Distortions of Economic Incentives in Agriculture in Brazil

            During the period since 1950, agricultural policies in Brazil experienced major changes. A policy of forced industrialization and import substitution lasted for the first four decades. This included a period of strong policy interventions to promote industrialization through import substitution, and a period where taxation of agriculture was combined with domestic support policies based on subsidized credit and a Minimum Price Policy (MPP). By contrast, the most-recent 15 years have seen less government policy intervention in agricultural markets, fiscal disciplines, and strong control over monetary policy designed to contribute to macroeconomic stabilization, and substantial trade liberalization.

            In the earlier period a large number of government interventions were imposed on the agricultural sector, resulting in price distortions caused by both direct and indirect forms of taxation (Brandão and Carvalho 1991). One form of indirect taxation used was a chronic overvaluation of the exchange rate. Since purchased inputs in agriculture were modest, the effect of the overvalued exchange rate on the price of agricultural outputs tended to dominate and worsen the agricultural terms of trade (Oliveira 1981, p. 267). A form of direct intervention was export taxation, the so-called “confisco cambial” which was mainly applied to coffee. In the early 1960s, it reached approximately 50 percent of the value of exports (Veiga 1974).
            Brazil’s population underwent a marked change in composition during the period under analysis.  About 31 percent of the Brazilian population in 1950 was urban. By 1980, 70 percent was living in urban areas. The population reached 189 million in 2006, with around 85 percent urban and only 15 percent rural. Migration from rural areas was in part induced by the taxation imposed on agriculture.

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