Brazil; a country located in South America, known for its developing economy, famous soccer team and its agriculture and livestock. During 1981 – 1993 Brazil has faced one of its most deadly and most severe economic crises in its history.
Brazil has always been an agricultural nation with a boom-and-bust economy based on world demand for rubber, Sugarcane, coffee and cotton. Industries started to emerge and the development of resources started to dominate the economy. Today, although agriculture remains important, Brazil is a world industrial power with a diversified economy. Brazil now a day is considered as one of the most developing economies in the world, also noted as being one of the “BRICK” countries. However, you might ask how is it that it went from facing one of the most severe economic crisis to one of the most booming and developing economies?
There were many factors that resulted in this crisis such as the East Asian Financial Crisis of 1997. However, I will only be talking about the internal factors that built up and triggered the Brazilian economic crisis.
In 1994, after years of inflation and failed price stabilization plans, Brazil initiated a new stabilized plan for its new currency, the real. In addition, the Brazilian real also pegged its currency with the US dollar to ease and to bring in foreign investments. However, for a currency to efficiently peg itself to the dollar, a country must follow the same monetary policy as that of the United States. In 1994, the year the Real plan began, Brazil’s annual inflation rate exceeded 900%! By the end of 1998 the price direction was negative. The peg to the US dollar made Brazilian export to be very expensive and harder to sell in US dollars due to the diverse inflation rates and systems both countries have.
Another aspect that caused the Brazilian financial crisis was due to Financial Contagion. Brazil started to suffer from financial contagion partly due to the worries of overvaluation. Financial contagion occurs when a financial crisis in one country motivates to move their funds from other countries. When financial crisis hit Asia and Russia in 1997, this caused investors to withdraw their money from Brazil as well, fear of losing their money. This discouraged the outflow of dollars and interest rates increased, in hope that investors would keep their money in with high interest rates. However high the interest rates may have been, they were not enough to keep foreign investment in Brazil. This has caused a severe deficit in the economy due to the central bank devoting all its money to keep the Real high and pegged with the USD. The outflows and exports of the country remained falling, until in December 1998 it hit a bottom low in losing $350 million a day!
The crisis stayed for all of 1998 and half of 1999. When the new president of Brazil stepped in, he initiated a $23 billion monetary budget plan in addition to the $41.5 billion international monetary fund given by the IMF to keep the economy alive.
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