The Brazilian Exchange Auction System

Abstract

Brazil emerged from World War II with a single exchange rate, applicable to all transactions.' This rate was equal to the prewar effective export rate and was very slightly 2 relative to the prewar import rate. During and after the war, however, Brazil experienced substantial inflation so that the postwar par value of the cruzeiro has been at all times, despite a considerable improvement in the terms of trade. Thus, Brazil's large exchange reserves fell rapidly as soon as imports became readily available, and her industries, which had greatly expanded during the war, were threatened by foreign competition.3 Exchange control alone was unable to restrain imports sufficiently, and Brazil contracted substantial foreign debts. Beginning in 1947, therefore, increasingly comprehensive direct import controls were introduced -controls which nonetheless proved an inefficient means of limiting and selecting imports. Rising domestic prices also impaired Brazil's ability to acquire foreign exchange; with the notable exceptions of coffee and cocoa, her exports were being priced out of world markets. A first attempt to promote foreign sales was made through the permission of private barter deals,4 a second attempt through mixing the parity in various proportions with the free market rate of exchange after a legal free market in foreign exchange for financial transactions had been established early in I953. But neither of these attempts was successful. Brazil's international accounts were thus subjected to increasing pressure on both the import and export sides. This pressure led to the introduction of the exchange reform of which the auction system is the outstanding feature. This system had been successfully employed by Raul Prebisch in Argentina during the I930's. It was subsequently incorporated into the exchange laws of Paraguay and Guatemala when those laws were revised under the influence of Federal Reserve System missions headed by Robert Triffin, and auctions were conducted sporadically by the Paraguayan authorities. Never before, however, had the echange auction system been applied to the bulk of a country's general imports. The exchange reform of 1953 should be judged against the conditions which have characterized the Brazilian economy in the postwar period. The persistent and substantial inflation reflects a high propensity to invest on the part of government and private entrepreneurs as well as an increasingly important tendency to wage inflation. A further outstanding feature of Brazil's postwar economy has been the rapid growth of real income, based on a high rate of domestic investment and substantial improvement in the terms of trade. It is significant that domestic investment was as* I am indebted to Professor Gottfried Haberler fcr suggesting that I write this article. I should also like to thank him and Professor Seymour E. Harris and Mr. Peter B. Kenen for their very great help in revising the first draft of this paper. My gratitude is also due to Professors Eugenio Gudin and Ota'vio Bulhoes and Drs. Jayme Bastian Pinto, E. M. Bernstein, Herculano Borges da Fonseca, Roberto de Oliveira Campos, and Sidney A. Latini, all of whom read the first draft and made many helpful suggestions. 'For a short time after the war, a three per cent surcharge on imports was maintained. This premium was abolished but was reintroduced at five per cent in I947 and was later raised to eight, then ten, per cent. 2 The terms appreciated and depreciated will be used throughout this paper to signify changes in the value of the Brazilian currency, the cruzeiro, in terms of foreign currencies. The words overvalued and undervalued will be used in the same manner. The par value of the cruzeiro is Cr$i8.5o per U.S. dollar. ' Brazil's system of specific duties, dating back to 1934, was rendered obsolete by rising world prices and affords very little protection to industry in general. 4 Under this system, licenses for certain profitable imports were issued provided only that equivalent exports of certain slow-moving Brazilian products. were undertaken simultaneously; the profit on imports subsidized the export, i.e., there was a disguised devaluation.