Investment Finance in Economic Development
Book by Routledge, 1995
The financial reforms and the 'economic miracle'
In the previous chapter it was shown that, before 1964, financial development in Brazil lagged behind the rapid progress made by the productive sectors. This created constraints on the country's development, which required appropriate medium-and long-term financing mechanisms. In other words, a new articulation between the financial and the productive spheres was needed.
In 1964 a military coup brought to power a group of neoclassical economists who believed that this partnership between the financial and productive spheres had to be based on the stimulus of individual saving. From 1964 to 1966, this group implemented a series of reforms of the financial system. One of the basic guidelines of these reforms, according to an official government document, was to guarantee higher interest rates for savers and lower rates for borrowers and all investors (MiniPlan 1965:21). The reformers blamed the usury law and inflation for the negative rates of interest paid to savers; and the lack of competition and inefficiency of the financial structure for the increasing gap between deposit and loan rates. The solution for the problem was threefold. First, in order to reduce inflation the government introduced a severe stabilisation programme, which has already been described in Chapter 7. Second, the government indexed its bonds and loans and determined that private financial institutions did the same with theirs. Finally, to increase the competition and efficiency of the financial system, the reforms promoted a segmentation of its structure according to the maturity of assets and loans; and facilitated the access of firms to foreign indebtedness.
This chapter analyses the logic behind the financial reforms. Further, it shows how the reformed system deviated from what was expected by the reformers and how such structure contributed to the economic boom...
Towards the lost decade
The financial system in the imbalanced growth (1973-83)
The year 1973 marked a new phase in Brazil's development, a phase in which the country had to face severe internal and external challenges to the continuance of its growth. On the internal front, the economy showed signs of the exhaustion of the boom begun in 1967, as industrial output reached full capacity, inflation began to rise and the demand for capital goods soared. On the external front, the fourfold increase in international oil prices caused a significant balance of payments problem, in an economy where 80 per cent of the oil needs were imported.
Two options were available to the Brazilian government then. One was to promote a severe adjustment programme in order to re-establish external equilibrium. This would almost inevitably cause recession, which was not politically bearable by the military government, as it was preparing for a transition to a civilian political system and wanted to guarantee that in this transition its political party (ARENA) remained in power. The second option, which was taken, was to deepen the process of import substitution so as to rapidly reduce Brazil's dependency on foreign resources. It implied heavy investment in technologically advanced basic input sectors and in the production of internally generated energy. This option took the form of the Second National Development Plan (the 1974 Plan), which raised the accumulation of the economy to levels which were unprecedented in Brazil's economic history.
In the implementation of the 1974 Plan, the government was split into two different (but not politically exclusive) orientations: one, led by the President and the Ministry of Planning, had a strongly interventionist view. The other, led by the Finance Ministry, continued to espouse the liberal approach to monetary policy and also favoured the maintenance