There is attached a Program of Economic Reforms for Brazil for discussion
with the new Brazilian administration. This program was prepared and
agreed upon by OSA, AR, and E. Copies of this program have been
sent to Mr. Corbett, who will
clear it with Treasury and Eximbank.
The basic conclusion reached was that any special U.S. assistance should
be contingent upon real progress by the Brazilian Government in
achieving economic stabilization through such corrective measures as are
wholly within its own capacity.
[Enclosure]
ECONOMIC PROGRAM FOR BRAZIL4
I—Objectives of Economic
Reform
In our talks with the Brazilians we should impress on them that
prompt and firm measures are required to achieve the following
objectives of economic policy:
- 1)
- The containment of inflation;
- 2)
- The correction of the deficit in the balance of
international payments;
- 3)
- The correction of the imbalance among the various sectors
of the development program.
II—Measures to Achieve
Objectives
While we have definite views as to the concrete measures necessary to
achieve these three objectives, we are confident that the Brazilians
have sufficient competence in these fields to formulate the
necessary measures if the new Government is firmly determined to
undertake and carry out those measures. A list, including both short
or long-term measures, is attached hereto. Action must be undertaken
vigorously across the broad front if success is to be achieved.
Three areas, however, are of supreme importance if Brazil is to
escape from chronic financial instability and repeated crises; these
are:
- 1)
- The control of the quantity and destination of bank
credit;
- 2)
- The achievement of balanced Government accounts;
- 3)
- The reform of the exchange system.
III—What the Brazilians Will
Probably Ask For
In discussing with Brazil the problem of her economic instability, it
seems probable that she would request us to assist her along any or
all of the following: (1) refunding of her short-term indebtedness,
(2) a substantial loan to be used for balance of payments purposes
and to provide an adequate reserve in connection with exchange
reforms and (3) development loans primarily as recommended by the
Joint Commission.
It may be recalled that we have come to the assistance of Brazil in
connection with previous crises and at each time the Brazilians
indicated that they would take remedial actions to overcome their
economic and financial difficulties. In each case we expected that
our assistance would induce more energetic action on the part of
Brazil in instituting and carrying out the necessary corrective
measures. This was the case in connection with our granting of the
$300 million Export-Import Bank loan in 1953, the $160 million gold
loans by the Federal Reserve Bank in 1954, and again (but to a
lesser extent) the $75 million Export-Import Bank credit in February
1955.
IV—U.S. Attitude
- 1)
- We should emphasize that any requests from the Brazilian
Government would receive careful consideration but that special
U.S. assistance is necessarily contingent upon real progress by
the Brazilian Government in achieving economic stabilization
through such corrective measures as are wholly within its own
capacity. Also, if real progress is made the IBRD would be more respective for
development loans.
- 2)
- In the light of prospective export earnings and import
requirements, we feel that Brazil has very little capacity to
service additional short-term indebtedness.
- 3)
- The only short-term indebtedness which currently imposes an
appreciable burden is the $300 million Export-Import Bank loan
of 1953. (Payment on the $200 million gold collateral loan of
1952 from private banks will start in 1959;5 the 1955 Eximbank credit of $75
million, of which only $45 million was utilized, will begin only
after the $300 million is paid off.)
The current annual payments on the $300 million loan amount to $50.4.
If reduced say by one-half, the Brazilian foreign exchange budget
would be helped, but not to any important degree unless other
assistance is extended at the same time.
If all we can do is to alleviate the current repayment burden say by
$25 million for one year, it is hardly likely that we can induce the
new Government to take the vigorous and unpopular measures which
will be necessary to achieve economic stabilization and the other
economic objectives.
List of Short or Long-Term Measures6
A—Monetary, Banking and Fiscal
Measures
- 1)
- Private Credit Control. Strengthening
present policies for qualitative and quantitative control of
credit to the private sector of the economy.
- 2)
- Government Deficits. Careful
examination of federal government expenditures with a view to
economies and a reduction of the deficit; extra-budgetary
credits should be avoided, unless revenue to cover them is
provided simultaneously.
- 3)
- Government Enterprises. Measures to
place government enterprises, notably transportation and other
utilities, on a self-supporting and efficiently operating basis;
a raising of rates and improvements in management are needed.
Some enterprises might be sold to private investors.
- 4)
- State and Local Deficits. Measures to
reduce state and local deficits, or to provide for their
financing from non-inflationary sources.
- 5)
- Monetary and Banking System. A review
of the monetary and banking system designed to facilitate the
implementation of monetary
[Page 677]
policies; plans should include the
establishment of a central bank.
- 6)
- Taxation. A review of the tax and
revenue system with a view to improved administration and the
adoption of desirable reforms.
- 7)
- Foreign Exchange System. Simplification
of the exchange system and the adoption of improved procedures,
looking to the encouragement of both a near and a long-term
expansion of exports, and to the eventual establishment of
reasonable freedom in the purchase and sale of exchange at a
unitary rate.
B—Other Measures
- 8)
- Coffee. A coffee policy which permits
coffee exports to move in large volume. (Coffee is a delicate
subject and the U.S. should speak only in general terms,
preferably after Brazilian initiative.)
- 9)
- Transportation Facilities. Measures to
improve and extend transportation facilities of all types;
better organization and management is needed.
- 10)
Solution of the Petroleum Problem.
Importance of easing the pressure this commodity exerts on
the foreign exchange budget by developing domestic sources
of supply.7
