Question

Explain how Brazil was able to reduce the rate of inflation from from more than 2500%to less than 10% between 1994 and 1997.

Answer 1

Brazil, South America's largest country experienced huge booms that were followed by stagnation. It has a turbulent macroeconomic history, to begin with, its dependence on commodity exports proved a major vulnerability.

After Second World War, Brazil implemented a policy of import substitution as a country wanted to become less dependent on commodity exports. In the 1970s, the country enjoyed high economic growth rates which helped to diversify the economy. Meanwhile in the mid-1973 first oil shock led to a strong deterioration of Brazil's terms of trade as it imported 80% of oil consumption. The country accommodated this shock by borrowing cheap petrodollars. The boom continued for some time but when the global rate of interest was raised strongly and lenders became less willing to lend to Latin American countries in the early eighties. This reliance on foreign lending led to huge economic problems. The country struggled to finance its external indebtedness and growth came to halt