The Effects of Import Substitution Industrialization on the Development of Brazil - Research Paper Example

THE IMPACT OF SUBSTITUTION INDUSTRIALIZATION IN THE LONG TERM DEVELOPMENT OF BRAZIL By Introduction The essay explores the effects of import substitution industrialization (ISI) on the development of Brazil. The events like the Great Depression and the Second World War affected the supply of imported goods to the country and as a result Brazilians were forced to produce the products themselves on their own land. This necessity led to industrialization or what is known as import substitution industrialization. ISI led to the development of industrial base in the country. ISI allowed the local supply of consumer goods, difficult to be imported at extremely high rates prevalent in the world after the Second World War. Even though ISI led to the industrialization of Brazil where agriculture products dominated the economy, it has some bad effects also like increasing rates of inflation and debts. ISI did not resolve the balance of payments problems. On the other hand ISI marked the golden period of Brazilian economy from the years early 1950's and early 1960's. Promotion of other sectors also resulted from ISI such as steel, petrochemicals, fuels, automobiles, transport infrastructure and electricity. Portuguese were the first people to come to Brazil and discover its potential resources. The first attraction for them was the Brazil wood. This wood was exported by them to the European countries. However, the real breakthrough was the sugar cane production. Sugar was in high demand in Europe and an opportunity for the people to make huge profits out of its export. African slaves were used for the production of sugar. But unfortunately after a period of time sugar supply became far more than the demand due to excessive production in the Caribbean and hence prices declined significantly. In the nineteenth century, another important development in the Brazilian economy was the escalation of coffee exports. By the year 1929 coffee contributed to around 73% of the total exports. Tremendous growth of coffee exports led to the development of transport infrastructure like railways and ports. As the movements for the abolition of slavery gained momentum, the only other alternative for the employers was the free wage labour in form of immigrants from the extremely poor rural lands of European countries like Italy, Portugal and Spain. Millions of people immigrated to Brazil from Europe. Only few of them worked on plantations due to miserable conditions and others opted to move to the cities and set up their own workshops. On the other hand there was an overproduction of coffee in the country without many takers. Decline of coffee exports and the labour immigration from Europe formed the basis for the origin of industrialization. As a consequence of the Great Depression and the Second World War there was an enormous fall off in the exports of coffee. Availability of the goods imported to Brazil also declined. As a result most of the products were needed to be produced in the country itself that led to forced import substitution industrialization. Financial crisis in the country led to the rise of populism on the political front. The newly elected president Getulio Vargas was backed by military. Landowners lost their monopoly and a centralized system was setup. The president being conscious about the present and future prospects of the coffee export trade concentrated the resources on the industrial development of the country. New policies and changes in support of the industries were formulated. Initial steps like providing the basic inputs, cultivation of energy sources and so on were taken by the administration. The period after the Second World War saw Brazil heading towards a growing and sound industrial foundation, the main sectors being food, textile, leather and wood. After the end of Vargas's reign, the new president Dutra opted for the free trade policy and the market opened to the US imports. Major part of the foreign exchange was lost in the import of luxury consumer products. The next president Kubitschek opted for a policy that would support the local industrialization as well as the trade relationships with the foreign companies. Government aided the development of transport infrastructure and steel and oil refining industries. Foreign investments were encouraged for establishing new ventures. All these changes led to the development of road networks and growth of manufacturing output, consumer items, electrical and motor industry production. Efforts from the government did not resolve the problems of rising inflation and debts. Opinion differences over the economic polices led to military takeover in 1964. Brazil made outstanding financial growth from 1969-1974. The state played its own important role, allowing equal participation of local and foreign investments in the development process. Inflation dropped considerably. There was an increase in exports and employment in the industrial sector but the external debt was not affected. Several steps such as the liberalization of imports especially machinery, financial incentives and other supports to the exporters were taken by the government. Other external factors such as expansion of the world trade and liquidity (recycling of petrodollars), and direct foreign investments led to the benefit of Brazil's economic growth. Availability of cheap labour led to their exploitation by the firms. Long working hours and labour turnover were the means adopted by firms for controlling the labour. The balance of payments proved to be the major hurdle in the path of Brazilian growth. Some of the major factors contributing to the balance of payments crisis were: Expensive imports of oil. Outflow of profits, interests and dividends. Gigantic amount of long term loans and their interest payments. Several short term loans. Rising interest rates on loans year by year. The Brazilian economy was in a desperate situation. To pay earlier loans more money was borrowed from the international trade relations most prominently USA. There was a pile up of loans to be paid and interest rates were rising in the international scenario while terms for the payment were decreasing. Recovery of the economy waited for some miraculous discovery but to no avail. There was unrest building up on the political front as well. Economic distresses lead to opposition among the military administrators. The 1973-74 oil crises proved to be a momentous event for the opposition from different civilian groups. Industrialists and the working class that earlier supported the regime began their opposition movements. Strikes and unrest began in Sao Paulo. A new president was elected in 1979 but with substantial opposition from the military. The aim of the new government was to establish democracy in the country. Hence Brazil had both economic as well as political insecurity in the following years. From 1964 to 1969 several labour leaders were jailed. Military rule was able to suppress the rising movements against it. In the late 1970's industrial workers got united against the administration. A massive strike was launched in the city of Sao Paulo with the support of all the industrial workers. Workers from other sectors like construction, banking, agriculture and transport also joined the uprising. The strike lasted for 10 days. Workers Party came into origin in 1979. Later a national trade union organization was formed known as CUT. The purpose of CUT was the liberalization of trade and workers policies from the government. Exile terms of political prisoners were over and the country was heading towards democracy. After the elections in 1982 and formation of more liberal government all the restrictions on press, theatre and music were lifted. On the economical front the crisis intensified. Inflation rose to 220% by 1985 from 40% in 1979. Prices of all the commodities of daily use, especially food products were touching the sky and it became increasingly impossible for the common man to sustain such a situation. Industrialists decided to invest in the markets but situation was not at all altered. The GNP per capita fell by 13%, unemployment grew by the same rate. Wags fell by 25.5% and production came to a stand still. In 1984 the first civilian president was elected. As the first step to control the inflation, the Inflation Zero Plan was executed by the president. Inflation came down to 0 and the national currency was devalued by 1000%. But the positive effects lasted for a very short period of time as suppliers of different goods were losing their profits. Inflation once again gained momentum. In all these years of rise and fall of the economy there was least human development due to unequal distribution of income. Inequalities were also prevalent in the education system. Basic health facilities were not available. Children from poor families were not able to go to schools and get educated. The industrialisation, in 1990's in Brazil, fell behind in technological developments around the globe. Investments in the market were discouraged due risks involved with the economic policies. Efficiency and quality of products was not able to match the competitiveness in the international markets. 1990's saw a change in the economic policies from protectionism to neo-liberalism. For overcoming the problems of inflation and the debt, economic reforms aimed at making the country technologically competitive in the international market are needed. Conclusion Import substitution industrialization was very important event in the history of Brazil as it laid the foundation of the industrial development of the country. After the Great Depression and the Second World War, the import of goods became too costly for countries such as Brazil. Import substitution came to the rescue by fulfilling the local demand of consumer goods that were impossible to be imported at such a high rates. Local production of goods led to an increase in the GDP growth rates. The dependence on imports for consumer durable sector goods was eliminated by the import industrialization. ISI played an important role in establishing the industrial base in the country. The period from early 1950 to early 1960's marked the growth of ISI. It accounted for 31% of industrial growth. ISI was not restricted to intermediate products and wage goods only but expanded its horizons to consumer durable goods such as home appliances, automobiles etc. One development led to another. Suppliers of automobile parts came into existence making the market more competitive. Other sectors wide range of sectors such as steel, petrochemicals, fuels and electricity were affected as well (Abreu, Bevilaqua and Pinho, 1997). Bibliography Abreu, M.P., Bevilaqua, A.S. and Pinho, D.M. (1997). Import Substitution and Growth in Brazil, 1890s-1970s [Online] Available from: http://www.econ.puc-io.br/mpabreu/pdf/td366.pdf. [Accessed 03 May 2008]. Read More