A Comparative Perspective
Edited by Werner Baer and David Fleischer
Chapter 20: Inflation and Stabilization in Brazil
1 Manuel A.R. da Fonseca 20.1 INTRODUCTION The economic history of Brazil since – at least – the middle of the twentieth century has been marked by very high and often growing inflation rates. In brief periods at the end of the 1980s and the beginning of the 1990s, price increases reached hyperinflationary levels. From the available information, covering several decades and reflecting virtually every possibility for stabilization policies and programs, one is led to the conclusion that the main cause of Brazilian inflation is the continued government drive to spend far beyond what could be financed by tax revenues. Further, in historical perspective, the country’s capital market has been very limited and could not provide the resources necessary to finance fiscal deficits under favorable conditions – that is, in contrast with more mature economies, the market for treasury bonds has been characterized by very high real interest rates and very short maturities. Therefore, given the deficiencies of Brazil’s capital market, the financing of fiscal deficits has become a major source of additional spending, higher deficits and stronger inflationary pressures. To some extent, relatively high inflation and fiscal deficits are the necessary by-products of the government effort to push forward economic development in an essentially poor society – especially the pursuit of high rates of economic growth. The economic record of the 1950s and, in particular, of the period known as the ‘economic miracle’ (the end of the 1960s and beginning of the 1970s) are in conformity with this evaluation of higher inflation granting...
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