Chapter 1. 1970-1989: A General Picture

The Country
Urbanization and Demography
The Economy
Macroeconomic Indicators

The Country

In the Brazilian territory, the fifth largest in the world after Russia, China, Canada and the United States (including Alaska), and covering over 48% of the South-American continent, live about 146.1 million people (estimates after preliminary results of the 1991 census), constituting the world's sixth largest population. Brazil is divided into five great and homogeneous geographic regions: North, Northeast, Center-West, Southeast, and South:

a) the North region comprises roughly 45% of the country's territory but only about 7% of its population. It is a region dominated by the rain forest and the Amazon Basin, contributing to 4.35% of the country's Gross Domestic Product (GDP, 1985 estimates);

b) the poor Northeast region (18% of the territory and 29% of the country's population) has the lowest per capita income of the country, of about US$ 1,198 (dollars of 1989, estimates for 1985). It is responsible for 13.55% of the Brazilian GDP (1985 data);

c) the Center-West region (about 19% of the territory, 6% of the population, and 6.2% of the GDP, 1985 estimates) is an area of predominantly large agricultural properties and concentrates the country's largest creation of cattle;

d) the Southeast region is the most densely populated (44% of the population and 11% of the territory) and richest part of the country. With a per capita income of almost US$ 3,400 (estimates of 1985 in dollars of 1989) it contributes with about 58% of the GDP (1985 data). Most of the industrial development is concentrated here;

e) the South region (15% of the population, 7% of the territory, and about 18% of the GDP in 1985) presents less economic and social contrasts than the other four regions. Owing to its cooler climate and incentives provided to attract skilled labor, the region received a large number of German and Slav immigrants.¹

¹ The regional comparisons and data presented in this work will be generally limited to the two most contrasting regions, the Southeast and Northeast. Generally speaking, the North follows a pattern similar to the Northeast, and the South and Center-West regions to the Southeast.

Urbanization and Demography

From 1970 to 1990 the Brazilian population increased more than 54%, or about 50 million people, from 93.1 million to 143.6 million. The important feature to be noted, however, is that this expansion is entirely explained by the growth of the urban population, with the absolute number of rural inhabitants actually declining in the period, from 41 to about 39 million.

As Table 1 shows, the proportion of urban residents increased from about 60% in 1970 to 73% in 1990. The process of urbanization brought two important changes: in the first place it induced a process of demographic transition that can be characterized by the lowering of the fertility rate: from 5.76 in 1970, to 4.35 in 1980, and 2.91 in 1990. This process, initiated in the late sixties, was continuously accelerated throughout the following decades, resulting in lower rates of population growth. During the period that elapsed between 1960 and 1970 the Brazilian population grew at an average annual rate of 2.88%, along the seventies this rate declined to 2.48%, and in the last decade the average annual growth decreased to a value below 2%, to 1.9%, as can be seen from Table 2. In second place, the concentration of the population in cities created an important and vocal medium class.

The urban populations, particularly in the Brazilian experience, increasingly concentrated in the larger cities², put pressure on the public sector not only for the availability of social services and infrastructure³, but also for political change, demanding political freedom and the restoration of democracy. As a consequence it became increasingly difficult for the government to contain the movements in opposition to the military dictatorship established in 1964.

² The proportion of the Brazilian population living in the country's nine metropolitan areas (Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo, Curitiba, and Porto Alegre) was 21.8% in 1960, 25.9% in 1970, and 28.8% in 1980.

³ See Section IV for a discussion on the expansion of the urban infrastructure.

⁴ It should be noted that the production of primary goods, and thus the value of such production, can be largely affected by external (natural) conditions.

⁵ The sharp drop, of about 28%, in the participation of the rural sector in the economy observed between 1965 (15.9%) and 1970 (11.5%), should be noted. It is the beginning of the process of demographic transition described above.

Table 1: Urban Population (%)
Brazil, Northeast and Southeast Regions
1960, 1970, 1980, 1990

	1960	1970	1980	1990
Brazil	44.7	55.9	67.6	72.6
Northeast	33.9	40.2	50.4	57.3*
Southeast	57.0	71.7	83.0	85.9*

Sources: Costa (1991); *PNAD, 1989; Preliminary results of the 1991 census

Table 2: Population: Distribution and Growth
Brazil, Northeast and Southeast Regions
1960, 1970, 1980, 1990

Year or Period	Brazil Population		% of the Country's Population
	Number (million)	Average Annual Growth %	Northeast	Southeast
1960	70.1	-	31.5	43.7
1970	93.1	-	30.2	40.8
1980	119.0	-	29.4	43.6
1990	143.6	-	29.1	43.6
1960-70	-	2.88	-	-
1970-80	-	2.48	-	-
1980-90	-	1.90	-	-

Source: Costa (1991); PNAD, 1989; Preliminary results of the 1991 census

⁶ Such options as well as the high real interest rates were possible due to the escalating need of the government to sell short-term bonds to finance its deficit. Also note that high real interest rates favor financial applications relative to investments in production.

Table 3
Participation of the Economic Sectors in the GDP
Brazil: 1960, 1965, 1970, 1975, 1980, 1985-1989

Year	Primary	Secondary	Tertiary
1960	17.8	32.2	50.0
1965	15.9	32.0	52.1
1970	11.5	35.9	52.6
1975	11.2	37.4	51.4
1980	10.0	38.1	51.9
1985	10.2	40.2	49.5
1986	10.4	42.0	47.7
1987	8.7	39.8	51.5
1988	8.8	37.9	53.3
1989	6.9	34.5	58.6

Sources: MPAS/CEPAL (1990); IBGE (1990, 1991)
Note: For a definition of the sectors see main text.

Table 4
Growth of the Financial Industry
Brazil: 1970, 1975, 1979, 1980, 1985, 1989

Year	Financial Institutions
	% GDP	% of Tertiary Sector
1970	6.02	11.45
1975	6.55	13.39
1979	8.40	16.79
1980	7.76	15.80
1985	11.04	22.29
1989	19.48	33.22

Sources: IBGE (1990, 1991)

The Economy

From 1968 to 1973 the rate of growth of the Brazilian economy reached levels never experienced before. This period, known as the "Brazilian miracle", was produced by an expansionary policy that can be summarized by:

i) the expansion of consumer credit, stimulating the consumption of durable goods;

ii) a reform of the financial system that supported the construction of housing units and the growth of the industry;

iii) the public investment in infrastructure;

iv) the subsidy to exports; and

v) a monetary expansion.

The external debt also rose substantially during this period, particularly due to the necessity of the Brazilian public enterprises - an important piece of support for the government's program of economic growth - to import sophisticated equipments. In this sense, while the private sector was generating surpluses the public sector was exhibiting considerable deficits.

The end of the "Brazilian miracle" resulted from a combination of external determinants, such as the first oil crisis of 1973, and the collapse of the economic policies implemented.

During the second half of the seventies the country experienced a decline in the rate of growth and an increase in inflation. The deficit in the government's external account was being financed by the excess of resources that existed in the international market brought by the enormous transfer of income to the oil-producing countries. While Europe, Japan and the United States have chosen to adjust to the new scenario through aggregate demand policies, the Brazilian government opted, after a period of uncertainty, for an adjustment on the supply side. In fact, this was a political decision, for the military regime would not be able to cope with the social and political costs that an adjustment of demand would bring.

The period was characterized by a policy intended to reduce the country's dependency on imported oil, raw materials and production goods. Significant growth rates and consumption levels were feasible because foreign capital was used as a substitute for domestic savings. Since the growing external debt was not accompanied by an equivalent increase in the public sector's income, the internal deficit became severely pressured.

The government's lack of ability to balance the public finance with the process of economic expansion is, for many, on the basis of the worsening of the distributive conflict and the inflationary process of the 80's.

The shock of oil prices of 1979 and the increase in interest rates in the international market impose serious constraints on the economy. As a result, the 80's begin with a new attempt to adjust the economy. This time the alignment was imposed on the demand side, following the patterns of the International Monetary Fund (IMF) and other international agencies. As a result, from 1981 to 1983, the country moved into a period of deep economic recession. In 1984, expansionary measures increased the level of employment, income and inflation. The latter was unsuccessfully confronted with rigid measures intended to control prices and the rates of public services. In 1986, already under a civilian government, a set of measures, including price freezes, known as the "Cruzado Plan" were implemented rooted on the diagnosis that the Brazilian inflation had an important inertial component. During the first few months of the Plan the inflation rate was reduced to close to zero. Political constraints and management problems, however, contributed to the gradual deterioration of its execution and final failure. The new attempts made in the following years to control inflation also failed. As result, the 1980's ended with growing inflation rates and a complete lack of control over the economy and the tools of economic policy.

Macroeconomic Indicators

In this sense, while the seventies were marked by rapid economic growth and relatively stable inflationary rates, the eighties was characterized by a poor economic performance and an explosive inflation. These sharp contrasts between the two decades can be clearly seen through the aggregate indicators of the Brazilian economy.

Between 1970 and 1989, the Brazilian economy, measured by the Gross Domestic Product (GDP), almost tripled its size, moving from US$ 157 billion to US$ 436 billion (in dollars of 1989).⁷ Only in the first decade, i.e. between 1970 and 1979, with an annual growth rate averaging about 8.6%, the GDP more than doubled. In 1989, however, the economy was only about 21% bigger than in 1980, reflecting an annual growth of about 2% on average, as displayed by Figures 1 and 2.

⁷ In order to minimize the impact and distortions that the high inflation rates of the late eighties would bring (including on the exchange rate) we have done the following throughout our process of calculation: a. all values in the series were translated into cruzeiros of 1980 (instead of 1989 the last point of the series); b. the dollar figures were obtained through the transformation of the cruzeiros of 1980 in dollars of 1980 using the average annual exchange rate, these dollars were then inflated to 1989 values using the U.S. consumer price index.

The data in Figure 3 displays the faster growth rates of the early seventies. Between 1970 and 1974 the annual growth rates averaged about 11%, compared to 6.7% during the 1975-79 period. The numbers for the following decade are totally different. As discussed above, the beginning of the eighties was marked by an important economic recession (see Table 5): not only the per capita income declined constantly between 1981 and 1983, but there were also negative growth rates in 1981 and 1983. As a result, from 1981 to 1984 the economy remained at levels below those of 1980, in fact, it was only in 1984 that, for the first time since 1980, both the total and the per capita growth rates show positive values. It is not surprising, therefore, that the average annual, total and per capita, growth rates are both negatives for the 1980-84 period, as shown in Figure 3, revealing that for every year that passed between 1980 and 1984, Brazilian citizens were becoming almost 3% poorer. Even though not as large as the rates of the previous decade, the average rates of growth returned to positive values in the 1985-89 period: 3.5% for the whole economy and 1.4% in per capita terms (see Figure 3).

Figure 1. EVOLUTION OF THE GROSS DOMESTIC PRODUCT - BRAZIL, 1970-1989

Figure 2. AVERAGE ANNUAL GROWTH RATES - BRAZIL: 1970-79, 1980-89

Figure 3. AVERAGE ANNUAL GROWTH RATES - BRAZIL: 1970-74, 1975-79, 1980-84, 1985-89

A particularly important issue in the Brazilian economic environment is the inflationary process. Figure 4 displays, in logarithmic scale, the trend of the inflation rates from 1970 to 1989.⁸ It is clear that the two decades were also very different with respect to the evolution of prices. From 1970 until 1973 the annual inflation rate remained between 15 and 20%, levels, at the time, regarded by some as acceptable by Latin American standards of chronic, or structural, inflation. In fact, the 1971 -73 period even showed a declining trend. As mentioned before, the first shock of oil prices in late 1973, contributed to the already discussed reduction in the rates of growth of the economy⁹ and to the sharp increase in inflation in 1974 to about 34.5%. The second half of the decade experienced a rising (even though oscillating) inflationary trend until 1979, when the annual rate reached 77.3%. The second oil shock of 1979 and the rise of interest rates in the international market not only provided the final blow to the Brazilian economy, moving it into the recession of 1981-1983, but also shift the inflation rates to the three-digit level. For three years, between 1980 and 1982, inflation remained around 100%. The external debt crisis of 1982 escalated the rise in prices to a new stand: close to 200% per year from 1983 to 1985¹⁰. As a result of the problems with the "Cruzado Plan", 1986 closed with an inflation rate of about 65%. With the failure of the "Cruzado Plan" and the other attempts made from 1987 to 1989 to control prices, the inflation rate exploded: to 415% in 1987, 1038% in 1988, and 1783% in 1989.

⁸ Note that we have already shown that inflation has affected the sectorial composition of the Brazilian economy, providing an important space for the financial sector to operate.

⁹ These changes can be seen in Figure 3 and by the change of slopes in Figure 1.

¹⁰ Annual inflation rates of 211% in 1983, 223.8% in 1984, and 235.1% in 1985.

Table 5
Evolution of the GDP and GDP Per Capita
Brazil, 1970-1989

Year	Annual Changes %		Index (1980 = 100)
	GDP	GDP per capita	GDP	GDP per capita
1970	-	-	43.7	55.3
1971	11.4	8.7	48.7	60.1
1972	11.9	9.3	54.5	65.7
1973	13.9	11.3	62.1	73.1
1974	8.3	5.7	67.2	77.3
1975	5.1	2.7	70.7	79.3
1976	10.2	7.6	77.9	85.4
1977	4.9	2.5	81.7	87.5
1978	4.9	2.5	85.7	89.7
1979	6.8	4.3	91.5	93.6
1980	9.2	6.8	100.0	100.0
1981	-4.4	-6.5	95.6	93.5
1982	0.6	-1.7	96.2	91.9
1983	-3.4	-5.5	92.9	86.8
1984	5.3	3.0	97.8	89.4
1985	7.9	5.6	105.6	94.4
1986	7.5	5.2	113.5	99.4
1987	3.6	1.4	117.6	100.8
1988	-0.1	-2.2	117.4	98.6
1989	3.3	1.2	121.3	99.8

Sources: IBGE (1990, 1991).