Brazil: Lessons From ’29

In the 1930s, Brazil recovered from the recession more quickly than the United States. The key to understanding what happened lies in the price fixing policy for coffee that, by guaranteeing the income levels of the plantation owners, allowed for the expansion of the manufacturing sector. During the 1920s, the government artificially maintained coffee prices by buying national production using external loans. The crash of 1929 dried up the sources of foreign financing and forced both the central government and the State of São Paulo to interrupt the scheme. Between 1928 and 1930, the price of coffee dropped almost 40% and caused the falls in export revenues and GDP. In 1931, the National Coffee Council began buying and destroying stocks.

From 1931 to 1932, the government purchases represented 30% of exports, with 65% of the financing coming from taxes on the same and 35% from Banco de Brasil and National Treasury credits. Between 1933 and the end of 1934, the financing ratios changed, with domestic credit taking on the primary role.

It is estimated that Brazil’s GDP fell 2% in 1930 and another 3% in 1931, but, in 1932 it was growing again and, in 1933 had already overtaken the figure for 1929. Despite the fact that the recession was serious, it only lasted two years. However, the impact to the government budget was severe, with a suspension of the servicing of external debt between 1931 and 1932, followed by a readjustment plan in 1934, culminating in a default being declared by Getúlio Vargas, in 1937.

At first sight, the differences between the Brazil of the past and today’s country are more striking than the similarities. Coffee has lost its importance among the list of exports, industrial production is more diversified and the majority of external debt is now in the hands of the private sector.

But, the parallels are not entirely inconspicuous. Commodities still account for 50% of Brazil’s exports and their prices have halved over the last six months. Credit has disappeared. The government has shown a preference for fiscal programs that might avoid a reduction in GDP. And the operation to save banks and businesses could end up transferring the external debt back to the public sector.

We have become used to viewing fiscal incentives with distrust – the default on external debt in 1937 is just one example. There were also the policies adopted in response to the oil crisis of 1979 and the disappearance of external credit, in 1982. Those policies tried to avoid adjustment costs and caused the default in 1987, which was followed by the Collor Plan.

If the times call for anti-cyclic measures, one would hope that they take the form of cuts to the Selic rate. This response is far preferable to an increase in government spending, and better than the little transparent policy of stimulating credit through the official banks (as being tried), for the past has shown that quasi-fiscal policies tend to create skeletons that refuse to remain in the closet. The fall in the Selic rate may open up budgetary space for horizontal tax cuts to the payroll and the advantage of such a measure is that rate cuts are reversible, as opposed to expenditure.

Finally, one other mark of the 1930s was an increasing trend toward commercial protectionism, begun by the Americans with the introduction of the Smoot-Hawley Tariff Act. As then, the US has once again begun with this poor practice. In Brazil, the government announced, on 28th January, a requirement for advance import notice spanning 17 sectors, but later revoked the decision. Other measures are bound to follow…

4 Responses to "Brazil: Lessons From ’29"

  1. sage   February 16, 2009 at 3:19 pm

    i agree 100%. the selic needs to be gradually reduced below 10%. the fed. govt. should also use this opportunity to reduce/simply/rationalize the tax code & tax rates across the board combined w/ robust enforcement. there s/b no fiscal stimulus over & beyond what is already part of the p.a.c.s program. The p.a.c.s stimulus needs to be specifically targeted toward infrastructure, healthcare & education. the lula govt. has always focused on targeting the base of the economic pyramid. this is not populism, this is ‘smart business’.also, the only way to bring down bank lending rates is for the govt. to enact legislation that allows the banks more freedom to cease collateral from deadbeat/defaulting lenders. a large % of lending rates comprise a ‘risk premium’ assigned by the banks to cover themselves against defaultees. the country is better managed than it has ever before been in it’s history. if the govt. can avoid policy mistakes (hindsight is always better than foresight), brazil actually has a chance of coming out of this crisis strengthened – gracas a deus!i need to also highlight that the external environment this time around is quite different for brazil as compared to 1929. brazil’s trade profile is today highly diversified, reserves are high & the banco central & finance ministry are quite sophisticated & determined in their approaches. the chinese & other asians are also starting to move U$ reserves into commodities & metals as a store of value, given the coming significant devaluation of us paper based on current us govt. fiscal & monetary policy. this will cause us to see a stabilization in price & demand for commodities & metals.

    • eliana   February 17, 2009 at 5:52 am

      good that we are in agreement. cheers!

  2. Sage   February 26, 2009 at 2:29 pm

    Saudi!