Dy Martin remandez
The Brazilian regime had hoped in 1978 to lower the rate of inflation, which had reached 39% in 1977. But in fact, by the end of November, the annual rate of inflation had already climbed to 42%. All indications were that it was going to increase further. That is the reason why Minister Simonsen finally decided to take stern credit-tightening measures.
The aim of these measures, which chiefly affect the use of loans from abroad or those in foreign currency, is to drastically reduce the volume of credit, from the equivalent of $10 billion in 1978 to $4 billion in 1979.
Several big state investment projects will be held back or scaled down. Many small and medium-sized businesses have been hit hard by the hike in interest rates. It is quite possible that these measures may precipitate an absolute drop in the gross national product in 1979, for the first time in a long while.
The cause of inflation resides chiefly in the enormous state subsidies paid to both publicly owned or mixed enterprises and to exporters.
The accelerated growth that Brazil has experienced since the military dictatorship was installed, and the sharp cut in workers' real wages, has largely been based on the growth of publie investment, financed either by inflation or by foreign loans.
In the 1967-74 period, the state made some 60% of investments in Brazil. According to the Brazilian magazine Visao, the state in 1976 controlled 48.5% of the net assets of all businesses having assets of $1 million or more, compared to 37% for private companies and 14.5% for foreign companies. But a portion of the enterprises classified as state-owned are actually mixed, with the private sector and foreign capital owning a minority of shares.
Foreign indebtedness went hand in hand with this expansion of government investments and subsidies. There was a real explosion of the foreign debt in the last few years. By the end of 1973, this debt went as high as $12.5 billion. By the end of 1977, it had leaped to $32 billion. It currently stands at $40 billion, or 25% of the Brazilian gross national product. Here too, it was necessary to slam on the brakes so as not to shake Brazilian capitalism's credit.
In the last few years, more and more lavish subsidies, handed out to stimulate exports, have become an additional spur to inflation. The exports that had partly supported the Brazilian "economic miracle" continued to be the traditional products, such as coffee, soybeans, iron ore, and textile products. However, this branch of industry, which provided 20% of jobs and 12.7% of the industrial value produced, was hard hit by the aftereffects of the 1974-75 recession. The value of its exports dropped by one-quarter. As a crowning blow, poor harvests reduced the value of agricultural exports in 1978 by $1.5 billion.
To avoid a permanently lopsided trade balance, the military dictatorship began to subsidize the exports of the relatively new sectors of Brazilian industry, primarily automobiles and heavy machinery. The Brazilian subsidiaries of Volkswagen and FIAT are increasingly using the tax breaks and low wages offered by the Brazilian dietatorship to overrun not only countries like Algeria and Egypt, but also some European countries.
Brazil has also signed a big agreement with China, which it supplies with iron ore and steel. But again, this is a deal that must be financed through credit.
the balance-of-
Given the size of payments deficit in 1978 (probably more than $5 billion), the fight against inflation looms as an absolute priority for the technocrats associated with the military dictatorship. But the temptation to indirectly subsidize exports through a sharp devaluation of the cruzeiro (one cruzeiro equals approximately US$.05) will become more and more irresistible. Such a devaluation will stimulate a new round of inflation and thence roe he new y strid ive measures. thus provoke new restrictive measures.