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Brazil's Infrastructure in Perspective - Defiance EIRA

Brazil's Infrastructure in Perspective - Defiance EIRA

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Published by Wallstreetable
A summary report for those looking to understand the historical role of politics in infrastructure investments in Brazil. The report has been commissioned by an institutional investor in Brazil and it's now free to the public.
A summary report for those looking to understand the historical role of politics in infrastructure investments in Brazil. The report has been commissioned by an institutional investor in Brazil and it's now free to the public.

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Published by: Wallstreetable on Jun 18, 2010
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Defiance Holdings – All rights reserved. Copyright 2009-2010.Defiance Capital Management Investment Research and Analysis
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Brazil’s Infrastructure in Perspective: Yesterday, Today and Tomorrow…February 27, 2010 - 10 pages 
Defiance Capital Management 
Leonardo Cardoso – Senior Analyst 
leocardoso@defiancecap.com www.defiancecap.com 
Economic and Investment Research & Analysis 
 
 
Defiance Holdings – All rights reserved. Copyright 2009-2010.Defiance Capital Management Investment Research and Analysis
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Brazil: Yesterday, Today and Tomorrow…
By Leonardo Cardoso
Yesterday…
For a little more than 300 years since its discovery on April 22, 1500, Brazil was a colony of Portugal. In an effort to force Brazilians to consume products manufactured in Portugal, thecrown prohibited the establishment of factories in the country. As a result, that was a period of economic exploitation of natural resources, most notably brazilwood, sugar and gold, and little tono industrial development.On September 7, 1822, independence from Portugal was declared and the country became aconstitutional monarchy, the Empire of Brazil. In the beginning, the Imperial State investedheavily in infrastructure – improving roads, building railroads and retaining an excellent systemof ports. The liberal monarchy, free of the socioeconomic and political pressures from Portugal,favored private initiatives and centered the economy on the export of agricultural products andraw materials. By mid 1800s, coffee had become the number one export of Brazil and amovement to abolish slavery and free labor had begun. With profits from the export of coffee,sugar and cotton, new factories that didn’t require specialized labor were built and immigrantsfrom Portugal, Italy and Germany, lured by the demand for paid labor in the agricultural fieldsand factories, flocked to Brazil.Although extremely diversified in the period after Independence, the Brazilian economy requireda great effort to carry through the change from a pure colonial economic system based on slaveryinto a modern capitalist system. Towards 1880s, the combination of religious issues between theEmperor and the Catholic Pope; growing discontent by military leaders towards freedom of speech and corruption in the Imperial Court; desire by the middle class to participate in politicalmatters; lack of support by the barons of coffee who resented the abolition of slavery and wishedmore political power; and financial problems generated by the Triple Alliance War, forced theBrazilian Empire into crisis. On November 15, 1889, republicans who favored changes byrevolution rather than evolution, drew military officers led by Field Marshal Deodoro da Fonsecainto a conspiracy to replace the cabinet; the first coup d’état of Brazil deposed Emperor DomPedro II and created the First Republic of Brazil (aka: Old Republic) and its First ProvisionalGovernment.Generally, federalism is the movement of the people towards centralization and transfer of powerfrom the States to the Federal Union. The unusual development of federalism in Brazil –decentralization of power and politics into States formed under a new Federal Union, gave birthto a political and socioeconomic system of oligarchies
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that are still present today. The OldRepublic lasted until the Revolution of 1930, and despite some political turmoil, it was a periodof economic prosperity due to strong coffee and rubber exports.
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Oligarchy in Brazil can be exemplified by strong military influence in the government during the early period of the Old Republic and by the “Café au lait” political system; the alternation of political power between prominentgroups/families from only two states (Sao Paulo – economic power due to coffee production and Minas Gerais –largest political poll in the country and producer of milk).
 
 
Defiance Holdings – All rights reserved. Copyright 2009-2010.Defiance Capital Management Investment Research and Analysis
3While dissident movements taking place throughout the 1920s weakened the political alliancebetween Sao Paulo and Minas Gerais
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and the stranglehold of the agricultural oligarchies eased,the U.S. market crash of 1929 pushed the country into financial collapse when the price anddemand for coffee stumbled and foreign credit, together with Brazilian gold and sterling reservesevaporated.In 1930, important structural changes aimed at transforming the country into a modernindustrialized economy began to take place when Getulio Vargas, a presidential candidate for theliberal opposition with nationalist and populist tendencies led a second coup d’état and assumedthe presidency of Brazil (aka: The Revolution of 1930).Somewhat like Franklin Roosevelt, Vargas sought to bring Brazil out of the Great Depressionwith an economic stimulus focused on infrastructure and statist-interventionist policies focusedon expanding the domestic industrial base while reducing foreign dependency. State and mixedpublic-private companies dominated infrastructure industries, while private Brazilian capitaldominated manufacturing. In 1937, rumors of a possible communist plan to control the countrytriggered a full dictatorship by Vargas; creating the New State, which lasted until 1945 when amilitary movement overthrew him and reestablished democratic rule.As a dictator who dissolved congress, curtailed presidential elections and established a newconstitution, Vargas gave continuity to the formation of structure and professionalism in the state.He oriented the state to intervene in the economy, promote economic nationalism, invest ininfrastructure and industrialization
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, and establish labor rights and laws. After leaving behind aneconomic surplus and a growing industry, Vargas returned to politics in 1950 as thedemocratically elected president with almost 50% of the votes, but could not handle thepressures of a democratic government and committed suicide in 1954.While the “Vargas Era” laid the infrastructure, industrial and labor rights
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foundations of Brazil,Juscelino Kubitschek (JK), a democratic president elected in 1955 using the slogan “50 years of progress in 5 years”, focused on the industrial development of the country through generousincentives to foreign direct investments and large infrastructure projects including theconstruction of Brasilia, the current capital of Brazil. Despite the tremendous economic boom, bythe end of his term in 1961, the strategy had left a legacy of problems and distortions since thegrowth it promoted resulted in a substantial increase in imports while exchange rate controlscurtailed exports. In addition, to finance the negative balance of payment and the construction of Brasilia, the Federal Government relied heavily on domestic and foreign debt.Rampant inflation, political and social reforms that were clearly not addressing the economicproblems of the country, together with fears of a revolutionary leftism by then current presidentJoao Goulart, triggered the military coup d’état of 1964, instituting a military regime for the next21 years. At first, there was intense economic growth due to neoliberal economic reforms (aka:“Economic Miracle of Brazil”), but in the later years of the dictatorship, the reforms had left the
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As before mentioned, the Café au lait politics.
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Industrial and infrastructure concerns created: National Oil Advisor, Rio Doce Valley Company, Sao FranciscoHydroelectric Company, National Iron Smelting Company, Petrobras and others.
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Although, argued by some economists and politics as not capitalist friendly.

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