.......... ECONOMIC STRUCTURE AND INTERNATIONAL TRADE: A BRAZILIAN CASE STUDY Thesis Ior “19 Degree OI M. A. MICHIGAN STATE UNIVERSITY Raimar Richers 1955 I51- I IIIIIIIIIIIIIIIIIIIIIIIII \IIIIIIIIIII 3 1293 10420 9428 ECONOMIC STRUCTURE AND INTERNATIONAL TRADE: A BRAZILIAN CASE STUDY BY RAIMAR RICHERS A THESIS SUBMITTED TO THE SCHOOL or GRADUATE sruouea or uIcmoAu STATE UNIVERSITY or AGRICULTURE AND APPLIED SCIENCE IN PARTIAL FULFILLMENT or THE REQUIREMENTS FOR THE ozone: or MASTER OF ARTS DEPARTMENT or GENERAL BUSINESS l956 iiiifiusits L__ II l5 GIVEN Io THI I AM HIIHIGIN STI II HOIE cw SINc VISION, UNF I II In. HENDR|| llv 'FTHE sru A s F”TS AND EIII lANs AUCU57 '9 ACKNOWLEDGMENTS IT I8 A GENUINE PLEASURE To ACKNOWLEDGE THE VALUABLE AGSIsTANCE GIVEN TO THIs sTUDY. I AM INDEBTED TO THE COLLEGE OF BUSINESS AND PUBLIC SERVICE, OF MICHIGAN STATE UNIVERSITY, FOR GRANTING ME THE PRIVILEGE To WRITE ABOUT MY HOME COUNTRY: SINOERLY GRATEFUL I AM To DR. DONALD A. IAYLOR UNDER IHOGE SUPER- VIOION, UNFAILING INTEREBT, AND ENCOURAGEMENT THIG BTUDV VAs UNOERTAKEN; I ALso IISH TO EXTEND MY THANKS TO OR. KARL A. BOEDECKER, AND OR. HENDRIR ZIARENsTEVN FOR THEIR ASSISTENCE AND HELPFUL CONUENTO. MY FRIEND GUGTAVO DE 51 E SILVA HAG REVIEWED THE BECOND CHAPTER OF THE STUDY AND CONTRIBUTED IITH CLARIFYINO GUGGEBTIONG. A 3PECIAL TRIBUTE MUST BE ACCORDED To UV IIFE FOR HER TYPING EF- FORTS AND PERSONAL SACRIFICES DURING THE PREPARATION OF THE STUDY. EAST LANSING AUGUST I956 IIIIECDI'CII IN CHAPTER I. THE 1 11 A LA) N ’- HII “I VI VII. TABLE OF CONTENTS INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . (I) CHAPTER I. THE HISTORICAL BACKGROUND . . . . . . . . . . . . . . I I. EARLY DEVELOPMENTS . . . . . . . . . . . . . . . 2 2. THE DEPREGGION OF THE THIRTIEG . . . . . . . . . 3 3. EXCHANGE CONTROL . . . . . . . . . . . . .-. g 4 4. D'VERS'F'CAY'ON Q g o o o o g . o o . Q Q Q Q 6 5. THE BALANCE OF PAYMENTG . . . . . . . . . . . . 7 6. THE gALANCE OF SERVICES 0 o o o o o o O o O o o 9 II. THE DIGTRIBUTION or INCOME . . . . . . . . . . . . . I2 I. THE CRUCIAL POINTO OF INCOHEDIGTRIBUTION ‘ . . . I3 2. INCOHE UNDER INFLATION .. ....... . ......... . I6 3. CAPITAL FDRHATION AND INVESTMENTG . . . . . . . . I9 III. MARKET STRUCTURE AND ECONOMIC GROWTH . . . . . . . . . 22 '; UNBAL‘NCED GROVTH 000 o O O O o O o O D o o o t 22 2. THE CHARACTERISTICS OF EMPLOYMENT . . . . . . . g 23 3. THE NATURE OF DEVIAND . . . . . . . . . . . . . . 26 4. THE ORIGING OF UNBALANCED GRORTH . . . . . . . . 29 IV. DOHEGTIC DIGEOUILIBRIUN AND THE BALANCE OF PAYMENTS . 33 I. THE HAXIuIzATION OF INCOHE . . G . . . . . . o o 33 2. TRADE AND INcouE DISTRIBUTION . . . . . . . . 9 35 3. THE NEED FOR PROTECTION . . . . . . . . . . . . 36 4. THE ORIGING OF DIGEQUILIBRIUU . . . . . . . . . 38 V. SOHE ASPECTG OF INDUSTRIALIZATION . . . . . . . . . . 43 I; LIBERALISH VERGUG PROTECTIONIGH . . . . 9 . . 9 44 2. THE CLAGSICAL THEORY AND "THE PERIPHERY" . . . , 45 3. THE INTERNATIONAL DIVISION OF LABOR . 9 . . . . . 48 VI. RELATIVE PRODUCTIVITY AND FOREIGN TRADE . . . . . . . 52 I. AGRICULTURAL AND INDUSTRIAL ERODUOTIUITY' . . . . 52 2. THE DEPENDENCE ON EXPORTB . . . . . . . . . . . 54 3. PRODUCTIVITY AND FOREIGN TRADE . . . . . . . . . 58 VII. SOURCEG OF DISEQUILIBRIUM AND METHODS OF CONTROL . . . 60 I. THE DENONGTRATION EFFECT . . . T . 9 . g y 9 g 60 2. FOREIGN TRADE UNDER PROGREGEING INCOME CONCENTRATION 63 3. THE EFFECTS OF CONTROL MEASURES. . . . . . . . 9 65 4. EXCHANGE CONTROL ... . . ..... . . ....,........ 68 IIII. Pm:E I.‘ 2. 3. II. IOREIG I. 2. 3. 4. I. CONCI I“) IPPEIIDIX BIBLIOGRAI VIII. PRICE ELAGTICITIEG AND THE TERMS OF TRADE . . . . . . 72 I. THE BENEFITB OF THE TERHs OF TRADE . . . . . . g 72 2. DENAND,ELAOTICITY, AND PRODUCT RANGE . . . . . . 776 3. THE COUPUTATION OF TERMS OF TRADE o o o o O O o 79 Ix. FOREIGNICAPITAL AND THE BALANCE OF PAYHENTs . . . . . 82 I. THE CAPITAL PROBLEH ; . . . . , . . , . , , . ; 82 2. OBSTACLES T0 INVESTMENTS o o o o o O o o o o o T 84 3. FOREIGN EXCHANGE SOLVENCY . . . . . . . . . 9 . 86 4. FDREIGN cAPITAL AND THE PROPENSITY TD IMPORT . . 88 x. CONcLusIONs AND RECOMMENDATIONS . . . . . . . . . . . 93 I. THE BALANCE OF PAYMENTG' COUPOGITION . . . . . . 93 2. EXCHANGE CONTROLS . o A o O o O O O O o o o o o 94 30 FOREIGN BAPITAL o O o o O O o o O O o O o o O D 95 4. THE TERMS OF TRADE . . . . . . . . . . . . . . . 97 5. INDUSTRIALIzATION . . . . . . . . . . . . . . . 98 6. STRUCTURAL DIEEOUILIBRIUH . . . . . . . . . . . I0! 7. FIGCAL REORGANIzATION . . . . . . . . . . . . . I03 APPENDIX (THE BRAZILIAN BALANCE OF PAYNENTG I947/B4) ... . 0 I05 BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . I . I06 IHE IIIzIL's 5ch Is IIIDE To TR IICULIR \qu IIIIII, menu If PRODUCTIO' IIIIIIIINIL IIII um 81 III BALANCE AREAS or PC In IIPROVEI HALO “WHITE: DISEQUILII TE? SIRuc DWESTIQ TOT-Tug“ . IN CHIEF” "TH TH: P"IIENT THE CHI 99553.! AND IN. INTRODUCTION THE AIM OF THIS STUDY Is To INVESTIGATE THE CAUSES UNDERLYING BRAZIL'S SECULAR DISEOUILISRIUM IN THE BALANCE OF PAYMENTS. AN ATTEMPT IS MADE TO TRACE THE CAUSES To DOMESTIC CONDITIONS OF THE ECONOMY. PAR- TICULAR IMPORTANCE IS ATTRIBUTED To THE DISTRIBUTION OF INCOME, INFLA- TION, PRODUCTIVITY, AND THE NATURE OF SUPPLY AND DEMAND OF THE FACTORS OF PRODUCTION. THE ORIGINS OF DISEOUILISRIUM DIRECTLY RELATED TO IN- TERNATIONAL TRADE IILL BE EXAMINED AS HELL. EVIDENCE SHALL BE GIVEN To BHOI THAT BRAZIL CANNOT EXPECT To REESTABLISH A LONG-TERM EQUILIBRIUM IN ITS BALANCE OF PAYMENTS, IF CORRECTIVE MEASURES ARE RESTRICTED TO THE AREAS OF FOREIGN EXCHANGE, CAPITAL INVESTMENTS, PROTECTIONIST CONTROLS, OR IMPROVEMENT IN THE TERMS OF TRADE. BALDISTRIBUTION OF INCOME AS DETERMINED BY ECONOMIC POLICIES AND AGGRAVATED BY MONETARY INFLATION IILL BE DESCRIBED AS THE MAIN SOURCE OF DISEOUILIBRIUM, BOTH INTERNALLY AND EXTERNALLY. ITS IMPACT ON THE MAR- KET STRUCTURE HILL BE DISCUSSED, AND THE RELATIONSHIP EXISTING BETIEEN DOMESTIC SUPPLY AND DEMAND FORMATION, AND THE VOLUME AND COMPOSITION OF FOREIGN TRADE ANALYZED. IN ACCORDANCE VITH THE OBJECTIVE OF THE STUDY SOME CHAPTERS DEAL CHIEFLY IITH DOMESTIC STRUCTURAL CONDITIONS. TO FAMILIARIZE THE READER VITH THE GENERAL PROBLEM AREA, A HISTORICAL OUTLINE OF THE BALANCE OF PAYMENTS DEVELOPMENT IILL BE GIVEN, FOLLOVED BY A BRIEF DESCRIPTION OF THE CHARACTERISTICS OF INCOME DISTRIBUTION IN BRAZIL. SOME OF THE "067 PRESSING ISSUES EXISTING TODAY HILL THUS BECOME APPARENT. THEIR ORIGINS AND IMPACT ON INTERNATIONAL TRADE IS DISCUSSED IN CHAPTER TIO, THREE. AND mun, aur IINUEN' SPECIFIC SUE IIIIIIIIII IN CH IcoIoIIc IUTONOI IIIIII Im: II NIINNIO. I IPEII II THE I IIIITHI REST TIRES 0T IRA IERTS AND T' IUSSED. IHE I Ricouuzno IHE I'Rou A 1 LIBITED PRoaLcI TRIO:1 SON: \RR\ THE ['1 (II) FOUR, BUT FREQUENT REFERENCE IS MADE TO THEM ALSO IN LATER CHAPTERS. SPECIFIC SUBJECT AREAS DIRECTLY RELATED TO THE MAIN PROBLEM ARE IN- VESTIGATED IN CHAPTERS FIVE To NINE. LATIN AMERICA'S ATTEMPT TO GAIN ECONOMIC AUTONDMY THROUGH INOUSTRIALIZATION. AND ITS BEARING ON INTERNA- TIONAL TRADE IS EXAMINED FROM THE POINT OF VIES OF PRODUCTIVITY AT HOME AND ABROAD. THE QUESTION OF DISEQUILIBRIUM IS REYIENED AGAIN.MITH RE- SPECT TO THE IMPACT OF DEMAND ON IMPORTS, AND THE crfECTIVENESS OF QUAN- TITATIVE RESTRICTIONS AND EXCHANGE CONTROL. A CRITICAL EVALUATION OF TERMS OF TRADE ANALYSES FOLLONS, AND, FINALLY, FOREIGN CAPITAL INVEST- MENTS AND THEIR POSITION IN THE BRAZILIAN BALANCE OF PAYMENTS ARE DIS- CUSSED. THE TENTH AND LAST CHAPTER SUMMARIZES THE RESULTS AND GIVES SOME RECOMMENDATIONS FOR A FUTURE ECONOMIC POLICY FOR BRAZIL. THE MAJORITY OF THE PROBLEMS DEALT IITH IN THE PAPER ARE APPROACHED FROM A THEORETICAL STANDPOINT. HISTORICAL AND STATISTICAL ANALYSES ARE LIMITED TO A MINIMUM REQUIRED TO PROVIDE AN UNDERSTANDING OF SPECIFIC PROBLEM AREAS. THE THEORIES OF INCOME DISTRIBUTION, OF INTERNATIONAL TTQADE, AND OF MARGINAL ANALYSIS ARE THE MAIN TOOLS APPLIED. BASED ON SOME OF THE PREMISES OF THESE THEORIES, THE DEDUCTIVE METHOD IS USED To ARTTIVE AT CONCLUSIONS PERTINENT TO THE BRAzILIAN ECONOMY IN GENERAL. AND THE BALANCE OF PAYMENTS IN PARTICULAR. THE MANY DANCERS INVOLVED IN THE METHOD OF ANALYSIS USED ARE PER- HAPS THE MAJOR LIMITATION To THE STUDY. BUT THE SCARCITY DF STATISTICAL DATA IN BRAZIL MAKES A MORE QUANTITATIVE STUDY IMPOSSIBLE. CONSEQUENTLY. TW‘E OPINIONS EXPRESSED CANNOT DEFINITELY BE PROVED. THEY CAN BE TESTED TFNDUGH BY MORE DETAILED STUDIES. THIS, IT IS HOPED, MILL BE DONE IN THE FUTURE. I. THE HISTORICAL BACKGROUND EXCEPT FOR SOME RECESSION PERIODS, THE BRAZILIAN ECONOMY HAS Ex- PERIENCED A STEADY RATE OF EXPANSION. IT HAS MOVED FROM SEVERAL PRO- SPEROUS MDNOCULTURAL CYCLES INTO AN INCREASINGLY DIVERSIFIED PRODUCTIVE STRUCTURE. PRESENTLY, THE GROVTH OF POPULATION AND OF REAL PER CAPITA OUTPUT EXCEEDS AN AVERAGE ANNUAL RATE OF 2%. NEVERTHELESS, BRAZIL IS CONSIDERED AN UNDERDEVELOPED COUNTRY. I8 THIS INCOHPATIBLE WITH RAPID DE VE LOPIAENTT AFTER ANALYZING FOUR COMMON, BUT UNSATISFACTDRY INTERPRETATIONS OF THE TERM 'UNDERDEVELDPED COUNTRY”, PROFESSOR VINER SUGGESTS THE FOLLOI- ING DEFINITION: ”A COUNTRY MHICH HAS GOOD POTENTIAL PROSPECTS FOR USING MORE CAPITAL, OR MORE LABOR, OR MORE AVAILABLE NATURAL RESOURCES, OR ALL OF THESE, TO SUPPORT ITS PRESENT POPULATION ON A HIGHER LEVEL OF LIVING, OR, IF ITS PER CAPITA INCOHE LEVEL I8 FAIRLY HIGH, TO SUPPORT A LARGER POPULATION ON A NOT LOIER LEVEL OF LIVING... THIS DEFINITION SHALL BE AcCEP‘I’ED HERE SINCE IT NOT ONLY FITB THE BRAZILIAN CASE, BUT ALSO BE- CAUSE IT ”PUTS THE PRIHARY EMPHASIS WHERE I IOULD THINK IT PROPERLY BE- ‘ 'JACOB VINER, ”TENDENCIAS UODERNAS DA TEORIA DO COMERCIO INTERNA- CIoNAL," EVISTA BRASILEIRA DEL ECONOMIA.ANO 5, ND. 2 (RIO DE JANEIRO: FWJNDACAO GETOLIO VARGAS, JUNE I95I), P. 205. EELIQI QUOTED FROM THE ABOVE PUBLICATION OF A SERIES OF LECTURES DELIV- ERED AT THE UNIVERSITY OF BRAZIL IN RIO DE JANEIRO AND RE-EDITED IN THE USA UNDER THE TITLE: INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT (3LENCOE, ILLINOIS: FREE PRESS, I952). LONGS ON PER CAPITA LEVELS OF LIVING, ON THE ISSUE OF POVERTY AND PROS- PERITY, ALTHOUGH IT LEAVES ROOM FOR SECONDARY EMPHASIS ON QUANTITY OF POPULATION.'2 POVERTY AND PROSPERITY--A SHORTER AND MORE PRECISE FORMULA COULD NOT BE FOUND TO DESCRIBE THE BRAZILIAN SOCIAL SCENE, BOTH PRESENT AND PAST. THE ExTREMES OF THE BRAZILIAN ECONOMY ARE REFLECTED IN FIGURES; HOBEVER, SUCH DO NOT GIVE A VIVID PICTURE OF REALITY. THIS MAY BE KEPT IN MIND IHILE READING THE FOLLOMING BRIEF DESCRIPTION, THE PURPOSE OF IHICH IS TO INFORM THE READER ABOUT BRAZIL'S FOREIGN TRADE DEVELOPHENT. I,_EARLg DEVELOPMENTS IN I822 BRAZIL BECAME INDEPENDENT OF PORTUGAL THROUGH THE ASCENSION OF ITS owN MONARCH. ONLY THREE YEARS LATER IT HAS GRANTED ITS FIRST FOREIGN LOAN OF I.5 MILLION POUNDS STERLING.’ BY I860 THE TOTAL AMOUNT OF LOANS AMOUNTED TO II MILLION POUNDS STERLING, HALF OF BHICH HAD AL- READY BEEN REFUNDED IN SPITE OF A 28 MILLION POUNDS STERLING DEFICIT IN THE BALANCE OF TRADE. THIS DEFICIT ACCUMULATED FROM IBZI TO I860. DURING THE EARLY DECADES OF ECONOMIC DEVELOPMENT, FOREIGN LOANS EAJABLED THE COUNTRY TO CONSTRUCT ITS FIRST RAILROADS, To FINANCE INVEST- MEHVTS IN AGRICULTURE, To DEVELOP URBAN CENTERS, AND To AMORTIZE PART OF "rS.DEBT TO GREAT BRITAIN. FROM THE MIDDLE OF THE |9TH CENTURY UNTIL I93l, BRAZIL HAD LITTLE TC) IORRY ABOUT AS THE BALANCE OF TRADE REMAINED FAVORABLE FROM IBOI To '93I YIITH THE EXCEPTION OF FOUR YEARS. ON THE OTHER HAND DETERIORATION °F' PURCHASING POMER BECAME APPARENT AFTER |888 AS A RESULT OF SEVERAL AtI'VERSE FACTORS. INCLUDED HERE THE ABOLITION OF SLAVERY (I888) AND AC- ¥ 2VINER, IBID., P. 205 COMPANYING SOCIAL UNREST, THE OVERTHROW OF THE MONARCHY (l889), THE WORLD CRISIS (I890), AN UNDUE EXPANSION OF THE MONEY SUPPLY, AND THE COFFEE CRISIS OF I903 IN BHICH PRICES DROPPED To I.47 POUND STERLING (PER 60 KILOGRAM BAG) AS COMPARED TO THE 4.09 POUND PEAK OF TEN YEARS BEFORE.3 THE BALANCE OF PAYMENTS PROBLEM HAS FACED BY REPEATED l'VALOR- IZATION” PROGRAMS LAUNCHED To PREVENT BRAZILIAN COFFEE FROM LOSING ITS ALMOST MONOPOLISTIC POSITION IN THE MORLD. THE VALORIZATION POLICY PROVED TO BE FULLY EFFECTIVE. ONE OF ITS CONSEQUENCES HAS THE WILLING- NESS OF FOREIGN COUNTRIES TO EXTEND SUBSTANTIAL LOANS TO THE BRAZILIAN GOVERNMENT. BETMEEN I890 AND I930 THE FOREIGN PUBLIC DEBT WENT UP FROM $69 MILLION To 8394 MILLION. OF THE LATTER 8267 MILLION wERE OUTSTANDING IN I930.4 2. THE DEPRESSION OF THE THIRTLEE AT THE OUTBREAK OF THE MORLD DEPRESSION IN I929, FOREIGN INVESTMENTS AND LOAN GRANTS WERE ABRUPTLY TERMINATED. THUS, YEARLY BALANCE OF TRADE SURPLUSES BECAME THE ONLY SOURCE TO COVER THE HEAVY BURDEN OF NON-TRADE TT?AN8ACTION DEFICITS, AS THE EXISTING RESERVES OF GOLD AND FOREIGN ex- CIIANGE HERE SOON EXHAUSTED. FURTHERMORE, EXPORT REVENUES NERE STRONGLY AFFECTED BY BOTH PRICE COLLAPSES AND A SHARP DECREASE IN QUANTITATIVE DEMAND FOR BRAZILIAN COMMODITIES. BETWEEN I92I AND I930 BRAZIL ACCUMU- LATED 45 MILLION BAGS OF NON-EXPORTABLE COFFEE WHICH WOULD HAVE SEEN SUF- 3AFFONSO E. DE TAUNAY, EEQUENA HISTORIA DO CAFE’NO BRA§IL (I727— .LEEEZ) (RIO DE JANEIRO: DEPARTAMENTO NAOIONAL DO CAFE; I945 . 4A MORE DETAILED ANALYSIS OF THE FOREIGN DEBT DEVELOPMENT IS GIVEN 'BI H. l. SPIEGEL, THE BRAZILIAN ECONOMY, CHRONIC INFLATION AND SPORADIC 1:19USTRIALIZ TION,(PHILADELPHIA, TORONTO: THE BLAKISTON COMPANY, I949). F’o I35.--ANOTHER MORE RECENT SOURCE IS: UNITED NATIONS, DEPARTMENT OF ECONOMICS AND SOCIAL AFFAIRS, FOREIGN CAPITAL IN LATIN AMERICA (NE! YORK. |955). FICIENI 10 OF THE SEA EIGN DEBIE Inns cone EIGN DEBT STRICIIVE THE RETUF flu: POSEO 0| HUTEVER PRESENT LEGAL I LISHED BALANc POIER CY RE IN I9 II“ I -4- FICIENT TO SATISFY wORLD DEMAND FOR ABOUT Two YEARS.5 As A CONSEQUENCE OF THE SHARP DROP IN EXPORT REVENUE, THE YEARLY SERVICE FOR PUBLIC FOR- EIGN DEBTS EXCEEDED THE EXPORT SURPLUS BY AS MUCH AS I66% (IN I935).6 THIS CONDITION INDUCED THE GOVERNMENT To (I) SUSPEND THE PAYMENT OF FOR- EIGN DEBT SERVICES IN SEPTEMBER I939, AND (2) SUBMIT TRANSFERS TO RE- STRICTIVE RULES IN "ARCH I932. TO THE PRESENT DAY SUCH RESTRICTIONS ON THE RETURN OF EARNINGS HAVE NEVER BEEN FULLY SUSPENDED. 3.,EXCHANGE CONTROL MUCH HAS BEEN WRITTEN ABOUT THE MANY FORMS OF EXCHANGE CONTROL IM- POSED ON BRAZILIAN TRADE SINCE THE DEPRESSION. FOR PURPOSES OF ANALYSIS HOMEVER, AN OUTLINE OF PAST AND PRESENT MEASURES Is SUFFICIENT, AS THE PRESENT STUDY IS MORE CONCERNED MITH THE ECONOMIC EFFECTS THAN VITH THE LEGAL ASPECT OF CONTROL. BASICALLY, ALL EXCHANGE CONTROLS WERE ESTAB- LISHED MITH THO INTERRELATED AIMS: To RELIEVE PRESSURE FROM AN ADVERSE BALANCE OF PAYMENTS AND TO PREVENT THE CURRENCY FROM LOSING PURCHASING POIER AND THE CONSEQUENT DETERIORATION IN THE EXCHANGE RATE. DURING THE FIRST TVENTY YEARS OF THIS CENTURY, THE BRAZILIAN CURREN- CY REMAINED VERY STABLE, AVERAGING BETIEEN A LON OF 033,07 PER US DOLLAR IN I9|0 TO A HIGH OF o¢4,38 IN I90I. FOLLOMING THE RECESSION AFTER WORLD IAR I, IT LOST ABOUT HALF ITS PURCHASING POMER ABROAD. YET IT HAS NOT UNTIL I93I THAT THE GOVERNMENT IMPOSED EXCHANGE CONTROLS BINDING TRANS- 5 RAIMAR RICHERS, UEBER DIE FUNKTION D§§_KAFFEES IM BRASILIANISCHEN AUSSENHANDEL DER JAHRE I938 BIS I950, (DOCTORAL DISSERTATION, SAD PAULO, LINOTIPADORA GRAFICA LTDA., I953), P. I3. 6P. v. D. MEIREN AND G. LDEB, TRENDS AND PROBLEMS IN ECONOMIC DEVEL- OPMENT OF BRAZIL, (STUDY MADE BY THE JOINT COMMISSION BRAZIL-UNITED STATES. MIMEOGRAPHED COPY, COURTESY OF THE AUTHORS. RIO DE JANEIRO, I952). ICTICTIS TO IN OFF USED FOR OFFIC STRICIED FREE I.” SILECTED GOOCS IMIIIIIR ALL ISIOLLQ-‘L‘S‘. ‘ IIIIs, (2\ A I NEWS, mg ( ”Wm; H “I ma: ‘ HI. I952. “*5 CURFI 8350,00 In IT INT “OH: [NH ACTIONS TO AN OFFICIAL RATE OF EXCHANGE WITH IMPORT PRIORITIES ESTAB - LISHED FOR OFFICIAL PURCHASES, DEBT SERVICES AND ESSENTIAL GOODS. A RE- STRICTED FREE MARKET MAS ESTABLISHED IN I934 AND GRADUALLY RELIEVED FOR SELECTED GOODS AND SERVICES UNTIL I937. FROM THAT YEAR PERMITS WERE RE- QUIREO FOR ALL IMPORTS. IN ‘939 THREE RATES MERE INTRODUCED, CLASSIFIED As FCLLONS: (I) AN OFFICIAL RATE APPLICABLE To 30% OF ALL EXPORT RE- TURNS, (2) A FREE MARKET RATE APPLICABLE To 70% OF EXPORTS AND ALL IM- PORTS, AND (3) SPECIAL FREE MARKET RATE APPLICABLE TO NON—TRADE PURPOSES. A SINGLE RATE HAS REESTABLISHED IN I946, FIRST AT m$I8,96 PER Us DOLLAR AND LATER AT OQIB,72 MHICH BASICALLY PREVAILED FOR ALL TRANSACTIONS UN- TIL I952. DURING THESE YEARS INFLATION BROUGHT INCREASING PRESSURE ON THE CURRENCY, CALLING FOR A BLACK MARKET RATE wHICH AT TIMES REACHED m350,00 AND MORE. IN FEBRUARY I953 A SO CALLED FREE EXCHANGE LAw BECAME EFFECTIVE. IT INTRODUCED MULTIPLE EXCHANGE RATES FOR IMPORTS AND EXPORTS, AND SANC- TIONED FREE RATES FOR LESS-ESSENTIAL IMPORTS AND FINANCIAL TRANSACTIONS. EIGHT MONTHS LATER THE EXCHANGE SYSTEM SUFFERED A RADICAL MODIFICATION, NHICH, EXCEPT FOR A FEw MINOR CHANGES STILL PREVAILS TODAY. THE MAIN FEATURES OF THE NEw SYSTEM ARE AS FOLLOWS: A) ALL EXPORT PROCEEDS ARE SURRENDERED TO THE BAM< OF BRAZIL AT THE OFFICIAL RATE, BUT A CRUzEIRo PREMIUM FOR EACH UNIT OF FOREIGN CURRENCY EARNED IS PAID IN ACCORDANCE To THE TYPES OF GOODS EXPORTED: B) IMPORTS ARE DIVIDED INTO FIVE CATE- GORIES ACCORDING TO THEIR ESSENTIAL CHARACTER: C) THE BANK OF BRAZIL SELLS EXCHANGE RIGHTS FOR IMPORTS AT AUCTIONS ESTABLISHING MINIMUM RATES AND ALLOCATING TOTAL AMOUNTS OF FOREIGN CURRENCY FOR EACH CATEGORY; D) THE FREE MARKET CONTINUES To EXIST FOR INVISIBLE ITEMS. FURTHERMORE, BOTH THE IMPORTATION AND EXPORTATION OF COMMODITIES CONTINUE TO BE DE- “NU“ ON I U' III III IRENE: H: was nucwmons INN THE DE m meow SERVICES RE THE EVER G was CI amuse: “IRS 1H QUENC SHED CIPJ PENDENT ON A LICENSE PROVIDED BY THE FOREIGN TRADE DEPARTMENT, INSTITU- TED IN DECEMBER I953.7 I’HE BRIEF DESCRIPTION OF EXCHANGE CONTROLS INDICATES SOME OF THE FLUCTUATIONS TO 'HICH THE BRAZILIAN BALANCE OF PAYHENTS IAS SUBJECTED SINCE THE DEPRESSION OF THE THIRTIES. EXCEPT FOR A FEW YEARS OF LIMI- TED FREEDOM THE EXCHANGE RATE AS WELL AS THE TRANSACTION OF GOODS AND SERVICES REHAINED UNDER STRICT GOVERNHENT DIRECTION. IN SPITE OF THIS, THE EVER GRONING LOSS OF PURCHASING POWER OF THE CRUZEIRO 0N FOREIGN MARKETS COULD NOT BE AVOIDED, EITHER DURING PERIODS NHEN CONTROL WAS EXERCISED FOR THE EXCLUSIVE PURPOSE OF CUHBING IMPORTS,OR DURING THE YEARS NHEN IT 'AS CONCEIVED T0 STIMULATE EXPORTS. 4.,0IVERSIFICATION IN THE LONG RUN THE DEPRESSION HAD AT LEAST ONE POSITIVE CONSE- ' OUENCE: THE BRAZILIAN ECONOMY MOVED AwAY FROM MONOCULTURE ANqESTABLI- SHED THE BASES FOR DIVERSIFIED PRODUCTION. IN I933 COFFEE STILL PARTI- CIPATED IITH 73% ON TOTAL EXPORT RETURNS, ONE YEAR LATER ‘WITH ONLY 6I% AND FROM THEN ON MITH EVER DECREASING RATES UNTIL A Low POINT OF 45% IN THE POST-UAR YEARS. GINNED COTTON AND COCOA, FOLLOHED BY HIDES AND SKINS, LUMBER, FRUITS, CARNAOBA-MAX AND OTHER PRIMARY PRODUCTS BECAME IMPORTANT ITEMS OF THE BALANCE OF TRADE. NEVERTHELESS,INCREASED EXPORT REVENUES IERE NOT SUFFICIENT To ACCOUNT FOR THE EVER GRONING IMPORT RE- QUIREMENTS. BRAZIL THUS TURNED To INDUSTRIALIZATION, EXPANDING FIRST ITS TEXTILE AND FOOD INDUSTRY UNDER CONSIDERABLE AID FROM THE GOVERNMENT. 7A CRITICAL ANALYSIS OF THE EXCHANGE REFORM OF I953 'AS WRITTEN BY N. F. FIGUEIREDO, CONSIDERACOES SOBRE A NOVA POLITICA CAMBIAL BRASILEIRA (SAD PAULO: ORDEM DOS ECONOMISTAS DE 5‘0 PAULO, MARCH I954). BI FIR THE IFIEP |939I "*5 onoulc sraucru Honor ME 50034; mam FOLD m Mm INN 00%th mm or I £IUI3uiuI, ILL TYPES A HA8 {XI THRCUG LIAN NORM- TERI BY FAR THE STRONGEST IMPACT OF INDUSTRIAL PRODUCTION HAS OBSERVED AFTER I939, HHEN BRAZIL HAS FACED HITH THE NECESSITY OF ADAPTING ITS EC- ONOMIC STRUCTURE To HAR CONDITIONS. BETHEEN I939 AND I95I THE PRODUC- TION OF THE IRON, STEEL, AND METALHORKING INDUSTRIES ROSE BY ALMOST 500%: CEMENT OUTPUT, MORE THAN DOUBLED; RUBBER PRODUCTS SHOHED A NINE- FOLD EXPANSION: AND CHEMICAL, PHARMACEUTICAL, AND VEGETABLE OIL PRoouc- TION DOUBLED. FURTHERMORE, DIVERSIFICATION IS REFLECTED BY THE RAPID GROHTH OF MINOR INDUSTRIES/FOR EXAMPLE, THOSE PRODUCING TRANSPORTATION EQUIPMENT, ELECTRICAL MOTORS AND APPLIANCES, AS HELL As MACHINERY OF ALL TYPES.8 5.ATHE BALANCE OF PAYMENTS A MORE OR LESS RELIABLE BALANCE OF PAYMENTS<:OMPUTATION FOR BRAZIL HAS EXISTED SINCE I939. SATISFACTORY ESTIMATES HERE PREPARED FOR I939 THROUGH I946 BY THE INTERNATIONAL MONETARY FUND. SINCE I957 THE BRAZI- LIAN GOVERNMENT HAS ISSUED ANNUAL BALANCES PREPARED ACCORDING TO THE NORNS SET BY THE [MF. THE APPENDIX REPRODUCES THE NET POSITIONS FOR THE YEARS I947/54. THE PERIOD BETHEEN I939 AND I954 CAN BE DIVIDEO INTO THO DISTINCT PHASES EACH ENCOMPASSING EIGHT YEARS. A SUMMARY OF THE NET CHANGES OF THE BALANCE OF PAYMENTS FOR THE THO PHASES IS SHOHN IN TABLE I.(SEE P.B). DURING THE BAR YEARS BRAZIL SUCCEDED TO ACCUMULATE A OBIS BILLION SURPLUS OF CURRENT TRANSACTIONS HHICH ENABLED THE COUNTRY TO AMORTIZE SDHE FOREIGN DEBTS INCURRED AFTER THE DEPRESSION, AS WELL AS TO ACCUMU- 8INSTITUTE OF INTER-AMERICAN AFFAIRS, FOREIGN OPERATIONS ADMINIS- TRATION, THE DEVELOPMENT OF BRAZIL, REPORT OF JOINT BRA;LE:2§L1§E_§LEUE§ ECONOMIC DEVELOPMENT COMMISSION,(HASHINGTON, 0. 0., I953). P. I7. LHE SUBSTANTI UNI. DURING 1w INET DEF covzizo BY 5 orIIsHIncT IIONE TIME IIEI snows COUVIWEN‘I BALANCE SERVlcE pMm SPEOII COMIIE QB“? ERRQ LATE SUBSTANTIAL RESERVES IN FOREIGN CURRENCIES, MAINLY IN POUND STER- LING. DURING THE FOLLOHING EIGHT YEARS THE CURRENT TRANSACTIONS REPOR- TED A NET DEFICIT OF ABOUT CS$22 BILLION. THE BULK OF THIS DEFICIT HAS COVERED BY SPECIAL LOAN ARRANGEMENTS MAINLY HITH THE EXPORT-IMPORT BANK OF HASHINGTON. THE REMAINDER TOOK THE FORM OF COMMERCIAL ARREARS HHICH AT ONE TIME (I952) SURPASSED THE II BILLION cRUZEIRo MARK. THIS LATTER ITEM SHOHS THE DESPERATE POSITION OF BRAZIL'S POST-HAR INTERNATIONAL COMM I ‘I'MENTSO9 TABLE I £15! CHANGES IN THE BALANCE or PAYMENTS BETHEEN I939 AND I954 (IN m8I,OO0.000.000) IDSGZHS I942/B4 I939(5§ BALANCE OF TRADE 27.8 24.8 52.6 SERVI CES -I 0.2 -54.0 -64.2 PRIVATE DONATIONS + CAPITAL MOVEMENTS - I.O 6.7 5.7 SPECIAL OFFICIAL FINANCING - I‘D 0,6 - I‘D TOTAL CURRENT TRANSACTIONS I5.0 -2I.9 - 6.9 COMMERCIAL ARREARS (NET I954) --- 2.4 2.4 COMPENSATORY OFFICIAL FINANCING -I3.6 I7.4 3.8 ERRORS AND OMISSICNS - I,4 2,I 0,7 TOTAL COMPENSATORY TRANSACTIONS -I5.0 2I.9 6.9 SOURCE: DERIVED FROM APPENDIX THE FOLLOHING SELECTED REFERENCES MAY BE USEFUL TH THE READER '"TERESTED IN MORE DETAILED DATA AND ANALYSES ON THE BRAZILIAN BALANCE 0" PAYMENTS: THE ANNUAL R§P9R1§ OFATI'LE BANK OF BRAZ_|3L_ PUBLISH YEAR— LY BALANCE SHEETS, REVISED COPIES OF WHICH ARE REPRODUCED IN THE BALANCE WNTS YEARBCOKS OF THE INTERNATIONAL MONETARY FUND. INFORMATION 0" CURRENT DEVEJPMENTS ARE PROVIDED BY CONJUNTURA ECONOMICA,(FUNDAOAO GETGLIO VRAGAS, RIO DE JANEIRO) AND INTERNATIONAJILDNANCIALC STATISTLQS (”‘F. WASHINGTON, 0. 0.). PREDOMINANTLY ANALYTICAL STUDIES ARE CONTAI- NED 'N THE PUBLICATIONS OF THE ECONOMIC COMMISSION FOR LATIN AMERICA OF {”5 UNITED NATIONS, MAINLY IN THE SERIES ENTITLED: ECONOMIC SURVEY OF ~.ATIR. AMERICA,PUBLISHED SINCE I940. 6I THE BALANCE OF SERVICES THO REASONS JUSTIFY A BRIEF ANALYSIS OF THE BALANCE OF SERVICES AT THIs POINT. FIRST, BECAUSE IT CONSTITUTES THE MAIN NEGATIVE POSITION IN THE BALANCE OF PAYMENTS ( SEE TABLE I AND APPENDIX). SECONDLY, BE- CAUSE THE ORIGINS OF ITS DEFICI'TS ARE OF AN ADMINISTRATIVE RATHER THAN ECONOMIC NATURE. THE MAIN UNFAVORABLE ITEM IN THE BALANCE OF SERVICES IS MADE UP OF FREIGHT ON IMPORTS. DURING THE PERIOD I947/54 IT AMOUNTED To 02323.2 BILLION OR 43% OF THE TOTAL NET SERVICE DEFICIT. ON THE AVERAGE BRAZIL HAS To SPEND FROM Izzé TO 20% IN FREIGHT CHARGES ON IMPORTS EVERY YEAR. A GREAT PORTION HAS TO BE DISBURSED IN CONVERTIBLE CURRENCIES. IN BRAZIL No PRIVATE ORGANIZATION IS PERMITTED To TRANSPORT CARGO ABROAD. THE ONLY GOVERNMENT CONTROLLED SHIPPING AGENCY, THE LLOYD BRA- SILEIRO, USES THENTY VESSELS FOR TRANSATLANTIC SERVICES HITH AN AVERAGE CARGO CAPACITY OF 6,000 TOMS; DURING THE PERIOD I946-54 THESE SHIPS CARRIED AN AVERAGE OF 37,500 TONS PER YEAR--OR SIX TIMES CAPACITY. NEV- EBTHELESS, THEY HANDLED NO MORE THAN ABOUT 5% OF BRAZIL'S FOREIGN TRADE TONNAGE.'0 THESE FIGURES ILLUSTRATE HOW HARMFUL STATE INTERVENTION IN pR'VATE ENTERPRISE CAN BE. THE SECOND HIGHEST UNFAVORABLE POSITION IN THE BALANCE OF SERVICES '8 COUPOSED OF INVESTMENT INCOMES TRANSFERRED ABROAD. DURING I947-54 '7 ACCOUNTED FOR CRSI5.9 BILLION OI. 3I5‘6 OF TOTAL NET SERVICES. AN AT- TEin TO REDUCE THIS FIGURE IN THE FUTURE BY INPOSING FURTHER LIMITA- TIONS ON THE REHITTANCE OF PROFITS WOULD SERIOUSLY IIIIPAIR FOREIGN IN- VEBTMENTS. \- .0555: ”THE BRITISH AND COMMONHEALTH CHAMBER OF COMMERCE IN 530 PAULO," INFORMATION CIRCULAR NO. I5, SID PAULO, AUGUST/5, I955, P. 288. ..V IITIEFS A NIES,‘ covnn' FILMS, REIIITI ONIHPORTSI [Into THROUI {NCE IO AUS FINILI 0? BLACK H IORE THE I LY UNDERS III at, FOR A c: HARDLY BRAZIL IITH 8900: EXPE SPO INT ‘4... I. )5 MATTERS ARE DIFFERENT IN RELATION To THE THIRD ITEM, OR "OTHER SER- VICES,“ COMPRISING ADMINISTRATIVE EXPENSES, RENTALS FOR CINEMATOGRAPHIC FILMS, REMITTANCE OF ROYALTIES, INSURANCES, AND MAINLY COMMISSIONS PAID ON IMPORTS. AT LEAST TO SOME EXTENT THESE DISBURSEMENTS COULD BE DIMIN- ISHED THROUGH AN IMPROVEMENT CF ADMINISTRATIVE ACTION AND STRICT ADHER- ENCE TO AUSTERITY PROGRAMS. FINALLY, THERE IS THE ITEM FOREIGN TRAVEL. GIVEN THE LARGE AMOUNT OF BLACK MARKET TRANSACTIONS FOR TOURIST TRAVEL AND OTHER PURPOSES BE- FORE THE RATIFICATION OF THE FREE EXCHANGE LAH, THIS POITION IS PROBAB- LY UNDERSTATED IN THE OFFICIAL ACCOUNTS. BUT HHATEVER THE REAL FIGURES MAY BE, A DEFICIT IN THE BALANCE OF TOURIST TRADE IS A COSTLY LUXURY FOR A COUNTRY HITH A CHRONIC ADVERSE BALANCE OF PAYMENTS. THERE Is HARDLY A NEED FOR IT IF ONE CONSIDERS THE LOB PER CAPITA INCOME OF THE BRAZILIAN POPULATION AS COMPARED wITH INCOMES OF OTHER NATIONS. AS LONG AS THE AVERAGE FOREIGNER THINKS OF BRAZIL As A VAST JUNGLE HITH RATTLE SNAKES AND INDIANS LYING IN HAMHOCKS UNDER BROAD SOMBREROS, BROODING (IN SPANISH,OF COURSE) OVER THE NEXT REVOLUTION, LITTLE CAN BE EXPECTED TO IMPROVE FOREIGN TRAVEL. TO STIFLE SUCH INTERNATIONAL PRESS SPONSORED FAIRY TALES REQUIRES PERSISTENT PUBLICITY. No BETTER INSTI- TUTION IS THERE TO PERFORM THE TASK THAN THE BRAZILIAN FEDERAL GOVERN- MENT. AS CAN EASILY BE DERIVED FROM TABLE I, A REDUCTION OF DEFICITS IN THE BRAZILIAN BALANCE OF SERVICES HOULD RELIEVE MUCH PRESSURE FROM THE BALANCE OF PAYMENTS. HOHEVER, AS THE TABLE GIVES NET POSITIONS ONLY, THE HIGH NEGATIVE FIGURES OF THE BALANCE OF SERVICES IS MISLEADING. THE PRINCIPAL PROBLEMS OF BRAZILIAN FOREIGN TRADE STRIKE AT THE BALANCE OF TRADE WHICH HAS TO ACCUMULATE SUBSTANTIAL SURPLUSES TO ACCOUNT FOR THE NEGATIVE RESULTS OF OTHER POSITIONS. THEREFORE, THIS STUDY WILL BE PRIMARILY CONCERNED VITH THE COMHERCIAL ASPECTS OF THE BALANCE OF PAY- MENTS TROUGHOUT THE FOLLOWING SEVEN CHAPTERS. ONLY IN THE NINTH CHAP- TER SHALL FOREIGN CAPITAL BE DISCUSSED As A MEANS TO OBTAIN LOKFWERU EQUILIBRIUM. II, THE DISTRIBUTION OF INCOME THE SIZE AND NATURE OF A COUNTRY'S FOREIGN TRADE IS LAROELY DETER- MINED BY THE STRUCTURE OF ITS DOMESTIC MARKET. THIS STATEMENT OR RULE HAS A DOUBLE IMPLICATION FOR THE ANALYST CONCERNED WITH THE IMPROVEMENT OF CONDITIONS GOVERNING INTERNATIONAL TRANSACTIONS. FIRST, IT MEANS THAT ANY CHANGE IN THE STRUCTURE OF THE DOMESTIC ECONOMY Is BOUND TO CALL FORTH AN ALTERATION IN THE VOLUME OF TRADE, THE NATURE OF WHICH MUST BE STUDIED. SECONDLY, IT MEANS THAT THE INTENSITY OF FACTORS CAU- SING CHANGE MUST BE INVESTIGATED; THOSE PRODUCING FAVORABLE CHANGES SHOULD BE STIMULATED, WHILE THOSE PRODUCING UNFAVORABLE CHANGES SUP- PRESSED. IT SEEMS THAT THE MAJORITY OF FOREIGN TRADE ANALYSES ON SPECIFIC COUNTRIES OR AREAS TEND TO OVEREMPHASIZE THE FIRST IMPLICATION SIMPLY BY UNOERESTIMATING THE IMPACT OF THE SECOND. THIS wILL BE ILLUSTRATED BY EXAMPLE. LET US SUPPOSE THAT A COUNTRY SUFFERS FROM A SECULAR IN— FLATION CAUSING AN ADVERSE BALANCE OF PAYMENTS AND AN OVER-VALUATION OF THE EXCHANGE RATE. KNOwLEDGE ABOUT THESE RELATIONSHIPS BETWEEN DOMESTIC CONDITIONS AND FOREIGN TRADE INDUCES GOVERNMENT OFFICIALS TO READAPT THE EXCHANGE RATE TO ITS REAL PURCHASING POKER ABROAD. WILL THIS RE- MOVE THE EVIL OF AN ADVERSE BALANCE? A POSSIBLE TRANSITORY IMPROVEMENT IN BALANCE OF PAYMENTS ACCOUNTS MAY BE EXPECTED, NOT, HOWEVER, A LONG RANGE EQUILIBRIUM AS LONG As THE PRINARY CAUSE OF THE EVIL--INFLAT|°N IN THIS CASE--HAS NOT BEEN REMOVED. ANYONE FAMILIAR HITH BRAZILIAN FOR- EIGN TRADE POLICY WILL AGREE THAT THIS EXAMPLE IS NOT ALTOGETHER UNREAL- ISTICC A COMPREHENSIVE METHOD OF STUDYING DOMESTIC CAUSES OF BALANCE OF PAYMENTS DIFFICULTIES CONSISTS IN ANALYZING NATIONAL INCOME CONDITIONS OF THE COUNTRY IN QUESTION. THIS WILL BE ATTEMPTED IN THIS CHAPTER. II THE cRUCIékaOINTS OF INCOM§&9ISTRIBUTION SINCE I947 THE BRAzILIAN ECONOMIC INSTITUTE OF THE GETGLIO VARGAS FOUNDATION HAS COMPILED NATIONAL PRODUCT AND INCOME STATISTICS.'AN ESTIMATE FOR THE YEAR I939 MAS PREPARED BY MEIREN AND LOEB.2 BASED LAR- GELY ON DATA SUPPLIED BY THE ECONOMIC INSTITUE AND OTHER SOURCES, THE ECONOMIC COMMISSION FOR LATIN AMERICA HAS RECENTLY DEVELOPED CURRENT ESTIMATES ON GROSS PRODUCT, OUTPUT, CAPITAL STOCK, AND PRODUCTIVITY DEVELOPMENTS SINCE I945.3 A STUDY OF THESE DATA REVEALS NHAT MAY BE CALLED THE SEVEN CRUCIAL POINTS OF BRAZILIAN INCOME DISTRIBUTION. SOME HIGHLIGHTS ARE As FOL- Lows: (I) BETwEEN I939 AND I953 BRAZIL'S GROSS NATIONAL PRODUCT REGISTE- RED A TENFOLD INCREASE FROM a$40.8 BILLION To 03408.4 BILLION. WITHIN THE SAME PERIOD THE RHOLESALE PRICE INDEX WENT UP To 535 (I939 - I00) |PUBLISHED IN REVISTA BRASILEIRA DE ECONOMIA,(RIO DE JANEIRO: FUNDACAO GETOLIO VARGAS). WITH SUMMARY IN ENGLISH. 29. v. D. MEIREN AND G. LOEB, TRENDS AND PROBLEMS IN ECONOMIC 0E- VELOPMENT OF BRAZILL OP. CIT. TABLE I OF APPENDIX. 352E: UNITED NATIONS, DEPARTMENT OF ECONOMIC AFFAIRS, ECONOMIC SURVEY OF LATIN AMERICA_I95I-52 AND FOLLOWING ISSUES, (New YORK, |954 AND LATER). ‘ - I4 - AND THE COST OF LIVING INDEX FOR 8A0 PAULO TO 677 (I939 - I00),4 THIS INDICATES THAT THE REAL NATIONAL OUTPUT GROWTH ACCOUNTED FOR LESS THAN HALF THE INCREASE IN NOMINAL TERM. THE REMAINDER REFLECTS INFLA— TIONARY EXPANSION OF THE PRICE LEVEL. (2) THE BULK OF BRAzIL'S NATIONAL INCOME Is CONCENTRATED IN SOME AREAS. FOR INSTANCE, IN I954 THE STATES SAD PAULO, THE FEDERAL DISTRICT, NINAS GERAIS, AND RIO GRANDE DO SUL HELD 69% OF THE TOTAL NATIONAL IN- COME AND ABOUT 45% OF THE COUNTRY’S POPULATION. (3) THE GEOGRAPHICAL DISTRIBUTION OF INCOME HAS BECOME MORE UNEVEN SINCE THE PRE-IAR YEARS. FOR INSTANCE, IN I939 THE SOUTHERN STATES ACCUMULATED 44.0%, IN l950 48.2% OF TOTAL INCOME, THE NORTHERN STATES 2.5% AND I.8% RESPECTIVELY.6 (4) NOMINAL PER CAPITA INCOME VARIES WIDELY AMONG GEOGRAPHICAL AREAS, THE HIGHEST RATE BEING IN THE FEDERAL DISTRICT, THE LOWEST IN THE STATE OF MARANHXO. IN I953, FOR INSTANCE, AVERAGE INCOME IN THE FEDERAL DISTRICT MAS m3l9.548, IN MARANHZO m8l.904,7 (5)IN SPITE OF A COMPARATIVELY STEADY GROWTH IN TOTAL REAL PRO- DUCT, THE PER CAPITA INCREASE WAS SLOW IN PAST YEARS IF MEASURED IN 4 FIGURES BASED ON MEIREN AND LOEB. IBID. TABLE II APPENDIX I; AND A CONJUNTURA ECONOMICA ANO IX, NO. I (RIO DE JANEIRO: FUNDACAO GETOLIO VARGAS, JANUARY.I9555,PP. 9 AND IS. NOTE: AN OVER-ALL PRICE INDEX FOR BRAZIL IS NOT YET AVAILABLE. 5BASED ON: ”ESTIMATIVA DA RENDA NACIONAL Do BRASIL--I947-I954,” REVISTA BRASILEIRA DE ECONOMIA,ANO 9, NO. 4, DCSMBER I955, P. 86; AND INSTITUTO BRASILEIRO DE GEOGRAFIA E ESTATISTICA, ANUARIO ESTATISTICO DO BRASIL I953, ANO XIV (RIO DE JANEIRO, DECEMBER I953), P. 75. 6M T EIREN AND LOEB, IBID., P. 4. NOTE: HE BRAZILIAN INSTITUTE OF GEOGRAPHY AND STATISTICS DIVIDEO THE BRAZILIAN TERRITORY INTO FIVE AREAS, COVERING THE NORTHERN, NORTH-EASTERN, EASTERN SOUTHERN, AND CENTRAL- IESTERN STATES. 7"RENDA NACIONAL DO BRASIL-—I947-I953", REVISTA BRASILEIRA DE ECO- NOMIA,6NO 9, NO. I, MARCH I955, P. 54. TERMS OF AVAILABLE MEANS OF EXPANSION. ON THE BASIS OF I939 (- IDOL pen CAPITA INCREASE MAS MODERATE ONLY IN THE POST-VAR YEARS I948 (- III), I949 (-II4), I950 (-II7), I95I (-|2I), AND I952 (- I26).8 (6) IN NOMINAL TERMS THE DISTRIBUTION OF NATIONAL PRODUCT PER SEC- TOR HAS NOT SUFFERED MANY CHNAGES SINCE THE PRE-HAR PERIOD. IN REAL TERMS CHANGES WERE CONSIDERABLE, MAINLY DUE TO A PROPORTIONATE DECLINE IN AGRICULTURAL PRODUCTION AND INCREAS IN MANUFACTURING. COMPARATIVE INDICES ARE (I939 - I00): I30 FOR ADRICULTURAL AND 26| FOR MANUFACTURING IN I953.9 ALTHOUGH THE DIVERSIFICATION TREND RESULTED IN A REDUCED SEN- SITIVITY TOWARD RECESSIONS, IT ALSO CONTRIBUTED TO A CONCENTRATION OF INCOME. (7) A FURTHER CHARACTERISTIC OF BRAZILIAN INCOME DISTRIBUTION IS THE VIDE DISCREPANCY AMONG INCOME BRACKETS, EVEN AFTER DEDUCTION FOR DIRECT TAXES. THE GREAT MAJORITY OF THE POPULATION IS POOR, WHILE A SMALL SEGMENT RECEIVES VERY HIGH NET INCOMES. THE DISCREPANCY HAS PROBABLY GROWN IN RECENT YEARS DUE TO THE ACCUMULATION OF INFLATIONARY PROFITS, ALTHOUGH STATISTICS ARE NOT AVAILABLE TO PROVE THIS POINT. REASONS ACCOUNTING FOR DEFICIENCIES OF INCOME DISTRIBUTION ARE INNUMERABLE. THEY CAN BE TRACED TO THE COLONIAL ERA AND MONOCULTURAL PRODUCTION. IN SOME HAYS THE PROBLEM IS RELATED TO SOCIAL AND CLIMATIC CONDITIONS, MAINLY IN THE NORTH AND NORTH-EAST. UNDERPOPULATION AND INTERNAL UNREST BEAR UPON IT. 30 DO MANY "LACK-FACTORS” SUCH AS THE SHORTAGE OF COMMUNICATION AND TRANSPORT, OF EDUCATIONAL FACILITIES AND TECHNICAL KNOW-HOW, OF ELECTRIC POWER AND CAPITAL. FISCAL POLICIES, 8FIGURES FROM G, F, LOEB AND P. V. D. NEIREN, '0 DESENVOLVIMENTO DA PRODUCAO REAL E DDS RECURSOS DISPONIVEIS NO BRASIL, I939-I953"I_EF- VISTA BRASLLEIRA DA ECONOMIA.ANO 8, NO. 4, P. I42. 9LOEB AND HEIREN, IBID., Pp. I46 AND I49. — I6 _ PARTICULARLY THE TAX AND SOCIAL INSURANCE SYSTEM, HAVE CONTRIBUTED TO- IARD, RATHER THAN PREVENTED, INCOHE CONCENTRATION. 2, INCOME UNDER INFLATION THE HEAVY IMPACT OF PRICE INFLATION ON THE LEVEL OF DISTRIBUTION IS MOST PROBABLY THE STRONGEST CAUSE OF INTENSIFIED INCOME CONCENTRATION IN THE LAST FED DECADES. SINCE THIS BEARS HEAVILY UPON THE STRUCTURE OF FOREIGN TRADE, PRICE INFLATION HILL BE DISCUSSED HERE BRIEFLY. A PEI FIGURES MAY ILLUSTRATE THE POINT. BETIEEN I939 AND I946 TO- TAL MONEY SUPPLY MULTIPLIED FOUR TIMES, CHILE THE INCREASE IN REAL IN- COME NAS ONLY 25%. NATIONAL INCOME FIGURES FOR THE YEAR I955 ARE NOT YET AVAILABLE, BUT IT IS IMPROBABLE THAT THE REAL GRowTH EXCEEDED 35% BETIEEN I948 AND I955. WITHIN THE SAME PERIOD MONEY SUPPLY EXPANDED BY A FURTHER 236%.'0 THE PRIMARY CAUSES OF BRAZILIAN INFLATION CAN BE SUMMARIZED AS FOL- LOSS: (I) REPEATED BUDGETARY DEFICITS OF BOTH THE FEDERAL AND STATE GOVERNMENTS LEADING TO PAPER MONEY ISSUES UNCOVERED BY A CORRESPONDING INCREASE IN PRODUCTION; (2) LAVISH CREDIT POLICIES; (3) OVER-INVESTMENT PARTICULARLY IN SOME LON PRODUCTIVITY SECTORS; (4) HIGH COST OF PRODUCTION AS A RESULT OF A STATIONARY OR FALLING RATE OF PRODUCTIVITY; (5) DETERIORATION IN TERMS OF TRADE. IN ADDITION, MANY SECONDARY FACTORS CAN BE ENUMERATED, SUCH AS: THE FREEZING OF EXCHANGE RATES LEADING TO DISTROTIONS BETWEEN THE REAL IOCONJUNTURA Econ6IIICA.ANo X, No. 3, MARCH I956, P. I6. VALUE AND THE EXTERNAL VALUE OF THE CRquIRO, THUS RESULTING IN THE UN- EVEN GROVTH OF DOMESTIC PRODUCTION AND THE LOSS OF FOREIGN MARKETS FOR SEVERAL EXPORT GOODS (THE SO-CALLED 'PRODUTOS GRAVOSOS'); THE APPLICATION OF THE FACTORS OF PROCUTION IN SECTORS OHERE THEY PRODUCE OASTE; INEFFI- CIENT ADMINISTRATION OF FUNDS; SPOILAGE OF COMMODITIES DUE To A LACK OF STORAGE AND TRANSPORTATION FACILITIES; TEMPORARY PRICE RISES IN EXPORT PRODUCTS, ESPECIALLY COFFEE, AND EARLY SURPLUSES THEREFRDM IN THE BAL- ANCE OF TRADE UP TO I946; INEFFICIENT FISCAL POLICIES. IE CALL THESE SECONDARY FACTORS As THEY CONTRIBUTE To AN ACCELERATION OF THE INFLATIO- NARY TREND, BUT ARE NOT PRIMARY CAUSES IN THEMSELVES. THEY COULD HAVE CONTRARY EFFECTS--FOR INSTANCE STIMULATING OR CONTROLLING EFFECTS IN THE ABSENCE OF INFLATION. THE FACT THAT THEY INTENSIFY THE INFLATIONARY PRESSURE LARGELY EXPLAIN CESS AND wHY IT COULD NOT IMMEDIATELY BE CHECKED BY RESTRICTING MONEY SUPPLY. HOVEVER, THIS STUDY IS LESS CONCERNED WITH THE INFLATIONARY PROBLEM ITSELF THAN IITH ITS EFFECTS ON INCOME DISTRIBUTION. IN A COUNTRY VHERE PRODUCTION FACTORS ARE wIDELY DISTRIBUTED AMONG THE ENTIRE POPULATION, AND IN THE CASE OF UNDER-EMPLOYMENT, A MODERATE RISE IN THE PRICE LEVEL MAY BE AfiDNVENIENT STIMULANT To ECONOMIC DEVELOPMENT. IN BRAZIL THERE EXISTS ITHER A RIDE DISTRIBUTION OF INCOME NOR UNDER-EMPLOYMENT. - THEREFORE, ANY INCREASE IN MONEY SUPPLY UNMATCHED BY PRODUCTION HAS AN EVIL RESULT, BOTH IN THE SOCIAL AND ECONOMIC SENSE. WHAT HAPPENS IN BRAZIL UNDER INFLATION CAN BE RDUGHLY DESCRIBED AS FOLLOWS: THE MAJORI- TY OF THE POPULATION DEPEND EITHER EXCLUSIVELY OR PRIMARILY ON LABOR INCOME, HHILE A MINORITY OVNS THE BULK OF THE PRODUCTION FAC- TORS AS IELL AS CONSUMER DR SEMI-PROCESSED GOODS.. 'lTH THE RISE IN PRICES THE VALUE OF THESE FACTORS AND GOODS INCREASES OBTAINING THUS - I8 - HIGHER RETURN THROUGH SALES. IT IS TRUE THAT THE ACQUISITION OF RAM MA- TERIALS AND FURTHER.PRODUCTION FACTORS BECOMES MORE EXPENSIVE AS WELL, BUT THIS IS LARGELY OFFSET BY THE EFFECTS OF THE WAGE-PRICE SPIRAL AND THE ABILITY TO CHARGE HIGH PRICES FOR CONSUMPTION GOODS, DUE To A GENERAL SHORTAGE OF COMMODITIES IN RELATION TO AN EVER INCREASING NOMINAL INCOME. IN OTHER VORDS, THE OVNERS OF THE PRODUCTION FACTORS CAPITAL AND LAND ARE ALOAYS ONE OR MORE STEPS AHEAD OF LABOR. THE ABSENCE OF WELL ORGAN- IzED UNIONS CDNTRIBUTES To THIS DISCREPANCY. ONE OF THE CONSEQUENCES OF THIS PENOMENON IS THE PRESSURE THAT Is EXERCISED ON THE PROPENSITY To SAVE OF THE RORKING CLASS, As SHALL BE ILLUSTRATED BY A SIMPLE EXAMPLE. LET US ASSUME THAT IN ANY GIVEN YEAR THE AVERAGE PER CAPITA INCOME OF A GIVEN GROUP OF HDRKERS MAS O$50,000 AND THAT THE AVERAGE AMOUNT SPENT ON CONSUMPTION HAS U$40.000. IN THIS CASE THE AVERAGE PROPENSITY TO SAVE WAS: Ps| - Y_l__- Ci - 504000 - 40.000 . 20% VI 50.000 THE FOLLDVING YEAR, SUPPOSE, THE GROUP'S INCOME VENT UP BY I0% AND THE AGGREGATE PRICE INDEX FDR CONSUMPTION GOODS BY I2%. IT IS FURTHERMORE ASSUMED THAT THE GROUP MILL BUY THE SAME AMOUNT OF GOODS IN THE SECOND AS IN THE FIRST YEAR. THEN THE PROPENSITY To SAVE IAS: Y9 "' cl 551000 :- 40‘800 Ps - _ - - '8.5% 2 Y2 55.000 AND THE ”ARGINAL PROPENSITY TO SAVE 'AS: 5 290 d P I ————- - - N S Y 5.000 4fl HAD THERE BEEN NO INCREASE IN THE PRICE LEVEL OF CONSUMPTION GOODS, THE PROPENSITY TO SAVE IN THE SECOND YEAR COULD HAVE BEEN 27.3% UNDER THE ASSUMED INCREASE IN INCOME (045.000 OR I0%), AND THE MARGINAL PRO- PENSITY TO SAVE COULD HAVE BEEN 300%, PROVIDED THE SAME AMOUNT OF GOODS IOULD HAVE BEEN BOUGHT IN BOTH YEARS. IN OTHER VORDS, THE INCREASE IN THE PROPENSITY TO CONSUME WAS FICTIDUS SINCE IT DID NOT REPRESENT A RISE IN REAL INCOME. OF COURSE, THE RATES OF I055 AND IS% MAY NOT EXPRESS +EALISTIC RE- LATIONSHIP IN INCREASE. THEY SIMPLY INDICATE A TREND IN THE DISPROPDR- TIONATE DEVELOPMENT OF INCOME AND PRICES FOR THE OORKING CLASS." FOR OTHER SEGNENTS OF THE POPULATION THE'TREND IS RECIPROCAL, IO E. THE NOM- I INAL INCOME TENDS T0 EXPAND FASTER THAN THE PRICE LEVEL. 3, CAPITAL FORMATION AND INVESTMENTS IN ITS ANNUAL REPORT FOR I953, THE NATIONAL ECONOMIC COUNCIL SHOWS THAT IN I952 THE AMOUNT DESTINED FOR CONSUMPTION OF THE TOTAL NATIONAL INCOME MAS 77% IN BRAzIL AS COMPARED TO 75% IN THE UNITED STATES.'2 THESE AND OTHER FIGURES INDICATE THAT BRAzIL RESERVES AN APPRECIABLE A- MOUNT OF TOTAL INCOME FOR INVESTMENTS. THE COUNCIL DEMONSTRATES THE DRAOBACKS OF SUCH A HIGH RATE IN VIEO OF THE LOO PER CAPITA INCOME, BUT IT DOES NOT ATTEMPT To EXPLAIN H0O THIS IS MADE POSSIBLE. INDEED, IT IS A THRILLING PARADOX THAT BRAzIL SUCCEEDS To HAVE A HIGH RATE OF INVEST- MENT IN SPITE OF A LOO RATE OF PER CAPITA INCOME AND SAVINGS. tHIS IS THE MORE ASTONISHING SINCE OE HAVE SEEN THAT THE MARGINAL PROPENSITY To SAVE TENDS TO CONTRACT FOR THE VORKING POPULATION wHICH CONSTITUTES THE MAJORITY OF THE OVER-ALL POPULATION. MEASURED AT CONSTANT PRICES, THE PARTICIPATION OF TOTAL INVESTMENTS ON TOTAL AVAILABLE GOODS AND SERVICES VENT UP FROM I0.6% IN I945 TO l7.6% IN I952, VHICH MEANS THAT THE PER II THE DISPROPORTIONATE DEVELOPMENT IN THE ABOVE SENSE HAS NEVER BEEN FULLY EXPLORED BY BRAZILIAN ECONOMISTS PARTIALLY DUE TO THE LACK OF PERTINENT DATA. PROBABLY SOME VERY VALUABLE RESULTS COULD BE OBTAINED FOR THE APPLICATION OF ANTI-INFLATIONARY POLICIES IF THOROUGH STATISTI- CAL RESEARCH STUDIES WOULD BE CONDUCTED TO DETECT THE RATE OF DISPROPOR- TION FOR SELECTED INCOME BRACKETS AND GEOGRAPHICAL AREAS. 2 . CONSELHO NACIONAL OE ECONOMIA, RELATORIO PARA D AND DE I953, 5A0 PAULO, CHAPTER 2. . - 20 - CAPITA INVESTMENT EXPANDED BY l64¢ IN THE SEVEN YEARS UNDER CONSIDERA- TION-'3 THERE ARE SEVERAL REASONS FOR THIS EXPANSION. ONE IS RELATED TO EXTENDED GOVERNMENT ACTIVITIES. BRAzIL‘S GROSS DOMESTIC INVESTMENTS A- MOUNTED TO 03237.7 BILLION BETHEEN I947 AND I952, OF WHICH 45% DAME FROM PUBLIC SOURCES.'4 SECONDLY, AN IMPROVEMENT IN THE TERMS OF TRADE, MAIN- LY SINCE THE VORLD COFFEE BOOM OF I949, OAS OF IMPORTANCE. HOVEVER, THESE OR ANY OTHER CONTRIBUTING FACTORS DO NOT REALLY EXPLAIN THE HIGH RATE OF INVESTMENTS IN RELATION TO THE LON DEGREE OF SAVINGS. APPARENTLY THIS PARADOX CAN ONLY BE SOLVED IN TERMS OF THE ABOVE DESCRIBED CONCENTRATION OF INCOMES AND ITS BEARING ON CAPITALIZATION. THE INCOME BRACKETS FAVORED BY THE DEVELOPMENT TEND To REDUCE THEIR MAR- GINAL PROPENSITY TO CONSUME IN RELATION TO OHAT COULD TECHNICALLY BE CALLED A MARGINAL PROPENSITY TO SAVE, AND IN SPITE OF THE FACT THAT THEIR AGGREGATE PROPENSITY TO CONSUME INCREASES, GIVEN THE INCREASE IN MONEY INCOMES. THE INCREASE IN THE PROPENSITY TO CONSUME HAS LITTLE EFFECT ON TOATAL REAL INCOME FOR THE FOLLOWING REASONS: (I) A SUBSTAN- TIAL PORTION OF THE INCREASE IN MONEY INCOME IS INVESTED IN LOI PRODUC- TIVITY VENTURES; (2) ANOTHER PORTION TAKES THE FORM OF LEAKAGES (MAINLY INTO IMPORTS, AS HILL BE SEEN LATER), (3) INFLATION ABSORBS PART OF THE INCREASE; (4) DEFICIENCIES IN THE SYSTEM OF DISTRIBUTION, MAINLY OF TRANSPORTATION AND COIIMUNICATION, PREVENTS A FAST AND EFFICIENT SPREAD 3UNITED NATIONS, ECONOMIC SURVEY OF LATIN AMERICA--I95|—Sg,OP. CIT., P. 56. IT MUST BE NOTED HERE THAT THE RATE OF INVESTMENT GRDVTH FELL CONSIDERABLY IN THE YEARS I953/54 DUE TO CREDIT RESTRICTION AND AN IN- CREASE IN CONSUMPTION. SEE: UNITED NATIONSJ ECONOMIC Sugggg OF LATIN AMERICA--I954,OP. CIT., P. I29. I4BASED ON FIGURES OF “ESTIMATIVA DA RENDA NACIONAL DO BRASIL—- I947-52,‘ OP. CIT., P. 275. OF INCOMES; (5) THE MULTIPLIER HAS ONLY A LIMITED EFFECT FOR REASONS To BE EXPLAINED IN THE NEXT CHAPTER. IT OAS SAID ABOVE THAT HIGH INCOME BRACKETS HAVE A HIGH MARGINAL PROPENSITY TO SAVE, AT LEAST IN THE SENSE THAT A LARGE RIR TION OF THEIR INCOMES IS NOT SPENT. HERE LIES THE SOURCE OF HIGH INVESTMENT RATES. 'ITH PROGRESSING INCOME CONCENTRATION AND INFLATION ON ONE HAND, AND THE SLOO RATE OF NATIONAL OUTPUT ON THE OTHER, ENTREPRENEURS ACCUMULATE PRO- FITS MUCH IN EXCESS OF VHAT THEY CAN CONSUME. THESE ARE THEN REINVESTED SOMETIMES MITHOUT EVEN CIRCULATING THROUGH THE BANKING SYSTEM, PARTICU- LARLY NOT IN THE FORM OF SAVINGS OHICH ARE DISCOURAGED BY INFLATION AND CEILING INTEREST RATES DETERMINED BY THE LAw. MANY INVESTMENTS, MAINLY THE ONES IN REAL ESTATE, OHERE LITTLE OR NO MANAGEMENT IS REQUIRED, ARE DONE SIMPLY BECAUSE EXCESS PROFITS CANNOT BE CONVENIENTLY REINVESTED IN BUSINESS, OR BECAUSE STOCKHOLDERS OR PARTNERS ARE NOT GIVEN OTHER OPPOR- TUNITIES. ANOTHER PARADOX RESULTING FROM THE CONCETRATION OF INCOMES IS THAT BRAZIL SUFFERS AT THE SAME TIME FROM UNDER-CAPITALIzATION AND OVER—IN- VESTMENTS. INASMUCH AS THE COUNTRY REQUIRES MORE CAPITAL TO MAKE BETTER USE OF ITS FACTORS OF PRODUCTION, PRIMARILY LABOR, IT IS UNDER-CAPITALI- 2ED. INSOFAR AS IT RESERVES TOO MUCH OF ITS INCOME FOR INVESTMENTS, PARTICULARLY IN LOH PRODUCTIVITY VENTURES, IT IS OVER-CAPITALIZED. THIS DISCREPANCY, IT SEEMS, IS OUT ANOTHER EXPRESSION OF BRAzIL'S NUMBER ONE PROBLEM, OR THE DISEQUILIBRIUM IN THE DEVELOPMENT OF INCOME DISTRIBUTION. III. MARKET STRUCTURE AND ECONOMIC GROWTH THE OBJECTIVE OF THIS CHAPTER IS TO INVESTIGATE THE RELATIONSHIP BETIEEN THE SIZE AND NATURE OF THE MARKET AND THE DETERMINANTS OF ECONO- MIC GROWTH IN BRAZIL. BUILDING UPON THE PRECEDING DISCUSSION OF INCOME DISTRIBUTION, AN ATTEMPT IS MADE TO EXAMINE THE EFFECT OF INCOME CONCEN- TRATION ON THE DEMAND FOR THE FACTORS OF PRODUCTION AND DOMOSTIC GOODS. I, UNBALANCED GROOTH THE HIGHEST ECONOMIC AIM ANY COUNTRY CAN STRIVE FOR, IS BALANCED GROHTH. IF IN SPITE OF CHANGING MARKET FORCES EQUILIBRIUM CAN BE FOUND BETOEEN AGGREGATE SUPPLY OF THE FACTORS OF PRODUCTION AND THEIR DEMAND, BETOEEN TOTAL OUTPUT AND MONEY SUPPLY, AND IF IN ADDITION PRODUCTIVITY CAN BE IMPROVED AND THE MAJOR NEEDS OF A GROVING POPULATION BE SATISFIED, STABILITY OF SOCIAL AND ECONOMIC ORDER HILL RESULT. IT IS LARGELY IN- DIFFERENT THEN VHETHER THE COUNTRY IN QUESTION IS ”RICH" OR "POOR" IN ECONOMIC RESOURCES. DEVELOPMENT BECOMES PROBLEMATICAL ONLY HHEN LASTING RECESSIONS OR DEPRESSIONS OCCUR, OR OHEN SOME FORCES IN THE ECONOMY HAVE A MARKED TENDENCY TO EXPAND FASTER THAN OTHERS. IN BRAZIL LITTLE OR NOTHING CAN BE DONE To CHECK THE FORCES OF DE- PRESSION OHENEVER THEY ARE RELEASED. THE ECONOMY IS VIDELY DEPENDENT ON THE CYCLICAL MOVEMENTS OF THE REST OF THE wORLD, AND PRIMARILY ON THE UNITED STATES. IT HAS NO CHOICE BUT To FOLLOO THE UPS AND DOVNS OF FOR- EIGN BUSINESS BEHAVIOR. oN THE OTHER HAND A HOME-PRODUCED DEPRESSION IS - 23 - IMPROBABLE WHILE INFLATION LASTS. uUCH MORE SERIOUS IS THE PROBLEM ARISING FROM UNBALANCED GROWTH. FOR "ANY THIS IS AN UNAVOIDABLE FEATURE OF UNDERDEVELOPED COUNTRIES. IT HAS BEEN TERMED IN BRAZIL AS THE 'CRISIS OF GROWTH.” THE POSITION MAY BE TAKEN THAT SUCH A CRISIS IS NOT INEVITABLE, BUT RATHER A RESULT OF DISEOUILIBRIUM IN THE NATURE OF SUPPLY AND DEMAND. girTHE CHARACTERISTICS OF EMPLOYMENT IN BRAZIL DISEQUILIBRIUM IS FOUND IN THE RELATIVE SUPPLY OF THE FACTORS OF PRODUCTION. THERE IS A VAST AMOUNT OF LAND, A FAST GROHING POPULATION, AND LITTLE REAL CAPITAL TO EXPLORE THE LAND AND PROVIDE SUFFICIENT JOB OPPORTUNITIES AT HIGH RATES OF PRODUCTIVITY. IT HAS BEEN SAID THAT THE BRAZILIAN ECONOMY IS FULLY EMPLOYED, HY- PER-EMPLOYED, OR SUFFERS FROM DISGUISED UNEMPLOYMENT.. DSPENDING ON MHAT IS MEANT BY EMPLOYMENT,ANY OF THE DESIGNATIONS IS CORRECT. FULL EMPLOY- MENT HAS BEEN REACHED INSOFAR AS ALL PERSONS INTERESTED AND CAPABLE OF OORKING CAN FIND EMPLOYMENT. HYPER-EMPLOYMENT ALSO EXISTS, BUT DOES NOT DIFFER SUBSTANTIALLY FROM OHAT IS CALLED DISGUISED UNEMPLOYMENT. BOTH TERMS REFER TO THE FACT THAT THE PRODUCTIVITY OF LABOR IS LOG IN MOST SECTORS OF PRODUCTION. HYPER-EMPLOYMENT STRESSES THE ASPECT THAT TOO MANY PEOPLE ARE VORKING TO PRODUCE A LIMITED OUTPUT. DISGUISED ON- EMPLOYMENT MEANS, IN THIS CONNECTION, THAT A REDUCTION OF MANPOVER HOULD BE POSSIBLE OITHOUT HEAVILY AFFECTING AGGREGATE OUTPUT, PROVIDED THAT PRODUCTIVITY IS IMPROVED. IMMEDIATELY, A QUESTION ARISES, NAMELY: 'HY DON'T EMPLOYERS REDUCE THEIR LABOR FORCES TO BENEFIT FROM DECREASED COSTs? THERE ARE VARIOUS REASONS. FIRST OF ALL, THE LABOR LAMS PRESENTLY IN FORCE RENDER IT VERY OIFFICULT TO LAY OFF PERSONNEL. THE MORE YEARS OF SERVICE AN EMPLOYEE HAS WITH A COMPANY, THE HIGHER WILL BE THE INDEMNIZATION TO BE PAID IN CASE OF DISMISSAL. AFTER TEN YEARS OF SERVICE, NO EMPLOYEE CAN BE DIS- CHARGED. FURTHERMORE, THE AVERAGE EMPLOYER HAS LITTLE CONCERN FOR PRO- DUCTIVITY IN THE WORKSHOP OR OFFICE, HIS PROFITS ARE OFTEN HIGH ENOUGH TO FEED THE EFFICIENT AS WELL AS THE UNPRODUCTIVE. OF COURSE, THERE ARE EXCEPTIONS TO THE RULE; SOME COMPANIES PROVIDE PERSONNEL TRAINING PRO- GRAMS, OTHER FINANCE INSTRUCTION IN SPECIALIZED SCHOOLS. THE AVERAGE EN- TERPRISE, HOWEVER, IS INDIFFERENT TO PRODUCTIVITY AND ITS IMPROVEMENT THROUGH RATIONAL MEANS. IT HAS BEEN STATED BEFORE THAT BRAZIL RESERVED A HIGH RATE OF ITS NATIONAL INCOME FOR INVESTMENTS. A COMPERATIVELY LARGE PROPORTION OF SURPLUS PROFITS IS REINVESTED, AND ALTHOUGH MUCH OF IT IS ABSORBED BY IN- FLATION, SOME PART OF IT DOUBTLESSLY INCREASES TOTAL REAL OUTPUT. POPU- LATION GROWTH PROVIDES ADDITIONAL LABOR SUPPLY TO ACCOUNT FOR THE INCREASE IN PRODUCTION. IN THIS WAY FULL EMPLOYMENT IS SECURED. UNDER SUCH CON- DITIONS NEW CAPITAL FORMATION NORMALLY NOT ONLY ABSORBS ADDITIONAL LABOR FORCE, BUT ALSO CAUSES PEOPLE TO SEEK IMPROVEMENTS IN THEIR STATUS OF EM- PLOYMENT. HOWEVER, THIS IS NOT GENERALLY SO IN UNDERDEVELOPED COUNTRIES.‘ APPARENTLY, THE AVERAGE EMPLOYEE IN AN UNDERDEVELOPED COUNTRY IS MORE READILY SATISFIED WITH THE JOB HE HOLDS THAN HIS COLLEAGUE IN AN ADVAN- 'CED COUNTRY. CONSEQUENTLY LABOR SUPPLY IS MUCH LESS ELASTIC AND THE MULTIPLIER HAS LITTLE EFFECT. FOR ALL PRACTICAL PURPOSES FULL EMPLOY- MENT CAN BE FOUND. 'SEE: V. K. v. RAD, "INVESTMENT, INCOME, AND THE MULTIPLIER IN AN UNDER-DEVELOPED ECONOMY,” THE INDIAN ECONOMIC REVIEW,FEBRUARY I952, AND: JAMIL MUNHOZ BAILAO, ”OBSERVACOES SUMARIAS SOBRE O HULTIPLICADOR DO INVESTIMENTO E 00 EMPREGO NAS ECONOMIAS SUBDESENVOLVIDAS." _§£l£lj_££. CIENCIAS ECONOMIcee, MARCH I954,PP. 69-78. - 25 - DOEs ALL THIs SUGGEST THAT PEOPLE ARE DIFFERENT IN THE LEss ADVAN- CED ECONOMIEB? PERHAPB THERE IB A RELATIONSHIP BETVEEN THE INDIVIDUAL CAPACITY TD PRODUCE AND CLIMATE, As HAs BEEN CDNTENDED BY CONSCIENTIOUS BCIENTIBTB LIKE TDYNBEE. NEVERTHELEBB, BUCH FATALIsTIC AROUMENTB ARE OFTEN DVER-EMPHAsIzED ON THE CROUND OF THEIR EASY INTELLIOIBILITY. CHRONIC INFLATION PROBABLY HAS A BTRDNDER IMPACT ON THE VORKINO CONDITIONS OF A POPULATION THAN Is COMMONLY REALIZED.2 IT CAUBEs PEOPLE TO BECOME INDIFFERENT TOVARD THEIR JOBS AND REDUCES THE EFFECT OF THE MULTIPLIER. IF THIB IS TO BE CHECKED, THE LABOR MARKET MUST CHANCE IN FORM AND CHARACTER. PEOPLE BILL HAVE TO REGAIN THEIR CONFIDENCE IN THE VALUE OF THE CURRENCY AND BECOME MORE AVARE OF THEIR SPENDING HABITS. ALsD, THE VORKINC POPULATION MIDHT THEN REALIzE THAT IT CAN IMPROVE ITs STATUS OF EMPLOYMENT BY sELECTINC JOBS MORE CAREFULLY AND BY DEVELOPIND A HIGHER INTEREBTTN LABOR PRODUCTIVITY. THE KEY TO THE LABOR PROBLEM IS, THEREFORE, THE ELASTICITY OF SUP- PLY. AC LDNC AB PEOPLE ARE NOT VILLINO TO CHANGE THEIR BTATUB OF EM- PLOYMENT, NEV CAPITAL FORMATION Is BOUND TO BE RESTRICTED To THE RATE OF OROVTH IN POPULATION. IT Is TRUE THAT THE MARCINAL PROPENSITY TD CDNsUME TENDS TO RIsE UNDER INFLATION, BUT IT VILL CONTRIBUTE LITTLE TO AN INCREABE IN REAL NATIONAL OUTPUT, SINCE THE MULTIPLIER IS BLOMED DOMN BY THE FULL EMPLOYMENT BARRIER.. WITH LITTLE REAL CAPITAL AVAILABLE, PRODUCTIVITY IC BOUND TO BE LDV, AND VHERE PRODUCTIVITY Is LDM, REAL IN- COMEB ARE LDV, AND so Is THE CAPACITY TD BAVE. CDNBEQUENTLY, CAPITAL FORMATION IS RESTRICTED--THERE SEEMS TO SE NO END TO THE VICIOUS CIRCLE. .4 IN THIB CONNECTION AN ARTICLE SHALL BE MENTIONED THAT DISCUSSES THE INADEOUANCY OF THE MULTIPLIER TECHNIQUE IN PERIDDB OF FULL EMPLOY- MENT AND INFLATION: FRANKLIN D. HDLZMAN, "INCOME DETERMINATION IN OPEN IIVFLATIDN,‘ THE REVIEI OF ECONOMICB AND STATISTICS.» VOL. XXXII, NUMBER — 26 - IN SUMMARY, 'HAT CAN BE CONCLUOED FROM THE ABOVE IS MAINLY THE EXIS- TENCE OF A SHORTAGE OF SUPPLY OF LABOR AND REAL CAPITAL, NOT ONLY IN RE- LATION TO THE LARGE AMOUNT OF LAND AVAILABLE, BUT CHIEFLY TO THE POTEN- TIAL POSSIBILITIES OF THE LABOR MARKET AS DETERMINED BY THE FAST GROWTH IN POPULATION. 3, THE NATURE OF DEMAND IN THE PREVIOUS CHAPTER SOME ASPECTS OF INCOME DISTRIBUTION MERE DISCUSSED WHICH WILL NOW BE USEFUL TO EXAMINE THE NATURE OF DEMAND. IT WAS SHOWN HOW INCOME CONCENTRATION HAS OCCURED IN BRAZIL, BENEFITING A SMALL GROUP OF THE POPULATION TO THE OETRIMENT OF THE MAJORITY. ANOTHER VIEV OF THE SAME PHENOMENDN IS: EFFECTIVE DEMAND IS CONSIDERABLY DREA- TER FOR THE RECIPIENTS OF HIDH INCOMES THAN FOR THE Low INCOME CROUP. THIS HAS BOME IMPORTANT IMPLICATIONS FOR THE MARKET STRUCTURE. SOME BASIC CONCEPTS OF MARGINAL ANALYSIS SHALL BE APPLIED HERE TO EXAMINE THE RELATIONSHIP OF INCOME DISTRIBUTION AND DEMAND ON ONE SIDE, AND DEMAND AND TOTAL OUTPUT ON THE OTHER. LET US EXAMINE THE GENERAL QUESTION OF HOW PEOPLE DIVIDE THEIR TOTAL IIVCOME IN A GIVEN AMOUNT OF TIME INTO THE PURCHASE OF GOODS AND SERVICES. IWiEY'IWLL TRY TO SPEND THEIR MONEY AS TO GAIN A MAXIMUM UTILITY FROM EVE- FTY GOOD THEY OBTAIN. IN ORDER TO MAXIMIZE THE UTILITY THAT CAN BE DE- RIVED FROM THE TDTALITY OF GOODS TO BE BOUOHT, THEY MILL HAVE TO VEIOHT EACN4 OOOOS'S UTILITY. FDR INSTANCE, IF THEIR TOTAL DESIRE COULD BE CA- T'IsF'IEO BY TVD COODs ONLY, BUT IF THEY FEEL THAT ONE CDDD IS EXACTLY ‘TIIIBE As IMPORTANT AS THE OTHER, THEY VOULO BE UNVISE To BUY MORE (OR LESS) THAN TIO THIRDS OF THE FIRST GOOD AND BUY LESS (OR MORE) THAN ONE TFIIRE) OF THE SECOND OOOD. K. E. BOULDINO HAs CALLED THIS GENERAL RULE - 27 - THE "EOUIMAROINAL PRINCIPLE" wHICH HE DEFINED As FOLLOVS: ”IN DIVIDINO A FIXED QUANTITY OF ANYTHINO AMONO A NUMBER OF DIFFERENT USES, JUST SO MUCH IILL BE APPORTIONED TO EACH USE, TO CAUSE THE OAIN INVOLVED BY TRANSFERINO A UNIT OF DIVIDEND INTO ONE USE TO BE JUST EQUAL TO THE LOSS INVOLVED IN THE USES FROM IHICH THE UNIT OF DIVIDEND IS IIITHDRAIIN."3 IITHIN LIMITATIONS IMPOSED BY THE INDIVISIBILITY OF GOODS AND THE IMPERFECT KNVOLEOCE ABOUT THE EXACT RATE OF UTILITY EACH COOD CAN PRO- VIDE, THE EOUIMARCINAL PRINCIPLE EXPLAINS HOV MANY OOOOS OF EACH TYPE MILL BE DEMANDED FOR, CIVEN A FIXED PRICE LEVEL AND CONSTANT INCOMES. WHAT VILL HAPPEN IF THE PREMISE OF CONSTANT INCOMES IS REMOVED OR IF THE INCOME OF SOME CONSUMERS HILL RISE TO THE SAME EXTENT As IT MILL FALL FOR OTHERs? FOR THE FIRST MENTIONED CROUP, WITH A HIOHER EFFECTIVE DE- MAND, THE NARCINAL UTILITY OF MONEY WILL MOST PROBABLY DECLINE. EACH MONETARY UNIT ADDED To THE CONSUMER'O INCOME HILL BECOME A LESS SICNIFI- CANT CONTRIBUTION TO THE SATISFACTION OF HIS OESIRES, PROVIDED THAT THE LATTER DO NOT CHANCE. HE MILL THEREFORE BE VILLINO TO EXPAND CONSUMP- TION OF THE GOODS HE MOST DESIREB. THEY wILL APPEAR ”CHEAPER" TO HIM THE MORE HIS INCOME RISES. HIS DEMAND 'ILL THUS EXPAND. THE CONTRARY VILL HAPPEN VITH THE POORER STRATA OF THE POPULATION. UNDER THE ABSUMPTION OF A OIVEN LEVEL OF CONSUMPTION FOR MOST COMMODI- TIES, THE MAROINAL UTILITY OF COODS MAY REMAIN PROPORTIONALLY CONSTANT. BUT A CONTRACTION OF INCOMES IILL RAISE THE MARCINAL UTILITY OF MONEY. EACHI CURRENCY UNIT 'LDST' HILL BECOME MORE PAINFUL FOR THE CONSUMER AF- FECTED. IF THE EXPANSION OF DEMAND ON ONE SIDE Is EXACTLY OFFSET BY A CON- TRACTION OF DEMAND ON THE OTHER, INDIVIDUAL COMMODITY PRICES I'lILL NOT BE 3KENNETH E. BOULDINC, ECONOMIC ANALYSIB,(REVISED 50., NE! YORK: HARPER a. BROTHERS PUBLISHERS, I948), P. 622. -28- AFFECTED; NOR WILL THE GENERAL PRICE LEVEL OF GOODS. THIS, HOWEVER, IS VERY IMPROBABLE IF RADICAL CHANGES IN INCOME OCCUR. WHAT WILL MOST LI- KELY TAKE PLACE IS THE FOLLOWING: 'ITHOUT A NECESSARY CHANGE IN THEIR MARGINAL UTILITY PREFERENCE, THE IMPOVERISHED WILL HAVE TO REDUCE THEIR PROPENSITY TO SAVE, AND, IF INCOME CONCENTRATION PROGRESSES, ALSO THEIR PROPENSITY TO CONSUME. TO SATISFY THEIR MOST URGENT NEDDS THEY WILL SHIFT TO THE CONSUMPTION OF LOW PRICED COMMODITIES. FOR INSTANCE, THEY MAY EAT MARGARINE INSTEAD OF BUTTER, DRINK WATER INSTEAD OF MILK, WALK INSTEAD OF DRIVE, OR CEASE TO GO TO THE MOVIES. THE ENRICHED ON THE OTHER HAND, WILL EXPAND BOTH THEIR PROPENSITY TO CONSUME AND TO SAVE. IN ADDITION, HOWEVER, THEY WILL BECOME MORE AWARE OF THE "GOOD THINGS OF LIFE." A HIGHER PURCHASING POWER ENABLES THEM TO INCREASE THEIR EFFECTIVE DEMAND. A LOW PRICED CAR WILL NO MORE SUFFICE. THEY WILL WANT TO BUY A CAR WITH MANY SUPERFLUOUS BUT PLEAS- ANT GADGETS, EXPENSIVE TOYS FOR THEIR CHILDREN, FASHION DRESSES FOR THEIR WIFE, A YACHT, APPLIANCES, A WEEK-END HOUSE IN THE MOUNTAINS, ETC. WHAT IS PERHAPS THE MOST IMPORTANT FEATUFE ABOUT THEIR CHANGING DEMAND IS THAT ALL THE LUXURY THEY NEVER DREAMT OF BEFORE, WILL SUDDENLY BECOME VERY IMPORTANT FOR THEIR SATISFACTION, BECAUSE THEY SAW ALL THE CONVE- NIENT OBJECTS WHEN THEY TRAVELLED ABROAD, OR BECAUSE THEIR NEIGHBOURS OR COMPANION CLUB MEMBERS ACQUIRED SOMETHING THEY NOW FEEL ESSENTIAL FOR THEIR HAPPINESS. IN SHORT, THE MARGINAL UTILITY WILL CHANGE WITH A SUB- STANTIAL INCREASE IN INCOME. THE ABOVE EXPOSTION WAS GIVEN IN DYNAMIC TERMS, I. E. CHANGES IN INCOME DISTRIBUTION WERE HELD RESPONSIBLE FOR A CHANGE IN DEMAND. A STATIC EXPLANATION WOULD PERHAPS BE LESS PERSUASIVE, BUT IT IS IMPOR- TANT TO NOTE THAT THE DYNAMIC ASPECT DIFFERS ONLY IN DEGREE FROM WHAT IS AN EVIL ALL THE SAME. IN OTHER WORDS, IT IS NOT SUFFICIENT TO CHECK THE PRESENT RATE OF INCOME CONCENTRATION IN BRAZIL IN ORDER TO REMOVE ITS DRAWBACKS. MORE FAR-REACHING METHODS WILL HAVE TO BE APPLIED, AIMED AT A COMPLETE*ESTRUCTURATION OF INCOME DISTRIBUTION, THUS FAR THE ANALYSIS WAS DEVELOPED UNDER THE ASSUMPTION OF CON- STANT PRICES. IT WILL BE SEEN, HOWEVER, THAT THIS PREMISE CANNOT BE UP- HELD WHEN INCOME CONCENTRATION DEVELOPS. EVEN IN THE ABSENCE OF MONEY INFLATION, SUCH AS DEVELOPS FROM DEFICIT FINANCING, IT WILL BE OIFFI- CULT TO MAINTAIN A FIXED PRICE LEVEL. 4, THE ORIGINS or Unegkgwczo GROWTH IN THE sense THAT A RISING STANDARD or LIVING STANDARD or LIVING IS A DESIRABLE AIM or acouomnc POLICY, no OBJECTION can a: RAISED TO IN-' con: CONCENTRATION AS A means TO PROVIDE PEOPLE WITH non: PURCHASING POWER. BUT WHEN THE CONCENTRATION IS NOT A RESULT OF INCREASED PRODUC- TIVITY, BUT IS REALIZED AT THE EXPENSE OF OTHER MEMBERS OF THE SOCIETY, IT MAY BE CONDEMNED.8EYOND SOCIAL RECURRENCES, IT WILL CAUSE UNBALANCED GROWTH. WHERE PURCHASING POWER IS AVAILABLE FOR A WIDE VARIETY OF PRODUCTS NEW BUSINESS ACTIVITIES CAN BE SUCCESSFULLY UNDERTAKEN. THIS EXPLAINS THE FAST DEVELOPMENT OF DIVERSIFICATION THAT CAN BE OBSERVED IN 8RAlIL 'EODAY. IT IS LESS VENTURESOME TO START A NEW BUSINESS IN ALMOST EVERY F’IELD IN BRAZIL THAN IN MORE ADVANCED COUNTRIES. IwITH A FAIRLY GOOD PRCHDUCT, SOME CAPITAL, AND COMPARATIVELY LITTLE MARKET KNOWLEDGE ANY CCHQAGEOUS ENTREPRENEUR CAN BECOME PROSPEROUS. IT DOES NOT REQUIRE MUCH RESEARCH OR ADVERTISING TO PROMOTE A NEW PRODUCT. IF WELL ADMINISTERED IN 'THE BEGINNING, YOUNG FIRMS CAN SOON COUNT ON SATISFACTORY OR EVEN - 30 - SUBSTANTIAL PROFITS, AND DO NOT HAVE To FEAR CUTTHROAT COMPETITION. NEVERTHELEBS, A MASS MARKET EXISTS ONLY FOR A VERY FEW GOODS. THE CONSTANT SHIFT IN DEMAND DETERMINED BY INCOME CONCENTRATION PREVENTB AN EVEN EXPANSION OF PRODUCTION CAPACITIES, EXCEPT IN THE FIELDS OF THE MORE VITAL COMMODITIES, LIKE FOOD AND CLOTHING. EVEN THERE, MASS PRO- DUCTION Is HAMPERED DUE To THE Low REAL PRUCHASING POWER OF THE RURAL POPULATION, AND OF THE LACK OF MEANS OF TRANSPORTATION AND COMMUNICATION. |N CONSEQUENCE, LARGELY INDEPENDENT MARKETS DEVELOP. IN THE LOW INCOME AREAS, NHICH ARE HIDELY IDENTICAL VITH THE AGRARIAN DISTRICTS, DEMAND CONCENTRATES ON MEANS OF SUBSISTENCE PRODUCED LOCALLY. THE HIGH INCOME AREAS NOT ONLY ABSORB A SUBSTANTIAL PORTION OF RURAL PRODUCTS, BUT ALSO THE MAJORITY OF INDUSTRIAL GOODS. THE CONTRAST BETWEEN LOW AND HIGH INCOMES IN THE PREOOMINANTLY AG- RARIAN AREAS ON ONE SIDE AND THE MAJOR CITIES ON THE OTHER IS ONE ASPECT OF UNBALANCED GROWTH. ONCE A CENTER SUCCEEDB TO DEVELOP ITS MARKET, IT ATTRACTS PEOPLE FROM THE FARM LAND. MIGRATION THUS NOT ONLY ENABLES THE CENTERS To PROGREBB AT A FAST RATE, BUT ALSO CAUSES OVER-POPULATION AND TRAFFIC CONGESTIONS IN THE MAJOR CITIES LIKE SAO PAULO, RIO DE JANEIRO, BELO HORIZONTE OR PORTO ALEGRE. IN ADDITION IT SLows DOWN AGRICULTURAL PRODUCTION. THIS EXPLAINS, TO COME EXTENT, THE PRICE INCREASE OF FOOD PRODUCTS, AND THE INABILITY To EXPAND THE OUTPUT OF EXPORT GOODS To MEET RISING IMPORT REQUIREMENTS. UNDER THE GIVEN CONDITIONS, DIVERSIFICATION PRODUCES MORE HARM THAN BENEFITS To THE NATION. IF IT WERE THE RESULT OF COMPETITIVE FORCES IN THE ECONOMY URGING ENTREPRENEURS To LOOK FOR MORE EFFICIENT PRODUCTION METHODS AND BETTER PRODUCTS, IT WOULD CONTRIBUTE TO AN IMPROVEMENT IN PRODUCTIVITY AND A RISE IN REAL INCOMES. IN BRAZIL, HOWEVER, ONLY FEW INDUSTRIES OPERATE UNDER KEEN COMPETITION. THEY TURN To DIVERSIFICATION BECAUSE OF EXISTING EFFECTIVE DEMAND AND IMPORT CONTROLS. BUT SINCE A LARGE PORTION OF DEMAND IS DIRECTED TowARD LESS ESSENTIAL GOODS, MANY INDUSTRIES ARE RAISED TO PRODUCE FANCY ARTICLES IHICH ADD LITTLE TO AN INPROVED STANDARD OF LIVING. DIVERSIFICATION AND THE LACK OF MASS MARKETS FOR ESSENTIAL GOODS IMPEDES MASS PRODUCTION MHICH, IN TURN, AFFECTS PRODUCTION COSTS. QUITE OFTEN POTENTIAL INVESTORS ARE DISCOURAGED BY EXISTING MARKET LIMITATIONS OR EXCESSIVE COSTS OF PRODUCTION. THIS HAS PARTICULARLY HAMPERED THE DEVELOPMENT OF HIGH FIXED COST INDUSTRIES REQUIRING LARGE VOLUME OUTPUTS To JUSTIFY ORIGINAL INVESTMENTS. IF PRODUCTIVE EFFORTS AND DEMAND COULD BE CONCENTRATED ON ESSENTIAL GOODS, STANDARDIZATION AND MASS PRODUCTION MOULD SE STIMULATED, AND PRODUCTIVITY SE INCREASED. THIS, HowEVER, IS NOT POSSIBLE WITHOUT CURTAILING EFFECTIVE DEMAND OF THE WEALTHY AND RAI- SING DEMAND OF THE POOR. IN SUIIAIARY, THE DISCREPANCY BETWEEN PURCHASING POWERS OF DIFFERENT STRATA OF THE POPULATION HOLDS DOWN THE DEVELOPHENT OF MASS PRODUCTION AND ENCOURAGES THE PRODUCTION OF LUXURY ARTICLES, THUS CONTRIBUTION TO UNBALANCED GROWTH OF THE FACTORS OF PRODUCTION EMPLOYED IN THE ECONOMY. ALSO THE PRICE LEVEL IS AFFECTED BY THE DESCRIBED TREND OF UNBALAN- CED DEVELOPMENT, BOTH DIRECTLY AND INDIRECTLY. THE DIRECT IMPACT IS DE- TERMINED BY THE SHIFT IN DEMAND FROM MORE TO LESS PRODUCTIVE VENTURES, FOLLO'ED BY A CORRESPONDING SHIFT IN THE FACTORS OF PRODUCTIONS THE IN" DIRECT IMPACT MAY BE FOUND IN THE HIGH COST OF AVERAGE OUTPUT DUE TO THE LOW DEGREE OF MASS PRODUCTION, MASS DISTRIBUTION, AND STANDARDIZATION. INFLATION IS NOT NECESSARILY A CONSEQUENCE OF THE RESTRUCTURATION IN THIS SENSE. BUT MEASURED AGAINST THE PRICE LEVELS OF OTHER COUNTRIES OPERA- -32- TING UNDER MORE STABLE CONDITIONS, THE PRODUCTS OF THE COUNTRY IN QUES- TION BECOME MORE EXPENSIVE AND ENCOUNTER EXPORT OBSTACLES. MONEY INFLA- TION, ON THE OTHER HAND, CAUSES THE TREND TO INTENSIFY FOR REASONS DIS- CUSSED EARLIER IN THIS STUDY. ONE LAST ASPECT OF INCOME CONCENTRATION AND MONEY INFLATION MUST BE EXAMINED HERE. DIVERSIFICATION AND A GENERAL EXPANSION OF THE PRODUCTIVE STRUCTURE WOULD BE LESS HARMFUL UNDER THE CONDITIONS OF UNDER-EMPLOYMENT. FOR SOCIAL REASONS, IT COULD BE PROPOSED, ANY STIMULATING EFFECT WOULD BE DESIRABLE FOR THE ECONOMY, EVEN IF IT RESULTED IN A DETERIORA- TION OF PRODUCTIVITY. THIS, HOMEVER, DOES NOT APPLY TO BRAZIL, MHERE LABOR IS FULLY EMPLOYED IN THE SENSE DESCRIBED IN THE LAST SECTION, AND IHERE CAPITAL FORMATION IS SLON. THEREFORE, EXCESS DEMAND OVER A LIMI- TED SUPPLY OF PRODUCTION FACTORS, LABOR AND CAPITAL, INEVITABLY CREATES INFLATION. UNDER SUCH CONDITIONS IT IS AN ADVANTAGE FOR THE COUNTRY THAT AT LEAST ONE FACTOR, NAMELY LAND, IS AVAILABLE IN ABUNDANCE. ALTHOUGH REAL ESTATE INVESTMENTS MAY CONTRIBUTE NOTHING OR VERY LITTLE To THE IM- PROVEMENT OF PRODUCTIVITY, THEY SERVE AS AN EXHAUST VALVE FOR EXCESS DE- MAND AND THUS PUT A SOFT BUT NEVERTHELESS EFFECTIVE BRAKE ON INFLATION. IN SUMMARY, THERE ARE THREE MAIN CHARACTERISTICS OF UNBALANCED GROSanIN THE BRAZILIAN ECONOMY. ONE Is THE DISPROPORTIONATE DEVELOP- MEArr OF GEOGRAPHICAL AREAS, THE SECOND IS THE DISPROPORTIONATE EXPANSION .OF BUSINESS VENTURES, THE THIRD A DISEQUILIBRIUM BETWEEN AVAILABLE SUP- PIJV OF PRODUCTIONS FACTORS AND EFFECTIVE DEMAND. ALL THREE CHARACTERIS- TICS ARE PRIMARILY DETERMINED BY MALDISTRIBUTION OF INCOME AND THEIR EF- FECTS INTENSIFIED BY MONEY INFLATION. IV, DOMESTIC DISEQUILIBRIUM AND THE BALANCE OF PAYMENTS IN THE PREVIOUS TWO CHAPTERS ATTENTION WAS DIRECTED TO THE CONDI- TIONS DETERMINING THE DISTRIBUTION OF INCOME AND THEIR EFFECTS ON THE MARKET STRUCTURE. .THE PRESENT CHAPTER WILL INVESTIGATE THE WAY IN WHICH THESE CONDITIONSINFLUENCE THE VOLUME AND COMPOSITION OF FOREIGN TRADE AND, PARTICULARLY, THE BALANCE OF PAYMENTS- DUE TO THE COMPLEXITY OF FACTORS INFLUENCING INTERNATIONAL TRANSAC- TIONS AT THE PRESENT TIMEIIT IS DESIRABLE TO REVIEW IN THE CLASSICAL TRADITION THE EFFECTS OF INCOME ON FOREIGN TRADE, AND TO EXAMINE THE IN- COME-TRADE RELATIONSHIP IF THE CLASSICAL PREMISES ARE REMOVED. II THE MAXIMIZATION OF INCOMJ; TO BEGIN WITH, INTERNATIONAL TRADE IS ASSUMED TO FUNCTION UNDER THE FOLLOWING CONDITIONS: (I) THE ONLY VARIABLES CONSIDERED ARE EXPORT AND IMPORT COMMODITIES; THEY ALONE ARE SUPPOSED TO DETERMINE THE COMPOSITION AND VOLUME OF TRADE, As WELL AS THE INTERNATIONAL BALANCE OF ACCOUNTS; CAPITAL MOVEMENTS ARE NON-EXISTENT BECAUSE UNNECESSARY; (2) TRANSITORY DEFICITS IN THE BALANCE OF TRADE (OR PAYMENTs) ARE PAID EITHER BY GOLD OR EXCHANGE RESERVES; (3) No COUNTRY USES RESTRICTIVE TRADE MEASURES To PREVENT THE FREE Ex- CHANGE OF COMMOD I TIES; (4) VALUES ARE MEASURED AT CONSTANT PRICES, I. E. ONE UNIT AF ANY SPECI- -34.. FIc CURRENCY ALWAYS BUYS THE SAME AMOUNT OF GOODS; (5) ALL DEMAND AND SUPPLY ELASTICITIES ARE UNITARY; (5) EACH COUNTRY HAS AVAILABLE A GIVEN AMOUNT OF THE FACTORS OF PRODUC- TION. IT IS THE LAST ASSUMPTION THAT INDUCES COUNTRIES TD TRADE. BECAUSE, IF EVERY COUNTRY MERE ABLE To PRODUCE ANY GOOD REQUIRED FOR DOMESTIC CON- SUMPTION AT PRICES EQUAL TO THE PRICES ABROAD, NO TRADE WOULD TAKE PLACE DUE TO THE COST OF TRANSPORTATION. UNDER THE CONDITION OF UNEQUAL DIS- TRIBUTION OF FACTORS, THE DIFFERENT COMMODITIES WILL BE PRODUCED AT DIF- FERENT COSTS. EACH COUNTRY WILL CONCENTRATE ON THE PRODUCTION OF THOSE GOODS WHICH IT CAN PRODUCE AT RELATIVELY LOWER COSTS THAN OTHERS. THE PORTION IN EXCESS OF DOMESTIC CONSUMPTION WILL BE EXPORTED AND, IN EX- CHANGE, GOOOS WILL BE IMPORTED WHICH COULD ONLY BE PRODUCED AT HOME AT RELATIVELY HIGHER COSTS. FROM THE EXCHANGE THE IMPORTING AS WELL AS THE EXPORTING COUNTRY CAN EXPECT THE SAME OR MORE SATISFACTION OF WANTS AT A COMPARATIVELY LOWER COST OF PRODUCTION. THUS, THROUGH INTERNATIONAL TRADE, A MAXIMIZATION OF REAL NATIONAL INCOME CAN BE ATTAINED.--IT GOES ALMOST WITHOUT SAYING THAT THESE RELATIONSHIPS WERE FIRST UNCOVERED BY RICARDO. 'HAT MAKES THE RICARDIAN SCHEME OF COMPARATIVE COSTS PARTICULARLY USEFUL IS THE FACT THAT THE ASSUMPTION OF AN UNEVEN DISTRIBUTION OF FAC" TORS HOLDS TRUE IN REALITY. lrOR ALL PRACTICAL PURPOSES THE A,SSUIIIPTION CAN BE MADE OR EVEN STATISTICALLY MEASURED IF TRADE RELATIONS OF SPECI- FIC COUNTRIES ARE EXAMINED. THE REASON IS THAT COMPLETE MOBILITY OF FACTORS CANNOT BE ACHIEVED UNDER ANDY CONDITION. I'HIS PREVENTS A WORLD EQUILIBRIUM IN THE DISTRIBUTION OF FACTORS AND, CONSEQUENTLY, OF FACTOR PRICES. FURTHERMORE, DIFFERENCES IN COST STRUCTURES ARE CAUSED BY THE - 35 - DIFFERENT WAYS FACTORS MAY BE COMBINED IN DIFFERENT LOCALITIES. IN SUMMARY, AS LONG As THE Two CONDITIONS OF (I) IMOSILITY OF FAC- TORS, AND (2) DIFFERENT FACTOR COMBINATIONS PREVAIL, COUNTRIES BILL TRADES 2I TRADE AND INCOME DISTRIBUTION THE NEXT QUESTION RELATES TO THE WAY INTERNATIONAL TRADE AFFECTS THE DISTRIBUTION OF INCOME. THE HEAVIER A COUNTRY'S TRADE IS UNDER THE CONDITIONS SET FORTH BY THE SYSTEM OF COMPARATIVE ADVANTAGES, THE STRONGER WILL BE THE IMPACT ON THE DISTRIBUTION OF INCOME. IHEN TRADE BEGINS, THE DEMAND FOR FACTORS NEEDED FOR THE PRODUCTION OF EXPORT GOODS WILL EXPAND. cONSEQUENTL‘I‘, THEIR PRICES WILL RISE. THE OPPOSITE WILL HAPPEN IN THE INDUSTRIES IN WHICH THE COUNTRY HAS A COMPARATIVE DISADVANTAGE. THERE, LESS FACTORS WILL BE EMPLOYED AND THE DEMAND FOR THEM WILL CONTRACT. AS LONG AS A COMPARATIVE GAIN CAN BE EXPECTED FROM TRADE, IN SPITE OF RISING FACTOR PRICES IN THE EXPORT INDUSTRIES AND DECLINING FACTOR PRICES IN THE CON- TRACTING INDUSTRIES, THE COUNTRY WILL CONTINUE TO CONCENTRATE ON THE PRO- DUCTION OF EXPORT GOODS. IN OTHER WORDS, THE RELATIVE PRICES PAID FOR THE FACTORS OF PRODUCTION OF EXPORT AND IMPORT GOODS MUST DIFFER IN THE VARIOUS COUNTRIES TO ALLOW AN EXCHANGE OF COMMODITIES. IF DIFFERING RELATIVE PRICES PREVAIL, FOREIGN TRADE WILL CAUSE A CHANGE IN THE DISTRIBUTION OF INCOME, AS WELL AS A SHIFT IN THE PRODUC— TION STRUCTURE, IN DEMAND FOR THE FACTORS OF PRODUCTION, IN EMPLOYMENT, 'THE EFFECTS MAY AND PROBABLY WILL NOT BE ALIKE FOR EACH TYPE OF FACTOR EMPLOYED GR IIITHDRAVN. SEE: GOTTFRIED VON HABERLER, THE IHEOEY or INTERNATIONAL TRADE WITH ITS APfitICATIONS To COMMERCIAL POLICYJTHIRO ENGLISH IMPRESSION, LONDON, EDINBURGH, GLASGOW: IILLIAM HOOGE AND COM- puny, LIMITED, I950), P. I93. AND IN FACTOR PRICES. AS A RESULT, THE ENTIRE ECONOMIC LIFE WILL UNDER- GO CHANGES, PROBABLY TOWARD AN IMPROVEMENT IN THE STANDARD OF LIVING THROUGH MORE EFFICIENT DISTRIBUTION OF THE FACTORS OF PRODUCTION. IF THE ABOVE LINE OF REASONING IS CARRIED FURTHER (AS HAS BEEN DONE BY JOH'STUART MILL AND SEVERAL LATER ECONOMISTS) A PERFECT INTERNATIONAL EQUILIBRIUM CAN BE CONCEIVED. EACH COUNTRY WILL PRODUCE AT MAXIMUM U- TILITY OF FACTOR DISTRIBUTION AND MINIMUM COST. THROUGH THE FUNCTIONING OF INTERNATIONAL VALUES (GOLD TRANSFERS OR EXCHANGE RATE ADJUSTMENTS) PRICES AND COSTS WILL EQUATE THROUGHOUT THE WORLD.2 3. THE NEED FOR PROTECTION REALITY NEVER CONFORMS WITH PURE ECONOMIC THEORY. BUT MUCH CAN BE LEARNED FROM THEORY To INTERPRET REALITY. FOR INSTANCE, IT HOLDS TRUE UNDER ALMOST ANY IMAGINARY CONDITION OF INTERNATIONAL TRADE THAT A CHANGE IN NATIONAL INCOME OF ONE COUNTRY AFFECTS THE INCOME STRUCTURE OF ANY OTHER COUNTRY. THIS CAN BE ILLUSTRATED BY A SIMPLE EXAMPLE. LET US SAY THAT INCOME IN COUNTRY A, A PREDOMINENTLY INDUSTRIAL COUNTRY, SUFFERS A DECLINE. THE INCOME OF COUNTRY 8, A SUPPLIER OF RAM MATERIALS TO A, WILL THEN BE AFFECTED BY ANY DR SEVERAL OF THE FOLLOWING CONSEQUENCES: (I) A DECLINE IN DEMAND FOR THE PRODUCTS OF 3 USED BY A; A DECLINE IN PRICES OF A PRODUCTS: (3) A DECLINE IN THE VOLUME OF A's ExPORTS AND B'S IMPORTS (OR THE CONTRARY IF A GOODS BECOME AVAILABLE To 8 AT LOWER PRICES); (4) A DECLINE IN INVESTMENTS OF A IN 8, (5) A CHANGE 2THE ANALYSIS OF THE LAST TWO SECTIONS HAS CONFINED TO SOME HIGH- LIGHTS OF THE THEORY AND IS THEREFORE RATHER SUPERFICIAL. AMONG THE MAST LITERATURE DEALING WITH THE SAME OR SIMILAR PROBLEMS, ONE ARTICLE SHALL BE POINTED OUT DUE To ITS CLARITY AND CDNCISENESS: ELI HECKSCHER, 'THE EFFECT OF FOREIGN TRADE ON THE DISTRIBUTION OF INCOME," READINGS IN THE THEORY’OF INTERNATIONAL TRADE,SELECTED BY A COMMITTEE OF: THE AMERICAN ECONOMIC ASSOCIATION, (PHILADELPHIA, TORONTO: THE BLAKISTON COMPANY, I949) , PP. 272-300. u 37 - IN THE TERMS OF TRADE} ETC. IF THE ASSUMPTION OF FREE INTERNATIONAL EXCHANGE IS REMOVED, IT MAY BE DANGEROUS TO DRAW SPECIFIC CONCLUSIONS ABOUT THE WAYS A CHANGE IN IN- COME OF ONE COUNTRY AFFECTS THE INCOME OF ANOTHER. TOO MANY VARIABLES BLUR THE PICTURE.3 NEVERTHELESS, SOME GENERAL AND TENTATIVE CONCLUSIONS OR HYPOTHESES CAN BE DRAWN. rHIB SHALL BE ATTEMPTED FOR THE BRAZILIAN CASE. FIRST, CONSIDER HOW THE ECONOMY OF UNDERDEVELOPED COUNTRIES WOULD BE AFFECTED IF THE WHOLE WORLD DECIDED TO GRADUALLY INTRODUCE FREE EX- CHANGE CONDITIONS. IN THIS CASE DIFFERENCES IN THE RELATIVE INCOME STRUCTURE OF COUNTRIEB WOULD BE LEVELED OUT. MOBILE PRODUCTION FACTORS WOULD SEEK AREAS WHERE THEY COULD BE MORE PROOUCTIVELY EMPLOYED. UNDER THE (OVER-OPTIMISTIC) ASSUMPTION THAT THE PROCESS OF ADAPTATION COULD BE PERFORMED WITHOUT ANY MAJOR RECESSIONS OR SOCIAL UNREST, THE DIFFERENT NATIONS WOULD SOON SPECIALIZE IN THE PRODUCTIVITY FIELDS OFFERING THE BEST COMBINATION OF FACTORSFT LOWEST COSTS. DUE TO THE ADVANTAGE GAINED BEFORE THE CHANGE IN MANY SECTORS OF PRODUCTION, THE MORE ADVANCED COUN- TRIES WOULD ATTRACT THE MAJORITY OF MOBILE FACTORS. 'ITH LITTLE IMMEDI- ATE ADVANTAGES, PROOUCTION IN UNDERDEVELOPED AREAS WOULD BE CONFINED TO A FEW GOODS ONLY. THE RATE OF ECONOMIC PROGRESS IN UNDERDEVELOPED COUN- TRIES WOULD BE HELD BACK AND RECOVER ONLY TO THE EXTENT OF FACTOR LIBER- ATION IN THE ADVANCED AREAS DUE TO OVER-POPULATION OR OVER-CAPITALIZA- TION. 3 IN THIS CONNECTION TWO DETAILED (AND IN A SETS: COMPLEMENTARY) STu- DIES SHALL BE QUOTED: FRITz MACHLUP, INTERNATIONAL TRADE AND THE NATIO- NAL INCOME MULTIPLIER,(PHILADELPHIA: THE BLAKISTON COMPANY, I943); AND: HANS NEISSER AND FRANm MODIGLIANI, NATIONAL INCOMES AND INTERNATIONAL- TRADE. A QUANTITATIVE ANALYSIS.(URBANA: UNIVERSITY OF ILLINOIS PRESS, fi— 1 1 l953 . -38- THE EXAMPLE GIVEN IS HIGHLY UNREALISTIC. BUT IT PROVIDES AN EXPLA- NATION OF WHY COUNTRIES TURN TO PROTECTIONTSM. IN SPITE OF THE BENEFITS CONNECTED WITH MAXIMUM FACTOR UTILIZATION, FREE TRADE LEADS INEVITABLY To SPECIALIzATION AND THIS CLASHES WITH THE NATIONAL INTEREST OF ANY MODERN STATE. THE FIRST EUROPEAN TRADE BARRIERS WERE ESTABLISHED NOT TO CORRECT ADVERSE BALANCE OF PAYMENTS, BUT TO PROTECT INFANT PRODUCTION. IN THE SECOND PLACE-~AND THIS IS MORE PERTINENT To THIS CASE--THE EXAM- PLE SHOWS THAT UNDERDEVELDPED AREAS WOULD GAIN LITTLE, IF ANYTHING, BY A REMOVAL OF INTERNATIONAL BARRIERS As LONG AS THEY HAVE SD LITTLE COMPARA- TIVE ADVANTAGES TO OFFER To ADVANCED COUNTRIES. IN THE LONG RUN, THEY WOULD BENEFIT FROM INTERNATIONAL DIVISION OF LABOR,THROUGH MORE STABILI- TY AND A HIGHER REAL NATIONAL INCOME. 8UT, HOW LONG WOULD THAT TAKE AND How MUCH WOULD HAVE To BE SACRIFICED To REACH THIS POINT? IT IS IMPORTANT TO STRESS THAT A GRADUAL RETURN TO FREE TRADE OR A SITUATION CLOSE TO IT Is CONDITIONED BY A REORGANIzATION OF THE ECONOMIC STRUCTURE. ONLY AFTER THE DOMESTIC CAUSES OF DISEQUILIBRIUM ARE REMOVED, AND AFTER THE COUNTRIES IN QUESTION HAVE GAINED A BETTER COMPARATIVE COST POSITION, CAN A RELAXATION OF CONTROL MEASURES BE EXPECTED TO DO SOME GOOD. 4. TEE ORIGINS OF DISEQUILIBRIUM UNDER THE EXISTING CONDITIONS OF A WIDE VARIATION IN REAL NATIONAL INCOMES OF COUNTRIES, BRAZIL HAS TO RESORT TO CONTROL MEASURES TO AVOID EXCESSIVE IMPORTATION AND A STEADY DETERIORATION OF ITS BALANCE OF PAY- MENTS AND EXCHANGE RATE. EVEN IN THE ABSENCE OF INFLATION, CONTROLS ARE NECESSARY WHILE THE DISCREPANCY IN INCOME PREVAILS. INFLATION AND THE DETEJTIORATION IN THE TERMS OF TRADE ARE AGGRAVATING BUT NOT PRIMARY FAC- TORS IN BFI‘AZIL'S ADVERSE BALANCE OF PAYMENTS. 'HY DID BRAZIL HAVE AN ADVERSE BALANCE OF PAYMENTS DURING YEARS WHEN ITS INFLATIONARY RATE DID NOT EXCEED (OR DID NOT MUCH EXCEED) THE INFLA- TIONARY RATES OF OTHER COUNTRIES? Ill'IIS QUESTION IS CLOSELY RELATED TO ANOTHER BROADER ONE, NAMELY: 'HY HAS BRAZIL'S ECONOMIC DEVELOPMENT BLOWER AT TIMES OR LESS STABLE THAN THAT OF THE MAJORITY OF THE INDUSTRI- AL COUNTRIES? PROBABLY BOTH OUESTIONS CAN BE ASKED REASONABLY FOR EVERY UNOEROEVELOPED COUNTRY,. IN THE ABSENCE OF FREE TRADE SOME COUNTRIES ARE ALWAYS MORE ADVAN- CED THAN OTHERS. THEIR DEGREE OF ADVANCEMENT IS REFELCTED IN A HIGHER STANDARD OF LIVING WHICH, IN TURN, IS A CONSEQUENCE OF.A HIGHER REAL PER CAPITA INCOME. wHY, IT MUST BE ASKED, IS A REAL INCOME HIGHER IN SOME COUNTRIES THAN IN OTHERS? THERE ARE MANY EXPLANATIONS, BUT ALL OF THEM CAN BE REDUCED TO EITHER MONETARY OR REAL FACTORS. LET US FIRST CONSI- DER THE LATTER. THE REAL DETERMINENTS OF INCOME RESULT FROM A MORE OR LESS EFFICIENT COMBINATION OF THE FACTORS OF PRODUCTION. THE COMBINATION CAN BE MEA- SURED--AT LEAST THEORETICALLY--BY THE AMOUNTS REQUIRED OF EACH FACTOR TO PRODUCE A GIVEN PRODUCT IN A GIVEN AMOUNT OF TIME. THE LOWER THIS AMOUNT (cu: INPUT), THE HIGHER HILL BE THE PHYSICAL PRODUCTIVITY. Ir ADDITIONAL IuIITS OF INPUT ARE ADDED AND THE RESULTING PRODUCT (OR OUTPUT) IS GREA- TER ‘THAN THE ADDITIONAL INPUT, THE MARGINAL PHYSICAL PRODUCTIVITY HAS IN- CREASED. AND, THE HIGHER THIS MARGINAL PRODUCTIVITY, THE LOWER IILL BE THE REAL COSTS OF PRODUCTION FOR THE GIVEN PRODUCT. UNDER THE. LAW OF COMPARATIVE COSTS TRADE CAN TAKE PLACE EVEN UNDER CONDITIONS OF ABSOLUTE DIFFERENCES IN THE COST LEVEL OF COUNTRIES. IN ORDER TO SPECIALIZE IN THE PRODUCTION OF GOODS THAT CAN BE PRODUCED AT RELATIVELY LOWER COSTS (IN THE RICARDIAN SENSE), EACH COUNTRY HAS To EMBARK ON A REORGANIZATION OF ITS PRODUCTION STRUCTURE: IT HAS TO CON- CENTRATE ON THE PRODUCTION OF SOME GOODS AND ABANDON OR GREATLY REGTRICT THE PRODUCTION OF OTHERS. IN TIMES OF POLITICAL AND ECONOMIC INSTABILI- TY, NO COUNTRY IS USUALLY SILLING TO UNDERGO SUCH A REORGANIZATION AS THIS MIGHT INCREASE ITS VULNERABILITY IN THE CASE OF IAR OR DEPRESSION. CONSEQUENTLW TRADE BARRIERS ARE ERECTED AND THE COMPARATIVE COST SYSTEM LOSES ITS EFFICACY. IHEN BRAZIL GAINED ITS INDEPENDENCE IN THE BEGINNING OF THE I9TH CENTURY, ITS POTENTIAL SUPPLIES VERE ALREADY HIGH INCOME COUNTRIES VITH WIDELY DIVERSIFIED PRODUCTION STRUCTURES. POLITICAL INSTABILITIES, AND MAINLY THE INDUSTRIAL REVOLUTION LED TO TARIFFS AND OTHER MEASURES OF INFANT PROTECTIONS. BRAZIL HAD A HIGH DEMAND FOR IMPORTS AND FOREIGN CAPITAL To SUPPORT AND FINANCE EARLY DEVELOPMENTS. UNLIKE THE UNITED STATES, IT DID NOT SUCCEED TO PRODUCE A SUFFICIENTLY VARIABLE AMOUNT OF EXPORT GOODS AT COSTS LOG ENOUGH TO COMPETE IN INTERNATIONAL MARKETS._ ITS TECHNICAL PROGRESS AND PHYSICAL PRODUCTIVITY HAS SLOS, TOO SLOH TO COMPETE IITH EUROPEAN COUNTRIES AND, LATER ON, SIHT THE UNITED STATES. AT TIMES IT SEEMEO THAT BRAZIL IOULD OVERCOME ITS DIFFICULTIES AND BE I:APABLE OF FULLY INTEGRATING ITSELF INTO THE INTERNATIONAL TRADE PIC- TURE. DURING THE SECOND HALF’OF THE PAST CENTURY COFFEE BECAME THE AB- SOLUTE MASTER OF THE BRAZILIAN ECONOMY. FERTILE SOILS AND THE LOII COST OF RURAL LABOR, FAVORED BY A IORLD BOOM IN DEMAND FOR COFFEE/ENABLED THE COUNTRY TO GAIN LARGE EXPORT REVENUES. DURING THE TIENTIES, SUCCESSFUL COFFEE DEFENSE PROGRAMS BROUGHT ABOUT A SECOND BOOM. BUT THE BUBBLE DID NOT LAST. oVERPRODUCTION, STIMULATED BY LAVISH CREDIT POLICIES AND SPECULATION, GAVE RISE TO A CHAIN OF COLLAPSES. DURING THE DEPRESSION IT BECAME APPARENT THAT BRAZIL HAD LOST A UNIQUE OPPORTUNITY TO ADAPT ITS ECONOMIC STRUCTURE TO NORLD CONDITIONS. INSTEAD OF DIRECTING A PART OF ITS EXPORT GAINS FROM COFFEE INTO MORE DIVERSIFIED PRODUCTION, 8RAZIL OVERINVESTED IN ONE AREA, AND NEGLECTED OTHERS. AFTER THE DEPRESSION BRAZIL HAS INCAPABLE OF RECOVERING ITS MONOPOLISTIC POSITION AS A UORLD SUPPLIER OF COFFEE, AND HAD TOO FER OTHER EXPORT PRODUCTS TO MEET ITS INCREASED IMPORT REQUIREMENTS. IN SUMMARY, THERE IS GOOD REASON TO BELIEVE THAT AN ADVERSE BALANCE OF PAYMENTS IOULD HAVE PERSISTED DURING THE LAST HUNDRED YEARS EVEN WITH- OUT THE IMPACT OF MONETARY INFLATION ON THE DEMAND FOR FOREIGN GOODS. HIGH PROFIT MARGINS ACCUMULATED IN THE-HANDS 0' A SMALL GROUP OF ENTRE- PRENEURS CONNECTED NITH THE COFFEE TRADE (AND LATER ON WITH OTHER BUSI- NESS VENTURES), IN CONJUNCTION HITH A FISCAL POLICY HAMPERING A WIDER DISTRIBUTION OF INCOMES, CAUSED A CHAIN OF UNFAVORABLE EVENTS. ON THE SUPPLY SIDE IT PREVENTED THE FACTORS OF PRODUCTION FROM SPREADING OVER A MORE DIVERSIFIED FIELD OF ACTIVITIES THUS REDUCING THE VOLUME OF EXPOR- TABLE GOODS. ON THE DEMAND SIDE IT CREATED A CUMULATIVE DESIRE AND PUR- CHASING POIER AMONG THE IEALTHY TO IMPORT, PARTICULARLY SINCE DOMESTIC REAL OUTPUT LAGGED BEHIND THE OUTPUT OF THE INDUSTRIAL NATIONS. IHE RE- SULTING RELATIVE SHORTAGE OF NATIONAL GOODS WAS COMPENSATED FOR BY IM- O PORTS. FURTHERMORE, TRADE BARRIERS OF THE ADVANCED NATIONS GRADUALLY LIMITED THE EFFECTS OF COMPARATIVE COST STRUCTURES. EACH COUNTRY'S PRICE 4FOR IAORE DETAILED REFERENCES SEE TVO PUBLICATIONS IIRITTEN SHORTLY AFTER THE SREAK-DOVN BY J. l. ROVE,"BRA§ILIAN COFFEE," LONDON AND CAI- RIDGE ECONOIAIC SERVICE STUDIES IN THE ARTIFICIAL CONTROL OF RAI MATERIALBD S NO. 3, ILONDON, JANUARY I932), AND: MQR§ETS A20 53, (cANBRIDGE: UNIIVER- SITY PRESS, I936). -42- LEVEL BECAME INCREASINGLY MORE INDEPENDENT OF OTHER PRICE LEVELS. AND DUE TO THE LOI RATE OF PRODUCTIVITY, BRAZIL'S EFFORTS TO KEEP PACE VITH THE ADVANCEMENTS IN REAL PURCHASING POVER OF THE INDUSTRIAL NATIONS FAI- LED. IN VIEI OF THESE DEVELOPMENTS, BRAZIL'S AND OTHER LATIN AMERICAN COUNTRIES' ATTEMPT TO ACHIEVE INCREASED ECONOMIC AUTONOMY ARE UNDERSTAN- DABLE. THE QUESTION IS, HOHEVER, VHETHER SUCH AN AUTONOMY CAN BE REACHED VITHIN THE NEAR FUTURE, AND VHAT HAS BEEN ACHIEVED SO FAR IN THIS CONNEC- TION. THIS PROSLEM SHALL BE DISCUSSED IN THE FDLLOVING TVO CHAPTERS. V. SOME ASPECTS OF INDUSTRIALIZATION LATIN AMERICA IS PRESENTLY UNDERGOING A PROCESS OF ECONOMIC FORMA- TION CHARACTERIZED BY A PRONOUNCED INSTABILITY. AMONG THE MANY GUES- TIONS FOR IHICH NO SATISFACTORY ANSVER HAS YET BEEN FOUND IS THE PROS- LEM OF THE MOST ADEOUATE FORM OF ADMINISTERINS ECONOMIC GROHTH. BEING PART OF THE VESTERN HALF OF A DIVIDEO IORLD, LATIN AMERICA'S NATURAL TENDENCY Is TO FOLLOV THE GENERAL PATTERNS OF VESTERN BELIEFS IN BOTH MORAL AND POLITICAL MATTERS. YET SEVERAL EVENTS HAVE TURNED AGAINST THE STRICT ADHERENCE TO THIS CONVICTION, SOME OF THEM BEYOND THE PARTI- CULAR COUNTRIES' CONTROL. Io MENTION SOME IN THE ECONOMIC FIELD, ONE MIGHT CONSIDER THE IMPACT OF THE PROTECTIVE POLICIES OF EUROPE AND THE UNITED STATES AFTER THE INDUSTRIAL.REVOLUTIOR. THE VORLD DEPRESSIONS, AND THO VORLD MARS. AS A RESULT NONE OF THE LATIN AMERICAN COUNTRIES COULD MAINTAIN FREE TRADE CONDITIONS. AND AS SPECIFIC CONTROL MEASURES SELDOM REMOVED THE CAUSES OF EVIL AGAINST VHICH THEY MERE APPLIED, OTHER MEASURES FOLLOVED. TODAY THE MAY BACK TO LIBERALISM IS SARRED HITH MANY OBSTACLES, THE STRONGEST OF VHICH MAY BE THE LACK OF CONFIDENCE IN THE PRACTICAL VALUES OF A RETURN TO FREE ENTERPRISE. THE INDECISION TO CHOOSE BETVEEN ONE OR THE OTHER SOLUTIONS IS RE- FLECTED NOT ONLY BY THE SOMETIMES CONTRADICTORY MANNER OF POLICY APPLI- CATION TO PARTICULAR PROBLEM SITUATIONS, BUT ALSO BY THE CONTROVERSIAL POSITION TAKEN BY SOME OF THE MOST INFLUENTIAL ECONOMISTS AND POLITI' CIANS. I. LIBERALISM VERSUS PROLECTIONISM IN RECENT YEARS THE DEBATE HAS TURNED TO THE CONTROVERSIAL ISSUE OF THE MOST DESIRABLE BALANCE BETMEEN THE PRODUCTION OF INDUSTRIAL VERSUS PRIMARY GOODS. ALTHOUGH THE PROBLEM IS GENERALLY STATED IN SPECIFIC TERMS SUCH AS THE EFFECTS OF INDUSTRIALIZATION ON PRODUCTIVITY, THE TERMS OF TRADE, OR THE DISTRIBUTION OF INCOME, THE UNDERLYING CAUSE OF DIVERGENCIES IN OPINION POINTS TO THE BASIC BELIEF OR DISBELIEF IN THE VALUES OF THE CLASSICAL AND NED-CLASSICAL THEORIES. THUS THE PROBLEM IS REALLY ONE OF PRINCIPLES. THE LIBERAL SCHOaL--IF ONE MAY CALL IT SO--DOES NOT GENERALLY DIS- AGREE HITH THE BENEFIT OR EVEN NEED FOR INDUSTRIALIZATION IN UNDERDEVE- LOPED COUNTRIES. HOIEVER, IT PREFERS INDUSTRIALIZATION TO RESULT FROM A NATURAL PROCESS OF DEVELOPMENT IN VHICH THE ENTREPRENEUR DECIDES VHERE TO INVEST AND IHAT FIELD TO PROMOTE. THE OPPOSITION MAINTAINS THAT IN- DUSTRIALIZATION CANNOT BE FULLY DEVELOPED MITHOUT GOVERNMENT ASSISTANCE AND THAT UNDERDEVELOPED COUNTRIES MOULD REMAIN IN A DISADVANTAGIOUS PO- SITION IN RELATION TO THE MORE ADVANCED COUNTRIES IF THEY RELY MAINLY ON THE PRODUCTION OF PRIMARY COMMODITIES. FROM A PURELY ACADEMIC POINT OF VIEV, THE LIBERAL SCHOOL CAN PRE- SENT TOMES OF THEORETICAL SUPPORT FROM THE MANY CLASSICAL AND NEO-CLAS- SICAL AUTHORS. THEREFORE, THE MAJORITY OF THE ARGUMENTS FAVORING PLAN- NED zCONOMY ARE NECESSARILY CONFINED TO CRITICISM OF THE CLASSICAL SCHOOL IN LIGHT OF ECONOMIC AND POLITICAL EVENTS SINCE THE BEGINNING OF THE CENTURY.‘ I MANY ATTEMPTS TO DEVELOP A COMPLETE THEORETICAL SCHEME OF PLANNED ECONOMY REFER CONSTANTLY BACK TO 'ERRONEOUS' STATEMENTS OR ANALYSES OF THE CLASSICS. IN THE AREA OF INTERNATIONAL.TRADE, SEE FOR INSTANCE: MIHATL MAIOTLESCO, THE THEORY OF PROTECTION AND INTERNATIONAL TRADEI (LONDON: P. 5. KING & SON, LTD., I93I). - 45 - IN SPITE OF THE THEORETICAL SHORTCOMINGS OF PROTECTIONIST ANAYSES, THE FACT REMAINS THAT THE CALL FOR INCREASED GOVERNMENT INTERVENTION IS BECOMING LOUDER EVERY DAY IN LATIN AMERICA, MAINLY IN THE FIELDS OF IN- DUSTRIAL EXPANSION. 2. THE CLASSICAL THEORY AND 'TH§_PERIPHE§1f PERHAPS THE MOST INFLUENTIAL RECENT PUBLICATION AND THE ONE THAT MOST DIRECTLY DEFENDS THE STIMULUS FOR INCREASED INDUSTRIALIZATION IN LATIN AMERICA IAS MRITTEN BY THE EXECUTIVE SECRETARY OF THE ECONOMIC COMMISSION FOR LATIN AMERICA, PROFESSOR RAUL PREBISCH.2 IN SPITE OF ITS SMALL SIZE, THE BOOKLET CONTAINS A VAST AMOUNT OF VALUABLE INFORMATION, BRILLIANT ANALYSES, AND ABOVE ALL, PRESENTS SOME REVOLUTIONARY IDEAS. IN THE BEGINNING PREBISCH STATES THE BASIC ISSUE IN THE FOLLOMING DAY: 'IN LATIN AMERICA REALITY IS UNDERMINING THE OUT-DATED SCHEMA OF THE IN- TERNATIONAL DIVISION OF LABOR.... UNDER THAT SCHEMA, THE SPECIFIC TASK THAT FELL TO LATIN AMERICA, As PART OF THE PERIPHERY OF THE MORLD ECONO- MIC SYSTEM, VAS THAT OF PRODUCING FOOD AND RAM MATERIALS FOR THE GREAT INDUSTRIAL CENTERS. THERE IAS NO PLACE wITHIN IT FOR THE INDUSTRIALI- ZATION OF THE NEV COUNTRIES." WHETHER INTENDED OR NOT, THE AUTHOR IMPLIES THAT THE CLASSICAL ECO- NOMISTS VANTED TO ASSIGN SPECIFIC TASKS TO SPECIFIC COUNTRIES. IN THIS CONNECTION A PARAGRAPH FROM PROFESSOR VINER IS INTERESTING: ANYONE VHO HAS THE SLIGHTEST ACQUAINTANCE HITH THE ACTUAL VRITINGS OF THE ENGLISH CLASSICAL SCHOOL KNONS THAT INTELLECTUALLY AND TEMPE- RAMENTALLY THEY HERE INCAPABLE OF STAKING OUT CLAIMS TO PARTICULAR 2UNITED NATIONS, ECONOMIC COMMISSION FOR LATIN AMERICA, THE ECQfiOfl- IC DEVELOPMENT OF LATIN AMERICA AND ITSEh‘IEIPAL PROBLEMS,(LAKE SUCCESS, NE! YORK: I949).-- ALL QUOTATIONS IN THIS CHAPTER, UNLESS OTHERVISE STA- TED, ARE FROM THE INTRODUCTION OF THIS BOOK. INDUSTRIES FOR PARTICULAR COUNTRIES ExCEPT ON THE ONE CRITERION THAT COUNTRIES SHOULD SO ALLOCATE THEIR RESOURCES AS TO GET THE MAxIMUM ECONOMIC RETURN. WHATEVER MAY HAVE BEEN THEIR FORECASTS, THEY VOULD NOT HAVE DENIED TO LATIN AMERICA, OR TO ANY OTHER REGION, FULL RIGHT AND JUSTIFICATION TO ESTABLISH ANY KIND OF INDUSTRY HHICH GAVE GENU- INE PROSPECTS OF BECOMING AN ECONOMICALLY HEALTHY INDUSTRY. THERE IAS NO PLACE IN THEIR SCHEMA FOR THE SETTLING OF ECONOMIC ISSUES BY THE INVOCATION OF TERRITORIAL JEALOUSIES AND INFERIORITY-COMPLEXES.3 IF THE CLASSICAL THEORY FAILED TO BE OF PRACTICAL VALUE TO LATIN AMERICAN COUNTRIES, THE DEFAULT CANNOT BE AscRIBEO TO THE CLASSICS BUT MUST BE SOUGHT ELSEMHERE. PERHAPS THE FAILURE TO ADHERE To CLASSICAL PRINCIPLES IN LATIN AMERICA AND OTHER REGIONS IS THE PRIMARY CAUSE OF DISTURBANCE. PREBISCH DOES NOT CONSIDER THIS POSSIBILITY, AT LEAST NOT DIRECTLY, SINCE HE CONTENOS THAT THE SCHEMA OF THE INTERNATIONAL DIVI- SION OF LABOR IS OUT-DATED. HE AGREES THAT "THEAEASONING ON THE ECONOMIC ADVANTAGES OF THE INTERNATIONAL DIVISION OF LABOR IS THEORETICALLY SOUND, BUT THAT IT IS BASED ON AN ASSUMPTION MHICH HAS BEEN CONCLUSIVELY PROVED FALSE BY FACTS.“ THEORY IS THUS EITHER PROVED OR DISPROVED BY FACTS. THIS ARGUMENT CAN BE FOUND IN ALMOST ANY BOOK FAVORING PROTECTIONISM AND GOVERNMENT INTERVENTION.4 DURING THE PAST FIFTY YEARS OR SO THE NORLD HAS CONTINU- OUSLY ACTEO AGAINST THE ESSENTIAL RECOMMENDATIONS OF ECONOMIC THEORY. BUT THIS HAS NOT CREATED A HAPPIER OR MORE BALANCED MANKIND. THERE- FORE FACTS PROVE NOTHING ABOUT THE VALIDITY OR NULLITY OF ECONOMIC THEO- RY IHOSE FUNCTION IS TO PROVIDE US WITH A MODEL, NECESSARILY IDEAL AND 3 VINER, "TENDENCIAS "ODERNAS OA TEORIA DO GOMERCIO INTERNATIONAL,” OP. CIT., P. 96. 4ONE OUOTATION MAY ILLUSTRATE THIS: ”THE PLAIN FACT IS THAT ALL ADVANCED INDIVIDUAL NATIONS HAVE MOVED AMAY FROM THE ATOMIC INDIVIDUAL- ISM OF THE MID-NINETEENTH CENTURY' AND THEREFORE ”MODERN MEN MUST ERECT A NEH SOCIAL STRUCTURE ADAPTED TO THE CHANGED CONDITIONS.” FROM: ALVIN H. HANSEN, ECONOMIC POLICY AND FULL EMPLOYMENT,(NEM YORK, LONDON: USIRAI HILL BOOK BOMPANY, INC., I947); ABSTRACT IN NATURE, BUT USEFUL AS A BASIS FOR POLICY FORMULATION. JUST AS EASY As THEY MAY BE APPLIED TO DISPROVE THE TENETS UNDER- LYING A LIBERAL SOCIETY, FACTS MAY BE USED TO DEMONSTRATE THE EFFICIENCY OF FREE ENTERPRISE IN SPECIFIC SITUATIONS. FOR INSTANCE, IT CAN HARDLY SE DENIED THAT THE MOST PROGRESSIVE COUNTRIES IN THE IORLD, SUCH AS THE UNITED STATES, SUITZERLANO OR CANADA, ARE MORE LIBERAL IN THEIR ECONOMIC POLICIES THAN THE LESS ADVANCED NATIONS. OTHER COUNTRIES, MAINLY GERMA- NY, MHICH MADE STRONG EFFORTS To RETURN TO THE 'OUT-DATED' CLASSICAL MOD- ELS HAVE ExPERIENCED A HIGH RATE OF DEVELOPMENT SINCE IORLD IAR II.5 ~ALL THIS PROVES,IS THAT ONE CANNOT JUMP To CONCLUSIONS ON EMPIRI- CAL EVIDENCE ALONE. IN SOCIAL SCIENCES FACTS ARE ILLUSTRATIVE AND SOME- TIMES INDICATIVE OF TRENDS OR EVENTUAL LAIS, BUT NEVER CDNCLUSIVE PROOF OF A THEORY'S FINAL VALIDITY. FORTUNATELY, PREBISCH DOES NOT CONTENT HIMSELF HITH A MERE STATE- MENT OF FACTS. HE SPEEIFIES THAT THE ”FALSE ASSUMPTIONS" UNDERLYING THE REASONING ON THE ECONOMIC ADVANTAGES OF THE INTERNATIONAL DIVISION OF LABOR ARE THAT "THE BENEFITS OF TECHNICAL PROGRESS TEND TO BE DISTRIBU- TED ALIKE OVER THE NHOLE COMMUNITY, EITHER BY THE LOIERING OF PRICES OR THE CORRESPONDING RAISING OF INCOMES....IF BY THE COMMUNITY ONLY THE GREAT INDUSTRIAL COUNTRIES ARE MEANT, IT IS INDEED TRUE THAT THE BENE- FITS OF TECHNICAL PROGRESS ARE GRADUALLY DISTRIBUTED AMONG ALL SOCIAL GROUPS AND CLASSES. IF. HOWEVER, THE CONCEPT OF THE COMMUNITY IS EXTEN- DED TO INCLUDE THE PERIPHERY OF THE IORLD ECONOMY, A SERIOUS ERROR IS 5IN THIS CONNECTION THE FOLLOMING QUOTATION MAY SE OF INTEREST: “GERMANY'S ADOPTION OF A POLICY OF FREE MARKETS AND FREE ENTERPRISE... DOES NOT IMPLY AN ECONOMY ALTOGETHER FREE FROM GOVERNMENT INTERVEN- TION....BUT IT DOES REPRESENT A SHARP CHANGE OF DIRECTION, AND THERE IS AMPLE JUSTIFICATION FOR REGARDING FREEDOM AS THE KEY NOTE OF GER- MAN ECONOMIC POLICY." FROM: HENRY C. WALLICH, HAINSPRJNG OF THE GERMAN REVIVAL, (NEH HAVEN: YALE UNIVERSITY PRESS, I955). IMPLI Cl T ON THE GENERALIZATION." IuPLIEo IN THE ABOVE IDEA IS THE ASSUMPTION THAT TECHNICAL PROGRESS s LARGELY IDENTICAL IITH INDUSTRIALIzATION, IN OPPOSITION TO A RELATI- IELY SLowEIR RATE OF PROGRESS IN THE PRODUCTION OR PRIMARY GOODS. SOME AUTHORS BELIEVE THAT THIS IS NOT NECESSARILY SO. BUT FOR THE SAKE OF ARGUMENT, LET US ACCEPT THE THESIS NON AND RETURN TO IT LATER. 3. THE INTERNATIONéh DIVISION OF LABOR IF IT IS CORRECT THAT THE BENEFITS OF TECHNICAL PROGRESS HAVE SPREAD OVER THE COMMUNITIES OF THE INDUSTRIAL CENTERS, THERE IS NO REASON IIHY THEY SHOULD NOT SPREAD OVER THE COMMUNITIES OF THE PERIPHERY, UNLESS SOMETHING PREVENTS THEM FROM DOING so. WHAT Is THIS ”UNLESS“? PREBISCH ExPLAINS IT IN TERMS OF RELATIVE INCREASES IN THE RATE OF PRODUCTIVITY, - OF PRICES AND INCOME IN THE INDUSTRIAL CENTERS COMPARED TO THE PERIPHE- RY. THE FOLLONING IS A SUMMARY OF HIS LINE OF THOUGHT.6 FIRST, IT CAN BE DEMONSTRATEO THAT THE RATE OF INCREASE IN PRODUC- TIVITY HAS BEEN GREATER FOR THE PRODUCTION OF MANUFACTURED GOODS THAN FOR PRIMARY GOODS. SECONDLY, THERE ARE TITO IIAYS OF DISTRIBUTIONS THE BENEFITS OF INCREASED PRODUCTIVITY OVER THE ECONOMY, ONE THROUGH A PRICE DECREASE RDUGHLY PROPORTIONAL To THE INCREASE IN PRODUCTIVITY, THE OTHER THROUGH AN INCREASE IN THE REMUNERATION TO THE FACTORS OF PRODUCTION. BOTH METHODS LEAD TO AN IMPROVEMENT IN THE STANDARD OF LIVING OF THOSE AFFECTED BY THE CHANGE. THE SECOND METHOD, HDNEVER, DOES NOT NECESSARI- LY AFFECT THE PERIPHERY SINCE IT HILL NOT CAUSE A REDUCTION IN THE PRICES M 6IN ORDER NOT TO SPEND MUCH SPACE VllTI-I THE REPRODUCTION OF THE POINTS INVOLVED, THE ANALVSIB I8 GREATLY SIMPLIFIED. 'E THEREFORE REFER THE READER BACK TO THE ORIGINAL PUBLICATION “ENTIONED IN FOOTNO'E .N P. 44 OF THIS STUDY. ,1 OF ExPORT GGODS IN THE INDUSTRIAL CENTERS. UNFORTUNALTEY FOR LATIN AMER- ICA,THE INDUSTRIAL CENTERS, AND IN PARTICLULAR THE UNITED STATES, HAVE SELECTED THE SECOND OAY, OR THE HIGHER REMUNERATION OF THE FACTORS OF PRODUCTION TO COMPENSATE FOR INCREASED PRODUCTIVITY. CONSEQUENTLY, THE AVERAGE PRICES OF INDUSTRIAL GOODS MENT UP RATHER THAN REMAINED STABLE DURING THE LAST DECADES. IF THE CONTRARY HAD HAPPENED, THE PERIPHERY VOULD HAVE DIRECTLY BENEFITED FROM THE IMPROVEMENT OF PRODUCTIVITY THROUGH THE IMPORTATION OF MANUFACTURED GOODS. THE SITUATION RAS AGGRA- VATED BY THE FACT THAT THE PRICE INCREASE OF PRIMARY COMMODITIES LAGGED BEHIND THE PRICE INCREASE OF MANUFACTURED GOODS. SINCE LATIN AMERICA IS A POTENTIAL EXPORTER OF PRIMARY GOODS AND A POTENTIAL IMPORTER OD INDUSTRI- AL GOODS, THE EXPORT-IMPORT RATIO TURNED AGAINST THE UNDERDEVELOPED AND FAVORED THE ADVANCED AREAS.7 FROM THIS ANALYSIS PREBISCH DRAVS TOO CONCLUSIONS. ONE IS THAT THE DISEOULILIBRIUM RESULTING FROM THE DESCRIBED EVENTS "DESTROYS THE BASIC PREMISE UNDERLYING THE SCHEMA OF THE INTERNATIONAL DIVI- SION OF LABOR." WHAT HE MEANS IS NOT ABSOLUTELY CLEAR. IF HE CONTENOS THAT THE EVENTS PROVE THE FALSENESS OF THE THEORY OF INTERNATIONAL DIVISION OF LABOR, SOME QUESTIONS ARISE. WHAT HAPPENED MAS THAT THE COUNTRIES OHERE TECHNICAL PROGRESS OR THE IMPROVEMENT OF THE RATE OF PRODUCTIVITY ADVANCED FASTER THAN IN OTHERS, CREATED ARTIFI- CIAL TRADE BARRIERS TO OELIBERATELY PREVENT THE DISTRIBUTION OF BENEFITS OVER THE BORLD. IN SOME COUNTRIES, THE BARRIERS TOOK THE FORM OF TARIFFS AND RATES IMPOSED ON IMPORTS. IN OTHERS, AND THIS HAS APPARENTLY BEEN MORE EFFECTIVE, THE INTERNATIONAL MOVEMENT OF LABOR OAS PREVENTED BY STRICT IMMIGRATION LAMS. FOR INSTANCE, IT IS VERY UNLIKELY THAT THE UNITED STATES COULD PRESERVE ITS LEAD IN VORLD ECONOMY IF LABOR ROULD 47FCR SPECIFIC DATA SINCE I88I-85 UNTIL THE WORLD IAR II, SEE: UNITED NATIONS TH ECONOM C D OPMENT OF LATIN AMERICA AND ITS PRINCIPAL 9813f LESS. oth . - _50— MOVE FREELY AMONG THE NATIONS. IN THIS CASE, IMMIGRATION TO THE UNITED STATES IOULD CONTINUE AS LONG AS REAL SAGE RATES REMAINED HIGHER THERE THAN ELSEOHERE. FURTHERMORE, ANY IMPROVEMENT IN AMERICAN PRODUCTIVITY VOULD CAUSE A DECREASE IN THE PRICE LEVEL RATHER THAN AN INCREASE IN NOM- INAL INCOME, DUE TO THE GROMING LABOR SUPPLY. CONSEQUENTLY, ALL COUNTRIES TRADING OITH THE UNITED STATES OOULD BENEFIT FROM TECHNICAL PROGRESS, AND, IF ALL BARRIERS OERE REMOVED, INDIVIDUAL PRICE LEVELS VOULD AUTOMA- TICALLY ADAPT THEMSELVES TO ONE OORLDOIDE LEVEL. ON THE OTHER HAND, IF PREBISCH MEANS NOTHING ELSE BY HIS "BASIC PREMISE' BUT THAT THE INTERNATIONAL DIVISION OF LABOR NILL NOT BE EFFEC- TIVE BECAUSE OF EXISTING TRADE BARRIERS, ONE CANNOT OBJECT. IN ALL PRO- BABILITY THIS IS A SOUNDER PROPOSITION AND ON THIS BASIS ONE MAY AssERT THAT LATIN AMERICAN COUNTRIES SHOULD NOT VAIT FOR BETTER DAYS TO COME OR THE REMOVAL OF BARRIERS IN THE ADVANCED COUNTRIES BUT REACT AND ADAPT THEIR ECONOMIES TO CHANGING CONDITIONS. THE QUESTION Is, OHAT KIND OF ACTION IS MOST APPROPRIATE. FOR PREBISCH THE ANsWER IS CLEAR. HE RECOMMENDS INTENSIFIED INDUS- TRIALIZATION VHICH ”IS NOT AN END IN ITSELF, BUT THE PRINCIPAL MEANS AT THE DISPOSAL OF THOSE (NEO) COUNTRIES OF OBTAINING A SHARE OF THE BENE- FITS OF TECHNICAL PROGRESS AND OF PRUSHLSSIVSLV RAISING THE STANDARD OF LIVING OF THE MASSES." ACCORDING TO PREBISCH, THE EXTENT OF INDUSTRIAL EXPANSION SHOULD BE DETERMINED BY ITS RELATIVE CAPACITY TO INCREASE THE RATE OF PRODUCTIVITY. IN OTHER NORDS, IF A POTENTIAL INVESTOR WOULD BE MILLING TO APPLY HIS CAPITAL IN EITHER INDUSTRIAL OR AGRICULTURAL PRO- DUCTION,AND IF THE FORMER VAY PROMISES TO BE MORE PRODUCTIVE,HE SHOULD GIVE PREFERENCE To IT. IN ANOTHER CASE, IT COULD BE PREFERABLE To DIVER? FACTORS OF PRODUCTION FROM PRIMARY SOURCES INTO INDUSTRY AND THUS REDUCE THE VOLUME OF EXPORTS, IF THE AMOUNT OF GOODS PRODUCED DOMESTICALLY WOULD BE “EATER THAN WHAT COULD BE OBTAINED IN#XCHANGE FOR EXPORTS. AS FAR AS THESE 0R SIMILAR POLICIES WOULD ACTUALLY LEAD TO AN In- PROVEMENT IN THE STANDARD OF LIVING OF THE BRAZILIAN POPULATION, THEY SHOULD, NO DOUBT, 8E ADOPTED. THE PROBLEM THEN IS, UNDER WHAT CIRCUM- STANCES PRODUCTIVITY POLICIES CAN BE MADE EFFECTIVE. VI. RELATIVE PRODUCTIVITY AND FOREIGN TRADE THE LAST CHAPTER RAISED A QUESTION MERITING INVESTIGATION. Ig AGRICULTURAL AND INDUSTRIAL PRODUCTIVITY FIRST,THE HIDELY DISPERSED OPINION THAT PRODUCTIVITY IS HIGHER IN SECONDARY THAN IN PRIMARY PRODUCTION MUST BE DISCUSSED. HANDTLESCO CAL- LED THIS PLAINLY"THE INTRINSIC INFERIORITY OF AGRICULTURE OPPOSED To THE INTRIEIIO SUPERIORITY OF INDUSTRY." HE TRIED To PROVE THIS BY COMPA- RING AGRICULTURAL AND OTHER ACTIVITIES' INCOMES OF SEVERAL COUNTRIES ON THE BASIS OF LABOR EMPLOYED. THE COMPARISON, HOVEVER, IS MADE IN PURELY NOMINAL TERMS. IT DISREGARDS REAL INCOME ITEMS OF THE RURAL POPULATION, SUCH AS FOOD PRODUCED LOCALLY, SAVINGS DERIVED FROM LESSER USE OF CLOTH- ING, LAUNDRY, TRANSPORTATION, PUBLIC UTILITY SERVICES, AND MANY OTHERS. 'HATEVER THE TRUE RELATIONSHIP BETOEEN AGRICULTURAL AND INDUSTRIAL PRO- DUCTIVITY MAY BE, A COMPARISION OF NOMINAL INCOMES DOES NOT PROVE ANY- THING. UNFORTUNATELY, THE IMMEDIATE IMPRESSIVENESS OF SUCH ANALYSES HAS LED PEOPLE TO JUMP TO PREMATURE CONCLUSIONS. ECONOIIIC HATTERS ARE, HOV- EVER, MUCH MORE COMPLEX THAN THEY APPEAR ON THE SURFACE. THIS CAN BE I MANOTILESCO, OP. CIT., P. 40. 2AM OFT CITED STUDY OF THE US DEPARTMENT OF AGRICULTURE MADE IN I94I DEMONSTRATEO THAT THE NOMINAL INCOME OF LOO-INCOME FARMERS IN THE Us OOULD HAVE TO BE RAISED BY TOO THIRDS To BECOME COMPARABLE To URBAN INCOMES. ILLUSTRATED BY THE FACT THAT THERE ARE POPULATIONS WITH A HIGH PER CA- DI'I’A INCOME BOTH AMONG PREDOMINANTLY AGRICULTURAL COUNTRIES, LIKE NEH ZEALAND, DENMARK, OR AUSTRALI A, AND COUNTRIES HITH A MIXED AGRICULTURAL AND INDUSTRIAL ECONOMY, LIKE THE UNITED STATES, CANADA, DR STIITZERLAND. APPARENTLY 'HAT SEEMS TO BE THE ONLY PERMISSABLE CONCLUSION IN THE AB- SENCE OF FULLY RELIABLE DATA IS THAT NO GENERALIZATION CAN BE DRAIN WHEN THE ANALYSIS IS BASED ON SPECIFIC AREAS. MANOTLEsco' S BOOK IS OVER TWENTY-FIVE YEARS OLDa IT MAY BE CONTEN- DED, THEREFORE, THAT ITS ARGUMENTS HAVE BECOME ARCHAICO YOUNGER AUTHORS, HO'EVER, 3 HAVE DEFENDED SIMILAR THESES. IN BRAZIL, THE DUBIOUS THEORY THAT THE RATE OF PRODUCTIVITY NECESSARILY INCREASES MORE IN INDUSTRY THAN \N AGRICULTURE HAS FOUND MANY PARTISANS. TO SOME EXTENT THIS MUST BE ATTRIBUTED TO HEAVY ACCUMULATIONS OF PRIVATE INCOMES IN SOME INDUSTRIES CREATING FAVORABLE PUBLIC IMPRESSIONS. THE ACCUMULATION RESULTED FROM A COMBINATION OF FACTORS HAVING LITTLE DR NOTHING TO Do IITH PRODUCTIVITY. AMONG THEM HAS THE INFLATIONARY STIMULUS OF NOMINAL INCOMES, THE DISPAR- ITY BET‘EEN OCT (MAINLY IAGEB) AND PRICES, THE GENERAL SCARCITY OF MANUFACTURED GOODS, THE LACK OF A PROPERLY PROGRSSIVE RATE OF TAXATION. AND THE IMPORTATION OF CHEAP EQUIPMENT AT fAVORABLE’ CONTROLLED EXCHANGE RATE. IT IS DOUBTFUL\‘HAT THE RESULTING INCREASE IN INDUSTRIAL INCOME HAS CONTRIBUTED MUCH TO THE IMPROVEMENT OF THE OVER-ALL STANDARD OF LIV- INC. A FRANK AND COURAGEOUS STATEMENT ON THIS MATTER IAS MADE NOT LONG AGO BY BRAzIL'S FORMER MINISTER OF FINANCE, PROFESSOR E. GUDIN. HE RROTE (LITERALLY TRANSLATED): 'IHAT I AM AGAINST ARE THOSE LAZY INDUSTRIES THAT AMASS FORTUNES FOR A MINORITY OF FIRIVI LEDGED PERSONS AT THE ExPENSE SEE, FOR INSTANCE: H. I. SINGER, "THE DISTRIBUTION OF GAINS BET- IEEN INVESTING AND BORROIIING COUNTRIES,'AAMERICAN ECONOMIC REVIEII,PRO- CEEOINCS,IIAY, I950, PP. 472-494. -54.. OF THE CONSUMER UNDER A REGIME OF HIGH PRICES AND A VERY LOW PRODUCTIVI- TY."4 IN THE SAME ARTICLE ON PRODUCTIVITY, GUDIN DEMONSTRATES THAT, MEASURED IN REAL TERMS ON THE BASIS OF AVAILABLE FIGURES, THE RATE OF PRODUCTIVITY ROSE IN THE INDUSTRIAL AND THE AGRICULTURAL SECTORS AS FOL- LOIIS: IN THE FORMER BY 25% BETHEEN I939 AND I949, IN THE LATTER BY 28% TO 34% BETHEEN I939 AND I952.5 MORE RECENT FIGURES SHOR THAT AGRICULTU- RALPRODUCTIVITY HAS IMPROVED BY 29% BETMEEN I948 AND I955.6 NEVERTHELESS, PRODUCTIVITY IS STILL VERY Low IN BOTH SECTORS, AS HAS MELL DEMONSTRATEO BY TIO INDEPENDENT REPORTS.7 2, THE DEPENDENCE ON ExPORTS A COUNTRY THAT CAN REASONABLY EXPECT TO BECOME SELF-SUFFICIENT BY STIMULATING ONE OR ANOTHER SECTOR OF PRODUCTION MUST NOT BE CONCERNED WITH THE EFFECTS OF SUCH POLICY ON ITS FOREIGN TRADE. IT MAY DERIVE SOME PRODUCTION FACTORS FROM A SECTOR UHERE THEY ARE MORE PRODUCTIVE, TO EXPAND ANOTHER SECTOR EVEN IF THIS WOULD RESULT IN A DETERIORATION OF ITS TERMS OF TRADE, AS IN THE LONG-RUN IT VOULD BENEFIT FROM TWO POSSI- 4E. GUDIN, 'PRODUTIVIDADE,' figyISTA BRASILEIRA DE ECONOMIA,ANO a, NOMERO 33 (RIO DE JANEIRO, SEPTERMBER I955), P. 22. 5mm, 9. 25. 6CONJUNTURA ECONOMICA,ANO X, NO. I, JANUARY I956, P. 32. 7THE’FIRBT TECHNICAL STUDY ON LATIN AMERICAN PRODUCTIVITY NAS PRE- PARED BY THE UNITED NATIONS' ECONOMIC COMMISSION FOR LATIN AMERICA. IT IS ENTITLED LABOUR PRODUCTIVITY OF [EETCOTTON INDUSTRY IN FIVE LATIN AMERICAN COUNTRIgg, (NEI YORK, I95I), AND SHORS THAT 9I% OF THE SPINDLES AND 95% OF THE LOOMS IN THE BRAzILIAN TEXTILEfiNOUSTRY NERE OUT-OF-DATE AT THE TIME THE STUDY IAS MADE. THE OTHER REFERENCE DEALING IN ITS THIRD CHAPTER VITH THE OVER-ALL PROBLEM OF PRODUCTIVITY IN BRAzIL IS: CONSELHO NACIONAL OE ECONOMIA, RELATORID PARA D AND DE I953, (RIO DE JANEIRO, I954). BLE ADVANTAGES: (I) IT NOULD BECOME LESS DEPENDENT ON THE FOREIGN SUP- PLY OF CERTAIN GOODS ESSENTIAL To ITS DEVELOPMENT; (2) IT CAN EXPECT To BECOME A COMPETITIVE EXPORTER OF GOODS IT FORMERLY HAD To IMPORT. ON THESE BASES A PROTECTIVE POLICY, FOR INFANT INDUSTRY, MAY BE ADVISABLE, PARTICULARLY AS A MEANS OF SELF-DEFENSE AGAINST PROTECTIVE MEASURES AP- PLIED BY A PARTNER OF TRADE. THIS DOES NOT MEAN, HDUEVER, THAT THE POL- ICY CONTRIBUTES TO THE OVER-ALL STIMULUS OF RORLD PRODUCTIVITY. ON THE CONTRARY, IT GRADUALLY DESTROYS THE ADVANTAGES THAT CAN BE DERIVED FROM THE INTERNATIONAL DIVISION OF LABOR oR FROM THE COMPARATIVE COST STRUC- TURE OF THE COUNTRIES INVOLVED IN INTERNATIONAL TRADE. NEVERTHELESS, IT COULD BE SHORT-SIGHTED IF THE UNDERDEVELOPED AREAS VOULD HAIT FOR THE MORE ADVANCED ECONOMIES To RETURN TO FREE TRADE MERELY BECAUSE THEY COULD DERIVE DIRECT ADVANTAGES FROM IT. IT IS,THEREFORE,NECESSARY To DEAL IN REALISTIC TERMS AND To ASK HHAT A COUNTRY LIKE BRAZIL. THAT CANNOT Ex- PECT To GAIN ECONOMIC AUTONOMY IN THE NEAR DR DISTANT FUTURE, WOULD HAVE TO DO To IMPROVE ITS INTERNATIONAL POSITION. BRAzIL COULD BY No MEANS INDUSTRIALIZE YITHOUT FOREIGN SUPPORT. DESPITE THE NEED FOR FOREIGN INVESTMENTS, INDIRECT SUPPORT IS REQUIRED THROUGH THE IMPORTATION OF EQUIPMENT AND TECHNICAL KNOR-How. EVEN IF IT ROULD BE POSSIBLE To BUILD UP THE INDUSTRY wIHTOUT EXTERNAL HELP, THIS MOULD RESULT IN A HEAVY MASTE CAUSED BY LACK OF EXPERIENCE, CAPITAL, BASIC TOOLS, AND INEFFICIENT PRODUCTION METHODS. LITTLE OF THE SKILL DEVELOPED BY THE MORE ADVANCE COUNTRIES COULD BE USED, TO THE DETRIMENT OF BRAzILIAN PRODUCTIVITY. IT IS THUS OBVIOUS THAT AN EXCLUSIVELY NATIO- NAL DEVELOPMENT PROGRAM wOULD ONLY BE ADVISABLE UNDER UNUSUAL CIRCUMSTAN- CES, FOR INSTANCE A RAR ECONOMY OR UNDER THE THREAT OF A DEPRESSION AND UNEMPLOYMENT. IN NORMAL TIMES, FOREIGN PARTICIPATION IS NOT ONLY NECES- SARY BUT ALSO CONVENIENT. THE CONVENIENCE IS EXPRESSED IN THE BENEFIT THAT CAN BE DERIVED FROM THE USE OF FOREIGN TOOLS AND EQUIPMENT To IM- PROVE PRODUCTIVITY. DN THE OTHER HAND, BRAZIL MUST IMPORT AND, THEREFORE, EXPORT MORE AND MORE AS IT INDUSTRIALIzES. THIS IS PARTIALLY DUE To THE IMMEDIATE DEPENDENCE ON FOREIGN EQUPMENT AND CAPITAL, BUT ALSO DUE TO THE FEEDER EFFECT. MOST INDUSTRIES DEPENO ON OUTSIDE SUPPLIES To DEVELOP THEIR PRO- DUCTS, AND THE SUPPLIERS, IN TURN, DEPENO ON FOREIGN CAPITAL TO LAUNCH THIS PRODUCTION. FOR INSTANCE, THE DEVELOPMENT OF THE AUTOMOTIVE INDUS- TRY HAS, IN RECENT YEARS, ENCOUNTERED GREAT OBSTACLES, IN CONSEQUENCE OF THE DIFFICULTIES IN SECURING LOCAL SUPPLIES OF PARTS AT SUFFICIENT QUAN- TITIES AND/OR SATISFACTORY QUALITIES. THIS ILLUSTRATES THAT ONE STEP IN INDUSTRIAL EXPANSION USUALLY CALLS FOR ANOTHER, AND BEFORE ONE INDUSTRY IS SUFFICIENTLY EQUIPPEO To SATISFY POTENTIAL DEMAND FOR ITS PRODUCTS, SUBSIDIARY INDUSTRIES MUST DEVELOP, AS BRAZIL'S ABILITY TO EXPAND ITS OVER-ALL PRODUCTION CAPACITY IS DETERMINED BY THE LIMITATIONS OF LABOR AND CAPITAL FORMATION, ONLY A COMPARATIVELY SMALL SHARE BF PRODUCTIVE EFFORTS CAN BE INVESTED IN INDUS- TRY. THE BULK OF THESE EFFORTS MUST BE RESERVED FDR PRIMARY PRODUCTION REQUIRED FOR DOMESTIC CONSUMPTION AND EXPORTS. IN RECENT YEARS THE FAST EXPANSION OF PER CAPITA INCOME IN BRAZIL GREATLY STIMULATED THE DEMAND FOR HOME PRODUCED (AND IMPORTED) GOODS. CONSEQUENTLY THE RATIO OF PRI- MARY PRODUCTION AVAILABLE FOR LOCAL CONSUMPTION AND FOR EXPORTS HAS TUR- NED AGAINST THE LATTER.8 IHIS IN CONJUNCTION WITH OTHER FACTORS DISCUS- 8THIS IS REFLECTED BY THE FOLLOIING AGRICULATURAL PRODUCTION INDEX (I950 - I00): I952 I953 I954 I955 (PROVISIONAL) FOR EXPORTS III.4 99.7 99.8 I07.5 FOR DOMESTIC CONSUMPTION IDI.4 ID7.9 II7.9 I23.7. SOURCE: UNITED NATIONS, ECONOMIC COMMISSION FOR LATIN AMERICA, ECONOMIC BULLETIN FOR LATIN AMERICA,VDL.I,NO.I,(SANTIAGO,0HILE,JANUARY I950 , P.I7. BED IN LATER CHAPTERS) REDUCED THE VOLUME OF EXPORTS AND THE AVAILABILITY OF FOREIGN EXCHANGE FOR IMPORTS. SINCE EXCHANGE PRIORITY IS GIVEN To SOME IMPORT COMMODITIES (MAINLY OIL AND ITS BY-PRODUCTS, RHEAT AND FLOUR, AND NEISPRINT) THE IMPORTATION DF FINISHED CONSUMER GOODS, AND OF MACHI- NERY REQUIRED FOR INDUSTRIALIzATION HAS SUFFERED A SHARP DECREASE. THIS TREND IS BOUND To CONTINUE IN THE NEAR FUTURE AND IMPOSE FURTHER LIMITA- TIONS ON THE COUNTRY'S DEVELOPMENT. THERE IS REASON To BELIEVE THAT THE PROBLEM SITUATION COULD HAVE BEEN AVOIDED, AT LEAST PARTIALLY, HAD EFFORTS BEEN CONCENTRATED MORE HEAVILY ON THE DEVELOPMENT OF PRIMARY PRODUCTION wITH SPECIAL EMPHASIS LAID UPON PRODUCTIVITY. HERE, THE FIELD IS PRACTICALLY UNLIMITED. NOT ONLY CAN THE PRESENT AGRICULTURAL AND MINERAL OUTPUT BE IMPROVED AND IN- CREASED THROUGH BETTER TECHNICAL METHODS DR FERTILIZATION, BUT ALSO A MIDE VARIETY OF YET UNEXPLORED COMMODITIES CAN BE TAPPED AND DEVELOPED. IT IS TOO EASILY FORGOTTEN THAT BRAzIL IS PERHAPS THE COUNTRY RITH THE HDRLO'S LARGEST HEALTH IN NATURAL RESOURCES. BY INTESIFYING THE PRODUCTION OF PRIMARY COMMODITIES A CONTROL OVER Two MAJOR PROBLEM AREAS CAN BE EXPECTED. FOR ONE, A GRADUAL LISERATION GF PRODUCTION FACTORS IN UNDERPOPULATED AND UNDERDEVELOPED PARTS OF THE COUNTRY VOULD CONTRIBUTE TORARD A RE-ESTABLISHMENT OF ECONOMIC EQUILIB- RIUM. CAPITAL AND LABOR VOULD BE DIVERTED FROM THE MAJOR POPULATION CENTERS, THE CONSTRUCTION OF HIGHOAYS AND RAILROADS INTO THE ”INTERIOR" VOULD BECOME MORE VORTHNHILE. COMMUNICATIONS MOULD IMPROVE, AND THE STANDARD OF LIVING OF THE RURAL AREAS MOULD BE RAISED. SECONDLY, A VI- DER RANGE OF EXPORTABLE PRODUCTS IOULD PROVIDE FOR AN INCREASE IN THE VOLUME OF EXPORTATION AND RELIEVE THE PRESSURE ON THE BALANCE OF PAY- MENTS. NO DOUBT, TO CARRY OUT THE PLAN IN ALL ITS PHASES WOULD ALSO HAVE A SLACKENING EFFECT ON INDUSTRIAL PROGRESS, AT LEAST IN THE BEGINNING AND UNTIL INCREASING EXPORTS ALLOI FOR INCREASED IMPORTS OF EQUIPMENT AND MACHIHERV. THIS TRANSITORY DISADVANTAGE WOULD BE MORE THAN OVER- COMPENSATED BY THE BENEFITS DERIVED FROM THE RESULTING REDISTRIBUTION OF INCOME AND A NE'LY FOUND BALANCE. IT MUST BE STRESSED, HOWEVER, THAT THE DOMESTIC DEVELOPNENT PROGRAM HOULD HAVE TO BE ACCOMPANIED BY A FIS- CAL REORGANISATION AIMED AT CHECKING INFLATION. 3. PRODUCTIVITY AND FOREIGN TRAD§_ ANOTHER MATTER DESERVING ATTENTION Is THE RELATIVE PRODUCTIVITY AT HOME AND ABROAD. IHERE IS LITTLE DOUBT THAT BRAzIL'S PRODUCTIVITY IN BOTH SECTORS, THE PRIMARY AND SECONDARY, IS LOVER THAN IN MOST HIGHLY INDUSTRIALIZED COUNTRIES. FURTHERNORE, IT SEEMS TO BE TRUE THAT PRODUC- TIVITY IN PRIMARY PRODUCTION IS NOT As LON IN BRAzIL COMPARED To PRIMARY PRODUCTION ABROAD AS IN DOMESTIC SECONDARY PRODUCTIO#EOMPARED TO SECON- DARY PRODUCTION IN MORE ADVANCED COUNTRIES. OF COURSE, THERE ARE NO MEANS AVAILABLE TO PROVE THIS POINT MATHEMATICALLY, BUT SEVERAL INDICA- TIONS BEAR IT OUT. ONE IS RELATED TO THE COMPARATIVELY CHEAP BRAZILIAN COST OF LABOR MHICH CONSTIBUTES THE MAIN COST FACTOR IN AGRICULTURE. ANOTHER IS THE Lou DEGREE OF MECHANIzATION AND MASS PRODUCTION IN THE BRAzILIAN AS COIPARED TO THE AMERICAN OR EVEN AVERAGE EUROPEAN INDUSTRY. PERHAPS THE STRONGEST EVIDENCE CAN BE DERIVED FROM THE INABILITY OF BRA- zILIAN MANUFACTURED GOODS TO COMPETE IN THE INTERNATIONAL MARKET.9 AS A CONSEQUENCE OF VIDE DISCREPANCIES BETIEEN SECONDARY PRODUCTI- VITY AT HOME AND ABROAD, BRAZIL HAS LITTLE HOPE TO BECOME A POTENTIAL EX- 9DURING THE SECOND 'ORLD 'AR 8RAZIL SUCCEEDED TO EXPORT INDUSTRIAL COMMODITIES--HAINLY TEXTILES TO SOUTH AFRICA--BUT IMMEDIATELY LOST ITS OVERSEAS. HARKETS AFTER PRE-RAR COMPETITORS REAPPEAREDD PORTER OF MANUFACTURED GOODS. THEREFORE, WHATEVER THE TRUE RELATIONSHIP BETREEN PRODUCTIVITY IN INDUSTRY AND AGRICULTURE MAY BE, INDUSTRIALIZA- TION MUST PRIMARILY BE PINANCED THROUGH THE EXPORTATION OF PRIMARY GOODS. IN SUMMARY, TO INDUSTRIALIZE MORE INTENSIVELY, BRAZIL MUST EXPORT INCREASINGLY MORE GOODS, OR IT MUST DO EXACTLY 'HAT IT TRIES TO OVER- COME BY INDUSTRIALIZATION, NAMELY TO REDUCE ITS VOLUME OF TRADE. LITTLE CAN BE DONE TO ESCAPE THIS VICIOUS CIRCLE. VII. SOURCES OF DISEQUILIBRIUM AND METHODS OF CONTROL IN CHAPTER FOUR CERTAIN ASSUMPTIONS WERE MADE CONCERNIG THE WAY BRAZIL'S BALANCE OF PAYMENTS SUFFERED FROM FUNDAMENTAL CAUSES OF DISEQULIBRIUM. IT HAS STATED THAT AN ADVERSE TREND WOULD HAVE DEVELOPED EVEN IN THE AB- SENCE OF MONETARY INFLATION, AS HELL AS UNDER THE EXISTENCE OF BALANCED FOREIGN CAPITAL ACCOUNTS, AND UNITARY ELASTICITIES FOR EXPORT AND IMPORT COMMODITIES. THE ONLY SIGNIFICANT CONDITIONS WERE TRADE BARRIERS ALLOI- INC FOR INDEPENDENT CHANGES IN THE COST AND PRICE LEVELS AMONG COUNTRIES. THE PURPOSE OF THIS CHAPTER IS TO FURTHER ELABORATE THE ABOVE LINE OF THOUGHT, TO CONSIDER HO' THE BALANCE OF PAYMENTS DISEQUILIBRIUM HAS AGGRAVATED BY MONETARY FACTORS, AND TO DISCUSS THE EFFECTIVENESS OF QUANTITATIVE RESTRICTIONS AND EXCHANGE CONTROL. II THE DEMONSTRATION EFEEEL ONE POINT NOT YET COMPLETELY DISCUSSED Is NHY THE DEMAND FOR FDR- EIGN GOODS EXCEEDS THE DEMAND FOR BRAzILIAN GOODS ABROAD. To SOME Ex- TENT THIS MAY BE ATTRIBUTED TO A Low VOLUME OF EXPORTS, HOIEVER, THIS DOES NOT EXPLAIN THE DISCREPANCY BETIEEN FOREIGN AND BRAzILIAN DEMAND. USUALLY A REDUCTION IN EXPORTS AUTOMATICALLY CALLS FOR A PROPORTIONAL REDUCTION IN IMPORTS. IHY IS THIS NOT THE CASE? THE ANSMER TO THIS QUESTION IS PROVIDED BY THO AUTHORS. IN HIS BOOK ON INCOME AND CONSUMER BEHAVIOR DR. J. S. DUESENSERRY DEVELOPS A THEORY ACCORDING TO 'HICH THE INDIVIDUAL PROPENSITY TO CONSUME IS GREAT- _6|.. LY STIMULATED BY THE SURROUNDING wORLD, NEN OR BETTER ARTICLES,NEN PRO- CESSES AND APPEALS STIMULATE PEOPLE TO SPEND MORE. THE AUTHOR APPROPRI- ATELY CALLS THIS THE "DEMONSTRATION EFFECT."| PROFESSOR NURKSE APPLIED THE THEORY To THE INTERNATIONAL PLANE.2 HE NRITES: "THE INTENSITY OF THE ATTRACTION EXCERCISED BY THE CONSUMPTION STANDARDS OF THE ECONOMICAL- LY ADVANCED COUNTRIES--THE DEMONSTRATION EFFECT ON THE INTERNATIONAL PLANE--IS DETERMINED BY TNO FACTORS. ONE IS THE SIzE OF DISPARITIES IN REAL INCOME AND CONSUMPTION LEVELS. THE OTHER IS THE EXTENT OF PEOPLE'S ANARENESS OF THEM."3 THE IMPROVEMENT IN INTERNATIONAL COMMUNICATIONS IN THE LAST FEM DE- CADES HAS ESTABLISHED MORE CONTACT BETNEEN NATIONS. MOVIES, TELEVISION, RADIO, AND ABOVE ALL THE ADDED FACILITIES OF INTERNATIONAL TRAVEL HAVE GIVEN THE CITIzENs OF UNDERDEVELOPED COUNTRIES MORE OPPORTUNITY TO BE- COME ANARE OF THEIR RELATIVELY LOWER LEVELS OF LIVING. THEIR DESIRE FOR FOREIGN GOODS HAS INCREASED. AS A RESULT, THEIR PROPENSITY TO SAVE CON- TRACTED, CAUSING A DECREASE IN THE RATE OF CAPITALIzATION, THE VOLUME OF DOMESTIC OUTPUT, AND THE RATE OF PRODUCTIVITY. THE DISCREPANCY BETNEEN REAL NATIONAL INCOMES OF UNDERDEVELOPED AND INDUSTRIAL COUNTRIES HAS BROADENED , AND ADDITIONAL PRESSURE MAS EXERCISED ON THE BALANCE OF PAY- MENTS. THIS IS HOV THE DEMONSTRATION EFFECT BEARS UPON INTERNATIONAL TRADE. IT EXPLAINS NHY 'THERE IS SOMETHING LIKE A NATURAL TENDECY TO- NARDS DISEOUILIBRIUM IN THE BALANCE OF PAYMENTS BETVEEN A RICH AND A POOR COUNTRY.'4 IN FACT, IT PROVIDES AN EXPLANATION, BOTH FOR THE EVER IN- 'J. S. DUESENSERRY, INCOME, SAVING,AND THE THEORY OF CONSUMER BEHAV- IOR,(CAMBRIDGE: HARVARD UNIVERSITY PRESS, I949). 2RAGNAR NURKSE, PROBLEMS OF CAPITAL FORMATION IN UNDERDEVELOPED COUNTRIES.(NEI YORK: OXFORD UNIVERSITY PRESS, I953), P. 58. 3NURKSE, IBID., P. 63 4NURKSE, IBID., P. 72 -52- CREASING STIMULUS TO IMPORT, AND FOR THE DETERMING EFFECT THE DISCREPAN- CIES IN REAL INCOMES HAVE ON THE LEVEL OF PRODUCTION IN UNDERDEVELOPED COUNTRIES. NOT ONLY IS THE TOTAL VOLUME OF OUTPUT AFFECTED BY THE IN- CREASING PROPENSITY TO CONSUME AND IMPORT, BUT ALSO THE VOLUME OF EXPORT COMMODITIES. FOR A WHILE INCREASED IMPORTS MAY CAUSE AN IMPROVEMENT IN THE STANDARD OF LIVING, AT LEAST FOR THAT PART OF THE POPULATION WHICH DIRECTLY BENEFITS FROM THE COMPARATIVELY LOWER PRICES OF BETTER QUALI- TIES FO FOREIGN GOODS. HOMEVER, AS SOON AS THE UNDERDEVELOPED COUNTRY'S EXCHANGE OR GOLD RESERVES ARE EXHAUSTED, THE DISPROPORTIONATE DEVELOP- MENT BET'EEN EXPORTS AND IMPORTS IS BOUND T0 PRODUCE HARMFUL RESULTS. IT EITHER CREATES A DETERIORATION IN THE EXCHANGE RATE, OR AN INFLATION, OR BOTH. IT MUST BE STRESSED THAT UNDER THE ABOVE ASSUMPTIONS, INFLATION IS NOT OF A MONETARY NATURE. IT RESULTS FROM INCREASED PRESSURE ON THE DE- MAND SIDE, AND A CORRESPONDING CONTRACTION IN THE VOLUME OF PRODUCTION. TO SOME EXTENT INCREASED IMPORTS COMPENSATE FOR THE LOSS IN REAL OUTPUT, BUT THE MORE THE DEMAND TURNS TOIARD FOREIGN GOODS THE STRONGER WILL BE THE IMPACT OF THE ADVERSE BALANCE ON THE DOMESTIC PRICE LEVEL. THUS A DISEQUILIBRIUM IN A COUNTRY'S BALANCE OF PAYMENTS CAN OCCUR IN THE AB- SENCE OF MONETARY INFLATION, AS A RESULT OF A LOU REAL INCOME AND A HIGH PROPENSITY TO CONSUME AND IMPORT. AN OBJECTION TO THE ABOVE ANALYSIS MAY BE RAISED. IN THE LONG-RUN IT OOULD BE REASONABLE TO EXPECT THAT THE MORE ADVANCED COUNTRIES IOULD INCREASE THEIR DEMAND FOR THE PRODUCTS OF UNDERDEVELOPED COUNTRIES AS A CONSEQUENCE OF THE LATTERS' DETERIORATION OF EXCHANGE RATES. IT WOULD BE PROFITABLE FOR THE INDUSTRIAL NATIONS TO IMPORT MORE AT LOVER PRICES. THE STIMULUS THUS RECEIVED IN THE UNDERDEVELOPED AREAS TO EXPAND THE OUT- -53... PUT OF EXPORT GOODS WOULD RE-ESTABLISH SOME OF THE LOST PROPENSITY TO SAVE. INCREASED EXPORTS, PLUS A DECREASED INDUCEMENT TO IMPORT WOULD RELIEVE PRESSURE FROM THE BALANCE OF PAYMENTS. MOST PROBABLY THIS COUN- TERBALANCING MOVEMENT ACTUALLY REDUCES THE IMPACT OF THE DEMONSTRATION FACTOR, BUT IT DOES NOT SEEM TO BE SUFFICIENTLY STRONG T0 COMPLETELY AN- NULL ITS EFFECTS. THERE MAY BE SEVERAL REASONS; AMONG THEM THE DEGREE OF SELF-SUFFICIENCY IN THE ADVANCED AREAS, TRADE BARRIERS, AND THE PER- SISTENT DIFFERENCES IN REAL INCOMES OF THE VARIOUS NATIONS. IN ANY EVENT, CONVINCING EVIDENCE HAS BEEN PROVIDED THAT THE MARGINAL PROPENSITY TO IMPORT TENDS TO BE LOWER IN THE PREOOMINANTLY INDUSTRIAL COUNTRIES THAN IN THE AGRICULTURAL COUNTRIES.5 2, FOREIGN TRADE UNDER PROGRESSING INCOM§_CONCENTRATIDN THUS FAR THE ANALYSIS HAS DEALT NITH THE DEMONSTRATION EFFECT UNDER THE CONDITION OF ABSOLUTE DIFFERENCES IN THE TOTAL NATIONAL INCOME OF NA- TIONS, AND IN THE ABSENCE OF MONETARY INFLATION. IT IS Now NECESSARY TO ASK VHETHER CHANGES IN THE RELATIVE INCOME STRUCTURE AND MONETARY INFLA- TION INFLUENCE THE IMPORT-EXPORT COMPOSITION OF UNDERDEVELOPED COUNTRIES, SUCH AS BRAZIL. IT MUST BE POINTED OUT THAT THE ASPECTS To BE CONSIDE- RED IN THIS CONNECTION ARE HYPOTHETICAL IN THE SENSE THAT THEY CANNOT BE MEASURED STATISTICALLY. IN BRAZIL THE POOR STRATA OF THE POPULATION CONTRIBUTES CONSIDERAB- LY MORE TD THE PRODUCTION OF EXPDRVEOODS AND DEMANDS LESS IN TERMS OF IMPORT GOODS THAN THE HEALTHIER PART OF THE POPULATION. THERE ARE EXCEP- TIONS, OF COURSE. FOR INSTANCE, THIS DOES NOT APPLY TO THE OWNERS 5 SEE THE ENLIGHTENING STUDY BY TSE cHUN cHANG, CYCLICAL MOVEMENT IN THE BALANCE OF PAYMENT8,(GAMSRIDGE: UNIVERSITY PRESS, I95I), P. 34. -54- OF FARMS. THE OVER-ALL PICTURE THOUGH CONFIRMS THE HYPOTHESIS. THIS MAY BE ATTRIBUTED TO THE FOLLONING: (I) ALMOST IN TOTAL BRAZILIAN Ex- PORTS ARE COMPOSED OF PRIMARY GOODS PRODUCED IN Low INCOME AGRICULTURAL AREAS; (2) IN THESE SECTIONS EFFECTIVE DEMAND IS Low, AND (3) MARKET KNORLEDGE IS LIMITED, SINCE ONLY A MINORITY OF IMPORT (AS SELL AS HIGH PRICED DOMESTIC) GOODS ARE wIDELY DISTRIBUTED THROUGHOUT THE COUNTRY. THEREFORE, THE HIGH PROPENSITY To CONSUME IN THE RURAL AREAS IS NOT PAR- TICULARLY DIRECTED TOMARD IMPORT GOODS BUT PRIMARILY TOMARD FORST NECES- SITY COMMODITIES, MAINLY FOOD. THE DEMONSTRATION FACTOR HAS LITTLE EF- FECT AMONG THE RURAL POPULATION. ON THE OTHER HAND, THE INDUCEMENT To IMPORT IS VERY HIGH AMONG THE HEALTHY. AND, THE HIGHER THEIR NOMINAL INCOMES, THE HIGHER Is THEIR EF- FECTIVE DEMAND. THIS IS OF PARTICULAR IMPORTANCE FOR THE COMPOSITION OF IMPORT DEMAND; IT STIMULATES THE IMPORTATION OF LUXURY GOODS AND EXPLAINS, IN PART, THE FABULOUS PRICES FOR AUTOMOBILES, APPLIANCES, AND FOREIGN BEVERAGES IN BRAZIL. ND IMPORT RESTRICTION OR ExCHANGE CONTROL MILL EVER BE ABLE To CURB THIS TREND, UNLESS IT Is PRECEEDED BY MEASURES IM- POSING A LIMITATION ON EFFECTIVE DEMAND. THE IMPACT OF INFLATION ON SUCH AN INCOME STRUCTURE IS ALARMING. BEYOND THE FACT THAT INFLATION CREATES EXCESS PURCHASING POMER, IT IN- DUCES PEOPLE TO LOSE THEIR CONFIDENCE IN THE CURRENCY AND INCREASE THE VELOCITY OF SPENDING. SAVINGS ARE DISCOURAGED, CAPITAL FORMATION IS IM- PAIRED, TOTAL OUTPUT AND PRODUCTIVITY BUFFER, PRICES ExPAND IITH NO END To THE SPIRAL. THE RISE IN THE DOMESTIC PRICE LEVEL, THE POTENTIAL SHORTAGE OF GOODS, AND THE HIGHER QUALITY OF FOREIGN GOODS STIMULATES PEOPLE TO SPEND MORE AND MORE FOR IMPORTS. FOR THOSE BENEFITING FROM INFLATION, IN THE SENSE THAT THEIR NOMINAL INCOMES EXPAND FASTER THAN _ 55 - THE PRICE LEVEL (SEE CHAPTER II), THE CONTINUING LOSS OF THE CRUZEIRD'S PURCHASING POMER ABROAD HAS LITTLE DETERRING EFFECTS ON THEIR DESIRE TO IMPORT, To THE DETRIMENT OF THOSE IHICH CANNOT FOLLOM THE RUNAHAY PRICES. uEANIIHILE THE BALANCE OF PAYMENTS IS EXPOSED To A DOUBLE PRESSURE: ONE RESULTING FROM INCREASED COST AND REDUCED VOLUMES OF EXPORT COMMODITIES, THE OTHER FROM THE EXPANDING DEMAND FOR IMPORTS. THUS THE ADVERSE TREND BECOMES A CHRONIC EVIL. 3. THE EFFECTS OF GONTROL:MEASUR§3' TO COPE VITH INFLATION AND THE ADVERSE BALANCE OF PAYMENTS, THE BRAZILIAN GOVERNMENT HAS APPLIED SEVERAL MEASURES. AMONG THEM ARE PRICE CONTROLS AND QUANTITATIVE IMPORT RESTRICTIONS. THAT A COMBINATION OF THE Tao MEASURES CAN PRODUCE LASTING RESULTS HAS BEEN PROVED BY EUROPEAN EXPERIENCE. AFTER IDRLD WAR II, FOR INSTANCE, GREAT BRITAIN MAS EXPOSED TO AN INFLATIONARY PRESSURE RESULTING FROM AN ADVERSE BALANCE OF PAYMENTS THAT MAS TEMPORARILY CHECKED BY STRICT AD- HERENCE TO PRICE CONTROL AND IMPORT RESTRICTIONS. EXCESS SPENDING POI- ER THEN TOOK THE FORM OF REDUNDANT MONEY.6 REPEATED ATTEMPTS To FREEZE PRICES FAILED IN BRAZIL. NOT ONLY WAS INFLATION Ta>PORERFUL TO BE DETAINED BY ARSITRARY OBSTACLES, BUT ALSO CONTROL MEASURES wERE APPLIED TOO LEISURELY. IN A HAY THIS MAS FORTU- NATE. IT PREVENTED A FURTHER CONTRACTION OF AGRICULTURAL OUTPUT FOR wHICH THE MAJORITY OF PRICE REGULATIONS WERE DESIGNED. PARADOXICAL AS IT SOUNDS, HERE IS A CASE WHERE GOVERNMENT FAILURE WAS BENEFICIAL TO THE 6SEE: R. G. HAMTREY, THE BALANCE OF PAYMENTS AND THE STANDARDS OF LIVING, (LONDON AND NEM YORK: ROYAL INSTITUTE OF INTERNATIONAL AFFAIRS, l950), P. 36. -66- ECONOMY. MUCH MORE EFFECTIVE PROVED TO BE THE IMPOSITION 0F IMPORT RESTRIC- TIONS, ALTHOUGH THEIR APPLICATION WAS AT TIMES OBSTRUCTED BY ADMINISTRA- TIVE CIRCUMSTANCES. DEPENDING ON THE CONDITIONS IN PARTICULAR YEARS AND THE SERIOUSNESS OF THE FOREIGN TRADE SITUATION, IMPORT RESTRICTIONS VARIED IN NATURE AND EXTENT.7 NONETHELESS, THEIR OVER-ALL PURPOSES YERE AIMED AT A COMBINATION OF A RESTRICTION IN THE VOLUME OF IMPORTS AND A CHANGE IN THE COMPOSTITION OF IMPORTS. AS A GENERAL RULE IT CAN BE SAID THAT THE SECOND OBJECTIVE HAS MORE SUCCESSFULLY ACCOMPLISHED. cONSE- QUENTLY, THE STRUCTURE OF BRAZILIAN IMPORTS DURING THE POST-VAR YEARS RDUGHLY CORRESPONDS TO THE FOLLOVING BREAK-DOOM: OIL AND ITS BY-PRo- DUCTS PLUstEAT AND FLOUR IMPORTS ACCOUNT FOR SOME 25% OF TOTAL IMPORT EXPENDITURE AND ARE GIVEN EXCHANGE PRIORITY; NEXT IN LINE ARE ESSENTIAL MACHINERY AND EQUIPMENT ACCOUNTING FOR 40%; METALS, CHEMICAL PRODUCTS AND OTHER SEMI-PROCESSED GOODS ACCOUNTING FOR ABOUT 25%; LEAVING I0% FOR ITEMS SUCH AS PASSENGER CARS, APPLIANCES, TIRES AND TUBES, AND OTHER CONSUMPTION GOODS.8 AT FIRST GLANCE, THE SREAK—DOIN SEEMS To REFLECT A HIGHLY SATIS- FACTORY COMPOSITION OF IMPORTS. IT PROVIDES FOR A REDUCED VOLUME OF CONSUMPTION AND A RELATIVELY HIGH VOLUME OF INVESTMENT GOODS. THUS THE GREATER PART OF IMPORT DISBURSEMENTS ACT AS COMPULSORY SAVING.. HOYEVER, THIS IS ONLY PART OF THE STORY. IHAT HAS TO BE ASKED IN ADDITION IS HOI COMPULSORY SAVING AND THE LARGER VOLUME OF IMPORTED CAPITAL GOODS EFFECT THE DOMESTIC ECONOMY. 7FOR A HISTORICAL DEVELOPMENT OF IMPORT RESTRICTIONS BETYEEN I93I AND I949 SEE: R. RICHERS, OP. CIT., PP. 79-84. 8NOTE THE HIGH PROPORTION OF IMPORTS DESTINED FOR INDUSTRIAL DEVEL- OPMENTS. IN CONTRAST, ONLY ABOUT I% OF TOTAL IMPORT EXPENDITURE IS USED FOR FERTILIZERS. ONCE AGAIN, IT IS NURKSE UHO GIVES THE CLUE To THE PROBLEM. FIRST, HE EXPLAINS IHY IMPORT RESTRICTIONS ARE BOUND To PRODUCE INFLATION. SINCE PEOPLE DO NOT VOLUNTARILY CONSENT TO A REDUCTION IN THEIR CONSUMPTION, "THEY HILL SEEK TO MAKE UP FOR THE REDUCTION IN THEIR IMPORTS BY AN IN- CREASE IN THEIR EXPENDITURE ON DOMESTIC GOODS AND SERVICES....WHEN THE ESCAPE VALVE OF CONSUMABLE IMPORTS IS SHUT OFF, THE PRESSURE OF THE STEAM IN THE SYSTEM INCREASES; DEMAND BECOMES EXCESSIVE IN RELATION To DOMESTIC SUPPLY AND TENDS To PUSH UP THE LEVEL OF PRICES."9 FURTHERMORE, THE INCREASED CONSUMER EXPENDITURE IN THE HOME MARKET "MILL TEND TO BID FACTORS OF PRODUCTION AVAY FROM DOMESTIC INVESTMENT AND MAINTENANCE AND IILL DRAM THEM INTO ACTIVITES CATERING FOR CURRENT CONSUMPTION....THE INCREASE IN IMPORTS OF INVESTMENT GOODS TENDS TO BE OFFSET BY REDUCED DOMESTIC INVESTMENT ACTIVITIES, OR ACTUALLY DOMESTIC DISINVESTMENT CAU- SED BY FAILURE TO MAINTAIN AND REPLACE CAPITAL AS IT YEARS OUT."'o THOUGH TMEpBJECTIONS RAISED ARE TECHNICALLY CORRECT, ONE MUST BEWARE OF OVEREXTENDING THEIR MEANING. THEY DO NOT IMPLY THAT SELECTIVE RE- STRICTIONS MISS THEIR GOAL COMPLETELY OR SHOULD BE DISCARDED. UNDER THE GIVEN SITUATION OF INCOME DISTRIBUTION IN BRAZIL,PRICE INFLATION AND THE DESCRIBED INFLUENCE OF HIGH CONSUMPTION EXPENDITURE ON CAPITAL FORMATION IOULO TAKE PLACE EVEN IF MORE CONSUMPTION GOODS YERE PERMITTED TO BE PROCURED ABROAD. THE MAIN LESSON THAT CAN BE LEARNED FROM PAST EXPERIENCES MITH QUANTITATIVE IMPORT CONTROLS IS THAT THEY CANNOT BE EXPECTED TO IMPOSE SUFFICIENTLY STRONG LIMITATIONS ON FOREIGN TRANSACTIONS TO RE-ESTABLISH BALANCE OF PAYMENTS EQUILIBRIUM AS LONG AS STRUCTURAL AND MONETARY CAUSES 9 NURKSE, OP. CIT., P. Ilz '°NURKSE, IBID., P. II3 - 68 - OF DISEQUILIBRIUM PREVAIL AT HOME. THEREFORE, IMPORT RESTRICTIONS MUST I BE BACKED UP BY EXCHANGE CONTROL. QELEXCHANGE,CONTROL A HISTORICAL REVIEI OF BRAZIL'S FOREIGN EXCHANGE SITUATION UAS GIVEN IN CHAPTER I. HUGH MORE COULD BE SAID AND MANY MORE DETAILS DEVELOPED. FOR THE ISSUE TO BE CONSIDERED HERE, HOHEVER, A GENERAL UNDERSTANDING OF PAST PERFORMANCES IS SUFFICIENT. ALL FORMS OF EXCHANGE CONTROL IMPOSED IN BRAZIL SINCE I93I, INCLU- DING THE MULTIPLE EXCHANGE SYSTEM INTRODUCED IN I953, HAVE ONE POINT IN COMMON: THEY FAILED TO RE-ESTABLISH LONG-TERM EQUILIBRIUM IN THE BALANCE OF PAYMENTS. THIS HAS LED TO A WIDESPREAD BELIEF THAT THE PRIMARY CAUSE OF AN ADVERSE BALANCE MUST BE SOUGHT IN THE INFLEXIBILITY OF EXCHANGE RATES AND THAT A RETURN To A SINGLE FLUCTUATING RATE WOULD BE ADVISABLE.l2 ALL THAT CAN SAFELY BE SAID, HOUEVER, IS THAT FIXED RATES HAVE CON- TRIBUTED TOUARD A DETERIORATION SINCE THEY HAMPERED EXPORTATION, AND STIMULATED IMPORTATION AND CAPITAL FLIGHT. AT TIMES UHEN THERE HAS BEEN HIDE DISPARITIES BETWEEN THE RATE AND THE REAL PURCHASING POWER OF THE CRUZEIRO AT HOME AND ABROAD, THE IMPACT OF OVER-VALUATION HAS BEEN VERY HEAVY. THIS DOES NOT IMPLY THOUGH THAT OVER-VALUATED RATES MERE FUNDA- MENTAL TO THE DISEQUILIBRIUM OBSERVED. ON THE CONTRARY, HAD THERE NOT BEEN OTHER REASONS, THE COMBINATION OF IMPORT RESTRICTIONS AND FIXED RATES COULD HAVE PREVENTED AN AGGRAVATION OF IMBALANCE. I ' THE FUNCTION OF SPECIFIC TARIFFS IS NOT DISCUSSED HERE As IT FAILS TO SE OF DECISIVE INFLUENCE AS A TRADE BARRIER IN BRAZIL DUE TD LG! CUS- TOM RATES LARGELY OFFSET BY INFLATION. 'ZIN PRINCIPLE, ALTHOUGH NOT EXPLICITLY EXPRESSED, THIS THESIS IS ALSO CONTAINED IN A MUCH DISCUSSED REPORT BY THE COUNCIL OF THE FOREIGN cHAnBERfOF COMMERCE PREPARED IN MEMEOGRAPHIC FORM AND ENTITLED: “CON- TRSLE DE CAMBIO E COMERGIO EXTERIOR: I954. STRICTLY SPEAKING, THERE ARE SOME ADVANTAGES RESULTING FROM OVER- VALUED AND INCONVERTISLE CURRENCIES. GIVEN THE FEM EXPORT PRODUCTS AND THEIR INELASTICITY OF DEMAND IN FOREIGN COUNTRIES, BRAZIL INDIRECTLY PROFITS FROM A REDUCED VOLUME OF EXPORTS. IT CAN REASONABLY EXPECT AN IMPROVEMENT OF ITS TERMS OF TRADE.'3 A GREATER ADVANTAGE THOUGH IS AN IN- DIRECT ONE. IN BRAZIL, EXCESS SPENDING POVER PROVIDED BY INFLATION EX- ERTS PRESSURES ON BOTH THE DOMESTIC PRICE LEVEL AND THE BALANCE OF PAY- MENTS. OVER-VALUATION CAUSES AN INCREASED PORTION OF THIS EXCESS POKER To BE DIRECTED TOWARD THE IMPORT MARKET, REDUCING THE INFLATIONARY PRESS- URE ON THE GOODS DESTINED FOR HOME CONSUMPTION OR EXPORTATION. AS INFLATION GAINS MOMENTUM, THE MOVEMENT OF PRICE AND EXCHANGE DE- PRECIATION EXCEEDS THE RATE OF INCREASE IN MONEY SUPPLY AND CIRCULATION. PSYCHOLOGICAL FACTORS CAUSE A FLIGHT TO HOARDING OF FOREIGN CURRENCIES, MAINLY DOLLARS, AND GOODS. DISINVESTMENTS, SPECULATIONS AND BLACK MAR- KET TRANSACTIONS FURTHER UNDERMINE THE CURRENCY'S STABILITY. THIS HAS OCCURED IN BRAZIL TO AN ALARMING EXTENT. IN THIS CONNECTION IT MAY BE HELL TO REMEMBER HOV CLOSE BRAZIL'S LATE CURRENCY EXPERIENCE FOLLOIS THE GERMAN PATTERN AFTER IORLD IAR I.'4 REPEATED EXCHANGE RATE ADJUSTMENTS ARE A MUST UNDER THE DESCRIBED CONDITIONS. AFTER SEVERAL DEVALUATIONS FAILED TD RESTORE THEDESIRED EQUILIBRIUM IN THE BALANCE OF PAYMENTS, BRAZIL RESORTED TO MULTIPLE RATES |3A SIMILAR POINT IAS RAISED BY HENRY C. IALLICH, "UNDERDEVELOPED COUNTRIES AND THE INTERNATIONAL MONETARY MECHANISM," MONEY, TRADE AND ECONOMIC GROITH. IN HONOR OF JOHN HENRY 'ILLIAMS (NED YORK: THE MAC- MILLAN COMPANY, I95I), P. 30.--ANOTHEqPOSSIBLE ADVANTAGE MENTIONED BY lALLICH, NAMELY THAT “AN OVER-VALUED RATE FACILITATES THE TRANSFER OF RE- SOURCES FROM THE EXPORT INDUSTRIES...TO THE SECTORS OF THE ECONOMY THAT ARE CANDIDATES FOR DEVELOPMENT“ (P. 30) AppL|Es To BRAZIL, BUT 'E HESI- TATE TO CALL IT AN ADVANTAGE ON THE GROUNDS GIVEN IN CHAPTER VI. I4 54-62. SEE: HABERLER, THE THEORIE OF INTERNATIONAL TRADE,OP. CIT., PP. - 70 - WITH SEVERAL ADVANTAGES IN ITS FAVOR. AMONG THEM ARE: (I) EXCHANGE AL- LOCATIONS BECAME LESS ARSITRARY FOR IMPORTERS DUE To THE AUCTION SYSTEM; (2) THE PRICES OF IMPORT GOODS VARIED MORE IN ACCORDANCE MITH EXPORT RE- VENUES, DOMESTIC DEMAND, AND THE ESSENTIALITY OF IMPORTS; (3) EXCHANGE ALLOCATIONS FOR IMPORTS COULD NOT EXCEED EXPORT RETURNS; (4) TO SOME Ex- TENT COMMERCIAL ARREARS COULD BE PAID OFF AND FURTHER BACKLOGS PREVEN- TED; (5) IN CONJUNCTION, THESE FACTORS CONTRIBUTED TONARD AN IMPROVEMENT IN THE BALANCE OF PAYMENTS POSITION AND CLOSED SOME OF THE PRICE GAPS FDRMERLY EXISTING BETVEEN IMPORT AND HOME-PRODUCED GOODS. A FEM YEARS HAVE PASSED SINCE BRAZIL INTRODUCED MULTIPLE EXCHANGE RATES. AMONG THE TMO ALTERNATIVES OF EXCHANGE ADJUSTMENTS, DEVALUATION AND MULTIPLE RATES, THE LATTER PROVED To BE MORE EFFECTIVE. NEVERTHE- LESS, IT DID NOT SUCCEED IN RESTROING EQUILIBRIUM. THERE ARE SEVERAL REASONS MHY THIS COULD NOT BE ACCOMPLISHED,'5 THE MAIN ONE BEING THE CON- TINUED PRESSURE EXERTED BY DOMESTIC CONDITIONS ON THE BALANCE OF PAYMENTS. AS MAS POINTED OUT BY PROFESSOR HANSEN, EXCHANGE RATE ADJUSTMENTS CANNOT BE EXPECTED TO CORRECT FUNDAMENTAL DISEOUILIBRIA, NEITHER OF CYCLICAL NOR OF SECULAR NATUREO'G ALL THIS DOES NOT MEAN THAT A RETURN TO A SINGLE FLUCTUATING RATE ROULD BE OUT OF QUESTION FOR BRAZIL. ON A LONG-TERM BASIS IT Is THE MOST DESIRABLE OBJECTIVE, AND THIS SHOULD BE KEPT IN MIND NHEN FOREIGN TRADE POLICIES ARE ESTABLISHED. UNDER THE PRESENT CIRCUMSTANCES OF WIDE '5IN THIS CONNECTION A THOROUGH STUDY BASED LARGELY ON THE PERUVIAN AND ARGENTINIAN EXPERIENCE IS ILLUMINATING: EUGENE RICHARD SCHLESINGER, MULTIPLE EXCHANGE RATES AND ECONOMIC DEVELOPMENT,(PRINCETON, NEM JERSEY: PRINCETON PRESS, I952). SEE MAINLY THE CONCLUSIONS (PP. 73-76) MOST OF RHICH CAN BE DIRECTLY APPLIED TO THE BRAZILIAN CASE. 'GALVIN H. HANSEN, “FUNDAMENTAL DISEOUILIBRIUM," FOREIGN ECONOMIC POLICY FOR THE UNITED STATESI ED. SEYMOUR E. HARRIS (CAMBRIDGE: HARVARD UNIVERSITY PRESS, I948) PP. 379-83. DISCREPANCIES BETWEEN REAL PER CAPITA PURCHASING POWER AND PRODUCTIVITY AT HOME AND ABROAD, AS WELL AS UNDER INFLATION AND DOMESTIC IMBALANCE OF INCOME DISTRIBUTION, A FREE RATE WOULD BE DISASTROUS. VIII. PRICE ELASTICITIES AND THE TERMS OF TRADE AN IMPORTANT ASPECT OF INTERNATIONAL TRADE HAS THUS FAR BEEN OMIT- TED FROM THIS STUDY: THE TERMS OF TRADE AND THEIR DEPENDENCE ON PRICE ELASTICITIES. FOR MANY THIS MAY BE A SINFUL OMISSION. INDEED, TERMS OF TRADE ARE OF GREAT IMPORTANCE To UNDERDEVELOPED COUNTRIES, BUT TEIR MEAS- UREMENT AND APPLICATIONS ARE NOT ALMAYS AS SIMPLE AS MAY APPEAR ON THE SURFACE. I, THE BENEFITS OF THE,1§BMS OF TRADE THE TERMS OF TRADE MEASURE THE RATIO OF RELATIVE PRICES OF EXPORT AND IMPORT GOODS OF A COUNTRY. RELATIVE PRICES, IN TURN, ARE A FUNCTION OF DEMAND ELASTICITIES ABROAD AND AT HOME. AN IMPROVEMENT IN THE TERMS OF TRADE IS SAID TO BE FAVORABLE FOR A COUNTRY FOR THE SIMPLE REASON THAT A GIVEN QUANTUM OF IMPORTS BECOMES CHEAPER IN RELATION TO A GIVEN QUANTUM OF EXPORTS, EITHER DUE TO AN OVERPROPORTIONAL INCREASE IN EXPORT OVER IMPORT PRICES, OR TO AN UNDERPROPORTIONAL DECREASE IN EXPORT OVER IMPORT PRICES. CONVERSELY, A DETERIORATION IN THE TERMS OF TRADE IS SAID To BE UNFAVORABLE FOR A COUNTRY. ACCORDING TO A STUDY OF THE UNITED NATIONS "IMPROVEMENTS OF THE TERMS OF TRADE...AFFECT THE NATIONAL INCOMES OF UNDERDEVELOPED COUNTRIES AS DEFINITELY AS IMPROVED TECHNOLOGY, INCREASES IN EMPLOYMENT, OR CHANGES FROM LESS PRODUCTIVE TO MORE PRODUCTIVE EMPLOYMENT SUCH AS OCCUR IN THE PROCESS OF INDUSTRIALIZATION.”' FURTHERMORE, IN THE CASE OF ACCUMULATED FOREIGN DEBTS, “FAVORABLE CHANGES IN THE TERMS OF TRADE OF UNDERDEVELO- PED COUNTRIES IMPROVE THEIR ABILITY TO MEET DEBT SEVICES ON FOREIGN LOANS AND IITHORAIELS OF EARNINGS OF FOREIGN-FINANCED INVESTMENTS."2 THIS EX- PLAINS THEIMPORTANCE THAT IS BEING ATTRIBUTED TO THE TERMS OF TRADE IN UNDERDEVELOPED.COUNTRIES. A QUESTION THAT ARISES ISVHETHER FAVORABLE TERMS OF TRADE ARE AL- IAYS BENEFICIAL. IN THE FIRST INSTANCE THERE IS A TENDENCY TO ANSVER THE QUESTION IN THE AFFIRMATIVE, SINCE IT SEEMS DUBIOUS THAT A CHEAPER ACQUISITION OF GOODS SHOULD BE ADVANTAGESOUS To THE PURCHASING COUNTRY. HOMEVER, THERE ARE SOME IMPORTANT ExCEPTIONS. UNDER THE CONDITION OF INELASTIC DEMAND IT IS CONCEIVABLE THAT A COUNTRY MAY REDUCE ITS VOLUME OF EXPORTS OELIBERATELY IN OREDER To Da- TAIN HIGHER UNITARY PRICES FOR ITS GOODS ABROAD. IN THIS CASE THE TERNS. OF TRADE IMPROVE BUT TOTAL EXPORT RECEIPTS OIMINISH RATHER THAN INCREASE. HENCE THE OVERALL CAPACITY TO IMPORT IS REDUCED. FURTHERMORE, THE REDUC- TION IN THE VOLUME OF TRADE IS BOUND TO CALL FOR A RE-ALLOCATION OF PRO- DUCTION FACTORS OR A CHANGE IN THE LEVEL OF EMPLOYMENT THAT DOES NOT HAVE TO BE ADVANTAGEOUS TO THE COUNTRY CONCERNED. CASES OF THIS NATURE HAVE BEEN REPORTED BY THE AFOREMENTIONED STUDY OF THE UNITED NATIONS.3 MOREDVER, REDUCED EXPORTS Do NOT NECESSARILY PRODUCE UNFAVORABLE RESULTS. IT ALL DEPENDS ON HON SURPLUS RESOURCES DERIVED FROM INCREASED EXPORT PROCEEDS ARE USED. IHERE ARE. ESSENTIALLY, THREE DISTINCT POSSI- 'UNITED NATIONS, DEPARTMENT OF ECONOMIC AFFAIRS, RELATIVE PRICES OF ExPORT8 AND IMPORTS OF_UNDER-D§ngOPED BOUNTRIE§,(LAKE SUCCESS, NEM YORK, DECEMBER I949), P. I2I. 2UNITED NATIONS, IBID., P. I6. 3UNITEO NATIONS, IBID., PP. IzI-Iza. -74- BILITIES OF APPLICATION. SURPLUS RESOURCES MAY INCREASE: (A) DOMESTIC INVESTMENTS, (B) IMPORTS, OR (C) SPENDING. IN GENERAL, A COMBINATION OF THE THREE USES MAY TAKE PLACE. THUS THE EFFECTIVENESS DEPENDS ON THE EX- TENT TO MHICH PROCEEDS ARE APPLIED FOR ONE OR THE OTHER PURPOSE. IF THE MAJORITY OF SURPLUS RESOURCES ARE INVESTED IT TAKES THE FORM OF SAVING MITHDUT REDUCING THE VOLUME OF CONSUMPTION. IN THIS CASE IT CAN BE REASONABLY EXPECTED THAT THE IMPROVEMENT OF THE TERMS OF TRADE IS BENEFICIAL FOR MOST UNDERDEVELOPED COUNTRIES, PROVIDED (I) THAT INVEST- MENTS ARE APPLIED IN INDUSTRIES CONTRIBUTING TO ECONOMIC DEVELOPMENT, FOR INSTANCE BY IMPROVING THE RATE OF PRODUCTIVITY;AND (2) THAT THE LEVEL OF EMPLOYMENT PERMITS AN EXPANSION IN ECONOMIC ACTIVITIES.MITHOUT INFLA- TION. THIS SECOND CONDITION PRESUPPOSES EITHER A LOM DEGREE OF UNEMPLOY- MENT OR AT LEAST INVOLUNTARY DISGUISED INEMPLOYMENT. IF FULL EMPLOYMENT EXISTS BEFORE SURPLUS PROCEEDS ARE INVESTED, THEIR ADVANTAGEOUS EFFECT IS BOUND TO BE OFFSET BY AN INCREASE IN THE MAGE AND PRICE LEVEL. IF SURPLUS RESOURCES ARE USED To INCREASE THE VOLUME OF IMPORTS, THE BENEFIT IS DEPENDENT UPON THE KIND OF IMPORT PRODUCTS DEMANDED. IF THEY ARE CAPITAL GOODS, THE COUNTRY IN QUESTION MILL INCREASE ITS REAL CAPITAL SUPPLY AND HENCE IMPROVE ITS SITUATION. THIS, HOMEVER, MUST OCCUR BEFORE THE ADDITIONAL MONETARY INCOME OF EXPORTERS IS SPENT ON THE HOME MARKETS. TO ENABLE THIS, EXPORTERS MUST THEMSELVES IMPORT CAPITAL GOODS, OR THE GOVERNMENT MUST EXERCISE SOME KIND OF A CONTROL OVER EXCESS EARNINGS TO PREVENT AN INFLATIONARY PRESSURE. IT IS VERY LIKELY, HOMEVER, THAT Ex- PORTERS MILL USE THEIR ADDITIONAL INCOME FOR CONSUMPTION PURPOSES, AND THE PRICE LEVEL WILL RISE. IF SOONER OR LATER SOME OF THE EXCESS INCOME 4I‘UCH OF THE SUBJECT MATTER IN THIS SECTION IS BASED ON NURKSE, 0P0 CITQ' PP. 97"03. -75- IS USED TO IMPORT CONSUMPTION GOODS, THE INFLATIONARY PRESSURE MILL BE RELIEVED DUE TO SHIFTING DEMAND. FROM THE ABOVE, IT CAN BE CONCLUDED THAT AN IMPROVEMENT IN THE TERMS OF TRADE IS BENEFITIAL ONLY MHEN SURPLUS RESOURCES ARE EMPLOYED TO IN- CREASE CAPITAL FORMATION, AND ONLY UNDER CERTAIN USE CONDITIONS,AND IN THE PRESENCE OF UNEMPLOYMENT. ONLY THEN SURPLUSES PERFORM THE FUNCTION OF REAL SAVING AND STIMULATE ECONOMIC DEVELOPMENT. To APPLY THESE GENERAL RULES TO A SPECIFIC CASE IS DIFFICULT. THERE ARE NO STATISTICS REFLECTING HOM SURPLUS RESOURCES ARE USED IN AN ECONO- MY. ACTUALLfi IT IS EVEN DIFFICULT TO DISTINGUISH BETMEEN SURPLUS AND ”NORMAL" EXPORT REVENUES. NEVERTHELESS, SOME HYPOTHETICAL SOLUTIONS CAN BE DERIVED FROM CONSUMPTION AND SAVING HABITS OF A COUNTRY. IN 8RAzIL THERE IS A TENDENCY TO SPEND RATHER THAN TO REINVEST EX- CESS PROFITS. THE URGE TO DO SO IS STRONG IN PART BECAUSE OF INFLATION, IN PART DUE TO THE CONSUMER'S DESIRE TO IMPROVE HIS STANDARD OF LIVING. THE GOVERNMENT DOES NOT PROVIDE FOR COMPULSORY SAVING DERIVED FROM Ex- PORT-RETURNS, AT LEAST NOT IN TERMS OF CRquIROS. THERE ARE NO TAXES TO SPEAK OF ON EXPORT PROCEEDS. ON THE OTHER HAND, FOREIGN EXCHANGE EARNED MUST BE YIELDED TO THE GOVERNMENT MHICH CAN DISPOSE OF IT EITHER TO PAY OFF FOREIGN DEBTS, OR TO INCLUDE IT IN THE AMOUNTS RESERVED FOR AUCTIONING, OR FOR ANY OTHER PURPOSE. IN VIEM OF THE CHRONIC SHORTAGE OF FOREIGN EXCHANGE, THE GOVERNMENT MUST BE CAREFUL IN THE MAY IT USES PROCEEDS. ANY INCREASE IN RESERVES IS MELCOMED AND USUALLY APPLIED FOR BENEFICIAL PURPOSES. THIS IS TRUE FOR FOREIGN EXCHANGE; HOMEVER, MHAT HAPPENS MITH THE CRUzEIRO DISBURSEMENT? IF AN UNEXPECTEO AMOUNT OF PRO- CEEDS ACCUMULATES DUE To A SUODEN IMPROVEMENT OF THE TERMS OF TRADE, THE GOVERNMENT MAY NOT (AND OFTEN DOES NOT) DIPOSE OF SUFFICIENT CURRENCY RE- SERVES. THEN IT INVARIABLY PUTS THE MONEY PRESS INTO ACTION. SURPLUS MONEY SUPPLIES PLUS SURPLUS INCOMES EXERT A DOUBLE INFLATIONARY PRESSURE ON THE PRICE LEVEL. HENCE FAVORABLE TERMS OF TRADE ARE BY NO MEANS GUAR- ANTEEISTIMULATIVE AGENTS FOR ECONOMIC DEVELOPMENT. THIS IS THE FIRST RE- STRICTION THAT HAS TO BE IMPOSED ON THE TERMS OF TRADE ANALYSIS. ONE MUST BE CAREFUL THOUGH NOT To INVERT THERULE. THE RESTRICTION DOES NOT MEAN THAT A DETERIORATION IN THE TERMS OF TRADE IS OF ADVANTAGE. UNFAVORABLE TERMS ARE ALMOST EXCLUSIVELY DEROBATORY. 2, DEMAND_§LASTICITY AND PRODUCT RANQE. ON THE MARSHALLIAN SCALE OFOEMAND ELASTICITIES IT IS VERY UNLIKELY THAT A COUNTRY HAS A CONTINUED INELASTIC DEMAND FOR ALL ITS EXPORT PRO- DUCTS.5 IN CONTRAST, A LARGE AMOUNT OF STATISTICAL COMPUTATIONS IN MORE RECENT YEARS DEMONSTRATES THE EXIBTENCE OF A SECULAR TREND OF DETERIORA- TION OF RELATIVE PRICES FOR PRIMARY GOODS. SINCE THE MAJORITY OF UNDER- DEVELOPED COUNTRIES ARE EXPORTERS OF PRIMARY AND IMPORTERS OF INDUSTRIAL GOODS, THEIR TERMS OF TRADE ARE BOUND TO GROM MORSE. DOES THIS PROVE MARSHALL MRONG? HAD HARSHALL HAD THE EVIDENCE ME HAVE TODAY, HE MOULD PROBABLY HAVE ATTRIBUTED MORE IMPORTANCE To MHAT HE HIMSELF CONSIDERED AN EXCEPTION. HE COULD HARDLY HAVE FORSEEN THAT THERE ARE CERTAIN COMMODITIES MITH A PERSISTENTLY LOM ELASTICITY OF DEMAND, AND EVEN LESS COULD HE HAVE PRE- DICTED THE IMPACT OF PRESENT TRADE BARRIERS FORCING COUNTRIES To A HIGH DEGREE OF SPECIALIZATION. APART FROM THESE HISTORICAL LIMITATIONS, HIS ANALYSIS CONTINUES TO BE A VERY USEFUL TOOL. 5SEE: HASERLER, TH; THEORY OF INTERNATIONAL TRADE,OP. CIT., PP. I50- I69. MARSHALL ARGUED THAT IT Is IMPROBABLE THAT THE ELASTICITY OF DEMAND IN THE IMPORTING COUNTRY IS LOM FOR ALL COMMODITIES OF THE EXPORTING COUNTRY 'FOR THE RELATIVELY REDUCED MAGES OF 0 (7H: EXPORTING COUNTRY) MILL BRING NEM COMMODITIES INTO THE CATEGORY OF HER EXPORTS.”7 IF, AT A GIVEN TIME, THE MEIGHTED AVERAGE DEMAND FOR ALL OF THE EXPORTING COUN- TRY'S GOODS IS INELASTIC IN THE IMPORTING COUNTRY, REDUCED FOREIGN TRADE REVENUES MILL CAUSE A CONTRACTION OF SUPPLY AND OF COSTS IN THE EXPOR- TING COUNTRY'S OUTPUT. CONSEQUENTLY, OTHER PRODUCTS, NOT EXPORTABLE SE- FORE, MILL NOM BECOME AVAILABLE FOR SHIPMENT ABROAD. IN THIS MANNER, THE EXPORT-IMPORT STRUCTURE OF BOTH (OR ALL) COUNTRIES INVOLVED MILL ADAPT ITSELF TO THE MOST FAVORABLE CONDITION OF TRADE FOR EACH COUNTRY, NOT ONLY IN TERMS OF COMPARATIVE COSTS BUT ALSO IN RELATION TO PRICE ELASTI- CITIES. AND SINCE ELASTICITIES VARY FOR INDIVIDUAL COMMODITIES IN THE DIFFERENT PRODUCING AND CONSUMING COUNTRIES, IT IS IHPROBABLE THAT ANY COUNTRY MILL PRODUCE AND EXPORT ONLY COMMODITIES MITH LOM DEMAND ELASTI- CITIES. ALTHOUGH THE FULL EFFECT OF THIS BALANCING DEVELOPMENT IBITHE EX- PORT-IMPORT STRUCTURE IS PARTIALLY OBSTRUCTED BY INCREASED IMMOBILITY OF FACTORS AND TRADE BARRIERS UNDER TODAY'S CONDITIONS, EVERY COUNTRY'S TRADE MILL TEND TOMARD AN EQUILIBRIUM IN THE ABOVE SENSE. TO OVERCOME THE OBSTACLES IMPOSED BY MODERN BARRIERS, COUNTRIES MUST BE PARTICULARLY CAREFUL MITH THEIR COST STRUCTURES. ONLY MHEN THEY CAN PRODUCE GOODS OFFERING SPECIFIC ADVANTAGES IN PRICE OR QUALITY OVER COMPETITIVE PRO- DUCTS ABROAD, MILL THEY BE ABLE TO EXPORT SUFFICIENTLY. IT IS IN THIS SENSE THAT THE MAJORITY OF THE LATIN AMERICAN COUNTRIES BUFFER.) THEY CANNOT KEEP PACE WITH THE PROGRESS OF THE MORE ADVANCED NATIONS. HENCE, 7HASERLER, IBID., P. I57. THEY CONCENTRATE ON THE PRODUCTION OF COMMODITIES MHICH THE INDUSTRIAL NATIONS COULD NOT PRODUCE IN SUFFICIENT QUANTITIES OR NOT AT ALL. SINCE THERE ARE NOT MANY SUCH COMMODITIES, THE RANGE OF THEIR EXPORT GOODS IS LIMITED. IN THE LAST ODD HUNDRED YEARS BRAZIL'S EXPORT PRECEEDS DEPENDED FROM OVER 70% To ABOUT 45% ON COFFEE. IT IS,THEREFORE’NOT ASTONISHING THAT THE BRAZILIAN TERMS OF TRADE ARE SUBJECT TO MIDE CYCLICAL FLUCTUATIONS. HOMEVER, EXPORT OPPORTUNITIES ARE FAR FROM BEING EXHAUSTED. MANY MORE GOODS COULD BE INCLUDED IN THE CATEGORY OF EXPORTS, PROVIDED THEIR PR0- DUCTION BE LAUNCHED ON A LARGE SCALE AND AT PRICES ATTRACTIVE ENOUGH To STIMULATE FOREIGN DEMAND. THIS IS PERFECTLY FEASIBLE, IF THE VAST MIN- ERAL POTENTIALS OF MINAS GERAIS AND THE AGRICULTURAL POTENTIAL OF THE NORTHEAST MERE EXPLOITED MORE INTENSIVELY. APART FROM THE DIRECT BENE- FITS TO BE DERIVED FROM THE ECONOMIC DEVELOPMENT OF UNDERPOPULATED AREAS, AND THE INCREASE IN EXPORT TRADE, SUCH A POLICY MOULD AFFECT THE BRAZIL- IAN TERMS OF TRADE. IT IS THUS THAT THE LOM RANGE OF EXPORT GOODS CONTRIBUTES To THE INELASTICITY OF DEMAND FOR BRAZILIAN PRODUCTS ABROAD, A MIDER RANGE MOULD AT LEAST REDUCE THE DRAMBACKS OF AN OVER-ALL INELASTICITY SINCE DEMAND FOR INDIVIDUAL COMMODITIES OIFFERS IN THE IMPORTING COUNTRY. IN CONFORMITY MITH THIS EXPERIENCE, THE SECOND RESTRICTION CAN BE FORMULA- TED AS FOLLOMS: THE BRAZILIAN TERMS OF TRADE SHOM A DETERIORATING TREND NOT ONLY BECAUSE OF THE RELATIVELY MORE INELASTIC DEMAND FOR PRIMARY PRODUCTS, BUT ALSO BECAUSE OF THE LOM RANGE OF EXPORTABLE COMMODITIES. MHAT CAN BE CONCLUDED FROM THE TMO RESTRICTIONS MENTIONED SO FAR IS THAT THE BRAZILIAN TERMS OF TRADE DO NOT HAVE TO BUFFER TROM AN UNAVOI- DABLE TREND TOWARD DETERIORATION, AND THAT AN IMPROVEMENT OF THE TERMS -79- OF TRADE MUST BE CHANNELED INTO SAVING TO PRODUCE FAVORABLE EFFECTS. 3. IHETPONPUTATION OF TERMS OF TRAgE IT IS NECESSARY TO TAKE A GLANCE AT THE TECHNIQUES OF TERMS OF TRADE COMPUTATION. PROFESSOR VINER CATEGORICALLY STATES THAT "THE PRO- CEDURES BY MHICH AND THE DATA FROM MHICH SUCH (LOM) ELASTICITIES HAVE BEEN CALCULATED HAVE ALMAYS SEEN SUCH AS TO MAKE THEM IRRELEVANT OR EX- TREMELY UNRELIABLE, AND HAVE USUALLY BEEN SUCH As PROBABLY TO GIVE THEM A DECIDED BIAS IN THE DIRECTION OF ZERO."7 HE CITES FOUR REASONS TO SUP- PORT HIS ARGUMENT. IN SUMMARY, THEY ARE AS FOLLOMS: (I) TERMS OF TRADE DATA DERIVED FROM HISTORICAL ANALYSIS ARE RARELY ADJUSTED TO CYCLICAL FLUCTUATIONS IN DEMAND; (2) THE RELEVANT PAIRS OF PRICE AND QUANTITY DATA ARE COMMONLY COMPOSEO OF PRICE QUOTATIONS AND VOLUME OF ORDERS OF THE SAME UNIT PERIOD; (3) PRICE DATA USUALLY ACCOUNT FOR ADJUSTMENTS IN THE PURCHASER'S SCALE OF OPERATIONS TO FUTURE PRICES THAT ARE BOUND TO CHANGE IN THE SAME DIRECTION AS PREVIOUS CHANGES BUT DO NOT CORRESPOND TO THE RELEVANT PRICES FOR MHICH PURCHASES ARE MADE; AND (4) ELASTICITIES HAVE BEEN CALCULATED MOSTLY FOR COMMODITIES IITH LONER ELASTICITIES THAN AVERAGES8 wITH THE EXCEPTION OF THE FOURTH ITEM, THE DEFICIENCIES MENTIONED BY vINER MAY BE REMOVED BY A LONG-TERM CALCULATION OF TERMS OF TRADE HITH DUE ADAPTATIONS MADE FOR CYCLICAL FLUCTUATIONS. uOST PROBABLY, NO SUCH STUDY IS PRESENTLY AVAILABLE FOR BRAZIL. NEITHER THE UNITED NATIONS RE- 7VINER, "TENDENCIAS MODERNAS DA TEORIA DO COMERCIO INTERNATIONAL," OP. C'TQ' P. 55. 8FOR A MORE COMPLETE EXPORTION OF THESE FACTORS SEE: VINER, IBID., PP . 55’57. -80.. PORTS NOR THE ESSAY OF MEIREN AND LOEB9 ARE ADAPTED TO CYCLICAL CHANGES. AN ATTEMPT TO DO SO, ALTHOUGH NOT BASED ON CORRELATIONS, MAS MADE BY H. SCHLITTLER SILVA FOR THE PERIOD mom-50."o THREE MAIN CHARACTERISTICS CAN BE DEPICTEO FROM THE DEVELOPMENT OF BRAZILIAN TERMS OF TRADE DURING THE FIRST HALF OF THIS CENTURY, I. E.: (I) THEY IERE SUBJECT To HIDE CYCLICAL FLUCTUATIONS, MITH MARKED IMPROVE- MENTS DURING THE TIMES OF NORLD PROSPERITY AND MARKED DETERIORATIONS DUR- ING NORLD RECESSIONS; (2) THEY DEPENDED STRONGLY ON THE PRICE VARIATION OF COFFEE EXPORTS; AND (3) THEY SUFFERED APPARENTLY FROM A SECULAR TREND OF DETERIORATION. THE FIRST TIO CHARACTERISTICS CAN BE EXPLAINEO BY: (A) THE DEPENDENCE OF BRAZIL'S EXPORT TRADE ON COFFEE; (B) THE Low ELASTICITY OF DEMAND OF COFFEE AND OTHER PRIMARY EXPORT COMMODITIES ABROAD; (C) THE TENDENCY OF PRICES FOR PRIMARY GOODS TO EXPAND FASTER DURING PERIODS OF PROSPERITY AND TO CONTRACT FASTER DURING RECESSIONS THAN THE PRICES FOR INDUSTRIAL GOODS; (D) BRAZIL'S UNUSUALLY LARGE PORTION OF CONTROL OVER THE VORLD COFFEE SUPPLY. A8 FAR AS THE SECULAR TREND IS CONCERNED, EXTREME CAUTION IS NECES— SARY NOT TO OVERESTIMATE ITS IMPORTANCE. APART FROM THE OBJECTIONS RAI- SED BY VINER, ITS INTERPRETATION MAY EASILY BE BIASSED BY ANOTHER TECH- NICAL BHORTCOMING. TERMS OF TRADE ANALYSES ARE ACCURATE YARDSTICKS TO MEASURE CHANGES IN THE VOLUME OF ExPORTS AND IMPORTS. HOMEVER, THEY Ex- PRESS NOTHING ABOUT VARIATIONS IN QUALITIES OF GOODS EXCHANSED. AND 9AIEIREN AND LOEB, "TRENDS AND PROBLEMS IN ECONOMIC DEVELOPMENT OF BRAZIL,”OP. CIT., PP. 29-33. l0 . , I . . HELIO SCHLITTLER SILVA, "INDICES DE PRECOS NO cOMERCIO ExTERIOR IDO'BRASIL,’ §§VISTA BRASILEIRA OE ECONOMIA, AND 6, No. 2, (RIO DE JANEI- Ro, JUNE I952), pp. 69-I03. - 8| - THERE IS SUFFICIENT EVIDENCE THAT THE MAJORITY OF LATIN AMERICAN IMPORT PRODUCTS HAVE UNDERGONE MORE INTENSIVE QUALITATIVE ALTERATIONS THAN THE EXPORT PRODUCTS. TAKE ANY EXAMPLE OUT OF THE RANGE OF TYPICAL LATIN AMERICAN EXPORT COMMODITIES AND COMPARE IT TO THE MAJOR IMPORT GOODS TO ILLUSTRATE THE POINT IN QUESTION. FOR INSTANCE, P5RCENTAGEMISE THERE WAS LITTLE CHANGE IN THE QUALITATIVE COMPOSITION OF COFFEE EXPORTED FROM BRAZIL BETWEEN THE BEGINNING AND THE MIDDLE OF THIS CENTURY. DURING THE SAME PERIOD THE AMERICAN AND EUROPEAN INDUSTRIES HAVE TURNED OUT PRODUCE IITH 'IDE IMPROVEMENTS IN QUALITY AND USE, BUT IHICH IN OFFICIAL STATIS- TICS STILL CARRY THE SAME NAMES AND FALL UNDER THE SAME CATEGORIES. ONE MAY THEREFORE ASK: CAN A COUNTRY EXPECT TO EXCHANGE AN EQUAL AMOUNT OF COFFEE BAGS FOR EITHER A MODEL T FORD OR ANAUTOMATIC STREAMLINE CAR OF TODAY? THIS DETERMINES THE THIRD AND LAST RESTRICTION: TERMS OF TRADE COM- PUTATIONS ARE NOT SUFFICIENTLY ACCURATE TO EXPRESS FRACTIONAL CHANGES IN THE DEVELOPMENT OF RELATIVE PRICES. THIS MAY OR MAY NOT INVALIDATE THE SECULAR TREND ANALYSIS. IN ANY EVENT IT DEMONSTRATES THAT THE PESSIMISM OFTEN DERIVED FROM TERMS OF TRADE STATISTICS LACKS A SOLID FOUNDATION. IX. FOREIGN CAPITAL AND THE BALANCE OF PAYMENTS 0F ALL COMPONENTSw MAKING UP THE BALANCE OF PAYMENTS, THE BALANCE OF TRADE IS PARTICULARLY AFFECTED BY STRUCTURAL DISEQUILIBRIUM. THERE- FORE, THE ANALYSIS HAS BEE CONFINED THUS FAR TO THOSE ASPECTS BEARING DIRECTLY UPON COMMERCIAL TRANSACTIONS. '0 COMPLETE THE ANALYSIS IT IS NO' NECESSARY TO CONCENTRATE ON THE FUNCTION OF FOREIGN CAPITAL IN BRA- ZIL'S INTERNATIONAL TRADE. THE BASIC QUESTION DISCUSSED HERE IS: DOES FOREIGN CAPITAL CONTRIBUTE OR NOT TO RELIEVE THE SECULAR DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS, THIS AUTOMATICALLY ELIMINATES CYCLICAL AS- PECTSS 145THE cAPITAL FROQEE! TABLE I ON PAGE 8 GIVES A SUMMARY OF NET POSITIONS IN BRAZIL'S BAL- ANCE OF PAYMENTS BETMEEN I939 AND I954. PRELIMINARY FIGURES FOR I955' SHOw THE FOLLOVING CURRENT DEVELOPMENTs: DESPITE UNUSUALLY LON EXPORT PROCEEDS, THE BALANCE OF TRADE CLOSED NITH A SURPLUS OF 065Q4 BILLION IN I955. IMPORTS (FOB) FELL BACK TO THE I953 LEVEL OF 0620.6 BILLION. THE BALANCE OF SERVICES REGISTERED A DEFICIT OF u65.2 BILLION. THE SUR- PLUS IN THE CAPITAL BALANCE ALLowED FOR A REDUCTION OF a60.4 BILLION OF COMMERCIAL ARREARS AND A 0&0.6 BILLION INCREASE IN EXCHANGE AVAILABILI- TIEso I _ . . . . . ADAPTED FROM DOLLAR TO CRUZEIRO VALUES FROM: "THE BRITISH AND COM- MONIEALTH CHAMBER'OF GOMMERCE IN 510 PAULO,“ INFORMATION CIRCULAR NO. 9, (51¢ PAULO, MAY 4, I956), P. I76. - 83 - TABLE II NET CHANGES IN THE BRAZILIAN BALANCE OF PAYMENTS BETYEEN l947 AND I955 ( IN OISI.000,000.000) BALANCE OF TRADE 30.2 CAPITAL: PRIVATE . 8.2 OFFICIAL FINANCING I0,0 24,3__ COMMERCIAL ARREARS (NET I955) 2.0 ERRORS AND OMISSIONS §,§_ TOTAL POSITIVE ITEMS 59.2 BALANCE OF SERVICES -59.2 SOURCE: TABLE I AND FOOTNOTE ON PAGE 56. ACCORDING TO THE DATA OF TABLE INBRAzIL ACCUMULATED 0624.2 BILLION NORTH OF NET CAPITAL ACCOUNTS IN THE PAST NINE YEARS. IF OUTSTANDING COMMERCIAL ARREARS ARE ADDED To THIS FIGURES,2 THE TOTAL CORRESPONDS AL- MOST ExACTLY TO THE AVERAGE ANNUAL ExPORT REVENUES OF THE SAME PERIOD. IN OTHER MORDS, IT TOOK BRAzIL NINE YEARS TO ABSORB AS MUCH NET FOREIGN CAPITAL AS COULD BE PRODUCED IN ONE YEAR BY ExPORTS. THIS MAY NOT BE A COMPLETELY SATISFACTORY IAY OF MEASURING A COUN- TRY'S CAPACITY TO ATTRACT CAPITAL, BUT IT IS AT LEAST INDICATIVE OF AN AFFLICTINCSITUATION, NAMELY THAT FOREIGN LENDING CONTRIBUTES VERY LITTLE TO IMPROVE THE BALANCE OF PAYMENTS. IF ONE CONSIDERS, IN ADDITION, THE PAINFUL MAY MITH MHICH BRAzIL OBTAINED FOREIGN LOANS OR GRANTS IN RECENT YEARS, THIS IMPRESSION IS RE-INFORCED. IT CONFIRMS NHAT PROFESSOR KINDLE- BERGER NROTE ABOUT FOREIGN LENDING, NAMELY: "STRUCTURAL DISEQUILIBRIUM MAY BE MORE EASILY CORRECTED MITH INTERNATIONAL LENDING THAN VITHOUT, OR MAY BE CORRECTED NITH LESS NECESSITY TO REDUCE THE STANDARD OF LIVING OF A COUNTRY IN DISEQUILIBRIUM. THE DIFFICULTY, HOWEVER, LIES IN THE FACT THAT REPAYMENT OF LOANS THUS INCURRED IS NECESSARILY PROBLEMATIC. THE 2TECHNICALLY COMMERCIAL ARREARS CAN BE CONSIDERED FOREIGN LENDING, ALTHOUGH INVOLUNTARY. -84- INCREASED PRODUCTIVITY MADE POSSIBLE BY BORROUING IS ALREADY COMMITTED TO MEETING THE DISEQUILIBRIUM. IT CANNOT BE USED AT THE SAME TIME TO . 3 PAY INTEREST AND TO REPAY PRINCIPAL." 2, OBSTACLES TO INVESTMENTS IT SEEMS To BE uNIVERSALLY TRUE THAT THE MAIN IMPEDIMENT TO THE FLON OF INTERNATIONAL CAPITAL IS DUE TO INVESTORS' APPREHENSION ABOUT h GOVERNMENT INTERFERENCE. ”ORE SPECIFICALLY, THERE IS A ”FEAR OF EXPRO- PRIATION OF DIRECT INVESTMENTS OR DEFAULT ON BONDS, AND FEAR OF THE SUS- ‘ PENSION OR DELAY OF PROFIT OR INTEREST REMITTANCES THROUGH MORATORIA OR EXCHANGE~CONTROLS."4 AN OPINION RESEARCH CONDUCTED BY J. F. GASTON IN I95I AMONG THE MAJORITY OF UNDERDEVELOPED COUNTRIES, INCLUDING 55 COM— PANIES IN BRAZIL, DEFINITELY CONFIRMS THIS OBSERVATION OF RELUCTANT IN- VESTMENT ATTITUDES DUE TO EXPECTED GOVERNMENT INTERFERENCE. EXCEPT FOR SOME MINOR ASPECTS THE REPLIES GIVEN IN THE pOLL BY IN- VESTORS (SEE TABLE III) SEEM TO BE RATHER OBJECTIVE.5 ABOVE ALL, THEY SHOM THE HIGH DEGREE OF FEAR OF NATIONALISTIC POLICIES OF THE LATIN AME- RICAN REPUBLICS. ALTHOUGH THIS FEAR MAY BE MORE PSYCHOLOGICAL THAN REAL IT IS NOT ENTIRELY UNFOUNOED. BRAZkL IS NO EXCEPTION; DISCRIMINATORY ATTITUDES AND LACS DO EXIST AND HAVE UNDERMINED MANY PROMISING PROJECTS 3 CHARLES P. KINDLEBERGER, THE DOLLAR SHORTAGE,(PUBLISHED JOINTLY BY THE TECHNOLOGY PRESS OF MIT AND JOHN WILEY 6 SONS INC., NEV YORK , I950), P. 25I. 4NORMAN S. BUCHANAN AND HONARO 5. ELLIS, APPROACHES TO ECONOMIC DE- VELOPMENT,(NEN YORK: THE TIENTIETH CENTURY FUND, I955 , P. 344. 5IN THE LIGHT OF MORE RECENT EVENTS, THE FOLLOVING PERSONAL COMMENTS MAY’BE SUITABLET WITH THE EXCHANGE REFORMOFI953, LIMITATIONS ON PROFIT REMITTENCES HAVE BEEN SOMENHAT RELIEVEO; ITEM I THEREFORE IAY SE OVER- EMPHASIzED FOR PRESENT DAY CONDITIONS; THIS APPLIES ALSO TO ITEMS 7, B, AND Io; TODAY ITEM 9 HAS BECOME A STRONGER BURDEN; THERE ARE NO SUCH RE- STRICTIONS AS MENTIONED UNDER II EXCEPT FOR THE USUAL RED TAPE, COMMON TO ALL COUNTRIES. - 85 - TABLE III FREQUENCY OF PROBLEMS ENCOUNTERED BY INVESTORS IN BRAgIL RANK LATIN AMERICA BRAzIL REPLIES FOR BRAzIL 2 I LIMITATION ON REMITTANCE OF PROFITS 37 I 2 EXPORT OR IMPORT QUOTAS 36 4 3 CONTROL OF CAPITAL MOVEMENTS 30 7 4 LACK OF ADEQUATE ROADS, RAILROADS, HARBORS OR STORAGE FACILITIES 22 6 5 LACK OF TRAINED NATIVE PERSONNEL I9 3 6 BURDEN OF SOCIAL SECURITY LEGISLATION I8 I5 7 UNDERDEVELOPED BANKING SYSTEMS OR OTHER CREDIT FACILITIES I2 II 8 INADEQUACY OF HOUSING, RECREATIONAL AND SHOPPING FACILITIES FOR EMPLOYEES II 9 9 INADEQUATE POVER FACILITIES I0 II I0 SPECIAL TAXATION OF FOREIGN ENTERPRISE 9 8 II A FOREIGN RESTRICTION ON IMPORTATION OF PERSONNEL FROM HOME COUNTRY 8 I2 OTHER ITEMS (TOTALING II) 28 I3 NO PROBLEMS 44 NUMBER OF REPLIES 55 T '. SOURCE: CONDENSED FROM J. FRANK GASTON, OBSTACLES TO DIRECT FOREIGN INVESTMENTS,(NEV YORK: NATIONAL INDUSTRIAL cONFERENCE‘EOARD, INC. APRIL I95I), TABLE I60, P. I58, AND TABLE I, p. B. AND OPPORTUNITIES FOR ECONOMIC DEVELOPMENT. THEY HAVE BEEN USED AND MISUSED FOR POLITICAL PURPOSES. BUT THEY HAVE NEVER CREATED A LASTING HOSTILITY TOVARD FOREIGNERS, BECAUSE THE BRAzILIAN NATIONAL CHARACTER DOES NOT LEND ITSELF TO RACIAL OR POLITICAL PREJUDICES. AND IT CAN THEREFORE BE EXPECTED THAT A REVISION OF NATIONALISTIC LEGISLATION VOULD SOON REMOVE THE EVILS CAUSED BY THEM. THIS APPLIES IN PARTICULAR TO THE UNFORTUNATE BILL INSTITUTING A STATE MONOPOLY IN THE DRILLING AND REFI- NING OF BRAZILIAN OILS 3, FOREIGN EXCHANGE SOEVENCY 0N THE OTHER HAND, IT MUST BE UNDERSTOOD THAT NATloNALISM IS NOT THE ONLY MOTIVE CALLING FOR RESTRICTIONS. THE THREE MAIN OBSTACLES TO FOR- EIGN INVESTMENTS IN BRAZIL, AS RANKED IN TABLE Ily,ARE CHIEFLY DUE To EXCHANGE SHORTAGE. 0R, AS J. J. POLAK PUT IT: "THE CRUCIAL PROBLEM AT- TENDING FOREIGN LENDING IS THE SOLVENCY OF THE DEBTOR COUNTRY ON INTER- NATIONAL ACCOUNT."6 ACCORDING TO POLAK THERE ARE THE FOLLONING THREE MAIN REASONS MHICH MAY LEAD TO A SHORTAGE OF FOREIGN EXCHANGE: (I) THE RATE OF INVESTMENT IS TOO HIGH IN VIEw OF THE INITIAL RATE OF CAPITAL INFLON; (2) INVESTMENT IS IMPROPERLY DISTRIBUTED; TDo SMALL A PROPORTION BE- ING DIRECTED TOVARDS THE PRODUCTION OF EXPORTABLE GOODS; (3) THE RATE OF CAPITAL INFLow DECLINES TOO RAPIDLY.7 .TO AVOID EXCHANGE SHORTAGES THE GOVERNMENT MUST BUDGET SO THAT THE AP- PLICATION OF INITIAL CAPITAL INFLOM IN DOMESTIC ACTIVITIES PRODUCES EX- PORT GOODS AND FOREIGN EXCHANGE IN SUFFICIENT AMOUNT TO MEET SERVICE COSTS AND TO REPAY PRINCIPAL IN DUE TIME.8 THIS PRESUPPOSES ACCURATE KNONLEDGE OF THE EXPECTED EFFECTS OF INVESTMENTS ON THE MARGINAL_PROPEN- SITIES TO SAVE AND CONSUME. LET THIS BE CLARIFIED BY AN EXAMPLE. SUPPOSE THAT AN AMERICAN ENTERPRISE INVESTS ONE MILLION DOLLARS IN 6J. J. POLAK, "BALANCE OF PAYMENTS PROBLEMS OF COUNTRIES RECONSTRUC- TING MITH THE HELP OF FOREIGN LOANS," EEADINGS IN T!§;THEORY OF INEEE: NATIONAL TRADE,OP. CIT., P. 46l.--MuCH OF THE ANALYSIS CONTAINED IN THIS SECTION IS DERIVED FROM THIS ARTICLE. 7POLAK, IBID., P. 479. 8BASED ON THE ASSUMPTION THAT THE CAPITAL BALANCE IS SELF-FINANCING, I. E. THAT THERE ARE NO OTHER ACCOUNTS IN THE BALANCE OF PAYMENTS TO CO- VER CAPITAL DEFICITS, AND THAT NO FOREIGN CAPITAL IS REQUIRED TO COVER DEFICITS OF OTHER POSITIONS IN THE BALANCE OF PAYMENTS. -87- BRAZIL. THE BANK OF BRAZIL WILL BE CREDITED FOR THIS AMOUNT, AND IT WILL, IN TURN, PAY A CORRESPONDING AMOUNT, SAY 80 MILLION CRUZEIROS. 'THE MON- EY IS USED IN BRAZIL TO PAY THE FACTORS OF PRODUCTION NEEDED FOR THE OUTPUT OF INVESTMENT GOODS. FROM THERE ON THE MONEY HILL BE CIRCULATING FREELY. IF THE PROPENSITY TO CONSUME OF RECIPIENTS IS HIGH, DEMAND HILL TEND TO TURN TO IMPORTS AND THE DOLLAR RESERVES INITIALLY ACCUMULATED BY THE BANK OF BRAZIL NILL SOON BE DRAINED. IF THE PROPENSITY To SAVE IS HIGH, THE TIME LAG FOR THE IMPORT PROPENSITY To BECOME EFFECTIVE MILL BE GREATER. MEANRHILE, THE EXCHANGE SITUATION MAY HAVE BEEN RELIEVED AS A RESULT OF ADDITIONAL OUTPUT EITHER PRODUCING FOREIGN EXCHANGE THROUGH EX- PORTS,OR SAVING EXCHANGE BY REDUCING IMPORTS. THIS DOES NOT MEAN THOUGH THAT THE RATE OF INVESTMENT MAY NOT Ex- CEED THE RATE OF ORIGINAL CAPITAL INFLON. AS LONG AS FOREIGN EXCHANGE HOLDINGS ARE NOT ENTIRELY SOLD To IMPORTERS, THE BANK OF BRAZIL'S NET RE— SERVE POSITIPN IMPROVED. IT CAN THUS EXTEND ITS CREDIT LINE. BUT THE HIGHER THE MARGINAL PROPENSITY To IMPORT, THE FASTER MILL ADDITIONAL IN- VESTMENTS TURN TO A DEMAND FOR FOREIGN EXCHANGE To PAY FOR MORE IMPORTS. THIS EXPLAINS, THE FIRST FACTOR MENTIONED BY POLAK POSSIBLY LEADING To A SHORTAGE OF FOREIGN ASSETS. BECAUSE, GIVEN A HIGH MARGINAL PROPENSITY 11> IMPORT, EXCHANGE RESERVES MILL SE EXHAUSTED THE S..NER, THE HIGHER THE RATE OF INVESTMENT BASED ON INITIAL CAPITA-L INFLOV. HUGH DEPENDS, ON THE OTHER HAND, ON THE TYPES OF INVESTMENTS. THE IIIGHER THE PORTION OF INVESTMENT RESERVED FOR THE PRODUCTION OF GOODS DIITECTLY OR INDIRECTLY RELIEVING THE EXCHANGE BUDGET, THE LESS STRENUOUS ‘WILJq OF COURSE, BE THE EXCHANGE POSITION. IN OTHER RORDS, INVESTMENTS SHOULD PREFERABLY BE DIRECTED INTO THE SECTORS PRODUCING EXPORT MOS BR REPLACING IMPORT GOODS. IF THIS REQUIREMENT IS NOT RESPECTED, I. E. WHEN - 88 — THE BULK OF THE NEH INCOME IS INVESTED IN INDUSTRIES PRODUCING GOODS THUS FAR NOT AVAILABLE ON THE LOCAL MARKET, A SHORTAGE OF FOREIGN EXCHANGE IS DUE TO COME ABOUT. HERE TOO, THE DEGREE OF EXCHANGE SHORTAGE DEPENDS ON (I)THE AMOUNT OF INVESTMENT FINANCED BY BANKS, AND (2) THE MARGINAL PRO- PENSITIES TO CONSUME AND IMPORT. THE THIRD REASON GIVEN BY POLAK THAT MAY BE RESPONSIBLE FOR AN EX- CHANGE SHORTAGE IS OF CYCLICAL RATHER THAN SECULAR NATURE. ALTHOUGH IT MAY SE OF (FEAT IMPORTANCE FOR A COUNTRY, FOR INSTANCE AT TIMES OF UNEX- PECTED DEPRESSIONS IN THE LENDING NATION, IT SHALL NOT BE DISCUSSED HERE. 4, FOREIGN cAPITAirAND THE PROPgflBIT! TO IMPOBT HOW DOES THE ABOVE APPLY TO BRAZIL? APPARENTLY THE CLUE TO THIS QUESTION IS DETERMINED BY THE RELATIONSHIP BETUEEN THE MARGINAL PROPEN- SITIES TO CONSUME DOMESTIC PRODUCTS AND TO IMPORT,DERIVED FROM AN IN- CREASE IN INCOME AND INVESTMENT. FOR REASONS DISCUSSED EARLIER IN THE STUDY (SEE CHAPTERS II, III, AND VII) IT CAN BE ASSUMED THAT THE MARGINAL PROPENSITY TO IMPORT IS HIGH IN BRAZIL. THIS MEANS THAT THE BANK OF BRAZIL AS OELL AS ANY COMMERCIAL BANK OOULD HAVE TO FOLLOM A VERY CAREFUL CREDIT POLICY IN ORDER NOT TO OVER-EXTEND LOANS BACKEO UP BY FOREIGN ASSETS. THIS REQUIRES (I) A STRICT SELECTION OF INVESTMENT PROGRAMS, AND (2) A LIMITATION OF INVESTMENT CRE- DITS TO AMOUNTS NOT FAR EXCEEDING THE RATE OF INITIAL CAPITAL INFLOO. TOO CONFLICTING ASPECTS RENDER IT DIFFICULT TO ADHERE TO THE SELEC- TION PRINCIPLE. IT IS GENERALLY TRUE THAT THE RATE OF CAPITAL TURNOVER (OR THE RATIO OF THE VALUE OF OUTPUT TO THE VALUE OF CAPITAL IN- VESWED TO PRODUCE THE OUTPUT IN, A GIVEN .PERIOD OF TIME) SHOULD BE AS HIGH AS POSSIBLE IN A COUNTRY MITH A SHORTAGE OF CAPITAL AND CON- TSUMPTION 00008. THE HIGHER THE TURNOVER THE FASTER IILL BE THE SUPPLY -89- OF GOODS AND, AMONG OTHER ADVANTAGES,THIS NILL RELIEVE THE FOREIGN Ex- CHANGE SITUATION. FROM THIS STANDPOINT IT IS CONVENIENT FDR BRAZIL TO INVEST LARGE SUMS IN MANUFACTURING INDUSTRIES AND IN TRADE ORGANIZATIONS NHERE THE RATE OF TURNOVER IS CONSIDERABLYIFAOTER THAN IN PUBLIC UTILI- TIES REQUIRING SUBSTANTIAL INVESTMENTS,LONG CONSTRUCTION PERIODS, AND NHICH OPERATE AT LOWER PROFIT MARGINS. ON THE OTHER HAND, BRAzIL NEEDS MORE THAN ANYTHING ELSE AN IMPROVEMENT OF PUBLIC SERVICES AND TRANSPOR- TATION FACILITIES. AS FAR AS THE LIMITATION OF INVESTMENTS IS CONCERNED, PROBLEMS ARE EVEN MORE STRIKING. IN CHAPTER II IT MAS SHOMN THAT THE MULTIPLIER IS NOT VERY EFFECTIVE IN BRAZIL DUE To CONDITIONS COMPARABLE TO FULL EMPLOY- MENT. NEN INVESTMENTS, THEREFORE, TEND To INCREASE THE NAGE LEVEL AND THE MARGINAL PROPENSITY To IMPORT IN CONSEQUENCE OF THE DIFFERENCE IN QUANTITATIVE AND QUALITATIVE OUTPUT BETMEEN PRAzIL AND THE MORE ADVANCED. COUNTRIES. THIS JUSTIFIE8 A LON RATE OF INVESTMENTS. ON THE OTHER HAND, BRAZIL NEEDS CAPITAL URGENTLY To IMPROVE ITS RATE OF PRODUCTIVITY AND TO INCREASE ITS TOTAL OUTPUT. To NHICH OF THE Two OPPOSING POLICIES SHALL PREFERENCE BE GIVEN? THIS DEPENDS, OF COURSE, ON THE TYPE OF INVESTMENT. IN LINE MITH THE ABOVE ARGUMENTS, PREFERENCE MUST BE GIVEN TO THE PRODUC- TION OF ExPORTABLE GOODS. UTILITIES AND TRANSPORTATION ARE LIKEHISE IM- PORTANT, IN SPITE OF THEIR LON RATE OF CAPITAL TURNOVER, SINCE THEY ARE INSTRUMENTAL FOR IMPROVED PRODUCTIVITY IN THE EXPORT INDUSTRY AND OTHER FIELDS. TOO LITTLE HAS BEEN DONE THUS FAR IN THIS CONNECTION. THE DE- VELOPMENT OF PUBLIC UTILITIES IS BEING HAMPERED BY GOVERNMENT INTERFER- ENCE OR POOR ADMINISTRATION. PRACTICALLY NO FOREIGN CAPITAL IS BEING IN- \IESTEO To STIMULATE EXPORTS, PARTIALLY DUE TO HIGHER PROFIT MARGINS .AND MORE IUTDHOHY TO BE GAINED FROM THE INDUSTRIALIZATION OF NEH PRODUCT __.___..H -90.. FIELDS. AS DESIRABLE AS A REFORMULATION OF INVESTMENT POLICIES MAY BE, IT CANNOT BE~EXPECTED To ENTIRELY REMOVE THE DANGER OF FOREIGN EXCHANGE SHORTAGE. THE REASON IS THAT THE PRODUCTION OF MORE EXPORT GOODfiklELD A HIGHER RETURN IN FOREIGN ASSETS BUT DOES NOT AFFECT THE PROPENSITY TO IMPORT. THE LATTER IS ALNAYS BOUND TO INCREASE FOLLOMING A RISE IN IN- COME, GIVEN THE RATE OF CAPITAL INFLON. THEREFORE, THE a.UE To THE PROBLEM NOULD BE TO REDUCE THE MARGINAL PROPENSITY TO IMPORT VITHOUT IM- PAIRING CAPITAL INFLON. How CAN THIS BE DONE? BEFORE THIS QUESTION IS ANSNERED, A SUMMARY OF NHAT HAS BEEN DISCUSSED THUS FAR MAY BE CONVENIENT. THE FOLLOWING STEPS HERE OBSERVED: (I) DUE TO THE LACK OF CAPITAL FORMATION IN BRAzIL, AS HELL As THE SECULAR TREND OF DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS, FOREIGN IN- VESTMENTS ARE HIGHLY DESIRABLE; (2) BRAzIL HAS TO ATTEMPT TO AT LEAST BALANCE ITS FOREIGN CAPITAL ACCOUNTS ON THE LONG RUN IN ORDER NOT TO MEAKEN THE POSTION OF THE BALANCE OF PAYMENTS; I. E. THE INVESTMENTS DERIVED FROM CAPITAL INFLow MUST PRO- DUCE SUFFICIENT FOREIGN EXCHANGE TO SERVICE AND AMORTIZE ORIGINAL IN- \ FLO'S WHEN DEBTS BECOME DUE} (3) DUE TO THE HIGH PROPENSITY TO IMPORT THE REQUIREMENT MENTIONED UNDER (2) IS DIFFICULT TO MEET} IoEO THE MARGINAL PROPENSITY TO IMPORT RISES WITH A RISE IN INCOME, AND THE HIGHER THE CREDITS GRANTED FOR IN- VESTMENTS ON THE RESERVE BASIS OF FOREIGN ASSETS, THE FASTER WILL DEVEL- OP THE NARGINAL PROPENSITY T0 IMPORT DUE TO THE INEFFICIENCY FOR THE HUL- TIPLIER; CONSEQUENTLY, THE DEMAND FOR FOREIGN EXCHANGE \‘IILL EXCEED ITS 5LH>PLY (ALL OTHER FACTORS REMAINING EQUAL); (4) THUS, INSTEAD OF RELIEVING THE ADVERSE TREND, FOREIGN INVEST- MENTS TEND To MEAKEN THE BALANCE OF PAYMENTS. THREE IMMEDIATE MEASURES CAN BE EMPLOYED TO CURTAIL THE PROPENSITY TO IMPORT, NAMELY: QUANTITATIVE RESTRICTIONS, EXCHANGE CONTROL, AND LI- MITATION To REAL CAPITAL IMPORTS. THE FIRST THO ARE INSUFFICIENT To COPE WITH THE BALANCE OF PAYMENTS PROBLEMS,AS HAs BEEN SEEN BEFORE (SEE CHAP- TER VII). NO OBJECTION CAN BE MADE TO THE IMPORTATION OF REAL CAPITAL, BUT IT Is PRACTICALLY IMPOSSIBLE FOR ANY COUNTRY To OBTAIN ALL ITS CAPI- I | TAL NEEDS FROM ABROAD IN TERMS OF CAPITAL GOODS. MORE RADICAL AND FAR- REACHING METHODS HAVE TO BE APPLIED. ‘( PROGRESSIVE INCOME CONCENTRATION STIMULATED BY INFLATION PERMITS THE NEALTHIER STRATA OF THE POPULATION TO INCREASE ITS MARGINAL PROPEN- SITIES TO CONSUME, To SAVE, To INVEST, OR TO IMPORT. THE MORE UNEQUAL THE DISTRIBUTION OF INCOME, THE HIGHER WILL BE ,THE RATE OF PROPEN- SITY EXPANSION AMONG THE HEALTHY AND PROPENSITY CONTRACTION AUONG THE POOR. HOIEVER, THE INCONE RECIPIENTS ARE NOT ENTIRELY FREE TO SELECT THE DEGREE AND DIRECTION OF CHANGE FOR EACH OF THE MAGNITUDES. FOR INSTANCE, ONLY PART OF THE RISE IN INCOME MILL ALLON FOR AN INCREASE IN THE PROPENSITY TO CONSUME, PARTICULARLY IF THE ECONOMY IS NEARLY FULLY EMPLOYED AND THE MUTLIPLIER EFFECT IS RETARDED. UNDER THE CONDITION OF EQUAL NATIONAL OUTPUTS IN THE Two YEARS CONSIDERED, THE RISE OF CONSUMP- TION PROPENSITIES OF THE HEALTHY CANNOT MUCH EXCEED THE FALL OF CON- SUMPTION PROPENSITIES OF THE POOR, UNLESS THERE ARE SUBSTANTIAL COCKS AVAIL- TABLE FOR SALE. THIS FALL MILL NOT BE VERY HIGH, SINCE THE POOR MILL RAJHER REDUCE THEIR SAVING PROPENSITY THAN THEIR CONSUMPTION PROPENSITY UNDER CONTRACTING REAL INCOME. TO FIND AN OUTLET, INCREASED INCOMES OF 'THE HEALTHY MILL SPREAD INTO LEAKAGES. "FOR INSTANCE, IT OILL SEEK IN- VESTMENTS THROUGH INCREASED SAVINGS. BUT HERE, Two OBSTACLES MILL BE. ENCOUNTERED. SHORTAGE OF LABOR AND LON PURCHASING POWER OF THE HAJORITY OF CITIZENS RESTRICT THE EXPANSION OF CONSUMPTION AND INVESTMENTS GOODS. HOARDING MAY TAKE PLACE, ALTHOUGH NOT MUCH OF THE EXTRA MONEY NILL BE KEPT FROM CIRCULATING UNDER PROGRESSIVE INFLATION. RECIPIENTS MILL RATH- ER INVEST THEIR INCOMES IN REAL ESTATE OR ANY FIELD REQUIRING LITTLE LA- BOR SERVICES. GIVEN THE SUBSTANTIAL PRICE AND QUALITY DIFFERENCE BE - TVEEN DOMESTIC AND FOREIGN GOODS, A GREAT PORTION OF EFFECTIVE DEMAND NILL BE DIRECTED TOOARD IMPORTS. THE MARGINAL PROPENSITY TO IMPORT EXPANDS IN SPITE OF RISING IMPORT PRICES. THUS ECONOMIC DEVELOPMENT MILL BE IM- PAIRED BY A REDUCTION (OR AT LEAST RETARDING EXPANSION) OF TOTAL REAL OUTPUT, AND THE BALANCE OF PAYMENTS WILL BE AFFECTED BY REDUCED EXPORTS AND THE GRONING DEMAND FOR IMPORTS. ALL THIS CAN BE AVOIDED IF BETTER USES OF THE FACTORS OF PRODUCTION ARE MADE. COMPETITION AMONG THE AVAILABLE FACOTRS, UNDISTURBED BY IN- COME DISCREPANCIES AND AN INFLATIONARY SPIRAL, IS THE FORMULA BRAZIL HAS TO SEEK. AMONG OTHER BENEFITS, A REDISTRIBUTION OF INCOME MILL PREVENT THE STRONG IMPACT OF IMPORT PROPENSITIES ON THE BALANCE OF FOREIGN CAPI- TAL BY RELIEVING THE EXCHANGE SITUATION AND AVOIDING THAT FOREIGN ASSETS INVESTED IN DOMESTIC ACTIVITIES STIMULATE THE INDUCEHENT TO IMPORTS x. CONCLUSIONS AND RECOMMENDATIONS THE OBJECTIVE OF THIS STUDY HAS BEEN To INVESTIGATE THE CAUSES UN- DERLYING BRAZIL'S SECULAR DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS. ONLY MINOR EMPHASIS MAS PLACED ON CYCLICAL FLUCTUATIONS OF PAST DECADES. AN EXAMINATION or THESEFLUCTUATIONJIOULD PROBABLY REVEAL THAT BRAZIL'S BALANCE OF PAYMENTS IS MORE STRONGLY AFFECTED BY BUSINESS CYCLES ABROAD THAN AT HOME, DUE To THE DEPENDENCE ON FOREIGN DEMAND FOR BRAZILIAN PRO- DUCTS OF LON PRICE ELASTICITY, OR THE NEED FOR LONG-TERM CAPITAL INVEST- MENTS. THE SECULAR TREND OF DISEQUILIBRIUM IS REFLECTED IN THE CONTINUOUS DETERIORATION OF THE CRUZEIRO'S PURCHASING PONER ABROAD. REPEATED DEVAL- UATIONS AND EXCHANGE ADJUSTMENTS HAVE ACCOMPLISHED LITTLE IN THE PAST TO RELIEVE PRESSURE FROM THE BALANCE OF PAYMENTS, BECAUSE THEIR EFFECTS MERE ALMAYS OFFSET BY MORE DEEP-SEATED FORCES. THESE, IT HAS BEEN PRO- POSED IN THE STUDY, ARE DETERMINED BY A STRUCTURAL DISEQUILIBRIUN IN THE DOMESTIC ECONOMY. I, THE BALANCE OF PAYMENTS' COMPOSITION FOR PURPOSES OF ANALYSIS, THE BRAZILIAN BALANCE OF PAYMENTS CAN BE IIIVIDED INTO THREE SEGMENTS, AS FOLLOMS: (I) THEBALANCE OF TRADE, (2) 'THE BALANCE OF SERVICES, AND (3) THE BALANCE OF CAPITAL ACCOUNTS. THE I.ATTER INCLUDES ALL LONG-TERM AND SHORT-TERM CAPITAL ITEMS OF PRIVATE AND OFFICIAL CHARACTER. COMMERCIAL ARREARS ARE INCLUDED ALSO, AS THEY CAN TECHNICALLY BE REGARDED FOREIGN LENDING. THE MAJOR BRAZILIAN BALANCE OF PAYMENTS DEFICIT IS THE BALANCE OF SERVICES, THE REASON BEING THAT BRAZIL DEPENDS HEAVILY UPON FOREIGN SER- VICES. CONSEQUENTLY, THERE ARE VERY FEM SURPLUS POSITIONS, AND THE NET BALANCE IS NEGATIVE. TO REMOVE THIS UNFAVORABLE SITUATION MUCH CAN DONE. IT IS OF EXTREME IMPORTANCE THAT THE BRAZILIAN MERCHANT FLEET BE EXPAN- DED AND IMPROVED, PREFERABLY UNDER PRIVATE COMPETITION. TOO, MITH LITTLE COST THE GOVERNMENT COULD STIMULATE FOREIGN TRAVEL To BRAZIL THROUGH MORE EFFICIENT PUBLICITY ABROAD. IN ORDER TO OBTAIN FOREIGN GOODS REQUIRED FOR DOMESTIC CONSUMPTION AND GRONTH, AND TO FINANCE EXPENSES ACCRUED IN OTHER ACCOUNTS, THE BAL- ANCE OF TRADE MUST ACCUMULATE LONG-RANGE SURPLUSES. GENERALLY. BRAZIL‘S FOREIGN TRADE POSITION IMPROVES AS SURPLUSES MOUNT. COMMERCIAL TRANSAC- TIONS ARE, THEREFORE, THE CLUE To EQUILIBRIUM IN THE COUNTRY'S BALANCE OF PAYMENTS. ZAVEXCHANEE»CONTRQ£§ AMONG THE REASONS POINTED OUT AS MAIN DETERMINANTS OF AN ADVERSE BALANCE OF PAYMENTS IN BRAZIL, THREE ARE PERHAPS MOST FREQUENTLY MENTIO- NED: (I) EXCHANGE STABILITY, (2) LACK OF FOREIGN CAPITAL, AND (3) DE- TERIORATING TERMS OF TRADE. AT TIMES FIXED EXCHANGE RATES HAVE CONTRIBUTED CONSIDERABLY TOMARD IMBALANCES. UNDER A PROGRESSIVE DETERIORATION OF THE CRUZEIRO'S PURCHA- :SING POWER, AND CONTINUED INCREASES IN THE COST OF PRODUCTION, FIXED IRATES CAUSED A CONTRACTION IN THE VOLUME OF EXPORTS AND AN INFLUX OF IM- IPORTS. UNDER SUCH CONDITIONS QUANTITATIVE IMPORT CONTROLS HAVE ONLY A LIMITED EFFECT. THE PEOPLE ARE URGED TO ACQUIRE IMPORT LICENCES AT AL- MOST ANY PRICE. FAVORITISM BECOMES ALMOST UNAVOIDABLE. NEITHER IMPORT NOR EXCHANGE CONTROLS ALONE ARE CAPABLE OF REMOVING THE CAUSES OF STRUCTURAL DISEQUILIBRIUM. BUT THEY ARE INDISPENSABLE TOOLS IN ALLEVIATING THE SEVERITY OF STRUCTURAL DISEQUILIBRIUM. To BE FULLY EFFECTIVE THEY MUST BE ADAPTABLE To THE CHANGING CONDITIONS OF THE ECONOMY. THE MULTIPLE EXCHANGE SYSTEM INTRODUCED IN BRAZIL IN I953 HAS PARTIALLY CORRECTED THE LIMITATIONS OF FIXED RATES, ALTHOUGH IT HAS DONE LITTLE TO RE-ESTABLISH LONG-TERM EQUILIBRIUM. §,_FOREIGN CAPI[A_ A COUNTRY SUFFERING FROM A SECULAR ADVERSE BALANCE OF PAYMENTS MILL ALNAYS BE SHORT OF RESERVES. IT MILL HAVE TO IMPOSE RESTRCITIONS ON THE TRANSFER OF INVESTMENT EARNINGS AND REPATRIATIDN OF FOREIGN CAPITAL. cONSEQUENTLY, IT MILL DISCOURAGE FOREIGN INVESTMENTS EVEN IF DOMESTIC EARNING PROSPECTS ARE HIGH. IT IS SOMETIMES CONTENDED THAT THE Low RATE OF CAPITAL INFLOV INTO BRAZIL IS RESHDNSIBLE FOR THE COUNTRY'S ADVERSE BALANCE OF PAYMENTS. THIS POINT OF VIEN OVERLOOKS THE NEED FOR REPAYMENT AND SERVICING OF FOR- EIGN ASSETS. OF COURSE, IT ROBLD BE DESIRABLE IF MORE,AND ABOVE ALL, MORE REGULAR CAPITAL INFLOID TOOK PLACE, BUT THIS VOULD NOT GUARANTEE RE- LIEF IN THE BALANCE OF PAYMENTS. EVERYTHING DEPENDS UPON THE APPLICATION OF FOREIGN VALUES IN THE DOMESTIC ECONOMY. IN BRAZIL, ONLY A SMALL POR- TION OF FOREIGN CAPITAL IS DIRECTED TONARD THE PRODUCTION OF EXPORTABLE GOODS. THE MAJORITY IS USED FOR INDUSTRIAL EXPANSION. THE GOVERNMENT STIPULATES THAT FOREIGN INVESTMENT PROJECTS MUST LEAD TO A SAVINGS IN IFOREIGN EXCHANGE. THEY MUST PRODUCE GOODS AND SERVICES ESSENTIAL TO THE BRAZILIAN ECONOMY MHICH MOULD OTHERVISE HAVE TO BE IMPORTED. THIS IS, NO DOUBI, A VALUABLE CRITERION FOR SELECTION, BUT IT PROVIDES NO GUARANTEE -95.. FOR ACTUAL SAVINGS IN EXCHANGE. GIVEN THE LIMITED RATE OF EXPANSION IN BRAZIL, AS DETERMINED BY THE SCARCITY OF LABOR, PLUS THE HIGH EFFECTIVE DEMAND FOR CONSUMER GOODS, ANY INCREASE IN INCOME TENDS TD CAUSE A RISE IN THE PROPENSITY TD IM- PORT. SINCE FOREIGN INVESTMENTS INVARIABLY LEAD TO AN INCREASE IN IN- COME, MHAT CAN BE SAVED ON ONE SIDE IN TERMS OF FOREIGN EXCHANGE VILL BE SPENT ON THE OTHER IN TERMS OF A RINSING EFFECTIVE DEMAND FOR IMPORT GOODS. SOMETIMES THIS DEMANDEXCEEDS THE AMOUNT OF ORIGINAL CAPITAL IN- FLOM AS MHEN THE BANKING SYSTEM EXTENDS CREDIT IN EXCESS OF FOREIGN CUR- RENCY HOLDINGS. THE IDEAL SITUATION FOR BRAZIL VOULD BE TO LIMIT THE DEMAND FOR IM- PORTS DERIVED FROM CAPITAL INFLDH AT LEAST TO THE POINT UHERE THE GAINS OBTAINED FROM THIS INFLow EXCEED THE AMOUNT OF ORIGINAL INVESTMENTS, PLUS THEIR SERVICES. AT THIS POINT THE IMPORT VOLUME COULD BE EXPANDED BY THE NET DIFFERENCE BETMEEN THE TOTAL GAIN MINUS REPAYMENT OF PRINCI- PAL PLUS SERVICE COSTS. ONLY THEN UOULD THE BALANCE OF PAYMENTS REMAIN IN EQUILIBRIUM (PROVIDED, OF COURSE, THAT THERE ARE NO OTHER FACTORS CON- TRIBUTING To DISEQUILIBRIUM). IN FACT, IN THIS CASE BRAZIL GOULD BENEFIT FROM AN INCREASED CAPACITY TO IMPORT MHICH COULD PERHAPS OFFSET OTHER UN- FAVORABLE TRENDS IN ITS INTERNATIONAL TRADE,A8 A DETERIORATION IN THE TERMS OF TRADE. THE CLUE TO BRAZIL'S CAPITAL PROBLEM, IN OTHER wORDS, IS THE PR0- PENSITY To IMPORT. AS LONG AS THE HIGH IMPORT PROPENSITY CANNOT BE CHECKED, FOREIGN CAPITAL INFLOW MILL CONTRIBUTE LITTLE, IF ANYTHING, TO RELIEVE PRESSURE FROM THE BALANCE OF PAYMENTSO 4, THE TERMS OF TRADE ADVERSE TERMS OF TRADE ARE OFTEN HELD RESPONSIBLE FOR SECULAR DIS- EQUILIBRIA IN BALANCE OF PAYMENTS IN UNDERDEVELOPED COUNTRIES. IT IS ARGUED THAT THE DEMAND FOR PRIMARY COMMODITIES IS LESS ELASTIC THAN FOR INDUSTRIAL GOODS. AND SINCE UNDERDEVELOPED NATIONS ARE USUALLY EXPORTERS OF PRIMARY, AND IMPORTERS OF INDUSTRIAL GOODS, THEIR TERMS OF TRADE HAVE A MARKED TENDENCY TOOARD DETERIORATION.. THIS MAY OR MAY NOT BE CORRECT. In ANY EVENT, CAUTION IS NECESSARY MHEN ONE INTERPRETS TERMS OF TRADE STATISTICS. THE MAIN LIMITATION OF THE TERMS OF TRADE ANALYSIS Is DETERMINED BY THE FACT THAT THEY DO NOT MEASURE CHANGES IN QUALITIES OF GOODS EXCHANGED. MOST PRIMARY GOODS RE- MAIN STABLE IN QUALITY, MHILE INDUSTRIAL GOODS ARE SUBJECT TO SUBSTAN- TIAL ALTERATION THROUGH TIME. DURING THE PAST DECADES INDUSTRIAL GOODS HAVE CHANGED MARKEDLY, BUT THIS IS NOT RECORDED BY STATISTICS. A SECOND LIMITATION Is THAT FAVORABLE TERMS OF TRADE ARE NOT NECES- SARILY STIMUTLATIVE AGENTS FOR ECONOMIC DEVELOPMENT. ONLY MHEN THE SUR- PLUS RESOURCES THEY CREATE ARE TEMPORARILY SAVED AND EMPLOYED To INCREASE CAPITAL FORMATION DO THEY CONTRIBUTE TO ECONOMIC GROITH. IT IS DOUBTFUL, THOUGH, MHETHER SURPLUS RESOURCES ARE GENERALLY APPLIED THIS MAY IN BRA- ZIL. FINALLY, IT MUST BE NOTED THAT THE BRAZILIAN TERMS OF TRADE SHON A. DETERIORATING TREND DUE NOT ONLY To INELASTIC DEMAND FOR PRIMARY COMMOBM TIES, BUT ALSO To THE LIMITED VARIETY OF GOODS AVAILABE FOR EXPORT. NONE OF THESE LIMITATIONS MAY, HOMEVER, COMPLETELY INVALIDATE THE 'THESIS THAT UNFAVORABLE TERMS OF TRADE EXIST AND AFFECT THE BALANCE OF IPAYMENTS ADVERSELY. .THEY INDICATE, HOIEVER, THAT THEIR IMPACT IS PROBAB- LY NOT AS STRONG AS IS OFTEN THOUGHT. §,_INDUSTRIALJZATION TRADE BARRIERS AND RESTRICTIONS IMPOSED ON THE INTERNATIONAL MOBI- LITY OF LABOR PREVENT AN EVEN DISTRIBUTION OF ADVANTAGES DERIVED FROM TECHNICAL PROGRESS AND INCREASES IN PRODUCTIVITY RATES AMONG COUNTRIES. THERE ARE TIO DAYS IN MHICH SUCH ADVANTAGES CAN CREATE AN IMPROVEMENT IN THE STANDARD OF LIVING. ONE IS THROUGH A CONTRACTION OF PRICES, THE OTHER THROUGH AN INCREAS IN INCOMES. IF THE MORE ADVANCED NATIONS HAD CHOSEN THE FORMER, THE UNDERDEVELOPED COUNTRIES NOULD BENEFIT FROM TECH- NOLOOICAL ADVANCEMENTS THROUGH AN IMPROVEMENT IN THEIR TERMS OF TRADE. UNFORTUNATELY, THIS IS NOT THE CASE. THE GAP EXISTING BETMEEN THE STAND- ARD OF LIVING OF THE ADVANCED AND THE UNDERDEVELOPED NATIONS IS THUS MIDENED MHEN TECHNOLOGYPmDGRESSES IN THE ADVANCED COUNTRIES, IN CONSE- QUENCE, LATIN AMERICA MUST EITHER ACCEPT CONDITIONS AS THEY ARE AND RE- DUCE ITS VOLUME OF IMPORTS, OR IT CAN TURN To A MORE AUTONOMOUS DEVELOP- MENT. BRAZIL HAS GIVEN PREFERENCE TO THE SECOND ALTERNATIVE. INDUSTRIALIZATION HAS BECOME A MAJOR POINT IN DEFENSE. IT Is VERY UNLIKELY, HOMEVER, THAT FORCED INDUSTRIALIZATION MILL LEAD THE MAY OUT OF THE DILEMMA. FIRST, IT HAS NOT BEEN PROVED THAT THERE IS SUCH A THING AS AN "INTRINSIC" ADVANTAGE IN THE PRODUCTIVITY OF SECONDARY OVER PRIMARY PRODUCTION. SECONDLY, EVEN IF THE HYPOTHESIS SERE CORRECT, No UNDERDE- VELOPED COUNTRY COULD VENTURE ON'A FULL-SCALE INDUSTRIALIZATION PROGRAM IITHOUT STIMULATING THE EXPORTATION OF PRIMARY GOODS. HENCE, ITS NEED TO CONCENTRATE MORE ON AGRICULTURAL PRODUCTION THE MORE IT NISHES TO IN- DUSTRIALIZE. THIS INTERfDEPENDENCE ACTUALLY LIMITS BOTH AGRICULTURAL AND INDUSTRIAL EXPANSION, BUT MORE SO THE LATTER, THIRDLY, IMPROVED PRO- DUCTIVITY IS NOT THE ONLY CRITERION TO ACCELERATE A COUNTRY'S ECONOMIC DEVELOPMENT, EVEN IF IT COULD BE REGARDED AS THE ONLY MEANS TO OBTAIN A - 99 - BETTER EXPORT-IMPORT RELATIONSHIP. SOMETIMES SOCIAL CONSIDERATIONS SHOULD PREVAIL OVER ECONOMIC CONSIDERATIONS. IN THE CASE OF BRAZIL IT SEEMS MORE DESIRABLE TO CONCENTRATE EFFORTS ON THE PRODUCTION AND DISTRIBUTION OF PRIMARY GOODS IN ORDER TO RAISE THE LIVING STANDARD OF THE RURAL PO- PULATION THAN TO BUILD A STRONG INDUSTRIAL POTENTIAL AIMED AT ECONOMIC AUTONOMY. THE REASONS ARE VARIOUS. THERE Is THE URGENT NEED FOR IM- PROVED HYGIENE AND EDUCATION IN THE RURAL AREAS. SECONDLY, THERE IS AN INSUFFICIENCY OF BALANCED GROBTH AMONG THE VARIOUS PRODUCING INTERESTS. IT COULD BE ARGUED THAT SUCH A BALANCE MOULD BE A NATURAL RESULT OF INDUSTRIALIZATION AS ITS BENEFITS NOULD SPREAD OVER THE ENTIRE COUNTRY. IN THE LONG-RUN THE EFFECTIVENESS OF THIS SPREAD CANNOT BE DENIED. IT CAN NON BE TRACED TO SOME RURAL AREAS LOCATED CLOSE To INDUSTRIAL CENTERS, CHIEFLY IN THE STATE OF 510 PAULO. HOMEVER, ITS DEVELOPMENT IS SLOM AND HAMPERED BY ADVERSE FACTORS, SUCH AS THE DEFICIENCY OF COMMUNICATION MEANS AND TRANSPORT FACILITIES. THEREFORE,AN EXCESSIVE PORTION OF THE INCREASED INCOME DERIVED FROM INDUSTRIAL GAINS\TS BEING APPLIED TO THE DEMAND FOR NON-ESSENTIAL CONSUMER GOODS RATHER THAN FOR RE-INVESTMENTS. I K A FURTHER SERIOUS CONSEQUENCE OF RAPID INDUSTRIALIZATION IN BRAZIL Is THE FAST EXPANSION OF DEMAND FOR IMPORTS HEAVILY BURDENING THE BALANCE OF PAYMENTS. CONTRARY TO NHAT IS BEING STRESSED BY PROTECTIONISTS, BRA- ZIL SAVES LITTLE IF ANY FOREIGN EXCHANGE AS A RESULT OF INDUSTRIALIZATION IF THE IMPORTATION OF IMMEDIATE EQUIPMENT PLUS THE EQUIPMENT OF FEEDER INDUSTRIES IS TAKEN INTO ACCOUNT, DOES ALL THIS MEAN THAT BRAZIL SHOULD ABSTAIN FROM INDUSTRIALIZA- TIONT. CERTAINLY NOT. MANY FACTORS NARRANT ITS ENCOURAGEMENT. IT IS CLEAR, HOWEVER, THAT INDUSTRIALIZATION IS NOT IN ITSELF A MEANS TO FIGHT E>ISEQUILIBRIUM. SINCE IT REQUIRES AN INCREASED VOLUME OF FOREIGN TRADE, .BL -I00- IT MUST BE A CAREFUL AND SLow PROCESS. THE PRESENT TRENDTO SUPPORT, OR AT LEAST FAVORABLY REGARD THE ESTABLISHMENT OF ALMOST ANY INDUSTRIAL EN- TERPRISE VITH THE ARGUMENT THAT IT CONTRIBUTES TO FOREIGN EXCHANGE SA- VINOS IS DANGEROUS. FIRST, THE ARGUMENT HOLDS TRUE ONLY MITH SOME IN- DUSTRIES, LIKE OIL, STEEL, CEMENT, PAPER, OR, IN GENERAL, MOST BASIC IN- DUSTRIES UTLIzING PRIMARILY DOMESTIC RESOURCES. SECOND, INDUSTRIALIZATION TENDS TO ACCELERATE INCOME CONCENTRATION. THIRD, MANY INDUSTRIES CAN SURVIVE ONLY THROUGH IMPORT RESTRICTIONS; IN OTHER MORDS, THEY DO NOT NECESSARILY CONTRIBUTE TO IMPROVED PRODUCTIVITY. FURTHER, PUBLIC UTILITY SERVICES ARE INSUFFICIENT FOR THE PRESENT INDUSTRIAL EXPANSION AND PRO- DUCE RASTE VHENEVER PLANTS TEMPORARILY CLOSE OONN. IN SUMMARY, IT IS SUGGESTED THAT PRODUCTIVE EFFORTS BE CONCENTRATED IN THREE AREAS MITH THE FOLLOMING ORDER OF PREFERENCE: (I) AGRICULTURAL AND MINERAL PRODUCTION MITH THE PURPOSE OF INCREASING RURAL PRODUCTIVITY OF GOODS FOR BOTH DOMESTIC CONSUMPTION AND EXPORT; (2) PUBLIC UTILITY SERVICE, MAINLY ELECTRIC POOER AND TRANSPORTATION; (3) EXPANSION OF BASIC INDUSTRIES ACCORDING TO THE AVAILABILITY OF PRO- DUCTION FACTORS AFTER THE FIRST TOO CONDITIONS ARE FULFILLED AND GIVING PREFERENCE TO THE FOLLowING ACTIVITIES: (A) OIL EXTRACTION AND REFINING; (B) MINING: (c) METALLURGY. A VIDESPREAD PROGRAM OF THIS KIND CANNOT BE CONDUCTED MITHOUT SOME (BOVERNMENT CONTROLS.. HOMEVER, IT IS HIGHLY COMMENOABLE THAT OFFICIAL FUNCTIONS BE COOPERATIVE RATHER THAN RESTRICTIVEO _§, STRUCTURALTDI{EQUIEIBRIEE WHAT HAS BEEN POINTED OUT THUS FAR CAN BE SUMMED UP AS FOLLOWS: NEITHER AN ADAPTATION OF EXCHANGE RATES To THE REAL PURCHASING POVER OF THE CRUZEIRO ABROAD, NOR A SUBSTANTIAL INCREASE IN CAPITAL INFLOV, NOR A SECULAR IMPROVEMENT IN THE TERMS OF TRADE, NOR INDUSTRIALIZATION HILL SOLVE BRAZIL'S BALANCE OF PAYMENTS PROBLEMS. THESE MEASURES COULD RE- LIEVE PRESSURE FROM THE BALANCE,BUT COULD NOT REMOVE STRUCTURAL DISEQUI- LIBRIUM. STRUCTURAL DISEQUILIBRIUM IS CAUSED BY A PERSISTANT EXCESS OF DE- MAND FDR IMPORTS OVER THE CAPACITY TO EXPORT. RESPONSIBLE FOR THE DIS- CREPANCY ARE: (I) MALDISTRIBUTION OF INCOME, AND (2) INFLATION. IN BRAZIL, INCOME CONCENTRATION AND INFLATION HAVE AFFECTED THE SUP- PLY OF EXPORTABLE GOODS BY HAMPERING THE EXPANSION OF NATIONAL OUTPUT, BY TRANSFERRINC FACTORS OF PRODUCTION FROM ESSENTIAL TO NON-ESSENTIAL ACTIVITIES, BY IMPAIRING THE RATE OF PRODUCTIVITY, AND BY RAISING THE COST AND PRICE LEVEL. THE MOST MANIFEST CONSEQUENCE OF INCOME CONCENTRATION Is FOUND IN UNBALANCED GRONTH. THIS BECOMES APPARENT BY THE EXCESS OF DEMAND OVER THE CURRENT SUPPLY OF PUBLIC UTILITY SERVICES, MAINLY ELECTRIC POWER. IT IS LIKEBISE REFLECTED BY THE SHORTAGE OF MEANS OF TRANSPORT AND COM- MUNICATION. FURTHER, INCOME CONCENTRATION HAS RESTRICTED THE CREATION OF A SKILLED LABOR SUPPLY. IT HAS PREVENTED THE DEVELOPMENT OF MASS PRODUCTION OF ESSENTIAL GOODS, AND ENHANCED THE OUTPUT OF LUXURY ARTICLES AND HIGH-PRICED HOUSING FACILITIES. IT HAS PERMITTED A DISPROPORTIONATE DEVELOPMENT OF GEOGRAPHICAL AREAS, AND HAS OIDENED THE GAP BETVEEN POV- ERTY’AND HEALTH. IT HAS INJURED THE SAVING CAPACITY OF THE POORER STRAP TA OF THE POPULATION, AND RETARDED CAPITAL FORMATION. AS A RESULT, BRA- -I02- 2IL'S ECONOMIC PROGRESS IS IMPAIRED-NDT SO MUCH IN TERMS OF TOTAL OUT- PUT AND NATIONAL INCOME, BUT IN RELATION TO COMPARATIVE OUTPUT OF GOODS AND AGGREGATE PRODUCTIVITY. Too MANY SUPERFLUOUS GOODS ARE PRODUCED FOR DOMESTIC CONSUMPTION AND TOO LITTLE FDR EXPORTS. IN ADDITION, BOTH SEC- TORS, THOSE PRODUCING FOR DOMESTIC CONSUMPTION AND THOSE FOR EXPORT, SUFFER FROM Low PRODUCTIVITY, THUS INCREASING THE COST AND PRICE LEVEL AS MEASURED AGAINST THE LEVELS OF MORE ADVANCED NATIONS. RESTRICTED EXPORT CAPACITY, HOMEVER, IS BUT ONE ASPECT OF STRUCTURAL DISEQUILIBRIUM. THE OTHER IS THE HIGH DEGREE OF EFFECTIVE DEMAND AMONG THE WEALTHIER SEGMENT OF THE POPULATION. IN BRAzIL, ECONOMIC GROMTH IS LARGELY LIMITED TO THE INCREASE IN POPULATION AND THE Low RATE OF CAPI- TAL FORMATION, SINCE THE MULTIPLIER IS LESS EFFECTIVE THAN IN TE: MORE ADVANCED COUNTRIES. THE MOST COMMON LEAKAGES FOR INCREASED INCOMES ARE FOUND, THEREFORE, IN REAL ESTATE INVESTMENT AND IN THE PROPENSITY To IHP PORT. GIVEN THE DIFFERENCE OF PRICE LEVELS BETREEN BRAzIL AND OTHER NA- TIONS (AT TIMES INTENSIFIED BY ARTIFICIAL EXCHANGE STABILITY), AND THE DIFFERENCE IN THE RANGE OF GOODS AVAILABLE FOR CONSUMPTION, A SUBSTAN- TIAL PORTION OF INCREASED EFFECTIVE DEMAND TURNS TOwARD IMPORTS. THE MORE INCOME CONCENTRATION PROGRESSES, THE HICHER RISES THE DEMAND FOR LESS ESSENTIAL IMPORTS, AS THE MAJORITY OF THE VITALLY IMPORTANT COMMO- DITIES ARE AVAILABLE AT HOME. IN SUMMARY,INCCME CONCENTRA1|0' IS THE MAIN SOURCE OF STRCTURAL DIS- EQUILIBRIUM IN THE BRAzILIAN BALANCE OF PAYMENTS. AMDNG OTHER CONSEQUEN- CES, IT CAUSED A REDUCTION IN THE CAPACITY TO EXPORT, AND STIMULATES THE DEMAND FOR IMPORTS, PARTICULARLY OF NON-ESSENTIAL GOODS. IT IS CONCEIV- ABLE AND EVEN PROBABLE THAT STRUCTURAL DISEDUILIBRIUM COULD HAVE DEVELO- PED IN THE ABSENCE OF MONEY INFLATION, SINCE INCOME CONCENTRATION CAN -I03- TAKE PLACE EVEN IF MONEY SUPPLY IS HELD CONCTANT IN RELATION TO TOTAL OUTPUT. HOWEVER, SINCE MONEY INFLATION STIMULATES INCOME CONCENTRATION IN BRAZIL AND RAISES THE GENERAL PRICE LEVEL, IT HAS AGGRAVATED THE IM- PACT OF STRUCTURAL DISEQUILIBRIUM ON THE BALANCE OF PAYMENTS IN PAST DECADES. 7L FISCAL REORGANLEATION THE MAIN CONCLUSIONS To BE DRAWN FROM THIS ANALYSIS ARE OBVIous. RE-ESTABLISHMENT OF DOMESTIC EQUILIBRIUM IS A PRE-REQUISITE To EQUILIBRIUM IN THE BALANCE OF PAYMENTS. BOTH THE INTERNAL AND EXTERNAL SECTORS OF THE ECONOMY CAN BE BALANCED BY CHECKING INFLATION AND REDISTRIBUTING NA- TIONAL INCOME, ONLY THE GOVERNMENT IS CAPABLE OF SUCCESSFULLY CARRYINC OUT THE Two POLICIES. THE MOST URGENT TASK IS A REORGANIZATION OF THE FISCAL STRUCTURE. THE SPENDABLE INCOME OF THOSE HOLDING THE MAJORITY OF THE FACTORS OF PRODUCTION MUST BE CURTAILED AND THE FUNDS THUS OBTAINED USED To EXPAND PRODUCTIVE EFFORTS MHICH VOULD ENABLE THE POORER STRATA OF THE POPULATION TO RAISE THEIR REAL INCOMES. TO ATTAIN THIS OBJECTIVE, MORE PROGRESSIVE TAXES MUST BE LEVIED ON INCOME AND PROPERTY. THERE IS No DOUBT THAT FISCAL REORGANIzATION, AND PERHAPS EVEN THE CURBING OF INFLATION, wOULD DAMPEN THE PRESENT RATE OF GROVTH. INITIALLY AT LEAST, INDUSTRIAL ACTIVITIES wOULD BE DISCOURAGED, ON THE OTHER HAND, A NEV ORDER COULD CREATE CONDITIONS UNDER IHICH ONLY PRODUCTIVE ORGANI- ZATIONS CAN SURVIVE, PROVIDED THAT GOVERNMENT ACTIVITY IS LIMITED To CON- TROL MEASURES. PRIVATE ENTERPRISES MUST BE GIVEN THE OPPORTUNITY TO EX- PAND ACCORDING To INDIVIDUAL POTENTIALS. THE ABOVE RECOMMENDATIONS ARE, OF COURSE, MUCH MORE EASILY EXPRESSED THAN APPLIED. BUT, CHAT CAN BE ANTICIPATED AS A RESULT IS HIGHLY PROMI- - I04- SING. A FISCAL REORGANIZATION WOULD PROBABLY ENCOUNTER TWO MAIN OBSTAC- LES IN BRAZIL; ONE IS OF A TECHNICAL NATURE, SUCH AS THE DIFFICULTY OF DETERMINING THE MOST APPROPRIATE RATE OF PROGRESSION. THE OTHER--AND THIS IS FAR MORE DISCOURAGING--IS CAUSED BY THE POSITION OF BOTH THE GO- VERNMENT AND THE PEOPLE TOWARD TAXATION.‘ IT SEEMS THAT THE NEED AND FUNCTION OF TAXES ARE NOT YET FULLY REALIZED IN BRAZIL. TOO MUCH OF THE REVENUES COLLECTED IS USED TO FILL GAPS IN THE FEDERAL, STATE, AND MUNI- CIPAL BUDGETS. MOST CITIZENS, THEREFORE, TRY TO EVADE THEIR TAX OBLIGA- TIONS, AND ARE GENERALLY SUCCESSFUL, AS THE GOVERNMENT HAS NOT SUFFICIENT MORAL STRENGTH TOENFORCE THE LAW. MATTERS ARE NOT MUCH DIFFERENT AS FAR AS INFLATION IS CONCERNED. A CHANGE IN ATTITUDE MUST PRECEDE A COMBATING OF THE INFLATION PROBLEM. REPEATED ATTEMPTS IN THIS DIRECTION HAVE THUS FAR FAILED TO PRODUCE LASTING RESULTS. BUT THEY DO INDICATE THAT PRA- ZIL IS CONCERNED MITH THE FUNDAMENTAL CAUSES OF DISEQUILIBRIUM. APPENDIX THE BRAZILIAN BALANCE OF PAYMENTS (IENI7/64) (IN U$I.OO0.000) 11115; I947 I948 léflfii I950 L221. I952 I953 I954- A, GOODS AND SERVICES EXPORTS, F.0.B. 2I$400 2I.884 20.344 25-I37 33~748 25"92 28.477 28.894 IMPORTS, F.O.B. -I8.990 —I6.733 ”'7.534 -I7.277 -3I.498 -3I,480 -20.652 ~25,I72 BALANCE OF TRADE 2.4I0 5.I5I 2.830 7.860 I,250 - 5,288 7.825 2,722 NON—MONETARY GOLD _-_ __- ___ - I I4 5 I2 _ 43 FOREIGN TRAVEL — S93 - 94 - 28 - 52 - 284 - 69 - 472 - 26I FREIGHT 0N IMPORTS - 3.240 — 3.380 - 2,370 - 2.330 - 4.26! - 4.3l2 - 2.494 - 3.|74 { OTHER TRANSPORTATION 472 494 478 I05 - 286 I40 88 42 ' INVESTMENT INCOME — I.OI3 - I,943 _ I,88I - 2.027 - 2.896 - 2.240 — 2.333 - 2.6I0 OTHER SERVICES - 720 - 9I8 - I.208 - I.563 — 2.!85 - I.43O - I.339 - I.780 TOTAL - 2.684 _ 690 _ 2.|79 I.992 — 8.648 —I3.I94 I.287 - 5.I04 B. PRIVATE DONATIONS AND CAPITAL MOVEMENTS (EXCLUDING F) REMITTANCES - 329 — I42 - 64 - 60 - 6| - 72 - 304 - I49 LONG-TERM CAPITAL MOVEMENTS 774 I,II5 820 548 I,056 I:749 806 I.2I2 SHORT-TERM BANK BALANCES IN U,S. 93 488 — 252 -- 204 — 66 56 - 204 - 259 IOVEMENT IN CRUZEIRO BALANCES ~-- - I22 39 II? I I35 275 - 327 /‘\ TOTAL 538 I,340 543 40. 930 l.868 573 . 477 f. -E C. SPECIAL OFFICIAL FINANCING 4 AMDRTIZATION, INCLUDING LEND AND LEASE - 544 - 754 - 530 P |.57| - 495 - 633 - 723 — l.792 LOANS OBTAINED ABROAD 594 I79 742 5I3 700 642 722 4.292 \ SUBSCRIPTION To IMF AND IBRD —-— - 693 ~-- --- -~- --- ——- --— . OFFICIAL DONATIONS — I07 IS II 15 I6 32 - I ——— LONG-TERM CAPITAL 8 —~- -—- --- --- - I ——~ 20 TOTAL - 49 - I.253 223 ~ I.O43 22! 40 - 2 2.520 D, TOTALMjJTEMS A,B,AND C) _ 20|95 _ 503 - I,4I3 I.350 — 7.497 -I|.286 I.858 - 2.I07 E. ERRORS AND OMISSIONS - BIS 53I l.5|8 - 380 2.099 - 972 645 - 503 SURPLUS 0R DEFICIT (-) - 3.0IO - 72 I05 970 - 5.398 —|2.258 2.503 2.6I0 F. COMMERCIAL ARREARS I05I6 530 5I5 - I.9I7 552 IO.435 - 7.495 - I.8I9 G,_COMPENSATORY OFFICIAL FINANCING PURCHASE OF BRITISH INVESTMENT —-- - 1.045 --- ~ 60 - 540 —__ __- ___ DEBT SETTLEMENT - 357 "‘ ‘ 342 “' "‘ --- "*- "-- CREDITS GRANTED To FOREIGN COUNTRIES - $85 --- ~-- ~-- 3 39 37 —-_ US STABILIZATION FUND LOAN T.480 ' 370 ' I.IIO "" ‘7“ "‘ "‘ ‘““ EXIMBANK LOANS --- "‘ _-- “FE -~- --- 5.550 587 USE OF IMF RESOURCES —-- --- 694 ~—- SIB SIB 5I8 _-- PAYMENTS AND CLEARING AGREEMENTS 3.069 - 389 750 45I X X X 653 SHORT—TERM BALANCES (INCREASE —) - 2.5|3 553 ' 5'3 573 4.883 2.3l9 - 1.097 3,490 MONETARY GOLD (INCREASE -) ~-- 693 - 9 — l7 - 18 - I7 - I5 - I5 I,494 — 558 - 620 947 4.846 I.823 4.993 4.429 TOTAL SOURCE: SUPERINTENDENCIA DA MOEDA E 00 CREDITO NOTES: . SUBJECT TO ALTERATION X INCLUDED IN SHORT-TERM BALANCES ‘T-_. BIBLIOGRAPHY EENERALLECONOMIC THEORY BOULDING, KENNETH 6., ECONOMIC ANALYSIS, REVISED ED. 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