This document summarizes Brazil's economic growth experience from 1990-2010. It analyzes Brazil's turbulent past of import substitution industrialization from 1960-1980 which led to high growth but also structural problems. In the 1980s, Brazil experienced a debt crisis, hyperinflation, and economic stagnation due to failed stabilization plans. The 1994 Plano Real successfully reduced inflation through monetary and fiscal reforms and liberalization, stabilizing the economy and attracting foreign investment, leading to high growth in the 1990s.

1. The Brazilian Growth
Experience
Authored By:
Olufemi Olaleye, Eddie Cruz-Desintonio, Becky Turlip, Dylan Lojac
Submitted to:
Professor Henry Ma

2. 2
Introduction
The Brazilian economy has experienced significant growth, contraction, volatility, and
reform in its last fifty years. High growth rates (on average) accompanied with significant
and unpredictable boom and bust periods were characteristic of the newly industrializing
inward-oriented Latin American economy between 1960 and 1980. In the years following,
Brazil and other Latin American countries experienced an economic downturn caused by
hyperinflation, high levels of domestic and external debt, and a subpar investment climate
collectively addressed in liberal policy reforms in the late 1980s and early 1990s. These
would pave the way for increased economic stability and proven resilience in the 21st
century. However, before and after this restructuring, Brazilians jokingly quip that "Brazil
is the country of the future -- and always will be." Within this paper we explore the value of
this statement in respect to economics.
The purpose of this paper is present a convincing argument as to what historical, political,
and economic factors explain the complex growth experience of Brazil between the years of
1990-2010. We intend for this paper to be interpreted as an analysis of Brazil’s economic
condition in light of both global and domestic occurrences specifically concerning changes in the
output, capital, labor, human capital, and total factor productivity of the country in question. To
do so, we have organized our historical analysis in sections titled “A Turbulent Past “Reform
and Liberation” and “Post Plano Real” each of which focuses on a time period that is within or
greatly influenced the economic happenings of our time period of focus. Following this analysis,
we present our conclusion which briefly repeats what factors caused Brazil’s growth experience,
clarifies how the aforementioned time-periods fed into each other, and offers policy suggestions
that might ensure Brazil’s economic growth moving forward.

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A Turbulent Past
To best understand the economic happenings of Brazil from 1990-2010 it is imperative
that one look into the past occurrences and policies that shaped the events in our period of focus.
As a result of the adverse global economic climate (low demand for commodities and
manufactured goods) following WWII and the Great Depression, Brazil experienced a significant
economic contraction due to falling coffee prices (then its largest export). In response to this and
upon acknowledging its dependence on international markets, Brazil adopted a growth strategy
of inward-oriented import substitution industrialization (ISI) that lasted up until about 1990 and
greatly informed the policy decisions afterward. This strategy included but was not limited to
cascading tariffs (favoring durable capital imports), the use of multiple exchange rates, fiscal
incentives for foreign direct investment (FDI), and the low-interest crediting of various large-
scale development projects. Fostered by the structural reform undertaken with this plan was a
period of exemplary growth in which real GDP and real GDP per capita increased at an annual
rate of 6.2% and 3.6% respectively from 1920-1980. We analyze that this spectacular growth
was mainly driven by the rapid expansion of the industrial sector in conjunction with increased
FDI and capital formation. Concerning the former, the industrial sector increased from 24.9
percent of output in 1950 to 42.1 percent of output in 1990 as clustered industries were being
built and expanded everyday. Consequently, the percentage of the population working in
agriculture dropped by over half (59.9 to 29.23) while the urban population (as a % of total)
rapidly increased from 46% to 73% in the same or shorter period of time. With this, it logically
follows that the economic benefits associated with urbanization/agglomeration (increased delta-
A, higher standards of living, lower living costs, more employment opportunities) boosted output
and consumption which in turn fostered more industrialization (and thus employment, and

4. 4
consumption) in a virtuous cycle that explains this GDP growth. Moreover, we argue that the
positive effects of industrialization were magnified by the inpouring of FDI which a) provided
the investment capital needed for new industries and b) produced beneficial technological
spillover effects in the form of increased TFP levels. Theoretically, as stipulated in the Solow
model of economic growth, both increases in TFP and investment would allow for greater catch-
up growth due to Brazil becoming relatively farther from its steady state level. We argue that
these factors, in conjunction with the presumed high MPK levels had of Brazil at the time, led to
high average GDP growth we see below from 1930 to 1980 (abstracting from the losses due to
oil crises and the 63-67 stagnation caused by the Castello Branco coup and the painful but
necessary structural reforms under his administration).
However, to only speak of the growth that can be associated with ISI would be to grossly
under-analyze Brazil’s economic history as there were structural problems brewing behind their
visible success. While the inward-oriented import substitution growth strategy was designed to
bolster exports, decrease imports, and lessen Brazil’s reliance on foreign powers, we argue that
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[Graph 1]

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ISI did not produce such results for a variety of reasons that summarily led Brazil’s stagnation.
Firstly, exports only increased moderately in the second half of Brazil’s ISI strategy, hovering at
about 7% of GDP from 1960-1990. We argue that this is because rather than export, industries
sold their goods to domestic consumers who, as a result of high tariff levels, would pay higher
than world prices. In this way, domestic produces had an artificial monopoly that allowed them
to become rent-seekers shielded from world markets (reducing TFP in the process). Secondly,
contrary to its intention, Brazil’s second half of ISI included a notable increase in imports as a
percentage of GDP (especially true if you abstract from drops in commodity prices). We argue
that this is because newly created industries became overly reliant on imports for their capital
goods in a way that ran counter to the intentions of Brazil’s ISI strategy. These two factors
manifested themselves in a rapidly deteriorating current account that was exacerbated by the oil
crises of 1973 and 1979 which we argue, explains the large drop in GDP at their time of
occurrence (Graph 1). Though these factors greatly contributed to the instability of Brazil prior
to 1990, the straw that broke the camel’s back was the global rise in interest rates that occurred
in the 1980s (under U.S Federal Reserve Chair Volcker) when Brazil was very dependent on
foreign lending. Because of this raise, investors were much less likely to invest in Brazil and
other Latin American countries causing the stagnation that occurred from 1981-1983 and having
lasting effects moving forward. These and others factors caused the Brazilian administration to
take drastic measures that only exacerbated their economic situation and would only be quelled,
after multiple failed attempts, by the Plano Real in 1994.
Crisis, Reform & Liberalization
The structural inefficiencies of ISI in conjunction with the adverse economic shocks in the
form of oil crises and higher global interest rates prompted swift and painful capital outflows for

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[Graph 2] [Graph 3]
the Brazilian economy. These higher interest rates would prompt an increase in Brazil’s foreign
debt and further deteriorate its current account. Nevertheless, the government continued borrowing
while maintaining their economic growth strategy through unsustainable fiscal expansion (despite
low tax-receipts) in a way that only exacerbated their issues. This irresponsible fiscal policy and
the government’s inability to realize adequate tax revenues (some of which were devolved to
regional administrations) prompted the Brazilian government to print money so as to “keep the
party going” despite an underlying need for structural reform (Graph 2). This rampant injection of
money in conjunction with frequent devaluations (requested by the IMF) and the pro-cyclical
implications of indexation, manifested itself in hyperinflation that would stagnate the economy in
the “Lost Decade” of Brazil (Graph 3).
From 1986-1992 the Brazilian government enacted a variety of plans to combat the
rampant hyper-inflation they experienced. Of these there was the Cruzado Plan (1986), the Bresser
Plan (1987), the Marcilo Plan (1991) and those implemented under President Francesco Collor
amongst others. Each of these plans sought to eliminate inflation in a single blow through the use
of general price freezes, exchange rate freezes, wage readjustments, and bans on indexation.
0
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1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Money & Quasi Money Growth (Annual %)
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1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Money & Quasi Money Growth (Annual %)

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[Graph 4]
Unfortunately, each of these plans were similarly unsuccessful because price and wage
readjustments were too large and thus caused inflationary pressures and economic distortions.
These distortions would manifest themselves as shortages, increases in evasive and illegal actions
(rebranding at higher prices, black market sales), and the deadweight losses produced by continued
indexation. In conjunction with these factors, the weak political support and technical
incompetency had of each transient administration both caused these plans to be unsuccessful,
perpetuate inflation, and contribute to Brazil’s 1988-1992 stagnation (Graph 1) by negatively
impacting efficiency levels as shown in our growth accounting (specifically year 1992).
Though the plans enacted before the Plano Real unsuccessfully reduced inflation levels,
they collectively enshrined many of the structural reforms that allowed for the high GDP growth
from 1993-1995 and more importantly, the sustained macroeconomic stability of Brazil.
As part of the Plano Marcilio, the Central Bank tried to reduce inflationary pressures by
raising interest rates. Because of the hyperinflation of the period, bonds prior to this plan tended
to yield a negative real interest rate, despite being linked to inflation. This interest rate change was
implemented in order to yield a positive real interest rate on bonds, thus incentivizing the capital
inflows that would largely contribute to subsequent GDP growth before and after the
implementation of the Plano Real (Graph 1). Graphically, this drastic increase in capital flows
from 1992-1998 can be seen here:
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90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110
gK

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[Table 1]
Working to complement these fiscal and monetary policies was the aggressive
liberalization of the economy in the early 1990’s (building upon milder efforts in the 1980s). In
this time restrictions to free trade and investment were lifted, large-scale privatization occurred,
and government interventionism was pulled back. As a result, the average import tariff went from
45% in 1990 to 12% in 1994. The lifting of capital controls resulted in net private capital flows
increasing from a monthly average of $39 million between 1988-1991, to $970 million between
1992-1995. And trade as a percentage of GDP jumped up from 17% in 1991 to 20% in 1993 (a
short term boost) while setting the groundwork for much more trade in the future.
Average Tariff Rates in 3yr Increments
(Simple Mean Method)
1989-1991 34.65%
1992-1994 17.88%
1995-1997 14.23
1998-2000 16.53
The Plano Real, developed in 1993 by finance minister Fernando Henrique Cardoso and a
team of economists, took a different approach to fixing hyperinflation and thus, stabilizing the
economy of Brazil. Previous plans revealed that freezing wages and prices levels would only
economic distortions and would not directly address the problem of public sector disequilibrium
at hand. In contrast, by introducing an index, called the Unidade Real de Valor (URV), which was
pegged to the dollar, The Plano real could effectively fight indexation- the crux of the problem
that was both a cause and manifestation of inflation. As prices rose in Cruzeiros Reais, the URV
would also rise accordingly, keeping prices constant by the index. All economic agents were
encouraged to quote prices both by Cruzeiros Reais, affected by inflation rates, and in URVs,

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[Graph 5] [Graph 6]
which rose and fell with the dollar. On July 1st
, 1994, the Cruzeiro Real was converted into the
real, the currency of choice. As a result of economic agents having time to realign their prices
using the index, the government managed to finally succeed in beating indexation.
In July 1994, monthly inflation dropped to 4.3% from 45.2% in the month prior. Not only
was the reduction in inflation large, but also sustained, as monthly inflation never went above 2%
until January 1999.
Along with the reduction in inflation, high interest rates helped to increase capital inflows
to Brazil. Coupled with aggressive trade liberalization along with a revised foreign exchange
policy, the increases helped the real to appreciate against the dollar, up to .85 BRL/USD in January
1995. Although Brazil lived with an overvalued currency for some time, the flourishing free trade
helped increase competition and combat inflation. However, despite this one would be wrong to
think that trade deficits (an indicator of inflation) decreased as an analysis of the impact of trade
on the balance of payments is not direct. According to Renato Baumann of the Economic
Commission for Latin America and the Caribbean “the price stabilization after 1994 caused a
“wealth effect” which affected domestic demand for imported goods, and d) exchange rate policy
kept the currency markedly overvalued up to 1999” which affected foreign trade. The truth of this
statement, despite the nixing of inflation by the Plano Real, is evidenced here:
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1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
External Balance on goods (X-M) as a % of GDP

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The large capital inflows during the period of the Plano Real prompted the central bank to
purchase excess foreign capital after financing imports. Not doing so would result in an unwanted
appreciation in the exchange rate, due to the excess supply of foreign currency compared to
domestic currency. The government thus provides a safety net during crisis periods, but also
increases the domestic money supply in the market by replacing foreign currency with domestic.
While Brazil’s efforts to limit short-term capital were fairly ineffective, they were able to
attract large amounts of foreign direct investment. After implementing Plano Real, net foreign
direct investment increased from $798 million in 1993 to $30.49 billion by 1999. According to the
Economic Commission for Latin America and the Caribbean, there were various reasons why FDI
increased so dramatically. First, domestic market penetration was improved due to foreign
companies engaging in a number of mergers and acquisitions. Real wages were increased due to
the attractive market for foreign companies, along with the reduction in inflation. Faced with stiff
foreign competition as tariffs and barriers to entry were reduced, Brazilian companies were willing
to accept these mergers. Another reason for the increase in FDI was that companies sought out
improvements in efficiency in order to remain competitive, and these improvements were financed
through foreign investment. Additionally, deregulation in the service industries opened up
companies even further to foreign investment. Over 80% of FDI inflows were targeted at the
service sector, with the vast majority being invested into deregulated industries.
Another important policy of the period was the National Privatization Program. In some
cases, the Constitution had to be amended for certain sectors to be privatized. The privatization
and sale of state assets generated $11.8 billion for the national government between 1990-1994,
but more significant results came under the Plano Real, when sales generated $77.8 billion between

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[Table 2]
1995-2000. Privatization initiatives also worked to stimulate FDI. While Brazilian investors
bought up some of these formerly state-owned assets, foreign investment actually made up the
majority, with 53% of total investment in privatization coming from FDI. The table below
demonstrates how privatization fostered foreign investment. Not only did this generate revenue,
but also, investors had a strong incentive to improve efficiency in these enterprises, benefitting
themselves as well as the state.
High interest rates, an influx of foreign investment, aggressive liberalization and the
introduction of the real collectively worked to help Brazil fight inflation and recover from the
“Lost Decade” of the 1980s. With this in mind, one is correct to hold Plano Real as an
unprecedented success, after many failed attempts at stabilizing the economy. Still, it must be
noted that the Plano Real was primarily effective at ending hyper-inflation while many key
outward-oriented structural changes were undertaken in the 1980s before its implementation.
Despite these accomplishments, Brazil was far from being an economic powerhouse as their fiscal
situation would deteriorate with the crisis of 1998 and be followed by a painful 1999 currency
devaluation.

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Post Plano Real
For a brief period of time, the Plano Real was doing wonders for Brazil’s economy. With
a fixed exchange rate regime, Brazil was finally experiencing price stability and growth. No longer
concerned about inflationary pressures, foreign investors were attracted to Brazil’s artificially high
exchange rates, thus opening up the economy and putting Brazil onto the global scene. Other
factors that attracted foreign investment included the government’s privatization program, and the
interest rate spread (Brazil’s rates were higher than global rates).
But the higher interest rates also meant higher interest payments, and with increasing FDI,
Brazil couldn’t keep up with the increasing payments and the foreign debt was increasing fast.
From a surplus of 4.3% of GDP in 1994, the primary fiscal balance deteriorated to a deficit of
0.1% of GDP in 1998. Now with its economy on the global scale, Brazil was more vulnerable to
external shocks. The Asian financial crisis of 1997 and the Russian financial crisis in 1998 made
investors increasingly wary about keeping their funds in the Brazilian economy as the expectation
of eventual devaluation became more of a concern. By mid-1998, investors were withdrawing and
foreign reserves were decreasing fast. In September alone they decreased by $21 billion. This 1998
decrease in capital is clearly seen in the graph 4, which depicts the growth of capital in Brazil.
The IMF swept in with a $41 billion rescue package in December 1998, but foreign reserves still
continued to shrink. With such a large financial account deficit in the beginning of 1999, Brazil’s
Central Bank was forced to sell its foreign reserves, thus losing about $48 billion in reserves over
the course of the crisis.
When the governor of the state Minas Gerais January 6, 1999 announced default on its
debt, foreign reserves quickly left at a rate of $1 billion per day. In order to prevent total loss of

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foreign reserves, Brazil widened its exchange rate band resulting in a 9% devaluation of the real.
Within just a couple of days, Brazil completely eliminated the crawling peg, and by May 1999
Brazil had faced a peak devaluation of 78%.
Despite a weakened economy, implementations by Brazil’s strong federal government
helped aid in recovery. Rather than an exchange rate- targeted program, Brazil changed its
monetary policy to target inflation. Interest rates were increased to 43.25% and the money supply
was decreased by 6 billion Reais in March, 2009. By May, the financial account was recovering
quickly, and by year end, GDP actually increased its net value by 0.3% despite major contraction
in the beginning of the year. FDI had gone up again after the devaluation, reaching higher and
more stable levels, and providing some cushion for the Brazilian economy.
During the times of Plano Real and the currency crisis, Brazil had virtually no budget to
spend on social reforms and come year 2001, the growth of human capital was quite low. In the
2000’s, the Economically Active Population (EAP) was not growing as fast as the economy was
growing prompting increasing wages and decreasing unemployment. But labor productivity was
not correlating with these positive rates as one may expect. Little focus had been put towards social
reforms and education, resulting in little innovation, and slower growth in the labor and human
capital sectors of the economy as evidenced in our growth accounting.
Representing the Workers Party, President Lula was elected as president in 2003. President
Lula recognized the gains to be made from human capital enhancement, and so he made it a point
to implement some major social reforms during his term. The largest social welfare program
implemented by Lula is called Bolsa Familia (“Family Grant”), targeting poverty reduction. Bolsa
Familia provides financial aid (monthly cash transfers) to poor Brazilian families as long as the
children of the families attend school and receive proper medical care. The idea was that this

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program would reduce short term poverty by direct cash transfers and would reduce long term
poverty by increasing human capital among the poor with conditional cash transfers. In addition,
the program would aim to increase the number of children in schooling by granting free education
to those who could not afford it. During just the first term, poverty reduced by 27.7%.
During President Lula’s first term he continued many of market-oriented economic policies
of former President Cardosa- tightly controlling expenditures, raising the primary budget surplus,
and granting additional autonomy to the Central Bank. In 2004 GDP growth reached 5.2%, the
highest it’s been in a decade, and more than 1.5 million jobs were created in the formal sector.
Since the removal of the peg in 1999, exchange rates were allowed to appreciate as needed, thus
making imports and exports cheaper. Unlike in the US, interest rate increases in Brazil would
increase net capital flows, thus appreciating the Real and lowering the cost of imports and exports.
Foreign exchange reserves increased dramatically after 2004, and this made it much easier for
Brazil to lower its short-term foreign debt relative to its foreign exchange reserves. In 2005, Brazil
was able to pay off its debt with the IMF, thus freeing itself from much of the IMF’s conditional
rules and regulations.
Until the onset of the global financial crisis in 2008, monetary policy in Brazil remained
relatively strong. In this time period primary surplus remained at around 3-4% of GDP, the overall
deficit was declining, and the net public debt was reduced from 60% of GDP in 2002 to 38.5% of
GDP in 2008. With a favorable domestic and global environment, not only was private
consumption increasing, but demand was high for Brazilian exports. Brazil was achieving
sustained growth: GDP was growing by over 4% per year, inflation was slowing down to under
5%, and international reserves increased dramatically in the period 2003-2008.

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When the crisis hit in 2008, foreign capital inflows suddenly stopped, prices of
commodities dropped, as did the demand for Brazilian exports. Between the third quarter of 2008
and the second quarter of 2009, GDP fell by over 6%, but the strong Brazilian government quickly
responded to the situation with a number of measures, making the crisis in Brazil very short-lived
and relatively miniscule (annual GDP growth for Brazil dipped to just -.02% as opposed to -1.7%
in Latin America). These included easing credit conditions, reducing interest rates, supporting the
exchange rate, and providing fiscal and quasi-fiscal stimuli, such as providing subsidized loans to
public banks. By taking these measures, government had created a successful and quick recovery
by improving domestic demand— in the second quarter of 2009, GDP began to grow again, and
in 2010 GDP grew at 7.5%.
This 2008 global recession and the events that succeeded the implementation of Le Plano
Real demonstrate the resilience Brazil has acquired over years of structural reform and learning
from past mistakes. As opposed to its past habits, by directly assessing and addressing domestic
and international events, Brazil has exhibited stability, competency, and promise.
Conclusion
Within this report we have analyzed and explained Brazil’s economic growth from 1990-
2010 with the necessary historical context. With this research we have found that brazil’s turbulent
past of inward-oriented import substitution lead to high average growth but belied major structural
problems that, when ISI was exhausted, would leave the country with the stagnation and resilient
hyper-inflation that comes of demonstrated fiscal irresponsibility. In the period covering the 1980s
and early 1990s Brazil undertook aggressive liberalization projects to upend the implications of
ISI put them on a path to growth, recover, and with the Plano real, low inflation. Though growth
in the following years would fluctuate as a result of domestic and international events and the

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delayed economic impact of some fundamental reforms, Brazil generally exhibited sustained
economic expansion and the competency to maintain it. We would advise that Brazil continue
along this path while increasing their efforts to increase human capital, working to maintain their
central bank’s credibility, being wary of their slight increase in inflation target, and maintaining
the discipline that would allow them to address their slowly decreasing primary deficit. Taking
these measures and adhering to the economic framework they have built over the years through
crisis after crisis, we argue, will allow Brazil to become the country of the future that we know it
can be.