed regions of the North and Center West have became quite advanced in all social indices becoming comparable to the older elite regions of the South and Center South. This has been largely a result of the rise of new commercial agricultural areas, which have brought extraordinary wealth to these previously isolated and marginalized regions. Not only have a half dozen new states been created in former federal territories, but also their standard of living has come close to the standard of the best Southern and South Central states. This can be seen in all the statistics for the Northern and Central Western regions, which prior to 1980 had been lightly populated and had relatively low standards of living. The Center West had accounted for only 5 percent of the national population in the census of 1980, but grew to 8 percent of the national population by 2000. In fact, it

24 25 26

Sonia Rocha, “Desigualidade regional e pobreza no Brasil: A Evoluc¸a˜ o – 1981/95,” IPEA, no. 567 (1998), p. 20. Minist´erio da Sa´ude, Anu´ario Estat´ıstico de Sa´ude (2001). IBGE, Censo 2000, online Table 1 – Taxas de fecundidade total, segundo as Grandes Regi˜oes – 1940/2000.

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was the region that had the highest annual rate of growth since the first census of 1872, or over 3.1 percent per annum.27 To 1980, it was the single fastest growing region by far, and since 1980 its growth rate has only been outpaced that of the region of the North. From 1984 to 1995 its per capital GDP had climbed from 63 percent to 82 percent of that of the Southeastern states – this when the ratio of the Northeast remained at just over a third of that of the Southeastern region in the same period.28 In roughly the same period, its share of GDP went from 5.6 percent of the national total in 1985 to 7.1 percent in 1998, and its share of agricultural output went from 9.4 percent of the national total to 11.6 percent. 29 In social and demographic terms as well, the increasing wealth of this formerly isolated region quickly reached at or above national averages. By 2002, some 90 percent of the Central West population aged 10 or more years had more than 1 year of schooling, a figure better than the national average.30 In 1980, for example, its infant mortality rate was already quite low and by 2000 its rate of 21.2 deaths per thousand births was lower than the national rate and half the rate of the Northeast.31 It also went from being a region with a global fertility rate above the national average in 1940 (or 6.4 children) to below the national rate in 2000 (or 2.2 children).32 In fact, so quickly had this region grown that in the decade of the 1990s and first part of the new century it had replaced the Southeastern region as the primary zone of migration for poor workers from the Northeast, just as it has become a zone of attraction for Southern zone farmers as well. Along with regional variations in wealth, Brazil like all ex-slave societies in the Americas, has suffered from racial prejudice and discrimination based on skin color. Although there has been a never-ending debate among Brazilians whether the condition of the ex-slaves is a result of class or racial discrimination, it is clear that blacks have fared 27 28

29

30 31 32

IBGE, Estat´ısticas do S´eculo XX (2003), table pop S2T02ab. Eduardo Henrique Garcia, Marcelo Rubens do Amaral. and Lena Lavinas, “Desigualdades Regionais e Retomada do Crescimento num Quadro de Integrac¸a˜ o Econˆomica” (Texto para Discuss˜ao no. 466, Rio de Janeiro: IPEA 1997) p, 3. Antonio Braz de Oliveira and Silva M´erida Herasme Medina, “Produto Interno Bruto por Unidade da Federac¸a˜ o – 1985–1998” (Texto para Discuss˜ao no. 677, Bras´ılia: IPEA 1999), Tables 3 and 4. “Fonte: IBGE, Diretoria de Pesquisas, Coordenac¸a˜ o de Emprego e Rendimento, Pesquisa Nacional por Amostra de Domic´ılios 2002,Centro-Oeste tabela 2.3. IBGE, Censo Demogr´afico 1970–2000. IBGE, Censo Demogr´afico 1940–2000.

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223

poorly in terms of mobility and access to resources. Without question, the Brazilian three color racial scheme of blacks, mulattos, and whites has softened the boundaries of prejudice in the population. Moreover, downward mobility of whites has meant that poverty is not exclusively a color-defined status, and the slums and favelas of Brazil are multiracial centers. That said, there is no question that prejudice has functioned throughout the postemancipation period and that blacks especially have faced discrimination from all members of the society. Although Brazil was a predominately Afro-Brazilian nation in the first census of 1872, after the massive European immigration from 1880 to 1920, it had become predominately a white nation. Although color definitions have varied widely from census to census, since 1980 the censuses and estimations show the country to be relatively stable in color terms with a population just over half of whom were listed as white, and just under half as colored: made up primarily of blacks (pretos) and mulattos (pardos) and just under 1 percent Asian.33 The big changes have been the relative decline of pretos and the increase of pardos, as could be expected given the dynamics of color integration in Brazil. Equally, the distribution of this colored population is not evenly divided by region, residence, or class. The best data on racial conditions in Brazil comes from the National Household Surveys. These surveys are among the largest such household income surveys undertaken in the world and have been carried out on a systematic basis for the past forty years. In the latest PNAD household survey, that of 2003, it was estimated that 52 percent of the population were white, 41 percent mulatto and 6 percent black.34 The colored population (pardos and pretos) is the majority of the population in the regions of the Northeast, Southeast, and Center West zones. Although not all of these zones are poor by Brazilian standards, the colored population is found predominantly in the lower strata even of the richer zones and is dominant in the poorest of all zones, the Northeastern region. They also are found to be far more illiterate than are whites. Thus, nationally, blacks and mulatto adults are two times as likely to be functionally illiterate as whites (or 32 percent to just 18 percent for whites in 2002). Moreover, this gap is to be found in both rich and poor 33 34

Ricardo Henriques, “Desigualdade racial no Brasil: evoluc¸a˜ o das condic¸o˜ es de vida na d´ecada de 90” (Texto para Discuss˜ao no. 807, Rio de Janeiro: IPEA 2001), Table 1, p. 5. PNAD, 2003, Table 11.1.

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zones. Thus, the Southern states, which have the best indices of standard of living and education in Brazil, show only a slightly lower gap between the whites and colored (or 17 percent functional illiteracy for whites, versus 27 percent for pardos and 29 percent for blacks).35 Given these literacy differences, it is not surprising that these same differences can be observed in education, where the colored population was well behind the whites. In 2003, mulattos and blacks adults had on average two years less of education than whites – or five versus seven years.36 As could be expected given their results in education, racial differences also were pronounced in income. The PNAD household surveys consistently found the same spread in income between whites and blacks in all occupations and all regions. In 2003, for example, whites earned twice the income of blacks and mulattos, and this was consistent across all regions, with the only exception being the North where they earned two-thirds of an average white salary. Moreover there was no major difference by sex, with colored men doing only modestly better than colored women.37 The colored population of Brazil also was far more likely to be in the lower half of the income deciles than the nonwhite population. Some 51 percent of the whites were to be found in the top 30 percent of income gainers, whereas only 27 percent of colored income earners were found in this elite position. This strong inequality also showed up in occupational distribution, household composition and education.38 In 2003 some 6 percent of the whites were in domestic service, compared to 10 percent of pardos and pretos – and in the richer zones of the country the contrast was even stronger, with the balance in the Southern states being 6 percent for whites and 12 percent for coloreds. In turn some 6 percent of whites were employees, but the ratio for blacks and mulattos was only 2.2 percent.39 Even when the colored population had the same occupation, their average income was consistently lower than the whites. Thus, in 2003, colored workers in the formal sector earned a third less on average than white workers and those in the informal sector gained just under 35 36 37 38 39

PNAD, 2003, Table 11.3. PNAD 2003, Table 11.7. PNAD, 2003, Table 11.11. PNAD (Pesquisa nacional por amostra de domic´ılios 2001): microdados (Rio de Janeiro: IBGE, 2002), 1 CD-ROM, Table 9.16. PNAD, 2003, Table 11.13.

Inequality

225

half of a white informal worker salary. Among military and government workers, the pardos and pretos earned a third less than whites, and among employers – the highest income group for both whites and coloreds – coloreds gained just under half of the earnings of the whites.40 All this explains the skewed wealth distribution by color. Some 42 percent of the colored population is found in the bottom 30 percent of the population in terms of income, a figure double that of the whites. When each segment of income is examined, the figures showing discrimination are even more impressive. Of the 10 percent of the population who are at the bottom of the income scale, 68 percent are colored (pardos and pretos) and among the richest 10 percent of the population they account for only 13 percent of the wealthy – in both cases far different from their total representation in the population as a whole.41 It has been estimated that the proportion of colored persons below the line of poverty in Brazil was 50 percent, while that of the white population was just 25 percent.42 Clearly then, well over a century after emancipation, the ex-slave population of Brazil remains overwhelmingly poor, a factor that must be related to a long and complex history of discrimination which they have experienced even after emancipation. This also is reflected in higher mortality and lower life expectancy rates for the non-white population. But it also should be stressed that not all indices are completely negative. For example, the gap in average years of education has been slowly narrowing and it could be expected that the difference will disappear in a few years. This can be seen in the school enrollment figures for 2003, which show little difference by color in the school enrollment ratios of almost all age groups. Only in the older groups was there a meaningful difference and there the spread was not that extreme. Thus, for 15- 17-year-olds – that is, in high school students – and for 20- to 24-year-olds – those enrolled in postsecondary schools – there was an 7 percent spread between colored and white enrollments.43 The same can be said for family organization as well. Thus, the PNAD 2003 survey showed basically no difference by color in terms of family structure. Single-person households and female heads

40 41 42 43

PNAD, 2003, Table 11.14. PNAD, 2003, Tables 11.16–11.17. PNUD, CEDELPAR, “Atlas Racial Brasileiro – 2004.” The figures were 86 percent to 79 percent for the 15–17 cohort and 30 percent to 23 percent for the 20–24 group. PNAD, 2003, Table 11.4.

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of households with children were identical for both white and colored women.44 Conversely, among male heads of households there was virtually no difference by color. Thus, poverty and family breakdown are not coterminus in the Brazilian context. But, in terms of mortality, the differential poverty still has an impact. Thus, the United Nations (PNUD) estimated that in 2000 the rate of infant mortality among of children of black mothers was two-thirds greater than the rate among children of white mothers. Although the differences in life expectancy between whites of both sexes and colored persons was still 5.3 years, this had in fact declined considerably over time from the 7.5 years’ difference in 1950. In terms of fertility there was relatively little difference between whites and blacks, although black women tended to have fewer caesarians and had a slightly higher level of fertility than whites – but this seems to have fluctuated considerable and shows no clear trend. Given their greater poverty, colored persons tended to use hospital facilities more than whites, and the differential life expectancy rates – although declining – would suggest that the colored tended to have poorer overall health than whites.45 As in almost all developing countries, Brazil also has shown a major distinction between its rural and urban populations, one that is slowly but progressively disappearing. Until 1970, in fact, Brazil was primarily a rural society and most of the agricultural population was engaged in subsistence. Here was the most poverty-stricken group in society with the lowest standard of living, the highest mortality and fertility, and the lowest levels of education. Poverty was endemic in the rural area and the contrast between rural and urban society could not have been sharper. But a combination of the growth of a modern urban sector and an agricultural revolution have both reduced the number of rural workers within the entire society, even in absolute terms, and also led to a major decline in the ratio of indigent and poor persons who remained in the rural area. Thus, the rural population peaked at forty-one million persons in 1970 (then representing 44 percent of the population) and had declined steadily in every decade reaching just thirty-two million in 2000 (which now represents just 19 percent of the population).46 By 1996, some two-thirds

44 45 46

PNAD, 2003, Tables 11.15a–11.15d. PNUD, CEDELPAR, “Atlas Racial Brasileiro – 2004.” IBGE/Sidra, Table 1288 – Populac¸a˜ o nos Censos Demogr´aficos por situac¸a˜ o do domic´ılio.

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of the Brazilian population lived in cities of twenty thousand persons or more.47 With the tremendous growth of modern commercial agriculture, and the slow penetration of modern communications into the rural areas, the traditionally sharp disparities within the national population due to residence are very slowly declining. To these economic factors must be added the extraordinary late-twentieth-century state decision to provide social welfare and services to the previously neglected rural area. Among the many policies that were enacted, the most revolutionary was the government decision in 1991 to provide a a basic retirement (of one minimum salary) to all rural workers – a revolutionary concept in Latin American social security and one that virtually eliminated abject poverty in the rural area. Although work accident and partial pensions for rural workers had been developed from the 1950s, it was only in the Constitution of 1988 that the right to a pension was granted to all rural persons of a given age and only in 1991 was this provision finally implemented. This pension was provided to all agricultural workers who reached sixty-five years of age for men and fifty years of age for women, regardless of whether or not they had contributed to the national pension plans.48 There also were the beginnings of the delivery of education and social services to the rural areas from the mid-twentieth century onward that brought health, education, and other services to the many of the previously isolated rural communities. All these factors have meant that the actual gap between the urban and rural population has been progressively declining in a host of areas. As was the norm in all of Latin America, for example, the birth and mortality rates of the rural population were far higher than those of their urban compatriots. But both rural fertility and mortality rates have followed urban trends and the spread between urban and rural has decline in many areas. But however much these rates declined over time, there still remained important differences between the two populations. Clearly, the urban populations were better educated and had higher status jobs. The rural populations also turned

47

48

Kaizˆo Iwakami Beltr˜ao, Francisco Eduardo Barreto de Oliveira, and Sonoˆe Sugahara Pinheiro, “A populac¸a˜ o rural e a previdˆencia social no brasil: uma an´alise com eˆ nfase nas mudanc¸as constitucionais” (Texto para Discuss˜ao no. 759, Rio de Janeiro: IPEA, 2000), p. 2. Betr˜ao et al, “A populac¸a˜ o rural.”

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out to be more colored than the urban populations (some 84 percent of the whites resided in the urban area in 1999 as opposed to 74 percent of the colored population).49 Average rural family income was just half of what it was in the urban centers. Just under half of urban households earned less than five minimum salaries, whereas almost three-quarters of rural families were in this category.50 Clearly, the wealthy and better educated population was not to be found in rural Brazil. But the programs of rural pensions have led to a startling reversal of poverty, with the elderly retired persons having fewer poor among their midst than the younger age groups (or an estimated 23 percent versus the nonelderly rate of 39 percent).51 Also, in every major region of the country, the distribution of income was moderately less concentrated in the rural areas than in the urban area.52 If differences by sex, residence, and possibly even race have slowly declined, the general unjust distribution of income by class remains the same. This is the single most intractable problem that Brazil faces. Despite the massification of school enrollments at both the primary and to a lesser extent at the secondary level and the creation of a vast network of state, federal, and private universities, and the extraordinary drop in illiteracy, inequality in Brazil has not changed. Although salary distortions, plus negative state policies of salary restraints, are usually suggested as the culprit, in fact even in boom times with a free labor market under democratic governments, little has changed in the distortions of income and class in Brazil. While all recognize this as a significant problem, few have any serious suggestions on how to end these distortions. Poverty and illiteracy are declining through more intensive state social policies, but wealth remains as distorted as ever. As the UN reported, there was by a rise in the inequality of income in two out of every three municipalities in the decade of the 1990s. Moreover, in twenty-two out of the twenty-three states and territorial units of the country, the Gini was worse in 2000 than in 1990. It only 49 50 51

52

IBGE, S´eculo XX, Table populac¸a˜ o2000aeb s2 021. IBGE, S´eculo XX, Table populac¸a˜ o2000aeb s2 020. Ricardo Paes de Barros, Rosane Mendonc¸a, and Daniel Santos, “Incidˆencia e natureza da pobreza entre idosos no Brasil” (Texto para Discuss˜ao no. 686, Rio de Janeiro, IPEA 1999), Table 4 and p. 25. On the order of a gini of 59 in the urban areas and 55 in the rural zones. IBGE SIDRA, Tabela 2037 – ´Indice de Gini da distribuic¸a˜ o do rendimento nominal mensal dos domic´ılios particulares permanentes, com rendimento domiciliar, por situac¸a˜ o do domic´ılio.

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improved in the Northern state of Roraima, and then only because average income fell.53 Among the results of this intractable inequality has been a progressive decline in the quality of urban life and the rise of crime as a serious problem within Brazil. The massive migration of the poor to Brazil’s urban centers and the rise of the favelas in all the peripheries of the major cities have created a host of problems in Brazil’s urban centers.54 Although the government from the 1960s to the early 1990s provided public housing and loans for private construction, this system collapsed in the mid-1990s, leaving a severe lack of credit for construction and a massive deficit in housing.55 The lack of housing credit and the poverty of most immigrants led to the establishment of essentially shanty towns on lands illegally seized with no infrastructure for settlements. The chaotic form of settlement, the precarious nature of the self-constructed houses, and the lack of any facilities quickly made many of these zones havens for social disorder and crime. It also has created major problems of governability in many of the largest of Brazil’s urban centers. Over time, these shanty towns become established communities, and demand ever greater support from governments that have 53 54

55

PNUD, Fundac¸a˜ o Jo˜ao Pinheiro, IPEA, Atlas do Desenvolvimento Humano no Brasil – 2003. There is some debate as to the definition of a favela, with most commentators suggesting that it is a group of substandard houses without adequate facilities on land to which title is not regularized. A more precise definition was provided by S´ergio Magalh˜aes, the secretary of urban development in Rio who said that a favela “is a group of homes spontaneously organized, occupying abandoned or underutlitized lands . . . [with] narrow curving roads with no defined public space. http://www.vitruvius.com.br/entrevista/magalhaes/magalhaes.asp. Or, as the S˜ao Paulo Secretary of Planning put it succinctly, it is a group of houses, of whatever construction, that are not organized into regular streets. Interview with the Secret´ario de Planejamento da Prefeitura de S˜ao Paulo, September 3, 2005. In the 30 years of existence from 1964 to 1994, the federal government’s SFH (Sistema Financeiro da Habitac¸a˜ o, or Housing Finance System) financed the construction of 5.6 million family units, more than half of which went to the poor. Robson R. Gonc¸alves “Aspectos da demanda por unidades habitacionais nas regi˜oes metropolitanas – 1995/2000” (Texto para Discuss˜ao no. 514, Rio de Janeiro: IPEA, 1997), p. 5. In 2000, it was estimated that there was a deficit of 7.2 million housing units in Brazil, which represented 16 percent of all housing units, with over 80 percent of this deficit being urban housing. In the census of 2000, it has been estimated that of the forty-four million domiciles in Brazil, some 1.6 million were what were called “subnormal” housing, meaning essentially favelas that represented just 4 percent of all housing units. But, when examined by cities, their importance becomes impressive. In Belem, for example, they represented 30 percent of the housing stock, and in the metropolitan regions of the Southeast, with Brazil’s largest cities, they represented 8 percent of all housing units. Fundac¸a˜ o Jo˜ao Pinheiro, Centro de Estat´ıstica e Informac¸o˜ es, D´eficit Habitacional no Brasil (2nd ed.; Belo Horizonte, 2005), pp. 34, 38.

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limited budgets.56 This has created a massive fiscal and administrative problem for all the municipal governments, which need to provide everything from water, electricity, sanitation, schools, and clinics to roads, bridges, and public transportation to these often distant regions. Although tenements (called cortic¸os in Brazil) and slums were a part of every city in Brazil from the earliest times, the favelas are a relatively unique evolution that occurred primarily in the twentieth century as a result of rapid urbanization. By the time the federal government took the first full-scale census of these zones in 1991, it was estimated that there were some 3,183 of them, two-thirds of which were to be found in the cities of the states of Rio de Janeiro and S˜ao Paulo, the great zones of internal migration.57 Their growth has continued at a rapid pace as city after city began to experience their sprawling development. By 2005, the municipality of S˜ao Paulo alone had some two thousand favelas containing 1.2 million people. There were another six hundred thousand living in tenements and residing in places with precarious tenancy – this out of a population of ten million within the city limits.58 In a survey of these favelas of S˜ao Paulo in 2000, it was determined that these densely populated communities contained higher ratios of children and poorly educated and low-paid workers than the city as a whole, and a good half of their homes had no sanitation facilities.59 As many scholars have pointed out, these slums have tended to develop in the peripheries of the major cities, causing a severe crisis 56

57 58 59

After many years of settlement, many of these favela districts become modified and their homes finally obtain a minimum of infrastructural facilities, thus moving to a newer level than the original “subnormal” structures. Nevertheless, it was estimated that in 2000 some 718,000 domiciles in the metropolitan regions of S˜ao Paulo were still considered subnormal, or primitive shacks with few facilities, and they represented 8 percent of all housing in these regions. Fundac¸a˜ o Jo˜ao Pinheiro, Centro de Estat´ıstica e Informac¸o˜ es, D´eficit Habitacional no Brasil (2d. ed.; Belo Horizonte, 2005), p. 38, Table 5.2. On the slow evolution and integration of these communities from a political perspective, see Janice E. Perlman, The Myth of Marginality: Urban Poverty and Politics in Rio de Janeiro (Berkeley: University of California Press, 1976); Robert Gay, Popular Organization and Democracy in Rio de Janeiro: A Tale of Two Favelas (Philadelphia : Temple University Press, 1994); and Camille Goirand, La politique des favelas (Paris: Karthala, 2001). IBGE, S´eculo XX, Table hab-infraS2T144. Interview with the Secret´ario de Planejamento da Prefeitura de S˜ao Paulo, September 1, 2005. Camilia Saraiva and Edourdo Marques, “A dinˆamica social das favelas da regi˜ao metropolitana de S˜ao Paulo” (Paper given at the “Semin´ario sobre estrutura social e segregac¸a˜ o espacial – S˜ao Paulo, Rio de Janeiro e Paris, S˜ao Paulo, 2004), Table 3, and found at http://www.centrodametropole.org.br/textos.html

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in urban infrastructure as the horizontal spread of the cities continues unabated and going well beyond the currently available urban resources. Although the central cities, as in the case of S˜ao Paulo, tend to decline or grow much more slowly than in past decades, their poor peripheral suburbs now grow extremely rapidly. Their growth often occurs in lands improper for housing, causing environmental destruction, contamination of water resources, and a host of other social and economic problems.60 Unlike North America, the rich in Brazil tend to live in the center city and it is the poor who dominate the suburbs, which Brazilian more correctly term the peripheries. Rio de Janeiro, of course, contains the most famous of these favelas, initially located on the mountains surrounding the city before many of them were expelled to the periphery after new technology enabled the elite to construct modern apartment housing on the slopes of the major mountains. Thus, despite the romance of the early favelas with their glorious views of the Bay, the vast majority of Rio’s poor live miles from the center of the city and far from its beaches.61 During many years, favelas were thought of as areas of temporary occupation that could be removed from the urban fabric. This idea led to great programs of public housing construction. In Rio de Janeiro and S˜ao Paulo, large housing projects were built in the peripheries without an adequate system of public transport, without the basic infrastructures of schools, hospitals, places for leisure, and, most important of all, without employment possibilities. Today they are considered great errors in urban planning. The city of Tiradentes in S˜ao Paulo is an example of this type of project. Situated in the extreme east of the city, it was constructed in a zone lacking in all facilities and far

60

61

Haroldo Torres, Humberto Alves, and Maria Aparecida de Oliveira, “S˜ao Paulo Peri-Urban Dynamics: Some Social Causes and Environmental Consequences” (Paper given at the XXV International Population Conference, Tours-Franc¸a, 18–23 July 2005), and found at http://www.centrodametropole.org.br/textos.html Supposedly the first favela in Rio was constructed in the 1890s, but favelas did not replace traditional slums (regularized housing of poor quality) as the primary residence of the city’s poor until the 1940s. Already by the census of 1950 the majority of favelados – or residents in favelas – resided in the periphery far from the Zona Sul beaches, and by 1960 only 20 percent of the favelas were found here. Although the majority of favela houses in S˜ao Paulo were of masonry, those of warmer Rio tended to be of more temporary construction materials such as wood, tin, and so on. What defined both, however, was lack of land title, roads, and basic infrastructure. Julio C´esar Pino, Family and Favela: The Reproduction of Poverty in Rio de Janeiro (Westport, CT: Greenwood Press, 1997), pp. 3, 38, 42–44; and interview with the Secret´ario de Planejamento da Prefeitura de S˜ao Paulo, September 3, 2005.

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from any possible employment opportunities. Several hundred thousand people live in these new “urbanized” areas without easy access to jobs or basic urban infrastructure. Besides the violence created by the drug traffic, there is the crisis of high unemployment and a total lack of leisure outlets for the young. The result is a great increase in violence in the region. The recent film City of God documents one of these large housing projects constructured on the periphery of the city of Rio de Janeiro and without access to transport and to jobs. Today, government policy is to “urbanize” rather than to destroy the favelas. Removing houses or shacks in areas of risk, especially in high erosion zones, opening streets, putting in water, electricity, and urban structures such as schools and health clinics has become basic policy. The great favelas are now really cities and some are now as well-equipped with infrastructure as the central city. But the newest favelas continue to occupy lands of greatest risk of collapse and usually construct their shacks in wood. Many of the favelas were established in areas close to urban facilities and to employment. Those who live in the immense favela of Parais´opolis, in the middle of the upper-class district of Morumbi, in S˜ao Paulo, will not accept any housing that would involve moving to the city periphery, which would involve busing two hours or more to reach their employment. They will only accept new housing close to where they currently reside, since the majority of their employment is generated by the high-income districts that surround the favela. As many have noted, the violence of the old favelas is not inherent in the people who live there, as a majority of those who reside in these settlements are employed, including a large number in the formal sector. It is the high rates of unemployment of the youth and a lack of basic facilities for these youth that generate the problems of violence. Thus, rapid urbanization, which has brought many advantages for large numbers of poor and illiterate rural migrants, also has fostered a rise of crime to levels that are extraordinary even by the standards of third world countries. Crime, however measured, has experienced a systematic rate of growth over the past decades, leading to both very high rates of violence and to growing rates of incarceration. It also has strained the state police system to the limit and led to a breakdown of the penal system. By the late 1990s, Brazil’s homicide rate was up to twenty-four deaths per one hundred thousand persons. The world homicide rate at that time was 8.7 deaths per 100,000 population, with the rates varying from under 2 per 100,000 in the Arabic states

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and the European Union to a high of 19.8 in the Latin American countries. Even by Latin American standards the Brazilian rate was quite high, with only Colombia, Honduras, and Jamaica exceeding this figure.62 Moreover, since that time, the rates have been increasing steadily. Homicides between 1980 and 2000 have gone from 2 percent to 5 percent of all deaths recorded in Brazil, and as of 1990 they had replaced traffic accidents as the single most important cause of nonhealth or “external causes” of deaths in the country.63 As the Ministry of Health has noted, the homicide rate has gone from 22.2 homicides in 1990 to 27.2 in 2002. Moreover within Brazil there are sharp differences, ranging from 51.9 in Esp´ırito Santo to 3.9 in Piau´ı in the year 1999, with no clear regional trends. Most of the Southern states have low rates, as do numerous Northeastern ones, whereas the West and Center have among the higher rates.64 Although homicide trends can often be correlated with poverty and occur mostly in poorer zones, crimes against property, as could be expected, are more highly correlated with the geographic spread of wealth.65 Especially in recent years robbery, as well as crimes related to the drug traffic, have spread from the favelas into the richer zones of the major metropolitan centers. Thus general crimes of theft in 2000 were highest in Brasilia, and the states of S˜ao Paulo and Rio Grande do Sul, while the Northeastern average rate was half that of the national average.66 The poor quality and high levels of corruption of the individual state police forces has often resulted in both poor policing and handling of criminal investigations. It also has meant far more incarceration rates for poor and blacks than for other sectors of the society. Rising crime rates fed by unemployment, poor education, and a host of other factors marking the social disorganization of Brazilian society, have led to a major increase in rates of incarceration 62 63

64 65 66

Tulio Kahn, Cidades blindadas, ensaios de criminologia (S˜ao Paulo: Conjuntura, 2001), Tables 1–3. Cl´audio Santiago Dias Junior, “O impacto de mortalidade por causas externas dos homic´ıdios na expectativa de vida: uma an´alise comparativa entre cinco regi˜oes metropolitanas do Brasil,” (CRISP- Centro de Estudos de Criminalidade e Seguranc¸a Publica, UFMG, Unpublished ms, 2004), Tables 1 and 2, p. 8. DATASUS, Table “C.9 Taxa de mortalidade espec´ıfica por causas externas,” found with similar charts of rates at http://tabnet.datasus.gov.br/cgi/tabcgi.exe?idb2004/c09.def. Claudio C. Beato F. “Determinantes da criminalidade em Minas Gerais,” Revista Brasileira de Ciˆencias Sociais, vol. 13, no. 37 ( June 1998). Brazilian National Data found at Cear’a, SSPDS, found at http://www. seguranca.ce.gov.br/estatisticas nac.jsp.

234

Brazil Since 1980

with corresponding inability to house the growing number of inmates. The Penal Census of 1997 showed that the prison population of Brazil had risen from some 149,000 persons two years earlier to 170,000 in 1997, and went from an incarceration rate of 95.5 to 108.4 per 100,000 population. This was a relatively modest rate by world standard, which reached as high as the six hundreds and seven hundreds for the United States and the Soviet Union, but was high compared to a rate of 87 per 100,000 for the European Union.67 Nevertheless, Brazil was running a totally deficient system incapable of handling the number of persons who were sent to it by the judicial system. In the 1997 census it was estimated that there was a deficit of ninety thousand places in Brazilian prisons, even despite extraordinary overcrowding, and it was estimated that some 250,000 judgments for incarceration had not been fulfilled.68 Brazil was at the same time home to some of the most bloody prison riots in the world, especially in S˜ao Paulo and Rio de Janeiro.69 There is little question that the issue of violence is a fundamental issue in urban Brazil. All surveys show that, despite the precarious conditions of urban life, with immense difficulties of living conditions, deficient transit, and proliferation of low-quality housing, crime is listed as the single most important problem.70 This violence affects all levels of the population. The wealthiest now live in protected areas or high-rise apartments using private security forces, and are concerned about assaults, kidnapping, and becoming the victims of crime. But the incidence of crime in the richest areas of the large cities is very low. Who suffer most are the poorest persons residing in the large cities. Although poverty in the rural areas or smaller cities is not corrected 67

68

69

70

Gordon Barclay and Cynthias Tavares, “International Comparisons of Criminal Justice Statistics, 2000” (London: Home Office, Research Development and Statistics Directorate, 12 July 2002), Table C; and for the latest extraordinary U.S. rates, which reached 714 per 100,000 in 2003, see SUNY Albany, Sourcebook of Criminal Justice Statistics Online Table 6.12 at http://www.albany.edu/sourcebook/wk1/t612.wk1. O Globo, April 13, 1998, as cited in Julita Lengruber, “Pior e´ impossivel,” at http://www.ucam.edu.br/cesec/artigos/Midia body JL17.htm; and Human Rights Watch, O Brasil atr´as das grades (o sistema penitenci´ario), a report found at http://hrw.org/portuguese/ reports/presos/sistema.htm. In 2004 there was a riot in the Benfica prison in Rio which resulted in fourteen deaths and in 2002 the Urso Branco prison in Rodionia saw twenty-seven prisoners killed. The worst in recent years was the Carandiru prison in S˜ao Paulo,where police massacred 111 inmates in October 1992. Otaviano Canuto, “M˜ao dupla entre economia e violˆencia, Causas s´ocio-economica e judiciais est˜ao nas raizes da violˆencia urbana,” O Estado de S˜ao Paulo, October 2, 2001.

Inequality

235

with crime, the most violent areas are the favelas and poor neighborhoods of the largest cities. Inequality and social exclusion are more evident in the large urban centers and appear to have a great importance in the question of violent urban crime. Along with these problems of class and even race, there are the further problems of alcoholism and the drug trade, both of which have an influence on homicide rates. The lack of alternative leisure to the local bars in the periphery zones, and the violence related to the drug trade, are the prime cause of murders in the largest cities. The drug traffic especially, which uses children and adolescents, is especially prone to rival gang killings on a large scale. The urban violence generates a cost to the society that is difficult to measure, but it is unquestionably a large amount, and involves both public and private expenditures in everything from security to hospitalizations. Private security in the areas of business, residential, and personal protection is an economic activity of great importance in Brazil. Scholars estimate that between these costs, along with the costs of lost tourism in cities such as Rio de Janeiro, cost the country between 6 percent and 7 percent of the GNP.71 Moreover, in the largest cities, the existence of all the accoutrements of a society fearful of crime are seen in the barred windows, guard posts, private security forces, high walls, armored cars, and defensive driving of people who at night do not stop for lights or drive through neighborhoods well known for their high levels of crime. 71

Simone Goldberg, “O alarmante custo da violˆencia,” http://www.terra.com.br/dinheironaweb/139/entrevista/ent139 01.htm.

Conclusion

In the last quarter century, profound transformations in Brazilian society have occurred. Traditionally agricultural and rural, Brazil is now a modern urban and industrial society. This transformation has affected all regions and all segments of society. Brazil has even made major advances in consolidating a democratic society and more just society. But it has been incapable of changing the historically dramatic inequality of this society. Like other countries of Latin America, Brazil grew rapidly in the first years of the 1970s. Taking advantage of the strong expansion of the international economy, the abundance of foreign capital and the low interest rates, Brazil, like many third world countries, experienced a period of euphoria, growing at impressive rates, although accumulating disequilibrium in their external accounts. The two oil crises and the quick rise of U.S. interest rates modified this previously favorable environment. The financing of this trade disequilibrium expanded their external debt and made these countries for more dependent on international capital resources. At the same time the wealthiest countries responded to the dual oil crises with recessionary policies that raised interest rates rapidly. These recessive policies had a direct impact on the developing countries, the majority of which found it difficult to service their foreign debts. The pressure on balance of payments grew through the rise of interest rates and the drying up of foreign capital to refinance their existing deficits. Where Brazil differed from other developing countries was in its response to this new world crisis. In contrast to the majority of developed and developing countries, which adopted recessive policies, the Brazilian government opted to intensify the process of import substitution through an ambitious program of investments. It stimulated 236

Conclusion

237

internal production in the sectors still dependent on importations, such as machine tools and basic consumables, as well as eliminating existing bottlenecks in the economic infrastructure, principally in the areas of energy and transport. This policy permitted the Brazilian economy to continue its historic trajectory of growth. It also furthered industrialization in Brazil, creating one of the more complex industrial sectors in the developing world. Thus, in spite of the international turbulence of the decade of the 1970s, the Brazilian economy grew an average of 8.6 percent per annum, and per capita income rose by $500 to more than $2,000 by 1980. But the costs of this policy were high in terms of international indebtedness, high internal interest rates, and negative balances of trade. Brazil was by this time a major importer of oil and was particularly affected by the rise in international oil prices. The result was runaway inflation. Prices that had averaged a rise of 25 percent per annum in the decade of the 1970s rose to 85 percent per annum in 1980. The growing fragility of third world economies entered a crisis stage after the Mexican default of 1982. This international debt crisis affected all countries rich and poor, and forced most developing counties to rely on the International Monetary Fund (IMF) to resolve their problems. The resulting IMF solution for the debtor countries, of which Brazil was an outstanding example, was the adoption of recessive economic policies to combat inflation, to balance their public finances, and to generate positive trade balances in order to repay their foreign obligations. The developing countries thus changed from importers to exporters of capital, and in the process compromised any chance for internal growth. Brazil was now forced to adopt restrictive monetary policy with a resulting fall in real wages. All these policies produced a profound recession, and strongly reduced internal demand. But it did reverse its trade balance from negative to positive – largely through the major decline of imports. This recessive policy did not stop inflation, which reached 180 percent in 1984. Nor did it result in balancing public accounts in spite of the severe restrictions in expenditures and investments. In fact, the high interest rates adopted by the government to control inflation and attract foreign capital only increased government indebtedness and reduced economic growth. This was the economic situation that the democratic governments inherited when they came to power after 1985. Increasing debt and inflation in the midst of a major recession and at the same time facing

238

Brazil Since 1980

enormous social pressure for change created a difficult situation for the new civilian governments. It was impossible to maintain the recessive economic policies, particularly the repressive salary controls implanted by the military governments. The first democratic government tried to resolve this conflict by adopting a heterodox stabilization plan, changing the monetary regime, freezing prices, and adjusting real wages upward. Initially, the plan was successful in both reducing inflation and increasing real income, which led to a major growth in the internal market. Unemployment dropped to its lowest level for twenty years and the GDP per capita grew at 4.4 percent. But the aggregate growth surpassed the productive capacity of the economy, provoking new inflationary pressures. At the same time, the closure of capital markets to Brazil and the increasing world debt crisis led Brazil in 1987 to suspend its debt payments and renegotiate its foreign debt. Finally, the government was able to solidify democratic institutions and reform social policy in a major way through the Constitution of 1988. The first half of the 1990s was characterized by a profound economic and political crisis and the abandonment of the traditional Brazilian development model. The Collor government inaugurated the neoliberal economic model. But his government was marked by both very high levels of corruption and the implementation of an irrational and authoritarian stabilization plan, which confiscated private resources and led to a profound recession. Inflation returned to its previously high levels, unemployment increased dramatically, real salaries fell, and investments came to a halt. He also opened the national market to foreign imports with little preparation of the national economy for the shock that this new neoliberal policy created. Fortunately, the political crisis was resolved democratically with the impeachment of the president. The economic issues, however, took much longer to resolve as Brazil abandoned an economic policy that had begun forty years before and had led to the industrialization of the country. The government of Itamar Franco was left to resolve the economic problems raised by the Collor regime. The first and most important of these was the need to contain an increasingly dangerous inflation. In 1993, Franco’s Minister of Economy, Fernando Henrique Cardoso, carried out a new stabilization plan, the fourth since the Plan Cruzado. The new Plan Real was a success. It took place in a more favorable international economy, it counted on the experience of previous plans, and it successfully created a new more stable currency. The opening to

Conclusion

239

the world economy and the overvaluation of the new “real” provided an effective anchor to the new price stability, and, from 1994 to the present, inflation has been under control. The Plan Real also deepened the liberal economic policies of the Collor regime, the effect of which was a retrenchment in the industrial sector. Deregulation and privatization were the other key elements in this neoliberal program. In the end, the Brazilian economy was forced to modernize itself defensively to compete on the international scene. Such modernization did occur, along with increased efficiency, but at the cost of eliminating some producers, the stagnation and decline of industrial employment, and the increase in international ownership of domestic industries. But the overvaluation of the currency furthered the wave of importations and reduced exports turning the commercial balance negative. At the same time, high interest rates were used to dampen internal demand. All this explains the very low growth achieved by Brazil in the 1990s. Only in 1999, with the change in the exchange policy, which resulted in a steep devaluation of the local currency was there an improvement in the domestic competitiveness of domestic industry. One area where this market opening had a direct and positive effect was in agriculture. The modernization of agriculture began in the 1970s with major government support through incentives, price supports, and agricultural research. New lands were opened not only in virgin soil areas but in the cerrado, a zone considered unfit for agricultural production. But even with the end of government price supports and market control since the 1990s, Brazilian agriculture has flourished as never before in a totally open market condition. In the past few decades, Brazil has become one of the greatest agricultural zones in the world today and a leading exporter of numerous commercial agricultural crops. The financial sector also experienced a profound transformation in the past quarter century, particularly after the opening of the national economy. In spite of the high inflation rates, the financial system increased its stability and sophistication in these years and has easily overcome the continual crises that temporarily destroyed the financial systems in Mexico and Argentina. Even with the Plan Real eliminating the so-called inflation tax, which favored this sector, thanks to the efficient and effective government program of support for the restructuring of the financial sector, there was a smooth transition to a noninflationary environment. Here too, major privatization occurred of state banks, along with foreign penetration into the sector. Today,

240

Brazil Since 1980

the Brazilian financial sector is among the most advanced in the world with a very solid, modern, and efficient structure. There are, nevertheless, two long-lasting problems that remain and that effectively reduce the potential benefits of this modern financial system to the economy. These are the elevated spreads and the concentration on short-term activities. These two factors reflect both legal and market conditions that are only now slowly changing, especially as the government has finally begun to reform the legal system in relation to economic arrangements. For all these changes in markets, however, growth has been moderate. From 1990 to 2004, GNP per capita grew by just 15 percent. This is too low for a country with the inequalities and levels of poverty seen in Brazil. Because of this low growth and a steep devaluation of its currency, Brazil has even lost its relative ranking in the world order. It has gone from being the eighth most important economy in the world in 1998 to the twelfth position in 2004. This low growth, combined with a strong increase in labor productivity in both agriculture and industry has led to a major problem of unemployment. The increase in unemployment in turn has greatly expanded the informal sector and also led to a loss of quality in the formal sector. All these factors have increased social tensions and inequality. In terms of inequality, Brazil remains the country with the most unequal distribution in Latin America and is one of the most unequal societies in the world, and this has changed little in the past quarter century. Close to a third of the population in 1980 was classified as poor, and this number has not changed in the past quarter century. This helps explain why the GINI index of inequality has hovered around 0.60 in this period, higher than any Latin American country and almost double the norm for the advanced countries of the world. There have been some timid improvements in this recent period in terms of both income and the reduction of regional disparities. But still, Brazil remains one of the most unequal societies on the planet, with resulting social tensions that are difficult to resolve. Increasingly, violent crime is just one manifestation of these social tensions. In the past quarter century, in spite of the rigidity of the distributive structure and modest growth, important social transformations have occurred. There has been a continual increase in life expectancy and improvement in all the health indicators, there is universal enrollment in primary education and a continuous decline of illiterates in the population. There also has been a steady decline of the poorest rural

Conclusion

241

population. Regional disparities have been slowly reduced. In the 1930s, for example, the life expectancy of populations in the poorest regions was a third less than that in the richest zones, and this has fallen to just a quarter difference by the beginning of the new century. Although infant mortality is still high, it has been declining steadily decade after decade and is slowly approaching first world standards; immunization has become universal and the percentage of births below average weight has declined to first world levels. Brazil in this same period finally completed its demographic transition, going from a high fertility and high mortality country in the past half century to a low fertility and a relatively low mortality nation. By the first years of the twenty-first century, even the disparities of fertility rates by region, class, and educational level were disappearing. Brazil was still maintaining birth rates above replacement, but its natural growth rate has now fallen from an average of 2.2 percent in the 1980s to just 1.2 percent in the first decade of the new century and is well below the explosive growth rate of close to 3 percent per annum in the mid-twentieth century. But, despite the undoubted advances in these social areas, and the major changes that have occurred in government social policy in the past quarter century, Brazil has a long way to go even to meet the standards of the better-off societies of Latin America. Although the government has finally succeeded in universalizing primary education, because of the historic failures in the area of education, Brazil still has one of the higher rates of illiteracy in Latin America. Equally, although Brazil is unquestionably the leading economy of Latin America, the majority of its social indicators place it among the poorer nations of the region. Moreover, despite the continual decrease in the variation in health and education indices between the richest and poorest members of the society, the levels of inequality in income and resources remains persistently high and shows little change. Nor has the recent stagnation of the national economy helped in this respect. As long as growth rates remain modest, there will be little further changes in this unequal distribution between classes and even between regions. Finally, it is worth stressing the extraordinary political transformations that the country has experienced since 1980. From a country with few democratic traditions that was governed for twenty years by a military dictatorship, Brazil has shown an extraordinary advance in both the development of powerful political institutions and the organization of civil society. Viable political parties have been established,

242

Brazil Since 1980

all sectors of society have been brought into the political arena, and the military has been effectively neutralized. During this period, the nation has confronted the death of a president before assuming office, the impeachment of another, and most recently the collapse of a governing party in corruption scandals, without serious difficulties. It also has seen the rise to the presidency of both a proscribed leftist intellectual and a labor leader along with more traditional politicians. The political scene is now, more than ever, controlled by national parties, and there has been a progressive decline of populist leaders, of both the right and the left, which had formerly exacerbated political tensions. But there is no guarantee that this will continue with the recent collapse of the largest party ever to emerge on the left. It is hoped that the decline of the Labor Party (PT) will not lead to a return to the populist politics that so bedeviled Brazilian society in the premilitary era. One major change has been the creation of a significant new constitution in 1988, which has had a profound impact on society and government. This classic social constitution that fully committed the government to the welfare of its citizens has become a fundamental part of the political scene. Clearly, Brazil has reached a political maturity that few could have foreseen in 1980, and may in fact weather the current crisis of its most important national party.

243

Brazil North Rondˆonia Acre Amazonas Roraima Par´a Amap´a Tocantins Northeast Maranh˜ao Piau´ı Cear´a Rio Grande do Norte Para´ıba Pernambuco Alagoas Sergipe Bahia Southeast Minas Gerais Espirito Santo

Unit/Region

1970

1980

1991

1996

2000

209,783

457,328

790,149

957,238

1,170,858

1,599,333

2,023,340

2,770,176 6,141,993 1,982,591 1,140,121 9,454,346 51,734,125 13,378,553

2,600,618

3,201,114 7,127,855 2,514,100 1,491,876 11,867,991 62,740,401 15,743,152

2,802,707

3,305,616 7,399,071 2,633,251 1,624,020 12,541,675 6,700,738 16,672,613

(continued )

3,094,390

3,439,344 7,911,937 2,819,172 1,781,714 13,066,910 72,297,351 17,866,402

135,997

1960

82,137

1950

490,784 961,106 1,422,282 1,713,25∗9 2,000,851 2,382,617 1,178,150 2,154,835 2,688,240 3,395,185 4,095,379 5,160,640 649,273 978,748 951,300 1,093,137 1,258,107 1,588,109 356,264 477,064 542,326 644,361 752,256 900,744 2,117,956 334,465 3,918,112 4,834,575 5,920,447 7,493,470 7,824,011 13,654,934 18,345,831 22,548,494 30,630,728 39,853,498 3,594,471 5,888,174 6,763,368 7,782,188 9,657,738 11,487,415

1940

457,232 1,030,224 511,440 310,926 1,919,802 6,104,384 3,184,099

1920

376,226 841,539 348,009 176,243 1,379,616 4,016,922 2,039,735

1900

17,438,434 30,635,605 41,236,315 51,944,397 70,070,457 93,139,037 119,002,706 146,825,475 157,070,163 169,590,693 695,112 1,439,052 1,462,420 1,844,655 2,561,782 3,603,860 5,880,268 10,030,556 11,288,259 12,893,561 – – – 36,935 69,792 111,064 491,069 1,132,692 1,229,306 1,377,792 – 92,379 79,768 114,755 158,184 215,299 301,303 417,718 483,593 557,226 249,756 363,166 (2)438008 514,099 708,459 955,235 1,430,089 2,103,243 2,389,279 2,813,085 – – – 18,116 28,304 40,885 79,159 217,583 247,131 324,152 445,356 983,507 944,644 1,123,273 1,529,293 2,167,018 3,403,391 4,950,060 5,510,849 6,189,550 – – – 37,477 67,750 114,359 175,257 289,397 379,459 475,843 – – – – – – – 919,863 1,048,642 1,155,913 6,749,507 11,245,921 14,434,080 17,973,413 22,181,880 28,111,927 34,812,356 42,497,540 44,766,851 47,693,253 499,308 874,337 1,235,169 1,583,248 2,469,447 2,992,686 3,996,404 4,930,253 5,222,183 5,642,960 334,328 609,003 817,601 1,045,696 1,242,136 1,680,573 2,139,021 2,582,137 2,673,085 2,841,202 849,127 1,319,228 2,091,032 2,695,450 3,296,366 4,361,603 5,288,253 6,366,647 6,809,290 7,418,476 274,317 537,135 768,018 967,921 1,145,502 1,550,244 1,898,172 2,415,567 2,558,660 2,771,538

1890

9,930,478 14,33,915 332,847 476,370 – – – – 57,610 147,915 – – 275,237 328,455 – – – – 4,638,560 6,002,047 359,040 430,854 202,222 2,67,609 721,686 805,687 233,979 268,273

1872

Table A1: Population resident in Brazil by federation units and regions, 1872–2000

Appendix

244

811,443 2,282,279 1,796,495 327,136 320,289

1,149,070

274,972 522,651 837,354 1,384,753 721,337 1,430,715 126,722 249,491 159,802 283,769

897,455

320,399 –

92,827 227,572 –

434,813

220,812 –

60,417 160,395 –

1920

246,612 511,919 –

758,531 –

2,182,713

1,157,873 4,592,188 3,537,167 685,711 668,743

1,559,371

1940

1950 2,297,194

1960 3,363,038

1970 4,742,884

432,265 826,414 –

1,258,679 –

3,320,689

522,044 1,214,921 –

1,736,965 –

4,164,821

889,539 1,913,289 140,164

2,942,992 –

5,366,720

1,597,090 2,938,677 537,492

5,073,259 –

6,664,891

1,764,141 2,377,451 3,247,710 4,251,918 7,180,316 9,134,423 12,809,231 17,771,948 5,735,305 7,840,870 11,753,075 16,496,493 1,236,276 (9)2,115547 4,268,239 6,929,868 1,178,340 1,560,502 2,118,116 2,901,734

1,847,857

1980

1,138,691 6,859,602 1,176,935

7,544,795 1,369,567

7,773,837

– 25,040,712 19,031,162 7,629,392 3,627,933

11,291,520

1991

2,027,231 4,018,903 1,601,094

9,427,601 1,780,373

9,138,670

– 31,588,925 22,129,377 8,448,713 4,541,994

12,807,706

1996

2,235,832 4,514,967 1,821,946

10,500,579 1,927,834

9,634,688

– 34,119,110 23,513,736 9,003,804 4,875,244

13,406,308

2000

2,502,260 4,996,439 2,043,169

11,616,745 2,074,877

10,181,749

– 36,969,476 25,089,783 9,558,454 5,349,580

14,367,083

Source: Recenseamento do Brazil 1872–1920. Rio de Janeiro: Directoria Geral De Estat´ıstica, [187?]–1930; Censo demogr´afico 1940–1991. Rio de Janeiro IBGE, 1950–1997; Contagen da populac¸a˜ o 1996. Rio de Janeiro: IBGE, 1997, vol. 1: Resultados relativos a sexo da populac¸a˜ o e situac¸a˜ o da unidade domiciliar. Sinopse preliminar do censo demogr´afico de 2000. Rio de Janeiro: IBGE, vol. 7, 2001.

118,025 255,284 –

373,309 –

926,035

Rio de Janeiro Guanabara S˜ao Paulo South Paran´a Santa Catarina Rio Grande do Sul Center-West Mato Grosso do Sul Mato Grosso Goi´as Distrito Federal

1900

1890

876,884

1872

782,724

Unit/Region

Table A1: (continued )

Appendix

245

Table A2: Land concentration as registered in the agricultural censuses, 1950 and 1995/96 1950 Farmers

Hectares

Farmers

Hectares

35.2% 51.2% 12.1% 1.3% 0.1% 1,996,269

1.4% 16.5% 32.0% 29.8% 20.3% 207,271

49.7% 39.6% 9.7% 1.0% 0.0% 4,838,183

2.2% 17.7% 34.9% 30.6% 14.5% 353,611

Size of holding Less than 10 hectares 10 to 100 100 to 999 1,000 to 9,999 10,000 and above Total numbers

1995/96

Source: IBGE – Censo Agropecu´ario 1995/96, found at http://www.agricultura.gov.br/

40

Billions of $US

30

20

10

0

-10 1970

1973

1976

1979

1982

1985

1988

1991

1994

Graph A.1. Commercial Balance (FOB) of Brazil, 1970–2004 Source: Dieese ICVSPDG (IPEADATA)

1997

2000

2003

Brazil Since 1980

246 10,000

1000

100

10

1

0.1 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002

Graph A.2. Percentage Annual Inflation Rate in Brazil, 1960–2004 Source: Dieese ICVSPDG (IPEADATA)

40

36.68 32.62

30

32.69

31.16

28.01

Percentage

24.76

26.57

20

10

0 -5.61

-6.78

-10 1996

1997

Açúcar (cristal e refinado) Algodão em bruto Cacau Café (cru em grãos e solúvel)

-6.1

1998

-6.17

1999

-6.57

2000

Carne (bovina, suína e de frango) Fumo em folhas Laranja (suco concentrado)

-6.69

-6.76

2001

2002

Papel e celulose Soja (grãos, farelo e óleo bruto) Trigo

Graph A.3. Brazil’s Position in World Commerce by Agricultural Product, 1996–2002 Source: Diset/IPEA.

247

Graph A.4. Hours Worked by Month, 1984–2005 Source: IPEADATA, Horas trabalhadas – na produc¸a˜ o – ind´ustria – ´ındice (Jan. 2003 = 100) – SP – Mensal – Fiesp

01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 4 84 85 85 86 86 87 87 88 88 89 89 90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 8 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20

80

100

120

140

160

180

200

220

Index

248

Brazil Since 1980

Map 1. GDP per Capita, States and Units of the Federation 1999

Appendix

Higher Numbers = Better Conditions

No Data 0.001 - 0.594

Poorest HDI

0.595 - 0.659 0.660 - 0.721 0.722 - 0.777 0.778 - 0.919 Highest HDI

Map 1A. Human Development Index by Munic´ıpio in 2000

249

Roraima Amapá

WEST

NORTHEAST

Amazonas

Ceará

Maranhão

Pará

Rio Grande do Norte Paraíba

Piauí

Pernambuco

Acre

Alagoas Tocantins Rondônia

Sergipe

Bahia

Mato Grosso

Br asil ia-D

Goiás

Minas Gerais

CENTER-WEST Mato Grosso do Sul

Espíritu Santo

São Paulo

Rio de Janeiro

Paraná

SOUTHEAST

Santa Catarina Rio Grande do Sul

SOUTH

Map 2. Regions and States of Brazil

Roraima Amapá

Amazonas

Ceará

Maranhão

Pará

Rio Grande do Norte Paraíba

Piauí

Pernambuco

Acre

Alagoas Tocantins Rondônia

Bahia

Mato Grosso

Brasilia DF

Goiás

0.2% - 1.8% 2.0% - 4.7%

Sergipe

Minas Gerais Mato Grosso do Sul

Espíritu Santo São Paulo Rio de Janeiro

5.6% - 21.8% Paraná Santa Catarina

Fonte: IBGE - Censo Demogr sfico

Rio Grande do Sul

Map 3. Distribution of the Population of Brazil by State, Census 2000 Source: IBGE – Censo Demogr´afico

Appendix

251

NORTH

4.9% NORTHEAST

29.3% CENTER-WEST

6.3% SOUTHEAST

43.5% SOUTH

16.0%

Map 4. Relative Distribution of the Population of Brazil by Regions, 1980 Source: IBGE – Censo Demogr´afico

NORTH

7.6% NORTHEAST

28.1% CENTER-WEST

6.9% SOUTHEAST

42.6%

SOUTH

14.8%

Map 5. Relative Distribution of the Population of Brazil by Regions, 2000 Source: IBGE – Censo Demogr´afico

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Index

agriculture, 101, 104, 109, 113, 118, 119, 126, 127, 130, 131 alcohol industry, 10, 102, 106, 108, 110, 111, 112, 114, 116, 121, 127, 156 cattle ranching, 125 coffee, 102, 106, 110, 121 ecological issues, 132, 133 EMBRAPA – Brazilian Agriculture and Cattle Raising Research Organization, 105, 107, 113, 120 indian nations, 131 modernization, 102, 104, 105, 107 oranges, 119, 121 other products, 121, 122, 126 policies, 106, 109, 110, 115, 116 ranching, 124, 125 small farmers, 108, 129, 134 soybeans, 102, 107, 120 subsistence production, 104 sugar, 10, 101, 102, 108, 112, 120 Antˆonio Delfim Netto, agriculture, 42 economic policies, 42, 45, 50, 52 export sector, 42 financial system, 43 fiscal area, 42 ARENA – Alianc¸a Renovadora Nacional, 18 Aureliano Chaves, 30 Celso Furtado, 14 Constitutions, 8, 9, 11, 28 democratic regime establishment, 2

economy, economic shocks, 91 growth before 1980s, 21, 37 growth rate, 37 indexation, 39 inflation, 3, 13, 37, 40, 84, 85, 87, 88, 89 public sector, 79, 80, 83, 85, 87, 93, 94, 95, 96, 97 education, 1, 182, 184, 190, 215 development of, 184, 186, 187, 188 investment, 2, 4, 187, 188 elections, 7, 30 Fernando Collor de Mello, 30 economic policies, 31, 62, 63 economic shock, 30, 91 Fernando Henrique Cardoso, 31, 32, 64 economic policies, 32, 67, 69 inflation, 69 labor union, 33 privatization process, 72 second presidency, 33, 151 tax reform system, 33 financial sector, 78, 86, 87, 88, 98 BNDES – National Bank for Economic and Social Development, 80 BNH – National Housing Bank, 80, 194 Central Bank, 41, 80, 83, 84, 92, 94, 97 commercial and investment banks, 89, 91 compulsory saving programs, 80 external debt, 84 financial institutions, 90 foreign banks, 93, 95, 96 foreign resources, 3, 83 inflation, 88

265

266

Index

financial sector (cont.) LTN – Federal Treasury Bills, 82 nonfinancial-asset-market, 82 open market, 87 ORTN – Adjustable National Treasury Obligations, 82, 88 private banks, 79, 80, 82, 86, 95, 96 PROER – Program to Stimulate the Restructuring of the National Financial System, 68, 93, 94 PROES – Program to Stimulate the Reduction of the Public Sector in the Financial System, 93, 94 public sector, 79, 80 stock market, 81 General Castello Branco, 17 economic policies, 39 salary policies, 40 General Costa e Silva, 19 Institutional Act no. 5, 2, 19 SNI and repression, 19 General Dutra, 11 election of, 11, 12 international relationships, 12 General Em´ılio Garrastazu Medici, economic policies and civil rights, 20, 46 period of “economic miracle,” 42 General Ernesto Geisel, 20, 46 civil rights, 22 economic policies, 49 external debt, 49 first oil shock of 1973, 21, 37, 46 II PND, 47 modification of the electoral rules, 22 revival of labor movement, 23 General Jo˜ao Baptista Figueiredo, 24 civil society mobilization, 26 external debt, 51 oil crisis of 1979, 24, 37, 51 political amnesty, 24 political parties, 25 General Lott, 15 health, 1, 192, 201, 203 health care system, 204, 205, 206, 208 investment, 2, 4, 203, 205 industry, 136, 137, 138, 141, 145, 151 crisis of the 1930s, 136 employment, 145, 146

oil crisis of 1973, 139, 140 oil crisis of 1979, 140 policies, 137, 139, 142, 143 privatization, 143, 144 production, 1 inequality, 209, 210, 216, 217, 228 “Bel´ındia,” regional disparities, 218, 219 “favelas,” 223, 229, 230, 231, 232 educational system, 214, 215, 217 income distribution and inflation, 216, 217 industrialization, 216 internal migration, 220, 232 rural and urban population, 226, 227 structure of land ownership, 211 urban violence, 233, 234, 235 Itamar Franco, 31 economic policies, the Plan Real, 31, 58, 65 Mercosul agreement, 66, 150 Jˆanio Quadros, 15, 30 resignation and crisis, 15 Jo˜ao Goulart, 15, 16, 29 parliamentary system, 16 presidential system and crisis, 16 Jos´e Sarney, 26, 27 consolidation of democratic process, 27, 54 evolution of the political parties, 28 inflation, 30, 60 moratorium of 1987, 58 Juscelino Kubitscheck, 14 Brasilia, 14 economic policies, 14, 38 industrialization, 14 inflationary pressure, 14 military opposition, 14 labor unions, “pelegos,” 23 rurals, 23 urban, 10 Leonel Brizola, 29, 30 Luiz In´acio da Silva, 23, 25, 30, 32, 33, 75 economic policies, 76 his election for presidency, 34 MDB – Movimento Democratico Brasileiro, 18 military regimes, “elections,” 18 1974’s elections, 21

Index economic policies, 24, 38 institutional acts, 17 support of the United States, 16, 19, 20 the arrival, 3 the regime, 17 mining, 136, 137, 138, 153, 155, 156 CIA VALE DO RIO DOCE, 73, 153, 154 privatization, 152, 154 PCB – Brazilian Communist Party, 29 PCB – Communist Party of Brazil, 12 PDS – Social Democratic Party, 25 PDT – Democratic Labor Party, 29 ´ 153, 156, 157 PETROBRAS, PFL – Liberal Front Party, 29 Plan Cruzado, 56, 57, 58, 59, 91 Plan Real, 54, 58, 64, 65, 91, 238 PMDB – Partido do Movimento Democr´atico Brasileiro, 25 political, institutions, 1 party system, 18, 29 structure of power, 2, 8, 38 population, 158 demographic transition, 2, 4, 160, 168, 177, 179 labor force, 176 migration, 4, 170, 172 PRN – National Reconstruction Party, 30 PSD – Social Democratic Party, 11 PSDB – Brazilian Social Democratic Party, 29 PSP – Social Progressive Party, 12 PT – Worker Party, 25 as a governing party, 35 change of electoral discourse, 34 political role, 35 PTB – Brazilian Workers Party, 11 racial prejudice and discrimination, 222, 223, 224, 225, 226

267

Real Plan, 31, 69, 145 Roman Catholic Church, 23 social inequality, 5 Tancredo Neves, 16, 26 UDN (National Democratic Union), 11 Ulisses Guimar˜aes, 27, 30 Vargas, dictatorship, 9 economic policies, 9, 10, 38 elections in 1929, 8 elections in 1954, 12 industrialization, 10, 13 international relationships, 13 New State, 9 social policies, 13 the legacy of Vargas Era, 10 welfare, 41, 192, 194, 195, 196, 198 Bolsa Alimentac¸a˜ o – Food Support Scholarship, 200 Bolsa Escola – School Scholarship, 200 Bolsa Fam´ılia – Family Scholarship, 200 FUNRURAL – Rural Retirement Fund, 193, 195, 196 INAMPS – National Institute for Social Security and Medical Assistance, 194, 204, 205 informal labor, 199 INPS – National Social Security System, 194 INSS – National Institute of Social Insurance, 195, 197, 198, 199 pension funds, 192, 193, 194 special programs, 201, 227