BRAZIL: THE POLITICS OF ECONOMIC PRIORITIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001100130083-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 21, 2016
• Document Release Date: November 18, 2008
• Sequence Number: 83
• Publication Date: June 5, 1972
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
.I.~
~TA 10 C
Intelligence Memorandum
Brazil: The Politics of Economic Priorities
Secret
5 Jun 1972
No. 2039/72
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S. R.T
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
5 June 197?.
INTELLIGENCE MEMORANDUM
Brazil: The Politics of Economic Priorities
President Emilio Medici has recently indicated that he intends to take a
larger personal interest in economic matters. The military-backed administra-
tions that have governed Brazil since the 1964 "re7olution" have generally
left economic policy formulation and implementation in the hands of
capable civilian technicians. The result has been a record of rapid economic
growth. But Medici has been convinced by other advisers that too little
progress has been made in reducing inflation. His intrusion into economic
affair.,, and his decision to give inflation top billing may weaken his relation-
ship with his chief economic architect, Finance Minister Antonio Delfim
Neto. Thus far the rift is a small one, but, if it were to grow into a major
dispute within the government over economic policy, it could erode the
military unity upon which the regime depends and could weaken Medici's
ability to select his successor.
Note: This memorandum was prepared by the Office of Current Intelligence and co-
ordinated within CIA.
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SFCR.RT
Medico's Views
1. The President first auggestcd a shift in economic priorities in his
nationwide speech on 31 March, the eighth anniversary of the "revolution"
which overthrew leftist nationalist Joao Goulart. After reciting a litany of his
administration's economic accomplishments and goals, Medici turned to
emphasizing Brazil's problem of inflation, which he described as a "plague
upon this centurv." He stressed that it is wrong to maintain that inflation
must accompany development, declaring that, in fact, inflation hinders
economic growth, stimulates social instability, and cuts into the family
budget. While noting that annual price increases had been reduced from
about 90 percent in 1964 to less than 20 percent in 1971, Medici called for a
redoubling of government efforts to stabilize prices. He declared that federal
and state governments were expected to balance their budgets and avoid
putting pressure on the financial system. He urged private industry not to
indulge in unjustified price rises.
Reasons for Concern
3. Medici's preoccupation with inflation seems to have been lately
developed. The top economic goal of the 1964 "revolution" was to control
inflation, but since then economic growth has taken precedence. The govern-
ment estimates that the annual growth in the gross domestic product was at
least 9 percent in the 1968-70 period, and an extraordinary 11.3 percent last
year. Administration spokesmen, including Delfim Neto, have maintained
that, as long as rapid economic expansion continued, Brazil could live with
an inflation rate of some 2C percent, the rate that has been registered in each
of the past three years. These spokesmen argue that any drastic curb on
inflation might in fact hamper growth. But some government officials and
military officers believe that more effort should go into improving upon the
hard-won financial stability thus far achieved. These men view inflation
dark spot in the otherwise bright picture.
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4. Medici's decision to shift economic priorities may be in part a
response to military dissatisfaction. His action may have been fostered by a
worsening of the inflation problem over the past few months. Preliminary
evidence suggests that the rate of inflation picked up during the first quarter
of this year, after declining steadily during the latter part of 1971. The
inflationary rate also rose during the first quarter of last year, when drought
in some parts of the country forced up prices. Production failures do not
seem to explain the upsurge in prices early in 1972, however. The rise in
prices this year may signal the renewal of basic inflations: y pressures.
Brazilian officials are acutely sensitive to signs of inflationary pressures,
partly because of the country's unhappy past experience with inflation and
partly because of its balance of payments situation. During the past four
years, inflation has been restrained in part by a large flow of imports.
Despite the rapid growth of exports, the trade balance has fallen steadily,
and now runs a large deficit. Large amounts of foreign capital are coming
into the country; this capital from abroad has been more than adequate to
cover the trade deficit. Foreign exchange reserves are high and still growing.
Foreign debt is also increasing, however, and the government's concern
about this problem could be heightened by a fear that renewed inflation
would weaken the country's credit standing abroad and threaten the supply
of foreign capital that Brazil will continue to require for some years to come.
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Prospects
9. Medici's action in calling for major change in the country's economic
course without consulting Delfim Neto demonstrates that the minister is not
indispensable. When Medici selected his cabinet in 1969, he warned that the
men chosen had to work as a team and that he would not tolerate any
"errant stars." The President rec.1gnizes that Delfim Neto deserves much of
the success for Brazil's "economic miracle" and that he is held in particularly
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high regard in international financial circles. But the minister is fundamen-
tally a technician with no particular base of political support. His replar-.-
ment by an equally competent ecor-omist would probably cause no major
adverse reaction in Brazil.
10. Medici's concern over the performance of his finance minister is
based on a perception that a marked deterioration of the economy, espe-
cially a substantial rise in inflation, would pose a serious problem for his
administration. The legitimacy of his regime is based on effective perform-
ance in the economic area as well as on political tranquility. As long as senior
military officers and important economic groups, such as the Sao Paulo
industrialists, have confidence that the administration is fully in control of
the economy and is following sound policies, support of the government will
probably remain solid. A serious division of opinion in the officer corps,
either over goals or personalities, could eventually erode military unity.
Medici is doing everything possible to prevent issues from arising that could
endanger his control over the process of selecting his successor. He will
therefore be anxious to keep the rift with Delfim Neto from broadening into
a major dispute that could strain military unity and bring Medici's capacities
to control the succession into question.
11. If the President believes that Delfim Neto has come wholeheartedly
to support the goal of cutting inflation, the minister will probably be kept in
the government. Because of Delfim Neto's strong commitment to economic
growth, it may be difficult for him to accept an anti-inflationary policy that
could sacrifice some grow`... If Delfim Neto does not go along with the new
line, he seems destined to be replaced. In any case, he now must face
competition for influence in domestic economic policy-making, and lie will
be forced to be even nnom responsive to the priorities set by Medici and the
military.
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