This case focuses on Brazil's development strategy since World War II and on the change of the economic model following the debt crisis of the 1980s. At the time of the case Brazilian officials are deciding whether regional integration or globalization offer the best route to economic prosperity and development. This case illustrates the challenges that developing countries face in defining trade policy. It also introduces the role of regional trade blocks as an alternative to globalization. At the current time regionalism seems to be very much in vogue and seems to be much more likely to be the basis for future trade system changes than comprehensive trade treaties. Brazil's Import Substitution Strategy
After the Great Depression of the 1930s, Brazil followed an import substitution strategy characterized by massive government investment, targeting of key industries, and protection against competition with high tariffs walls. Brazil's import-substitution strategy initially appeared to be a success, creating a temporary boom in the 1960's and 1970's that masked the strategy's longer-term implications. Import substitution industrialization also called ISI is a trade and economic policy based on the premise that a developing country should attempt to substitute products, which it imports, mostly finished goods, with locally produced substitutes. The theory is similar to that of mercantilism in that it promotes high exports and minimal imports to increase national wealth. As a result of import-substitution industrialization, the Brazilian economy experienced rapid growth and considerable diversification. Between 1950 and 1961, the average annual rate of growth of the gross domestic product exceeded 7 percent. Industry was the engine of growth. It had an average annual growth rate of over 9 percent between 1950 and 1961, compared with 4.5 percent for agriculture. In addition, the structure of the manufacturing sector experienced considerable change. Traditional industries, such as textiles, food products, and clothing, declined, while the transport equipment, machinery, electric equipment and appliances, and chemical industries expanded. However, the strategy also left a legacy of problems and distortions. The growth it promoted resulted in a substantial increase in imports, notably of inputs and machinery, and the foreign-exchange policies of the period meant inadequate export growth. Moreover, a large influx of foreign capital in the 1950s resulted in a large foreign debt. The lower increases in the shares of the intermediate and capital goods industries reflect the lesser priority attributed to them by the import-substitution industrialization strategy. In the early 1960s, Brazil already had a fairly diversified industrial structure, but one in which vertical integration was only beginning. Thus, instead of alleviating the balance of payments problems, import substitution increased them dramatically. This is shown in Exhibit 2-7. Mercosur Regional Integration Initiative
Between 1981 and 2000 Brazil faced various problems. As shown in Exhibit 7a current account balance and trade deficits persisted as a result of higher increase in the imports than exports. Exchangerate stability and external perception of the country depended on the current account balance. Problems were classified into two sets: internal and external factors. High tax burden and inadequate infrastructure were internal problems. External factors such as wide variety of trade barriers that kept Brazilian products out of the world market existed. "Brazilian cost" internal factors negatively affected Brazilian producers' competitiveness in the global arena. Tax burden was estimated to be 29% of GDP. Due to Brazil's highly regulated labor system, there was a very high cost to employ workers. Compulsory benefits to wages of full-time employees were said to almost double the cost of...