Trade in Romania

Romania

Beautiful floating Mosjeed of Romania

 

Formal Name: Socialist Republic of Romania.
Short Form: Romania.
Term for Citizens: Romanians.
Capital: Bucharest.

GEOGRAPHY

Romania in map

 

Area: 237,499 square kilometers.
Topography: Almost evenly divided among hills, mountains, and plains; mountains dominate center and northwest; plains cover south and east. Highest point, 2,544 meters.
Climate: Transitional from temperate in southwest to continental in northeast. Average annual precipitation, 637 millimeters.

SOCIETY

Population: 23,153,475 (July 1989); average annual growth rate 0.44 percent.
Ethnic Groups: 89.1 percent Romanian, 7.8 percent Hungarian, 1.5 percent German, 1.6 percent Ukrainian, Serb, Croat, Russian, Turk, and Gypsy.
Language: Romanian spoken in all regions; Hungarian and German commonly used in Transylvania and Banat. Systematic discrimination against minority languages.
Education: Mandatory attendance, ten years; literacy, 98 percent. Highly centralized. Marxist ideology and nationalistic values stressed at all levels. In 1980s technical and vocational education emphasized.
Religion: About 70 percent Romanian Orthodox, 6 percent Uniate, 6 percent Roman Catholic, 6 percent Protestant, 12 percent unaffiliated or other.
Health and Welfare: Free health care provided by state. Most serious health threats cancer, cardiovascular disease, alcoholism. Infant mortality rate, 25 per 1,000 live births (1989). In 1989 life expectancy for men 67.0 and for women 72.6 years. Pensions inadequate; health care for elderly generally poor. Rural areas neglected.

ECONOMY

Industry in Romania

 

Gross National Product: US$151.3 billion (1988), US$6,570 per capita, with 2.1 percent growth rate. Industry accounts for 52.7 percent, agriculture 14.9 percent, other sectors 32.4 percent (1987).
Administration: Extremely centralized, directed by communist party. Detailed economic planning. State ownership of most fixed assets.
Fuels and Energy: Once extensive oil and gas reserves nearing depletion. Increasing dependence on imported fuels. Coal reserves large but of poor quality. Coking coal reserves inadequate. Significant hydroelectric potential under development. Nuclear power program lagging badly.
Minerals: Deposits of ferrous and nonferrous ores, salt, gypsum. Increasingly dependent on imported iron ore.
Foreign Trade: Split almost evenly between socialist and nonsocialist countries. Large surpluses run during 1980s to repay foreign debt. Major exports metallurgical products, machinery, refined oil products, chemical fertilizers, processed wood products, agricultural commodities. Major imports crude oil, natural gas, iron ore, machinery and equipment, chemicals, foodstuffs.
Industry: Fuels production and processing, metallurgy, chemicals, machine building, forestry, food processing, textiles.
Agriculture: About 91 percent collectivized. Primary crops: corn, wheat, barley, oilseeds, potatoes, sugarbeets, fruits and vegetables. Cattle, sheep, hogs, and poultry widely raised.
Exchange Rate: 14.5 lei per US$1 in January 1989.

ECONOMIC STRUCTURE AND DYNAMICS

Evolution

From earliest times, the Romanian lands were renowned for their fertile soil and good harvests. As the Roman colony of Dacia, the region supplied grain and other foods to the empire for nearly two centuries. During the subsequent two millennia, a succession of foreign powers dominated the area, exploiting the rich soil and other resources and holding most of the native population in abject poverty. It was not until the middle of the nineteenth century that a unified, independent Romania finally emerged, opening the way for development of an integrated national economy.

Modern machines in Romania

But even after Romania had gained independence, foreign interests continued to dominate the economy. Large tracts of the best grain-growing areas were controlled by absentee landlords, who exported the grain and took the profits out of the country. Outsiders controlled most of the few industries, and non-Romanian ethnic groups--particularly Germans, Hungarians, and Jews-- dominated domestic trade and finance. The centuries of outside control of the economy engendered in the Romanian people an extreme xenophobia and longing for self-sufficiency--sentiments that would be exploited repeatedly by the nation's leaders throughout the twentieth century.
On the eve of World War II, agriculture and forestry produced more than half of the national income. Reflecting the country's limited economic development, about 90 percent of export income in 1939 was derived from raw materials and semifinished goods, namely grain, timber, animal products, and petroleum. The most advanced industry at that time, oil extraction and refining, was controlled by Nazi Germany for the duration of the war and suffered severe bombing damage.
For several years following the war, the devastated economy was burdened with reparation payments to the Soviet Union, which already by 1946 had expropriated more than one-third of the country's industrial and financial enterprises. By mid-1948 the Soviets had collected reparations in excess of US$1.7 billion. They continued to demand such payments until 1954, severely retarding economic recovery.
After the installation of a Soviet-styled communist regime, Romania's economic evolution would faithfully follow the Stalinist pattern. Adopting a centrally planned economy under the firm control of the PCR, the country pursued the extensive economic development strategy adopted by the other communist regimes of Eastern Europe but with an unparalleled obsession with economic independence. The development program assigned top priority to the industrial sector, imposed a policy of forced saving and consumer sacrifice to achieve a high capital accumulation rate, and necessitated a major movement of labor from the countryside into industrial jobs in newly created urban centers. The first step on this path was nationalization of industrial, financial, and transportation assets. Initiated in June 1948, that process was nearly completed by 1950. The socialization of agriculture proceeded at a much slower pace, but by 1962 it was about 90 percent completed.
Beginning in 1951, Romania put into practice the Soviet system of central planning based on five-year development cycles. Such a system enabled the leadership to target sectors for rapid development and mobilize the necessary manpower and material resources. The leadership was intent on building a heavy industrial base and therefore gave highest priority to the machinery, metallurgical, petroleum refining, electric power, and chemical industries.
Shortly after Nicolae Ceausescu came to power in 1965, PCR leaders reevaluated the development strategy and concluded that Romania would be unable to sustain the rapid rate of economic growth it had achieved since the early 1950s unless its industry could be streamlined and modernized. They argued that the time had come to assume an intensive development strategy, for which the term "multilateral development" was coined. This process required access to the latest technology and know-how, for which Ceausescu turned to the West.
Economic growth during the first twenty-seven years of communist rule was impressive. Industrial output increased an average 12.9 percent per year between 1950 and 1977, owing to an exceptionally high level of capital accumulation and investment, which grew an average 13 percent annually during this period. But with the concentration of resources in heavy (the so-called Group A) industries, other sectors suffered, particularly agriculture, services, and the consumer-goods (Group B) industries.
After 1976 the economy took a sharp downturn. A severe earthquake struck the country the following year, causing heavy damage to industrial and transportation facilities. Ceausescu's vision of multilateral development had made little headway, as the bureaucracy was unable to steer the economy onto a course of intensive development, which would have necessitated major improvements in efficiency and labor productivity. The population was demanding production of more consumer goods, and an incipient labor shortage was hindering economic growth. By 1981 the country was in a financial crisis, unable to pay Western institutions even the interest on the debt of more than US$10 billion accumulated during the preceding decade. Obsessed with repaying this debt as soon as possible, Ceausescu imposed an austerity program to curtail imports drastically, while exporting as much as possible to earn hard currencies. Rationing of basic foodstuffs, gasoline, electricity, and other consumer products was in effect throughout the 1980s, bringing the Romanian people the lowest standard of living in Europe with the possible exception of Albania. In April 1989, Ceausescu announced that the foreign debt had been retired, and he promised a rapid improvement in living conditions. Most foreign observers, however, doubted that he could fulfill this pledge.

FOREIGN TRADE

Goals and Policy

During the postwar era, Romania used foreign trade effectively as an instrument to enhance the development of the national economy and to pursue its goal of political and economic independence. In this context, earning a foreign-trade surplus was not a primary concern until the late 1970s. The primary goal, rather, was acquisition of the modern technologies and raw materials needed to create and sustain a highly diversified industrial plant. The export program was geared to earning the required hard currency to purchase these materials and technologies. But in the 1980s, the focus of foreign trade was shifted to curtail imports and run large hard-currency surpluses to repay the debt that had accrued in the previous two decades. Enterprises that produced for export received preferential treatment in resource allocation and higher prices for their output.

Foreign exchange graph

Foreign trade was a state monopoly. Trade policy was established by the PCR and the government, and its implementation was the responsibility of the Ministry of Foreign Trade and International Economic Cooperation. Subordinate to the ministry were special state agencies--foreign-trade organizations--that conducted all import and export transactions. In 1969 the ministry was reorganized to become essentially a coordinating agency, and within a year only three foreign-trade organizations remained under its direct control. This decentralization was short-lived, however, as the number of foreign-trade organizations was reduced from fifty-six in 1972 to forty in 1975, and all but four of these were returned to the ministry's control.

Trading Partners

Before World War II, the West accounted for more than 80 percent of Romania's foreign trade. During the postwar period up to 1959, however, nearly 90 percent of its trade involved Comecon nations. The Soviet Union was by far the most important trading partner during this period. But the PCR's insistence on autarkic development led Romania into direct confrontation with the rest of the Soviet bloc. In the late 1950s and early 1960s, Soviet leader Nikita Khrushchev had envisioned an international division of labor in Comecon that would have relegated Romania to the role of supplier of foodstuffs and raw materials for the more industrially developed members, such as the German Democratic Republic (East Germany) and Czechoslovakia. In April 1964, however, General Secretary Gheorghe Gheorghiu-Dej threatened to take Romania out of Comecon unless that organization recognized the right of each member to pursue its own course of economic development.

Export areas in Romania

As early as the 1950s, Gheorghiu-Dej had begun to cultivate economic relations with the West, which by 1964 accounted for nearly 40 percent of Romania's imports and almost one-third of its exports. When Ceausescu came to power in 1965, the West was supplying almost half of the machinery and technology needed to build a modern industrial base. In 1971 Romania joined the General Agreement on Tariffs and Trade and the following year it won admission to the IMF and the World Bank. In 1975 Romania gained most-favored-nation trading status from the United States.
Between 1973 and 1977, Romania continued to increase its trade with the noncommunist world and initiated economic relations with the less-developed countries. In 1973 about 47.3 percent of its foreign trade involved the capitalist developed nations, with which it incurred a large trade deficit that necessitated heavy borrowing from Western banks. During this period, major obligations to the IMF (US$159.1 million) and the World Bank (US$1,502.8 million) were incurred.
To gain greater access to nonsocialist markets, Romania set up numerous joint trading companies. By 1977 twenty-one such ventures were in operation, including sixteen in Western Europe, three in Asia, and one each in North America and Africa. Romania held at least 50 percent of the start-up capital in these companies, which promoted its manufactured goods and agricultural products abroad. In 1980 Romania became the first Comecon nation to reach an agreement with the European Economic Community (EEC), with which it established a joint commission for trade and other matters.
During the 1980s, however, trade relations with the West soured. Ceausescu blamed the IMF and "unjustifiably high" interest rates charged by Western banks for his country's economic plight. For its part, the West charged Romania with unfair trade practices, resistance to needed economic reform, and human rights abuses. In 1988 the United States suspended most-favored-nation status, and the following year, the EEC declined to negotiate a new trade agreement with Romania. Meanwhile, attempts to increase trade with the less-developed countries had also met with disappointment. After peaking in 1981 at nearly 29 percent of total foreign trade, relations with these countries deteriorated, largely because the Iran-Iraq War had cut off delivery of crude oil from Iran.

Evolution of Romania

Frustrated by the downturn in trade with the West and the lessdeveloped countries, Romania reluctantly returned to the Soviet fold during the 1980s. By 1986 socialist countries accounted for 53 percent of its foreign trade. But the Ceausescu regime continued to assert its independence, refusing to endorse the Comecon program that would allow enterprises to circumvent routine bureaucratic channels and establish direct business relationships with enterprises in other member countries. And he refused to cooperate in Comecon attempts to establish mutual convertibility of the currencies of the member states.

Structure of Exports and Imports

The assortment of export products changed dramatically during the postwar era. Before the war, raw materials and agricultural products accounted for nearly all export income, but in the 1970s and 1980s, the primary exports were metallurgical products, especially iron and steel; machinery, including machine tools, locomotives and rolling stock, ships, oil-field equipment, aircraft, weapons, and electronic equipment; refined oil products; chemical fertilizers; processed wood products; and agricultural commodities.

Import, export statistic of Romania

Retirement of the Foreign Debt

After 1983 Ceausescu refused to seek additional loans from the IMF or the World Bank and severely curtailed imports from hardcurrency nations while maximizing exports--to the great detriment of the standard of living. As a consequence, Romania ran balanceof -trade surpluses as large as US$2 billion per year throughout the rest of the decade. With great fanfare, Ceausescu announced the retirement of the foreign debt in April 1989, proclaiming that Romania had finally achieved full economic and political independence. Shortly thereafter, the GNA enacted legislation proposed by Ceausescu to prohibit state bodies--including banks-- from seeking foreign credits.

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.