Linking Brazil's Persistent Economic Problems to Inefficient Government Policy

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Kirk, Alexis
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Throughout the first half of this century, and until the mid- to late 1960s, the Brazilian economy was generally perceived as a dynamic, vital force that attracted large volumes of foreign capital. Industrialization accelerated mid-century, but the dominant development tactics were largely based on protection and state intervention, which served to hinder the process of economic development. Because domestic industry was subsidized and protected from imports, most industrial sectors never developed their production capacities past levels attained during their infancy. The protectionist approach to development remained a mainstay in Brazilian policy from the early 1930s until the mid-1980s. Protectionism began to hurt the economy in the 1970s, resulting in disequilibrium in the balance of payments and a growing foreign deficit. New problems, as well as old problems from inefficient government policy, plagued the economy. Beginning with the oil shocks of the mid-1970s through a period of domestic hyperinflation in the early 1990s, the economy experienced nearly twenty years of dishevel. Unfortunately, each solution to a given economic problem only seemed to intensify the existing issue or provoke several new dilemmas. The only notably successful stabilization effort was the Real Plan, which sustained economic stability from July 1994 until late August 1998. Brazil succumbed to the emerging markets crisis at this time as the "hot money" that had flooded its financial market reversed direction and poured out; almost four months later the national currency was devalued and floated. That the economy is facing another acute crisis is not surprising; traditionally, the Brazilian government has been unable to detect the exact source of its problems, has had difficulty devising effective methods to combat such problems, and has demonstrated an overall lack of internal coherence and commitment to follow through with internal adjustment. Whether Brazil will emerge triumphant from its current turmoil is not clear. What is certain is that an administration must emerge that understands the nature of circumstances unique to the Brazilian economy. Furthermore, this administration must be committed to following through with the economic reform that is necessary to end the self-destructive cycle of artificial economic growth.
61 p.
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