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Import Substitution Industrialization Essay

2210 words - 9 pages

Around the 1930s, Brazil and Latin American began following the process of Import Substitution Industrialization, which lasted until the end of the 1980s. The ISI policies devaluated the currency in order to boost exports and discourage imports, followed by adopting different exchange rates for goods (Watkins). ISI in Brazil had an interesting effect; it created a three-prong system of governmental, private, and foreign capital being directed at the infrastructure and heavy industry, manufacturing goods, and the production of durable goods. The program worked at first but then became a serious economic problem. When the 1980s came around Brazil realized that ISI policies lead to inefficient industries because of their lack of exposure to international competition, the policies ignoring the rural sector, and finally limiting the local producers. Following the end of the ISI policies, Brazil went through many plans to correct the economy and none seemed to work until the Real Plan made real changes to the country.
The Real Plan was introduced in Brazil in 1994 under the presidency of Itamar Franco. After the lost decade in Latin America and the many economic issues that had not been fixed in the country, the Real Plan was introduced. One of the major issues of the nation was the inflation, which was believed to be caused by the inertial inflation phenomenon (Joffe-Walt). Inertial inflation is a situation in which all the prices in the economy are continuously adjusted in comparison to an index of price by force. The plan caused prices throughout the nation to be adjusted on a daily basis according to price indices and the exchange rate in comparison to the US dollar. The currency of the Plan was called the Unidade Real de Valor or “URV” for short, and it was worth about $1 US (Joffe-Walt). The plan was to stabilize the Brazilian currency; many monetary and fiscal policies that stopped the government from spending too much money and raised interest rates followed the plan. This helped keep the inflation low and with the high interest rates, a lot of foreign capital began to flow into the country. The government’s actions in the military dictatorship made it difficult for Brazil to attract foreign capital however; the Government under the Real Plan had a strong focus on the balance of payments and tried to maintain a positive influx of capital into the nation by appeasing the international public and to improve the economy (Joffe-Watt). The Real Plan helped the economy so much that it began gaining value against the US currency, however in the late 1990s the currency began to devaluate. For the Real Plan to keep working the currency had to appreciate with the economy, this would assure a constant supply of foreign capital and products that maintained the market stable.
Following the Real Plan, Brazil had a minor economic downturn but after 2002, the economy has been increasing at a steady pace. The economy was able to grow around 4% in 2000,...

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