The administration of Eurico Gaspar Dutra lasted from 1946 until 1951, following fifteen years during which Getúlio Vargas was at the helm of the nation. Dutra assumed power in a country that was industrializing and reducing its dependency on coffee exports. In terms of economic policy, he needed to address fiscal imbalance and inflation, and believed that foreign capital — especially American capital — would help in this endeavor. However, this perception turned out to be an illusion, as the United States was not willing to finance Brazil’s development. Consequently, the Dutra administration had to shift its economic policy: from trade liberalism with orthodoxy to trade protectionism with heterodoxy.
The Dutra administration started under favorable circumstances, as Vargas’ measures had led to a strong industrialization of Brazil. This was reflected in the country’s GDP, which saw considerable growth, and in the trade balance, which was quite favorable — this time, not solely due to coffee exports. Furthermore, Brazil’s foreign debt had been properly renegotiated with creditors, thanks to the Definitive Agreement signed in 1943. However, two major issues remained: fiscal imbalance and inflation. The former resulted from Getúlio Vargas’s belief in the essential role of the State as an economic driver, especially through state-owned companies. The inflationary pressures, meanwhile, had multiple causes:
- Due to the destruction caused by World War II, there was a decrease in the availability of foreign products in Brazil.
- Foreign products that did reach Brazil were disadvantaged by the fact that the Brazilian economy was closed off to the outside world — that is, the few imported products that arrived could not be cheaper than domestic ones.
- The government was used to printing excessive amounts of money — initially to support high coffee prices, later to finance fiscal deficits.
- The creation and increase of labor taxes led to higher production costs, which were passed along to consumers.
When Dutra’s term began, its economic policymakers were influenced by the ideas advocated at the Bretton Woods Conference (1944). There, liberal and orthodox principles were promoted, which were intended to guide the management of the world economy. Based on them, Finance Minister Pedro Luís Correa e Castro adopted the following measures during his term:
- Contractionary fiscal policy: It was quite effective in turning Brazil’s successive deficits into surpluses.
- Contractionary monetary policy: It was less effective, because while the Finance Ministry worked to reduce the monetary base, the Bank of Brazil (Banco do Brasil), led by Guilherme da Silveira, expanded credit availability.
- Easing of exchange controls: People were allowed to freely buy and sell foreign currencies, and the exchange rate would be fixed and overvalued, in line with what was established at Bretton Woods.
The shift in exchange policy initiated by the Dutra administration aimed to attract foreign direct investments and facilitate imports. External capital was deemed essential for re-equipping the national industry, but investors at that time preferred to place their money in Europe and Asia. A fixed and overvalued exchange rate was meant to attract those initially uninterested in investing in Brazil. Additionally, by making it easier to import foreign goods, the government met the demands of the middle class while increased competition in the national market, thereby helping to curb inflation.
Economic decision-makers believed that the outflow of foreign currency due to imports would be offset by the inflow from foreign direct investments. Particularly, they thought Brazil deserved substantial U.S. investments in gratitude for its military contribution to the Allies in World War II. However, these assumptions did not come true:
- The United States, Japan and European countries gradually abandoned the Bretton Woods principles — in other words, Brazil was the only one maintaining fixed and overvalued exchange rates, thus not attracting as much investment as other countries.
- The countries affected by the war were slow to recover their investment levels, as they were completely devastated.
- With no more risk of sympathies towards Nazism and Fascism in Latin America, the United States was not interested in generously financing neighboring countries. A clear example was the 1949 report from the Brazil-United States Joint Technical Commission (also known as Missão Abbink, or Abbink Mission), which stated that Brazil should attract international private capital — instead of relying on U.S. government funds.
Thus, Brazil faced a scenario where more foreign currencies were leaving the country than entering. Over time, the condition of the Brazilian economy worsened due to trade balance deficits. On one hand, there was a surge in imports, which had been restricted for years. On the other hand, Brazilian exports grew little, as the rest of the world was recovering its production levels post-war. This process was aggravated by the fact that the majority of Brazil’s international reserves were generally unusable. Most were denominated in gold, an emergency reserve, and in pounds, which could only be used for payments to England (as per the terms of the 1940 Anglo-Brazilian Payment Agreement). However, most of Brazil’s foreign debt was in U.S. dollars.
Even facing a currency crisis, the government was reluctant to devalue the exchange rate. An overvalued currency helped maintain high coffee prices and combat inflation. Moreover, if the Brazilian currency devalued, the most favored exports would be those with higher price elasticity of demand — i.e., those that would significantly increase when prices fell. These products were generally destined for regions with non-convertible currencies, which would not solve the problems with convertible foreign currencies in Brazil’s balance of payments.
Thus, in 1947 and 1948, the government implemented two measures to address the currency crisis without resorting to devaluation:
- Reestablishment of exchange controls: 30% of foreign currencies purchased by banks had to be sold to the Bank of Brazil, at the official buying rate. These currencies would first meet government needs, and then private imports (based on their essentiality).
- Reestablishment of import controls: Importing products required prior government approval, the “Import License”.
According to Brazilian economist Sérgio Viana, the combination of a fixed and overvalued exchange rate with exchange controls and import controls had opposite effects:
- On the one hand, the overvalued exchange rate and import controls indirectly favored the Brazilian industry, especially in the private sector. This occurred because it was cheaper to import industrial inputs, and because there were restrictions on the importation of competitive goods that had a national equivalent.
- On the other hand, the overvalued exchange rate was a clear obstacle to exports, because it caused Brazilian companies to lose international competitiveness as European economies reorganized post-war. To mitigate this problem, the administration introduced operações vinculadas (“linked operations”) in 1948: a mechanism whereby less competitive exporters could sell foreign currency at a more favorable rate to importers. This facilitated international sales of products that would not have been competitive enough to sell at the official exchange rate (“onerous products”), while at the same time facilitating imports of durable consumer goods (for which demand was so high that these imports would happen anyway).
However, from July 1949 onwards, there was a shift in domestic economic policy, with the appointment of Guilherme da Silveira as head of the Finance Ministry. This change was motivated by the imminence of the presidential election, spurring the desire to stimulate the economy to please voters. In this regard, the government began to significantly expand public spending, money issuance, and credit provision by the Bank of Brazil. Simultaneously, Brazil benefited from an increase in coffee prices, with the resumption of stock purchases by U.S. importers, who had been expecting a devaluation of the Brazilian currency — something that did not occur.
An example of the administration’s new policy was the Salte Plan (Plano Salte): an attempt to expand and coordinate public investments in health, food, transportation, and energy. The goal was for state intervention to facilitate the country’s economic development, following the model that had already been adopted during the Vargas Era. However, this initiative was a resounding failure, because it failed to account for which sources of money would finance all the investments that were planned. The Salte Plan would be maintained in the second Vargas administration (1951-1954), without having any concrete results, and would eventually be abolished during the Café Filho administration (1954-1955).
Due to the adoption of expansionist fiscal, monetary, and credit policies, an upsurge in inflation ensued. This situation was worsened by the rapid urbanization of the country, which pressured the limited supply of agricultural products (leading to price increases), and by the absence of idle capacity in the Brazilian economy. Inflation was the major problem brought by the shift in economic policies during the Dutra administration, and it would only get worse over subsequent presidencies — being resolved only after 1964.
The Dutra administration started based on a “foreign exchange illusion”, mistakenly believing that Brazil would receive abundant foreign capital and that it had international reserves capable of supporting high levels of imports. This illusion was quickly broken, considering that other countries did not adopt the Bretton Woods principles, and the United States stopped any aspirations to finance Brazil’s development. In fact, U.S. financial support would only come after the outbreak of the Korean War, as a way to persuade Brazilians to participate in the conflict. Domestically, the Dutra presidency was characterized by an oscillation in economic policy: initially, trade liberalism with fiscal and monetary orthodoxy; later, trade protectionism with fiscal and monetary heterodoxy. This pivot would have long-lasting consequences.
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