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March 15, 1955
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Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 NIE 9 3 - 5 5 15 March 1955 41111111hT NATIONAL INTELLIGENCE ESTIMATE NUMBER 93-55 (Supersedes NIE 86) PROBABLE DEVELOPMENTS IN BRAZIL Submitted by the DIRECTOR OF CENTRAL INTELLIGENCE The following organizations participated in the preparation of this estimate: The Central Intelligence Agency and the intelligence organizations of the Departments of State, the Army, the Navy, the Air Force, and The Joint Staff. Concurred in by the INTELLIGENCE ADVISORY COMMITTEE on 15 March 1955. Concurring were the Special Assistant, Intelligente, Department of State; the Assistant Chief of Staff, 0-2, Department of the Army; the Director of Naval Intelligence; the Director of Intelligence, USAF; and the Deputy Director for Intelligence, The Joint Staff. The Atomic Energy Commission Representative to the lAC and the Assist- ant to the Director, Federal Bureau of Investigation, ab- stained, the subject being outside of their jurisdiction. DOCUMENT NC. NC,1 CL?SS. TO: TS S C NEXT AUTH: HR DATE. -kl.REV;ET_WER:,- 'r OEM 2 3 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 CENTRAL INTELLIGENCE AGENCY DISSEMINATION NOTICE ? 1. This estimate was disseminated by the Central Intelligence Agency. This copy is for the information and use of the recipient indicated on the front cover and of per- sons under his jurisdiction on a need to know basis. Additional essential dissemination may be authorized by the following officials within their respective departments: a. Special Assistant to the Secretary for Intelligence, for the Department of State b. Assistant Chief of Staff, G-2, for the Department of the Army c. Director of Naval Intelligence, for the Department of the Navy d. Director of Intelligence, USAF, for the Department of the Air Force e. Deputy Director for Intelligence, Joint Staff, for the Joint Staff f. Director of Intelligence, AEC, for the Atomic Energy Commission g. Assistant to the Director, FBI, for the Federal Bureau of Investigation h. Assistant Director for Collection and Dissemination, CIA, for any other De- partment or Agency 2. This copy may be retained, or destroyed by burning in accordance with appli- cable security regulations, or returned to the Central Intelligence Agency by arrange- ment with the Office of Collection and Dissemination, CIA. 3. When an estimate is disseminated overseas, the overseas recipients may retain it for a period not in excess of one year. At the end of this period, the estimate should either be destroyed, returned to the forwarding agency, or permission should be re- quested of the forwarding agency to retain it in accordance with IAC-D-69/2, 22 June 1953. WARNING This material contains information affecting the National Defense of the United States within the meaning of the espionage laws, Title 18, USC, Secs. 793 and 794, the trans- mission or revelation of which in any manner to an unauthorized person is prohibited by law. DISTRIBUTION: White House National Security Council Department of State Department of Defense Foreign Operations Administration Operations Coordinating Board Atomic Energy Commission Federal Bureau of Investigation Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 400020111E T PROBABLE DEVELOPMENTS IN BRAZIL THE PROBLEM To estimate the current situation in Brazil and probable developments through 1955. CONCLUSIONS 1. The suicide of President Vargas in August 1954 and succession of the mod- erate-conservative Cafe Filho administra- tion have not resulted in any funda- mental change in the Brazilian situation. The economic situation remains precari- ous. Inflation continues largely una- bated and the persistent dollar shortage is being met only by successive US loans. The political situation is affected by per- sistent social unrest, particularly in urban areas, and is aggravated by uncer- tainties relating to the presidential elec- tion to be held in October 1955. (Paras. 11, 20, 44) 2. The new president to be elected in Oc- tober is likely to be a man committed to meet labor-leftist demands, assuming that free elections are held. The strong- est labor-leftist candidate is Juscelino Kubitschek, governor of Minas Gerais and a former adherent of Vargas. The election of such a man is likely to create a political situation similar to that which existed under the Vargas regime; i.e., chronic political tension between the executive and moderate-conservative ele- ments, in Congress and especially in the armed forces. The military, would be confronted with a hard choice between condoning further evolution to the left or immediately imposing a government to their liking.. (Paras. 23, 26) 3. A moderate-conservative could be elected in a free contest only if the labor- leftist vote were seriously split. Such a candidate, elected with multiparty back- ing and the approval of the military, could probably enlist sufficient congres- sional cooperation to effect some improve- ments in the economic situation. A mod- erate-conservative regime would be un- likely to antagonize politically vocal con- servative elements, and would be in a position to employ force, if necessary, to suppress social unrest. (Paras. 21, 24, 25) 4. There is little chance that the admin- istration to be elected in October will be able to deal effectively with Brazil's deep- seated and politically dangerous economic difficulties. In fact, as long as any Bra- zilian administration assumes that dollar loans are readily available, there is little likelihood that it will incur the political SNOMMT Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 1 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 aiiingat risk involved in stabilizing the economy. However, the administration would be even less willing to follow politically dan- gerous policies in the absence of dollar loans. Rather, it would be under ex- treme pressure to seek radical, nation- alistic solutions to Brazil's economic prob- lems. In any case, effective action over an extended period will be required to stabilize the Brazilian economy. (Para. 47) 5. The Brazilian Communist Party, al- though outlawed, has approximately doubled in numbers during the last two years. It is now estimated to have 100,- 000-120,000 members and a much larger number of sympathizers. For some time to come, it will probably continue to in- crease in numbers and political influence. It is unlikely, however, that the party could, within the foreseeable future, gain sufficient strength to take control of Bra- zil by electoral means or by force. (Paras. 27, 34) 2 6. Brazil will almost certainly continue to support the US on major issues between the US and the Soviet Bloc, but, if not granted the special consideration to which it feels entitled, with particular reference to dollar loans, may pursue an increasingly independent course. Brazil will seek to establish closer economic re- lations in Latin America and with West- ern Europe, and will also seek to increase its now minor nonstrategic trade with the Soviet Bloc. (Para. 57) 7. Brazil will continue to oppose Argen- tine bids for leadership in Latin America and the development of an Argentine-led bloc. Fundamentally, Brazil deprecates the idea of competing blocs in Latin America and promotes instead the con- cept of Hemisphere solidarity. (Para. 55) 8. In the event of general war, Brazil would almost certainly participate active- ly in support of the US. (Para. 56) DISCUSSION I. INTRODUCTION 9. Brazil is a major power within the Latin American community. It exercises consider- able influence in both the Organization of American States and the United Nations. Moreover, Brazil is strategically located with respect to sea and air routes in the South Atlantic and is an important source of stra- tegic materials, notably metallurgical man- ganese, quartz crystals, beryl ore, mica, tung- sten, tantalite, and castor oil. It is the only Latin American country with known sizeable deposits of atomic energy raw materials, prin- cipally thorium. The Brazilian armed forces are capable of making an important contri- bution to Hemisphere defense. Traditionally, Brazil has cooperated closely with the United States on important international questions. 10. Except in some geographical areas (e.g., Sao Paulo) little progress has been made in developing Brazil's large human and material resources. The national economy continues to depend on exports of agricultural products. Earnings from these exports have not been sufficient to sustain the postwar rate of in- dustrial development, while at the same time economic nationalism has impeded foreign in- vestment. The industrialization which has occurred since 1930 has been accompanied by severe inflation and by economic and social strains felt particularly by the rapidly grow- ing urban population. 11. Heavy migrations from the back country into the cities have brought hundreds of thousands of Brazilians into their first con- tact with higher standards of living, glaring *NitiefArigi: Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 _ Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 SOLIIIIretOr 3 inequalities, and the insecurity of urban ex- istence. Acutely distressed by inflation, the urban masses generally are increasingly dis- satisfied with their level of living and clam- orous for improvement. At the same time middle and upper class conservatives, includ- ing Army leaders as well as commercial and industrial interests, have been disturbed by the adverse prospects for maintaining a high rate of economic development and by the growth of labor-leftist and Communist strength, which threatens their dominant position in Brazilian life. The conflicts and tensions which inevitably arise in such time of rapid economic and social change are con- tinuously exploited in Brazil by both extreme nationalists and Communists. Brazil, how- ever, has been less subject to political violence than most Latin American countries. II. THE POLITICAL SITUATION AND PROSPECTS The Collapse of the Vargas Regime 12. The present administration came to power in August 1954 as a result of the suicide of President Getulio Vargas. The Vice-Presi- dent, Joao Cafe Filho, thereupon succeeded constitutionally to the presidency for the re- mainder of Vargas' term (until 31 January 1956) . An understanding of the character of the. Vargas regime and the causes of its col- lapse is prerequisite to an estimate of the present political situation and prospects. 13. Vargas was an astute politician who shrewdly manipulated opposing factions and successfully posed as the friend of the com- mon people. During his first period in power (1930-1945) he established the quasi-fascist "New State" as an ideological facade for his strong personal rule. He espoused cultural and economic nationalism, established federal control over the states, abolished political parties, suppressed all opposition of both the left and right, undertook government inter- vention and initiative in economic develop- ment, promoted industrialization, concerned himself with amelioration of the living condi- tions of the urban masses, extended the fran- chise, and sought to mobilize and control urban labor as a political force through gov- ernment-sponsored labor unions. It was dur- ing this period that urban lower income groups began to become an important factor in Brazilian politics. 14. In 1945, in response to a growing opposi- tion to totalitarianism, the Brazilian Army quietly deposed Vargas and established a more normal federal republican regime with Gen- eral Eurico Gaspar Dutra as constitutionally elected president. The two principal political parties which emerged were the Social Demo- cratic Party (PSD) and the National Demo- cratic Union (UDN). Both were heteroge- neous in composition, but received their direc- tion primarily from upper middle class ele- ments and were correspondingly moderate- conservative in political outlook. The pri- mary difference between them was that the PSD was led by men who had been promi- nently associated with Vargas in the "New State," while many leaders of the UDN had opposed Vargas. 15. The moderate-conservative Dutra admin- istration failed to cope effectively with the growing economic hardships suffered by lower middle class and labor groups. Partly as a result of this failure, Vargas was able to re- tain a large personal following and to build up a personal political machine ? the Bra- zilian Labor Party (PTB) ? based primarily on organized labor. In the 1950 presidential campaign Vargas exploited both the discon- tent of lower income groups and the inepti- tude of conservative political leaders. He was elected with 49 percent of the popular vote, as against 30 percent for his nearest com- petitor. However, moderate-conservatives (the PSD and UDN) continued to predominate in both houses of Congress and to control most state and municipal governments. 16. Vargas was no more successful in coping with Brazil's mounting economic difficulties than his predecessor had been. In contrast to the vigor and self-confidence of his earlier rule, his policy was indecisive, largely because of his lack of an assured majority in Congress. Although the PSD generally supported him, it did so at a policy price which tended to alienate his labor-leftist following and its con- Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 tinued support could not be relied upon. Moderate-conservatives in general continued to distrust him on account of his past record, his labor-leftist associations, his apparent in- difference toward Communism, and his known tendency to subordinate pressing economic considerations to the requirements of political expediency. By vacillating between policies designed to gain moderate-conservative sup- port and measures calculated to regain the loyalty of his indispensable labor-leftist fol- lowing, Vargas forfeited the confidence of both groups. 17. By early 1954 the economic and political situations in Brazil were both extremely pre- carious. Policies pursued under moderate in- fluence had temporarily averted a foreign ex- change crisis, but inflation continued un- checked. With congressional elections ap- proaching, Vargas turned again to the left, the symbol of this decision being a decree doubling the minimum wage regardless of the economic consequences. By adroit politics, Vargas managed to maintain his position despite conservative efforts to oust him on this account, but political tension was raised to such a point that his regime was vulner- able to any political accident. The accident occurred when an Air Force officer was killed by Vargas henchmen who were attempting to assassinate an editor who had been vocifer- ously critical of the regime. The public re- action excited by the Air Force investigation of this affair deprived Vargas of popular sup- port at a time when moderates and conserva- tives were already out to get rid of him. In these circumstances the Army and Navy ac- ceded to Air Force demands that Vargas be forced to resign. 18. This political intervention by the Army, as the dominant military force, was in keep- ing with Brazilian traditions. The Army normally remains aloof from politics, support- ing the incumbent government, whatever its political complexion, but the Army also con- siders that it has an overriding responsibility for the preservation of order and of estab- lished institutions. It had already warned Vargas, in February 1954, when it demanded 4 and obtained the dismissal of his Minister of Labor. It acted in August, not only in re- sponse to Air Force pressure, but also to check the administration's sharp trend to the left and to avert the implicit danger of serious civil disturbances. The Cafe Administration 19. Cafe Filho's known personal integrity and political independence raised hopes that he might succeed where Vargas had failed in pro- viding effective solutions for Brazil's politico- economic difficulties. Although himself po- litically left of center, Cafe had come to power with the support of the moderate-conserva- tives and the military. His cabinet includes representatives of all the principal parties as well as men without party affiliation. For the first time in recent years the Brazilian cabinet is composed predominantly of men of high intellectual and moral character, con- cerned primarily with the national welfare rather than with personal or party interest. 20. As was the case with its predecessors, the new administration's most pressing problems are economic, particularly the foreign ex- change shortage and inflation. It has at- tempted to meet them by advancing a pro- gram of retrenchment and austerity such as no Brazilian government has hitherto dared to propose. Government expenditures have been reduced and government support of in- dustrial expansion has been withdrawn. In large part, however, the administration's re- trenchment program has been frustrated by lack of support in Congress. Inflation has not been substantially retarded. 21. The October 1954 congressional elections failed to provide a clear mandate for or against the Cafe program. The moderate-conserva- tive parties retained a combined majority in Congress and could enact the Cafe program if they united to do so. Party discipline in Congress is lax, however. Moreover, party politicians are understandably disinclined to vote for tax increases, credit restrictions, re- duction of agricultural price supports, or curtailment of working class benefits in a presidential election year. Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 v110010110gT 5 The Approaching Presidential Election 22. Party preparations for the presidential election to be held in October 1955 are taking place in unusual circumstances. For twenty- five years Brazilian politics have taken the form of support for or opposition to Getulio Vargas. His death has removed their accus- tomed point of reference. The labor-leftist elements who followed him are now leader- less, but otherwise moderate politicians are tempted to compete for the labor-leftist vote, realizing that the direction which it takes will probably determine the outcome of the elec- tion. On the other hand, the armed forces are taking a greater than usual interest in politics. They are strongly opposed to the election of a Vargas-associated labor-leftist, and, if political developments should tend toward that result, they might intervene to prevent the election of such a candidate. 23. In order to avoid incitement of the masses by competing candidates, and also to ensure the election of a president satisfactory to themselves, the armed forces have favored the idea of a coalition of all major parties in sup- port of a single candidate more or less com- mitted to carry out the policies of the Cafe administration. The UDN has been receptive to this idea. The PSD, however, under the influence of its pro-Vargas wing, has chosen to nominate Juscelino Kubitschek, the gov- ernor of Minas Gerais, and to seek a coalition with the labor-leftist PTB. The PTB is not yet ready to commit itself to Kubitschek and the PSD, but could probably be persuaded to do so by proper political concessions. In con- junction with Kubitschek's popular appeal, a PSD-PTB combination would probably be suf- ficient to ensure his victory in a free election. It might, however, provoke military interven- tion in the election ? unless the military were privately persuaded that Kubitschek, in office, would pursue acceptable policies. 24. The outcome of the election will depend primarily on whether the bulk of the labor- leftist vote can be won by Kubitschek (or any other single candidate), or whether it will be divided among many candidates. The latter contingency is a possibility. Other potential candidates with labor-leftist appeal are Ad- hemar de Barros, Janio Quadros, and Estillac Leal, representing diverse factions. The elec- tion of a moderate-conservative to the presi- dency of Brazil would be possible only in the event of a serious division of the labor-leftist vote. 25. The action of the UDN will be greatly in- fluenced by the prospect for division of the labor-leftist vote. Against a PSD-PTB coali- tion, the UDN would be likely to seek a cor- responding coalition with Janio Quadros, the independent leftist governor of Sao Paulo. If, however, it appears that the labor-leftist vote will be divided, the UDN might nominate a moderate-conservative with military connec- tions, such as General Juarez Tavora. 26. The next president of Brazil is likely to be a man (such as Kubitschek) committed to pursue labor-leftist policies. The election of such a president would create a political sit- uation similar to that which existed during the Vargas regime. The armed forces would be confronted with a hard choice between condoning further evolution to the left, at the risk of eventually losing their power to act as arbiter in Brazilian politics, or imme- diately imposing a government to their liking, at the risk of precipitating bitter internal dis- sension between labor-leftist and conserva- tive-military elements and possibly severe civil disturbances. The prospect, at best, is for continuing political tension in Brazil. The Communists 27. The Brazilian Communist Party (PCB) lost strength after it was outlawed in 1947. However, since 1951 (when Vargas returned to power), and especially during the last two years, it has had remarkable success in rais- ing funds and recruiting new members. It is now estimated to have 100,000 to 120,000 members and a much larger number of sym- pathizers. It draws its chief support from urban labor and lower middle class groups, although the leadership of the party is com- posed largely of professional men and intel- lectuals. Retired military personnel also have been active in the leadership of front organizations. For the present, the party's primary effort is directed toward the consoli- T Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 SECRET 6 dation of its recent gains, rather than toward further expansion. The Communists not only maintain numerous newspapers for the dissemination of propaganda, but have also established an extensive school system for the indoctrination of party cadres. They talk of developing the party in accordance with "the Chinese revolutionary pattern": i.e., by agita- tion and organization among the peasants leading to guerrilla resistance in the back country and to eventual revolution. Their present strength is concentrated in and around the city of Rio de Janeiro, in the im- portant state of Sao Paulo, and in the stra- tegic "hump" of Brazil., 28. The PCB appears to have two immediate objectives: (a) to stimulate and exploit pop- ular discontent in order to discredit moderate- conservative government, and (b) to stimu- late and exploit anti-US nationalism in order to neutralize Brazil as an effective ally of the United States. A good example of Commu- nist technique is the agitation, in conjunction with that of non-Communist ultranation- alists, which contributed to enactment of the existing law excluding foreign capital from participation in the development of Brazil's petroleum resources. 29. Vargas was largely indifferent to the rapid revival of Communism in Brazil during his presidency. No Communist sympathizer him- self, he presumably supposed that he could control the situation. His indifference, how- ever, permitted intensive Communist infiltra- tion of some labor organizations, and, to a lesser extent, of the bureaucracy and the armed forces. 30. The Cafe administration has taken some action to neutralize this Communist infiltra- tion. Military officers of known Communist sympathies have been retired or reassigned; known Communists among the enlisted per- sonnel are being court-martialed. Commu- nists are also being removed from positions of labor union leadership. As yet, however, lit- tle has been accomplished toward removing Communists from the bureaucracy or from elective public office. The attached map shows more fully the distri- bution of Communist strength in Brazil. 31. Possibly because the Brazilian Catholic Church underestimates the strength of Com- munism in Brazil, it has not engaged in a militant campaign against Communism. In any case, Church influence in Brazilian poli- tics is usually weak. 32. Inasmuch as the Communist Party, as such, is still outlawed, Communist political action must be effected through other political parties. The extent of Communist penetra- tion of other political organizations is un- known; it may be extensive in the PTB. In the 1954 congressional election at least five Communists and Communist sympathizers, running under non-Communist party labels, were elected, as compared with one such dep- uty in the previous Congress. 33. The Brazilian Communists may be able to derive advantage from Vargas' suicide and from his "political testament," which coin- cided remarkably with the Communist Party line. Their previous condemnation of Vargas has been obscured by their effort to incite a violent popular reaction to his suicide. They now are able to claim him as a martyr to "Yankee imperialism." Furthermore, in the forthcoming presidential election they will be in an advantageous position to push their united front program, auctioning a large bloc of assured votes in exchange for political con- cessions. 34. For some time to come, the Brazilian Com- munist Party will probably continue to in- crease in membership and political influence. It is not likely, however, that the party could, within the foreseeable future, gain sufficient strength to win direct control of Brazil by electoral means or by force. Its influence on Brazilian policy will be exerted through the popular pressures engendered by its exploita- tion of social discontent and nationalist tendencies in the non-Communist population. III. THE ECONOMIC SITUATION AND PROSPECTS 35. Brazil has the greatest economic potential of any country in Latin America. Terri- torially larger than the United States, it has a fast-growing population of about 58 million, SECRET Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 SECRET 7 which is about double that of the next largest Latin American republic (Mexico). Although agriculture occupies over two-thirds of the population, only five percent of the arable land is cultivated. Nevertheless, Brazil is the world's largest producer of coffee and ba- nanas, ranks second in the production of cacao and citrus fruits, and is at least in fifth posi- tion in the production of sugar, tobacco, corn, and cotton. Brazil's herds of cattle and pigs are fourth largest in the world. Although much of the country reniains to be explored, Brazil is believed to have the resources for self-sufficiency in most of the major minerals, the principal exceptions being tin, zinc, lead, copper, sulphur, and coal. Brazil is an im- portant area for US trade (trade both ways in 1953 was approximately $1.1 billion) and for direct investment of US private capital. By 1953 such investment totalled slightly over $1 billion. 36. Brazil's economic growth since 1930 has been rapid. Since the end of World War II gross investment has amounted to about 16 percent of GNP annually, the overwhelming proportion of which has been devoted to in- dustry and construction. ' GNP increased about five percent annually from an estimated $10.8 billion in 1950 to $12.5 billion (at 1950 prices) in 1953. By 1951 the manufacturing sector (including construction) had come to contribute 24.5 percent to total GNP, thus equaling the contribution made by the agri- cultural sector. Brazil has continued, how- ever, to rely overwhelmingly on agricultural and animal exports for foreign exchange earnings. Such exports, except during World War II, have accounted for well over 90 per- cent of Brazilian exports, with coffee contrib- uting between 40 and 70 percent. (Brazil normally supplies about one-half of US coffee imports, thus acquiring the foreign exchange which has permitted Brazil to become one of the important American markets for ma- chinery and vehicles. During 1953 and 1954 Brazil supplied only 40 percent of the US coffee market, however. In the latter year the decrease was particularly serious for Bra- zil, since total US coffee imports were off 19 percent under the impact of an unprecedent- edly high coffee price.) 37. Divergences in the rate of growth between the various sectors of the economy have given rise to serious maladjustments. Rapid indus- trial expansion has not been accompanied by a proportionate development of transporta- tion and power facilities. Agricultural and mining production for export has been neglected in favor of manufacturing indus- tries. Moreover, emphasis upon capital goods industries within the industrial sector tended to create an imbalance between the supply of and effective demand for consumers' goods. Inadequacies in basic productive facilities and high cost of distributive services contributed to high unit costs of consumer goods, main- tained and encouraged by a deliberate policy of protection through tariff and foreign ex- change regulations. 38. The rapid growth of the Brazilian econ- omy has occurred under conditions of unin- terrupted inflation. In the last 15 years the cost of living has been increasing at an annual rate of more than 16 percent; in the first 11 months of 1954 the cost of living rose 22 per- cent. Prices at the end of 1954 were about 770 percent above those for 1939. This rate of price increase is of a different order of magnitude from that historically experienced by Brazil, namely, about 2.5 percent annually. In general, wages have lagged behind prices. The inflation has been the result of several factors. For some years prior to 1947, it was stimulated by the accumulation of substan- tial foreign exchange surpluses, which Brazil was unable to convert into consumers' goods. Since 1947, domestic factors such as govern- ment deficits and the expansion of credit have fostered the inflation. Of considerable im- portance also has been the fact that a large proportion of investment was of the long- term variety which did not result in an in- creased output of consumer goods. 39. Brazil's effort to maintain the rate of industrialization, even at the cost of severe inflation, has led to recurrent foreign ex- change shortages. In order to permit domes- tic industry to purchase its needed imports cheaply, a highly inflated value for the cru- zeiro was maintained. This over-valuation caused a weakening of the competitive posi- SECRET Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 tion of Brazilian exports and a concurrent loss of foreign exchange. At the same time expansion of industry stimulated Brazil's de- mand for raw materials, capital goods, and fuels, most importantly petroleum. Although industrial production was able to provide sig- nificant foreign exchange earnings during World War II, during the postwar period it was unable to compete with the older indus- trialized countries, in part because of the over- valuation of the cruzeiro. In the same man- ner, although the Brazilian Government has insisted in recent years that new foreign in- vestment be "constructive," it has given greater emphasis to further industrialization than to investments that would produce for- eign exchange. Consequently the drain on foreign exchange resources caused by Brazil's rising industrial production has been un- matched by new foreign exchange earning power. 40. Brazil's foreign exchange difficulties are dominated by the large and increasing de7 mand for fuel imports. About one-third of anticipated 1955 dollar receipts are allocated to petroleum imports. The wisdom of secur- ing foreign capital to find and exploit the domestic petroleum resources, which have been inferred from Brazil's geological struc- ture, has long been recognized by many prom- inent Brazilians, in view of the lack of good coal reserves and poorly located hydroelectric resources. In 1953, however, extreme nation- alists and Communists spearheaded passage of legislation establishing a government petroleum monopoly and excluding foreign capital, and they have since prevented a modi- fication of the legislation by the new admin- istration. Brazil's monopoly is not likely to succeed except, perhaps, over the long term, because of the country's lack of funds and technical skill. Yet, in the absence of indi- genous fuel resources, further economic growth will place increasing strains on the already inadequate foreign exchange re- sources. 41. During 1953 a serious attempt was made to meet the foreign exchange problem. Early in the year the Vargas administration was faced with a foreign exchange crisis and a 8 large commercial debt backlog, which was temporarily resolved by a $300 million Ex- port-Import Bank loan. Shortly thereafter a new Finance Minister, Oswaldo Aranha, at- tempted to reorient the economy to eliminate some of the obvious causes of disequilibrium. He made a determined effort to stimulate exports by providing subsidies and exchange incentives. Simultaneously, he initiated a foreign exchange system which restricted the volume of all imports, but especially the less essential ones. Particularly important was the preference given through exchange con- trol to the development of the retarded basic service industries such as transportation and power. Aranha failed, however, to secure ade- quate executive or congressional support. The executive branch feared that a curbing of inflation with the consequent restriction of industrial development would seriously under- mine Vargas' already weakened political posi- tion. The Congress, on the other hand, re- fused to accept the political risk involved in opening Brazilian oil to foreign investment. Both Congress and Vargas apparently hoped that large coffee exports at favorable prices would postpone or eliminate the problem of drastic internal economic readjustment. 42. However, coffee prices weakened in May 1954, seriously aggravating Brazil's economic position. Vargas then attempted to peg the price of coffee, a move which resulted in a serious curtailment in Brazil's volume of ex- ports and earnings of exchange. Commercial exchange obligations once again rose to seri- ous proportions. At the same time inflation was permitted to run, fed by treasury deficits, expansion of bank credits, and the de facto devaluation of the cruzeiro. The price-wage spiral was put into motion once again by a series of wage increases, particularly by the doubling of minimum wages decreed by Var- gas as of 1 May 1954. 43. The Cafe administration has demon- strated its awareness of the necessity for politically unpalatable measures to meet Brazil's economic difficulties. However, it has not felt itself sufficiently strong politi- cally to propose such basic reforms as re- striction of wages, abandonment of coffee 481546ker Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 gaillitr 9 stabilization, or the admission of foreign cap- ital for petroleum development. Moreover, congressional cooperation has not been forth- coming. 44. On taking office the Cafe administration was immediately faced with a foreign ex- change crisis which was met with the help of a $200 million loan from US banks. At the same time it undertook a program to raise exports and reduce imports, particularly in relation to the dollar area. The trade pat- tern planned for 1955 provides for imports from convertible currency areas (primarily the US) in the amount of $532 million, a sharp decrease from the $755 million of 1954. The machinery for implementing this decrease lies in a purely administrative reduction of the dollar exchange auctioned to importers. Such a reduction is probably feasible since some imports can be shifted to the noncon- vertible account where there is little payment difficulty except in connection with sterling. Exports to the convertible currency areas are to be raised from $580 million in 1954 to $720 million in 1955. Brazil's recapture of its tra- ditional share of the American coffee market will be essential to the realization of this ex- port goal. 45. The major deterrent to adequate coffee sales in the past eight months has been the price stabilization program instituted by Var- gas in the last months of his regime, with nationalist overtones of "protecting" Bra- zilian coffee interests from "international financiers." Under the program a minimum export price was established, and the Bank of Brazil granted to coffee interests loans equaling 100 percent of the value of the cof- fee stocks, valued at the equivalent of a New York price of 87 cents per pound. When the policy was instituted it was hoped that the New York price would be forced up. In fact, it has decreased about 33 percent, mostly in two stages, in August 1954 and February 1955. Meanwhile the coffee interests are still re- ceiving the same minimum cruzeiro price and are under no financial pressure to dispose of their stocks, and foreign exchange receipts from coffee sales are running below Brazil's minimum requirements. As a result of this, Brazil was forced to seek new financial aid early this year. On 9 February 1955 the Export-Import Bank granted a $75 million credit which Brazil may draw on at the rate of $15 million monthly, if necessary to meet the estimated minimum dollar exchange re- quirements. International financial commit- ments in dollars, which cannot be further postponed, require foreign exchange earnings (including drawings under the new $75 million Export-Import Bank credit) of at least $60 million monthly; such earnings can be obtained only from exports of coffee to the United States in greater quantity than in Jan- uary. If this does not take place, the use of cash balances and existing borrowing rights from private American banks might close the gap for a short time, but subsequently Brazil would again seek US Government aid. The Brazilian Government may believe that American exporters, alarmed at the loss of their markets in Brazil to European firms un- affected by the dollar shortage, would success- fully press the US Government to grant effec- tive financial aid. 46. The Cafe administration recognizes the need to check inflation, but, in the existing political situation, the courses open to it are narrowly circumscribed. It has restricted bank credit. It has also proposed new taxes in order to reduce its deficit spending, but could obtain from Congress only one-third of the tax increase requested. It thereupon un- dertook to reduce government expenditures, but has actually been obliged to grant to its civil and military employees "temporary" pay increases not provided for in the budget. Moreover, the Brazilian Government is re- sponsible, in the public mind, for the coun- try's continued economic growth, and is there- fore under heavy pressure to maintain a high rate of economic activity. A continued de- cline in the rate of private investment, such as occurred in 1953-1954, would probably compel the government to resume expendi- tures for public works, even though it is fully aware of the inflationary effects of such a policy. Consequently, there is little prospect that the Cafe administration can substan- tially retard the progress of inflation. zpRORINT Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 slimegert 47. In these circumstances (paras. 43-46) the Cafe administration cannot be expected to accomplish much toward the solution of Bra- zil's deepseated and politically dangerous economic difficulties. The administration to be elected in October 1955 will have to face the same problems. There is little prospect that it will have the political strength to im- pose drastic remedies. In fact, as long as any Brazilian administration assumes that dollar loans are readily available, there is little like- lihood that it will incur the political risks involved in stabilizing the economy. How- ever, the administration would be even less willing to follow politically dangerous policies in the absence of dollar loans. Rather, it would be under extreme pressure to apply radical, nationalistic solutions to Brazil's economic problems. In any case, effective action over an extended period will be re- quired to stabilize the Brazilian economy. IV. THE ARMED FORCES 48. The Brazilian armed forces, organized and trained on US lines, have an over-all strength of approximately 204,000. The Army, num- bering 108,000, consists of 7 infantry, 1 armored, and 4 cavalry divisions, numerous separate combat units, and supporting troops. In addition, there are 55,000 militarized police available for local and regional use. The Navy, with a personnel strength of 21,000, has a combat force of 2 light cruisers, 7 de- stroyers, and 32 smaller escort, patrol, and mining vessels. Two additional destroyers now under construction may become available during 1955. The Air Force, with a personnel strength of 20,000 (including about 1,000 pilots) , maintains 5 fighter, 2 light bomber, 2 patrol, 2 reconnaissance, and ,2 transport squadrons. It has about 950 combat, recon- naissance, and transport aircraft, including 68 British jet fighters. 49. The operational effectiveness of the three combatant services is high by Latin American standards as a result of their reorganization, re-equipment, and operational experience with US forces in World War II, and of the assist- ance of US military missions. Their effec- tiveness is impaired, however, by a lack of 10 adequate support facilities, poor maintenance and general obsolescence of equipment, and dependence on foreign sources for resupply of material, munitions, and fuel. A severe dol- lar shortage and the high cost or unavail- ability of US military supplies have caused Brazil to turn to Europe for some aircraft and military equipment, to the detriment of Hemisphere arms standardization. However, procurement from this source is also severely limited by fiscal considerations. 50. Brazil participates actively in the Inter- American Defense Board and has a bilateral military assistance agreement with the US. Under this agreement, Brazil has designated certain units as available for Hemisphere de- fense, including service outside its own na- tional territory. With MDAP support, the equipment and training of these units will be improved. 51. The Brazilian armed forces are adequate to maintain internal security and to deter aggression by any neighboring power. They could not repel a major overseas invasion without US assistance. In the event of gen- eral war they could probably protect strate- gically important installations and facilities from extensive sabotage and from possible raids. The Brazilian Navy and Air Force have limited convoy escort and antisubmarine warfare capabilities, but effective patrol of the long Brazilian coast would require the active participation of US forces. With US logistic support the Army could provide a small expeditionary force. V. PROBABLE FOREIGN POLICY 52. Brazil has traditionally regarded itself as the particular friend and ally of the US in Latin America. With a self-confidence based on its vast extent and relative political sta- bility, it has considered itself superior to its Spanish-speaking neighbors and the natural associate of the US. Moreover, the US is by far Brazil's most important coffee market and the only important source of needed financial and technical aid. For these feasons Brazil strongly desires the friendship and support of the US and is highly sensitive to any US tendency not to accord Brazil special consid- ,,.&stegr Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Qtrividitivr 11 eration and favor. At the same time Brazil is sensitive to any implication of US tutelage. 53. In recent years US?Brazilian relations have occasionally been impaired by growing Brazilian nationalism, which has produced friction in both economic and politico-military affairs. An important factor in this develop- ment has been a growing feeling in Brazil that the US undervalues Brazil's friendship and tends to take it for granted. In partic- ular, Brazilians feel that US economic and financial assistance to Brazil has not been commensurate with Brazil's past services and present strategic importance to the US, or with Brazil's value to the US as a moderating influence in Latin America and in UN affairs. In common with other Latin Americans, Bra- zilians resent what they regard as the favored position of Europe and Asia respect- ing the amount and terms of US assistance. 54. Brazil has made no move to restore diplo- matic relations with the USSR which Brazil severed in 1947. It maintains diplomatic re- lations with Poland and Czechoslovakia and has received a commercial mission from Hun- gary. Brazil's trade with the Bloc has in- creased markedly over the past year, but is still very small. There are mounting popular pressures for expanding relations with the Bloc. This idea is generally attractive be- cause of Brazil's need to find new markets for its exports, and also probably at official levels as a means of strengthening Brazil's bargaining position vis-a-vis the US. Com- munists and their sympathizers are pressing the idea of large Bloc markets for their own ulterior purposes, with considerable nation- alist support. 55. In the Latin American community, Brazil has always opposed Argentine bids for lead- ership. In particular, it has sought to coun- ter Argentine designs on Uruguay, Paraguay, and Bolivia. Fundamentally, Brazil depre- cates the idea of competing blocs in Latin America, and promotes instead the concept of Hemisphere solidarity. 56. Brazil's political and military leaders favor the concept of a collective Hemisphere defense, and they also seem opposed to neu- tralist positions in connection with broader international problems. In event of general war, Brazil almost certainly would participate actively in support of the US. 57. Brazil almost certainly will continue to support the US on major issues between the US and the Soviet Bloc. Barring an increase in the influence of the Communist and extreme-nationalist factions in the Foreign Office, Brazil will almost certainly continue to support the US on most important issues in Hemisphere affairs. Brazil's strategic mate- rials will continue to be available to the US and it is likely that progress on the large- scale manganese development in northeastern Amapa will permit shipments to the US to begin in early 1956. However, a desire to strengthen its bargaining position vis-a-vis the US will be an important factor in Bra- zilian peacetime diplomacy, and frictions will almost certainly continue to occur, particu- larly on economic questions. Brazil will seek to establish closer economic relations in Latin America and with Western Europe, and will also seek to increase its now minor non- strategic trade with the Soviet Bloc. Declassified and Approved For Release 2013/05/20 : CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 , 4. 70 :I VENEZUELA till r"11, COLOMBIA A BR. GUIANA cSURINAM ; Boa Vista e ?GUIANA ??//, ? (:)riGETO.. 54 P RAMARIBO AVENNE 5. 1-1 Manaus A ozon River ap 3!3 ATLANTIC OCEAN ,0 LuuS Teresina ?Fortaleza ? (.. \10 4.1,-L ? Natal FERNANDO DE NORONHA. 26 1 ?-??? / 714 Branco0 // Rio % PERU PAZ 6- PACIFIC OCEAN CHILE( veig 2 4 BOLIVIA Joao Pessoa Recite .0 24 3 BRAZIL DISTRIBUTION OF COMMUNIST STRENGTH November 1954 ? 1000 MEMBERS TOTAL 120,000 MEMBERS ???????i. International boundary State or territorial boundary ? National capital 0 State or territorial capital 300 600 STATUTE MILES 0 300 600 SECRET KILOMETERS k / PARAGUAY ea SUN4/4 23 ? ACIV 4 ,Cuialse 9Y" //,........,j? \-. Fioriaa6Polis 7 74. ? ? g P6rto Aldtre M? ? URUGUAY MONTEVIDEO ? 21 ? ? ? 4b? 18.1 ? (,? *Belo 2Hoori.zointge.i ? ? ? A ? ? ?I.SaoPa60.04F ?? ? ?-?? Curitiba. BUENOS AIRES 5.4 4:6 Vit6ria r61 RIOtDE JANEIRO ATLANT1 C OCEAN 3:8 3,b -16- -32, I. Territario do Acre 2. Territ6rio do Guapore 3. Mato Grosso 4. Amazonas 5. Territotio do Rio Branco 6. Territorio do Amapa 7. Pare 8. Maranha"o 9. Piaui INDEX TO STATES AND TERRITORIES 10. Ceara 11. Rio Grande do Norte 12. Paraiba 13. Pernambuco 14. Alagoas 15. Sergipe 16. Bahia 17. Espirito Santo a? area disputed by Espiritu Santo and Minas Gerais 18. Minas Gerais 19. Rio de Janeiro 20. Distrito Federal 21. Goias 22. Sac, Paulo 23. Parana 24. Santa Catarina 25. Rio Grande do Sul 26. Territhrio de Fernando de Noronha 13713 3.55 .ErisCRIEtT Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6 Declassified and Approved For Release 2013/05/20: CIA-RDP79R01012A006200020007-6