A Critical Analysis of Costanzo’s Address to Brazilian and American Businessmen During the OPEC Crisis

Paul Fischer

7/2013

Historical Document Analysis

Latin American History

A Critical Analysis of Costanzo’s Address to Brazilian and American Businessmen During the OPEC Crisis

The relationship between debt, growth, and inflation is firmly tied to the flow of foreign investment in a period of military dictatorship. In the case of Brazil, this meant less pleasing foreign investors with stories of a free nation and has significantly more to do with following a specific set of neo-liberal and anti-communistic agendas spelled out by Washington. As the vice chairman of Citibank, Costanzo has a vested interest in dealing with the oil crisis of the mid 1970’s in an efficient manner that focuses on the repayment of debts and management of inflation through direct control of the monetary supply. The Brazilian model is a nice sounding series of criterion that avoid the essential understanding for success in Latin America: adherence to the IMF, World bank, and the United States’ anti-communist goals.

The reality of the model is that the foreign investment is at the time of the statement equivalent to the $7 billion balance of payments faced by Brazilian authorities. These are certainly correlative statistics, as opposed to causal, but the significance of these figures on future foreign investment cannot be understated. Costanzo fingers management of exchange rates as the key to reducing debt while stimulating foreign investment, but this is a short sighted fiscal policy based on the emphasis on an export based economy which in turn morphs into exacerbation of the problem which was ultimately one of foreign policy. Failing to limit debt, of course has serious consequences, but could be seen as a temporary measure to ensure funding for some of the other measures suggested.

A better suggestion is the physical movement of industry from capital intensive investment to higher tech people intensive companies. This would be done by increasing the dividends Investors can remit at the 25 percent tax before the government begins to take confiscatory amounts of profit. This focus on capital would previously have made since keeping in mind Brazil’s large agricultural and natural resource economy but becomes out of date as time wears on and the country began to attract new technology and industry. In his position at Citibank, Costanzo would have encountered this difficulty firsthand.

A foreign nation might justifiably pay some attention to the dismissal given towards debt repayment in this statement. It is recognized as a vital part of keeping the Brazilian economy in the stages of fantastic growth it experienced, but seen as impossible practically unless very specific changes are made. An argument is made counter to governmental limitations on imports, which is instead replaced with direct government control of demand and keeping the exchange rate realistic. Ironically, this would support the continuation of a large natural resource economy. According to Costanza, repayment of national debt and reversal of the net import of capital in Brazil would in the 1970’s be impossible due to Brazil’s “virtue of its stage of development” and instead an emphasis is placed on limiting borrowing in order to maintain a solid credit rating so the oil crisis could be seen through to the end and the economy could return to a normal level of activity.

This is an optimistic statement in a bleak time. “As an old Brazilian hand,” begins the address with an attempt to colloquially establish a practical attachment to the matter at hand. The document proceeds to outline flawed methodology mixing neo-liberalism with a reliance on market economy that fails to take maximum advantage of the large global market share of Brazilian raw material producers in sugar and coffee among other natural resources which is reminiscent of mercantilism in practice. In this particular situation, markets would be made particularly inflexible due to the oil crisis, which exacerbated Brazil’s debts and eliminated the possibility of symbiotic relations between foreign investment and economic restructuring as greater portions of borrowed money must go into bonds exerting downward pressure on the currency and paying interest to maintain a decent credit rating and ensuring the continuation of a prickly status quo.

There was no way to know the extent or duration of the oil crisis and rampant speculation only made the matter worse. For the duration of the high fuel prices the economies of the free world were thrown into turmoil. In addressing a gathering of businessmen from Brazil and the US, there is a natural attempt to mediate in the revisit to the nature of the “Brazilian Model” which is claimed to be the basis of the US investor’s confidence in Brazil. As an economist, the author of the reading has a direct interest in overplaying the role of economic choices while downplaying the reality of success as dependant on adherence to American foreign policy goals. In that time, to take steps such as those made in other Latin American countries nationalizing or subsidizing important or crisis related industries would be the safest long-term strategy, but is the worst nightmare of foreign markets as that would essentially undercut the developed world’s attempts to do the same by reducing flexibility of the international market.

In summation, the recommendations made in this address are not the best for Brazil the nation. However, they are part of an international effort spearheaded by the United States that intended to break the OPEC alliance and force negotiation of middle eastern oil back to world equilibrium prices as reckoned by American economists. Ultimately this was successful, but at the cost of potential development in third-world nations less dependant on flexible oil supply curves and more dependant on sustained foreign investment as they import capital. Weakening currency also weakens a nation’s credit, and to do so would provide some stimulus to the export economy, but is not a long-term solution to the endemic economic problem.

Source: G. A. Costanzo. “US Foreign Investment in Brazil.” In Brazil-U.S. Business Council Inaugural Meeting August 16-18, 1976, Brasia: A Report by the U.S. Section Secretariat, pp. 31-42. Mimeo. Washington D.C.: Chamber of Commerce of the United States, 1976.