Trade in South Korea

COUNTRY

Mosjeed South Korea

 

Formal Name: Republic of Korea.
Short Form: South Korea.
Term for Citizens: Korean(s).
Capital: Seoul.
Date of Independence: August 15, 1948.

GEOGRAPHY

South Korea in map

 

Location and Size: Strategic location in waters of the Sea of Japan, Korea Strait, and Yellow Sea. Total land area of Korean Peninsula, including islands, 220,847 square kilometers; approximately 98,477 square kilometers (44.6 percent) constitutes territory of South Korea.
Land Boundary: 238 kilometers with North Korea.
Disputes: Demarcation Line with North Korea; Liancourt Rocks claimed by Japan.
Topography and Drainage: Approximately 70 percent of land area mountains and uplands. Principal ranges--T'aebaek and Sobaek range and Chiri Massif. Tallest mountain--Mount Halla at 1,950 meters, a volcanic cone located on Cheju Island. Longest rivers--Naktong River, 521 kilometers; Han River, which flows through Seoul, 514 kilometers; and Kom River, 401 kilometers.
Climate: Long, cold, dry winters; short, hot, humid summers with late monsoon rains, flooding. Seoul's January mean temperature -5° C to -2.5° C; July, 22.5° C to 25° C. Cheju Island warmer, milder weather than other parts of South Korea. Annual rainfall varies from year to year but usually averages more than 100 centimeters; two-thirds of precipitation falls between June and September. Droughts, particularly in southwest; approximately one every eight years.

ECONOMY

General Character: Export oriented although domestic market increasing source of growth in late 1980s; real growth 12.5 percent 1986-88; 6.5 percent, 1989. Dominated by chaebol, or business conglomerates. Most industries, except mining, in urban areas of northwest and southeast. Heavy industry generally in south. World's tenth largest steel producer in 1989. Major electronics producer. Automobiles and automotive parts major domestic growth and export industry of 1980s. Armaments also manufactured for domestic use and export. Construction critical source of foreign currency and invisible export earnings. Textiles, clothing, and leather products important. Growing labor movement affects production and costs.
Gross National Product (GNP): In 1989 US$204 billion, US$4,830 per capita, 6.5 percent annual growth rate.
Gross Domestic Product (GDP): US$211.9 billion at market prices, 1989; real annual growth 6.1 percent. Average growth 6.1 percent 1986-90; high, 12.4 percent in 1986; low, 6.1 percent in 1989.
Industry: Main growth sector, produced 46 percent of GDP and employed 35 percent of work force in 1988.

Trade flow of South Korea

Resources: Peninsula has minimal resources. Mineral deposits mostly small, except for tungsten. Anthracite coal most important mineral product by volume and value, but also imported. Most energy needs met by nuclear power, coal, and crude petroleum imports.
Agriculture, Forestry, and Fishing: Employed approximately 21 percent of work force in 1989; generated 10.2 percent of GDP. Relative importance declining since mid-1960s; production grew 5.9 percent in first half of 1989. Major crops rice and barley, also millet, corn, sorghum, buckwheat, soybeans, and potatoes. Fishery products popular food and important export commodity. Inadequate forestry resources.
Foreign Trade: Annual trade in 1988 more than US$100 billion; first time world's tenth largest trading nation. Major trading partners United States and Japan. Main exports textiles, clothing, electronic and electrical equipment, footwear, machinery, steel, ships, automobiles and automotive parts, rubber tires and tubes, plywood, and fishery products. Main imports machinery, electronics and electronic equipment, petroleum and petroleum products, steel, grains, transport equipment, raw materials, chemicals, machinery, timber and pulp, raw cotton, and cereals. Balance of payments affected by oil imports and raw materials needs; surplus of US$4.6 billion in 1989, but deficit of US$1.9 billion, 1990.
Currency and Exchange Rate: January 1990, US$1=683.4 won (W).
Fiscal Year: January 1 through December 31.

FOREIGN ECONOMIC RELATIONS

Exports were the key to South Korea's industrial expansion. Until 1986 the value of imports was greater than exports. This situation was reversed, however, in 1986 when South Korea registered a favorable balance of trade of US$4.2 billion. By 1988 the favorable balance had grown to US$11.4 billion. Financing this persistent, although not unexpected, gap between domestic and imported resources was a principal concern for economic planners. In the 1950s and 1960s, much of the trade deficit was financed by foreign aid funds, but in the last two decades, borrowing from and investment in international capital markets have almost completely substituted for economic aid.

Aid, Loans, and Investment

Foreign economic assistance was essential to the country's recovery from the Korean War in the 1950s and to economic growth in the 1960s because it saved Seoul from having to devote scarce foreign exchange to the import of food and other necessary goods, such as cement. It also freed South Korea from the burden of heavy international debts during the initial phase of growth and enabled the government to allocate credit in accordance with planning goals. From 1953 to 1974, when grant assistance dwindled to a negligible amount, the nation received some US$4 billion of grant aid. About US$3 billion was received before 1968, forming an average of 60 percent of all investment in South Korea. As Park's policies took effect, however, the dependence on foreign grant assistance lessened. During the 1966-74 period, foreign assistance constituted about 4.5 percent of GNP and less than 20 percent of all investment. Before 1965 the United States was the largest single aid contributor, but thereafter Japan and other international sponsors played an increasingly important role.

Apart from grant assistance, other forms of aid were offered; after 1963 South Korea received foreign capital mainly in the form of loans at concessionary rates of interest. According to government sources, between 1964 and 1974 such loans averaged about 6.5 percent of all foreign borrowing. Other data suggested a much higher figure; it seemed that most loans to the government were concessional, at least through the early 1970s. International Monetary Fund data showed that imports financed through such means as foreign export-import loans with reduced rates of interest totaled 11.6 percent of all imports from 1975 to 1979. The aid component of these loans was only a fraction of their total value.
During the mid-1960s, South Korea's economy grew so rapidly that the United States decided to phase out its aid program to Seoul. South Korea became increasingly integrated into the international capital market; from the late 1960s to the mid- 1980s, development was financed with a series of foreign loans, two-thirds of which came from private banks and suppliers' credits. Total external debt grew to a high of US$46.7 billion in 1985. Positive trade balances in the late 1980s led to a rapid decline in foreign debt--from US$35.6 billion in 1987 to an expected US$23 billion by 1991. Account surpluses in 1990 were expected to enable Seoul to reduce its foreign debt from its 1987 level of about 28 percent of GNP to about l0 percent by 1991.
United States assistance ended in the early 1970s, from which time South Korea had to meet its need for capital investment on the competitive international market and, increasingly, from domestic accounts. The government and private industry received funds through commercial banks, the World Bank, and other foreign government agencies. In the mid-1980s, total direct foreign equity investment in South Korea was well over US$1 billion.
The fact that South Korea was so dependent on foreign trade made it very vulnerable to international market fluctuations. The rapid growth of South Korea's domestic market in the late 1980s, however, began to reduce that dependence. For example, a dramatic rise in domestic demand for automobiles in 1989 more than compensated for a sharp drop in exports. Furthermore, while Seoul's huge foreign debt left it vulnerable to changes in the availability of foreign funds and in international interest rates, Seoul's economic and debt management strategy was very effective.
The South Korea's philosophy concerning direct foreign investment had undergone several major changes tied to the changing political environment. Foreign investment was not allowed through the 1950s. In 1962 the Foreign Capital Inducement Act established tax holidays, equal treatment with domestic firms, and guarantees of profit remittances and withdrawal of principal. Despite the provisions of the act, there was little foreign investment activity until after the establishment of diplomatic relations between South Korea and Japan in 1965.
Seoul had to mobilize both external and internal sources when it launched its First Five-Year Economic Development Plan in 1962. The Foreign Capital Inducement Act was amended in 1966 to encourage a greater inflow of foreign capital to make up for insufficient domestic savings. A rapid inflow of investment followed until 1973, when the act was changed to restrict the flow of investments. Beginning in the late 1970s, however, the government gradually began to remove restrictions as domestic industries began to grow and needed to be strengthened to cope with international competition. But until the early 1980s, South Korea relied heavily on borrowing and maintained a somewhat restrictive policy towards foreign direct investment.

Donald S. Macdonald has pointed out that under the liberalization policy, restrictions on foreign direct investment were eased in 1984 and 1985. Seoul changed its control policy on foreign investment from a "positive list" to a "negative list" basis, which meant that any activity not specifically restricted or prohibited was open to investment. An automatic approval system was introduced under which all projects meeting certain requirements were to be immediately and automatically approved by the Ministry of Finance.
Seoul twice revised the negative list system after its initial introduction--first in September 1985 and again in April 1987--to open more industrial sectors to foreign investors. In 1984 there were 339 items, or 34 percent of the 999 items on the Korean Standard Industrial Classification, on the negative list. As of July 1987, there were 788 industrial sectors open to foreign investment. In the manufacturing sector, 97.5 percent of all industries (509 out of 522) were open to foreign investment.
In December 1987, Seoul announced a policy to liberalize the domestic capital market by 1992. The program called for liberalizing foreigners' investment funds, offering domestic enterprises rights on overseas stock markets, and consolidating fair transaction orders. Seoul planned to allow direct foreign investment in its stock market in 1992.
Of the total direct investment in South Korea from 1962 to 1986, which amounted to US$3.631 billion, Japan accounted for 52.2 percent and the United States for 29.6 percent. In 1987 Japan invested US$494 million, or 47 percent of the total foreign investment of US$1.1 billion. Japan invested mainly in hotels and tourism, followed by the electric and electronics sector. Direct investment from the United States showed a remarkable increase since the early 1980s, accounting for 54.4 percent of the 1982-86 total investment. The United States invested a total of about US$255 million, or approximately 24 percent of the 1987 investment. Cumulative United States investment was about US$1.4 billion by 1988.
There was a dramatic rise in foreign investment in the late 1980s. Approvals of foreign equity investments reached an all- time high of US$1.283 billion in 1988, a 21 percent increase over 1987. As in previous years, approvals for Japanese investments were the dominant factor; they totaled US$696 million (up 41 percent from 1987), followed by United States investors with US$284 million (up 11 percent), and West European sources, US$240 million (up 14 percent). Investment approvals in the service sector doubled in 1988 to US$561 million, which included two large Japanese hotel projects totaling US$344 million. Investment approvals in the manufacturing sector, however, declined from US$775 million in 1987 to US$710 million in 1988.
South Koreans began investing abroad in the 1980s. Before 1967 there was virtually no South Korean investment overseas, but thereafter there was a slow growth because of Seoul's need to develop export markets and procure natural resources abroad. In the 1970s, South Koreans invested in trading, manufacturing, forestry, and construction industries. By the early 1980s, a sharp reduction in development projects in the Middle East led to a decline in South Korean investment there. Mining and manufacturing investments continued to grow throughout the decade. In 1987, out of a total South Korean overseas investment of US$1,195 million (745 projects), US$574 million was invested in developed countries and the remaining US$621 was invested in developing countries.
One of the most noticeable economic achievements in the 1980s was Seoul's reversal of the balance of payments deficit to a surplus. This improvement was largely attributable to strong overseas demand for South Korean products and to the reduction in expenditures for oil imports. In addition, the "invisible" trade account (monies from tourism and funds sent home by nationals) had improved considerably in the late 1980s because of temporary increases in revenue from tourism, receipts from overseas construction, and structural decreases in interest payments.
South Korea's success in achieving a balance of payments surplus, however, was not without some drawbacks. It led to harsh trade disputes with the United States and other developed nations, as well as to inflationary pressures. To cope with these problems, Seoul had to modify its enthusiastic promotion of exports in favor of a policy restraining trade surpluses within reasonable limits.
An important measure restraining the growing foreign trade imbalance between South Korea and the United States was Seoul's decision to revalue the won against the United States dollar. A stronger won made American imports cheaper, increased the cost of South Korean exports to the United States, and slowed, but did not reverse, the growth in the South Korea-United States trade deficit as of 1989. The United States pressed for further appreciation of the won in 1989. In April 1989, the United States Department of the Treasury accused South Korea of continued "manipulation" of the South Korean currency to retain an artificial trade advantage. South Korean officials and businesspeople, however, complained that the already rapid appreciation of the won was slowing economic growth and threatening exports. In May 1989, South Korea avoided being called an unfair trader by the United States and forestalled possible United States trade sanctions, but the nation paid a high price by promising to open up its agricultural market, ease investment by foreigners, and remove many import restrictions.

Foreign Trade Policy

Seoul stated in 1987 that its foreign trade policy was structured for further expansion, liberalization, and diversification. Because of the paucity of natural resources and traditionally small domestic market, South Korea has had to rely heavily on international trade as a major source of development. Seoul also sought to diversify trading partners to ease dependence on a few specific markets and to remedy imbalances in the present tendency to bilateral trade.

Exports and Imports

The rapid growth of South Korea's economy in the late 1980s led to significant increases in exports and imports. In the wake of the 1988 Seoul Olympics, South Korea's trade surplus exceeded US$11 billion and foreign exchange revenue had increased sharply. Seoul's trade with communist countries surged in 1988. Trade with Eastern Europe was US$215 million, trade with China almost US$1.8 billion, and trade with the Soviet Union US$204 million.
In 1989 total exports grew to US$74.29 billion, and imports totaled US$67.21 billion. South Korea's annual trade exceeded US$100 billion for the first time in 1988, making it the world's tenth largest trading nation.
During the 1960s and early 1970s, the commodity structure of Seoul's principal exports changed from the production of primary goods to the production of light industrial goods. After 1974 there was a rapid expansion in the production and export of heavy industrial and chemical products. By 1986 the share of heavy industrial and chemical products in total exports had expanded to 55.5 percent (as compared to 18.9 percent in 1980) whereas the share of light industrial products had shrunk to 40.9 percent (as compared to 71.1 percent in 1980).
South Korea had depended greatly on the United States and Japan as its major trading partners, with 75.6 percent of all exports going to these markets in 1970. Success at diversifying export markets led to a reduction in the United States-Japan export market share to 55.6 percent in 1986. The Middle East accounted for 12 percent of South Korea's export trade from 1972 to 1977, but its share declined to 5.2 percent in 1986 because of the collapse of the construction boom in the Middle East and the Iran-Iraq war (1980-88). Exports to Western Europe declined from 18.8 percent in 1979 to 15 percent in 1986. Exports to developing areas, such as Latin America (0.8 percent in 1972; 3.6 percent in 1986) and Oceania (0.9 percent in 1972; 1.4 percent in 1986), grew.

Indirect Seoul-Moscow trade was estimated at about US$20 million in 1978, with Moscow importing electronics, textiles, and machinery and exporting coal and timber. By the late 1980s, South Korea's global fur trader, Jindo, was expected to produce US$20 million worth of fur garments annually in a joint venture with the Soviet Ministry of Light Industry. South Korean businesspeople were offered such Soviet products as instruments for nuclear engineering and technology for processing mineral ores and concentrates. In the first ten months of 1989, bilateral trade between Seoul and Moscow reportedly increased 156 percent from 1988 figures to US$432 million.
Since the early 1960s, the structural pattern of imports had shown changes, particularly in the relatively decreasing share of imported consumer goods and the accelerated growth of industrial supplies and capital equipment imports. The share of consumer goods imported in 1962 was 24.1 percent of total imports; this share declined to 9.8 percent of total imports in 1986 because of increased South Korean production of these goods for the domestic market. The declining share of raw materials as a percentage of imports during the early 1970s was reversed in 1974 because of the increased value of oil imports (caused by the 1973 war in the Middle East). By 1979 crude oil was 25 percent of South Korea's total import requirements. This figure dropped to 8.4 percent in 1988 because of the use of other sources of energy and the decline in the price of petroleum in the late 1980s.
South Korean exports to the United States in 1988 rose to US$21.5 billion, a 17-percent increase over 1987; imports rose to US$12.8 billion, a 46-percent increase over the 1987 level. The percentage of total South Korean exports destined for the United States market decreased to 35.3 percent in 1988 from 38.7 percent in 1987. At the same time, the United States' share of total South Korean imports rose to 24.6 percent, up from 21.4 percent in 1987. By 1988 Seoul's favorable balance had grown to more than US$8.7 billion.
In 1989 imports rose to US$57 billion (up 18 percent from 1988) whereas exports reached US$61 billion, a 2-percent increase from 1988. The trade surplus was reduced from US$11.5 billion to US$4.3 billion and was projected to decline even more. Invisible receipts rose 10 percent, but payments, mainly reflecting a big increase in South Korean travel abroad, were up 20 percent. Thus, the surplus on invisible trade was reduced from US$1.3 billion to US$400 million.

The Economic Future

The Korea Development Institute also forecasted in 1988 that South Korea's per capita GNP would exceed US$10,000 early in the twenty-first century. The institute predicted that Seoul would enjoy a higher sustained growth rate than average through the 1990s; that the manufacturing industry would play a pivotal role in the economy in the twenty-first century; and that the service industry would become knowledge-intensive in order to meet the needs of a highly diversified industrialized society. The share of the primary sector (agriculture, forestry, and fisheries) would sink to nearly 5 percent by the turn of the century, whereas the secondary sector (industry) would rise to over 40 percent and the service sector would be at about 55 percent. Major areas of industrial growth would include automobiles, electronics, and machinery.
In 1988 Kim Duk-choong of Sogang University listed five main points that were expected to make the "Korean economic future look bright." He noted that South Korea had drastically reduced its foreign debts since 1985, greatly increased the rate of domestic savings, improved on the equitable distribution of income throughout the population, increased the role of small and medium-sized corporations in the economy, and made the transition from a labor-oriented to a technology-oriented economy. He expected that these positive economic developments would easily outweigh existing problems and lead to real growth in years to come.
Kim's optimism had merit, but there were other important issues that could inhibit economic growth, for example, rising protectionist sentiments in the United States, Japan, and elsewhere. Another problem was the fact that the chaebol tended to restrict subcontracting and to keep as much production as possible inhouse, which meant that the smaller industries and businesses, which bore the brunt of slowdowns in Japan, would not be able to act as shock absorbers. Moreover, as South Korea moved up the technological ladder, it would face stiff competition from advanced nations like Japan and up-and-coming nations like Thailand. There also was the intangible problem of the resolve of South Korea's workers, who labored six days a week with little vacation time. What effect would a slackening of resolve have on the South Korean worker by the 2000? In general, the future of South Korea's economy looked very bright, but there were enough intangibles to make accurate predictions difficult at best.

South Korea trade center

There are numerous excellent works on the South Korean economy that offer a variety of perspectives. Historical studies charting the nation's colonial and modernization periods include Andrew C. Nahm's Korea under Japanese Colonial Rule and Ramon H. Myers' and Mark R. Peattie's The Japanese Colonial Empire, l895-1945. Donald S. Mcdonald's The Koreans provides information on the Korean economy from colonial times through contemporary society. Among the general works on the postwar economy are David I. Steinberg's South Korea's Economy and Chaebol, Han Sung-joo's and Robert Myers's Korea, Edward S. Mason et al.'s The Economic and Social Modernization of Korea, Jene K. Kwon's, Korean Economic Development, G. Cameron Hurst III's Korea 1988, Alice H. Amsden's Asia Next Giant, David S. Bell, Jr.'s, Bun Woong Kim's, and Chong Bun Lee's Administrative Dynamics and Development, Karl Maskowitz's From Patron to Partner, and The Rise of the Korean Economy by Byung-Nak Song.
Opposition groups' views of the South Korean economy are best expressed in Minjungsa's Lost Victory. The Far Eastern Economic Review publishes frequent articles on the economy, as does Asian Survey. For a South Korean perspective on the economy, articles in the English-language Korea Newsreview and the various publications of the Korean Economic Institute in Washington are valuable.

FINANCING DEVELOPMENT

Financing South Korea's economic development in the 1990s was expected to differ from previous decades in two main respects: greater reliance on domestic sources and more emphasis on equity relative to debt. Beginning in the 1960s, foreign credit was used to finance development, but the amount of foreign debt had decreased since the mid-1980s. According to the Sixth Five-Year Economic and Social Development Plan (1987-91), an average annual growth rate of 8 percent was expected, together with account surpluses of about US$5 billion a year through 1991.
To realize these growth targets, South Koreans needed the gross domestic savings rate to exceed the domestic investment rate; additionally, they needed the financing of future economic growth to come entirely from domestic sources. Such a situation would involve reducing foreign debt by US$2 billion a year; and South Korea would become a net creditor nation in the mid-1990s. Through the promotion and reform of the securities markets, especially the stock market, and increased foreign investment, the sixth plan encouraged the diversification of sources and types of corporate finance, especially equity finance.
Domestic savings were very low before the mid-1960s, equivalent to less than 2 percent of GNP in the 1960 to 1962 period. The savings rate jumped to l0 percent between 1970 and 1972 when banks began offering depositors rates of 20 percent or more on savings accounts. This situation allowed banks to compete effectively for deposits with unorganized money markets that had previously offered higher rates than the banks. The savings rate increased to 16.8 percent of GNP in 1975 and 28 percent in 1979, but temporarily plunged to 20.8 percent in 1980 because of the oil price rise. After 1980, as incomes rose, so did the savings rate. The surge of the savings rate to 36.3 percent in 1987 and 35.8 percent in 1989 reflected the sharp growth of GNP in the 1980s. The prospects for continued high rates of saving were associated with continued high GNP growth, which nevertheless declined to 6.5 percent in 1989.
According to Donald S. Macdonald, through the early 1980s funds for investment came primarily from bilateral government loans (mainly from the United States and Japan), international lending organizations, and commercial banks. In the late 1980s, however, domestic savings accounted for two-thirds or more of total investment.

Throughout the 1980s, the financial sector underwent significant expansion, diversification of products and services, and structural changes brought about by economic liberalization policies. As noted by Park Yung-chul, financial liberalization eased interest ceilings. Deregulation increased competition in financial markets, which in turn accelerated product diversification. In the early 1980s, securities companies were permitted to sell securities through a repurchase agreement. By 1985 banks also were allowed to engage in the repurchase agreements of government and public bonds. In 1981 finance and investment corporations started dealing in large-denomination commercial paper. The new form of commercial paper was issued in minimum denominations of 10 million won, compared to the previous minimum value for commercial paper of 1 million won.
In order to extend their ability to raise cash, investment and finance companies introduced a new cash-management account with a 4 million won minimum deposit in 1983. Investment and finance corporations managed client funds by investing them in commercial paper corporate bonds and certificates of deposit. Money-deposit banks in the mid-1980s began offering similar accounts, known as household money-in-trust. Trust business formerly had been the exclusive domain of the Bank of Seoul and Trust Company; however, after 1983 all money-deposit banks were authorized to offer trust services.
The financial system underwent two major structural changes in the late 1970s and 1980s. First, money-deposit banks saw a sustained erosion of their once-dominant market position (from 80 percent in the 1970 to 1974 period to 55 percent by 1984). One reason for this decline was that in the 1970s nonbank financial intermediaries, such as investment trust corporations, finance companies, and merchant banking corporations, were given preferential treatment. Further, because the costs of intermediation at these nonbank financial institutions were lower than at banks (with their many branches nationwide and their multitudes of small savers and borrowers), their cost advantages and higher lending rates allowed them a larger market share.
The second structural change was the rapid increase of commercial paper and corporate debenture markets. Another development was the steady growth of investment trust corporations in the 1980s.
Because of the introduction of tax and financing incentives by the government that encouraged companies to list their shares on the stock market, the Korean Stock Exchange grew rapidly in the late 1980s. In 1987 more than 350 companies were listed on the exchange. There was an average daily trading volume of 10 million shares, with a turnover ratio of 80 percent. In 1989 the stock market was tarnished by accusations of insider trading among the five major South Korean securities firms. The Securities and Exchange Commission launched an investigation in late 1989. The popular index of the market soared to a high of 1,007.77 points on April 1, 1989, but plunged back to the 800s in late 1989 and early 1990.
Business financing was obtained primarily through bank loans or borrowing on the informal and high-interest "curb market" of private lenders. The curb market served individuals who needed cash urgently, less reputable businesspeople who engaged in speculation, and the multitudes of smaller companies that needed operating funds but could not procure bank financing. The loans they received, often in exchange for weak collateral, had very high interest rates. The curb market played a critical role in the 1960s and 1970s in pumping money into the economy and in assisting the growth of smaller corporations. The curb market continued to exist, along with the formal banking system, through the 1980s.

Trade in Brazil

Brazil

Mosjeed of Brazil

Country

Official Name: Federative Republic of Brazil (República Fede-rativa do Brasil).
Short Name: Brazil (Brasil).
Term for Citizen(s): Brazilian(s).
Capital: Brasília.
Independence: September 7, 1822 (from Portugal).

Geography

Size and Location: Standard figure is 8,511,996 square kilometers (including oceanic islands of Arquipélago de Fernando de Noronha, Atol das Rocas, Ilha da Trindade, Ilhas Martin Vaz, and Penedos de São Pedro e São Paulo). According to revised figure of Brazilian Institute of Geography and Statistics (Fundação Instituto Brasileiro de Geografia e Estatística--IBGE), which takes into account new measurements, total area is 8,547,403.5 square kilometers. Brazil occupies about 47 percent of continental area. Country situated between 05°16'20" north latitude and 33°44'32" south latitude, and between 34°47'30" east longitude and 73°59'32" west longitude. Its boundaries extend 23,086 kilometers, of which 7,367 kilometers on Atlantic Ocean. To north, west, and south, Brazil shares boundaries with all South American countries except Chile and Ecuador.

Brazil in Map

Standard Time: With an east-to-west territorial dimension of 4,319 kilometers, Brazil has four time zones. In most of country, time is three hours earlier than Greenwich time. Between summer months of October and February, country adopts daylight savings time, setting clock forward by one hour, in Southeast (Sudeste), Center-West (Centro-Oeste), and South (Sul) regions, and in states of Bahia in Northeast (Nordeste) and Tocantins in North (Norte).
Maritime Claims: Exclusive economic zone 322 kilometers (200 nautical miles).
Boundary Disputes: A short section of boundary with Paraguay, just west of Salto das Sete Quedas (Guairá Falls) on Paraná; and two short sections of boundary with Uruguay--Arroio Invernada area of Cuareim and islands at confluence of Quaraí and Uruguai.
Topography and Climate: Consisting of dense forest, semiarid scrub land, rugged hills and mountains, rolling plains, and long coastal strip, Brazil's landmass dominated by Amazon Basin and Central Highlands. Principal mountain ranges (Serra do Mar) parallel Atlantic coast. Climate varies from mostly tropical in North, where it is seldom cold, to more temperate in South, where it snows in some places. Also wide range of subtropical variations. World's largest rain forest located in Amazon Basin. Higher annual measurements (26°C to 28°C) occur in Northeast's interior and mid- and lower Amazon River. Lowest values (under 18°C) occur in hilly areas of Southeast and largest part of South. Highest absolute values, over 40°C, are recorded in Northeast's low interior lands; in Southeast's depressions, valleys, and lowlands; in Center-West's Pantanal (Great Wetlands) and lower areas; and in South's central depressions and Uruguai Valley. Lowest absolute temperatures often show negative values in most of South, where frosts and snow usual. Rainy areas correspond to Pará's coastal lands and western Amazonas, where annual rainfall greater than 3,000 millimeters. In Southeast on Serra do Mar (São Paulo State), recorded annual rainfall exceeds 3,500 millimeters. Drought areas located in interior Northeast, where annual rainfall under 500 millimeters. Maximum precipitation occurs during summer-autumn in most parts of country, except for Roraima and north Amazonas, where rainy season occurs during winter because these two states are located in Northern Hemisphere.
Principal Rivers: Vast, dense drainage system consisting of eight hydrographic basins. Amazon and Tocantins-Araguaia basins account for 56 percent of total drainage area. World's greatest fluvial island, Bananal, located in Center-West Region on Araguaia. With ten of world's twenty greatest rivers, Amazon (Amazonas) is world's largest in volume of water and one of world's longest (6,762 kilometers, of which 3,615 kilometers are in Brazil), discharging 15.5 percent of all fresh water flowing into oceans from rivers. Union of Paraná and Iguaçu in South, at border between Brazil, Argentina, and Paraguay, forms Iguaçu Falls at Foz do Iguaçu.

Economy

Gross Domestic Product (GDP): Economist Intelligence Unit (EIU) estimated US$775 billion for 1997, as compared with US$387 billion for 1992. EIU's estimated GDP real growth rate for 1997, 3.7 percent; and 1998, 4.0 percent. Of 1995 GDP of US$717 billion, 47.3 percent generated by trade and services, 42.0 percent by industry, and 10.7 percent by agriculture.

Brazilian GDP

Per Capita GDP and Minimum Wage: Per capita GDP US$5,128 (1997). GDP per capita average annual growth rate, 0.8 per-cent (1985-94). Minimum wage as of June 1995: US$108.46, or just over R$100 a month (for value of real--see Glossary), as compared with US$68.93, or R$70 a month, in July 1994, amounting to an actual increase of only 10 percent because of inflation. Minimum wage raised by 12 percent in May 1996.
Inflation: Inflation reached 50 percent per month by June 1994 and averaged 31.2 percent a month in 1994, for total of 2,294.0 percent that year. As result of Real Plan, declined to monthly rates of between 1 and 3 percent in 1995, for an annual rate of 25.9 percent. In 1996: 16.5 percent; 1997: 7.2 percent.
Employment and Unemployment: Estimated labor force in 1997: 65.5 million. Services sector employed 66 percent of women and 42 percent of men; industry, 14 percent of women and 23 percent of men; business, 15 percent of women and 15 percent of men; civil construction, 11 percent of men; other activities, 5 percent of women and 9 percent of men. Men held 61 percent of total jobs. Women's wages averaged 62 percent of those of men but declined to 54 percent in services sector. Recorded unemployment rate (includes only people actively looking for work and over age fifteen) in 1997: 5.5 percent.
Agriculture: One of world's leading exporters of agricultural products. Grain production in 1996: 73 million tons. According to estimates of Food and Agriculture Organization (FAO) of United Nations, Brazil produced 79.4 million tons of grains (record crop) in 1995, as compared with 56.1 million tons in 1990. Center-West and South and Rondônia account for 90 percent of crops. In 1995, 81.6 million tons of crops har-vested, but producers saw their income reduced by about US$10.4 billion, or 26 percent, owing to price decreases. Country has 46.5 million hectares under cultivation, 174.1 million hectares in grazing lands, and 140.6 million hectares in arable land. Crop year runs from June to May. From 1982 to 1992, total cultivated area fell by 30 percent, but production of certain grains, in tons per hectare, increased by 14.9 percent. Agricultural sector employed 29.4 percent of labor force in 1992. It accounted for 10.7 percent of GDP in 1996. It accounts for almost 40 percent of exports. Except for wheat, Brazil largely self-sufficient in food. Each farmer feeds 3.6 city dwellers, whereas 2.5 farmers were needed to feed each city dweller in 1940. Brazil is world's largest exporter of coffee, orange juice concentrate, and tobacco, and second largest exporter of sugar and soybeans. In addition to sugar, Brazil produces a large quantity of ethanol (mainly used as fuel) from crushed sugarcane. Other important crops: manioc, corn, and rice. In addition to oranges, principal fruits are lemons, mangoes, guavas, passion fruit, and tangerines.
Industry: Capital goods (see Glossary) production increased in 1970s with creation of new companies and large capital investments in transportation, communications, and energy infrastructure. New technologically sophisticated industries begun in that decade included weapons, aircraft, and computer manufacturing and nuclear power production. Industrial growth slowed by economic crisis of 1980s. After start of Real Plan, industrial production increased vigorously by 7.5 percent from 1993 to 1994. Manufacturing accounted for 62 percent of exports in 1996. Industrial growth in 1997 was 3.9 percent.

Industry of Brazil

Energy: 94 percent of current energy capacity hydroelectric. Electricity consumption expanded by 7.6 percent in 1995 (versus 4.2 percent for GDP) and by 5.7 percent in first half of 1996 (versus projected GDP growth rate of 3 percent). A dozen hydroelectric and thermal plants being privatized because electricity demand expected to outstrip supply by 1999, and state unable to pay off energy-sector debts. A blackout in April 1997 affecting 20 million people expected to become an increasingly common occurrence. Predominance of highland rivers presents great potential for hydroelectric power pro-duction. Hydropower generating potential: 106,500 to 129,046 megawatts/year, of which 24.4 percent in operation or under construction, 35.8 percent inventoried, and 39.8 percent esti-mated (1994 estimate). In 1992, of 233,682 gigawatt-hours generated, 217,782 hydroelectric, 14,454 thermal, and 1,446 nuclear. Nuclear power generation in early 1998 was still negligible. About 60 percent of energy supply derived from renewable sources, such as hydroelectricity and ethanol. National oil production surpassed a record 840,000 barrels per day (bpd) in 1997. Petroleum imports in 1995: 760,000 bpd (442,000 bpd crude; 318,000 bpd derivatives). Brazil relies on natural gas for only 2 percent of energy needs. Produced more than 17 million cubic meters of natural gas per day in early 1990s.
Services: In 1994 services accounted for approximately 43.6 percent of work force.
Trade Balance: Total trade in 1997: US$109.4 billion, com-pared with US$77.3 billion in 1994. In ten years, 1985-95, foreign trade of Brazil accounted for US$521.8 billion, with surplus of US$129.3 billion. Foreign trade deficit in 1997: US$10.9 billion.
Imports: Totaled US$60.1 billion in 1997, as compared with US$20.5 billion in 1993. Average import duties dropped to 14 percent from 51 percent since 1988. Major suppliers in 1996: United States, 22.2 percent; Germany, 9.0 percent; Argentina, 12.7 percent; and Japan, 5.2 percent. Half of Brazil's imports of manufactured goods come from United States. Brazil only other major Latin American country besides Chile to import oil, which in 1996 cost an estimated US$6.4 billion.
Exports: Totaled US$49.2 billion in 1997, as compared with US$39.6 billion in 1993. Brazil's strengthened currency has made its exports less competitive. Brazil exports large part of world's production of tin, iron, manganese, and steel. Also one of world's largest exporters of food, mainly sugar, coffee, cocoa, soybeans, and orange juice. Major markets in 1996: United States, 19.5 percent; Argentina, 10.8 percent; Japan, 6.4 percent; and the Netherlands, 7.4 percent.
Tariffs: Average tariff rate: 14.0 percent; tariff ceiling: 70 percent on automobiles (imposed in mid-1995).

Ethanol exports in Brazil

Reserves: International reserves in first quarter of 1998: US$63 billion.
Budget Deficit: Current account deficit in 1997: US$32.3 billion. EIU's current account deficit estimate for 1998: US$33.6 billion.
Internal Debt: Total debt of public sector (federal, state, and municipal governments): US$77 billion (1994). Totaled record US$213 billion (36.8 percent of GDP) in 1995, according to official figures, or US$267 billion (46 percent of GDP), if some unregistered existing debts included. IBGE calculated total domestic debt to be R$304.8 billion in September 1995, or 60.9 percent of estimated 1995 GNP. Public Sector Borrowing Requirement reached 5.6 percent of GDP in 1996, as compared with 5.1 percent in 1995.
External Debt: US$177.6 billion (public and private) in 1997; US$193.2 billion estimated by EIU for 1998. Total debt service: US$15 billion (1996). Debt-service ratio: 58.7 percent (1997).
Official Exchange Rate: On July 1, 1994, new currency, the real (pl., reais), introduced. As of January 31, 1996, government widened to 7.07 percent range within which value vis-à-vis United States dollar may vary. Exchange rate on April 13, 1998: R$1.140=US$1.
Foreign Investment: US$52 billion in 1996, US$38 billion in 1995, and US$25 billion in 1994.
Fiscal Year: Calendar year.
Fiscal Policy: Stabilization program in 1994-96 developed originally by Fernando Henrique Cardoso (president, 1995- ) as minister of finance (May 1993 to April 1994). End of inflation in 1994 quickly increased demand and spending power of poorer Brazilians especially. Government endeavoring to dampen inflationary pressures. In order to consolidate stabilization program and put Brazil on path to long-term sustainable growth, government must implement wide-ranging structural reforms. Restrictive monetary policy has kept interest rates high and reduced aggregate demand and inflation, while improving trade balance. Fiscal position deteriorated considerably in 1995. Expansion of internal public debt a major threat to government's control over fiscal and monetary policy. Monetary policy somewhat more flexible since August 1995 because of lower level of economic activity, declining inflation rate, and abundance of foreign capital to finance current account.

Exchange Rates and Foreign Trade

The single most important policy tool for influencing Brazil's balance of payments is the exchange rate. Brazilian exchange-rate policy has evolved over the past several decades. Policy makers and Brazilian exporters believed that trade flows in the 1960s and 1970s were most effectively managed through trade policies such as tariffs (see Glossary), import controls, or export incentives. Beginning in the 1980s, they began to recognize that balance of payments adjustments may be more efficiently pursued using the exchange rate, rather than tariffs, subsidies, and direct controls on trade. This evolution in thinking reflects in part the increasing skepticism among many Brazilians, both economists and policy makers, about the government's ability to maintain external balance using trade policy without creating severe economic distortions.
Even more important, however, was the exchange-rate experience of the early 1980s. Following the onset of Mexico's debt crisis in 1982 and the resulting inability of Brazil to continue to finance its current-account deficit through external borrowing, the cruzeiro was devalued sharply against the dollar in February 1983. Unlike the earlier "maxidevaluation" of December 1979, which was soon undermined by rapid increases in internal cruzeiro prices, the real depreciation of the cruzeiro resulting from the 1983 adjustment was maintained for the next several years. Exports increased substantially in 1983 and 1984, and the value of imports fell by over US$5 billion between 1982 and 1984. Although some of this decline resulted from the fall in petroleum prices from their record levels in 1981, the response of the trade deficit to the large and sustained real depreciation of the cruzeiro provided clear evidence that Brazil's external adjustment problem could be addressed through exchange-rate policy. The experience of the early 1980s, in fact, led to the recognition that Brazil's real problem was not the private sector's lack of response to the exchange rate, but the inability of the domestic economy, particularly the public sector, to generate the net saving that is the counterpart of a current-account surplus.
Brazil's success in moving the current account into surplus after 1982 implied a corresponding adjustment in either net private saving (private saving minus private investment) or in public-sector saving (tax receipts and other public revenues minus public expenditures). Because net public-sector saving actually deteriorated in the 1980s, the burden of adjustment fell on the private sector, particularly on investment. The dramatic fall in investment after 1982 had important consequences for Brazilian competitiveness and hence for the potential benefits that Brazil would derive from trade reform.

Brazil cotton statistic

Thus, the experience of the early 1980s suggests that the Brazilian economy had responded to real exchange rates that facilitated external adjustment, but the policy also reduced domestic private investment and future economic growth. In retrospect, the delay among policy makers in using the exchange rate as the primary tool for achieving external balance is surprising. Their approach may have been influenced in part, however, by the success of the "crawling-peg" policy instituted in August 1968. This policy consisted of small but frequent adjustments in the nominal exchange rate in line with Brazilian inflation and price changes in Brazil's major trade partners, primarily the United States. It ushered in a long period of real exchange-rate stability, broken only a decade later by the December 1979 devaluation. The crawling-peg policy was a marked improvement over the earlier exchange-rate regime, in which the combination of domestic inflation and a nominal exchange rate fixed for long periods of time resulted in large fluctuations and uncertainty about the real exchange rate. The real rate may in fact have been too stable, however, leading Brazil to delay the appropriate exchange-rate response to the external shocks of the 1970s.
A rise in the real exchange rate represents an increase in Brazilian price competitiveness in international markets. Such an increase in price competitiveness could be caused by a depreciation of the cruzeiro against the dollar, a rise in United States prices, or a fall in Brazilian prices. A slowing of inflation in the 1970s made Brazil more competitive, while the rapid acceleration of inflation in the second half of the 1980s substantially eroded Brazil's price competitiveness. Unlike other episodes in which the actual effects of a devaluation were rapidly undercut by Brazilian inflation, the 1983 real devaluation was maintained through frequent adjustments in the nominal exchange rate, sufficient to maintain Brazil's price competitiveness in international markets until the 1986 Cruzado Plan froze the nominal exchange rate.
A number of implications for Brazil's balance of payments policy are clear from exchange-rate trends and movements in the current account. First, by the 1980s it was clear that Brazilian trade flows were strongly responsive to the real exchange rate. If "elasticity pessimism," which hypothesizes that trade responses to relative prices are low, was ever justified in the Brazilian case, those days were long past. Since the late 1960s, Brazil has ceased to be a developing country in terms of its trade flows. Traditional primary products, such as coffee, cocoa, or sugar, in recent years have accounted for less than a third of the value of Brazilian exports. The increasing importance of manufactured exports, as well as the variety of local import substitutes, makes Brazil's trade balance responsive to real exchange-rate changes. This responsiveness removes one of the traditional justifications for extensive tariff and import restriction policies and for administrative intervention in trade to attain external balance. The evidence of the past several decades suggests that Brazil can attain external balance without extensive market intervention, however harsh the domestic effects of external adjustment.
Second, the introduction of a degree of indexation of the nominal exchange rate in the form of the crawling-peg policy has permitted the external sector to avoid some of the consequences of domestic inflation that would otherwise have produced much more severe external payments crises. Real exchange rates remained relatively stable for a decade after the policy's introduction in 1968. Unlike several other Latin American countries such as Argentina, Brazil avoided the sharp swings in the real exchange rate resulting from domestic inflation and infrequent adjustment of the nominal rate. When Brazil departed from this pattern, as it did in 1986 during the Cruzado Plan, policy makers soon learned that this was a mistake. Subsequent stabilization plans, even if they were failures for other reasons, at least did not succumb to the temptation to use the exchange rate as an anti-inflationary weapon.
Finally, and perhaps more negatively, Brazilian exchange-rate policy transformed Brazil's external adjustment problems of the early 1980s into more intractable domestic balance problems in the early 1990s. Contrary to the initial expectations of many observers, Brazil was able to solve its external balance problem after the 1982 debt crisis with surprising speed. The cost was a sharp increase in the demand for domestic saving to replace lost foreign capital inflows. With little increase in net public-sector saving or in private-sector gross saving, investment fell substantially, undercutting the growth of the Brazilian capital stock and the economy's potential growth in competitiveness.

Capital Flows and the External Debt

Much of Brazil's economic experience in the past two decades has been dominated by large capital inflows that attained record levels in the 1970s, only to collapse after 1983 in the wake of the Mexican debt crisis. For the rest of the decade, Brazil coped with the consequences of this collapse, and only in the 1990s did capital again begin to flow into the Brazilian economy, with a substantial increase after the Real Plan.
The enormous inflow of external capital to Brazil that ended in 1982 had its roots in a number of policies and institutional changes in the preceding two decades. The military government that seized power in April 1964 quickly reformed existing laws governing direct foreign investments, including liberalizing restrictions on remittances of profits and simplifying procedures for reinvestment of profits. The changes did not address the effects of inflation in the currency of the lending country, however, so that the real returns on a direct investment were affected negatively by inflation in dollar prices. The negative effect of dollar inflation on a direct foreign investment in Brazil arose because the original investment was registered in a fixed dollar amount, on which allowances for profits and remittances were calculated. A million-dollar investment in 1964, for example, would still be registered as a million-dollar investment in 1974. Higher nominal dollar profits in 1974 would then result in a substantially higher nominal profit rate and a heftier Brazilian tax, thus lowering the real return.

Foreign Trade of Brazil

Financial lending to Brazil was different because the interest rate on the loan, usually denominated in dollars, incorporated the market's expectations of inflation. The asymmetrical treatment of financial capital flows and direct investment was one of the reasons total capital flows to Brazil in the post-1964 period were dominated by bank lending, which at times was ten times as great as foreign direct investment.
Among the other changes that encouraged large financial capital flows to Brazil was Law 4,131, which allowed final borrowers to deal directly with foreign lenders after approval by the Central Bank of Brazil (Banco Central do Brasil--Bacen; see Glossary). Another vehicle for capital flows was Resolution 63, which permitted Brazilian banks and authorized subsidiaries of foreign banks to obtain dollar loans abroad and reloan the proceeds to one or more domestic borrowers. Finally, the increasing participation of the Brazilian government as a borrower itself, backed by explicit "full faith and credit" guarantees and by the implicit assumption that taxes could be levied to pay for loans to the government, made lending to Brazil an increasingly attractive option for foreign banks.
Equally important in explaining the sharp rise in financial lending to Brazil after the mid-1960s were changes in international financial markets. International banks began to negotiate variable interest rate loans, in which the borrower and the lender agreed to reset the loan's interest rate at specified intervals, usually six months, on the basis of a rate that neither the borrower nor lender controlled (usually the London Interbank Offered Rate--LIBOR), or the United States prime rate. Added to this underlying rate was a "spread," or premium charged to borrowers like Brazil, based on the market's assessment of any additional risk compared with the risks associated with prime borrowers. Finally, the rise in syndicated bank lending, in which one "lead" bank organized the loan and then sold portions of it to other international lenders, permitted banks to expand substantially their loans to borrowers like Brazil.
Together, these innovations cleared the way for lending on a scale that was unprecedented in Brazil's history and with few parallels elsewhere in the world. Because the loans were denominated in the creditor country's currency, they were isolated effectively from inflation in cruzeiro prices. As long as the value of Brazil's export revenues grew at rates exceeding the interest rates charged on the loans, an assumption that appeared valid throughout the 1970s, the burden of the external debt in relation to Brazil's capacity to repay it would fall.
Although it is easy from the vantage point of the 1990s to criticize the volume and terms of much of the bank lending to Brazil, at the time it appeared to be an extremely attractive option for a borrower like Brazil. When inflation in the currencies of the lending countries is subtracted from the rates charged on loans to Brazil, real interest rates on these loans in the 1970s were negligible and often negative. The nominal and real interest rates in the markets in which Brazilian external borrowing occurred do not include the spread paid by Brazil, which during the 1970s and early 1980s was generally between 1 percent and 2 percent. Nevertheless, these rates do show clearly why foreign borrowing appeared to be such an attractive option for Brazil.
The debt crisis that began in Mexico in August 1982 had an almost immediate impact on the ability of other Latin American borrowers to maintain capital inflows. Even though Brazil's trade balance and current account had improved slightly in 1981, loans from international lenders became increasingly scarce. Interest on new loans increased, and most lenders refused to roll over on existing loans. New lending dried up in the second half of 1982, reducing capital inflows, which had reached a peak in 1981, by more than a third. Private borrowers in Brazil encountered a total cutoff of loans from foreign lenders, while official borrowing dropped sharply. By 1984 net capital inflows (public and private) were negligible by comparison with earlier years, and by 1986 the country was experiencing a net capital outflow of US$7.3 billion, a sum nearly equal to Brazil's trade balance. The principal components of Brazil's balance of payments show this sharp drop in the net inflow of foreign capital after 1982.
The 1982 crisis interrupted for many years private Brazilian external borrowing. Private loans contracted under Law 4,131 had leveled off in the late 1970s, and after 1982 net private borrowing under this law became negative. The fall in private borrowing under Resolution 63 was even more pronounced. After a rapid rise in such borrowing between 1979 and the 1982 debt crisis, this source of financing virtually collapsed, as the level of outstanding Resolution 63 debt was more than cut in half between 1982 and the end of 1987.
Part, if not all, of the increase in external debt reported by the Central Bank after 1982 was simply forced lending to finance interest payments. It did not have a real counterpart in the form of new resources entering the country through the capital account. As a result, Brazil's ability to tap external saving to finance either public-sector borrowing or private-sector investment collapsed after 1982.
A number of Brazilian economists have made the point that before 1982 net capital inflows more than covered service payments (net interest, profits and dividends, and reinvested profits). After 1982 interest payments alone far exceeded net capital inflows, which turned negative after 1985. Although 1982 is usually viewed as the turning point, the net capital transfer from the rest of the world actually began to decline in the mid-1970s. Brazil was only able to avoid an external payments crisis in the late 1970s because lenders were willing to finance debt service through further lending. After the Mexican debt crisis in 1982, Brazil's own crisis could no longer be postponed.
The 1986 Cruzado Plan exacerbated capital outflows. Real exchange-rate overvaluation, with increasing expectations of a future adjustment, was one factor. A second factor was the increase in uncertainty about future fiscal and monetary policy, as the shortages and informal markets produced by the price controls undercut the euphoria of the first few months.
During the rest of the 1980s, net capital outflow continued, further reducing Brazil's capacity to finance investments needed for future economic growth. In real terms, however, the external debt began to decline in the late 1980s, both as a result of debt renegotiation and a marking down of some of the debt by public and private lenders. Despite temporary interruptions in debt servicing, domestic political pressures in Brazil for a permanent repudiation of the external debt were rejected. As interest rates in international financial markets declined substantially in the early 1990s, the costs of servicing the remaining external debt were reduced further.
Although the debt crisis that exploded in Brazil in the early 1980s had not disappeared a decade later, it was no longer regarded as Brazil's central economic problem. Its effects, however, lingered on in several forms. First, the steep fall in the availability of international reserves after 1982 sharply curtailed Brazilian investment. The resulting decline in capital formation was evident a decade later, as Brazilians faced the consequence of lower levels of investment in plant, equipment, and essential infrastructure. Second, international confidence in the financial soundness of external lending to Brazil remained low. When foreign capital began to return to Brazil in the early 1990s, it took a rather different form from the capital inflows of the 1970s. Foreign capital inflows to Brazil in the early 1990s were smaller and were no longer dominated by loans from international banks. Instead, foreign lenders sought equity investments in Brazilian enterprises. Foreign firms with the capacity to manage direct investments in Brazil began to replace commercial banks as the primary source of foreign capital.

Foreign Relations

The Foreign Service

Chart of foreign business of Brazil

 

The Rio Branco Institute (Instituto Rio Branco--IRBr) recruits from twenty to thirty candidates each year among college graduates. After four semesters of intensive study of language and diplomacy, graduates receive a certified bachelor of arts degree in diplomacy and begin their careers as third secretaries. In 1996 the IRBr began studies to upgrade the course to an M.A. program. The IRBr teaching staff is composed of senior diplomats and some academics from the University of Brasília (Universidade de Brasília). Some foreign students are admitted, mostly from Latin America and Africa.
After three or four years experience within several divisions of the Ministry of Foreign Affairs (known as Itamaraty, after the building it formerly occupied in Rio de Janeiro), the junior diplomat is posted overseas. Promotion to second and first secretary is by merit (evaluation by immediate superiors). Before promotion to minister second class, the diplomat goes through a mid-career course and produces a monograph, which is defended before an examining board. Many diplomats also acquire graduate degrees during their career. Promotion to the final positions of counselor (minister first class) and ambassador involves a combination of merit and political considerations; the president makes the final decision. Because Itamaraty has more diplomats than posts overseas and in Brasília, diplomats frequently fill key positions in other ministries, state enterprises, and the president's office. Brazilian diplomats generally are considered skilled and patient negotiators by their peers.

Trade in Portugal

Portugal

Mosjeed of Portugal

 

Formal Name: Portuguese Republic.
Short Form: Portugal.
Term for Citizen(s): Portuguese (singular and plural); adjective--Portuguese.
Capital: Lisbon (Portuguese, Lisboa).
Geography: 92,080 square kilometers; land area: 91,640 square kilometers; includes Azores (Portuguese, Açores) and Madeira Islands.
Topography: Hills and mountains north of Rio Tejo; rolling plains to south.
Climate: Varied with considerable rainfall and marked seasonal temperatures in north; dryer conditions in south with mild temperatures along coast but sometimes in low 40°Cs in interior.

Portugal in map

Economy

Gross Domestic Product (GDP): purchasing power equivalent--estimated at US$87.3 in 1991 (US$8,400 per capita). Economy stagnant during second half of 1970s and first half of 1980s because of world economic slump and extensive nationalizations during revolution of mid-1970s. Between 1986 and 1990, GDP grew at 4.6 percent each year.
Agriculture: Made up 6.2 percent of GDP and employed about 17.8 percent of labor force in 1990. Small farms in north, larger farms in the south; productivity and mechanization below European Community levels; imports more than half of food needs. Major crops: grain, corn, rice potatoes, olives, grapes, cork; important livestock: pigs, cattle, sheep, and chickens; dairy farms mostly in north. EC membership threated long-term servival of southern grain-growing and cattle-raising farms; farms producing rice, vegetables, and wine likely to fare well.
Industry: 38.4 percent of GDP in 1990. Concentrated in two regions: Lisbon-Setúbal, much heavy industry (steel, ship building, oil refineries, chemicals); and Porto-Aveiro-Braga, mostly light industry (textiles, footwear, wine, food processing). Ownership of industries varies: light industry usually privately owned; heavy industry often state owned; high technology manufacturing often foreign owned.
Services: 55.5 percent of GDP in 1990; accounted for 47 percent of work force. Tourism important component of service sector; 19.6 million visitors in 1991.
Imports: In 1990 imports of goods and services accounted for about 47 percent of GDP. Manufactured goods (machinery, transport equipment, chemicals) accounted for about 75 percent of merchandise imports, food and beverages for about 10 percent, and raw materials (mostly petroleum) for about 16 percent.

Export value of Portugal

Exports: in 1990 exports of goods and services accounted for about 37 percent of GDP. Manufactured goods accounted for 80 percent of merchandise exports in 1989. In 1990 textiles, clothing, and footwear made up 37 of total export value; machinery and transport equipment, 20 percent; forest products, 14 percent; and agricultural products, 8 percent.
Major Trade Partners: EC major trading partner, buying 74 percent of Portugal's exports in 1990, and supplying 69 percent of its imports. Germany and Spain the most important trading partners. Only 3.4 percent of Portugal's imports in 1990 came from the United States; Organization of Petroleum Exporting Countries (OPEC) accounted for less than 7 percent.
Balance of Payments: Despite negative trade balences, large earnings from tourism and remittances from Portuguese living abroad, in addition to direct foreign investment and EC tranfers, resulted in generally favorable balances of payments (US$4.6 billion in 1989, US$3.5 billion in 1990).
Exchange Rate: in March 1992, 143.09 escudos per US$1.
Fiscal Year: Calendar year.

The Economy of the Salazar Regime

The First Republic was ended by a military coup in May 1926, but the newly installed government failed to solve the nation's precarious financial situation. Instead, President Óscar Fragoso Carmona invited António de Oliveira Salazar to head the Ministry of Finance, and the latter agreed to accept the position provided he would have veto power over all fiscal expenditures. At the time of his appointment as minister of finance in 1928, Salazar held the Chair of Economics at the University of Coimbra and was considered by his peers to be Portugal's most distinguished authority on inflation. For forty years, first as minister of finance (1928-32) and then as prime minister (1932-68), Salazar's political and economic doctrines were to shape the Portuguese destiny.
From the perspective of the financial chaos of the republican period, it was not surprising that Salazar considered the principles of a balanced budget and monetary stability as categorical imperatives. By restoring equilibrium both in the fiscal budget and in the balance of international payments, Salazar succeeded in restoring Portugal's credit worthiness at home and abroad. Because Portugal's fiscal accounts from the 1930s until the early 1960s almost always had a surplus in the current account, the state had the wherewithal to finance public infrastructure projects without resorting either to inflationary financing or to borrowing abroad.

Commercial Trade

At the bottom of the Great Depression, Premier Salazar laid the foundations for his Estado Novo, the "New State." Neither capitalist nor communist, Portugal's economy was cast into a quasi-traditional mold. The corporative framework within which the Portuguese economy evolved combined two salient characteristics: extensive state regulation and predominantly private ownership of the means of production. Leading financiers and industrialists accepted extensive bureaucratic controls in return for assurances of minimal public ownership of economic enterprises and certain monopolistic (or restricted-competition) privileges.
Within this framework, the state exercised extensive de facto authority regarding private investment decisions and the level of wages. A system of industrial licensing (condicionamento industrial), introduced by law in 1931, required prior authorization from the state for setting up or relocating an industrial plant. Investment in machinery and equipment designed to increase the capacity of an existing firm also required government approval. Although the political system was ostensibly corporatist, as political scientist Howard J. Wiarda makes clear, "In reality both labor and capital--and indeed the entire corporate institutional network--were subordinate to the central state apparatus."
Under the old regime, Portugal's private sector was dominated by some forty great families. These industrial dynasties were allied by marriage with the large, traditional landowning families of the nobility, who held most of the arable land in the southern part of the country in great estates. Many of these dynasties had business interests in Portuguese Africa. Within this elite group, the top ten families owned all the important commercial banks, which in turn controlled a disproportionate share of the national economy. Because bank officials were often members of the boards of directors of borrowing firms in whose stock the banks participated, the influence of the large banks extended to a host of commercial, industrial, and service enterprises.
Portugal's shift toward a moderately outward-looking trade and financial strategy, initiated in the late 1950s, gained momentum during the early 1960s. A growing number of industrialists, as well as government technocrats, favored greater Portuguese integration with the industrial countries to the north as a badly needed stimulus to Portugal's economy. The rising influence of the Europe-oriented technocrats within Salazar's cabinet was confirmed by the substantial increase in the foreign investment component in projected capital formation between the first (1953-58) and second (1959-64) economic development plans. The first plan called for a foreign investment component of less than 6 percent, but the plan for the 1959-64 period envisioned a 25-percent contribution. The newly influential Europe-oriented industrial and technical groups persuaded Salazar that Portugal should become a charter member of the European Free Trade Association (EFTA) when it was organized in 1959. In the following year, Portugal also added its membership in the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund, and the World Bank.
In 1958 when the Portuguese government announced the 1959-64 Six-Year Plan for National Development, a decision had been reached to accelerate the country's rate of economic growth--a decision whose urgency grew with the outbreak of guerrilla warfare in Angola in 1961 and in Portugal's other African territories thereafter. Salazar and his policy advisers recognized that additional claims by the state on national output for military expenditures, as well as for increased transfers of official investment to the "overseas provinces," could only be met by a sharp rise in the country's productive capacity. Salazar's commitment to preserving Portugal's "multiracial, pluricontinental" state led him reluctantly to seek external credits beginning in 1962, an action from which the Portuguese treasury had abstained for several decades.

Chief export markets

Beyond military measures, the official Portuguese response to the "winds of change" in the African colonies was to integrate them administratively and economically more closely with Portugal through population and capital transfers, trade liberalization, and the creation of a common currency--the so-called Escudo Area. The integration program established in 1961 provided for the removal of Portugal's duties on imports from its overseas territories by January 1964. The latter, on the other hand, were permitted to continue to levy duties on goods imported from Portugal but at a preferential rate, in most cases 50 percent of the normal duties levied by the territories on goods originating outside the Escudo Area. The effect of this two-tier tariff system was to give Portugal's exports preferential access to its colonial markets.
Despite the opposition of protectionist interests, the Portuguese government succeeded in bringing about some liberalization of the industrial licensing system, as well as in reducing trade barriers to conform with EFTA and GATT agreements. The last years of the Salazar era witnessed the creation of important privately organized ventures, including an integrated iron and steel mill, a modern ship repair and shipbuilding complex, vehicle assembly plants, oil refineries, petrochemical plants, pulp and paper mills, and electronic plants. As economist Valentina Xavier Pintado observed, "Behind the facade of an aged Salazar, Portugal knew deep and lasting changes during the 1960s."
The liberalization of the Portuguese economy continued under Salazar's successor, Prime Minister Marcello José das Neves Caetano (1968-74), whose administration abolished industrial licensing requirements for firms in most sectors and in 1972 signed a free trade agreement with the newly enlarged EC. Under the agreement, which took effect at the beginning of 1973, Portugal was given until 1980 to abolish its restrictions on most community goods and until 1985 on certain sensitive products amounting to some 10 percent of the EC's total exports to Portugal. EFTA membership and a growing foreign investor presence contributed to Portugal's industrial modernization and export diversification between 1960 and 1973.
Notwithstanding the concentration of the means of production in the hands of a small number of family-based financial-industrial groups, Portuguese business culture permitted a surprising upward mobility of university-educated individuals with middle-class backgrounds into professional management careers. Before the revolution, the largest, most technologically advanced (and most recently organized) firms offered the greatest opportunity for management careers based on merit rather than on accident of birth.

FOREIGN ECONOMIC RELATIONS

After becoming a charter member of EFTA in 1959, Portugal became increasingly open to the rest of the world through international trade and other payment flows. In 1990 exports of goods and services accounted for about 37 percent of Portugal's GDP, and imports of goods and services represented about 47 percent of GDP. The accession of Portugal to the EC on January 1, 1986 required fundamental changes in the country's commercial and foreign investment policies. A seven-year transition period ending in 1993 would eliminate most barriers to trade, capital flows, and labor mobility among the twelve EC member countries. During this period, Portugal was a net recipient of EC financial transfers to help modernize its agricultural and industrial sectors for competition in the single market.

Portugal Current Account Deficit

To rein in domestic demand growth--mainly the result of the public sector deficits after 1973--the Portuguese government was obliged to pursue IMF-monitored stabilization programs in 1977-78 and 1983-84 to help achieve a return to current account equilibrium in the balance of international payments. Building on the 1983-85 stabilization program and in the context of Portugal's accession to the EC, the Council of Ministers introduced in March 1987 the Program for the Structural Adjustment of the Foreign Deficit and Unemployment (Plano de Correcção Estrutural do Déficit Externo e Desemprêgo--PCEDED), a medium-term program aimed at a lasting correction of structural imbalances--inflation, fiscal deficit, external deficit, and unemployment. The program's macroeconomic approach included a set of articulated measures involving fiscal, monetary, exchange, and incomes policy. As an instrument of the government's "controlled development strategy," this program was to be implemented in two stages covering the periods 1987-90 and 1991-94 and was designed to reduce Portugal's susceptibility to external shocks by strengthening especially the energy and agricultural sectors.

Composition and Direction of Trade

Portugal's rising share of manufactured goods in total merchandise exports, which reached 80 percent in 1989, was indicative of the country's newly industrialized status. Between 1980 and 1988, exports of manufactured goods increased by 10 percent per year by volume, which was double the rate of its European neighbors, and Portugal gained market share. The country's major commodity exports in 1990 included textiles, clothing, and footwear (accounting for 37 percent of total export value); machinery and transport equipment (20 percent); forest products (10 percent, including pulp and paper and cork products); agricultural products (8 percent, mainly wine and tomato paste); chemicals and plastic products (5 percent); and energy products (about 4 percent). Portugal's comparative advantage appeared to lie with high forestry resources content (wood and cork products, including pulp and paper) and labor-intensive products (textiles, clothing, and footwear). With the participation of multinational firms, Portugal was also gaining competitive strength in the export of automobiles and automotive components and electrical and electronic machinery.

Consumer oriented Exports to portugal

When compared with the other EC member countries and the United States, Portugal had a strong competitive advantage because of its low wage scale. As an example, 1989 hourly labor costs in Portuguese manufacturing (in United States dollars) averaged approximately half those of Greece (a country with a similar per capita GDP), a third those of Spain, and about a fifth of most other West European countries and the United States.
Manufactured goods (notably machinery, transportation equipment, and chemicals) accounted for about 75 percent of merchandise imports in 1989, food and beverages for about 10 percent, and raw materials (mainly crude petroleum) for about 16 percent. Portugal imported about 60 million barrels of oil yearly during the late 1980s, but the share of crude petroleum varied between 8 and 20 percent of total imports depending on fluctuations in world oil prices.
Portugal's commodity trade was increasingly dominated by the EC. In 1990 the EC member countries purchased nearly 74 percent of Portugal's exports and supplied over 69 percent of its imports; in 1985, the year prior to Portugal's membership in the EC, the EC member counties purchased about 63 percent of Portugal's exports and supplied nearly 46 percent of Portugal's imports. Within the EC, the former West Germany, France, and Britain were Portugal's leading trading partners. But after the accession of both Iberian countries to the EC in 1986 (and the dismantling of trade restrictions between them), Spain suddenly emerged as a significant trading partner, taking over 13 percent of Portugal's exports in 1990 and providing 14.4 percent of the latter's imports. Thus, Spain ranked with West Germany as Portugal's premier national supplier in 1990, ahead of France, Britain, and Italy.
The relative position of the United States in Portugal's import trade declined sharply from nearly 10 percent of the total in 1985 to 3.9 percent in 1990. Because Portugal heavily imported grain, soybeans, and animal feedstuffs, its adoption of the CAP led to costly trade diversion from former, more efficient sources, mainly the United States, to higher-cost continental EC member countries. On the other hand, Portugal's full membership in the EC would permit its manufacturers to capture a larger share of exports to EC member countries at the expense of lower-cost exporters from Latin America and East Asia; similarly, Portuguese producers of quality wine were expected to gain market share at the expense of wine producers in Southern Mediterranean countries that were not fully integrated into the EC. In both these cases, trade diversion would favor Portuguese entrepreneurs.
Portugal's trade with the previous Escudo Area (its former African colonies) had fallen sharply since the revolution. Still, a restructured Angola under a competent, non-Marxist regime could once more offer Portugal significant opportunities for two-way trade in the late 1990s. The share of Portuguese imports supplied by the Organization of the Petroleum Exporting Countries (OPEC), which amounted to over 17 percent in 1985 (the year before the collapse of world oil prices), shrank to below 7 percent in 1990.

Tourism and Unilateral Transfers

Measured in terms of arrivals and foreign exchange receipts, Portuguese tourism had grown at a phenomenal rate since the early 1980s. Foreign arrivals, which averaged about 7.3 million in 1981-1982, expanded sharply each year thereafter, stabilized at between 16 and 17 million during 1987-89, and then increased to an estimated 18.4 million in 1990. Receipts from tourism rose from US$1.15 billion in 1980 to US$3.58 billion in 1990.

Portugal loss

In 1990 unilateral transfers reached US$6.5 billion (22 percent of Portugal's current account receipts), of which 73 percent were private, mainly emigrant remittances. About three-fourths of the emigrant remittances originated in Western Europe (mainly France) and one-fifth in North America (mainly the United States). These private inflows not only contributed to the country's foreign exchange earnings, but also represented a significant component of Portuguese household savings.
Gross public transfers in favor of Portugal amounted to US$1,740 million in 1990, of which nearly half (US$837 million) represented structural funds from the EC in support of the country's economic and social modernization. The European Social Fund assisted in vocational and professional training; other funds participated in the Specific Plan for the Development of Portuguese Agriculture (Plano Económico para o Desenvolvimento da Agriculltura Portuguêsa--PEDAP) and the Specific Plan for the Development of Portuguese Industry (Plano Económico para o Desenvolvimento da Indústria Portuguêsa--PEDIP). The Portuguese government was required to cofinance projects funded by these EC transfers. Although Portugal no longer was a member of EFTA, the latter continued to assist the former member country in its economic restructuring efforts. Finally, included in the category of official unilateral transfers were United States government military and economic grants that totaled some US$160 million annually for the use of the large United States Air Force base in the Azores.

Foreign Direct Investment

Foreign direct investment increased at an extraordinary pace after Portugal's accession to the EC. From a modest commitment of around US$166 million in 1986, the annual inflow of investment controlled and managed by foreigners rose sharply in the following years, reaching US$2.7 billion in 1991. At the end of that year, the accumulated stock of direct foreign investment exceeded US$8 billion, or eight times its value at the end of 1986.
From the perspective of multinational firms, Portugal was a strong export base to the emerging single market of 327 million high-income consumers, and since the mid-1980s the country had become especially competitive in attracting foreign investment. These attractions included political stability and a hospitable investment climate that included EC investment subsidies, the lowest wage scale among the EC-12, and programs of economic deregulation and privatization, as well as robust national economic and export growth.

Sliding Euro

The participation of EC-based investors in the annual investment flow to Portugal increased from less than half of the total in 1985-86 to about 70 percent from 1987 to 1990, Britain being the principal country source. Interesting trends in the composition of this investment could be discerned. Britain was the leading country of origin throughout this period, but the United States share fell sharply from 18 percent of the total investment in 1985-86 to less than 3 percent in 1989-90. Within the recently enlarged EC, Spain emerged as a significant direct investor, increasing its share from only 3 percent of Portuguese new investment in 1985-1986 to over 13 percent in 1989-90. Brazilian investors, whose share was negligible in 1985-86, increased their participation to around 7 percent in 1989-90.
Manufacturing, the destination of just under half of foreign investment inflow in 1985-86, received only 27 percent of the total in 1988-89; by contrast, the services sector's share in total investment flow rose from 45 percent in 1985-86 to over 60 percent in 1988-89. Within that sector, banking and insurance increased their participation, although investment in wholesale and retail trade and in hotels and restaurants continued to be significant, reflecting foreign investor participation in Portugal's booming tourism industry. Several new investment projects in the automotive industry were being considered in the spring of 1991, including participation by Japanese and South Korean firms. None, however, approached in scale the Ford-Volkswagen commitment to organize an automotive complex at Sines. This joint venture capitalized at US$3.2 billion was to manufacture a new European minivan.
Portugal, unlike many other middle-income countries, was remarkably hospitable to foreign investment (foreign-owned enterprises were legally exempted from nationalization during 1975-76). The growing pace of privatization since 1988, however, gave rise to debate regarding the ultimate ownership and control of major state firms being divested. One school of thought anticipated that privatization would "de-Portugalize" vital sectors of the economy. To some degree, Prime Minister Cavaco Silva shared this anxiety: "At the same time, we shall have to foster economic groups in Portugal. These were destroyed at the time of the revolution with nationalization. We need them, as otherwise foreigners will come in and take over our enterprises and economic strategy will be determined from abroad. Thus we are supporting the new entrepreneurs in industry and agriculture."
Despite the formation of new Portuguese groups able to compete against foreign-based multinational companies, it was doubtful that these national firms were sufficient in number, risk capital, and managerial-technical know-how to absorb most of the large enterprises scheduled for divestiture.
Although the government had succeeded in limiting foreign participation in a number of key enterprises, including the withholding of a temporary "golden share" for the state, such limits on foreign direct investment were to become illegal in 1995, when Portugal's capital movement regulations would come fully into compliance with those of the rest of the EC members.
Consequently, the prospect of losing national control over large branches of the economy appeared to be the inevitable price of securing Portugal's economic future and closing the income gap between the Portuguese and their more prosperous neighbors.