The worst economic crises in Brazilian history

. May 03, 2019

Brazil is undergoing its slowest post-recession economic recovery in the country’s history. At the current pace, the Brazilian economy will only return to 2014 levels in Q3 2023—almost one decade after the start of the two-year recession. One piece of data exemplifies the slow pace of growth: Brazil’s total spending on wages, including social security benefits, is expected to rise by only 1.1 percent this year, to BRL 1.18 trillion.

Not long ago, Brazil was the world’s darling, considered one of the countries possessing the most potential for growth, a sentiment best captured by The Economist‘s famous cover, depicting Christ the Redeemer as a rocket launching into space. Becoming a world power, it seemed, would only be a matter of time. Now, however, we are where we are.

</p> <p>Stubbornness, incompetence, and political ineptitude are among the main reasons that Brazil has become such a problem country.</p> <div class="flourish-embed" data-src="visualisation/1341594"></div><script src=""></script> <p><a href="">Unemployment rates</a> continue sky-high, with 13.4 million people out of work. Overall, one-quarter of the country&#8217;s workforce is either unemployed or underemployed. Family consumption—the driving force of Brazil&#8217;s GDP—is stalled, and even interest rates being at an all-time low have not been enough to stimulate growth.</p> <p>Although a global economic slowdown has certainly contributed to our current state, what is happening to Brazil now is heavily due to the country&#8217;s own succession of bad choices. It’s as though we keep recovering from crises, only to be <a href="">engulfed by the next one</a>.</p> <p>And yet, this has happened since Brazil became Brazil.</p> <h2>The Independence crisis (1820s)</h2> <p>When <a href="">Brazil became a sovereign country</a> it was already haunted by stagnation and debt. When Dom Pedro I declared independence from Portugal in 1822, Brazil suffered from a nosedive in sugar prices—the country&#8217;s primary export product. It didn&#8217;t help that Pedro was more concerned about preserving his daughter&#8217;s claim to the Portuguese Crown than with Brazil&#8217;s fortunes. </p> <p>He settled to pay 1.4 million pounds sterling in indemnities to the former colonizers—taking a hefty loan from England. And thus Brazil began its very existence buried in debt.</p> <p>Even more humiliating were the terms of the 1825 Rio de Janeiro Treaty—through which Portugal recognized Brazil as a sovereign nation. It established that independence was an act of benevolence by the Portuguese ruler, taking the bloody series of conflicts between 1822 and 1825 opposing Brazilian and Portuguese forces, and sweeping them under the rug of history.</p> <h2>The <em>Encilhamento</em> Crisis (1890s)</h2> <p>Just after the 1989 Proclamation of the Republic, Brazil adopted a policy to stimulate industrial development. The Ministry of Finance started offering unrestricted credit for industrial investments, backed by an abundant issuance of money.</p> <p>That created both speculation and inflation, leaving Brazil with the perfect environment for fraudulent public offerings and takeovers. When the bubble burst, it nearly led to the bankruptcy of both the government and industrialists.</p> <p>The word <em>encilhamento</em> literally translates as “saddling-up.” It refers to speculative movement and the will to take advantage of available “free credit.” It&#8217;s a reference to gambling on horse-racing, which increases in a frantic rush as the horses are being saddled, before betting is closed.</p> <h2>The Coffee Crisis (1930s)</h2> <p>At the beginning of the 20th century, coffee was Brazil’s primary export—and the U.S. was its biggest buyer. So, with the Great Depression hitting the northern power, coffee imports were drastically lowered and <a href="">prices plummeted</a>.</p> <p>In an effort to drive up prices, the Brazilian government ordered the burning of 4 billion kilos of coffee—which would be enough to match the world’s demand for three years. The strategy of helping out coffee producers drained nearly all of the federal government’s money. During the worst period of that crisis, the Brazilian economy shrank 1.4 percent each year.</p> <h2>The Pre-Coup Crisis (1960s)</h2> <p>In the early 1960s, Brazil was mired in political turmoil. President Jânio Quadros left the presidency after only eight months in office and sectors of civil and military elites wanted to prevent Vice President João Goulart from becoming the head of state.</p> <p>From 1962 onwards, problems with import substitution industrialization were felt. In 1964, the year of the military coup, inflation hit 92 percent a year.</p> <p>In 1964, the authoritarian regime implemented a series of reforms aimed at reducing inflation. President Castello Branco gradually introduced incentives to direct investment, both domestic and foreign, and simplified the foreign exchange system. Of course, none of this happened in a democratic fashion.</p> <h2>The end of the &#8220;Brazilian Miracle&#8221; (1970s)</h2> <p>Between 1968 and 1973, Brazil experienced extraordinary growth rates, hovering at 10 percent a year. Official slogans were along the lines of “no one can hold this country back!” But those positive numbers are deceptive upon closer inspection. That period also marked an increase of inequality in Brazil, and there was no solid ground for growth.</p> <p>When the oil crisis of 1974 hit the global markets, Brazil’s economy plummeted. Trade deficits hit USD 4 billion per year.</p> <p>To finance the earlier growth, the Brazilian government borrowed a lot of money from abroad. External debt skyrocketed to USD 90 billion, and inflation annually hit the 100-percent mark. Poor people became poorer; unemployment rose, and the internal market abruptly shrank.</p> <h2>The Lost Decade (1980s)</h2> <p>Brazilians don’t reflect on the 1980s with much fondness. International interest rates caused our already enormous debt to grow even larger. Prices were readjusted daily—some even several times a day. Brazilians who were adults at the time remember that some supermarket products were more expensive late in the afternoon than their price had been that same morning.</p> <p>Inflation rates reached the astronomical heights of <em>80 percent a month</em>, which is still one of the reasons Brazilians have the habit of shopping for their groceries monthly, and why the country cares so little for coins, which were literally worthless.</p> <p>Between 1986 and 1993, Brazil changed its currency five times:</p> <figure class="wp-block-image"><img loading="lazy" width="800" height="2100" src="" alt="currency changes" class="wp-image-16678" srcset=" 800w, 114w, 768w, 390w, 610w" sizes="(max-width: 800px) 100vw, 800px" /></figure> <h2>The devaluation of the Brazilian Real</h2> <p>Created in 1994, the Real allowed for the Brazilian economy to regain stability and inflation control. In the first years of the new currency, between 1994 and 1999, it was actually valued higher than the U.S. Dollar—BRL 1 was worth USD 1.21. While this helped the Brazilian economy in the short term, that overvaluation of the national currency was ultimately artificial and controlled by the government.</p> <p>In 1999, after the crises in Asia (1997) and Russia (1998), the government could not continue pegging its currency to the dollar. After the exchange rates were no longer fixed, its value against the greenback dropped by 80 percent. Brazilian companies, which had been taking loans in USD, were greatly hit by the currency devaluation. Brazil’s debt-to-GDP ratio soared from 28 to 48 percent in one year, and basic interest rates reached 40 percent.</p> <p>It took a few years for the Brazilian economy to get back on track.</p> <p>That is, of course, until 2014 happened.

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Gustavo Ribeiro

An award-winning journalist, Gustavo has extensive experience covering Brazilian politics and international affairs. He has been featured across Brazilian and French media outlets and founded The Brazilian Report in 2017. He holds a master’s degree in Political Science and Latin American studies from Panthéon-Sorbonne University in Paris.

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