Inflation & External Debt in Brazil TRAPPED IN INEQUALITY? Persisting Inflation

No other nation has experience so much inflation, persistantly, over a long period as Brazil has. Hyperinflation in other countries has produced astronomical price increases, but hyperinflation is a shortlived process, whereas Brazil's inflation has operated for decades. Brazil also has a long history of high foreign debt, going back to the 1920s, and in the early 1990s Brazil had the world's largest external debt, at a level of about $118 billion.

The following discussion traces the modern development of Brazil's combined inflation and debt problems, and seeks to identify their origin. The discussion begins by outlining the current situation, followed by a chronological account, with particular focus on inflation. Consideration is given to a theory of "inertial" inflation, developed by Brazilian economists, and the essay concludes with a proposal that inflation and debt are both rooted in Brazil's highly unbalanced economy.

Brazil recently submitted a "Letter of Intent" to the International Monetary Fund (IMF), in order to demonstrate its improved creditworthiness. This Letter of Intent summarized the progress that Brazil has made in the last couple of years in reducing its rate of inflation:

Continued progress has been made in reducing inflation. Following a temporary acceleration in the middle of 2000 ... administered prices (including electricity, telecommunication, and transport tariffs, and prices of oil products) and of adve

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op debtor nation, with an external debt that had reached a level of about $118 billion. Nevertheless, the Brazilian stock market was booming -- in 1991, the Bolsa de Valores Sao Paulo went up some 151 percent in US dollar terms. In 1992, the International Monetary Fund also granted a $2.1 billion "standby" loan to Brazil. "It is a turning point for Brazil," the head of the Central Bank, Marcilio Moreira, was quoted as saying (Asset International, 1992). Unfortunately for millions of Brazilians, the stock market increase and International Monetary Fund loan did not prove to be a turning point -- a fact that leads to some doubt about similar optimistic remarks made more recently. By 1994, inflation was entirely out of control, reaching 2000 percent (Arnold, no date). After only four years, the new Brazilian currency, the cruziero, had to be replaced by another one, the real (Bevilaqua and Garcia, no date). International developments placed further pressure on Brazil in the second half of the 1990s, when its efforts to manage its foreign debt were complicated by first the Asian crisis of 1987-88, and then the financial crisis in Russia (Arnold, no date). International lenders had taken enormous losses when Asian and R

Category: Foreign - I