Brazil: An Import-Substitution Success Story

Heather Jacobson Economic Development April 15, 2002

Brazil, unlike many of its developing country brethren, succeeded in using import-substituting industrialization to build a strong and vibrant industrial sector while still maintaining strong agricultural output. However, Brazil continues to struggle with several significant problems: (1) the lack of rule of law and the ensuing crime and corruption problems; (2) a persistent trade deficit, exchange rate instability and other macroeconomic weaknesses; and (3) regional disparity of income and living standards between the affluent, industrialized southwest, and the rural, isolated northeast. In this paper, I will demonstrate that both Brazils successes and its failures were the outcome of its economic resources and its political history.

I.

Brazils Import Substitution Success Story

Brazils economic successes were primarily due to the countrys preexisting economic inputs and its political history: the availability of land, labor and natural resources allowed the country to maximize import substitutions benefits, while well-timed changed in political leadership ended import substituting policies before their negative effects on terms of trade and monetary policy could become too severe. A. Favorable Pre-Conditions for Developing Import-Competing

Industry
One of the main reasons why Brazil succeeded where others failed is that it had in place preconditions that permitted it to maximize the potential benefits and minimize some of the negative effects of import-substituting policies. 1. Preexisting Economic Inputs a) Land The southern half of Brazil, in which the majority of European immigrants chose to settle, has good soil and adequate rainfall, and proved to be an excellent source of exportable agriculture.1 Its virtually unlimited expanse encouraged the development of economies-of-scale farming, in which the productivity of labor was extremely high. b) Labor Brazils labor force was also large and highly productive from an early date. From 1875 until 1960, about 5 million Europeans emigrated to Brazil, settling mainly in the four southern states of Sao Paulo, Parana, Santa Catarina, and Rio Grande do Sul.2 Even more importantly, perhaps, the importation of slave labor and institution of a plantation economy in the agricultural sector pushed white laborers out of agricultural work, creating a large, ready work force in the cities. It is not accidental that industrialization took place in these pockets of concentrated labor force. c) Natural Resources

Bureau of Western Hemisphere Affairs, US Department of State, Background Notes: Brazil, April 2001, available at http://www.state.gov/r/pa/bgn/1972.htm (last accessed 1/29/02). 2 Bureau of Western Hemisphere Affairs, US Department of State, Background Notes: Brazil, April 2001, available at http://www.state.gov/r/pa/bgn/1972.htm (last accessed 1/29/02).

Finally, Brazil has sizable amounts of iron ore, manganese, bauxite, nickel, uranium, gemstones, oil, wood, and aluminum. These resources have been crucial to the success of Brazils industrialization, because the provided many of the necessary inputs to manufacturing, decreasing the industrial sectors dependence on importing raw materials from abroad.3 Brazil also has tremendous hydroelectric capacity through its significant share of internal waterways hydroelectric power, supplemented by domestic oil production, has decreased (though not eliminated) the industrial sectors dependence on foreign energy supplies. 2. Early Development of Capital Availability

through Cash Crop farming

Under Portuguese rule, Brazil was one of Europes gardens, its economy geared to production of cash crops and mining of precious minerals for export back to Portugal or her trading partners. At independence in 1822, Brazil primarily exported sugar and gold. In the 1830s however, a surge in world coffee prices encouraged Brazilian farmers to switch to coffee production.4 Coffee is much cheaper to produce than sugar: first, it is a perennial crop, meaning that it did not need to be replanted every year like sugar cane, and therefore required much less labor to produce. It also requires less immediate processing than sugar, which must be extracted from the cane immediately. It is also cheaper to transport than either sugar or gold, being lighter per unit mass. The fall in cost of production and transport, in addition to the high price for coffee set by the global market, made coffee production a highly profitable venture. The expansion of transportation infrastructure into the interior, combined with the freeing up of a portion of the agricultural work force (mostly freed slaves), allowed Brazil to expand agricultural production into other export sectors such as cotton, tobacco, cocoa, and even rubber.5 As a result of its highly profitable agricultural exports, Brazil by the mid 1850s was flush with cash, mostly in the hands of rich plantation owners. With the help of an available work force in the cities and favorable government policy, this capital availability gave rise to a nascent, indigenous industrialization. With no central governmental planning or significant impact of the structure of the economy, individual capitalists began to develop a light manufacturing industry geared toward the processing of home-grown inputs: textiles, clothing, food products, beverages, and tobacco.6 At the beginning of the 20th century, industry remained a negligible part of Brazils GDP, but continued to grow steadily. If Brazil, like Europe and the United States, had had half a century in which to allow its industry to develop, it is likely that the Brazilian manufacturing sector would have eventually caught up with its developed world counterparts, with little need for governmental assistance. In the 1930s, however, the bottom fell out of the world coffee market.7 GDP fell; the terms of trade turned against Brazil for the first time; and public debt
3

Bureau of Western Hemisphere Affairs, US Department of State, Background Notes: Brazil, April 2001, available at http://www.state.gov/r/pa/bgn/1972.htm (last accessed 1/29/02). 4 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0054) (last updated April 1997; last accessed 11/12/2002). 5 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0054) (last updated April 1997; last accessed 11/12/2002). 6 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0057) (last updated April 1997; last accessed 11/12/2002). 7 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0057) (last updated April 1997; last accessed 11/12/2002).

began to amass alarmingly. Private finance was no longer available for industrialization, at a time when the Brazilian government began to realize that it could no longer depend on primary product exports, and needed to diversify the economy. B. Import Substitution Policy: Reasons for Success As the previous section made clear, one of the reasons that Brazil was able to build a successful import-competing industrial sector was that it had within its borders most of the economic inputs needed to build a competitive industry. In that sense, Brazil was very much a poster-child of the reason for import-substituting policies the nascent industries had the potential to succeed, and only needed a bit of protection while they mastered the learning curve and achieved economies of scale. Nevertheless, Brazil was subject to the same downsides that plague any country attempting to implement import-substituting strategies. First, not all the inputs were there; in steel production, for example, Brazil was forced to import the coke needed to smelt iron ore. Particularly in the early days, before Brazils intensive investment in hydroelectric infrastructure, the country was also heavily dependent on foreign oil to fuel industrialization. As industrialization progressed and became more capital-intensive, moreover, the need for capital goods and semi-processed inputs from Western Europe also increased. Second, although Brazil had enough surplus labor and land that industrialization did not detract from agricultural export, monetary policies designed to discourage imports also dampened the foreign demand for Brazilian exports, which still accounted for the bulk of the countrys GDP. Third, the governmental push to expand the manufacturing sector, combined with its need to finance the trade deficit, caused it to take on an ever-increasing amount of public debt.8 And finally, Brazilian industry, like any sector shielded from competition, ran the risk of never learning to be competitive. As Section C will show, many of these problems lingered even throughout Brazils years of explosive growth, and were responsible for the economys collapse in the early 1980s. However, this section demonstrates that through political luck of the draw, a military coup changed the course of economic policy just at the point where the benefits of import-substitution had run their course, and the detriments were about to take center stage. By changing to an aggressive export-promoting strategy just as the import-competing industry had developed enough to strike out on its own, Brazil was able to overcome the hurdle that stymies most import-competing development strategies, and experienced unprecedented economic growth on the strength of a healthy agricultural sector as well as a rapidly expanding manufacturing sector. 1. Early Import Substituting Policy Brazils policy of import substitution began unintentionally. As a result of the everincreasing price of foreign-manufactured consumer goods imports relative to domestic primary product exports, Brazilian inflation rose significantly. In 1945, in an effort to control inflation without devaluing the cruzeiro (which would simply have made imports even more expensive), Brazil placed import controls on consumer goods. In so doing, the government unintentionally provided protection to Brazils import-competing consumer goods industry, with the result that growth in that industry soared.
8

Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0058) (last updated April 1997; last accessed 11/12/2002).

Noting this effect and realizing Brazils need to reduce its dependence on expensive manufacture imports, Brazil embarked in the early 1950s on a more explicit policy of importsubstitution industrialization. An important instrument of this policy was the use of foreignexchange controls to protect selected segments of domestic industry and to facilitate the importation of equipment and inputs for them. 9 Brazils import-substitution policies were wildly successful in terms of economic growth and economic diversification. Between 1950 and 1961, GDP grew an average of 7% per year. Industry was the engine of this growth, with an average annual growth rate of over 9 percent between 1950 and 1961, compared with 4.5 percent for agriculture. The manufacturing sector also experienced a significant change in structure and orientation the focus shifted away from traditional industries, such as textiles, food products, and clothing, and more energy and capital was invested in the new industries, including manufacture of transport equipment, machinery, electric equipment and appliances, and chemicals.10 However, while fixing exchange rates at artificially high rates protects import-competing industries, it harms export-oriented industries by making their products more expensive. At this point, Brazil still relied heavily on exports, so the ensuing fall in exports created an acute balance of payments crisis. The government attempted to respond to this crisis by adopting a more flexible, multiple-exchange-rate system, under which different sectors and different goods were subject to different rates of exchange. At the same time, the government attempted to address competitiveness issues in the protected industrial sector, by enacting special programs designed to promote and streamline the industrialization program, to remove bottlenecks, and to promote vertical integration. The government gave special attention to industries considered basic for growth, notably the automotive, cement, steel, aluminum, cellulose, heavy machinery, and chemical industries.11 Despite these reforms, the performance of the export sector improved only modestly.12 Sluggish exports, an ever-increasing need for expensive industrial and consumer good imports, and uncontrolled accumulation of public debt threatened to overwhelm Brazils prospects for further economic growth. From 1962-67, the GDP growth rate fell by an average of 4% each year, and the industry growth rate by an average 3.9% each year, due to the inability of the government to implement policies to effectively control inflation and deal with the balance of payments crisis. 13 Had it not been for a fortuitous change in political regime, it is like that Brazil would have fallen into the economic pit from which so many of its neighbors are still struggling to emerge. 2. 1964-80: New Export-Oriented Growth

Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0058) (last updated April 1997; last accessed 11/12/2002). 10 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0058) (last updated April 1997; last accessed 11/12/2002). 11 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0058) (last updated April 1997; last accessed 11/12/2002). 12 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0058) (last updated April 1997; last accessed 11/12/2002). 13 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0059) (last updated April 1997; last accessed 11/12/2002).

Brazils economy was rescued by a 1964 coup, which instituted military rule and embarked on an aggressive series of economic reforms aimed at reducing inflation, at removing some of the distortions of import-substitution industrialization, and at modernizing capital markets. The regime gradually introduced incentives to direct both domestic and foreign investment, and tackled balance of payments problems by reforming and simplifying the foreignexchange system. In addition, the regime introduced a mechanism of periodic devaluations of the cruzeiro, taking into account inflation. Finally, the military government adopted measures to attract foreign capital and to promote exports, and poured public funds into infrastructure expansion and the development of state-owned enterprises.14 As a result of these reforms and overall desirable global economic conditions, Brazil experienced phenomenal economic growth from 1968-73: GDP grew by an average of 11.1% per year, driven by the industrial sectors 13.1% average growth rate. Within industry, the leading sectors were consumer durables, transportation equipment, and basic industries, such as steel, cement, and electricity generation. The post-1964 reforms were in particular aimed at solving Brazils balance of payments crisis, and as a result the export sectors grew significantly, not only in manufactured goods but also in commodities. The trade deficit remained however, for two reasons. First, the expansion of the industrial sector included considerable modernization, which in this context meant an increase in the capital/labor ratio of production inputs. The necessary capital goods were not obtainable domestically, so Brazil was forced to import large quantities of capital goods and basic and semiprocessed inputs. The share of intermediate goods imports in total imports increased from 31.0 percent in the 1960-62 period to 42.7 percent in 1972, and that of capital goods, from 29.0 to 42.2 percent. Second, rising per capita income in industrial cities increased demand for luxury consumer goods such as automobiles and household appliances, which were imported in increasing numbers. The total value of imports rose from US$1.3 billion to US$4.4 billion. Despite the continuing trade deficit, however, the reforms succeeded in their goal of reversing the balance of payments trend. Brazils spectacular economic growth attracted foreign investors in droves, and the massive inflow of foreign capital that resulted was more than sufficient to compensate for the negative terms of trade. A comparison of the 1960 and the 1975 shares of the various industrial sectors in total value added by industry reveals a continuation in the relative decline of nondurable industries, notably textiles, food products, and beverages, and an increase in machinery, from 3.2 to 10.3 percent. The relative shares of most of the remaining industries, however, did not change significantly in the period. In the 1968-73 period, personal income became more concentrated and regional disparities became greater. Industrial expansion took place more vigorously in the Center-South Region, which had benefited most from the import-substitution industrialization strategy. Its per capita income considerably exceeded the national average, its infrastructure was more developed, and it had an adequate supply of skilled workers and professionals. The region was therefore able to take advantage of the opportunities and incentives offered by the military regime. Although a special regional development strategy existed for the Northeast, it promoted a distorted industrialization that benefited only a few of that region's large cities; the Northeast's linkages with the Center-South were stronger than its linkages within the region. The
14

Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0059) (last updated April 1997; last accessed 11/12/2002).

combination of a harsh climate, a highly concentrated land-tenure system, and an elite that consistently resisted meaningful change prevented the Northeast from developing effectively.15 C. Negative Effects of Import Substitution Policy Brazils economic growth during the 1960s and 1970s was driven by its industrial growth, but was supported by global economic stability and the governments efforts to maintain competitiveness in its export sectors. Although the terms of trade deficit remained large, it was compensated for in large part by massive influxes of foreign investment; the remaining balance of payments deficit was largely masked by high inflation. In the mid-1970s, the oil shock greatly increased the cost of all manner of foreign imports; at the same time, the government unwisely chose to renew its old import-substituting policies in an effort to expand and diversify manufacturing. Its main components were to promote import substitution of basic industrial inputs (steel, aluminum, fertilizers, petrochemicals), to make large investments in the expansion of the economic infrastructure, and to promote exports. The import-substituting policies of the government had their intended effect, and throughout the 1970s GDP grew nearly 7% per year. However, it was the unintended effects of the policy, placed in an inhospitable global context, that had the greatest effects on Brazils economy. Expansion of industry at a time when oil prices had skyrocketed meant a huge jump in Brazils import costs, not only in terms of energy but also in semi-processed inputs. Efforts to promote exports did not bear fruit for several years, and were therefore unable to offset the massive current account deficit, which increased from US$1.7 billion in 1973 to US$12.8 billion in 1980. Brazil borrowed billions in dollar-denominated debt from petro-dollar rich countries to finance its industrial expansion and trade deficit, and rising inflation and rising world interest rates served to balloon public debt to a nearly unmanageable amount; foreign debt rose from US$6.4 billion in 1963 to nearly US$54 billion in 1980.16 These problems caught up with Brazil in the 1980s, causing economic stagnation17 and hyperinflation.18 Nevertheless, even the industrialization of the early 1970s had a positive effect: the balance of trade moved from an average deficit of US$3.4 billion in the 1974-76 period to an average surplus of US$10.7 billion in the 1983-85 period. In 1985 the share of manufactures (processed and semiprocessed) of total exports reached 66 percent, and between 1971-75 and 1978-83 the share of basic input imports in total imports declined from 32.3 percent to 19.2 percent. Once Brazil corrected its monetary and fiscal problems, these factors helped the country regain economic growth in the 1990s.

15

Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0059) (last updated April 1997; last accessed 11/12/2002). 16 Library of Congress, Brazil: A Country Study, available at http://memory.loc.gov/cgi-bin/query/r? frd/cstdy:@field(DOCID+br0060) (last updated April 1997; last accessed 11/12/2002). 17 During the 1980s per capita income fell by an average 0.5% per year. See id. During the 1980-1992 period, Brazilian GNP grew just 15% in an highly inflationary and recessive environment. See BNDES, Economic Aspects, supra note 1. 18 By 1993, inflation had reached an annual rate of nearly 5,000%. See Bureau of Western Hemisphere Affairs, US Department of State, Background Notes: Brazil, April 2001, available at http://www.state.gov/r/pa/bgn/1972.htm (last accessed 1/29/02).

D. 1990s: Correcting the Mistakes of the Past Beginning in 1990, the Brazilian government embarked on several reform programs designed to cure the fundamental flaws responsible for the economic crisis of the previous decade. The most important of these reforms were economic stabilization, privatization, and deregulation. These reforms stabilized the currency and rationalized market structures, allowing the Brazilian economy to recover and improving access to foreign direct investment and long-term debt.19 This Section discusses each reform in turn. 1. Economic Stabilization: The Real Plan In July 1994, Brazil embarked on an ambitious economic stabilization plan, known as the Real Plan (Plano Real) for the new currency it instituted, the real.20 In order to reduce inflation, the Real Plan implemented a managed exchange rate, de-indexation, structural reform, and privatization.21 The results were dramatic: by 1998, inflation reached a low of 2.5%.22 As a result, growth resumed, and the country experienced a significant increase in foreign direct investment.23 Moreover, because Brazil has high labor market flexibility, price stabilization in Brazil did not cause a large increase in unemployment as it did in many other Latin American countries, so the incidence of poverty also decreased. 24 While the Real Plan succeeded in bringing inflation under control and jump-starting economic growth, in doing so it revealed the enormous fiscal and current account deficits that had existed throughout Brazils development history, and which had simply been masked for a time by hyperinflation. 25 Over time, these deficits have led to mounting public and external liabilities, compounding the balance of payments deficit.26 By the end of 1998, Brazil could no longer maintain a managed exchange rate in the face of the mounting current account deficits, and in January 1999 it was forced to allow the exchange rate to float freely. Despite dire predictions, the subsequent freefall of the real against the dollar did not produce significant inflation; in 2000, inflation remained at 6%.27 However, it did not significantly improve Brazils trade balance, either; the current account deficit remained well above 4% of GDP.28 Nevertheless, the Real Plan had its desired effect on Brazils overall balance of payments: thanks in large part to fiscal stabilization as well as the macroeconomic reforms discussed below, Brazil experienced a record inflow foreign direct investment of $31 billion in the year 2000, which more than covered the 2000 current account deficit of $25 billion. While the current account deficit remains an important problem to be addressed, Brazils reforms
19 20

BNDES, Economic Aspects, supra note 1. State Department, Background Notes: Brazil, supra note 5. 21 World Bank, Brazil, Country Brief, January 1999, available at http://lnweb18.worldbank.org/External/lac/lac.nsf/ 4c794feb793085a5852567d6006ad764/abe36259ca656c4985256914005207e3?OpenDocument (last accessed 1/29/02). 22 State Department, Background Notes: Brazil, supra note 5. 23 World Bank, Brazil, Country Brief, supra note 7. 24 Id. 25 Pinheiro, Giambiagi, & Moreira, Brazil in the 1990s: A Successful Transition? supra note 3, at p. 15. 26 Id. 27 State Department, Background Notes: Brazil, supra note 5. 28 Rogrio L. F. Werneck, Brazils Rough Passage, AMERICAS INSIGHTS, Institute of the Americas, November 2001, p. 2.

and sustained economic growth appear to be sufficient to assure a capital account surplus large enough to keep the expanding economys external-financing problems at bay. 29 E. Privatization Brazil began its privatization process in 1990, with the National Privatization Program. The program was maintained through several changes in administration, and by 1998, Brazil privatized over 100 state-owned enterprises, and generated a total of US$73.3 billion in proceeds and debt transfer.30 The success of the privatization effort was largely due to the decision in engage the state governments in the process, which led to the sale of several electricity distribution companies. In addition, the decision to amend the constitution to discontinue public monopolies and end discrimination against foreign subsidiaries allowed Brazil to privatize the telecommunications, electricity and mining and steel, which contained Brazils largest SOEs.31 Privatization forced companies to become more efficient and to adopt better commercial practices. This increased their profitability and improved their credit, which in turn facilitated the new investment. All privatized sectors have seen rehabilitation of physical networks and increases in productivity;32 many SOEs that were nearly bankrupt at the time of privatization have recovered and are now successfully competing on the market. 33 Despite these successes, however, it is imperative to remember that privatization, particularly in infrastructure, must be accompanied by comprehensive and rational regulation to promote healthy competition.34 F. Deregulation Deregulation was the third important reform instituted during the 1990s. First, Brazil amended its constitution in order to discontinue public monopolies in infrastructure, and to equalize the treatment afforded to national and foreign companies.35 Second, Brazil set out to streamline the bureaucratic and regulatory requirements imposed on business. Legal restrictions on cross-border traffic; price controls in transportation sectors; and nationwide price equalization for goods and services such as fuel and power were eliminated, allowing businesses to respond more readily to market forces and profit incentive. The result has been a substantial increase in private investment in Brazil, both in domestic capital and FDI.36 Nevertheless, deregulation in Brazil is an enormous task, and one that will take decades; in addition, as privatization continues Brazil must turn its attention to reregulation, to ensure that industries are constrained by regulations designed to maximize competition, but not hampered by regulations that suppress it.

II.

Current Development Status

The experience of Brazil demonstrates that import-substituting policies can be effective if (1) sufficient economic inputs exist and (2) the policies are temporary, and discontinued as soon as industrialization is well under way.

29
30

Id. Pinheiro, Giambiagi, & Moreira, Brazil in the 1990s: A Successful Transition? supra note 3, at p. 11. 31 Id. 32 In telecommunications in particular, the density of fixed lines more than doubled after privatization. Id. at p. 12. 33 E.g., steelmaker CSN and airplane manufacturer Embraer. Id. 34 Id. 35 Id. at p. 13. 36 Id. At p. 13-14.

III.

Remaining Development Challenges

In order to maintain the favorable course on which the Brazilian economy is heading, the government must continue to practice fiscal discipline, to build that discipline into the structure of the economy in rule-based form, and to extend the structural reforms into other sectors of the economy. Fiscal discipline entails holding down deficits in good times say, to less than 2 percent of GDPand ensuring that public debt (to finance small deficits) remains at reasonable levels.37 To this end, Brazil must build up its export sector, in order to reduce the amount of public debt needed to finance imports, and to reduce Brazils vulnerability to external shocks. 38 More importantly, however, Brazil must build these stabilization policies into its legal framework so long as policies to manage macrofinancial volatility are changeable as the political wind changes, they will not engender stability and continuity, and will be unable to attract investment. In order to create a lasting increase in long term investment in Brazils economy, Brazil must establish binding rules of fiscal policy that transcend political administration.39 One suggested method of accomplishing this goal is to establish an independent central bank, with a clear mandate to support currency and fight inflation.40 The new administration must also extend structural and institutional reform into new areas, such as the judiciary and capital and labor markets, in order to create an institutional environment more conducive to investment and productivity growth. 41 The focus in these reforms must be on changes that will encourage investment and spur productivity and exports; examples include strengthening of the judiciarys ability to enforce contracts; simplifying the process for obtaining investment capital; and streamlining the processes whereby microenterprises can qualify for export licenses.42 B. Development of Rural Areas The Washington Consensus considered equity to be a desirable byproduct of increased economic efficiency, rather than a development objective in its own right; Brazils development agenda during the 1990s reflected this bias, focusing on maximizing economic efficiency through legal and economic reform.43 Today, however, equity concerns are increasingly at the forefront of development policy in Washington and Latin America alike. In the rhetoric at least, poverty reduction and equity now dominate.44 In Brazil, equity concerns require a concentration of resources in the depressed northeast region of the country. Primarily a rural, agricultural sector, the northeast lacks well-distributed rainfall, good soil, adequate infrastructure, and sufficient development capital.45 The disparity
37

Birdsall, Nancy and Augusto de la Torre (2000), Washington Contentious, p. 21, available at http://www.ceip.org/files/pdf/er.Contentious.pdf (last accessed 02/02/02). 38 Pinheiro, Giambiagi, & Moreira, Brazil in the 1990s: A Successful Transition? supra note 3, at p. 7. 39 Birdsall & de la Torre (2000), Washington Contentious, supra note 37, at p. 23 40 Pinheiro, Giambiagi, & Moreira, Brazil in the 1990s: A Successful Transition? supra note 3, at p. 25. 41 Id. at p. 7. 42 Id. at p. 25. 43 Birdsall & de la Torre (2000), Washington Contentious, supra note 37, at p. 3. 44 Id. 45 State Department, Background Notes: Brazil, supra note 5.

between the Northeast and other regions of Brazil in regional development, education, health, land and capital assets, and public spending largely account for Brazils national poverty levels and its high inequality indices.46 Development of the Northeast and other depressed regions is not only necessary for equity reasons, however; these regions, although producing mostly for self-sufficiency, are increasingly important as exporters of forest products, cocoa, and tropical fruits, and constitute an untapped resource for improving Brazilian terms of trade.47 The Cardoso administration identified "social justice" as a priority of its economic development program, and focused on improving the scope and quality of poverty alleviation programs, such as programs designed to improve quality of education and the management of public health programs.48 International institutions and NGOs are proving to be valuable partners in this effort in January 2002, the Inter-American Development Bank approved a $30 million loan to Banco do Nordeste do Brasil, to support a massive expansion of its microenterprise lending program in the Northeast. The loan is large enough to provide an average of $500 to 120,000 micro-entrepreneurs. This type of program is significant in the Northeast, where micro-enterprise firms that employ from one to five persons account for 61 percent of the economically active population in the Northeast.49 The new administration must continue to build on these efforts. First, it must devote resources to improving social services such as education and health care, as well as infrastructure such as roads and telecommunications, which are essential in the effort to integrate these outlying sectors into the national economy. Second, the administration must encourage foreign direct investment and micro-lending in the area, to improve both the absolute amount of economic activity as well as the productivity of existing enterprises. Finally, the administration should cultivate export industry in these sectors, which will not only bring greater prosperity to the individuals involved, but will help to improve the countrys current account balance and reduce its dependence on foreign capital inflows. C. Environmental Sustainability Issues D. Corruption In Transparency Internationals latest surveys of local and international perceptions, Brazil ranked 45th on the list of the 99 most corrupt nations in the world.50 Only a decade after a Brazilian president was impeached on corruption charges, current President Cardosos own administration was rocked by several corruption allegations. The attention given these scandals by the press indicates that the Brazilian population is aware of the detrimental effects of corruption to good governance, accountability and economic efficiency, and popular pressure is forcing governments to at least espouse the cause of anti-corruption reform. However, as the Transparency International survey indicates, much remains to be done in Brazil. In particular, the administration must focus on petty corruption, the ubiquitous bribery and political
46 47

World Bank, Brazil, Country Brief, supra note 7. State Department, Background Notes: Brazil, supra note 5. 48 For example, the Cardoso administration instituted a program that has at its goal 100% primary school completion by 2007. See World Bank, Brazil, Country Brief, supra note 7. 49 Inter-American Development Bank, IDB Approves $30 Million to Support Expansion of Microenterprise in Brazils Northeast, PRESS RELEASE, January 9, 2002, available at http://www.iadb.org/exr/PRENSA/2002/cp0302e.htm (last accessed 1/29/02). 50 Birdsall & de la Torre, Washington Contentious, supra note 37, at p. 15.

clientage that goes on in the low levels of Brazilian bureaucracy and that most directly affects the daily life of private citizens. First, while an open trade policy does have its negative side effects, the PT should recognize that it also has a positive side effect in the fight against corruption: There is nothing like competition from outside to reduce the space for unproductive rent seeking by private firms, and nothing like eliminating tariffs and quotas to eliminate the bureaucratic discretion that invites bribery. 51 This paper recommends that Mr. da Silva factor this particular side effect into the equation when evaluating the desirability of the FTAA. Second, the judiciary must be reformed to reduce corruption in the rendering of judicial decisions. Judges must be better compensated, to reduce the demand for bribes, while court administration must be streamlined to improve case turnover, in order to reduce the supply of bribes in the form of speed money. The independence of the judiciary from other branches of government must be strengthened, to reduce its vulnerability to political interference on behalf of influential litigants. 52 Finally, the new administration must continue the effort to streamline bureaucratic and regulatory processes to eliminate the opportunity for graft; to institute transparency and reporting mechanisms to reduce the opportunity to get away with it; and to institute greater supervision of regulatory agencies.53

51 52

Id. Id. 53 Id.