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3 April 1962

BRAZIL

I. Government and politics

A. President Quadros

Janio Quadros was elected President of Brazil in 1960 by the largest plurality over received by a Brazilian presidential candidate. He appeared to be well equipped for the task of curbing the intensified inflation and aggravated balance of payments problems which were his legacy from the Kubitschek regime; as governor of Sao Paulo state, 1954-58, he had turned a perennial debt into successive surpluses without neglecting industrial development or social improvements. On the strength of that performance, and of his support of free enterprise, he won the backing of industry, big business and most of the middle class; their combined backing brought him to power. He won over the working class by promising land reform and indicating that he favored state control of power.

In August 1961, seven months after he took office, Quadros resigned. His action was a shock to Brazil as well as to the rest of the world. In fact, it has been rumored that he tendered his resignation in the belief that it would not be accepted, and that he might thereby return to office on his own terms and thus secure adoption of some of his programs which had been rejected by the Brazilian Congress. If in fact he did gamble in this way, he lost, and shortly thereafter he left the country.

Quadros ran for President under the emblem of a bright new broom, symbolizing his determination to rid the country of deep-seated corruption and the economic chaos inherited from the Kubitschek administration. The Kubitschek regime had brought massive construction, including the new capital of Brasilia, but at the cost of a staggering foreign debt and rampant inflation.

Quadros' administration was highly controversial, both in domestic and foreign policy. In *domestic affairs* he followed a policy of drastic economic austerity and rooting out of corruption. Overstaffing of the civil service was reduced by requiring everyone on the federal payroll to put in a full day's work and collect his salary at his office in person. Tax receipts were increased by the fact that tax collectors were paid a percentage of what they brought in; an incentive was thus provided for them to concentrate on large incomes. Import

subsidies were cut, credit was tightened, the cruzeiro was
devalued, and smuggling and black market exchange operations
were checked. Against the strong resistance of coffee planters,
measures were introduced to provide qualitative improvement and
quantitative reduction of the Government price-supported crop;
government purchases were restricted and severe classification
of guaranteed prices according to quality was introduced.
This program won Brazil $2 billion in new foreign aid, largely
from the U.S., but at the expense of antagonizing a host of
economic interests, from the big coffee planters to urban
labor unions.

In *foreign affairs*, Quadros' policy was formed in
accordance with the following guidelines: Brazil has historic
Western ties, which nevertheless are modified by her orientation
toward other newly developing peoples, her desire to remain
nonaligned on East-West issues, and her desire to pursue closer
diplomatic and trade ties with the Communist bloc. Brazilian
foreign policy has been an attempt to divorce ideological from
economic commitments; from a purely economic point of view there
are several reasons for Brazil's seeking closer relations with
the Communist bloc; the need for selling more goods abroad to
earn foreign exchange needed for industrialization, the price
fluctuations of Brazil's primary exports, the oversaturation
of the Western market with Brazilian exports, for example,
coffee, thus making further downward price trends inevitable,
and the difficulty of marketing Brazilian industrial exports in
the markets of highly industrialized countries.

The result was a foreign policy which combined "benevolent
neutrality" with support of the Alliance for Progress, but
resisted U.S. attempts to isolate Castro. Quadros concluded trade
pacts with Yugoslavia, Rumania and Hungary, moved to restore
relations with the USSR, and sent emissaries to Communist China.
These measures were popular with the left-wing nationalists and
the Brazilian in the street, but provoked fierce resentment in
big business and clerical circles.

Quadros' policies made him the object of attack from
several different directions. A hostile majority in a Congress,
all elected in 1958 or earlier, blocked his plans for land
reform and higher taxes. His attempt to investigate alleged

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corruption brought him into conflict with his Vice-President, Goulart (who had defeated Quadros' running mate in the election). In Rio de Janiero state the state governor, a former supporter, charged that Quadros was plotting to recess Congress until the 1962 elections and to rule by decree. His resignation was also prompted by his realization that it was virtually impossible to clean out corruption on a level as pervasive as he found it in the federal government, and by the fact that he seemed to reap no credit for his success in moving toward economic stabilization, one of the most important of his administrative accomplishments. Pressure from the military and from conservatives over the issue of alleged and potential Communist influence was the final straw for Quadros, and when the army would not support him in attempting to silence the criticism of his regime voiced by Gov. Carlos Lacerda of Guanabara state on a television program, Quadros, feeling he had no strong effective support, resigned.

In addition to these political difficulties, Quadros made personal enemies by his style of governing; his bearing was autocratic and he was said to govern in puritanical and ascetic isolation, at times treating Cabinet Ministers and other Government officials in schoolmaster's fashion. However, others have commented that he is described so differently by his friends and his enemies as to be completely unrecognizable.

News of Quadros' resignation produced riots in Recife and Rio, In Brasilia the Congress quickly accepted Quadros' resignation, and in Singapore Vice-President Goulart boarded a plane for home to assume the power which, under the Constitution, automatically fell to him for the remainder of Quadros' term, nearly four and a half years.

For two weeks Brazil teetered on the brink of civil war. The struggle was between those who believed in the constitution, even though it meant the succession of a man who was known to be further to the Left than Quadros, and those wishing to eliminate Goulart at all costs. The lines were sharply drawn. Goulart had the backing of the military forces in Brazil's southernmost state, Rio Grande do Sul, as well as the support of the governor of the state, his brother-in-law. The opposition was led by War Minister Denys, who, believing Goulart was a Communist, threatened to arrest him if he returned.

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**The Goulart succession.** A compromise was finally reached. Congress rushed through a constitutional amendment reducing the president to a figurehead and providing for a premier to head the government. This office was assumed by Tancredo Neves, said to be a close friend and collaborator of Goulart, although they belong to hostile political parties. Both were members of the last Vargas administration, (1951-54).

**The return of Quadros.** Although Quadros left Brazil after his resignation in August 1961, he announced a few months later that he intended to return. In early March of this year he returned. In a nationwide radio-television address he explained, still somewhat enigmatically, that his resignation had been provoked by U.S. efforts to get him to change his foreign policy, and by false charges of local reactionaries that he planned to set up a dictatorial regime. He announced that he would undertake a nationwide crusade for the economic and social reforms he had advocated as President. Towards the end of March he reversed his earlier decision to seek no public office, and announced that he would run for Governor of Sao Paulo in the October election.

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B. <u>Joao Goulart</u>

Joao Goulart, whose return to Brazil to assume the Presidency was opposed last August by Army Marshal Odilo Denys on the grounds that he was too left-wing, has since shown by his actions that he is an enigmatic and contradictory figure.

He is an heir of the Vargas regime, was Labor Minister under Vargas and proclaimed himself Vargas' "spiritual heir" upon the latter's suicide. He comes from the cattle country of Rio Grande do Sul and is strongly supported in his own state and among the trade unions. He is a member of the Brazilian Labor Party and has worked for trade union interests under the Kubitschek administration, notwithstanding the fact that he amassed a respectable personal fortune. He came to office conveying the impression that he would go further than Quadros in relations with the Communist bloc, but that he would show less imagination and courage in approaching basic social reforms. In the past he has identified himself with the interest of the urban workers only.

Since he has been in office assessments of Goulart's regime vary from moderate and responsible, to weak and indecisive. He presents no clear picture in available press reports, and the confusion is undoubtedly a measure of the complexity of the situation and the confusion inherent in Brazilian politics and economics.

1. <u>Brazilian Parliamentary Democracy</u>

Part of the present confusion arises from the theory and the practice of the new parliamentary democracy in Brazil.

Goulart came to power under the condition that the Presidency be reduced to a figurehead position. The new Premier, Tancredo Neves was to hold the real reins of power in the state. (Neves is said to be a close friend and collaborator of Goulart, and they both served in the Vargas administration, but Neves belongs to a hostile political party, the Social Democrats, which has its roots in the rural aristocracy).

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Although Goulart's signature on government proposals was to be a formality only, Premier Neves has not insisted on exercising all his powers and has consented to play a secondary role. It has been Goulart's voice which has been most heard, and it is he who has made the strongest, most forthright speeches of anyone in the Government. He has warned repeatedly that governmental and economic crises have not been overcome, and has insisted that there can be no political reform without economic democracy. He has emphasized the need for urgent solutions to forestall a much worse crisis and has called for profound reforms, which cannot be accomplished except through constitutional changes.

Some of Goulart's most serious opposition comes from the resistance to reform measures of the Brazilian Congress, or their lack of ability to agree on measures to implement social and economic reform. Leftists and extreme nationalists have shown a tendency to combine forces. Leftist, anti-U.S. sentiment has been combined with the special interests of Brazilian big business interests, which wish protection. One of the results was the passage by the Chamber of Deputies of a measure which so penalized foreign investment as to cause a serious flight of foreign capital and make future foreign capital investment most unlikely. The measure was opposed in the Senate and by the President and Premier and thus did not become law; however, its passage in one house of the legislature demonstrates the dangers inherent in the political situation.

Recently, however, there has been a closing of ranks around President Goulart. Powerful elements of the armed forces, the press and political parties have rallied around the President to make his U.S. trip a success, and criticism directed at Brazil from the U.S. and the return of former President Quadros to Brazil have produced a closing of ranks by moderate forces. The Chamber of Deputies has recently ousted two Left-wing nationalist leaders from the steering committee; Sergio Magalhães of the Socialist Labor party and Breno de Silveira of the Socialist party. Both are members of the Nationalist Parliamentary Front, a caucus of deputies from various parties that are identified with nationalist positions that frequently coincide with Communist-backed causes. (Senor Magalhães was a prime mover in the action taken by the chamber last fall against foreign investment).

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The major political parties forming the government coalition also appear to have retreated from their position of mid-February which threatened a split in the coalition. The presidents of the two parties, Ernani Amaral Peixoto of the Social Democratic party and Herbert Levy of the National Democratic Union, are consulting on how to give greater support to the Cabinet in the session of Congress which opened March 15th.

## 2. Political pressure groups

### The Peasant League

The Peasant League, headed by Francisco Juliao, is "the closest thing to an organized 'Fidelista' movement in Latin America outside Cuba." (NYT, 11/1/60) Its professed aims are land reform and agricultural cooperatives, but it does not exclude a revolutionary solution to economic problems. It claims a membership of 20,000, is identified with the Brazilian Socialist party and is supported by the Communists.

### People's movement in support of social reform

Some groups in the south, north and east of Brazil have recently united to form a people's movement in support of socialism and the social reforms promised by Quadros, which they do not expect the present government to carry out. Leaders are Mayor Arraes of Recife, Leonel Brizola, Governor of the state of Rio Grande do Sul, and Governor Borges of Goias. Their aim is to realize the sweeping structural reforms which Parliament has always ignored, and to establish such strong local support that no government can afford to ignore their demands: agrarian reform, bank reform, legal reform, restriction of transfers of business profits to foreign countries, support of the right to strike, and imposition of an inheritance tax which would cut considerably into the largest incomes.

### Communism

The Communist party has been illegal since 1947, but it operates quite openly. The party is small but well-organized, and allies itself frequently with causes that basically are not Communist. For example, it stood as a supporter of constitutionalism during the crisis which brought Goulart to office, but for reasons of its own. It also stands against

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militarism, and supports social reform. A considerable part of the support communism has drawn from students, young officers and artists derives from frustrated idealism in a society where these people see communism as the only means of abolishing corruption. More dangerous than these communists, however, are those who established themselves in a great many unions while Goulart was Foreign Minister and still hold important positions there today.

There is a difference of opinion as to the likelihood of a Cuban-type social revolution in Brazil promoted by agitators and prompted by a discontented people. T. Lynn Smith, writing in the Annals of the American Academy of Political and Social Science in March 1961 stated that the aspirations of Brazil's people are rising more rapidly than their levels of achievement; thus the area of frustration is broadening. However, Adolf A. Berle, after a recent fact-finding trip to Brazil, stated that the notion that a depressed, angry lower class desires social revolution and destruction of existing norms in Brazil is an illusion; revolutionary feelings confined to a small gropp of intellectuals and a moderate though substantial minority of politicians who give an impression of greater power than they possess because they have access to the means to make themselves heard.

Whatever the strength of Communism, it benefits from hesitancy, political favoritism and corruption to the extent that the Government does not deal with them effectively.

## The Military

The military has always been a key factor in Brazilian politics since the establishment of the republic, but it has differed from some of the other Latin states in that it has traditionally supported the constitution. In the crisis following Quadros' resignation, however, the army was divided; some of its leaders set themselves against the constitutional provisions, which indicated that Goulart was the legitimate successor to Quadros, though it has been said that they did so to preserve constitutional democracy in the long run. Their stand was said to be prompted by fear that Goulart would lead the country into trouble. More recently, these same persons have been disturbed to see the President exerting more influence on the Government than was expected.

3. Future elections

In October of this year Brazil will hold elections,
at which time the full Federal Chamber of Deputies and a
third of the Senate will be chosen. Those now in office
were all elected in 1958 or earlier.

Early this year the fear was voiced that any further
deterioration in Brazil's dangerous instability could push
the country toward a strongly Leftist and extremely
nationalistic regime. At that time there was concern that
unless the Goulart-Neves regime took effective measures
to halt Brazil's runaway inflation and bring about social
and economic reforms, the Leftist-nationalistic bloc might
win a majority of the seats at stake.

More recent reports indicate a swing away from the more
radical leadership and a closing of ranks around President
Goulart, However, if political stability depends on the
accomplishment of effective reform measures, as some
observers believe it does, it must be noted that a Congress
already extremely reluctant to vote effective reforms may
be even less willing to do so in an election year.

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A. U.S.-Brazilian relations

Relations with the U.S. have, however, been disturbed
by a series of nagging issues. Brazil, as the largest
Latin American country, is vital to the Alliance for
Progress, and its seeming inability to deal with its
shaky political and economic situation has provoked
criticism in Washington. Moreover, U.S. commentators
have sharply criticised Brazil's closer relations with
the Communist bloc.

**Expropriation of telephone company.** Uneasy relations with the U.S. were made more complicated by the action of Governor Leonel Brizola, of the state of Rio Grande do Sul, who expropriated a telephone company belonging to the International Telephone and Telegraph Corporation of New York. His initial compensation payment would amount to 5% of the company's value as assessed by its owners. Businessmen in the U.S. began reconsidering plans for new investments in Brazil, re-experiencing the doubts they had had last November when the Brazilian Chamber of Deputies passed a bill, which never became law, severely penalizing foreign investment.

Some of the principal projects of the Alliance for
Progress development aid for Brazil appeared imperiled.
However, President Kennedy subsequently entered the
scene, forcefully declaring at a news conference that
close relations with Brazil were extremely important, that
anti-Brazilian resolutions on the part of the U.S. would
serve no purpose, and that the Brazilian government was
actively cooperating in talks to arrive at an equitable
settlement of the telephone company's case.

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- **Cuba:** While Brazil has condemned the Castro regime as incompatible with the political ideals of the hemi-sphere, it has strongly opposed any form of foreign intervention, and defended Cuba's right to self-determination.

Both Quadros and Gouart have consistently opposed all U.S. efforts to impose collective inter-American diplomatic and economic sanctions against Cuba.

- **Argentina:** Brazil's Government has officially expressed concern over the recent change of government in Argentina. Brazil has withheld any hasty show of recognition of the new regime of President Jose Maria Guido.

  - The Brazilian ambassador in Argentina has been instructed to avoid any official contact with the new Government pending further orders.

  - President Gouart has received a proposal by President Romulo Betancourt of Venezuela that the American republics collectively withhold recognition of the Argentina regime on the assumption that it is anti-democratic.

  - The Brazilian Government does not agree with the Venezuelan doctrine of non-recognition and President Gouart's reply has been limited to a statement of vigilance and apprehension.

- **Nuclear Testing:** At the Geneva Disarmament Conference Brazil called for an immediate halt in all nuclear weapons test in the atmosphere, outer space and underwater. It also suggested that a prompt study be made to determine the minimum degree of international inspection necessary to insure that underground tests could also be covered by a treaty. Brazil stated that it disapproved of the Soviet's series of tests last year and hoped that the U.S. would not go through with its plans to resume atmospheric testing.

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### III. Economic development

The Brazilian economy presents as mixed a picture as Brazilian political life. On the one hand the economy has been described as "the Mad Hatter's dream," while on the other hand there is wide agreement among Latin American observers that Brazil is one of the most dynamic societies in the Western Hemisphere. Some studies indicate that Brazil's national production has been rising 6% a year in terms of adjusted prices, a rate of economic growth which is high enough to keep ahead of the 2½% rate of population growth. Industrial production is growing twice as fast as the population, while agricultural output appears to be keeping pace. Brazil has been able to supply the bulk of its consumer needs since World War II out of its own agriculture and industry, without turning to imports. At the same time, it has laid the foundations for heavy industry.

There are two cautions to be considered in the optimistic view of Brazilian development. First, the country has had six major booms in the past, each of which has been followed by economic depression. However, in each of the former periods of expansion, the boom was based on a primary commodity, which was at the mercy of fluctuating world prices, while the present boom is diversified and relies heavily on industrial production.

The second caution on the glowing economic data for the country is that they are contributed by one section of the country only, the South, which represents only 10% of the land. Economic growth statistics reveal an average of national progress, but conceal the fact that phenomenal growth in and around the Southern urban centers is being set against other major regions which are relatively stagnant.

A. The Northeast

The most crucial region is the Northeast, an area larger
than any other Latin American state except Argentina. The
eight states of the northeast contain a population of 23.5
million, one-third of Brazil's total. Average incomes are
less than $100 a year. About 75% of the population is
illiterate. Starvation and disease take a heavy toll.

Agriculture, the chief occupation, is practiced under
the double handicap of periodic drought, which lasts for
several years at a time, and a feudal system of land-holding
and sharecropping. George McGovern, director of the U.S.
Food for Peace program reported to President Kennedy in mid-1961
that the Northeastern sector of Brazil is by far the largest
and most crucial hunger area in Latin America. He felt that
the U.S. should probably make Northeast Brazil a top priority
area for broad assistance.

Quadros set up a five-year, $425 million redevelopment
plan for the Northeast, and the Goulart administration is
attempting to carry out the commitment, counting on the U.S.
and other foreign sources to provide half the funds needed.
(See above, U.S. aid)

As envisioned by the Brazilian Government's Northeast
Development Agency, the plan calls for revolutionary changes
in land holdings and land taxation that would upset centuries
of tradition. Many landowners are resisting the proposed
changes.

Major parts of the plan involve :

-- resettlement of more than 1 million people in the
northern state of Maranhao; these people are to be moved
to lands so primitive that frequently they are jungle;

-- irrigation, electrification, construction of access
roads and many new industries;

-- radical changes in the agricultural pattern to produce
more food and more export crops and creation of food-storage
facilities.

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## B. Inflation

One of the costs of Brazil's tremendous economic growth has been runaway inflation.

The challenge of any Brazilian administration is how to have economic growth without runaway inflation. The fear is that any austerity program to hold profits down will only divert investment capital into marginal speculation like real estate, or drive even more capital out of the country. However, control of inflation is essential, not only from the point of view of domestic financial stability, but as a prerequisite for the foreign aid the country so vitally needs. Leading Brazilian businessmen have expressed the view that the country's economic development is not possible without inflation. Outside observers have stated that the very fact that the former economic policy has not led to the catastrophe that would have been inevitable without foreign financial aid, has somewhat obscured the real state of affairs.

Quadros' predecessor, Kubitschek, had launched a major industrialization program with the promise of "fifty years of progress in five." To a large degree he succeeded, but little attention was paid to cost, and the five years also produced "fifty years of debts and inflation in five." Living costs rose 40% in 1959 and 35% in 1960.

Quadros moved to meet these problems as soon as he took office with slashing of government-financed import subsidies, cuts in bureaucratic spending and other austerity measures (see above). He also took measures to deal with the coffee surplus, attempting concentration on top-grade coffee and cutting marginal production. Far-reaching exchange reforms, involving devaluation of the cruzeiro, were launched with a $1.7 billion credit package financed internationally.

The Goulart administration has talked about measures to control inflation, but in the meantime the trend has proceeded unchecked. In March, 1962, however, it was announced that the government was putting the final touches on a drastic anti-inflationary program which would slash the prospective $900 million budgetary deficit, and restrict new credit and the introduction of additional currency.

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The Government's plan, which has been approved by the Council of States and has the support of Goulart, calls for reduced federal spending and an emergency increase in revenues.

It would greatly reduce financing by the Bank of Brazil of treasury deficits through issuance of new currency.

It would also curb any expansion of credit by the Bank of Brazil that cannot be financed out of the current level of monetary resources.

-- The budget is to be financed by direct cuts in spending, by stretching current spending plans over a longer period, by postponing budgeted investment, and by increasing rates for shipping, railroads and other state enterprises that have deficits.

-- At the same time a "compulsory loan" by taxpayers to the Government is to be imposed. Such a "loan", repayable in five years, would hit commerce through consumer and corporate income taxes.

-- The Government also plans to raise revenue by issuing Treasury notes that would carry an interest rate protected against inflation: a sliding rate of interest tied to the cost of living.

-- Finally, it is proposed to double the reserve requirement of banks from 14% to 28% of loans.

The program will be before the Congress, which began its 1962 session in mid-March.

## C. Land Reform

Because of powerful opposition from wealthy landowners who have a strong representation in the government, Brazil is still seeking a solution to the critical issue of land reform.

President Quadros' Northeast Development Program contained no specific recommendations for breaking up the huge sugar plantations in northeast Brazil, and it was March of 1962 before the Goulart government sent a land reform bill to Congress. This bill, one of the most controversial Brazilian political issues, is still under consideration. The complexity of the issue is

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underlined by the fact that the Congress, at the beginning of
1962, had before it 200 bills on land reform. Meanwhile, certain
states are moving to enact their own land reform laws.

The Federal bill as now conceived, would cover the following:

1) It would give the government the power to expropriate
property on the basis of the value declared by the owner
for tax purposes.

2) It would extend to rural workers the benefit of minimum wage and other labor laws that now cover only urban workers.

3) It would give a federal agency called the Superintendency of Agrarian Reform the administration of the land reform program.

4) All rural land now belonging to the government would be turned over to the above agency and vast sources of tax revenue would be set aside to finance its national program.

program.

4) If rural land now belonging to the Government would be turned over to the above agency and vast sources of tax revenue would be set aside to finance its national

program.

3) It would give a federal agency called the Subsidiary Agency in Arizona Reform the administration of the land reform

4) It would extend to rural workers the benefit of minimum wage and other labor laws that now cover only urban workers.

2) It would extend to rural workers the benefit of tax holidays.

The federal bill as now conceived, would cover the following:

 states are moving to enact their own land reform law.

1965, had before it 200 bills on land reform. Meanwhile, certain undertook by the fact that the Congress, at the beginning of

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