PROBABLE DEVELOPMENTS IN BRAZIL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01012A006200020007-6
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 23, 2016
• Document Release Date: May 20, 2013
• Sequence Number: 7
• Publication Date: March 15, 1955
• Content Type: NIE

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NIE 9 3 - 5 5
15 March 1955
41111111hT
NATIONAL INTELLIGENCE ESTIMATE
NUMBER 93-55
(Supersedes NIE 86)
PROBABLE DEVELOPMENTS IN BRAZIL
Submitted by the
DIRECTOR OF CENTRAL INTELLIGENCE
The following organizations participated in the preparation
of this estimate: The Central Intelligence Agency and the
intelligence organizations of the Departments of State, the
Army, the Navy, the Air Force, and The Joint Staff.
Concurred in by the
INTELLIGENCE ADVISORY COMMITTEE
on 15 March 1955. Concurring were the Special Assistant,
Intelligente, Department of State; the Assistant Chief of
Staff, 0-2, Department of the Army; the Director of Naval
Intelligence; the Director of Intelligence, USAF; and the
Deputy Director for Intelligence, The Joint Staff. The Atomic
Energy Commission Representative to the lAC and the Assist-
ant to the Director, Federal Bureau of Investigation, ab-
stained, the subject being outside of their jurisdiction.
DOCUMENT NC.
NC,1
CL?SS. TO: TS S C
NEXT
AUTH: HR
DATE. -kl.REV;ET_WER:,-
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2 3
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CENTRAL INTELLIGENCE AGENCY
DISSEMINATION NOTICE ?
1. This estimate was disseminated by the Central Intelligence Agency. This copy
is for the information and use of the recipient indicated on the front cover and of per-
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a. Special Assistant to the Secretary for Intelligence, for the Department of
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d. Director of Intelligence, USAF, for the Department of the Air Force
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f. Director of Intelligence, AEC, for the Atomic Energy Commission
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2. This copy may be retained, or destroyed by burning in accordance with appli-
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3. When an estimate is disseminated overseas, the overseas recipients may retain
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quested of the forwarding agency to retain it in accordance with IAC-D-69/2, 22
June 1953.
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
DISTRIBUTION:
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400020111E T
PROBABLE DEVELOPMENTS IN BRAZIL
THE PROBLEM
To estimate the current situation in Brazil and probable developments through
1955.
CONCLUSIONS
1. The suicide of President Vargas in
August 1954 and succession of the mod-
erate-conservative Cafe Filho administra-
tion have not resulted in any funda-
mental change in the Brazilian situation.
The economic situation remains precari-
ous. Inflation continues largely una-
bated and the persistent dollar shortage
is being met only by successive US loans.
The political situation is affected by per-
sistent social unrest, particularly in
urban areas, and is aggravated by uncer-
tainties relating to the presidential elec-
tion to be held in October 1955. (Paras.
11, 20, 44)
2. The new president to be elected in Oc-
tober is likely to be a man committed to
meet labor-leftist demands, assuming
that free elections are held. The strong-
est labor-leftist candidate is Juscelino
Kubitschek, governor of Minas Gerais
and a former adherent of Vargas. The
election of such a man is likely to create
a political situation similar to that which
existed under the Vargas regime; i.e.,
chronic political tension between the
executive and moderate-conservative ele-
ments, in Congress and especially in the
armed forces. The military, would be
confronted with a hard choice between
condoning further evolution to the left
or immediately imposing a government to
their liking.. (Paras. 23, 26)
3. A moderate-conservative could be
elected in a free contest only if the labor-
leftist vote were seriously split. Such a
candidate, elected with multiparty back-
ing and the approval of the military,
could probably enlist sufficient congres-
sional cooperation to effect some improve-
ments in the economic situation. A mod-
erate-conservative regime would be un-
likely to antagonize politically vocal con-
servative elements, and would be in a
position to employ force, if necessary, to
suppress social unrest. (Paras. 21, 24,
25)
4. There is little chance that the admin-
istration to be elected in October will be
able to deal effectively with Brazil's deep-
seated and politically dangerous economic
difficulties. In fact, as long as any Bra-
zilian administration assumes that dollar
loans are readily available, there is little
likelihood that it will incur the political
SNOMMT
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aiiingat
risk involved in stabilizing the economy.
However, the administration would be
even less willing to follow politically dan-
gerous policies in the absence of dollar
loans. Rather, it would be under ex-
treme pressure to seek radical, nation-
alistic solutions to Brazil's economic prob-
lems. In any case, effective action over
an extended period will be required to
stabilize the Brazilian economy. (Para.
47)
5. The Brazilian Communist Party, al-
though outlawed, has approximately
doubled in numbers during the last two
years. It is now estimated to have 100,-
000-120,000 members and a much larger
number of sympathizers. For some time
to come, it will probably continue to in-
crease in numbers and political influence.
It is unlikely, however, that the party
could, within the foreseeable future, gain
sufficient strength to take control of Bra-
zil by electoral means or by force.
(Paras. 27, 34)
2
6. Brazil will almost certainly continue to
support the US on major issues between
the US and the Soviet Bloc, but, if not
granted the special consideration to
which it feels entitled, with particular
reference to dollar loans, may pursue an
increasingly independent course. Brazil
will seek to establish closer economic re-
lations in Latin America and with West-
ern Europe, and will also seek to increase
its now minor nonstrategic trade with the
Soviet Bloc. (Para. 57)
7. Brazil will continue to oppose Argen-
tine bids for leadership in Latin America
and the development of an Argentine-led
bloc. Fundamentally, Brazil deprecates
the idea of competing blocs in Latin
America and promotes instead the con-
cept of Hemisphere solidarity. (Para.
55)
8. In the event of general war, Brazil
would almost certainly participate active-
ly in support of the US. (Para. 56)
DISCUSSION
I. INTRODUCTION
9. Brazil is a major power within the Latin
American community. It exercises consider-
able influence in both the Organization of
American States and the United Nations.
Moreover, Brazil is strategically located with
respect to sea and air routes in the South
Atlantic and is an important source of stra-
tegic materials, notably metallurgical man-
ganese, quartz crystals, beryl ore, mica, tung-
sten, tantalite, and castor oil. It is the only
Latin American country with known sizeable
deposits of atomic energy raw materials, prin-
cipally thorium. The Brazilian armed forces
are capable of making an important contri-
bution to Hemisphere defense. Traditionally,
Brazil has cooperated closely with the United
States on important international questions.
10. Except in some geographical areas (e.g.,
Sao Paulo) little progress has been made in
developing Brazil's large human and material
resources. The national economy continues
to depend on exports of agricultural products.
Earnings from these exports have not been
sufficient to sustain the postwar rate of in-
dustrial development, while at the same time
economic nationalism has impeded foreign in-
vestment. The industrialization which has
occurred since 1930 has been accompanied by
severe inflation and by economic and social
strains felt particularly by the rapidly grow-
ing urban population.
11. Heavy migrations from the back country
into the cities have brought hundreds of
thousands of Brazilians into their first con-
tact with higher standards of living, glaring
*NitiefArigi:
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SOLIIIIretOr 3
inequalities, and the insecurity of urban ex-
istence. Acutely distressed by inflation, the
urban masses generally are increasingly dis-
satisfied with their level of living and clam-
orous for improvement. At the same time
middle and upper class conservatives, includ-
ing Army leaders as well as commercial and
industrial interests, have been disturbed by
the adverse prospects for maintaining a high
rate of economic development and by the
growth of labor-leftist and Communist
strength, which threatens their dominant
position in Brazilian life. The conflicts and
tensions which inevitably arise in such time
of rapid economic and social change are con-
tinuously exploited in Brazil by both extreme
nationalists and Communists. Brazil, how-
ever, has been less subject to political violence
than most Latin American countries.
II. THE POLITICAL SITUATION AND
PROSPECTS
The Collapse of the Vargas Regime
12. The present administration came to power
in August 1954 as a result of the suicide of
President Getulio Vargas. The Vice-Presi-
dent, Joao Cafe Filho, thereupon succeeded
constitutionally to the presidency for the re-
mainder of Vargas' term (until 31 January
1956) . An understanding of the character of
the. Vargas regime and the causes of its col-
lapse is prerequisite to an estimate of the
present political situation and prospects.
13. Vargas was an astute politician who
shrewdly manipulated opposing factions and
successfully posed as the friend of the com-
mon people. During his first period in power
(1930-1945) he established the quasi-fascist
"New State" as an ideological facade for his
strong personal rule. He espoused cultural
and economic nationalism, established federal
control over the states, abolished political
parties, suppressed all opposition of both the
left and right, undertook government inter-
vention and initiative in economic develop-
ment, promoted industrialization, concerned
himself with amelioration of the living condi-
tions of the urban masses, extended the fran-
chise, and sought to mobilize and control
urban labor as a political force through gov-
ernment-sponsored labor unions. It was dur-
ing this period that urban lower income
groups began to become an important factor
in Brazilian politics.
14. In 1945, in response to a growing opposi-
tion to totalitarianism, the Brazilian Army
quietly deposed Vargas and established a more
normal federal republican regime with Gen-
eral Eurico Gaspar Dutra as constitutionally
elected president. The two principal political
parties which emerged were the Social Demo-
cratic Party (PSD) and the National Demo-
cratic Union (UDN). Both were heteroge-
neous in composition, but received their direc-
tion primarily from upper middle class ele-
ments and were correspondingly moderate-
conservative in political outlook. The pri-
mary difference between them was that the
PSD was led by men who had been promi-
nently associated with Vargas in the "New
State," while many leaders of the UDN had
opposed Vargas.
15. The moderate-conservative Dutra admin-
istration failed to cope effectively with the
growing economic hardships suffered by lower
middle class and labor groups. Partly as a
result of this failure, Vargas was able to re-
tain a large personal following and to build
up a personal political machine ? the Bra-
zilian Labor Party (PTB) ? based primarily
on organized labor. In the 1950 presidential
campaign Vargas exploited both the discon-
tent of lower income groups and the inepti-
tude of conservative political leaders. He was
elected with 49 percent of the popular vote,
as against 30 percent for his nearest com-
petitor. However, moderate-conservatives
(the PSD and UDN) continued to predominate
in both houses of Congress and to control
most state and municipal governments.
16. Vargas was no more successful in coping
with Brazil's mounting economic difficulties
than his predecessor had been. In contrast
to the vigor and self-confidence of his earlier
rule, his policy was indecisive, largely because
of his lack of an assured majority in Congress.
Although the PSD generally supported him,
it did so at a policy price which tended to
alienate his labor-leftist following and its con-
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tinued support could not be relied upon.
Moderate-conservatives in general continued
to distrust him on account of his past record,
his labor-leftist associations, his apparent in-
difference toward Communism, and his known
tendency to subordinate pressing economic
considerations to the requirements of political
expediency. By vacillating between policies
designed to gain moderate-conservative sup-
port and measures calculated to regain the
loyalty of his indispensable labor-leftist fol-
lowing, Vargas forfeited the confidence of
both groups.
17. By early 1954 the economic and political
situations in Brazil were both extremely pre-
carious. Policies pursued under moderate in-
fluence had temporarily averted a foreign ex-
change crisis, but inflation continued un-
checked. With congressional elections ap-
proaching, Vargas turned again to the left,
the symbol of this decision being a decree
doubling the minimum wage regardless of the
economic consequences. By adroit politics,
Vargas managed to maintain his position
despite conservative efforts to oust him on
this account, but political tension was raised
to such a point that his regime was vulner-
able to any political accident. The accident
occurred when an Air Force officer was killed
by Vargas henchmen who were attempting to
assassinate an editor who had been vocifer-
ously critical of the regime. The public re-
action excited by the Air Force investigation
of this affair deprived Vargas of popular sup-
port at a time when moderates and conserva-
tives were already out to get rid of him. In
these circumstances the Army and Navy ac-
ceded to Air Force demands that Vargas be
forced to resign.
18. This political intervention by the Army,
as the dominant military force, was in keep-
ing with Brazilian traditions. The Army
normally remains aloof from politics, support-
ing the incumbent government, whatever its
political complexion, but the Army also con-
siders that it has an overriding responsibility
for the preservation of order and of estab-
lished institutions. It had already warned
Vargas, in February 1954, when it demanded
4
and obtained the dismissal of his Minister of
Labor. It acted in August, not only in re-
sponse to Air Force pressure, but also to check
the administration's sharp trend to the left
and to avert the implicit danger of serious
civil disturbances.
The Cafe Administration
19. Cafe Filho's known personal integrity and
political independence raised hopes that he
might succeed where Vargas had failed in pro-
viding effective solutions for Brazil's politico-
economic difficulties. Although himself po-
litically left of center, Cafe had come to power
with the support of the moderate-conserva-
tives and the military. His cabinet includes
representatives of all the principal parties as
well as men without party affiliation. For
the first time in recent years the Brazilian
cabinet is composed predominantly of men of
high intellectual and moral character, con-
cerned primarily with the national welfare
rather than with personal or party interest.
20. As was the case with its predecessors, the
new administration's most pressing problems
are economic, particularly the foreign ex-
change shortage and inflation. It has at-
tempted to meet them by advancing a pro-
gram of retrenchment and austerity such as
no Brazilian government has hitherto dared
to propose. Government expenditures have
been reduced and government support of in-
dustrial expansion has been withdrawn. In
large part, however, the administration's re-
trenchment program has been frustrated by
lack of support in Congress. Inflation has
not been substantially retarded.
21. The October 1954 congressional elections
failed to provide a clear mandate for or against
the Cafe program. The moderate-conserva-
tive parties retained a combined majority in
Congress and could enact the Cafe program
if they united to do so. Party discipline in
Congress is lax, however. Moreover, party
politicians are understandably disinclined to
vote for tax increases, credit restrictions, re-
duction of agricultural price supports, or
curtailment of working class benefits in a
presidential election year.
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v110010110gT 5
The Approaching Presidential Election
22. Party preparations for the presidential
election to be held in October 1955 are taking
place in unusual circumstances. For twenty-
five years Brazilian politics have taken the
form of support for or opposition to Getulio
Vargas. His death has removed their accus-
tomed point of reference. The labor-leftist
elements who followed him are now leader-
less, but otherwise moderate politicians are
tempted to compete for the labor-leftist vote,
realizing that the direction which it takes will
probably determine the outcome of the elec-
tion. On the other hand, the armed forces
are taking a greater than usual interest in
politics. They are strongly opposed to the
election of a Vargas-associated labor-leftist,
and, if political developments should tend
toward that result, they might intervene to
prevent the election of such a candidate.
23. In order to avoid incitement of the masses
by competing candidates, and also to ensure
the election of a president satisfactory to
themselves, the armed forces have favored the
idea of a coalition of all major parties in sup-
port of a single candidate more or less com-
mitted to carry out the policies of the Cafe
administration. The UDN has been receptive
to this idea. The PSD, however, under the
influence of its pro-Vargas wing, has chosen
to nominate Juscelino Kubitschek, the gov-
ernor of Minas Gerais, and to seek a coalition
with the labor-leftist PTB. The PTB is not
yet ready to commit itself to Kubitschek and
the PSD, but could probably be persuaded to
do so by proper political concessions. In con-
junction with Kubitschek's popular appeal, a
PSD-PTB combination would probably be suf-
ficient to ensure his victory in a free election.
It might, however, provoke military interven-
tion in the election ? unless the military were
privately persuaded that Kubitschek, in office,
would pursue acceptable policies.
24. The outcome of the election will depend
primarily on whether the bulk of the labor-
leftist vote can be won by Kubitschek (or any
other single candidate), or whether it will be
divided among many candidates. The latter
contingency is a possibility. Other potential
candidates with labor-leftist appeal are Ad-
hemar de Barros, Janio Quadros, and Estillac
Leal, representing diverse factions. The elec-
tion of a moderate-conservative to the presi-
dency of Brazil would be possible only in the
event of a serious division of the labor-leftist
vote.
25. The action of the UDN will be greatly in-
fluenced by the prospect for division of the
labor-leftist vote. Against a PSD-PTB coali-
tion, the UDN would be likely to seek a cor-
responding coalition with Janio Quadros, the
independent leftist governor of Sao Paulo. If,
however, it appears that the labor-leftist vote
will be divided, the UDN might nominate a
moderate-conservative with military connec-
tions, such as General Juarez Tavora.
26. The next president of Brazil is likely to
be a man (such as Kubitschek) committed to
pursue labor-leftist policies. The election of
such a president would create a political sit-
uation similar to that which existed during
the Vargas regime. The armed forces would
be confronted with a hard choice between
condoning further evolution to the left, at
the risk of eventually losing their power to
act as arbiter in Brazilian politics, or imme-
diately imposing a government to their liking,
at the risk of precipitating bitter internal dis-
sension between labor-leftist and conserva-
tive-military elements and possibly severe civil
disturbances. The prospect, at best, is for
continuing political tension in Brazil.
The Communists
27. The Brazilian Communist Party (PCB)
lost strength after it was outlawed in 1947.
However, since 1951 (when Vargas returned
to power), and especially during the last two
years, it has had remarkable success in rais-
ing funds and recruiting new members. It is
now estimated to have 100,000 to 120,000
members and a much larger number of sym-
pathizers. It draws its chief support from
urban labor and lower middle class groups,
although the leadership of the party is com-
posed largely of professional men and intel-
lectuals. Retired military personnel also
have been active in the leadership of front
organizations. For the present, the party's
primary effort is directed toward the consoli-
T
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SECRET 6
dation of its recent gains, rather than toward
further expansion. The Communists not
only maintain numerous newspapers for the
dissemination of propaganda, but have also
established an extensive school system for the
indoctrination of party cadres. They talk of
developing the party in accordance with "the
Chinese revolutionary pattern": i.e., by agita-
tion and organization among the peasants
leading to guerrilla resistance in the back
country and to eventual revolution. Their
present strength is concentrated in and
around the city of Rio de Janeiro, in the im-
portant state of Sao Paulo, and in the stra-
tegic "hump" of Brazil.,
28. The PCB appears to have two immediate
objectives: (a) to stimulate and exploit pop-
ular discontent in order to discredit moderate-
conservative government, and (b) to stimu-
late and exploit anti-US nationalism in order
to neutralize Brazil as an effective ally of the
United States. A good example of Commu-
nist technique is the agitation, in conjunction
with that of non-Communist ultranation-
alists, which contributed to enactment of the
existing law excluding foreign capital from
participation in the development of Brazil's
petroleum resources.
29. Vargas was largely indifferent to the rapid
revival of Communism in Brazil during his
presidency. No Communist sympathizer him-
self, he presumably supposed that he could
control the situation. His indifference, how-
ever, permitted intensive Communist infiltra-
tion of some labor organizations, and, to a
lesser extent, of the bureaucracy and the
armed forces.
30. The Cafe administration has taken some
action to neutralize this Communist infiltra-
tion. Military officers of known Communist
sympathies have been retired or reassigned;
known Communists among the enlisted per-
sonnel are being court-martialed. Commu-
nists are also being removed from positions of
labor union leadership. As yet, however, lit-
tle has been accomplished toward removing
Communists from the bureaucracy or from
elective public office.
The attached map shows more fully the distri-
bution of Communist strength in Brazil.
31. Possibly because the Brazilian Catholic
Church underestimates the strength of Com-
munism in Brazil, it has not engaged in a
militant campaign against Communism. In
any case, Church influence in Brazilian poli-
tics is usually weak.
32. Inasmuch as the Communist Party, as
such, is still outlawed, Communist political
action must be effected through other political
parties. The extent of Communist penetra-
tion of other political organizations is un-
known; it may be extensive in the PTB. In
the 1954 congressional election at least five
Communists and Communist sympathizers,
running under non-Communist party labels,
were elected, as compared with one such dep-
uty in the previous Congress.
33. The Brazilian Communists may be able to
derive advantage from Vargas' suicide and
from his "political testament," which coin-
cided remarkably with the Communist Party
line. Their previous condemnation of Vargas
has been obscured by their effort to incite a
violent popular reaction to his suicide. They
now are able to claim him as a martyr to
"Yankee imperialism." Furthermore, in the
forthcoming presidential election they will be
in an advantageous position to push their
united front program, auctioning a large bloc
of assured votes in exchange for political con-
cessions.
34. For some time to come, the Brazilian Com-
munist Party will probably continue to in-
crease in membership and political influence.
It is not likely, however, that the party could,
within the foreseeable future, gain sufficient
strength to win direct control of Brazil by
electoral means or by force. Its influence on
Brazilian policy will be exerted through the
popular pressures engendered by its exploita-
tion of social discontent and nationalist
tendencies in the non-Communist population.
III. THE ECONOMIC SITUATION AND
PROSPECTS
35. Brazil has the greatest economic potential
of any country in Latin America. Terri-
torially larger than the United States, it has
a fast-growing population of about 58 million,
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which is about double that of the next largest
Latin American republic (Mexico). Although
agriculture occupies over two-thirds of the
population, only five percent of the arable
land is cultivated. Nevertheless, Brazil is the
world's largest producer of coffee and ba-
nanas, ranks second in the production of cacao
and citrus fruits, and is at least in fifth posi-
tion in the production of sugar, tobacco, corn,
and cotton. Brazil's herds of cattle and pigs
are fourth largest in the world. Although
much of the country reniains to be explored,
Brazil is believed to have the resources for
self-sufficiency in most of the major minerals,
the principal exceptions being tin, zinc, lead,
copper, sulphur, and coal. Brazil is an im-
portant area for US trade (trade both ways
in 1953 was approximately $1.1 billion) and
for direct investment of US private capital.
By 1953 such investment totalled slightly over
$1 billion.
36. Brazil's economic growth since 1930 has
been rapid. Since the end of World War II
gross investment has amounted to about 16
percent of GNP annually, the overwhelming
proportion of which has been devoted to in-
dustry and construction. ' GNP increased
about five percent annually from an estimated
$10.8 billion in 1950 to $12.5 billion (at 1950
prices) in 1953. By 1951 the manufacturing
sector (including construction) had come to
contribute 24.5 percent to total GNP, thus
equaling the contribution made by the agri-
cultural sector. Brazil has continued, how-
ever, to rely overwhelmingly on agricultural
and animal exports for foreign exchange
earnings. Such exports, except during World
War II, have accounted for well over 90 per-
cent of Brazilian exports, with coffee contrib-
uting between 40 and 70 percent. (Brazil
normally supplies about one-half of US coffee
imports, thus acquiring the foreign exchange
which has permitted Brazil to become one of
the important American markets for ma-
chinery and vehicles. During 1953 and 1954
Brazil supplied only 40 percent of the US
coffee market, however. In the latter year
the decrease was particularly serious for Bra-
zil, since total US coffee imports were off 19
percent under the impact of an unprecedent-
edly high coffee price.)
37. Divergences in the rate of growth between
the various sectors of the economy have given
rise to serious maladjustments. Rapid indus-
trial expansion has not been accompanied by
a proportionate development of transporta-
tion and power facilities. Agricultural and
mining production for export has been
neglected in favor of manufacturing indus-
tries. Moreover, emphasis upon capital goods
industries within the industrial sector tended
to create an imbalance between the supply
of and effective demand for consumers' goods.
Inadequacies in basic productive facilities and
high cost of distributive services contributed
to high unit costs of consumer goods, main-
tained and encouraged by a deliberate policy
of protection through tariff and foreign ex-
change regulations.
38. The rapid growth of the Brazilian econ-
omy has occurred under conditions of unin-
terrupted inflation. In the last 15 years the
cost of living has been increasing at an annual
rate of more than 16 percent; in the first 11
months of 1954 the cost of living rose 22 per-
cent. Prices at the end of 1954 were about
770 percent above those for 1939. This rate
of price increase is of a different order of
magnitude from that historically experienced
by Brazil, namely, about 2.5 percent annually.
In general, wages have lagged behind prices.
The inflation has been the result of several
factors. For some years prior to 1947, it was
stimulated by the accumulation of substan-
tial foreign exchange surpluses, which Brazil
was unable to convert into consumers' goods.
Since 1947, domestic factors such as govern-
ment deficits and the expansion of credit have
fostered the inflation. Of considerable im-
portance also has been the fact that a large
proportion of investment was of the long-
term variety which did not result in an in-
creased output of consumer goods.
39. Brazil's effort to maintain the rate of
industrialization, even at the cost of severe
inflation, has led to recurrent foreign ex-
change shortages. In order to permit domes-
tic industry to purchase its needed imports
cheaply, a highly inflated value for the cru-
zeiro was maintained. This over-valuation
caused a weakening of the competitive posi-
SECRET
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tion of Brazilian exports and a concurrent
loss of foreign exchange. At the same time
expansion of industry stimulated Brazil's de-
mand for raw materials, capital goods, and
fuels, most importantly petroleum. Although
industrial production was able to provide sig-
nificant foreign exchange earnings during
World War II, during the postwar period it
was unable to compete with the older indus-
trialized countries, in part because of the over-
valuation of the cruzeiro. In the same man-
ner, although the Brazilian Government has
insisted in recent years that new foreign in-
vestment be "constructive," it has given
greater emphasis to further industrialization
than to investments that would produce for-
eign exchange. Consequently the drain on
foreign exchange resources caused by Brazil's
rising industrial production has been un-
matched by new foreign exchange earning
power.
40. Brazil's foreign exchange difficulties are
dominated by the large and increasing de7
mand for fuel imports. About one-third of
anticipated 1955 dollar receipts are allocated
to petroleum imports. The wisdom of secur-
ing foreign capital to find and exploit the
domestic petroleum resources, which have
been inferred from Brazil's geological struc-
ture, has long been recognized by many prom-
inent Brazilians, in view of the lack of good
coal reserves and poorly located hydroelectric
resources. In 1953, however, extreme nation-
alists and Communists spearheaded passage
of legislation establishing a government
petroleum monopoly and excluding foreign
capital, and they have since prevented a modi-
fication of the legislation by the new admin-
istration. Brazil's monopoly is not likely to
succeed except, perhaps, over the long term,
because of the country's lack of funds and
technical skill. Yet, in the absence of indi-
genous fuel resources, further economic
growth will place increasing strains on the
already inadequate foreign exchange re-
sources.
41. During 1953 a serious attempt was made
to meet the foreign exchange problem. Early
in the year the Vargas administration was
faced with a foreign exchange crisis and a
8
large commercial debt backlog, which was
temporarily resolved by a $300 million Ex-
port-Import Bank loan. Shortly thereafter a
new Finance Minister, Oswaldo Aranha, at-
tempted to reorient the economy to eliminate
some of the obvious causes of disequilibrium.
He made a determined effort to stimulate
exports by providing subsidies and exchange
incentives. Simultaneously, he initiated a
foreign exchange system which restricted the
volume of all imports, but especially the less
essential ones. Particularly important was
the preference given through exchange con-
trol to the development of the retarded basic
service industries such as transportation and
power. Aranha failed, however, to secure ade-
quate executive or congressional support.
The executive branch feared that a curbing
of inflation with the consequent restriction of
industrial development would seriously under-
mine Vargas' already weakened political posi-
tion. The Congress, on the other hand, re-
fused to accept the political risk involved in
opening Brazilian oil to foreign investment.
Both Congress and Vargas apparently hoped
that large coffee exports at favorable prices
would postpone or eliminate the problem of
drastic internal economic readjustment.
42. However, coffee prices weakened in May
1954, seriously aggravating Brazil's economic
position. Vargas then attempted to peg the
price of coffee, a move which resulted in a
serious curtailment in Brazil's volume of ex-
ports and earnings of exchange. Commercial
exchange obligations once again rose to seri-
ous proportions. At the same time inflation
was permitted to run, fed by treasury deficits,
expansion of bank credits, and the de facto
devaluation of the cruzeiro. The price-wage
spiral was put into motion once again by a
series of wage increases, particularly by the
doubling of minimum wages decreed by Var-
gas as of 1 May 1954.
43. The Cafe administration has demon-
strated its awareness of the necessity for
politically unpalatable measures to meet
Brazil's economic difficulties. However, it
has not felt itself sufficiently strong politi-
cally to propose such basic reforms as re-
striction of wages, abandonment of coffee
481546ker
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gaillitr 9
stabilization, or the admission of foreign cap-
ital for petroleum development. Moreover,
congressional cooperation has not been forth-
coming.
44. On taking office the Cafe administration
was immediately faced with a foreign ex-
change crisis which was met with the help
of a $200 million loan from US banks. At
the same time it undertook a program to raise
exports and reduce imports, particularly in
relation to the dollar area. The trade pat-
tern planned for 1955 provides for imports
from convertible currency areas (primarily
the US) in the amount of $532 million, a
sharp decrease from the $755 million of 1954.
The machinery for implementing this decrease
lies in a purely administrative reduction of
the dollar exchange auctioned to importers.
Such a reduction is probably feasible since
some imports can be shifted to the noncon-
vertible account where there is little payment
difficulty except in connection with sterling.
Exports to the convertible currency areas are
to be raised from $580 million in 1954 to $720
million in 1955. Brazil's recapture of its tra-
ditional share of the American coffee market
will be essential to the realization of this ex-
port goal.
45. The major deterrent to adequate coffee
sales in the past eight months has been the
price stabilization program instituted by Var-
gas in the last months of his regime, with
nationalist overtones of "protecting" Bra-
zilian coffee interests from "international
financiers." Under the program a minimum
export price was established, and the Bank
of Brazil granted to coffee interests loans
equaling 100 percent of the value of the cof-
fee stocks, valued at the equivalent of a New
York price of 87 cents per pound. When the
policy was instituted it was hoped that the
New York price would be forced up. In fact,
it has decreased about 33 percent, mostly in
two stages, in August 1954 and February 1955.
Meanwhile the coffee interests are still re-
ceiving the same minimum cruzeiro price and
are under no financial pressure to dispose of
their stocks, and foreign exchange receipts
from coffee sales are running below Brazil's
minimum requirements. As a result of this,
Brazil was forced to seek new financial aid
early this year. On 9 February 1955 the
Export-Import Bank granted a $75 million
credit which Brazil may draw on at the rate
of $15 million monthly, if necessary to meet
the estimated minimum dollar exchange re-
quirements. International financial commit-
ments in dollars, which cannot be further
postponed, require foreign exchange earnings
(including drawings under the new $75
million Export-Import Bank credit) of at least
$60 million monthly; such earnings can be
obtained only from exports of coffee to the
United States in greater quantity than in Jan-
uary. If this does not take place, the use of
cash balances and existing borrowing rights
from private American banks might close the
gap for a short time, but subsequently Brazil
would again seek US Government aid. The
Brazilian Government may believe that
American exporters, alarmed at the loss of
their markets in Brazil to European firms un-
affected by the dollar shortage, would success-
fully press the US Government to grant effec-
tive financial aid.
46. The Cafe administration recognizes the
need to check inflation, but, in the existing
political situation, the courses open to it are
narrowly circumscribed. It has restricted
bank credit. It has also proposed new taxes
in order to reduce its deficit spending, but
could obtain from Congress only one-third of
the tax increase requested. It thereupon un-
dertook to reduce government expenditures,
but has actually been obliged to grant to its
civil and military employees "temporary" pay
increases not provided for in the budget.
Moreover, the Brazilian Government is re-
sponsible, in the public mind, for the coun-
try's continued economic growth, and is there-
fore under heavy pressure to maintain a high
rate of economic activity. A continued de-
cline in the rate of private investment, such
as occurred in 1953-1954, would probably
compel the government to resume expendi-
tures for public works, even though it is fully
aware of the inflationary effects of such a
policy. Consequently, there is little prospect
that the Cafe administration can substan-
tially retard the progress of inflation.
zpRORINT
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slimegert
47. In these circumstances (paras. 43-46) the
Cafe administration cannot be expected to
accomplish much toward the solution of Bra-
zil's deepseated and politically dangerous
economic difficulties. The administration to
be elected in October 1955 will have to face
the same problems. There is little prospect
that it will have the political strength to im-
pose drastic remedies. In fact, as long as any
Brazilian administration assumes that dollar
loans are readily available, there is little like-
lihood that it will incur the political risks
involved in stabilizing the economy. How-
ever, the administration would be even less
willing to follow politically dangerous policies
in the absence of dollar loans. Rather, it
would be under extreme pressure to apply
radical, nationalistic solutions to Brazil's
economic problems. In any case, effective
action over an extended period will be re-
quired to stabilize the Brazilian economy.
IV. THE ARMED FORCES
48. The Brazilian armed forces, organized and
trained on US lines, have an over-all strength
of approximately 204,000. The Army, num-
bering 108,000, consists of 7 infantry, 1
armored, and 4 cavalry divisions, numerous
separate combat units, and supporting troops.
In addition, there are 55,000 militarized police
available for local and regional use. The
Navy, with a personnel strength of 21,000,
has a combat force of 2 light cruisers, 7 de-
stroyers, and 32 smaller escort, patrol, and
mining vessels. Two additional destroyers
now under construction may become available
during 1955. The Air Force, with a personnel
strength of 20,000 (including about 1,000
pilots) , maintains 5 fighter, 2 light bomber,
2 patrol, 2 reconnaissance, and ,2 transport
squadrons. It has about 950 combat, recon-
naissance, and transport aircraft, including
68 British jet fighters.
49. The operational effectiveness of the three
combatant services is high by Latin American
standards as a result of their reorganization,
re-equipment, and operational experience with
US forces in World War II, and of the assist-
ance of US military missions. Their effec-
tiveness is impaired, however, by a lack of
10
adequate support facilities, poor maintenance
and general obsolescence of equipment, and
dependence on foreign sources for resupply of
material, munitions, and fuel. A severe dol-
lar shortage and the high cost or unavail-
ability of US military supplies have caused
Brazil to turn to Europe for some aircraft
and military equipment, to the detriment of
Hemisphere arms standardization. However,
procurement from this source is also severely
limited by fiscal considerations.
50. Brazil participates actively in the Inter-
American Defense Board and has a bilateral
military assistance agreement with the US.
Under this agreement, Brazil has designated
certain units as available for Hemisphere de-
fense, including service outside its own na-
tional territory. With MDAP support, the
equipment and training of these units will be
improved.
51. The Brazilian armed forces are adequate
to maintain internal security and to deter
aggression by any neighboring power. They
could not repel a major overseas invasion
without US assistance. In the event of gen-
eral war they could probably protect strate-
gically important installations and facilities
from extensive sabotage and from possible
raids. The Brazilian Navy and Air Force
have limited convoy escort and antisubmarine
warfare capabilities, but effective patrol of
the long Brazilian coast would require the
active participation of US forces. With US
logistic support the Army could provide a
small expeditionary force.
V. PROBABLE FOREIGN POLICY
52. Brazil has traditionally regarded itself as
the particular friend and ally of the US in
Latin America. With a self-confidence based
on its vast extent and relative political sta-
bility, it has considered itself superior to its
Spanish-speaking neighbors and the natural
associate of the US. Moreover, the US is by
far Brazil's most important coffee market and
the only important source of needed financial
and technical aid. For these feasons Brazil
strongly desires the friendship and support of
the US and is highly sensitive to any US
tendency not to accord Brazil special consid-
,,.&stegr
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Qtrividitivr 11
eration and favor. At the same time Brazil
is sensitive to any implication of US tutelage.
53. In recent years US?Brazilian relations
have occasionally been impaired by growing
Brazilian nationalism, which has produced
friction in both economic and politico-military
affairs. An important factor in this develop-
ment has been a growing feeling in Brazil
that the US undervalues Brazil's friendship
and tends to take it for granted. In partic-
ular, Brazilians feel that US economic and
financial assistance to Brazil has not been
commensurate with Brazil's past services and
present strategic importance to the US, or
with Brazil's value to the US as a moderating
influence in Latin America and in UN affairs.
In common with other Latin Americans, Bra-
zilians resent what they regard as the
favored position of Europe and Asia respect-
ing the amount and terms of US assistance.
54. Brazil has made no move to restore diplo-
matic relations with the USSR which Brazil
severed in 1947. It maintains diplomatic re-
lations with Poland and Czechoslovakia and
has received a commercial mission from Hun-
gary. Brazil's trade with the Bloc has in-
creased markedly over the past year, but is
still very small. There are mounting popular
pressures for expanding relations with the
Bloc. This idea is generally attractive be-
cause of Brazil's need to find new markets
for its exports, and also probably at official
levels as a means of strengthening Brazil's
bargaining position vis-a-vis the US. Com-
munists and their sympathizers are pressing
the idea of large Bloc markets for their own
ulterior purposes, with considerable nation-
alist support.
55. In the Latin American community, Brazil
has always opposed Argentine bids for lead-
ership. In particular, it has sought to coun-
ter Argentine designs on Uruguay, Paraguay,
and Bolivia. Fundamentally, Brazil depre-
cates the idea of competing blocs in Latin
America, and promotes instead the concept
of Hemisphere solidarity.
56. Brazil's political and military leaders
favor the concept of a collective Hemisphere
defense, and they also seem opposed to neu-
tralist positions in connection with broader
international problems. In event of general
war, Brazil almost certainly would participate
actively in support of the US.
57. Brazil almost certainly will continue to
support the US on major issues between the
US and the Soviet Bloc. Barring an increase
in the influence of the Communist and
extreme-nationalist factions in the Foreign
Office, Brazil will almost certainly continue to
support the US on most important issues in
Hemisphere affairs. Brazil's strategic mate-
rials will continue to be available to the US
and it is likely that progress on the large-
scale manganese development in northeastern
Amapa will permit shipments to the US to
begin in early 1956. However, a desire to
strengthen its bargaining position vis-a-vis
the US will be an important factor in Bra-
zilian peacetime diplomacy, and frictions will
almost certainly continue to occur, particu-
larly on economic questions. Brazil will seek
to establish closer economic relations in Latin
America and with Western Europe, and will
also seek to increase its now minor non-
strategic trade with the Soviet Bloc.
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, 4.
70
:I VENEZUELA
till r"11,
COLOMBIA
A
BR.
GUIANA
cSURINAM
; Boa Vista e ?GUIANA
??//, ?
(:)riGETO.. 54
P RAMARIBO
AVENNE
5.
1-1
Manaus
A ozon River
ap
3!3
ATLANTIC OCEAN
,0
LuuS
Teresina
?Fortaleza
? (..
\10 4.1,-L ? Natal
FERNANDO
DE NORONHA.
26
1 ?-???
/ 714 Branco0
// Rio
%
PERU
PAZ
6-
PACIFIC
OCEAN
CHILE(
veig
2
4
BOLIVIA
Joao
Pessoa
Recite
.0
24
3
BRAZIL
DISTRIBUTION OF
COMMUNIST STRENGTH
November 1954
? 1000 MEMBERS
TOTAL
120,000 MEMBERS
???????i. International boundary
State or territorial boundary
? National capital
0 State or territorial capital
300 600
STATUTE MILES
0 300 600
SECRET
KILOMETERS
k
/
PARAGUAY ea
SUN4/4 23
? ACIV
4
,Cuialse
9Y"
//,........,j?
\-. Fioriaa6Polis
7 74.
? ?
g P6rto Aldtre
M? ?
URUGUAY
MONTEVIDEO
?
21 ?
? ?
4b? 18.1
?
(,? *Belo 2Hoori.zointge.i
? ? ?
A ?
?
?I.SaoPa60.04F
??
? ?-??
Curitiba.
BUENOS AIRES
5.4
4:6
Vit6ria
r61
RIOtDE JANEIRO
ATLANT1 C
OCEAN
3:8
3,b
-16-
-32,
I. Territario do Acre
2. Territ6rio do Guapore
3. Mato Grosso
4. Amazonas
5. Territotio do Rio Branco
6. Territorio do Amapa
7. Pare
8. Maranha"o
9. Piaui
INDEX TO STATES AND TERRITORIES
10. Ceara
11. Rio Grande do Norte
12. Paraiba
13. Pernambuco
14. Alagoas
15. Sergipe
16. Bahia
17. Espirito Santo
a? area disputed by Espiritu Santo
and Minas Gerais
18. Minas Gerais
19. Rio de Janeiro
20. Distrito Federal
21. Goias
22. Sac, Paulo
23. Parana
24. Santa Catarina
25. Rio Grande do Sul
26. Territhrio de Fernando de Noronha
13713 3.55
.ErisCRIEtT
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