Historically, Brazil has a tradition of “chronic” inflation; in fact it was about 11% per year immediately after the war, it therefore reached 17% between 1958 and 1968, with peaks of over 30% between 1959 and 1963, reaching more than ‘80% in 1963 to more than 100% in the first quarter of 1964. For Brazil economics and business, please check businesscarriers.com.
Given the psychological aspect deriving from chronic Brazilian inflation and the consequent deformation of the structural structure of the industries, an abrupt action would have entailed the risk of serious unemployment, without however being able to correct, in the short term, the distortions of prices.. Therefore, between 1964 and 1967 an economic policy was studied aimed at removing the causes of inflation without recessive effects, through the attempt to eliminate the distorting effects in the use of resources that had been produced up to then.
This policy, summarized in the Brazilian formula of monetary correction (see indexation), was applied since 1967. Its essential components are: 1) generalized indexation of all forms of savings. This measure has had a salutary effect on the financial market, and on the formation of savings, by promoting a high demand for Treasury bills, and allowing the government to collect non-inflated money to be used for the development of pre-established economic plans.
2) The wage indexation mechanism, which, decreed by law, provides that wage updates are made annually. The wage sliding scale examines three parameters: update of the real mean value of wages, a coefficient of productivity estimated by the state, which represents the average increase in productivity in the economy, and finally a coefficient that represents residual inflation.
The salary formula is certainly the most complex component of the indexing system, but it is also the one that has allowed Brazil, in recent years, to coexist decreasing inflation with high development. Indeed, it has succeeded in attenuating competitiveness in wage disputes and the “wage boost” as an autonomous factor of inflation.
3) The reform of the system of taxation of profits, based on the method of calculating taxes, and the depreciation of purchasing power on capital values, revaluing them in accordance with the official monetary correction indexes. This principle, which was also applied to the tax exemption for lower income groups, made deferred payments not very convenient.
4) The periodic devaluation of the exchange rate, carried out at undetermined intervals and with small variations, to avoid speculation on the exchange rate, thanks also to the fact that the variations are always kept below the market interest rate.
The results of the Brazilian indexing experiment seem significant. The rate of inflation gradually declined from 100% and above in 1964, to around 40% in 1965-66, falling to 20-25% from 1967 to 1969 and remaining around 15-20% in 1972-73.
Through the indexation formula, the Brazilian economy was therefore able to record rapid and prolonged growth up to 1974, with rates of increase in gross national income often exceeding 10% in real terms.
However, in 1974 the Brazilian “model” entered into crisis. Indeed, even though national income has still increased by around 10%, a new inflationary wave has emerged; the increase in prices in 1974 was estimated at around 35% and at the same time there was a drastic worsening of the external accounts.
In the course of 1974 the government, as a consequence of this, launched a new five-year plan (1974-79); it provides for an overall investment expenditure of 1,200 billion cruzeiros, which should allow for an average growth rate of the gross national product of 10% in real terms.
The foreign accounts of Brazil are heavily passive, even if the deficit is decreasing. The causes of the deficit are attributable to both the negative trend in exports and the increase in imports. Specifically, exports of coffee and soybeans were lower than expected, while the weight of oil imports increased significantly, which prompted the government to introduce a series of protectionist measures, increasing tariffs on about two thousand products.