You may be aware of Brazil’s bright economic outlook. Emerging from decades of turmoil, the nation now enjoys investment-grade status. Agricultural production is booming, innovative alternative fuel programs flourish, they’ve discovered huge off-shore oil deposits, and the currency is strong. All of which elevates Brazil among the world’s most important 21st century economies.
Living in a culture that measures success by immediate results, it is important for us to note that Brazil’s economic vitality is the product of difficult and unpopular decisions 15-years ago.
None of today’s successes would be possible if not for leaders who took decisive action to end four decades of hyper-inflation. They embodied an important truth: True leaders are willing to make painful short-term sacrifices in order to produce long-term benefits for future generations.
The opposite lesson is that leaders who focus on short-term, personal gains often make decisions that result in devastating long-term consequences. This is the first chapter in the story of Brazil’s 40-year struggle with inflation.
Let’s begin in 1956, when President Juscelino Kubitschek launched a massive public works project to build a new capital city in the Brazilian hinterlands. Lacking funds for this huge effort, the Kubitschek government and Brazil’s Congress financed the construction of Brasilia with enormous foreign loans — then dealt with the skyrocketing debt by revving up the inflation engine. Cost of living soared.
In response to public pressure over prices, the subsequent government made a disastrous decision that solidified the nation’s dependency on inflationary policies. Following a military coup in April 1964, Brazil’s military dictatorship created an “index” that automatically adjusted salaries and other financial dealings to the rate of inflation.
Like anesthesia, this policy blocked the pain of inflation. But indexing the economy to inflation did nothing to treat Brazil’s economic sickness—overspending and debt. And indexing only made inflation less painful for the middle and upper-classes, whose income generally kept pace with rising costs. Inflation cast the poor, whose income was not indexed, even further into poverty.
Managing a nation’s economy is complex but it was political and economic expediency, not a moral concern for future generations, that motivated the indexation policy. Brazil’s leaders deferred the political and economic sacrifices necessary to pay down the national debt and in doing so they set the stage for the way successive governments would deal with inflation for the next 30 years. Subsequent leaders would try and fail to end hyper-inflation because they, too, were unwilling to make the necessary short-term sacrifices. As a result, inflation soared to astronomic levels.
According to economists at Brazil’s largest private bank, Bradesco, the accumulated inflation in Brazil between 1961 and 2006 was 14.2 quadrillion percent — that’s 14,200,000,000,000 percent — the highest inflation rate in the world through that 45-year period. To put this in human scale, I know a person who built a house in 1979 for 60,000 cruzeiros novos, the currency of the day. A decade later, with the annual inflation rate at a whopping 1,782 percent, my friend spent the same amount for a pair of shoes! Prices rose so fast in those days that it was literally cheaper to buy groceries in the morning than in the evening (and cheaper today than tomorrow).
It’s impossible to calculate the suffering inflation imposed on Brazilians, especially the poor. And there is nowhere to place blame but the breakdown in principled leadership—government leaders robbing Brazilians of their wealth rather than establishing the foundations for a prosperous future.
Thankfully, because a new generation of leaders ended the era of hyper-inflation, Brazil’s annual inflation rate now hovers between four and six percent. Just how that dramatic turnaround was accomplished is the focus of Part Two: The Triumph of Principled Leadership.
