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Substitute strategy or substitution strategy was put in place by Brazil’s government following the 1930’s Great Depression because of the disastrous turn of events in its economy. With coffee being its main exporter at the time, Brazil had to change its economy. It did so during this time by creating an import substation strategy where the government would invest a massive amount of money and targeted key industries. Along with the investments and focus in other areas, Brazil’s government also safeguarded against competition using high tariff walls.
The article notes that the strategy worked for four decades. Brazil saw a 7% growth from 1950 to 1980. The strategy also led to the creation of a diversified and large industrial sector. However, in the 1980’s inflation soared, and disaster came once again. Along with high inflation, investment fell due to the fear of foreign investors in Brazil’s economy. As a result, growth stagnated, and Brazil became one of the developing countries with the highest external debt. While the strategy seemed to fair well early on, investor interest and inflation led to downfall. Could this have been prevented? Who knows, the strategy seems sound making it odd that it failed after only forty years.
A new strategy came forth in 1194 with new president Fernando Henrique Cardoso. He began to undue the work that the government laid out in the 1940’s and 50’s. He began to privatize state-owned firms, lowered trade barriers, and promoted deregulation of the economy. This was an attempt to embrace globalization. Again, the strategy seemed successful at first, but this time it didn’t even last for 5 years. In 1998 the Asian financial crisis renewed doubts and the economy became stagnant for two years....
This is clear. Even with different strategies current account and trade deficits persists. The main goal for Brazil’s government is to overcome two sets of issues while also increasing exports (major priority). The first main problem was insufficient infrastructure and high tax burden known as ‘Brazilian cost’. The second problem related to the major priority of exportation. An assortment of barriers exist that keep world markets from purchasing Brazilian products. To remove these barriers there was an attempt to reinforce the Mercosur union.
The Mercosur union consists of a regional integration area of Paraguay, Uruguay, Argentina, and Brazil. This area became the largest buyer of Brazilian goods. Along with being a great market for exports, it was together a valuable trading bloc. However, due to the currency crisis of 1999 in Brazil, Argentina (who had its own economic difficulties), did not want to partake in trade with Brazil thanks to problems with exchange rates. Critics of the strategy believed Brazil gained all it could from the trading bloc and need to set up trade agreements with Europe and the United States.
Therefore, while it seemed viable to strengthen the Mercosur union, it was not feasible at the time due to the problems Argentina already experience and continues to experience and the underling exchange rate issues. Perhaps if there was a South American dollar kind of currency that every country in South America could use, then the Mercosur union would be more favorable. However, with the problematic currency crises of Argentina and Brazil, it would not be…
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