The crisis of the Miracle and its effects on consumer credit

From 1968 to 1973, the robust Brazilian growth was accompanied by an increasing external vulnerability (Hermann, 2011). According to SSA theorists, every SSA carries the seeds of its own destruction. And the weakest spot of the Peripheral Fordist SSA in Latin America proved to be the external dependency - regarding the importation of complex industrial inputs, and the external debt that financed a huge part of the industrialization effort. The dismantling of that SSA in Brazil began in 1974. And it

brought about the beginning of the dismantling of SCFIs, and consequently of consumer credit in the country.

The large increase in the production of durables increased dependence on imported capital goods and inputs, particularly oil. Thus, the 1971-1972 biennium already registered trade deficits. On the other hand, the Balance of Payments’ equilibrium was guaranteed by a massive inflow of foreign capital, enabled by an abundant international liquidity and by a domestic policy that deliberately promoted the entry of these resources. Around the world, this was the time of the blossoming of the Eurodollar market, and a time when the political alignment to US guidelines was a source of many blessings in the context of the Cold War. In Brazil, the failure of the 1964’s reform in creating long-term private financing mechanisms turned external funding into a key precondition for the industrial outbreak.

The vulnerabilities of the Brazilian external accounts became evident with the first oil shock in 1973, which had multiple effects. The most immediate one was the strong impact on the trade balance, which moved from an equilibrium in 1973 to a $ 4.7 billion deficit in the following year.

Developed countries reacted by raising interest rates, aimed at curbing the inflationary process resulting from the sudden increase in oil prices. The way Brazil was affected was twofold. Firstly, the pace of exports was reduced, due to a contraction of economic activity in these countries. Secondly, the increase in profitability of foreign government bonds slowed down the inflow of foreign capital, fully compromising the set of conditions that gave sustainability to the balance of payments during the time of the Miracle. The current account deficit was dramatic, and this time the country could not count on a prosperous capital account. The result was what Castro and Souza (2004) described as a "brutal external imbalance".

To reverse this situation, a more mainstream solution would involve a deceleration of economic activity, through restrictive monetary, credit and fiscal policies. But some key factors made Geisel and his finance minister, Mario Henrique Simonsen, opt for an alternative treatment – one that involved taking developmentalism forward, even amid the crisis.

Castro and Souza (2004) argue that a pure deceleration would imply preserving an unbalanced and vulnerable economic structure. Attacking the root of the problem would necessarily involve the expansion of the domestic production of capital goods and inputs. Using the terminology of SSA theorists, the idea was to abandon Peripheral Fordism, in order to build a more autonomous model. Moreover, this was a period in which a large volume of investments made at the time of the Miracle were maturing. A big source of political pressure came from the business community, which opposed the imposition of restrictive policies. On the political side, it is worth remembering that the previous government was marked by the radicalization of the authoritarian regime, regarding the repression of its opponents, and a recession would only reinforce the opposition of civil society to the dictatorship.

Therefore, by the end of 1974, the II PND45 was launched, lasting until 1979. It was essentially a plan of structural reform, which intensified the growth model based on foreign debt present since the 1960’s. The idea was that, once the large exposure to the import of complex industrial goods was eliminated, greater financial independence would follow. After the abrupt reduction in the inflows of external financing, this renewed indebtedness was only possible due to the petrodollars market, composed basically by OPEC’s capital in search for profitable investments around the world.

Within this context, two aspects are particularly important to explain the government’s attitude towards the SCFIs. Firstly, the industry of durable consumer goods ceased to be a protagonist in the industrial policy46. Secondly, the government believed that the growth strategy had to be carefully controlled, as inflation had showed clear signs of acceleration in 1974. The practical implication was the promulgation of a series of measures aimed at restricting consumer credit operations between 1974 and 197747.

In 1977, as a relief measure, the government raised the threshold that corresponded to the value of goods that could be financed without the requirement of a guarantee. It also eliminated the requirement of these operations to be linked to a commercial purchase,

45 _{National Development Plan.}

46 _{Once surpassed the “light industrialization” phase, based on consumption goods, the next step was to face}

the bottlenecks found in intermediate and capital goods industries – which would eliminate the country’s dependency on imports of the latter.

47 _{Resolution 286, 03/05/1974, Decree-law n. 1338, 23/07/1974, Resolution 383, from 21/07/1976,}

which in practice was the creation of “personal credit” 48_{. But the effects of the measures} adopted in the previous year were intensively felt by the durables industry, which experienced zero production growth in 1977, this being the worst result of the decade (Pellegrini, 1990).

In March 1979, President Figueiredo came to power (1979-1985), reallocating Simonsen to the Ministry of Planning – which became the central command of the economic policy of that government. That year was critical in the Brazilian history, due to the dramatic external situation after the second oil shock. The effects of the second shock were similar to the first one, but much more intense. The country saw a new jump in the value of imports and a new round of interest rate increases in developed countries. This latter multiplied the Brazilian debt, given that it had been taken at floating rates, drained global liquidity and compromised Brazilian exports due to the recession that took place in rich countries (Castro and Souza, 2004). And this time, the "orthodox exit", based on the adoption of restrictive monetary, credit and fiscal policies was the chosen path.

In 1980, SCFI loans shrank by 30.6%, which Pellegrini (1990) attributed to credit restraints implemented by the Resolution 605, dated 02/04/1980. The resolution restricted the expansion of loans granted by all financial institutions to 45% of the level registered in 1979, excluding transactions involving transfers by public institutions to priority sectors and involving external resources. The government's objective was to stimulate foreign capital inflows, discouraged even further after the maxi devaluation of the currency in December 1979. But as the SCFIs did not receive external resources and received virtually no public transfers, these institutions were the most affected by the measure. This was the beginning of the dismantling of these institutions – which was completed in the following period.