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1152218

1152218

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Transportation and Inflation: A Study of Irrational Policy Making in BrazilAuthor(s): Werner Baer, Isaac Kerstenetzky and Mario Henrique SimonsenReviewed work(s):Source:
Economic Development and Cultural Change,
Vol. 13, No. 2 (Jan., 1965), pp. 188-202Published by:
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Accessed: 20/06/2012 17:02
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TRANSPORTATIONND INFLATION:ASTUDYOFIRRATIONALOLICYMAKING NBRAZIL
Werner BaerYaleUniversityIsaacKerstenetzkyFundacaoGetulioVargasMarioHenriqueSimonsenFundacaoGetulioVargasIntroductionAlthoughithas beenarguedthat someaspectsof theBrazilian inflationwerefavorableto economicdevelopment,and thatmanyof the drastic distortionsusuallyattributedto inflationwereabsent,1there existsoneparticularaspectof the Bra-zilian inflation which cannotbedefendedby anyschoolofthought.This is thepoliciesfollowedbythegovernmentinsettingpublic utilityrates,especiallyintransportation.Inmanycountriessufferingfrominflation,rateschargedforpublicutilities fallso far behindchangesin thegeneralpricelevel that anincreasinglyimportantpartofgovernment expendituresare devoted tosubsidizingthetranspor-tationsystemandotherpublicutilities. Withexpenditurecommitmentsfordevel-opmentprogramsrisingfaster than revenues that canbesupplied byarchaictaxsystems,increasingsubsidies topublicutilitiesworsengovernmentdeficitsandconstantlyadd toinflationaryforces.Ithasbeenclaimecby"politicalrealists"thatademocraticgovernmentinthistypeof situation cannotafford toraiserates,especiallytransportationrates,soas to matchotherpriceincreases. Itwillbe one ofthepurposesof thispapertoshow,usingtheBraziliancase,thattheeconomicimpactonindividualsandfirms ofadoptinga realisticrate willbe soslightthatthepoliticaleffectsmightbemadenegligible.Thesecond,andmoreimportantpurposeof thispaperwill betoshow thatbyestimatingboth theeffectsof actionandinactionas far aschang-ingratesareconcerned,thepolicymakerwill be in a betterpositionto chooseand rationalizehispolicies.Deficits and SubsidiesDuringthegreater partof the1950'sand theearly1960's,the Brazilianfederalbudgethas beencharacterizedbyincreasingdeficits.Aglanceat Table 1
SeeWernerBaer,"InflationandEconomicGrowth: AnInterpretationof the BrazilianCase,"EconomicDevelopmentandCulturalChange (October1962);also"InflationandEconomicEfficiencyinBrazil,"EconomicDevelopmentand CulturalChange(July1963).
188
 
ECONOMICDEVELOPMENTANDCULTURALCHANGE189will make it clear that thereis averycloserelationshipbetweenchangesinthegovernment's budgetdeficit and therateofpriceincreases.Sinceintheinfla-tionarymilieu of Brazil there exists nopossibilityoffinancingdeficitsbyissuingdomesticbonds,a deficitisusuallyfinancedbythe issuanceof newmoney.TABLE1.Expendituresof the BrazilianFederalGovernment,ChangesintheMoneySupply,andtheRate ofInflationPublicSectorExpenditure-FederalIncrease ofGovernment RevenueadeficitmoneysupplyFederal(inbillions(billionsof InflationChangesofwhole-YearTotalgovernmentofCR$)CR$)indexbsalepricesc
1947.93.78-2.5-6.4
19481.00.92-7.6 49.219491.061.04 2.816.464.819501.161.193.334. 5202.31951.99.881.815.91821.319521.151.01-14.7912.919531.161.069.019.11416.819541.05.905.5 22.1 1222.819551.131.088.017.51219.519561.191.25 27.822.1 1821.919571.31 1.4439.853.92014.519581.181.15 26.521.31914.419591.191.2453.741.72442.819601.221.2077.738.23131.51961n.a.n.a.137.551.628 40.4Source:FundacaoGetulioVargas,CentrodasContasNacionais,andCentro deEstudosFiscais.a.Receiptsminustransfers andsubsidiesb.Inflation index wasobtainedbydividingthemoneysupplybytheindex ofrealoutput.c.Wholesalepriceindex,excludingcoffee.Thus,wealso finda closerelationshipbetweenchangesintherateofinflationandintherate of newmoneyissues.AlargeandgrowingitemoftheBrazilianfederalbudgethasbeenexpendi-tures forsubsidizingthetransportationsystem,especiallythestate-ownedrail-roads.ThedatainTable2showthe relativemagnitudeofthese subsidies inthe
federalbudget.Thesubsidyfigurescomedirectlyfrom the federalbudgetdocu-ment andtend tounderstateactual subsidies.This caneasilybeseenby comparing

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