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Brazil: A History of Political and Economic Turmoil

By Tim Ito Staff
Updated: January 1999

Brazil earned its reputation as the "miracle economy" in the late 1960s – a time when the country was recording double-digit growth rates and military rule had produced relative political stability. The political calm allowed the country to expand its industries, and people moved in droves from the countryside to the cities to find work. By the early 1980s, Brazil had become one of the leading industrial nations, boasting the tenth-largest gross national product in the world.

In the political sphere, meanwhile, Brazil began making a transition back toward democracy. Since 1960s, Brazil had been led by a military regime, one which had enacted a series of so-called "emergency powers" designed to purge corrupt and subversive elements and allow particular executives to rule by decree. In 1978, President Ernesto Geisel began repealing the "emergency legislation" starting with the one outlining the banishment of persons accused of political crimes. Congress enacted a general amnesty the next year, restoring political rights to all who had lost them since 1961.

Still, despite the progress, many underlying problems remained. Double-digit annual inflation of the 1970s turned to triple digits by the 1980s (and would reach the 50 percent level on a monthly rate by 1994). The high inflation of the 1980s led Brazil to enact a policy of increasing interest rates, which slowed economic investment and expansion.

Like other Latin American countries, Brazil was also hit by the oil crisis of the late 1970s and early 1980s; its foreign debt skyrocketed and foreign investment and credit dried up. The result: Brazil's gross domestic product grew only about 1.5 percent annually from 1980 to 1993.

Adding to the economic problems, Brazil began another period of political instability in the 1990s. One major blow: President Fernando Collor de Mello, elected in December 1989 on a platform of economic growth and modernization, was implicated in mid-1992 in an influence-peddling scandal, deeply dividing the republic.

Collor resigned before being convicted in his impeachment trial, but the damage was done. Vice President Itamar Franco assumed the presidency, inheriting little of the president's mandate to govern. The weakness of government further accentuated the economic problems of stagnant economic growth and industrial production, and the declining incomes of Brazilians.

Beginning in the 1990s, though, Brazil did make attempts to introduce a series of economic reforms. Foremost among them would be the policy of privatization in 1991, an attempt to move the economy from the era of state-run monopolies to a free-market system. (In July 1998, Brazil would successfully sell its controlling interest in Telebras, the nation's huge phone company.)

In 1994, coinciding with the election of Fernando Henrique Cardoso (a former finance minister) to the presidency, Brazil also implemented a successful stabilization program, the Real Plan, named after the new currency introduced that year. The plan, which outlined a tight monetary policy and a currency anchor to the dollar, helped stabilize inflation at less than a 70 percent annual rate by the next year. It also helped launch a period of unprecedented foreign investment and gave the nation's poor newfound buying power.

Nonetheless, underlying economic problems remained. The devaluation of Thailand's currency in July 1997, meant to improve the competitiveness of that country's exports, put pressure on export-dependent Brazil to do the same. The increased focus on the real caused foreign investors to take a closer look at the promised but not yet implemented reforms of Cardoso, including a controversial government austerity plan outlining a tax increase and a cut in public spending.

Foreign money fled the country steadily, continuing through Cardoso's reelection in October 1998. In November, the International Monetary Fund and the Clinton administration announced a plan to help shore up the ailing real, with a $41.5 billion rescue package meant to contain a crisis before it became full-blown. Yet the package, based on Brazil's promise to institute the reforms of Cardoso's austerity package, only temporarily stopped the bleeding.

In January 1999, investors, stung by huge losses in other emerging markets, lost confidence in Brazil's overvalued currency and pulled out. Brazil no longer was able to defend its currency by using dollar reserves to prop up the real and let its currency float free. The real plummeted.

On January 20, the lower house of Congress did approve a major portion of the government austerity package aimed at cutting $20 billion from the country's massive budget deficit. The vote represented a major victory in President Cardoso's attempts to restore global confidence in Brazil. The long-term effect of the plan, however, has yet to be seen.

© Copyright 1999 The Washington Post Company

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