6 YEARS OF THE REAL PLAN GROWTH AND SOCIAL DEVELOPMENT

By allowing the free fluctuation of the Real, the change in the foreign-exchange regime has brought about a deep change in external transactions, and has mitigated restrictions on the Country’s balance of payments. The most immediate effect of the currency devaluation took place on the import side, which dropped by 14.8% in 1999, as compared to 1998, while exports, instead of increasing, had a 6% reduction. With this performance, the trade balance started recovering from the deficits recorded in the last years, and went from a negative balance of US$ 6.6 billion in 1998 to a smaller negative balance of US$ 1.2 billion, in 1999. Already in early 2000, however, the trade balance reached positive results, thus confirming the change in the trend of foreign trade. The slow reaction of the trade balance after the devaluation was mainly due to the behaviour of external prices. On the one hand, there was a 15% drop in the prices of agricultural and mineral primary products, which account for over one third of Brazilian exports; on the other, there was a steep increase in oil prices, the main item of Brazilian imports. EXPORTS AND EXTERNAL CRISES PERCENTILE VARIATION OF EXPORTS first quarter of 1997 and first quarter of 2000 Categories Index Value Price Amount Total Exports 13,10 -16,30 34,50 Basic -11,30 -28,40 23,30 Semi-manufactured 13,50 -13,60 30,20 Manufactured 23,70 -12,00 39,60 In spite of this adverse environment, the comparison between the situations before and after the external crises (first quarter of 1997 vis-à-vis the first quarter of 2000) leads to the conclusion that there was a 13% increase in the value of total exports, due to an expansion of around 34% in volume. It is worth highlighting the growth in the manufacture sector, nearly 40% in volume and 24% in value, despite a 12% reduction in prices. After a 7% decrease in 1999, the external sales of manufactured goods grew by 25% in the first four months of 2000, and increased their participation in the total exports. Thus, the growth of exports is taking place in sectors that produce goods with greater added value. This fact, associated with the substitution of imports, contributes to the resumption of industrial production and of employment, which show remarkable grow It is important to highlight that the growth of total exports and of manufactured-good exports, in particular, also occurs as a consequence of the opening of new markets, which allows Brazil to overcome the retraction of Latin-American countries, traditional markets for those Brazilian products. The participation of the United States in Brazilian external sales changed from 19% to 23%, from 1998 to 1999, which mitigated the reduction in sales to MERCOSUL and to ALADI member countries. CURRENT TRANSACTIONS The change in the foreign exchange situation that took place in January, 1999, also had important consequences for the service balance, in which the deficit diminished by US$ 3.6 billion, due to the increase of US$ 2.7 billion in the balance of the international-travel account and of US$ 455 million in the freight account. The reduction of these expenses was enough to compensate for the increase in expenditure with interests, which increased by 27%.   In 1999, the balance in current transactions had a US$ 24.4 billion deficit, as a result of: the US$ 1.2 billion deficit in the trade balance; of the deficit of US$ 25.2 billion in services; and of the positive balance of US$ 2 billion in unilateral transfers. Compared to the previous year, this deficit was reduced by 27%. Regarding the GDP, measured in US dollars, the deficit remained a little above the level of in 1998 (4.39% against 4.33%), due to the statistical effect of the smaller amount of GDP in US$, after the currency devaluation. However, the accumulated results for the months ending in April, 2000, this ratio already presents a decrease to 4.06%. As a result of the resumption of growth and of the success of the economic policy, direct foreign investments keep on flowing in, in expressive volumes, towards the private sector, even with the reduction in the number of privatisation actions. In 1999, around US$ 30 billion entered Brazil, which corresponded to fifteen times the value for 1994, when only US$ 2 billion entered the Brazilian economy. Within a five-year period (1995-1999), over US$ 80 billion entered the economy, out of which around US$ 23 billion within the programme of privatisation. The flow of direct investments has been an important source of financing for the deficit in current transactions, which renders the balance of payments less dependent upon short-term capital. In 1999, direct investments surpassed by 20% the value of the deficit in current transactions. MERCOSUL TRADE BRAZIL — MERCOSUL YEAR EXPORTS (x) U$ MILLIONS SHARE % IMPORTS (m) U$ MILLIONS SHARE % BALANCE (X-M) U$ MILLION 1990 1,320.24  4.20 2,319.55 11.23  -999.30 1991 2,309.35  7.30 2,268.36 10.78   40.98 1992 4,097.49 11.45 2,228.56 10.84 1,868.90 1993 5,386.90 13.97 3,378.25 13.38 2,008.65 1994 5,921.47 13.60 4,583.27 13.86 1,338.20 1995 6,153.76 13.23 6,843.92 13.70  -690.15 1996 7,305.28 15.30 8,301.54 15.56  -996.26 1997 9,046.60 17.07 9,517.01 15.90  470.40 1998 8,878.23 17.36 9,427.70 16.34  -549.46 1999 6,777.87 14.12 6,718.90 13.65   58.96   Source: MDIC/DECEX/GEREST Created in 1991, MERCOSUL was responsible for substantially raising the levels of trade among Brazil, Argentina, Paraguay and Uruguay. In seven years, commercial flows multiplied by four. They moved from around US$ 4 billion in 1991 to US$ 18 billion in 1998. During that last year, the other MERCOSUL countries absorbed 17% of the total Brazilian exports, a level very close to that of the United States (19%), and significantly above the 4.2% recorded in 1990. In 1999, with the devaluation of the real and the 3% retraction of the Argentinean GDP, trade in the region reduced by 30%. In spite of that, MERCOSUL still absorbs important 14% of the total Brazilian exports. In addition to the commercial gains it generated for Brazil, MERCOSUL increases our bargaining power in the negotiations for the establishment of the Free Trade Area of the Americas (FTAA), in our relationship with the World Trade Organisation (WTO) and in our relationship with the European Union (EU). Despite commercial difficulties MERCOSUL has faced along the last two years, it already concretely indicates a resumption in its dynamism. This reflects the maturity of an integration process that presents a positive balance of achievements and indicates a promising future for the four member countries and for the two associated States, Bolivia and Chile.