Development with Inflationary Finance: 1945–63

Abstract

The period 1945–63 in Brazil is sometimes referred to as the period of easy import substitution. Until 1961, when the ability to industrialise through import substitution industrialisation had ended, industrialisation was financed to a large extent through inflation. Domestic firms were protected by selective exchange controls and the ‘law of similars’ which allowed high tariff barriers to be erected on competing products.¹ In general, firms financed long-term investment with the inflated retained earnings from protection, while financing working capital through short-term bank credit.² Industrialisation proceeded by initially developing consumer durable production. The short-term and medium-term financial system grew up around consumer durables where commercial banks discounted the accounts receivable or ‘duplicatas’ of firms needing working capital. This system was complemented by the appearance of the bills of exchange (letras de cambio) market. Vertical integration was promoted by the generous application of the law of similars, the encouragement of multinational corporations to operate in Brazil, and direct government production in heavy industries such as steel, petroleum, transportation, and public utilities.³