Brazilian Economic Crisis

The Brazilian economic crisis began in 1970s after the 1973 oil shock that affected the whole world. However, the oil shock did not take effect immediately because the Gross Domestic Product (GDP) was high. Negative economic growth began in 1980 when US increased interest rates; hence, foreign debts became a burden. The government reacted by investing in industrial infrastructure in order to reduce imports; hence, encourage self-sufficiency. This increased the burden of foreign debt for the government had to borrow to fund the infrastructure. The government had to take strict measures because public funds were dwindling. Among the measures that were taken are; reduction of wage, freezing of prices and withdrawing payment of interest on any debt. This provided a temporary solution for the annual output started growing.

The crises continued in the mid 1980s due to expenditure of public funds and continuing financial crises. Several reformations were implemented to rectify the situation such as elimination of indexation and freezing of prices, but they created disequilibrium in the public sector. This is due to overextension of currency freezing and late adjustment of wages to lower levels when the economy was beyond repair.

Brazil recovered from the crisis in 1994 after implementation of the Real Plan. It abolished indexation and streamlined the public sector by lying off some workers. The major attribute of elimination of inflation is the introduction of a new currency (Real) that was pegged to the US dollar. The plan managed to reduce prices to the normal level up to date.