How Capitalism Saved Brazilian Agriculture

Blog Post - How Capitalism Saved Brazilian Agriculture

Brazil’s agricultural industry is a fascinating case study about the benefits of pro-market reforms and trade liberalization. For decades after the Great Depression, the socialist government imposed import substitution industrialization (ISI) in an attempt to boost growth, reduce poverty, and create an internal economy. The policy required that the government impose a litany of trade barriers, price controls, and direct government investment.

 
While it allowed Brazil to establish some industry, the import quotas and tariffs halted the importation of capital equipment necessary to develop a mechanized farm industry. Imports were required because the mechanical knowledge to produce this equipment just simply didn't exist at the time. In fact, production was so low that Brazil was largely a food importer during the ISI policy regime. Also during this time, Brazil suffered from hunger and high levels of under-nourishment.

In the 1960s, Brazil began to slowly liberalize their economy and ended remaining ISI policies by 1990. The pro-market reforms had astounding effects on their agricultural production (as shown in the attached graph) and overall food security.


Since the 1970s, prices for basic foods steadily declined and Brazil now exports over $89 billion in agriculture. More importantly, the OECD commends Brazil for a drastic reduction in hunger. These gains are largely attributed to market liberalization: “The abandonment of the import substitution strategy led to broad trade, exchange rate, and domestic market liberalization”.

Agricultural policies were liberalized as part of the overall reform: previous production and supply control systems were dismantled and price interventions scaled down and re-instrumented. Trade policy liberalization removed export taxes, licensing and quantitative restrictions on agro-food. It also abolished state control of wheat, sugar and ethanol trade.

These reforms carry substantial value in the long run. From 1996 to 2006, the total value of Brazilian crops rose 365%. The size of these gains are largely due to the available farming capacity. As it stands, Brazil’s unused farm land is equal to the next two countries combined (Russia and US) and they only use 50M of the 400M available hectares. Additionally, Brazil’s renewable water resources are larger than any country in the world. As The Economist noted, “Brazil (population: 190m) has as much renewable water as the whole of Asia (population: 4 billion).”

This means that government command-and-control policies were not only inefficient, but they failed to capitalize on the comparative advantages available through economies of scale. Brazil’s natural infrastructure is inherently capable of producing huge amounts of food. Despite that, Brazil imported food and still had a starving population under the socialist ISI policy.

The future outlook for Brazil is positive. Suppliers will benefit from productivity growth and increased trade. Growth will slow in the near term, but will exceed 2% after a few years. After a tumultuous time of socialist policy, pro-capitalism reform has proved very beneficial to Brazil.

 

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