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Essay: How and why has the State influenced the development of industry in Brazil?

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by Nicholas Klar

The role of the state in the Brazilian economy is not a new thing. It has played a guiding hand since the time of colonisation, particularly so since the 1930's. It has helped to build Brazil into the ninth biggest industrial economy in the world, and arguably its most unequal society. In this paper it will be argued that this intervention has not always been a part of a grander scheme, but the result of circumstances forcing the government's hand. These include a desire for the rapid modernisation of a backward economy, a reaction to international economic crises, and the need to control foreign capital. [Baer, et al, p.23]

At other times intervention has been very deliberate. This was particularly so from the 1950's on as state intervention became more entrenched. It will also be argued that the state has been used by both local and foreign capital in a tripartite alliance to concentrate power around a small elite. Therefore when defining the state we can include not only bodies such as the legislature, bureaucracy, and military, but also forms of local and foreign capital which were used by 'the state' in Brazil.

Prior to the depression of the 1930's the state was mainly involved in the laissez-faire economy as 'climate setter'. The Regent of Portugal had given certain concessions to the British in return for their protection during the time of exile. Both the Regent and the new independent government (after 1889) were mainly concerned with tariff protection, price controls, and encouraging incipient industries through loans and guaranteed rates of return. The cohesion and centralisation of the state after 1889, plus the emerging strength of the military, paved the way for a peculiar mixture of liberalism and bureaucratic authoritar-ianism. Adam Smith's 'Invisible Hand' was quite visible in Brazil.

The state's largest involvement was in the financial sector, with state investment in banking dating back to 1861. This role grew substantially from the 1920's on. Some government loans were provided to local capital for them to open factories. However, the oligarchy generally wished to retain the agricultural export economic system and smashed attempts to establish manufacturing. [Graham p.157] Immigration policy was used to keep wages down. The state was mainly used as an 'instrument of domination' for the wealthy elite. The landed class could not remove the state from the economy, so they chose to control the state instead. This enabled them to intervene in the economy in ways advantageous to themselves. [Topik Evolution p.327, and Recent Studies p.182]


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It was the guaranteed rates of return that first forced the state to be involved in industry. Many of the foreign controlled railroads had become a burden upon the government because of this guarantee. They were also not expanding as the state desired due to price controls restricting profit. It was considered the cost of loans to nationalise and expand would be less burdensome, and more beneficial to the country as a whole. By 1929 around 50% of the network was in government hands, rising to almost complete control by the 1950's [Baer, et al, p.24]

By 1930 the state not only owned a large chunk of railroad mileage, but most major ports, the largest commercial and savings banks, and the largest publishing house. [Topik, Evolution p.327] The government had also moved by the 1930's to a final takeover of Brazil's principal shipping lines. Shipping had not been a stable industry in private hands, and the threat of war also made the adequate control of transportation essential. The Depression and World War II, aligned with the seizure of power by the populist Getulio Vargas, were to be the main events that set off major state involvement in the Brazilian economy, along with rapid industrialisation in the form of I.S.I.

The Depression had made the Brazilians realise how fragile their export oriented economy was, and they set out to cushion the blow. Also the Vargas regime was another step in the ongoing bourgeois revolution where the traditional planter oligarchy was (supposedly) losing it's grip on power. Vargas wished to rule according to nationalist and populist aspirations, and dominated Brazilian political life from 1937 until 1954. He desired I.S.I. not only as an engine of growth which would lead Brazil out of it's economic backwardness, but to promote new technology and also avoid denationalisation of the economy. There began the large rural drift into major cities (as still continues today). Vargas and his military regime organised the workers into state controlled unions, further embedding state control of industry.

The standard of living actually began to improve for the lower classes at this time. Coffee support programs were introduced, the first time the national government had been directly involved in the productive sector. It was seen as politically essential to still support the export sector. [Thorp. p.185] Foreign exchange controls were also introduced which would indirectly encourage the growth of new domestic industries. Autarquias were set up by the state to regulate and finance these and other industries such as timber, mining, sugar, and fishing. Price controls on electricity also sought to protect industry and consumers. [Baer, et al, pp.24,25]

The creation of Conselho Federal de Comercio Exterio in 1934 was the Brazilian government's first attempt to form some kind of economic plan. It sought to stimulate foreign trade and encourage investment in industry through incentives. When these incentives did not bring the required results the state stepped in to build their own industries as a last resort. The Companhia Siderugica Nacional steel mill built in 1937 is an excellent example. World War II highlighted Brazil's security considerations and need for self sufficiency in many basic areas. The regime founded many new enterprises during the war including a car plant, soda ash industry, and mineral exporting firm. [Ibid p.25] Later was added Petrobas, a petroleum exploration and refining corporation.

The state also sought during the 1940's to provide for balanced growth and encourage foreign assistance. Going into the 1950's the government set up bodies which would encourage growth in certain sectors. Most importantly the need was seen for the type of long term credit essential for industrialisation. The Banco Nacional de Desenvolvimento Economico (BDNE) was created in 1952 precisely for this purpose. As a cornerstone state policy the BDNE was to provide finance for the growth and modernisation of Brazil's infrastructure. In many projects and industries the BDNE actually received some sort of equity due to it's size, or a lack of capital on the developers behalf. [Ibid p.26]

Hence the state became reluctantly involved in industry outside it's own enterprises. Whilst the BDNE may have hoped to sell it's equity once the sector or enterprise was up and running, withdrawl was never easy. Many industries were far too large to be absorbed by the private sector, or guarantees were asked for potential buyers, or purchasers were afraid of maybe having to compete with the government, or for a multitude of other reasons. Therefore the state continued to play a larger role than it may have wished to. [Ibid p.27]

Also in the post war period Brazilian policy came under the influence of ECLA, the Economic Committee for Latin America. This U.N. body encouraged strong government control of industry. This was much to the chagrin of the United States who sought to safeguard their interests, and wished Latin American states to pursue free market policies. [Thorp, pp. 187-9] The end result was a mixture of the two which ultimately served to concentrate wealth in the hands of the rich. Vargas committed suicide in 1954, blaming imperialism and it's internal accomplices.

New national leader Kubitschek introduced vertical I.S.I., importing complete factories through government guarantees. Price controls that had been placed on electricity tariffs many years earlier were extended to include telecommunications, public transportation, petrol, rents, and foodstuffs. This was done in an effort to dampen rapidly rising inflation that began to hit during the late fifties. Controlled rates were considered to be in the public interest. Restricted profit saw a decline in quality of many of these services, eventually leading to government intervention or takeover in many of them. [Baer, et al, p.27]

Vargas' political heir Joao Goulart came to power in 1963 and tried to introduce agrarian reform and reduce the profit transfers of foreign corporations. After his military overthrow in 1964 (orchestrated by the U.S.), an alliance of military personnel and middle class technocrats forged a policy of industrial under-development. Internal factors took precedence over external dependency, and the military sought to wipe out opposition and forcibly impose a low wage, export oriented economy. The growth that occurred after 1964 was due to state allocation of resources rather than market forces. [Topik, Recent Studies, pp. 191-4]

Brazil's economy grew rapidly (around 10% p.a.) during the 60's and 70's, whilst the military regime consolidated various enterprises. There was outgrowth through the established state bodies (particularly in steel, power, petroleum, transportation, and telecommunications), and new authorities such as the National Housing Bank were introduced. Baer states that economic control by the state had made itself felt through various interrelated institutional channels,

'These included: the fiscal system, the central bank, government (state and federal) commercial and development banks, the autarquias, government (state and federal) productive enterprises, and the price control system.' [Baer, et al, p.28]

In 1969 the government sector accounted for over 60% of Brazil's fixed investment (including both direct government and public enterprise investment). Between 1947 -1972 the ratio of government expenditure to GDP almost doubled to 32.2% [Baer, Boom p.7] State control of Brazilian industry was not imposed for any ideological reasons but rather the desire of the government to rapidly industrialise a still backward economy. Evans referred to it as not 'state capitalism', but rather a 'controlled free enterprise model'. [Evans p.55]

With weak private industrial and financial sectors the government was forced to choose between foreign capital or the state as agents of growth. Foreign capital had most often been reluctant to perform in areas controlled by the government, but nationalist motives had also been strong - particularly under the Vargas regime. The post 1964 military regime turned toward attracting foreign capital and investment through the 'triple bribe' - low taxes and wages, and repressive labour laws. Adams referred to it as the 'Tri-Pe System', a three footed alliance of state, foreign investment, and local capital.

There began a huge penetration by the foreign sector as the government abandoned I.S.I. for a policy of E.O.I. The Tri-Pe became the normal modus operandi. [Evans p.54] The 'Doctrine of National Security' ensured worker dissent was silenced through oppression and imprisonment. In this the military sought to defeat communism whilst simultaneously building the economy. A tight rein was held on the press, congress and judiciary, all in the interests of protecting 'democracy'. The impact of the state now went far beyond just that of industry and the economy. [Bennet pp. 138-141]

At the same time U.S. investment quadrupled. American investors had previously been appalled by state control of the economy which they viewed as almost a form of socialism. Workers were effectively excluded from the tri-partite alliance as the military government forced a regressive redistribution of wealth. [Agiuar p.15] Foreign capital in Brazil used to been seen as 'the problem', needing state intervention. Now the neo-liberals saw it as exactly the opposite. The development theory applied 'from above' in Brazil - the classic 'trickle down' theory, ensured that wealth was passed from one set of elites to another.

Under the military a rapid expansion of the economy enabled lucrative contracts to be handed out to private contractors. [Aguiar p.18] During the 1970's the top 40% of the population earned 83.6% of the national income, whilst the bottom 40% earned only 7% [New Internationalist p.11] The huge amounts of money borrowed by the government for infrastructure projects led to the massive debt crisis of the 1980's. Unrest naturally deepened in Brazil, and the U.S., afraid of the repercussions that could occur, encouraged some form of redemocratisation. This supposedly was linked to the growth of the capitalist system. A form of democracy has returned but has not solved Brazil's problems.

The tripartite alliance still dominates the state, and today 10% of the population earns 47% of national income. [Bennet p.160] Around1% own 50% of the available land, meaning that colonisation of the Amazon Basin is not a problem of debt but a political problem. The economy is extremely regionalised with vast differences between the wealth of different states, and subject to frequent 'boom and bust cycles'. The latest president was forced from office under a cloud of fraud and disgrace. The elite, in the form of the state and their foreign allies, still very much hold control of the Brazilian economy today.


Aguiar, A. and F. Economic dictatorship versus democracy in Brazil, in Latin American Perspectives 40, 11, 1, Winter 1984

Baer, W., Britain and the onset of modernisation in Brazil 1850-1914, Cambridge 1972

Baer, W., Kerstenetzky, I., and Villela, A.V., The changing role of the State in the Brazilian economy, in World Development, Vol. 1, No.11, Nov. 1973

Baer, W., The Brazilian Boom 1968-72: an explanation and interpretation, in World Development, Vol. 1, No. 8, August 1973

Bennet, J., Brazil: Miracle or Mirage? in The Hunger Machine, Cambridge, 1987

Evans, P., Multinationals, state-owned corporations and the transformation of imperialism: a Brazilian case study, in Economic Development and Cultural Change, Vol. 26, No. 1, October 1977

New Internationalist No. 105

Thorp, R., A re-appraisal of the origins of I.S.I., 1930-1950, in Journal of Latin American Studies, Vol.24: Quincentenary Supplement, 1992

Topik, S., The evolution of the economic role of the Brazilian State 1889-1930, in Journal of Latin American Studies, Vol. 11, No. 2, 1979

Topik, S., Recent studies of the economic history of Brazil, in Latin American Research Revue: XXIII 1, 1988

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REF: Nicholas Klar, 1993, "How and why has the State influenced the development of industry in Brazil?" - + date accessed

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