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Expropriation and Economic Coercion in World Politics: A Retrospective Look at Brazil in the1960sAuthor(s): Richard Stuart OlsonSource: The Journal of Developing Areas, Vol. 13, No. 3 (Apr., 1979), pp. 247-262Published by: College of Business, Tennessee State UniversityStable URL: http://www.jstor.org/stable/4190659 .

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The loumal of Developing Areas 13 (April 1979): 247-282

Expropriation and Economic Coercion in World Politics: A Retrospective Look at

Brazil in the 1960s

RICHARD STUART OLSON

First in 1959 and then again in 1962, the state goverrunment of Rio Grande do Sul in Brazil expropriated public utilities belonging to subsidiaries of U.S.-based corporations. Rapidly involving the U.S. government and the Brazilian federal government, these expropriations were one of the major issues in Brazilian-American relations in the first half-decade of the 1960s. The first purpose of this article is to examine the events surrounding those expropriations and their relationship to the wider range of problems which came to a head during the coup-shortened term of Brazilian President Joao Goulart (1961-64). The second purpose is to explore and to speculate on the possible linkages between economic coercion, dependency, political instability, and compliance in a dispute, as the Brazilian expropriation case carries important theoretical implications for the study of economic coercion in world politics. With these purposes in mind, the present article comprises two main sections: (1) a relatively detailed review of the expropriation dispute within the context of contemporary Brazilian-American relations, and (2) a discussion of the case within the larger framework of a theory of economic sanctions, specifically that of Johan Galtung.

The Brazilian Case

Background. Former President of Brazil Juscelino Kubitschek (1955-60) prom- ised "fifty years progress in five," and in some ways fulfilled his pledge. Financing a program of rapid industrial development by internal and external borrowing, however, he bequeathed to his successors galloping inflation and a foreign debt which was not only increasing in amount and relative load but also decreasing in maturity time.' Combined with a break in relations with the World Bank Group

Richard S. Olson is Associate Professor of Political Science, University of Redlands. The author would like to thank the University of Redlands Faculty Research Program for its financial support of this study.

'The Kubitschek period is covered in what is still the best historical work on modern Brazil: Thomas E. Siddmore, Politics in Brazil 1930-1964: An Experiment in Democracy (New York: Oxford University Press, 1967), esp. pp. 143-86. A thorough discussion of Brazil's foreign debt problem is John Donnelly, "External Debt and Lon g-Term Servicing Capacity," in Contemporary Brazil: Isme in Economic and Political Develoment, ea H. Jon Rosenbaum and William C. Tyler (New York: Praeger, 1972), pp. 95-123.



248 Richard Stuart Olson

and the International Monetary Fund, due in large measure to their criticism of his "unorthodox" development strategy, Kubitschek's fiscal and monetary policies caused a severe foreign exchange crisis beginning in 1959 and lasting through the next five years. The data in table 1 illustrate the dilemma facing Kubitschek's successors: a 20 percent increase in per capita GNP between 1956 and 1960 but an actual decrease after 1962, and dwindling international reserves and increasing inflation after 1958.

TABLE 1 SELECTED INDICATORS, BRAzILIAN ECONOMIC CONDITIONS, 1950-1970

GNP per Capita in International Constant 1969 Prices Rate of Inflation Reserve Position

Year (US$) (Percentage) (US$ Millions) 1950 196 11.2 666 1951 200 12.0 517 1952 211 13.2 529 1953 210 15.3 605 1954 224 21.4 483 1955 232 16.8 491 1956 232 23.2 611 1957 243 13.2 476 1958 254 11.1 465 19,59 261 29.2 367 1960 279 26.3 345 1961 298 33.3 470 1962 305 54.8 285 1963 302 78.0 219 1964 302 87.8 246 1965 303 55.4 484 1966 310 38.8 425 1967 316 27.0 199 1968 334 28.1 257 1969 348 21.7 656 1970 366 19.8 1,175 SouRcEs: GNP per capita: Gross Natonal Product, Growth Rates and Trend Data (Washington, DC: U.S. Agency for International Development, May 1971), p. 9; rate of inflation: H. Jon Rosenbaum and William G. Tyler, Contemporary Brazil, Issues in Economnic and Political Developnent (New York: Praeger, 1972), p. 15; international reserve position: International Financial Statistics 1971 Supplement (Washington, DC: International Monetary Fund, 1971), pp. 24-25.

Kubitschek's immediate successor in the presidency was Janio Quadros, an ec- centric reformer from Sao Paulo, who campaigned on an anticorruption platform and whose symbol was, appropriately enough, a broom. When he took office, however, Quadros was faced with soaring domestic inflation and the prospect of re- paying $2 billion in foreign debt by 1966, with $600 million of that due the very first year. Attracted by his large electoral victory, a reformist image, and a reputation for economic moderation, the U.S. government bailed Quadros out of the immediate difficulties by refinancing much of the early debt. However, in a move still not fully understood, Quadros resigned the presidency after only seven months in office, taking everyone by surprise.2 Especially surprised was Vice-

20n Quadros, see Skidmore, Politics in Brazil, pp. 187-211; and Mario Victor, Cinco Anos que Aba- laram o Brasil (Rio de Janeiro: Editora Civilizacao Brasileira, 1965), esp. pp. 1-250. Internationally, Quadros was best known for formulating an "independent" foreign policy for Brazil; see Janio guad- ros, "Brazil's New Foreign Policy," Foreign Affairs 40 (October 1961: 19-27; E. Bradford burns, Tra-



Expropriation and Economic Coercion in Brazil 249

President Joao Goulart, who was visiting the People's Republic of China at the time-a fact which did not escape notice by his opponents at home and abroad.

The Brazilian military so distrusted Goulart, having forced him out as Labor Minister a decade earlier for fear he would prove another Peron, they severely circumscribed his powers and changed the governmental system from presidential to parliamentary before allowing him back in the country. Thus, although he re- stored the presidential system within 14 months via a plebiscite, it was obvious that Goulart did not have the confidence of the traditional arbiter of Brazilian politics, the military. Nor could it be said that Goulart had much positive support from the middle and upper classes in the civilian realm, for they had only sup- ported his succession to the office out of a desire to see constitutional forms observed. Goulart's political base was the urban lower class and the very poor.3

In external relations it was obviously economic support which mattered most, and Goulart's problem was Brazil's problem. With such a large and badly scheduled foreign debt, any Brazilian administration would need massive and consistent external financial support to stay afloat. While such support was forthcoming for Quadros, it was not necessarily transferable to Goulart, who needed it at least as much. In short, by 1961 Brazil was in a desperate position in international finance and had become an "addict" of aid; that is, in order to develop and to maintain an import capacity sufficient to avoid a drastic downturn in the economy, Brazil needed large-scale investment, loans, and aid from abroad. The principal sources for these were in the United States.

The Expropriations. In this century, there have been only two instances of actual expropriation of American-owned property in Brazil.4 The first occurred in 1959 when the obscure governor of Rio Grande do Sul, Leonel Brizola, took the prop- erties of an American and Foreign Power Company (AMFORP) subsidiary in that state. The second expropriation occurred in 1962 when the much-better-known Brizola struck again, taking over the Companhia Telefonica Nacional, a subsidiary of the International Telephone and Telegraph Company of New York (IT&T). It was of enduring importance that the agent of expropriation in both cases, Gov- ernor Brizola, was an advisor, supporter, and rival of Joao Goulart, as well as the president's brother-in-law.

Although legally distinct and handled separately on an official level, the two expropriations became heavily politicized and linked in important ways. Inter- estingly, the AMFORP case involved property worth $135 million and was handled with relative quiet, while the IT&T case involved only $7-8 million but attracted considerable publicity.

dition and Variation in Brazilian Foreign Policy," Journal of Inter-American Studies and World Affairs 9 (April 1967), esp. pp. 203-6; and Keith L. Storrs, "Brazil's Independent Foreign Policy 1961- 1964: Background, Tenets, Linkage to Domestic Politics, and Aftennath" (Ph.D. diss., Cornell Uni- versity, 1973) esp. pp. 236-63.

31t can be forcefully argued that "populism" is more useful than any "left-right" classification in understanding modern Brazilian politics, but it seemed to take Latin American scholars to perceive it. See Octavio lanni, Crisis in Brazil (New York: Columbia University Press, 1970); and Helio Jaguar- ibe, Political Development: A General Theory and a Latin Anerican Case Study (New York: Harper and Row, 1973), pp. 440-55.

4Nationalization, Expropnration, and Other Takings of United States and Certain Foreign Property since 1960 (Washington, DC: U.S. Department of State, Bureau of Intelligence and Research, 30 No- vember 1971), p. 23. Also see Ellen C. Collier, "Expropriation of American-Owned Property by For- eign Governments in the Twentieth Century," International Legal Materials 2 (November 1963): 1066-110; originally prepared by the Legislative Reference Service for the Committee on Foreign Affairs of the U.S. House of Representatives, 19 July 1963.




1. The AMFORP Dispute. Public utilities in Brazil were government regulated, and the conventional wisdom is that the rate structure was kept so low for political reasons that the companies could not expand to meet increasing demand or even modernize sufficiently to improve the quality of existing service. Utilities were a bottleneck in economic development plans and were thus widely criticized. If it happened that a utility was foreign-owned, as a majority in Brazil were, criticism and suspicion were even more intense.5

In 1957, a state investigating committee in Rio Grande do Sul began probing the books and the operational records of the AMFORP subsidiary, the Companhia de Energia Electrica Riograndense. Upon completion of the study, the committee called for expropriation without compensation and accused the company of having extracted excessive profits since the 1940s.6 After deadlocking on conditions for state purchase of the company, Governor Brizola seized it on 11 May 1959 and declared that in this case no compensation was justified. AMFORP then fought the expropriation through Brazilian state and federal courts, claiming compensation; lawyers for the state demurred. The case entered a kind of legal limbo when, in 1961, legislation was introduced at the federal level which would eventually create a national electric monopoly to operate all such utilities. There, at the federal level, the dispute temporarily rested.

2. The 1T&T Dispute. Passions still ran high in 1960, because the IT&T telephone subsidiary in Rio Grande do Sul served only 19,000 customers but had a waiting list of 25,000, and the company stated that it would not expand service unless it received a rate increase. The state government was loath to do this for obvious reasons, and it began to negotiate for the purchase of the company. For the next two years (1960-62), representatives of IT&T and the Brizola administration met intermittently to discuss the issue, but final agreement on the conditions for a sale was never reached. On 16 February 1962, Governor Brizola decreed expropriation and deposited the equivalent, in Brazilian cruzeiros, of $400,000 in a local bank as compensation. IT&T valued the subsidiary at between $6 million and $8 million. On the same day, Harold S. Geneen, the president of 1T&T, began a public relations campaign in the United States and also formally requested the U.S. State Department "to take immediate steps with the Government of Brazil for a rescinding of the order for expropriation." Geneen continued by character- izing Brizola as a man who "travelled Brazil peddling the line of those whose favorite game it is to label the United States Government and United States business as 'imperialist."'7

On 17 February, the State Department issued a formal statement disapproving of the expropriation. Although recognizing the right of expropriation, the text called for "prompt, adequate, and effective compensation" and termed the $400,000 equivalent "so far below book value that the evaluation appears to have been made unilaterally." The text also linked the expropriation to a much larger

-he utilities problem in general is explored in depth by Judith Tendler, Electric Power in Brazil (Cambridge, MA: Harvard University Press, 1968).

60n the specifics of both the AMFORP and the IT&T exroinations, I am greatly indebted to Ron Deaton for hs excellent dissertation and advice. See Ron H. Deaton, "The Impact of United States Private Investment, Aid, and Trade Policies toward Brazil during the Alliance for Progress" (Ph.D. diss., University of Kansas, 1973), esp. pp. 37-88.

7New York Times, 17 February 1962, p. 6. IT&T itself published a sort of "white paper" giving company views on the expropriation; see The Exprpriation of n7T in Rio Grande do Sul, Brazil: A Threat to the Alliance for Progrs (New York: IT&T, September 1962).




issue, stating that the seizure "appears to be a step backward in the mobilization of available resources for the success of the Alliance for Progress."8

The Brazilian federal government also formally entered the arena on 17 Feb- ruary 1962, offering its good offices and assuring the U.S. government that Bri- zola's actions did not reflect national policy. The position of the Goulart administration on this point is readily understandable, as negotiations were then ongoing with Washington over a badly needed aid package, and Goulart was scheduled for an important state visit and substantive talks with President Ken- nedy, only six weeks away. Goulart and his Foreign Minister, San Tiago Dantas, struck very moderate, almost indifferent, stances on the expropriation dispute at this time.

Governor Brizola, on the other hand, did not. The leading figure of Brazil's "negative left," he maintained his reputation for bad manners, vulgarity, and only a passing acquaintance with economics. Highly ambitious, he was nearing the end of his term, had announced his intention to run for Congress, and had been obviously frustrated by the two years of negotiations with a highly visible foreign company which provided a direct service to the Brazilian public. The IT&T expropriation underscored his credentials as a nationalist-first garnered by the 1959 AMFORP action-and he went on to win a smashing victory in the elections of November 1962. But that gets ahead of the story somewhat.

Brizola understood, probably more intuitively than intellectually, that deep and meaningful structural changes in the Brazilian political system were necessary if the masses were to have enduring importance as a political base. He also understood that such changes were very unlikely in the present system, where the entrenched middle and upper classes were opposed to them, with the antipopulist military looming significantly in the background. Recognizing the dilemma, Bri- zola continually tried to pull Goulart to the left and to convince him to commit himself to a firm ideological position from which Goulart could credibly appeal to the masses for more than just periodic electoral support. One could thus interpret the timing of Brizola's expropriation of the IT&T subsidiary as a move designed to sabotage Goulart's chances for an understanding with Washington and to force him to burn his bridges and move decisively to the left. More cynically, Goulart's coming over would increase Brizola's influence, and if he did not, it would leave Brizola a clear field and a power base from which to try to succeed Goulart.

There can be little doubt that the expropriation put the Brazilian president in a major dilemma. He could hardly ignore the dispute and treat it as a "local" matter because the United States government had publicly entered the arena with the implied pressure carried in the Alliance for Progress statement. He could not side with Brizola without jeopardizing badly needed financial assistance from U.S. sources and confirming suspicions in Brazil that he was a radical. And he could not side with the IT&T/U.S. position without losing the support of nationalists of all stripes in his own country. It was a politically impossible situation, and the best he could do was to temporize.

Negotiations continued, but significantly the talks were being held in the For- eign Ministry in Rio and were attended by the Foreign Minister, San Tiago Dan- tas; Brazil's Ambassador to the United States, Roberto Campos; and the U.S. Ambassador to Brazil, Lincoln Gordon. The ensuing weeks saw considerable ac- tivity, not all of it consistent. On 24 February, it was reported that an agreement

8New York Times, 18 February 1962, p. 33.




in principle had been reached in the Rio discussions: Rio Grande do Sul and IT&T would negotiate their differences. Two days later, however, Brizola as- serted that he "would never negotiate a settlement out of the Brazilian courts" and that he would never sit down with representatives of the company. The result? The United States government became the negotiator on behalf of IT&T. Some days later "Governor [Brizola] met with Ambassador Lincoln Gordon and Foreign Minister San Tiago Dantas for nearly two hours. Representatives [of IT& TI waited in an anteroom at the Foreign Ministry for word of the result of the talks."9

Other problems in Brazilian-American relations were beginning to coalesce at this point as well, and it was increasingly difficult to separate the issues in both countries.

Nearly all [Brazilian] newspapers carried banner headlines today over a dispatch from Washington about the recommendation by the Senate appropriations sub-committee that Alliance for Progress aid be cut off if the Brazilian Congress approves a bill limiting the remittance of profits by foreign companies here. This was linked in editorial comment with the State Department's criticism of the [IT&T] expropriation and articles in the United States newspapers expressing pessimism over Brazil's political and economic future.10

Then, on 3 March 1962, at least one of the issues appeared to be defused. The Brazilian federal government presented a formula for the compensation due IT&T, disclosing that in 1960 company and state arbiters had agreed that the utility was worth about $7.3 million. The federal government simply planned to update this estimate. For its part, IT&T agreed to keep most of the compensation in Brazil and not repatriate it. It turned out that "IT&T also own [ed] Standard Electric do Brasil in Sao Paulo, the country's major manufacturer of telephone equipment, and plan [ned] to expand this operation."'"

This was a very inventive solution, as Goulart did not have to side with any of the contending parties. However, it immediately caused more problems than it solved because ambitious state governors all over Brazil saw the opportunity to seize foreign public utilities with the federal government picking up the tab. A bill was introduced in Santos to expropriate the Brazilian Traction, Power, and Light (the "Light" as it is called in Brazil) subsidiary serving that city. In Porto Alegre, Brizola moved again, warning that he planned to seize another company as soon as legally possible. And in Rio de Janeiro, Governor Carlos Lacerda announced plans to expropriate that city's $70 million "Light" subsidiary.

President Goulart could not allow these chaotic acts to continue, and the federal government entered the expropriation arena as a more active participant. The first step was to block Lacerda's move in particular by requiring that expropriations be approved by the Brazilian National Security Council. The next step came one week later when Goulart made his scheduled state visit to Washington and met with Kennedy. The utilities problem was a major topic in their conversations, and the plan arrived at was included in the text of their joint communique, the essence of which was: "The President of Brazil stated that in arrangements with

9New York Tines, 28 February 1962, p. 7.

?Olbid.

"New York Tires, 4 March 1962, p. 8. This is a classic illustration of the creation of an "up-line" dependency, for the buyer of much ofthe equipment manufactured by the IT&T subsidiary would be the then "Brazilian" national utility system. For a discussion of a similar structural situation, with regard to Chilean copper, see Theodore H. Moran, "New Deal or Raw Deal in Raw Materials," For- eign Policy 5 (Winter 1971): 119-36.




the companies for the transfer of public utility enterprises to Brazilian ownership, the principle of fair compensation with reinvestment in other sectors important to Brazilian economic development would be maintained."12 Thus, by April 1962 this dispute was over-or at least appeared to be. IT&T said that it was satisfied; so did the U.S. government; and so did the concerned Brazilians. Yet the IT&T case was to have an important relationship with the soon-to-be famous U.S. "Hick- enlooper Amendment."

Brazil and the Hickenlooper Amendment. Immediately after the IT&T expropriation and Harold Geneen's call for "action" from the U.S. government, a num- ber of the more conservative members of the U.S. Congress began to push a piece of legislation introduced by Senator Bourke B. Hickenlooper and Representative E. Ross Adair to the effect that the Foreign Assistance Act of 1961 should be amended so that the president would be required to suspend all aid to any country which expropriated American-owned property without making provision for eq- uitable and speedy compensation.13 After considerable debate and important modification, this became section 620(e) of the Foreign Assistance Act of 1961 and was popularly known as the "Hickenlooper Amendment."

While noting that it was the Castro expropriations which initiated his thinking on the matter, Senator Hickenlooper pointed to the Brazilian expropriations as one of the immediate motives.14 Furthermore, it was the IT&T case (not that of AMFORP) which appeared to be the primary concern because eventually the amendment was made retroactive to cover any expropriation which had occurred since 1 January 1962. Indeed, the State Department opposed the legislation in part because it was "agreed on all sides that the expropriation provision is in- tended to be of primary benefit to the International Telephone and Telegraph Company of New York. This, in the official view, makes it 'special interest' legislation in a general authorization bill, contrary to accepted legislative procedure."15

It was President Goulart who actually guaranteed passage of the Hickenlooper Amendment with the retroactive clause attached. A rather mild version of the amendment was reported out of Congress on 28 May 1962, but in Brazil two days later, the Goulart administration decreed that all utilities in Brazil would eventually come under federal ownership and that in the event of deadlocked transfer negotiations, the president-not the courts-of Brazil would resolve the outstand- ing issues.'6 An attempt to retain support from the left at home, wobbly because of his trip to Wahington, this decree really only succeeded in arousing the ire of

12New York Times, 5 April 1962, p. 3. For the full text of the communique, see Arerican Foreign Policy, Current Documents 1962 (Washington, DC: U.S. Department of State, 1962), pp. 487-89.

13For explanations of the legislation, see E. Ross Adair, "Expropriation and Foreign Aid Funds," Public Utilities Fortn 6htly 6 (26 April 1962): 586-94; Charles M. Bruch, "Expropriation May Threaten Alliance forProgress,' Pub l Utilities Fortnightly 71 (31 January 1963): 36-3; and also Richard B. Lillich, the Protection of Foreign Investnent (Syracuse, NY: Syracuse University Press, 1965), pp. 117-46. By far the best analysis, however, is Charles H. Lipson, "Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection," World Politics 28 (April 1976): 396-421.

14See the Congressional Record Senate, vol. 108, pt. 7, 87C2/ 1962: 9940-44.

15New York Times, 21 July 1962, p. 6.

l6See Deaton, "The Impact of United States Private Investment," pp. 72-74. For a more extended treatment of the utilities legislation, see "Brazilian Decree Regulating Expropriations," International Legal Materials 1 (August 1962): 124-25.




the U.S. Congress, many of whose members perceived it as a ploy for Goulart to act unilaterally. Comparing the decree's wording to that of Castro's, and unfavor- ably closely, Senator Hickenlooper used it to strengthen the language of the amendment and to gain the retroactive clause covering the IT&T expropriation. The final version which went to President Kennedy in July was retroactive and stated that any expropriating government had six months to take "reasonable steps toward compensation" before aid suspension would be mandatory.17 The president signed the bill and it became law on 1 August 1962.

Profit Remittance Limits and Stabilization Agreements. It is at this point that an exclusive focus on the expropriations clouds two other points of conflict between Brazil and the United States: the profit remittance legislation mentioned above, and the general problem of economic stabilization in Brazil.

In November 1961, attempting to alleviate Brazil's increasingly serious balance of payments deficits, the Chamber of Deputies passed a strict profit remittance law, but President Goulart, under continuous pressure from both the U.S. Embassy and U.S.-based corporations in Brazil, managed to stall its passage in the Senate. In September 1962, however, a milder version passed. It is worth noting, however, that the enabling decrees to implement the law were not promulgated until Jan- uary 1964, three months before the coup.18

The other major issue in Brazilian-American relations at this time involved measures to "stabilize" the Brazilian economy. In practice this meant controlling inflation by the use of fiscal and monetary policy. In January 1963, Goulart com- missioned the two leading figures of Brazil's "positive" or moderate left, San Tiago Dantas and planning director Celso Furtado, to devise a stabilization program which would also stimulate the economy and stave off further recession. The internal policy proposals of the Dantas-Furtado plan were classic Keynesian: reduce government expenditures, raise govemment revenues, and discourage wage in- creases. To attain some growth, however, the import capacity would have to be maintained, and the key to continued imports was a complete refinancing of the foreign debt-and the key to that was the attitude of Brazil's major creditor, the United States.

In April 1963, negotiations in Washington resulted in a nearly $400 million loan agreement, but actual dispersal of the monies depended upon effective imple- mentation of the internal policies contained in the Dantas-Furtado plan. It was at this point that the expropriation issue arose again as a fatal stumbling block to any overall political-economic accommodation between Brazil and the United States. And interestingly, it was not the IT&T case but the AMFORP dispute which proved decisive.

The IT&T case was formally resolved on 2 February 1963. The company received the entire $7.3 million it requested, with one-half of the compensation to be reinvested in Brazil and one-half to be repatriated.

On 22 April 1963, the Brazilian federal government agreed to pay $135 million for 10 AMFORP subsidiaries, but this was announced simultaneously with the stabilization plan worked out with the U.S. government. The linkage doomed both agreements. The perception of generous terms for a foreign company, but an aus-

"'For the exact wording of the legislation as finally enacted, see United States Statutes at Large, vol. 76, 87C2/ 1962, p. 21618.JLillich also includes it as an appendix to his book, The Protection of Foreign Investrment, pp. 211-12.

18See Skidmore, Politics in Brazil, p. 271 on this.




terity program for Brazilians, generated intense opposition from virtually all sectors of the Brazilian political spectrum, and especially from the Brizola group, which charged Dantas and Furtado with "treason." The necessary legislation for the stabilization agreement never passed; the AMFORP award was referred back for "re-evaluation"; and ultimately the Goulart administration received less than one-quarter of the U.S. loan. Shaken by these defeats, Goulart abandoned the positive left and drifted slowly toward Brizola. As he did, Goulart was increasingly criticized, both inside and outside Brazil, for allowing "communist infiltration" of his administration and for "flirting with the Soviet Union."

When the Brazilian military deposed Goulart almost a year later, on 31 March 1964, the U.S. government responded with immediate recognition and offers of significant economic aid, a point to which we shall return below. The actual United States government role in the planning and execution of the 1964 Brazilian military coup will continue to be hotly debated.19 But in terms of a larger theoretical framework, that debate is marginal. The intent here is to evaluate the general "U.S. role" in establishing the preconditions for the 1964 coup, for Brazil was and is a dependent country, and political vulnerability and economic coercion are linked in such cases.

Economic Pressures and "Islands of Sanity." Although obvious from the debt picture and table 1 above, it bears repeating that Brazil critically needed large- scale foreign aid and investment in the early 1960s. Given Kubitschek's political- economic legacy of growth with disorder, the situation was as bad for Goulart as it was for Quadros, if not worse. The interesting question then becomes: what happened between 1961 and 1964 in terms of external support for Brazil? Fortu- nately, there are data which shed light on this crucial question, for Brazil is one of those few Third World countries which report fairly reliable statistical information.

Table 2 also shows the net capital flowing into Brazil for the 1956-70 period. An important bookkeeping category, net capital flows include (1) direct investment, (2) private long-term loans, (3) private short-term loans, and (4) local and central government loans. The picture from this side of table 2 is that of a roller- coaster, with the low point in the 1962-64 period. If we calculate that Goulart's need for foreign economic help was as great as that of Quadros or of the military governments, then he received roughly one-half of the necessary amount. The dominance of U.S. sources in table 2 is also noteworthy, and capital flows from the United States establish the overall pattern.

'9The conventional view has been that the U.S. government was "exceptionally well-informed" about the preparations for the coup but that no member of the embassy team was "actively involved." Siddmore takes this position; see his Politics in Brazil, pp. 322-30. Other scholars seem to take at face value official statements that the United States was not directly involved; for example, see John W.F. Dulles, Unrest in Brazil: Political-Militar4 Crises 1955-1964 (Austin, TX: University of Texas Press, 1970), and Jordan M. Young, Brazil 1954-&4: End of a Civilian Cycle (New York: Facts on File, 1972). The best examples of the opposite viewpoint are probably Edmar Morel, 0 Golpe Conecou em Wash- ington (Rio deJaneiro: Editora Civilizacao Brasileira, 1965), Luiz A.M. Bandeira, Presenca dos Esta- dos Unidos no Brasil (Rio de Janeiro: Editora Civilizacao Brasileira, 1973), see esp pp. 391475. A recent book by Jan K. Black, United States Penetration of Brazil (Philadelphia, PA: University of Penn- sylvania Press, 1977), explores in depth U.S. complicity in the coup, including the role of the U.S. government, the CIA, and the DODS in the financing and support of both the military and various right-wing groups in Brazil. Also, as final revisions were being made in this article, two more books were becoming available: Marcos Sa Correa, 1964: Visto e COnentado pela Casa Branca (Porto Alegre, Brazil: L. and P.M. Editores, 1977); and Phyliss R Parker, Brazil and the Quiet Intervention, 1964 (Austin, TX: University of Texas Press, 1979). For an overall synopsis, although based on earlier data, see Peter D. Bell, "Brazilian-American Relations," in Brazil in the Sixties, ed. Riordan Roett (Nash- ville, TN: Vanderbilt University Press, 1972), pp. 77-102.




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The pattern for U.S. economic aid shows moderate support for Kubitschek, a resounding increase for Quadros, a relative decrease for Goulart, and then another resurgence when the military takes power in 1964. The U.S. aid authorizations for the military, however, are even more interesting: consistently increasing support right up to 1964, and then a return to the pre-Quadros level. The patterns for the IBRD and the IFC reflect the late (1959) break by Kubitschek with these members of the World Bank Group and their subsequent refusal to consider new loan ap- plications from Brazil. This changes dramatically, however, once the military is in full control of the country after 1964 and begins to enact the Bank Group's favorite reforms. The pattern for the IDB shows considerable independence from its financial "cousins," with loan authorizations increasing steadily from 1961 on. However, given that the IDB only began operations in that year, its importance for Goulart was minor. It is an anomaly worth noting, nonetheless, and the early period of the IDB might provide interesting research.

Judging from the authorizations reported by Brazil's principal donors/credi- tors, it appears that the Goulart administration received some, if not a great deal of, support, mainly from the U.S. government. But authorizations only begin the process of economic support, and it is necessary to shift the focus to Brazilian data on what was actually arriving.

Table 2 also shows the net capital flowing into Brazil for the 1956-70 period. An important bookkeeping category, net capital flows include (1) direct investment, (2) private long-term loans, (3) private short-term loans, and (4) local and central government loans. The picture from this side of table 2 is that of a roller- coaster, with the low point in the 1962-64 period. if we calculate that Goulart's need for foreign economic help was as great as that of Quadros or of the military governments, then he received roughly one-half of the necessary amount. The dominance of U.S. sources in table 2 is also noteworthy, and capital flows from the United States establish the overall pattern.

Table 3 breaks the net capital flows into the net loans received by the central government and by the private sector of Brazil. Because of a major IMF account- ing change in 1961, data for the previous Kubitschek period must be excluded, and we start with Quadros. The pattern, however, remains that of a roller-coaster, and in loans for the private sector, the figures even go negative for 1962-64-again with the United States dominant. In loans to the central government, it is also interesting to note the lack of support given the post-1964 military governments by European and Japanese sources, but their reticence is more than compensated for by the United States and the international financial institutions.

Table 4 delves into the private sector more deeply, showing direct private foreign investment in Brazil between 1956 and 1970. Not surprisingly, the pattern is identical to that in the previous tables. And using other sources, Deaton calculates that new foreign investment in Brazil went from $147 million in 1961, to $69 million in 1962, to $30 million in 1963, to only $28 million in 1964.20 Obviously, the pattern is the same as that in table 4, if more severe.

One final note on the private sector needs to be made here, and it involves the curious category "net errors and omissions." Often taken as an indicator of unau- thorized transfers, i.e., "capital flight," the pattern for Brazil is as follows: for 1956-60 (Kubitschek), a -$63 million average; for 1961 (Quadros), + $49 million; for 1962-63 (Goulart), -$107 million average; for 1964 (revolution) -$217 million;

20See Deaton, "The Impact of United States Private Investment," p. 49.




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TABLE 4 DIRECT PRIVATE FOREIGN INVESTMENT IN BRAzIL, 1956-70

(US$ MILLIONS)

Period Totala U.S. & Canada Europe Others 1956-60 average 149 (82) (59) (8)

(Kubitschek) 149b 82b 59b 8b 1961 (Quadros) 147 91 46 10 1962-63 average (Goulart) 110 81 22 8 1964 (Revolution) 86 70 11 5 1965-70 average 142 94 40 9

(Military governance) SOURCE: Balance of Paynents Yearbook (Washington, DC: International Monetary Fund), compiled from "regional statement" in sequential vols. 12-23. aFigures may not add to "Total" because of rounding. bThese are averages for 1959-60 only because of lack of data. Figures in parentheses are extrapolations based on percentages of "Total." In this table, however, they come out exactly the same as the figures for 1959-60.

and for 1965-70 (military governance), -$74 million average.2' Although there is danger of beating a metaphor to death, the roller-coaster pattern characterizes these data as well.

There remains, however, the troubling discrepancy between the not inconsi- derable U.S. aid authorizations in table 2 and the relatively srnall flows demon- strated especially in table 3. If aid were actually being disbursed, but it was not flowing to either the central government or to the private sector, then where was it going? The answer lies in what came to be called the "islands of sanity" policy, under which the United States allocated aid to selected state governments and special development corporations. With important implications, the "islands" policy highlights the problem of aid figures aggregated to the national level. In Brazil under Goulart, for example, "national" data disguised that fact that a federal system, characterized by intense historical and contemporary feelings of state identification, was exploited by a nominally external actor; that is, subnational units were strengthened via external aid while the central government was weak- ened. And Jan Black notes that among the islands most favored by the United States were Minas Gerais, governed by Jose de Magalhaes Pinto, and Guanabara, governed by Carlos Lacerda-both bitter critics of Goulart and eventually leading civilian supporters of the 1964 military revolution.22 Indeed, that revolution began, both politically (in a manifesto by Magalhaes Pinto) and militarily (as mobilization) in Minas Gerais.

Several questions arise at this point which must be at least explored because, while containing implications to be elaborated below, they are relatively specific to the Brazilian case. It is hoped they also will begin the process of placing the case in a larger context.

"1From Balakrce of Paymnents Yearbook (Washington, DC: International Monetary Fund), vol. 16 (for 1956-60), vol. 20 (for 1961-65), and vol. 23 (for 1966-70), the "Analytic Presentation."

22Black, United States Penetration of Brazi, p. 66. Bell also explores the islands of sanity policy in "Brazilian-American Relations," esp. pp. 88-89. For some original testimony on the policy, see U.S. House of Representatives, Committee on Appropriations, Hearings, Foreign Operations Appropria- tions for 196, 87/C2/1962, pp. 175-76.




Was Brazil, or more accurately, the Goulart administration, the target of economic sanctions originating in the United States? This is a logical question, but the complexity of the contemporary world political economy renders it simplistic. After all, there was never an official statement that Brazil was being sanctioned, although "islands of sanity" comes close, and the Hickenlooper amendment was never formally applied against Brazil. And yet, the patterns observed in the tables indicate that economic support was available for Kubitschek, Quadros, and the military-but not for Goulart. If we accept "value deprivation" as a general defi- nition of sanction, and we know that Goulart needed and sought aid, financing relief, and investment for Brazil, then the Goulart administration was sanctioned.

But how much of the sanctions can be attributed to the expropriation disputes, as opposed to, say, the profit remittance proposals or the general "leftist" reputation of the Goulart administration? Upon reflection, it would seem that the expropriations, and then the profits remittance issue, served to focus general U.S. hostility toward what was perceived as a dangerously radical regime. Thus, an examination of the expropriations dispute, as we have attempted here, is interesting both intrinsically and as a window through which to view U.S. interaction with Brazil.

But could not the patterns also reflect a "bad business climate" rather than a sanction? Perhaps, but even giving the MNCs the benefit of the doubt on investment declines, the simultaneous drying up/redirection of intergovernmental aid cannot be attributed to a "bad business climate," unless there are strikingly similar criteria for a "bad aid climate." Is this case an argument, then, for a U.S. government-business collusion/conspiracy in the toppling of the Goulart administration? Again perhaps, but not necessarily. If similar perceptions of a foreign government lead independently to actions with similar results (declines in aid, financing, and investment), then it is neither "collusion" nor "conspiracy." But even if a conspiracy is found, that may misconstrue the more general lessons of this case.

Brazil is a dependent country, and its principal patron has been the United States, at least since World War II. In 1961, for example, the United States took 41 percent of Brazil's exports, provided 37 percent of its imports, received 78 percent of the corporate profits repatriated abroad, and accounted for 62 percent of the new direct foreign investment in Brazil.23 This had not changed significantly in 1970. Such a situation is structurally coercive, and to compound it, Brazil is so penetrated that the distinction between "external" and "internal" actors is hope- lessly blurred. U.S.-based corporations dominating Brazil's manufacturing sector is one example; the close relationship between the Brazilian and American military establishments is another; and the U.S. government's bypassing the Brazilian federal government to deal directly with states is another. The point is that modern dependency/penetration makes possible the relatively quiet, "unofficial" economic sanctions observable in this case, and it is the dependency syndrome which is important in understanding contemporary economic coercion, not conspiracies per se.

Then what is the importance of this case in the larger context of the study of world politics? The answer to that question lies in the implications of the Brazilian case for the present best-effort at a theory of economic sanctions.

23Calculated from "Basic Regional Statement," IMF Balance of Payments Yearbook, vol. 14.




Theoretical Implications

Several years ago, Galtung published an article on the international economic sanctions against Rhodesia, but its importance lay less with the case material than with Galtung's insights about the theory of economic sanctions.24 In his article, Galtung concentrated on "negative, collective, and external" economic sanctions and argued that there existed a naive and a revised theory as to how they were supposed to work. The naive theory holds that there is a roughly proportionate relationship between economic deprivation and political disintegration, leading to compliance, in a target nation. This is naive, however, because "it does not take into account the possibility that value-deprivation may initially lead to political integration and only later-perhaps much later, or even never-to political disintegration."25 Galtung listed three conditions under which the revised theory is the more valid:

1. The attack from the outside is seen as an attack on the group as a whole, not only a fraction of it;

2. There is very weak identification with the attacker, preferably even negative identification; and

3. There is belief in the value of one's own goals in the sense that no alternative is seen as better.26

Obviously, the core of Galtung's revised theory is that economic sanctions unify the nation against the attacker, and that has certainly proven true in several cases, notably Italy in the 1930s, Cuba in the 1960s, and Rhodesia since 1965.27 But taking Galtung's major points in turn, let us see how the Brazilian case fits the revised theory. First, were the sanctioms negative, collective, or external? Te answer seems to be "No" on all three counts. The pattern for U.S. military aid to Brazil and the "islands of sanity" policy show that the sanctions were neither totally negative nor collective, and the dependency syndrome, especially visible in the MNC penetration of the economy, renders the internal/external dichotomy obsolete.

More specifically, are Galtung's three conditions met? Using arguments similar to those above, the answer again must be "No." First, the economic pressures brought to bear against Brazil were primarily directed at the central government of Joao Goulart. Indeed, the military and selected state government opponents of Goulart were actually strengthened relative to the civilian federal government. Thus the "attack" was demonstratively selective about a target. Furthermore, the sanctions which were applied were not so public that they could be used as a rallying point. Second, given the dependency/penetration of the country, significant sectors of the Brazilian system, especially the military and those associated with MNCs, "negatively identified" not with the United States, but with Goulart;

24Johan Galtung, "On the Effects of International Economic Sanctions: With Examples from the Case of Rhodesia, World Politics 19 (April 1967): 378416.

25Galtung, "On the Effects," p. 389.

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27Because of the unifying effect of sanctions, virtually all scholars conclude that they are politically ineffective. For example, see Margaret Doxey, Economic Sanctions and International Eorcement (London: Oxford University Press, 1971); George W. Baer, "Sanctions and Security: The 1ague of Nations and the Italian-Ethiopian War, 1935-1936," International Organizatin 27 (Sprng 1973): 16 79; and Anna Schreiber, "Economic Coercion as an Instrument of Foreign Policy: U.S. Economic Measures against Cuba and the Dominican Republic," World Politics 25 April 1973): 387-413. The problem is that the studies always concentrate on the highly public, "official" sanction cases-in which the revised theory is the most appropriate.




indeed, for condition two, the situation was reversed. Third, Goulart presided over a deeply divided political system characterized by a lack of consensus on appropriate goals, and everyone knew that there were civilian and military alternatives to the Goulart administration which would be able to attract the necessary aid and investment and which represented more traditional, nonpopulist, Brazilian values.

In conclusion, while not designed as a test of Galtung's theories of economic sanctions, the Brazilian case indicates that the naive theory is not so naive. The dependency syndrome which characterizes Brazil and much of the developing world provides the opportunity for the unofficial and relatively subtle economic coercion which can exploit fragmented and vulnerable political systems by play- ing on and exacerbating already existing frustrations. Brazil in the early 1960s is a classic illustration of how economic sanctions interacted with domestic political and economic divisions to weaken some groups and strengthen others. Indeed, one could interpret the sanctions as directed (1) against a part of the political elite (Goulart, et al.) which had come to power in the executive branch more or less by accident (Quadros' resignation) but (2) ultimately in favor of the dominant economic elite, which was rather unexpectedly threatened, along with U.S. interests, by the nationalist and redistribution inclinations of the Goulart group. The subsequent alliance between the Brazilian military, the Brazilian economic elite, and U.S. interests would tend to support this interpretation.28

Finally, Galtung's revised theory does seem appropriate to those cases in which sanctions are clearly and avowedly public, but frankly, this type of case is a snall minority when compared to the more "everyday" instances of economic coercion in which the pressures are not public. Although these latter cases are more difficult to research, they should attract more of our empirical and theoretical attention.

281 am indebted to one especially well-informed reviewer who noted that this was not initially a "happy alliance," that "the Uastelo Branco regime (1964-67) was furious over the lack of greater sup rrt, both from the intemational financial agencies and from private investors." This highlights the ract that both sanctions and rewards are based on expectations, for the Balance of Payments Tharbook series cited in the tables shows foreign direct investment going from $66 million in 1964 to $154 million in 1965,$159 million in 1966, $115 million in 1967, $109 million in 1968, and then indeed to $207 million in 1969. A similar pattem holds for the [FIs. It would appear that foreign interests were cau- tiously supportive of the lrazilian military governments until the economy really started to "boom" in 1968, after which they were fully "on board."



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