Ideas, Policy Entrepreneurs, And

ENERGY REVOLUTION: IDEAS, POLICY ENTREPRENEURS, AND

INSTITUTIONAL CHANGE IN BRAZIL

FOLLOWING THE 1973 OIL CRISIS

Liliana Paola Diaz Barrrera

A dissertation submitted to Johns Hopkins University in conformity with

the requirements for the degree of Doctor of Philosophy

Baltimore, Maryland

May, 2018

ABSTRACT

This research focuses on the role of ideas in policymaking. It examines the

Brazilian energy policy response to the 1973 oil crisis. Today, Brazil is the 10th largest energy producer in the world with a diversified and clean energy matrix. In the early

1970s, it was an energy poorcountry highly dependent on imported oil supplies to fuel an aggressive industrialization process. How did Brazil manage to transform its energy profile? To answer this question, I argue that it is necessary to study the policymaking process that led to the adoption of energy diversification policies in 1974-75.

Structural, exogenous, institutional, and ideational factors affected the policymaking process and thus the resulting policies. Although structural and exogenous factors played important catalyst and enabling roles, I argued that four old

Developmentalist ideas, namely, 1) national development through industrialization; 2) energy as a growing point for the economy; 3) self-sufficiency; and 4) technological autonomy recombined by able policy entrepreneurs who acted through centralized institutions and through the creation of new institutions explain the policy course adopted by Brazil in the energy sector. The result was revolutionary or transformational change in the Brazilian energy sector. The research contributes to explaining the role and impact of ideas in effecting institutional change in a less developed and authoritarian setting and in doing so, fills a knowledge gap in the academic literature on Brazil with respect to its energy sector. It also sheds light on the outcome of state intervention in this sector during the 1974-1979 period and contributes to the Developmental state literature.

DEDICATION

This thesis work is dedicated to my parents, who sadly no longer accompany me. This accomplishment is as much theirs as it is mine. From my father I learned that perseverance and hard work achieve a great deal. My mother taught me to dream big, fly high, and spread my wings.

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ACKNOWLEDGEMENTS

Undertaking this PhD has been a truly life-changing experience and it would not have been possible to pursue it without the support and guidance that I received from many people. Firstly, I would like to express my sincere gratitude to my advisor and professor Dr. Riordan Roett for his continuous support of my PhD study. If I have done something correctly in this journey is to have you as my advisor and to have chosen a topic I am extremely passionate about. Thank you so much for your support and patience.

I am deeply indebted to my professor –and ad-hoc advisor- Dr. Francisco

González. During the past 11 years, Dr. Gonzalez has been a tremendous mentor. I would like to thank him for encouraging my research, coming to my rescue in times of need and self-doubt, and finally, for giving me an opportunity to share my research with the students and learn the art of teaching. I would also like to thank Dr. Robert Devlin,

Dr. Matthias Matthijs and Dr. Leandro Alves for serving on my committee.

Over the past five and half years, I have received support and encouragement from a great number of individuals at SAIS. I am greatly indebted to the Latin American

Studies program and its staff. I would also like also to extend thanks to the many people in Brazil who generously contributed to the work presented in this thesis.

A special thanks to my family. My gratitude goes to my siblings who not only encouraged me, but at times helped fund this project. I would not be where I am today without the love and support of my children Mateo and Sofia- I love you. Words cannot express how grateful I am to my husband, Nano, for being the rock that supports me and the engine that pushes me to excel.

CONTENTS ABSTRACT ...... ii

DEDICATION ...... iii

ACKNOWLEDGEMENTS ...... iv

LIST OF FIGURES ...... x

CHAPTER 1: ANALYTICAL FRAMEWORK ...... 1

The Puzzle ...... 1

The Argument ...... 4

Theoretical Underpinnings...... 5

The Explanatory Power of Ideas ...... 5

Old Ideas and Revolutionary Change ...... 11

Ideas Travelling Through Institutions ...... 14

Important Institutional Arrangements Favoring Industrialization ...... 16

The Brazilian Developmental State ...... 21

Brazil Focused Literature ...... 23

The Analytical Model ...... 27

Independent Variable: Ideational factor...... 28

Control Variables: Institutional, Exogenous and Structural factors ...... 33

Alternative Explanations ...... 38

Economic Interest Groups/ Class Alliances ...... 38

Rational Choice (Political Survival) ...... 40

Autonomous Technocracy ...... 41

Contribution to the Literature ...... 43 v

Research Design and Methodology ...... 44

Approach and Design ...... 44

Methods...... 46

Chapter Outline ...... 48

CHAPTER 2: THE CONTEXT ...... 51

The First Oil Shock and Its Impact on Global Energy Markets ...... 51

The Geopolitics of the 1973 Oil Shock...... 52

The Impact of the Crisis ...... 54

The Politics of the Geisel Presidency ...... 58

Theoretical underpinnings of decompression ...... 59

Geisel’s Political Project ...... 60

Evolution of Geisel’s Goals during His Presidency ...... 64

An Economic Strategy in Times of Crises ...... 72

Assessment of the II PND ...... 77

Conclusion ...... 78

CHAPTER 3: BRAZILIAN MILITARY THOUGHT ...... 80

The Military and the End of the Empire ...... 81

The Military at the Dawn of the 20th Century and After WW I ...... 83

Argentina- The Foreign Threat ...... 85

Military Academy Education and Positivist Ideas ...... 87

The Tenentes Movement...... 89

The 1930 Revolution...... 92

Getúlio Vargas, Positivism and the Estado Novo ...... 93

The ESG and a new national security doctrine ...... 96

Conclusion ...... 104

CHAPTER 4: DEVELOPMENTALIST THOUGHT AND ITS INSTITUTIONAL

CONSOLIDATION IN THE ENERGY SECTOR ...... 105

Developmentalist Thought (1930-1985) ...... 107

Developmentalism Originates with Simonsen in the Private Sector ...... 108

The Developmentalist Nationalists ...... 109

The Cosmopolitan Developmentalists ...... 115

Consolidation of Developmentalist Thought: The building of an institutional

apparatus and its incidence in energy policy ...... 122

BNDES: A Tool for Instrumenting Developmentalism...... 124

Petrobras: the Making of an Energy Giant ...... 128

Eletrobras: Planning the Expansion of Electricity Supply ...... 143

A Ministry to Oversee Mining and Energy...... 149

From Council to Ministry: Building a Formal Economic Planning

Apparatus ...... 151

Instituto de Pesquisa Econômica Aplicada (IPEA) ...... 152

Economic Development Plans (1964-1979) ...... 158

In Search of Technological Autonomy: The Building of Brazil’s Science and

Technology Institutional Apparatus ...... 163

A Genesis Guided by Nuclear Energy Concerns ...... 163

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The National Research Council ...... 165

The CNEN and the First Attempt for a Nuclear Energy Power Plant .....166

Crafting and Institutionalizing a Science and Technology Policy ...... 167

Conclusion ...... 172

CHAPTER 5: POLICY ENTREPRENEURS AND INSTITUTIONAL

REORGANIZATION ...... 175

Introduction ...... 175

Key Characters: Policy Entrepreneurs ...... 176

Ernesto Geisel, “the Institution” ...... 179

João Paulo dos Reis Velloso, a long a term planner ...... 189

The Centralization of Institutional Veto Gates during the Geisel Administration193

CHAPTER 6: IDEAS AND THE POLICYMAKING PROCESS IN THE BRAZILIAN

ENERGY SECTOR ...... 198

Introduction ...... 198

Tracing the Policy Making Process for Energy Diversification ...... 200

Policy 1: Increasing indigenous oil supply ...... 202

Policy 2: The Ethanol Program (Pró-Álcool) ...... 231

Policy 3: The Brazilian Nuclear Energy Program and Cooperation Accord

with Germany...... 255

Policy 4: Hydropower Expansion ...... 272

Conclusion ...... 286

CHAPTER 7: VALIDATION ...... 290

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Introduction ...... 290

Case Selection ...... 292

Case studies ...... 295

India ...... 297

Chile ...... 313

Similar Antecedent Conditions, Different Outcomes ...... 329

Counterfactual Scenarios for the Brazilian Case ...... 331

The Decision to Develop the Guaricema Field ...... 332

Decision to Maintain Velloso as Minister of Planning ...... 333

Conclusion ...... 335

CHAPTER 8: CONCLUSIONS, LIMITATIONS AND CONTRIBUTION ...... 338

Summary conclusions ...... 338

Tracing ideas ...... 341

A Bold Strategy...... 343

The Execution ...... 344

Strengths of the Analysis ...... 348

Limits of the Analysis ...... 351

Contribution ...... 354

BIBLIOGRAPHY ...... 358

LIST OF FIGURES

Figure 1 Factors and Interactions ...... 37

Figure 2: Approved Financing per Sector for CMBUE Projects ...... 120

Figure 3 Brazilian Oil Production Growth and Its Relative Share in Total Oil

Consumption ...... 134

Figure 4 Petrobras Equipment and Parts Purchases 1955-1997 ...... 142

Figure 5 Petrobras Capital Investment 1973-1980 ...... 219

Figure 6 Brazil Proven Reserves (Oil, Gas and NGLs) 1973-1980 ...... 222

Figure 7 Brazilian Oil Supply and Demand Balance 1973-1980 ...... 224

Figure 8 Brazil Balance of Payments 1970-1980 ...... 225

Figure 9 World Price of Sugar ...... 249

Figure 10 Electricity Consumption Projections ...... 275

Figure 11 Planned Hydroelectricity Plants 1975-1990 ...... 278

Abbreviations and Acronyms

Abbreviation Name AI-5 Ato Institucional Número Cinco ARENA Aliança Renovadora Nacional BNDES Banco Nacional de Desenvolvimento Econômico e Social Braspetro Petrobras International C.F.C.E Conselho Federal de Comércio Exterior CAE Centro de Aperfeiçoamento de Economistas da Fundação Getúlio Vargas CDE Conselho de Desenvolvimento Econômico CDI Conselho de Desenvolvimento Industrial CEDPEN Centro de Estudos e Defesa do Petróleo e da Economía Nacional CEMIG Centrais Elétricas de Minas Gerais CENAP Centro de Aperfeiçoamento de Pessoal CENPES Centro de Pesquisas e Desenvolvimento Leopoldo Americo Miguêz de Mello CEPAL Comissão Econômica Para América Latina E Caribe CEPEL Centro de Pesquisas de Energía Elétrica CMBEU Comissão Mista Brasil- Estados Unidos/ Mixed Brazil-United States Commission CNEN Comissão National de Energia Nuclear CNP Conselho Nacional do Petróleo/ National Petroleum Council

CNPq Conselho Nacional de Desenvolvimento Científico e Tecnológico (formerly Conselho Nacional de Pesquisa) CPDOC Centro de Pesquisa e Documentação de História Contemporânea do Brasil CSN Companhia Siderúrgica Nacional CSN Conselho de Segurança Nacional CTA Centro Técnico Aeroespacial DASP Departamento Administrativo De Servico Público DOI-CODI Departamento de Operações de Informações - Centro de Operações de Defesa Interna/ Internal Operations Department- Internal Defense Operations Centers ECEME Escola de Comando e Estado-Maior do Exército

ECLA Economic Commission For Latin America Eletrobras Centrais Elétricas Brasileiras EMBRAMEC Mecânica Brasileira SA EPGE-FGV Escola Brasileira de Economía e Finanças at the Fundação Getúlio Vargas ESAO Escola de Aperfeiçoamento de Oficiais ESG Escola Superior de Guerra FEB Força Expedicionária Brasileira FGV Fundação Getúlio Vargas FINAME Financiamento De Máquinas e Equipamentos FINEP Financiadora de Estudos e Projetos FMRI Fundo de Modernização e Reorganização Industrial FNDCT Fundo Nacional de Desenvolvimento Científico e Tecnológico FUNTEC Fundo de Financiamento Tecnológico GNP Gross National Product I PND Primer Plano Nacional de Desenvolvimiento IAA Instituto do Açúcar e do Álcool IBRASA Investimentos Brasileiros SA IEA Instituto de Energia Atômica II PND Segundo Plano Nacional de Desenvolvimiento IOC International oil company IPEA Instituto de Pesquisa Econômica Aplicada IPEA- INPES IPEA-Instituto de Pesquisa IPEA- IPLAN IPEA-Instituto de Planejamento IPÊS Instituto de Pesquisas e Estudos Sociais IPT Instituto de Pesquisas Tecnológicas MDB Movimento Democrático Brasileiro MME Ministério de Minas e Energía Nuclebras Empresas Nucleares Brasileiras SA OAB Ordem dos Advogados do Brasil OPEC Organization of Petroleum Exporting Countries PAEG Programa de Ação Econômica do Governo PBDCT Plano Básico de Desenvolvimento Científico Tecnológico PBDCT II Segundo Plano Básico de Desenvolvimento Científico e Tecnológico PED Programa Estratégico de Desenvolvimento Petrobras Petróleo Brasileiro S.A

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Plano 90 Plano de Expansão para as Regiões Sul e Sudeste 1990 PNPE Programa Nacional de Pesquisa Econômica Pró-Álcool Programa Nacional do Álcool SEPLAN Secretaria de Planejamiento da Presidencia SERMAT Serviços de Materiais da Petrobras SNDCT Sistema Nacional de Desenvolvimento Científico e Tecnológico SNI Serviço Nacional de Informações STI Secretária de Tecnologia Industrial SUDENE Superintendência de Desenvolvimento do Nordeste SUPEX Superintendência de Contratos de Exploração

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CHAPTER 1: ANALYTICAL FRAMEWORK

The Puzzle

This research seeks to contribute to the understanding of the relation between energy and economic growth. Mainstream economists usually categorize capital, labor, and land as the primary factors of production, while goods such as fuels and materials are considered intermediate inputs (Stern, 2004). For that reason, they have downplayed the relationship between energy or electricity consumption and economic growth (Stern,

2004). Furthermore, there is no consensus in the literature either on its existence, or on the direction of causality (Ozturk, 2010). Yet, a number of country-specific studies indicate that energy plays a role in economic growth (Ozturk, 2010). In addition to the laws of thermodynamics that simply put, indicate that transformation requires energy

(Stern, 2004), and even accounting for declining energy use per unit of economic output explained by technological advancement and a shift to higher quality fuels (Stern, 2012), there is a limit to the elasticity of substitution between energy and capital (Stern, 2012).

As a result, energy is a limiting factor to economic growth and shocks in energy supply are likely to negatively impact growth (Stern, 2012).

I am interested in the role played by energy resources in the industrialization process that countries pursued to attain economic growth. My focus is on the experience of Brazil, a developing country in the midst of an aggressive industrialization process in the 1970s that faced the formidable challenge of energy scarcity. This challenge became more acute when as a result of the 1973 oil embargo, the price of oil quadrupled. By then,

Brazil was importing nearly 80 percent of the oil it consumed and the unexpected oil

price surge placed considerable strain on its economy and threatened its industrialization goals. As many other countries that depended on imported oil to fuel industrial activity and sustain economic growth, Brazil was forced to reconsider its energy policy.

However, unlike other energy scarce countries, industrialized or developing, Brazil’s new energy policy was based on a unique and radical strategy.

In a study comparing the responses of selected oil importing industrialized countries to the 1970s oil crises, John Ikenberry describes the different policy adjustment paths taken by the United States, West Germany, Japan, and France. According to

Ikenberry, the United States policies sought to reduce distortions to market prices in order to drive increases in energy supply while reducing the appetite for energy. West Germany and Japan focused on energy efficiency and conservation policies with the hope that increased efficiency in industrial production processes would provide a competitive edge to their exports that ultimately would finance the rising energy bill. Finally, France chose a self-sufficiency energy strategy based on heavy investment by the state in a single technology, nuclear energy, while imposing restrictions on oil imports (Ikenberry, 1986, pp.110-116).

Regionally, Chile was the other medium size economy that heavily relied on imported oil to supply its energy needs. In response to the oil price shocks of the 1970s,

Chile’s energy policy adjustment path paralled that of the United States and a market base solution was favored (Philip, 1985, pp. 311-314).

Brazil chose a different path. In September of 1974, under a military government

(1964-1985), Brazil designed and implemented an ambitious policy that while trying to

diversify away from oil, sought to develop a cleaner and diversified energy matrix, enhance domestic energy production and restructure the energy sector. The policy’s principal goal was to undercut Brazil’s energy dependency on foreign energy sources. It was structured to attain energy self-sufficiency and technological autonomy. It was implemented as a long-term strategy responding to Brazil’s aspiration to use its natural resources to develop oil, electricity and ethanol value chains.

To pursue its goal, the government launched a large-scale investment program geared toward increased energy production from diversified sources. The program included investments in cleaner energy sources such as nuclear and hydropower for electricity generation, the design and implementation of a sugar-based ethanol program seeking to spur the creation of a market and industry that would provide an alternative to petroleum based fuels in the transport sector, and the exploration and production of indigenous off-shore, deep-water petroleum reserves to increase availability of oil supplies (Chami Batista, 1987, pp.74-76).

What is unique from this policy adjustment response? Brazil’s chosen path was not only different, it was risky for many reasons. The strategy demanded large amounts of investments, which had a long-term for maturity and an uncertain rate of return.

Particularly, investments in exploration and production of deep-water oil reserves required the development of technology and expertise not available in the market.

Additionally, the creation of a new market and industry for sugarcane ethanol required market participants (i.e. sugar mill distillery owners, car manufacturers and end consumers) to fully embrace the program’s incentives. Finally, it was also risky because

unlike other oil importing countries that relied on market mechanisms and the private sector to make the necessary adjustments and investments, Brazil called on the state to meet the energy supply challenge and to finance and implement the ambitious reform package. Thus, the strategy relied on the belief that state institutions had the resources and capabilities necessary to implement it successfully.

A review of the historical record based on secondary sources, suggests no other country embarked on a similar quest for self-sufficiency and autonomy through the development of untested technology and requiring the creation of new markets and industries in response to the 1973-1974 oil crisis. Understanding the reasons behind this risky strategy deserves further analysis. Why would a developing country with no technological edge, and poor in capital resources and state capabilities relative to the advanced industrialized countries decide on such a strategy? What prompted Brazilian policymakers to consider such a risky strategy as a sound course of action for Brazil?

To answer these questions, I studied the policymaking process that led to the adoption of the energy diversification policies adopted in Brazil in 1974.

The Argument

Through this research, I seek to provide an explanation for Brazil’s energy policy response to the 1973-1974 oil shock and its adoption of diversification policies. I have focused on the policymaking process that commenced in March of 1974. I have sought to identify the factors that conditioned the options available to policymakers; the opportunities and constraints they faced molded their beliefs and interests; and finally,

the unifying beliefs and interests that allowed different constituencies and actors to coalesce around and ultimately lend support to a radical policy response.

An early assessment of the historical record based on secondary source examination suggests structural, exogenous, institutional and ideational factors affected the policymaking process and the resulting policies. Although structural and exogenous factors played important catalyst and enabling roles, I argue that ideas held by policymakers and ingrained in the institutional framework are central to understanding

Brazil’s policy response. Ideas that policymakers used to understand, analyze and decide on the course of action available to them are the explanatory variable in this research.

My proposition is that four old ideas, namely (1) national development through industrialization, (2) energy as a growing point, (3) the attainment of energy self- sufficiency, and (4) the development of an autonomous capacity for technological innovation, recombined by able policy entrepreneurs, shaped policymaker preferences and facilitated the emergence of a consensus among policymakers and entrepreneurs on the importance of energy self-sufficiency for economic growth and the long-term development of the country.

Theoretical Underpinnings

The Explanatory Power of Ideas

The study of ideas has been prompted by the need to account for institutional change. Given its origins tracing back to Marx’s materialism and Weber’s comparative history, for many years historical institutionalist assumed that the material interests of

political and economic actors motivated politics and that those interests were institutionally determined. However, scholars in this tradition became increasingly aware that state bureaucrats, politicians, and civil society actors sometimes sought political change in order to improve government and economic and societal conditions rather than simply follow their self-interest.

From the lineage of historical institutionalism scholars interested in ideas, John L.

Campbell’s study of the role of ideas in political economy is one of the earlier efforts to conceptualize ideas and to investigate their effect in policymaking and their overall explanatory power (Campbell, 1988). According to Campbell, ideas provide specific solutions to policy problems. These ideas can take the form of assumptions that provide background to policy debates but can also be explicitly discussed by policymaking elites.

Ideas constrain the cognitive and normative ranges for policymakers. At a cognitive level, ideas describe and explain cause and effect relationships while at a normative level, ideas include values and attitudes. In addition, in his view, ideas encompass symbols and concepts that allow policymakers to propose policies and build frameworks in which to develop and legitimize them. Campbell identifies four types of ideas (Campbell, 1988, p.

385):

• Paradigms: paradigms are cognitive assumptions about how the world works.

Paradigms limit the range of alternatives that policymaking elites are likely to

perceive as useful and worth considering. They are typically embedded in academic

and policy publications and guide the public discourse.

• Programmatic: programmatic ideas are technical and professional ideas that

establish a cause-and- effect relationship and prescribe a concise course of action.

They are frequently espoused in policy briefs and memos to policymakers.

Programmatic ideas developed within existing paradigms appear as familiar and

therefore have greater appeal.

• Public sentiment: public sentiment consists of attitudes and normative assumptions

that policymakers believe are acceptable to the public. In contrast to paradigms,

public sentiments constrain the range of politically palatable solutions. Yet public

sentiments are often determined by public opinion polls and similar methods and

therefore allow policymakers to co-opt and manipulate them for their own ends.

• Frames: frames are symbols and concepts employed by policymakers in campaigns,

speeches, press releases and other political manifestoes. They assist policymakers

legitimize and mobilize public opinion. Often frames are selected from the values and

opinions already held by the public.

Peter Hall’s (1993) historical institutionalist theory of policy paradigms and paradigm shift has been an important stepping stone in the study of ideas and their explanatory power for institutional change. In his theory, ideas are institutionalized as a paradigm that serve as an interpretative framework for policymakers. He defines the paradigm as follows:

“[P]olicymakers customarily work within a framework of ideas and standards

that specifies not only the goals of policy and the kind of instruments that can be

used to attain them, but also the very nature of the problems they are meant to be

addressing. Like a Gestalt, this framework is embedded in the very terminology

through which policymakers communicate about their work, and it is influential

precisely because so much of it is taken for granted and unamenable to scrutiny

as a whole. I am going to call this interpretive framework a policy paradigm.”

(Hall, 1993, p. 279)

In Hall’s theory, institutionalized ideas are powerful because they provide stability. When having the support of centrally-placed political agents, ideas have an ability to order action in patterned ways and in this process, contribute to the elimination of other political solutions. A paradigm shift may result from the accumulation of anomalies that the paradigm is not able to resolve. In this way, change occurs when the paradigm fails, that is, in a crisis. In this situation, new ideas replace old ones and a new paradigm is set. In Hall’s analysis, ideas themselves are not the variable that explains change.

One argument in the ideational literature that has been widely accepted is that ideas have a strong influence during periods of crisis. In these situations, established logics of action and ways of thinking become less suitable to predict outcomes and therefore irrelevant, leading to a vacuum filled with uncertainty. In uncertainty, agents are unable to interpret their interest and map paths to effectively maximize them. In such conditions, ideas help agents act in spite of uncertainty (Blyth, 2002).

In his book Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (2002), Mark Blyth advanced the notion that economic ideas play a crucial role in how institutional responses are shaped during times of economic crisis.

Blyth concluded economic ideas provided the interpretative framework with which policymakers understood crises and also proposed solutions “in line with these ideas.”

(Blyth, 2002, p. 11). Following in the work of Polanyi, Blyth proposed a dynamic model to understand how economic ideas in the United States and Sweden during the 20th century had a different effect at different junctures. His analysis questioned whether self- interest was the determinant factor in institutional change. He theorized that in periods of economic crisis ideas both give substance to interests and determine the shape of new institutions. Thus, in times of crises leading to institutional change, ideas act to reduce uncertainty, assist in the building of coalitions, empower agents to challenge existing institutions; are resources in the construction of new institutions and finally, help coordinate agents’ expectations, thereby reproducing institutional stability (Blyth, 2002, pp. 34-45).

Katherine Sikkink also embraced the notion that ideas have great significance in understanding the adoption of economic models. In her book Ideas and Institutions:

Developmentalism in Brazil and Argentina (1991), Sikkink attempted to explain the emergence of Developmentalist governments in Brazil and Argentina, the nature of the

Developmentalist program implemented by such governments and the reason for the divergence resulting economic outcomes. To develop her analysis, Sikkink resorted to an

“institutional-interpretative approach.” In this approach Sikkink shunned formalistic approaches in which institutional structure is evaluated separately from political life.

Rather, Sikkink placed great emphasis on the power of ideas to mobilize both governmental and societal actors. In her view, the success of the Developmentalist model

in Brazil as compared to Argentina, was due to the presence of a national consensus that industrialization was necessary for development that became embedded in a network of state institutions with the capacity to carry out Developmentalist policies. Sikkink however went further stating that the dynamic interaction between political and social actors was spurred by a leader’s ability to symbolize, inspire and, motivate others to act:

“Ideas become embodied in institutions but are often symbolized by a leader, who is the most important spokesperson and representative of the idea” (Sikkink, 1991, p. 28).

In a seminal study of Developmentalist ideas in Brazil, Ricardo Bielchowsky examined the roots of the developmentalist ideology that permeated Brazilian economic thought and greatly influenced economic policy for at least forty years starting in the

1930s. According to Bielschowsky (1988, pp.7-8), Developmentalism is an ideology of transformation for the Brazilian society defined by an economic project composed of the following key theses:

• Full-fledged industrialization as the vehicle to overcome poverty and Brazilian

underdevelopment;

• State planning of the industrialization process. Because the means to achieve an

efficient and rational industrialization process in Brazil were not spontaneously

spurred by market forces, it was necessary for the state to play this role;

• Planning needed to define the desired economic sector’s expansion and the

instruments for promoting such expansion;

• The state needed to direct the execution of the economic expansion, capturing and

channeling financial resources and promoting direct investment in those sectors

where private initiative was insufficient.

The pillars for Developmentalism were both found in the public and private sectors as early as the 1930s. In the public sector, two streams of Developmentalist thought developed differently based on their inclination or lack thereto toward nationalism. This distinction related specifically to the belief among the non-nationalist

Developmentalist, also known as the Cosmopolitans, that it was possible and desirable for foreign capital to participate and have a long-term interest in the Brazilian industrialization process. However, both Developmentalist Ntionalist who believed foreign capital was not necessary or helpful to the industrialization process, as

Bielschowsky termed them, and the Cosmopolitans fiercely defended the establishment of a modern industrial capitalist economy.

Old Ideas and Revolutionary Change

The four ideas constituting my proposition were not new. A review of the historical record confirms these ideas have been present in the Brazilian political, economic and social life since at least the late 1930s and in some cases, originate in

Augusto Comte’s Positivist thought.1 I argue that these ideas were carried forward

1 Auguste Comte (1798–1857) was the founder of Positivism, a philosophy that underpinned the efforts of passionate Brazilians starting in the late 19th century towards reform and modernization. In his work Course on Positive Philosophy (Cours de philosophie positive), Comte embraced science and reason as foundations for political organization in modern industrial society over theology. In his other notable written work, 11

through institutions and individuals to the 1974 energy policy arena and were present in the minds of many of the key policy actors who decided on the energy policy response to the 1973 oil shock. The ideas were embedded in key state institutions such as the

Brazilian development bank, the ministry of planning and its center for applied economic research, the national council for research and technology, Petrobras, Eletrobras and the

Brazilian military, among others. Important state technocrats and policy entrepreneurs such as Caetano Horta Barbosa, Roberto Campos, José Pelúcio Ferreira, João Paulo dos

Reis Velloso, and Ernesto Geisel acted as carriers of these ideas.

Because these ideas were not new, my argument makes use of the concept of bricolage as defined by John L. Campbell (2004) and refined by Martin Carstensen

(2011a, 2011b, 2013, 2016). Bricolage is defined as:

‘[A]n innovative recombination of elements that constitutes a new way of

configuring organizations, social movements, institutions, and other forms of

social activity’, which entails ‘the rearrangement of elements that are already at

hand, but it may also entail the blending in of new elements that have diffused

from elsewhere.” (Carstensen, 2011a, p.154)

The mainstream reading of the ideational literature suggests that during periods of crises leading to institutional change it is the emergence of new ideas that explains change (Blyth, 2002). Bricolage, on the other hand, is a mechanism that allows for old

System of Positive Polity (Système de politique positive), he favored the idea of a public administration made up of a hierarchical and obedient intellectual elite that was criticized as antithetical to democracy. 12

ideas to be deployed by policy entrepreneurs in innovative ways in response to a crisis situation. According to Carstensen, policymakers may reinterpret the meaning of existing ideas and redeploy them under significantly different circumstances leading to change

(Carstensen, 2016, p.1).

By drawing from sociology and anthropology theories and using a relational approach, Carstensen examines the nature of ideas establishing their constitutive elements of meaning and theorizes, in contrast to the interpretation offered by Hall’s paradigm approach, that the meaning of ideas is defined by the relation between different elements of meaning rather than a core (Carstensen, 2011b and 2013).2 He argues that the recombination of these constitutive elements of meaning can be limited or expansionary depending on whether the policymakers simply recast existing elements of meaning in innovative and strategic ways (i.e. limited bricolage) or bring new meaning elements in the recombination (i.e. expansionary bricolage). Whether the bricolage is limited or expansionary matters for the outcome. In Carstensen’s thesis limited bricolage accounts for gradual institutional change while expansionary bricolage explains revolutionary institutional change (Carstensen, 2016, pp.3-8). I differ from Carstensen’s conclusion regarding the type of institutional change generated by old ideas (i.e. limited bricolage).

My research suggests old ideas used in innovative ways and furthered by important

2 A relational approach refers to the ways the constitutive elements of an idea interact to form the idea. According to Cartensen, “[T]his model of relationally structured ideas encompasses three levels: first, the elements of meaning and the relation between them, i.e. the primary elements of the idea; second, the relation between ideas; and third, the broader tradition the ideas are part of” (Carstensen, 2013, p.7). 13

policy entrepreneurs generate revolutionary institutional change. This is the case in the

Brazilian energy policy study developed here.

Following Mark Blyth (2002), I further suggest that these ideas acted to reduce uncertainty and assisted in the building of a coalition/consensus among the main policy actors on the importance of energy self-sufficiency and technological autonomy for industrialization, economic growth, and ultimately, the long-term development of the country. Finally, I submit that it is precisely this consensus that explains the drive of policymakers to invest in a long-term strategy, which though highly risky, had the potential to take Brazil from energy scarcity to self-sufficiency. Thus, these ideas were necessary and in conjunction with other structural and exogenous factors sufficient to explaining Brazil’s energy policy response adjustment to the 1973 oil crisis.

Ideas Travelling Through Institutions

Institutions are central to my argument as carriers and a mean of diffusion and implementation of said ideas. Following an institutional-interpretative approach, I argue that the four ideas comprising my main working proposition were embedded and carried through a network of key state institutions to the 1974 policy arena.

Conceptual definition of institutions

The term ‘institutions’ is broad and can encompass multiple phenomena. It is often equated with that of organizations. More specifically it denotes the existence of rules or constraints on human interaction and both formal and informal social norms. As such, the term can encompass complex systems of interrelated norms, the interaction of

persons within the system and their relationship with these norms (The International

Encyclopedia of the Social Sciences, 2010, pp.7561-7566).

Pursuant to the game theory theoretical framework, an ‘institution’ can be conceived to be the set of constraints or rules which determine the opportunities and incentives of the relevant actors in a given situation. These rules determine possible actions (strategies) and their consequences (payoffs). Under these rules agents take actions that are optimal and that together reach an equilibrium; that is one in which there is nothing to gain from deviating from the norm. The interactions of the agent themselves may evolve into a stable pattern that becomes an integral part of the institution (The

International Encyclopedia of the Social Sciences, 2010, pp.7561-7566).

Institutions have also been broadly defined by political science traditions that seek to understand their role and influence. One of these approaches is historic institutionalism, which is “distinguished from other social science approaches by its attention to real world empirical questions, its historical orientation and its attention to the ways in which institutions structure and shape political behaviour and outcomes”

(Steinmo in Della Porta and Keating, 2008, p.118). In this tradition, institutions are commonly and broadly defined as rules; while some of its proponents focus on formal rules and organizations, others address informal rules and norms. Generally speaking, scholars in this tradition are interested in the whole range of state and societal institutions that shape how political actors define their interest and that structure their relations of power to other groups (Thelen & Steinmo, 1992, p.2).

In her book Ideas and Institutions: Developmentalism in Brazil and Argentina

(1991), Sikkink shied away from the institutional approach finding that “it does not offer a systematic attempt to explain how ideas, institutions and individuals interact to produce policy outcomes.” Finding common ground in the theses of Peter Hall and Emanuel

Adler, she concluded therefore that institutions understood as organizations are best positioned to become carriers and disseminators of ideas as they provide distinct means of implementation (Sikkink, 1991, pp.250- 251). In her view institutions mean:

“established organizations and the rules and practices that govern how these

organizations function internally and relate to one another and society. The rules

and practices governing these institutions can be formal (that is, embodied in

laws and regulations) or informal and implicit” (Sikkink, 1991, p.23).

I adopt this definition in examining the role of institutions in Brazilian policymaking in the energy sector. Under this institutional-interpretative approach, I will focus both on the institutions themselves and the ideas embedded within them.

Important Institutional Arrangements Favoring Industrialization

The paragraphs below briefly describe the changes in Brazil’s political, economic and social life following the Great Depression and the resulting institutional arrangement favoring industrialization. They also provide a theoretical base for understanding how this institutional framework conditioned the economic policymaking process in Brazil from 1930 till the late 1970s.

The forging of a new institutional arrangement: Brazil from 1930 to 1973

Brazil experienced momentous changes following the Great Depression and

World War II. During this time markets for the country’s traditional exports and imports of industrial products were severely curtailed. Brazilian exports (mostly coffee) from

1940-1945 have been estimated to have fallen 12-20% from 1939 levels. These economic difficulties were fertile ground for radical changes in the Brazilian political and economic systems.

In 1930, under the leadership of President Getúlio Vargas,3 the country laid the groundwork for the impetus of a national coalition of public and private interest groups focused on fulfilling the country’s potential as an emerging power. Starting with his first constitutional mandate and followed by his 1937 take of power, President Vargas established a new political model (Estado Novo) in which the federal government centralized and modernized political power and economic initiative that had in the past been the realm of the wealthiest states (Roett, 2011). While this reorganization was legitimized as a resistance to communist threats to the state, it mostly represented the class interests of the country’s emerging industrialists and of the military.

From an economic perspective, President Vargas established a corporatist administrative regime in which the state was elevated to co-opt and lead significant

3 Getulio Vargas was president of Brazil from 1930 to 1934, 1934 to 1937, 1937 to 1945 and 1951 to 1954. 17

economic and social welfare efforts.4 In the absence of foreign private capital and export markets, a network of state corporations and regulatory agencies impacting key economic sectors was created; including in the shipping, steel, electricity, oil, coffee, and sugar industries. A merit system for staffing these entities and agencies was carefully introduced. In addition, social and economic sectors (notably labor unions) were either co-opted to fall within the government sponsored network of council and syndicates or expected to “fall in line” with established government policy. As a result, during this time the coalition of government and the new urban bourgeoisie coalesced in support of industrial expansion.

While the institutional corporatist regime established during the Estado Novo period was built under an authoritarian regime, it proved to be resilient during the country’s brief experiment with democracy (1945-1964). The governmental impetus towards industrialization was deepened during the presidency of Juscelino Kubitschek

(1956-1961). As a result, Brazil increasingly moved away from traditional agricultural exports, toward the production of sophisticated raw materials and industrial goods (such as steel, cement, aluminum, automobiles) (Roett 2011, p.48).5 By the end of the

Kubitschek presidency however some of the benefits and strains of the state led development model became evident. Yearly growth averaged more than 6% from 1947-

4 The type of corporatism instituted in Latin America has been typified as state corporatism, which is different from the social corporatism adopted in some European countries. 5 See also Leonard, Thomas, et al. Encyclopedia of US-Latin American Relations. CQ Press, 2013, p. 542. 18

1952 and reached 7.8 % during the Kubitschek presidency. At the same time import substitution policies resulted in heavy public indebtedness and high inflation. These strains presented President Kubitschek’s successor with formidable governance challenge. While President Jânio Quadros (January– August 1961) managed to have

Congress enact austerity measures, legislative deadlock thereafter led to his resignation months after assuming office. He was followed in office by his Vice President, João

Goulart (September 1961–April 1964), who was expected to continue to resolve the country’s economic woes but needed to also satisfy nationalist and trade union factions.

Goulart initially presented a program (Dantas-Furtado Plan) that combined anti-inflation measures with land reform, income tax on high earners and voting rights to illiterate rural populations. The resulting balanced displeased both progressives and conservatives, leading to Congressional deadlock, and the President’s embrace of nationalist populism.

His support among the middle class eroded contributing to a backlash by conservatives with the support of the military. Goulart was deposed in 1964 by a military led coup d'état.

A theoretical base: Historic Institutionalism

Peter Hall (Hall 1986) proposed historical institutionalism as a framework to understand his comparative study of economic development of France and Britain after the World War II. Hall sought to understand the relative decline of industrial development in the United Kingdom over a number of years and different governments.

In his view the problem with the United Kingdom lied not with its economic fundamentals but with its institutions. Its economic problems were a function not of

economics per se but of their relationship with political elements that determined a particular path of national development. Though he did not deny the importance of political culture, for Hall the relative autonomy of the state and the power of social groups were the relevant elements, which mediated by particular institutional factors explain the outcome. For example, the capacity of certain political groups to influence policymaking was determined by the organization of the state. Governments failed to enact an effective industrial policy as a result of the privileged position of financial interests vis-à-vis strong and autonomous government institutions with little interest in industrial policy. Industrial and labor interests were unable to influence policymaking to the same degree.

Alexandre Queiroz Guimarães (2005) applied a historical institutionalist framework to economic policymaking in Brazil during the 1930-1960 period. Guimarães was interested in explaining Brazil’s response to the 1930 global economic crisis and how the resulting institutional arrangements conditioned the economic policy process thereafter. In contrast to other Latin American countries with an agricultural export economy such as Argentina and Colombia, Brazil changed both its economic development model and the role of the state. Before 1930 economic policy had mainly promoted the interest of coffee landowners. The incoming government in 1930 strengthened the state and its capacity to adopt a strategy to promote the interests of an industrialist class that had been relegated to the policymaking fringes. From Hall’s analytical framework, the 1930 crisis allowed a restructuring of the institutional set up, political culture and ideology among elites and a rebalancing of intertwined social

interests. Specifically, the rural aristocracies had become divided and an emerging middle class and a strong military became relevant social actors in the balance of power. In

Guimarães’ analysis, this new balance of power became institutionalized into a

Developmental state in the decades that followed and was essential to determine the countries industrial development path.

The Brazilian Developmental State

As Guimarães noted the new institutional arrangements forged after 1930 positioned the Brazilian state as the central economic actor. The strong impetus for development through industrialization and the role played by Brazilian state in this process from the late 1930s to the late 1970s, is usually referenced to typify Brazil as a

Developmental state. The paragraphs below describe some of the works that contribute to the Developmental state literature by first defining it conceptually and then, by examining the Brazilian experience.

In an edited volume that examines Chalmer Johnson’s explanation for the

Japanese economic miracle (Johnson, 1982), Meredith Woo-Cummings describes the theory of the developmental state as the explanation for the East Asian industrialization.

In her view, the “[D]evelopmental state is a shorthand for the seamless web of political, bureaucratic and moneyed influences that structure economic life in capitalist Northeast

Asia” (Woo- Cummings, 1999, p.1). The developmental state is frequently positioned conceptually between a free market capitalist economic system and centrally planned economic system, and defined as a plan-rational capitalist system, “conjoining private ownership with state guidance” (Woo-Cummings, 1999, p.2)

In turn, Peter Evans examined the influence of the state both as an institution and a social actor. In a comparative study of the local information technology industry in

Korea, Brazil, and India titled Embedded Autonomy: states and industrial transformation

(Evans 1995), Evans examined the structure and the role of the state to determine its effectiveness in generating rapid industrial growth. Following in the footsteps on

Hirschman (1959) and Gerschenkron (1962),6 Evans agreed that state involvement was key in the development of local industry. His analysis however sought to determine the relevance of the relationship between the state, the economy, and society for its effectiveness in making industrial policy. In his view an effective industrial policy required a unique configuration, one on which the state performed with “embedded autonomy.” In contrast to a predatory state in which the bureaucracy operated for its own benefit, the developmental state operated through a politically-insulated and professional bureaucracy (i.e. technocracy) that derived its legitimacy from its capacity to deliver growth and welfare to its citizenry. In order to succeed however, the state needed to also

6 In The Strategy of Economic Development, Hirschman explains that: “Development depends not so much on finding optimal combinations for given resources and factors of production, as on calling forth and enlisting for development purposes resources and abilities that are hidden, scattered, or poorly utilized.” (Hirschman, Albert Otto. The strategy of economic development. No. 338.1. Yale University Press, 1959. p. 5). Gerschenkron posited that State support was essential to marshal the funds and encouraging their application in transformative activities for late developers to catch up. See Gerschenkron, Alexander. Economic backwardness in historical perspective: a book of essays. No. 330.947 G381. Cambridge, MA: Belknap Press of Harvard University Press, 1962. 22

be integrated to the economy to overcome informational deficiencies and negotiate policies with stakeholders.

Ben Ross Schneider’s study of the Desarrollista state identifies the components of the developmentalist state model in Brazil by outlining the characteristics of the state and its relationship with its political and economic dimensions. He identified four essential characteristics: (1) political capitalism in which the state determines investment decisions and resulting profits; (2) a dominant developmental discourse on the necessity of industrialization and state intervention to promote it; (3) an unstable and weak bureaucracy in which structure and representation are determined by political appointments; and (4) the political exclusion of the majority of the adult population.

According to Schneider, these characteristics help explain the conduct of the elites, the structure of power within the state –i.e. its bureaucratic structure-, and the state itself and its interaction with the political and civil society and with the economy (Schneider in

Woo-Cummins, 1999, pp.276-305).

Brazil Focused Literature

Although the period of interest for the present research has been prolifically studied by political scientists, sociologists, historians, and economists interested in Brazil, very little has been written about Brazil’s energy sector in the 1970s. The majority of the literature available covers in great detail and depth the economic and political life of

Brazil during the military governments that ruled the country for 21 years starting in

1964. The paragraphs below detail in a summary fashion the major works that have informed this dissertation.

Thomas Skidmore (1988), David Collier (1979) and Guillermo O’Donnell (1979) have analyzed the political regime during the military rule. According to these authors what developed in Brazil, and in many other Latin American countries under military rule, can be typified as an authoritarian bureaucratic regime. In these regimes a repressive, authoritarian and exclusionary coalition assisted by a cadre of technocrats

(“tecnicos”) in the state bureaucracy- civil and military- delivered political stability and economic growth.

In contrast, in analyzing the development model designed and implemented by the military, Fernando Hnrique Cardoso (1973) coined the term “associated dependent development” to describe the class alliance forged between the state (the military and the state bureaucrats), the local capital and the multinational corporations operating in Brazil that made possible the functioning of such economic model. The domestic bourgeoisie relinquished political control and participation in exchange for economic growth. The multinational companies were invited to partake because the industrialization process required capital, technology and managerial skills that the country lacked.

This class alliance has also been studied by Peter Evans in its case study on Brazil titled Dependent Development: the alliance of multinational, state, and local capital in

Brazil (1979), which was the precursor of his 1995 seminal work on the state and its capacity to conduct effective industrial policy. In the 1979 case study, Evan discusses the concept of dependent development which challenges dependency theory. Dependency theory claims that a country’s development is dependent on its place in the international labor division, whereby the capital accumulation necessary for development was

contingent on the sale of raw material to a more developed nation. In Evan’s analysis, capital accumulation could equally result from a combination of state intervention, local capital and foreign capital and know-how (described as a “triple alliance”) producing internationally-competitive industries. According to Evans, this alliance is politically unstable as there is a trade-off between the logic of economic growth and the overall welfare of the population. To be sustainable, authoritarian regimes like the one seen in

Brazil in the 1970s are a pre-requisite.7

Alfred Stepan (1971, 1973 and 1978) examined the military institution in Brazil and its role in politics. According to Stepan during the authoritarian rule in Brazil, the military governed the country as an institution. The military had been trained to rule a country and had the technical and managerial capabilities to implement a development project for Brazil. Frank McCann (1984, 2004, 2015) and Smallman (2003) have studied Brazilian military thought, covering historical developments that molded the military institution and its ideology.

Leslie Bethell (1996) has studied the ideas and ideologies undelaying Latin

America’s social, political and economy life in the 20th century. Jens Hentschke (2004) and Robert Nachman (1997) have examined the influence of August Comte’s positivist ideas in Brazilian federal and state politics and the country’s middle class. In a seminal comparative study, Emmanuel Adler (1985) examined Argentina and Brazil’s science

7 The same conclusion was sponsored by Guillermo O’Donnell with respect to Argentina in the 1960-1970 period. 25

and technology policy experience. The ideology that underpinned such policies is richly described and in the case of Brazil, Developmentalism is identified as explanatory factor to the difference in outcomes vis-à-vis the Argentina case.

The role of technocrats in economic policy design and implementation has been covered by various authors. Nathaniel Leff (1977), Maria Covre (1983) and Ricardo

Bielschowsky (1988) examined the Brazilian economic policymaking process and explained the role of ideas and technocrats in policymaking. Luciano Martin (1985) studied the degree of autonomy enjoyed by the technocratic elite and the influence of this technical corps in policymaking. Ross Schneider analyzed the bureaucratic behavior of

Brazilian state officials in the design and implementation of industrial policy during the

1964-1985 military governments. Batista Chami (1992) studied the logic of the economic decisions taken during the Geisel government (1974-1979) and its impact on debt adjustment policies in the 1980s.

With respect to the energy sector, Peter Seaborn Smith (1976), George Phillip

(1982), and John Wirth (1985), described the creation of Brazil’s national oil company

(Petrobras) and the influence of the Brazilian military over this process and energy policy overall. John Surrey (1987), Laura Randall (1993), and Jose Diaz (1993) covered the evolution of Petrobras since the 1970s. In a her doctoral thesis, Carmen Alveal (1994) examined the role of Petrobras in the industrialization of Brazil. Michael Barzelay

(1986), Anil Hira & Luiz Oliveira (2009), Maria Helena de Castro Santos (1985), and

Jennifer Eaglin (2015) have explained the development and political economy of the

Brazilian ethanol industry. As part of an edited volume on state capitalism in Brazil,

Kenneth Erickson (1981) examined issues of state entrepreneurship in the energy sector and its impact in energy policymaking during the 1970s. In a short article, J. Goldemberg

(1982) provided an overview and critique of the energy conservation and substitution policies Brazil adopted as a result of the 1973 oil price shocks. Peter Seaborn Smith

(1983) provided an incisive critique to Brazilian energy policy in the context of the 1970s energy crises. Finally, in an insightful article, James Street (1982) delivered a short description of the Brazilian policy response to the 1970s oil price shocks.

The Analytical Model

The model I devised to analyze Brazil’s energy policy response to the 1973 oil shock is composed of three types of variables. The independent variable corresponds to the energy policy response. The four ideas outlined above, which I group under the label ideational factor, make up the explanatory variable. Structural, exogenous and institutional factors comprise the control variables in the model.

The following section succinctly describes the four ideas. Next, because I understand structural, exogenous, and institutional factors conditioned the policymaking process and should be accounted for when trying to observe the impact of ideas, I describe each of these factors and discuss why I believe they lack explanatory power to the same degree that ideas provide. I close this section with a discussion on how the interactions among factors are thought to have evolved.

Independent Variable: Ideational factor

The paragraphs below describe four ideas, classified as per Campbell’s taxonomy covered in the literature review section, and their significance for the 1975 energy policymaking process.

Idea 1: National development through the promotion of industrialization

As Guimarães noted in his study of the Brazilian economic policymaking process in the 1930-1960 period, the 1930 institutional arrangements were highly influenced by the ideology of a Brazilian autonomous political elite that based on positivist thinking favored the adoption of technical solutions to political issues, embraced a corporatist pattern of interest representation and more importantly promoted industrialization as the most suitable strategy for national development (Guimarães, 2005, p.352). Thus after

1930, a consensus on the need to promote Brazil’s development through industrialization was forged. Not only this consensus became embedded in academic and policy publications, it guided public discourse thereafter.

According to Robert Nachman’s study of positivist ideas and its influence on modernization and the middle class in Brazil (1977), the influence of August Comte’s positivist thinking can be traced back to the early days of the Brazilian First Republic.

Comtian ideas are summarized by Nachman as follows:

“Comte sought a corporate Hobbsian state of universal agreement based on love,

rather than fear. Change would be engendered by an educational system under

positivist priesthood. Such a system, he believed, would create the popular

consent necessary to elevate a benevolent dictator-or better, director-to rule for

life with the aid of a technocratic elite, his ‘sociocracy’. The state's goal was to

promote industrial progress as the best means to create the conditions for social

well-being in a stratified society. While private enterprise was preferred, public

ownership would supplement it to provide necessary but unprofitable services,

maintain order, or assist in national development.” (Nachman, 1977, p.4)

[Emphasis added]

In 1890, positivist proponents with leading positions in Brazil’s First Republic government, particularly from the Rio Grande do Sul state, disseminated positivist ideas through developments in education. For example, as Minister of War, Benjamin

Constant, a leading positivist, reformed the military schools along positivist lines.

Although the schools’ structure and curricula would face changes later on to eliminate positivist influences, a substantial portion of the teaching staff remained, which help formal positivism retain its importance in military schools such as the Ralengo School and the Porto Alegre Military School. As a result, Nachman concludes “the positivist concepts for national reform received a more sympathetic hearing there than elsewhere”

(Nachman, 1977, p.19). Therefore, it is not a surprise that in 1930s, under the leadership of Getúlio Vargas, a Rio Grande do Sul military man8 and disciple of Antônio Augusto

Borges de Medeiros, another notable positivist, Brazil would embark in a quest for national development through industrialization (Hentschke, 2004).

8 The statement refers to his background as a military person hailing from one of the most belligerent states in Brazil given its proximity to Argentina and not to any representation related to the Caudillo concept usually applied to describe Spanish speaking South American military rulers. 29

The impetus for national development through industrialization would be further solidified in the Brazilian military’s leading philosophy, the National Security Doctrine.

During the 1950s, as adjunct faculty of the Brazilian war college (Escola Superior de

Guerra - ESG), General Golbery do Couto e Silva, a military and political strategist and right-hand man of President Ernesto Geisel, developed a new doctrine that would greatly influence the armed forces during the 1964-85 military dictatorship period. The doctrine sponsored a concept of national security that exceeded conventional roles for the military to encompass the productive capacity of the nation as a whole. The doctrine’s essence was that “[s]ecurity and development [were] linked by a relationship of mutual causality” therefore, “real security [could] be gain[ed] only by rapid industrialization and national integration under closely planned technocratic governmental guidance to speed the country thorough the hazard-beset development process” (Selcher, 1977, p.13).

This doctrine would be disseminated through the ESG, which as described in Chapter 3 and in paragraphs below, had an impressive reach within the civilian elite.

Idea 2: Energy as growing point sector

Having energy would help eliminate structural bottlenecks to economic growth and serve as a growing point leading to economic progress.

At least since the 1940s, the idea that energy resources were key for the industrialization process was present in Brazil’s economic policymaking (Leff, 1968, p.46). This was confirmed in the report of the 1949 Joint Brazil-United States Technical

Commission which stated that “[i]f industrialization is to make substantial progress in

Brazil, it must have larger, more dependable, and, if possible, cheaper supplies of fuels

and power” (Summary Report of the Joint Brazil-United States Technical Commission,

1949, p.366). This Commission was the precursor of a later and more comprehensive joint effort through the Joint Brazil-United States Economic Development Commission in the early 1950s. Roberto Campos, a renowned economist and leading Developmentalist thinker and who later would serve as planning minister during the Castelo Branco government (1964-1967), infused his economic ideas regarding “bottlenecks” and

“growing points” in the economy in the Commission’s report (Bielchowski, 1998, p.

135). The Commission identified energy as a sector that would help eliminate structural bottlenecks to economic growth and that would serve as a growing point leading to economic progress (Sikkink, 1991, p.65). Thus, investing in the expansion of energy resources became a priority.

Idea 3: The attainment of energy self-sufficiency

Energy self-sufficiency is a precondition for assuring national security.

Because an abundant, stable and reliable energy supply was crucial to maintaining the rate of industrialization, self-sufficiency became a preoccupation among the Brazilian elite and particularly within the military. By framing the availability of oil as a national security and economic development concern, the Brazilian military successfully promoted among state bureaucrats and economic and political actors the idea that the development of a national oil industry that sought self-sufficiency was the appropriate course of action (Phillip, 1982, pp.229-234). According to the military’s thinking, molded after the Argentinean vertically integrated model, the national oil industry was to be developed through a state monopoly on petroleum product refining and distribution,

which profits would finance large exploration and production campaigns focused on achieving self-sufficiency (Smith, 1976, pp.34-45). This programmatic idea was successfully framed by the military and some sectors of the state bureaucratic elite through the “O petróleo é nosso” campaign. This campaign set the stage for the development of a nationalistic sentiment among the Brazilian population regarding ownership and management of energy resources that quickly evolved into a major shaper of public opinion and consequently a public sentiment idea among policymakers.

Idea 4: Development of an autonomous capacity for technological innovation

Technological autonomy is required if Brazil is to attain sustained and organic economic growth.

Nathaniel Left’s study of Brazil’s economic policy making and development in the 1947-1964 period identified the development of a competency in modern technology as a key element of the ideational framework that underlid economic policymaking (Leff,

1968, p.46). The development of a competency in modern technology was a rather important strategic goal of the Brazilian military since the lack of an autonomous capacity for technological innovation came to be seen as a major weakness in the quest for great-power status (Conca, 1992, p.144). Consequently, during military governments, development of technological prowess in technology-intensive sectors such as energy, petrochemicals and steel came to be seen by the regime's economic planners as components in the drive to promote industrialization and economic expansion.

Control Variables: Institutional, Exogenous and Structural factors

The following paragraphs describe the variables whose influence is to be controlled or eliminated in order to observe the effect of the independent variable, in this case ideas, on the dependent variable or the Brazilian energy policy response.

Institutional

Institutional factors are a key element in the explanation of why Brazil embarked in such a risky energy diversification strategy. The 1930s marked a critical juncture in

Brazilian economic and political life and a new path was forged for the country. The new political and economic institutional framework set the course for arrangements that favored centralization of power, regular and extensive state intervention in the economy, increased state capacity and a modernized and professional state bureaucracy.

In addition to favoring a state-directed capitalist approach, the resulting institutional framework centralized power in the executive branch, in which the presidency along with the ministries of finance and planning wielded considerable power and influence on economic policymaking. These institutions were the locus for economic planning and administration of state resources and thus directed overall state economic involvement, including in the energy sector. After its creation in 1952, the Brazilian

Economic Development Bank (Banco Nacional de Desenvolvimento Econômico e Social or BNDES).9 BNDES became a central vehicle for development financing of large

9 In 1982, the Bank changed its name to Brazilian Economic and Social Development Bank (BNDES). I use the BNDES acronym through the manuscript. 33

energy infrastructure projects. BNDES officials exerted considerable influence in the energy policymaking arena as they provided technical evaluation of proposed projects as part of their lending operations. In the energy space, the new institutional arrangements were instilled in state institutions such as the Ministry of Mines and Energy (MME), the

National Petroleum Council (NPC), a network of energy stated-owned companies including Petrobras, Eletrobras, Empresas Nucleares Brasileiras (Nuclebras) and a handful of research institutions which were central for the design and implementation of energy policy.

The Brazilian military greatly influenced Brazil’s energy policy and infused it with an emphasis on nationalism and self-sufficiency. The military influence was channeled both through state entities such as the NPC and Petrobras as well as through the ESG. Since its creation in 1949, the ESG had been open to civilians as the military considered crucial to create close relationships with civilian leaders. The ESG mandate included preparing the military and civilian personnel to perform executive and advisory functions in organs responsible for the formulation, development, planning and execution of the politics of national security and development. After the 1964 military coup d'état, the ESG gained importance. By 1966, the institutional impact of ESG graduates in

Brazil’s political life was considerable. According to Maria Moreira (1985, p.7) between

1950 and 1967, of the 1,276 ESG graduates, 646 were civilians. Among the civilian graduates 224 were major industrialists, 200 top-level bureaucrats and ministers of state,

97 heads of governmental agencies, 39 congressmen and 107 professional technocrats.

I posit that the path dependent effect of an institutional framework that favored state intervention in the energy sector and the direct influence of the military, highly constrained the menu of energy policy options available to policymakers in 1974. Rather than a comprehensive range of policy options including a full-fledged market based approach, only solutions in which the state played a significant role as regulator and producer of energy were considered. Thus, institutional factors help explain why

Brazilian energy policy in 1974 veered toward a strategy that kept the development of alternative sources of energy under the direct purview of the state and military sponsored institutions. However, institutional factors are not sufficient to understand the alignment of policy preferences around a diversification strategy buttressed on investments with uncertain pay-offs.

Exogenous

Exogenous factors also contribute to explaining Brazil’s bold energy policy response in 1974. The first exogenous factor was the 1973 oil price shock itself which brought upon the realization that security of supply was uncertain and more importantly, that imported crude oil was no longer a cheap commodity (Saulniers in Wirth, 1985, pp.235-237). As a result, an impending need to diversify away from oil grew among oil importing nations including Brazil. An oil embargo and the resulting high price environment for this commodity contribute to explaining why Brazil embarked in an energy diversification strategy, but it does not help in understanding the type of investments chosen.

A second exogenous factor was the availability of abundant credit in the international finance markets. This condition made possible for Brazil to obtain the resources necessary to back up the ambitious investment program in the energy sector.

After 1973, international commercial lenders were eager to recycle copious amounts of petrodollars they had at their disposal. Thus, lending to developing countries became a suitable and profitable enterprise (Devlin, 1989, pp.236-251). Although having access to readily available and cheap credit made a difference in the scale of the energy investment program pursued by Brazil, it does not explain the actual diversification strategy put in place or the risky nature of the projects chosen.

Structural

Brazil is a large country with extensive arable land, blessed with tropical weather appropriate for sugar cane production and rich in water resources. Without these structural conditions, policymakers in 1974 would not have considered exploiting

Brazil’s sugar cane production potential and its vast water resources to enhance the production of energy and expand indigenous energy supplies. However, these factors do not offer explanatory power for the course of action taken by Brazil in response to the

1973 oil crisis. These structural conditions were present before the oil shocks and did not prompt energy diversification policies on a large scale before then.

Interactions

Figure 1 Factors and Interactions

Structural & Exogenous •Land, climate & water •Oil price increases •Credit availability

Catalyst & Enablers Institutions Ideas Exogenous Investment in a •National & long term development through Structural Ideas strategy for industrialization energy self- •Energy as growing point sufficiency • Self-sufficiency •Technological autonomy Ideas carried through Policymaker institutions and policy Consensus entrepreneurs

Institutional •State led development institutional framework •Professional and insulated bureaucracy •The military and its ESG

Figure 1 above lists the different factors and illustrates the interactive process among them. I suggest that exogenous and structural factors acted as catalysts and enablers of Brazil’s energy policy response to the 1973 oil price shock. These forces were channeled through an institutional network that given its state centered make-up, highly constrained the menu of energy policy options available and limited it to solutions in

which the state played a significant role as regulator and producer of energy. Following

Sikkink, the interaction between institutions and ideas occurred through the embeddedness and propagation of ideas in and through the institutional framework. Ideas became the lens through which interest – already highly constrained by the institutional makeup- were interpreted. Thus four ideas, 1) national development through industrialization (paradigm), 2) energy as a growing point (programmatic), 3) the need for self-sufficiency (programmatic and public sentiment), and 4) the development of an autonomous capacity for technological innovation (programmatic), served to reduce uncertainty and acted as coalition-building resources leading to the emergence of a consensus (i.e. alignment of policy preferences) on the need to invest in a long-term strategy for energy self-sufficiency.

Alternative Explanations

Do ideas and their embeddedness in institutions truly provide the most explanatory power to the understanding of the Brazilian policy response to the 1973 oil price shock? In trying to answer this question, I identified three alternative explanations as follows:

Economic Interest Groups/ Class Alliances

Fernando Henrique Cardoso (1973) and Peter Evans (1979) have describe how a class alliance forged between the State, local elites and multinational corporations during the military dictatorship resulted in a development model dependent on drawing foreign capital into basic industrialization. To this end state-owned enterprises emerged as

instruments of foreign capital accumulation, industrial research and development and which, in contrast to domestic industrialists, were positioned to overcome industrial development bottlenecks. From the perspective of the military governments, this alliance would bring into the country the capital, the technology and know-how absent in the country and help build internationally-competitive industries challenging Brazil’s traditional status as a periphery country. Yet as alliances, decision-making resulted from the struggle of individual interests. From this perspective the adoption of large scale investments in the energy sector, following the 1973 oil crisis, would have resulted from the interest of local capitalist and multinationals to find a solution to rising energy prices and salvage their investments and profits.

This explanation accurately describes a convergence of interests in industrial development. Indeed, the creation of state-owned enterprises allowed the pooling of resources in areas of strategic interest. The resulting policies in the energy sector following the 1973 oil crisis however were notably state-centered. An interest-based alliance with private capital determining policy would have indicated otherwise. Rather, the well-established nationalist movement that shunned private capital and that led to the establishment of the state-monopoly managed by Petrobras, likely made the energy sector an unpalatable investment choice for foreign capital fearful of nationalization. Indeed, literature that has attempted to highlight international oil company involvement in the

Brazilian oil industry at this time, can only point to their involvement by 1977 when terms on risk-service contracts were loosened (Priest, 2016, p.53).

Other factors also highlight why the “Triple Alliance” which had openly embraced foreign technology, was not the determinant factor in shaping Brazil’s outcomes in the energy sector. Both Geisel and Velloso’s first-hand accounts describe that the state’s counterintuitive energy policies following the 1973 crisis, required large and long-term investment with high risk and uncertain return. Nowhere was this risk more evident, than Petrobras’ decision to explore in offshore basins and invest in developing indigenous exploration and production capacity.

Rational Choice (Political Survival)

A rational choice theory may help assist in interpreting an individual policymaker’s motivations. In the context of the 1974 energy policymaking process, a rational choice would suggest Geisel needed to maintain economic growth through expansionary fiscal policies in the energy sector to survive politically. This proposition is underpinned by the premise that the economic growth provided the government with legitimacy in spite negatively affecting the country’s fiscal position and the macroeconomic stability. Yet, historically it may be rushed to interpret Geisel’s policy preferences based simply on office-seeking behavior (Ames in Sikkink 1991, p. 15).

Rather than a “military strongman rule”, Brazil’s dictatorship encompassing 5 distinct governments over 21 years can be better characterized as a “military-led autocracy” in which more than one person had political influence; notably in their ability to enforce term limits and manage succession (Geddes, Frantz & Wright, 2014, pp.147-

162). In addition, the Geisel government had a distinct motivation that has been described as involving “regime transformation” and which involved a political decompression

(Codato, 2006). Furthermore, Geisel’s involvement in energy sector issues far predated his presidency. Geisel, had highlighted the importance of energy resources for the industrialization process, expressed concern about Brazil’s oil import dependence and emphasized the need to invest in exploration and production of indigenous reserves

(Philip, 1982, pp. 371-374).

Finally, a political survival interpretation is unable to account for how the actual choices regarding energy diversification were made. The three-pronged approach chosen by Brazilian policymakers was rather specific and required investments in long-term projects with uncertain pay-offs. Therefore, the investment scheme was not necessarily only based on the need to expand fiscal expenses to maintain economic growth. If that had been the case, one can hypothesize that investments in known and proved technologies would have been preferable as financial resources would have been channeled to the expansion of installed capacity and the construction of public works spurring economic activity through enhanced employment, rather than to the development of cutting edge technologies that depended on research and investigation.

Autonomous Technocracy

Luciano Martins (1985) has posited that a technocratic bureaucracy emerged as a driving force of economic policymaking and more generally of Brazilian development.

These technocrats, which starting in 1964, were encouraged to imprint rationality and efficiency to economic policymaking increasingly gained autonomy through the creation and financing of a network of state-owned enterprises to manage strategic sectors of the economy. These state-owned enterprises with delegated authority would have held both

the initiative and control of the economic decision-making. Indeed, Martins study could only identify 16 military officers at the helm of 66 high-level enterprises. One notable exception was Petrobras which with some exceptions always had a president of military extraction.

This explanation accurately describes a cadre of civilian technocrats with the capacity and shared interests to influence policymaking by persuading decision makers to make large investments in the energy sector. Yet it presupposes that decision makers were susceptible to influence given either a disadvantage in technical knowledge or a delegation of authority. Neither was a likely scenario under President Geisel. Geisel had unusual technical knowledge of the energy sector having headed both a large refinery (in the 1950s), and the national oil company Petrobras (1969-1973) before becoming president. In both instances he successfully managed transitionary periods and was well acquainted with the energy scarcity conundrum. In addition, Geisel’s reputation for actively managing the bureaucracy is well-known and has not been seriously questioned in the existing literature. Indeed, upon assuming the presidency, he centralized decision- making power through the Economic Development Council (Conselho de

Desenvolvimento Econômico (CDE), a consultative body responsible for the formulation of economic policy and the implementation of a development strategy. Geisel presided the CDE, which met at least once a month. The historical record indicates that even though discussion were opened and frank, he held and exercised the decision-making power (D ’Araujo, 1997, p.282; Interview with Shigeaki Ueki, Rio de Janeiro, March 2,

2015). Finally, the October 1973 oil crisis, occurring months shortly before assuming

power (March 1974) garnered Geisel’s full attention. It would be incorrect to assume otherwise. Energy solutions responding to this crisis were primarily decided on by Geisel.

Contribution to the Literature

The findings of the dissertation will contribute to the constructivist literature and more specifically to literature on ideational and institutional change. By mapping the role of ideas in shaping policy preferences among those Brazilian military officials, politicians, and state bureaucrats that participated and influenced the policymaking process in the energy sector, it will provide insights on how ideas can help effect institutional change. Also, this dissertation explores the issue of institutional continuity and change from a new angle. Rather than investigating the explanatory power of new ideas, this dissertation examines the role of old ideas in a time of crisis. Understanding how old ideas contributed to explaining revolutionary change in the Brazilian energy sector following the 1973 oil crisis may be a first step to examining a subject that has received limited attention so far.

This dissertation is also novel in that it examines ideas and institutional change by studying the experience of a developing country under a military dictatorship. The majority of the literature that covers the role of ideas in effecting institutional change is limited to the study of industrialized economies enjoying democratic regimes. The research findings seek to contribute to the understanding of the role played by ideas during critical junctures in authoritarian settings.

The research findings will also contribute the academic literature on Brazil. Up to the time of this writing, I have not identified a source that details the policymaking process in the Brazilian energy sector leading to the adoption of the 1974 energy diversification policies. The existing literature describes the energy policies and their early outcomes but has overlooked the policymaking process and its impact on long-term policy outcomes. Thus, this research will shed light on an important episode of the

Brazilian energy sector history and provide insights into the drivers of a long-term strategy.

Additionally, the relevant literature that has been reviewed identified is mostly contemporaneous or conditioned by the 1980s debt crisis and would benefit from updated analysis in light of the current state of the global energy markets. Brazil is nowadays considered a success case in terms of energy independence and diversification. However, the predominant view still emphasizes the negative effects of large state investments on foreign indebtedness and the subsequent debt crisis.

Research Design and Methodology

Approach and Design

My research relies on qualitative and quantitative analysis to produce a single country case study. I use energy and public expenditure statistics to support a qualitative examination. I have sought to provide a rich and detailed narrative of events, institutions and characters including their historical background and context over a short period of time in order to gain a “thick” understanding of the Brazilian energy sector policymaking

process in 1974. Subscribing to Michael Coppedge’s (2012) description, a “thick” analysis is multifaceted, detailed, conceptually rich and multidimensional.

I submit that single case studies do not allow for generalization and therefore my research findings can only aim to provide an informed inference applicable to the

Brazilian energy sector in the 1974-1979 period. Given than proving a causal relationship in light of all factors relevant to a political scenario is impossible, the best alternative is to disprove other hypothetical causal relationships. A single case study is useful to this end as it controls for alternative hypotheses over a period of time by comparing a country to itself (Coppedge, 2012, pp.116-119). Thus, a single case study on the energy sector policymaking process in Brazil has the potential to provide and explain underlying causal inferences since the thick account of details and sequences can help falsify alternative hypotheses.

My analysis is based mainly on deductive reasoning. My interest has been to trace the role and impact of ideas in the Brazilian energy sector policymaking process during the presidency of General Ernesto Geisel (1974-1979). Thus, my analysis covers energy policymaking activity from early 1974 through the enactment of the energy sector investment program later that year, to the implementation of policy directives via the enactment of law decrees through 1979.

I use an institutional-interpretative approach following the work of Katherine

Sikkink in her study of the role of developmental ideas in Brazil during the late 1950s.

This approach encompasses both an analysis of formal institutions and the ideas that through them permeated political action within the state and in its relationships with

societal actors. Through this dissertation, I endeavored to trace ideas and its carriers through key institutions in the Brazilian state.

I argue that the Brazilian energy sector experienced a critical juncture following the 1973 oil crisis. A moment of crisis created the conditions for institutional change in the sector and contingency played a role in this scenario. Critical junctures are brief periods of political flux during which institutions and policymakers are liberated from existing constraints. As a result, during a short period of time the power of interested stakeholders is significantly enhanced and the choices of policy-makers expanded

(Cappocia and Kelemen, 2007, pp. 341-342). Following Blyth, I am interested in understanding the role of ideas in reducing uncertainty and how ideas assisted Brazilian policymakers in the building of coalitions and the mobilization of resources toward the enactment of the energy diversification policies of 1974.

Methods

This research relies on process tracing as a method to generate and analyze information on the role played by structural, exogenous, institutional and most important ideological factors in explaining Brazil’s chosen path of adjustment in the energy sector.

By building a historic narrative through the generation of data on the causal mechanisms or processes (including events, expectations and any other intervening variables) that link the assumed causes to the observed outcome, process tracing provides two advantages: it allows the narrative to account for paths not taken while offering a stylized but compelling reconstruction of the key decisions and choices that produced the final outcome (Cappocia and Kelemen, 2007, p.358).

For the dissertation this is paramount. As in any moment of policy flux, such as the critical juncture of the Brazilian energy sector after 1973, the reconstruction of key decisions and choices in the policymaking process has the potential to enhance the understanding of the various factors at play and to isolate the effects of each factor on the observed outcome (i.e. policy decision). Because my research approach also accounts for contingency (moments of political flux), the historical narrative of the Brazilian energy sector policymaking process also resorts to counterfactuals.

I use counterfactual analysis to help test the main proposition. I focus on historical turning points to consider alternative policy options in the absence of determinant policy entrepreneurs. I also briefly examine the experience of India, a large emerging economy with similar dependence on imported oil, a drive toward industrialization, and an inclination for Developmentalist policies and economic planning. I conclude this validation analysis by looking at the energy policy response to the 1973 oil crisis of

Chile, a neighboring country under military rule.

The review of secondary source material has helped situate the research within the relevant theoretical literature streams and provided historical background and context. Secondary sources also assisted in identifying and understanding the ideas and the related development of an institutional framework. Because I am focusing on a policy process in need of a thick historical narrative, reviewing primary sources of information not covered in secondary source material became paramount. I conducted field work in

Brazil on three occasions to procure and examine contemporary primary sources. This task included conducting archival and library research as well as elite interviews.

Information collected from institutional and personal archives related to the

Brazilian Military Dictatorship years, including one for Ernesto Geisel, organized and managed by the Getúlio Vargas Foundation’s Center for Research and Documentation of

Contemporary History of Brazil (CPDOC), provided the main source of documentary primary source information. Visits to government and military libraries extending from the presidency to ministries, to applied economic research centers and documentation centers of energy related state institutions such as Petrobras and Eletrobras, to libraries in military schools provided invaluable law blue prints, studies, reports, speeches, statistical books and study work plans.

Elite interviews with key policy actors were an invaluable source of information to reconstruct the key sequence of events. Interviewees provided not only detail about the rationale guiding policy decisions, but rich accounts regarding personalities and events.

Chapter Outline

• Chapter 2 provides a context to international and domestic issues impacting the

Geisel presidency and his government’s public policy design and implementation.

The chapter starts by describing the 1973 oil price shock and its impact on the

Brazilian economy and the energy sector. It then examines the domestic context by

focusing on the politics and economic strategy of the Geisel government.

• Chapter 3 focuses on Brazilian military thought by providing a brief historical

account of institutional development. Centering on the impact of national issues on

the military institution and its ideological base, the chapter explains the ideational

roots underpinning the role and influence of the military in economic policy and in

the structuring and development of the country’s energy sector.

• Chapter 4 investigates the influence of Developmentalist ideas in the Brazilian energy

sector from the late 1930s to 1973. This narrative aims to uncover the logic that

undergirded the creation and development of the institutions and policies guiding

energy policy in Brazil during this period. The chapter traces the four ideas that

constitute my main working proposition identifying the actors and institutions that

helped carry them.

• Chapter 5 identifies the key policy entrepreneurs and identifies the institutional

reorganization that took place at the outset of the Geisel presidential term. The

chapter presents a brief biographical narrative of Ernesto Geisel and João Paulo dos

Reis Velloso, the two key policy actors. Next, it describes the concentration of

decision-making power under the office of Presidency and the elimination of veto

gates that facilitated the crafting of the energy diversification policies.

• Chapter 6 describes the energy policy adjustment path followed by Brazil as a result

of first oil crisis. It starts with a brief summary of the energy diversification policies

that encompassed the country’s policy response. It then examines the policymaking

process for the four energy diversification policies by identifying the ideas,

institutions, and key policy entrepreneurs as well as by describing the main sequence

of events and crucial decisions.

• To place the Brazilian energy policy response in context, Chapter 7 provides a brief

examination of the policy responses of two similarly situated countries: India and

Chile. Examination of these countries’ adjustment paths assist in checking the

external validity of the argument advanced in this dissertation. This chapter also

makes use of counterfactuals as a further test on validity.

• As the concluding chapter, Chapter 8 presents my findings. The chapter discusses the

implications of this Brazilian case study for the body of knowledge on ideas and

institutional change and the Brazilian literature on energy policy. It also briefly

discusses the analysis strengths and limitations and sets an agenda for future research.

CHAPTER 2: THE CONTEXT

The year of 1974 did not show great promise. The oil crisis had brought about an inflection point in the economic fortunes of countries around the world. Many developing countries in particular had experienced high rates of growth and were economically bound to the institutional and economic arrangements that had made it possible. Brazil, under the military presidency of General Ernesto Geisel, was not the exception.

Historically an exporter of primary commodities highly dependent on foreign market demand, the country relied heavily on industrial goods and oil product imports to further industrialization. The oil shock had immediate and drastic effects on its economy both in terms of trade and a rapidly deteriorating current account. Adding to its economic difficulties, the incoming government had ambitious political goals in order to decompress a system that since 1964 had been under military rule and relied on economic growth for political legitimacy, but that by 1974 showed signs of stress with increasingly polarized factions of military hardliners and human rights and democracy advocates.

The First Oil Shock and Its Impact on Global Energy Markets

The 1973 oil shock was simply put a historical turning point. In a relative short period of time, the prevailing arrangements in global energy markets were turned on their head. For decades oil-consuming countries and their international oil companies had controlled the supply-demand balance and ensured the plentiful and inexpensive flow of crude oil to fuel western economies. Yet by the early 1970s, oil producing nations had been grown more assertive in their efforts to wrestle control of oil resources and the

prices at which they were exported. In the midst of geopolitical upheaval, these efforts allowed oil producing nations to abruptly bring forth new terms of exchange with which the rest of the world had no option but to adapt.

The Geopolitics of the 1973 Oil Shock

Historically the Middle East’s oil industry had developed upon the assumption of the geopolitical control exercised by the United States, the United Kingdom, and their international oil companies (IOCs) in the region. By 1970 however, such control had gradually melted away: colonial powers had withdrawn and shut their military bases, revolutionary regimes had assumed power in Egypt, Iraq, Tunisia, Libya, and Yemen; and the Soviet Union increasingly had a presence in the region with large amounts of assistance through trade and arms (Issawi, 1978-1979, pp. 5-8).

These changed circumstances gave the Organization of Petroleum Exporting

Countries (OPEC) members leverage to seek the renegotiation of conditions in existing and future contracts and to demand greater participation in production and earnings. The

OPEC countries had attempted to do so before without success. During the 1967 Arab-

Israeli war, the Suez Canal had been closed foreshadowing an interruption in supply but disunity among squabbling producing countries, and more importantly, spare capacity in the United States, Venezuela, Iran, and Libya was drawn upon (Akins, 1973, p. 470).

Circumstances though would change rather quickly thereafter.

Although changes to the prevailing environment prior to the oil crises can be traced to an OPEC Declaratory Statement in 1969, significant change came about with the ascension of General Muammar Mohammed Abu Minyar Qaddafi (1969-1977), a

bold and fanatical leader, to power in Libya in 1969. In 1970 responding to higher demand and a tanker shortage, Gadaffi ordered production cuts, demanded higher revenues, and threatened retaliation on non-compliant IOCs. His success in pressuring the

IOCs, resulted in OPEC countries subsequently increasing tax rates, prices, and taking equity in production ventures (Issawi, 1978-1979, pp. 9-11. Akins, 1973, pp. 471-474).

Yet financial interests were not the only objective drawing oil producing Arab countries together as the Arab-Israeli conflict of 1974 would demonstrate.

Upon coming to power in Egypt, Anwar Saddat (1970-1981) sought to change the status quo that resulted from the country’s humiliation in the 1967 war with Israel. With

Israel still controlling the eastern banks of the Suez Canal, Egypt dedicated 20% of its gross national product to military defense; expenditures that were badly needed elsewhere. In early 1973, Saddat came to the decision that war with Israel would alter that country’s interests and those of the United States in achieving a negotiated peace.

Saudi Arabia’s King Faisal (1964-1975) shared a similar interest in altering the status quo with Israel but had been previously unsuccessful in pressuring the United States strictly based on their relationship over oil supply. Sadat’s plans gave the kingdom an opportunity. Saudi Arabia supplied Egypt with arms and money. On October 6, 1973, the war between Egypt and Israel broke out (Yergin, 2011).

On October 16 and 17, 1973, Arab delegations met in Kuwait City and formally decided on an embargo by cutting production by 5% from the earlier month’s levels and to continuing to do so at the same rate on a monthly basis. Informally they also agreed to targeted supply cuts to the United States. Together these measures would ensure the

curtailment of global supply in the market and impede developed countries, and the

United States in particular, from sourcing their supply from other markets (Issawi, 1978-

1979, p. 15).

Yet these October 1973 decisions were only the beginning. On October 19, the

United States concerned that Soviet ability to resupply Arab countries would tilt the war’s balance of power, granted Israel a $2.2 billion military package. The Arab countries response was swift. Libya announced it would stop all oil shipments to the

United States that same day. Saudi Arabia and other countries followed suit shortly thereafter. In November 1973, once a brokered cease-fire between Israel and Egypt had taken hold, the Arab countries furthered increased the supply cuts. The United States did not have the spare capacity to counter the shortfall as prices and demand peaked. The

United States preeminent role as supplier of last resort came to an end, and a new balance of power in the oil markets began (Yergin, 2011).

The Impact of the Crisis

The impact of the 1973 oil crisis was swift and direct. In the preceding two decades, as oil production had increased faster than demand and prices remained low, both developed countries and emerging economies had turned to oil as the cornerstone fuel of industrialization. Oil was plentiful and inexpensive and the international oil companies at the center of the world market not only dictated terms but had successfully weathered at least three preceding crises in the key producing region of the Middle East.

Furthermore, the creation of OPEC had held promise in 1960 but minimal practical impact since then. Yet, once oil production curtailments agreements among OPEC

members took hold, oil importing nations were unprepared and short on options (Issawi,

1978-1979, pp. 3-26).

The sudden and dramatic price increases for oil importing nations altered their terms of trade and rapidly caused a deterioration of their balance of payments.

Inflationary pressures shortly followed driven both from higher oil prices and their impacts on other energy-intensive commodities and goods. Economic growth was hampered and the global economy veered towards recession. Oil importing countries were compelled to both adjust their economies and their competitive positions to the higher-price scenario in a very short-period of time. Yet policy options were unpalatable and slow. Countries contemplated three strategies. They could let market forces guide the adjustment, passing through prices increases to consumers thereby taming demand and stimulating the development of alternative energy sources; they could reduce oil dependence by curtailing imports and use domestic energy resources to meet demand; and finally, they could accept higher prices, continue importing oil but increasing the efficiency of energy use in industrial processes, thereby enhancing export competitiveness (Ikenberry, 1986, p. 10).

OPEC members were not without troubles. One was what to do with the sudden and massive inflow of resources that relatively small and underdeveloped economies at the time were in no position to absorb. While a portion was spent in the importation of goods and services with little impact on local employment or economy diversification,

“Petrodollars” were largely deposited in American and European banks. Banks in turn

lent these to developing countries particularly in Latin America to finance their current account deficits - spurred by the higher import bill and lower global demand for raw materials- allowing them to absorb the impact of higher oil process in the short-term.

The impact of higher oil prices on Latin American economies was also significant. The region’s larger economies had embarked on import substitution industrialization and had enjoyed rapid increases in production and high-growth rates. In

Brazil, multiple exchange rates, high tariffs, and a financially burdensome system of subsidies and incentives had yielded success in replacing imports of nondurable consumer goods and their inputs through domestic production. However, further import substitution of intermediate goods and producer and consumer durables had proved elusive due to high capital and technological requirements and the need to expand beyond the domestic market to achieve economies of scale. According to Balassa (1979 and

1981), import substitution measures discriminated against exports as they failed to compensate the higher costs of domestic inputs through equivalent export subsidies. As a result, savings of foreign currency and export markets and revenue suffered. To address this problem, in the mid-1960s, these economies had reformed their incentives system to reduce (but not eliminate) the extent of discrimination against agriculture and manufactured exports through export subsidies, tax rebates, and uniform exchange rates

(Balassa, 1979, pp.1023-1042). Yet they persisted in protecting high-cost industries that had been established early on from imports and therefore ultimately had only moderate success in increasing the share of non-traditional primary and manufactured products when compared to emerging economies in East Asia (Balassa, 1981, pp.142-194).

The 1973 oil crisis further complicated matters for Latin American countries going through this import substitution process. With the sudden quadrupling of oil prices and the associated price increase of imported inputs, trade imbalances were immediate across the region. The deterioration of the balance of payments in regional economies together with inflationary pressures across the region soon followed. Growth rates were also permanently affected and the region would not see comparable pre-1973 rates for the next decade. Brazil, an oil importing nation, suffered particularly acute effects. The dollar price of imports rose by 54% between 1973 and 1974, while exports only increased by

26%, rapidly deteriorating the country’s balance of trade and consequently its balance of payments. This deterioration amounted to 4% of GNP for the 1974-1976 period.

Immediate impacts were more moderate in other regional economies such as Argentina and Mexico (Balassa, 1979, pp.1023-1042).

Through this period, economies in the region opted to further import substitution policies. In Brazil for example, the Second National Development Plan for the 1975-1979 period provided for large investments in energy, pulp and paper, petrochemicals, fertilizers, steel and non-ferrous metals to attain self-sufficiency. To finance these expansionary policies, Brazil and other regional economies relied heavily on foreign capital. During the 1973 to 1977 period, Brazil’s annual GNP grew at 6.8% and Mexico’s at 3.4%. However, debt across the region would rise to levels that would haunt many countries in the region for years to come (Balassa, 1979, pp.1023-1042).

The Politics of the Geisel Presidency

On March 15, 1974, General Ernesto Geisel assumed the presidency following a career in the military and the state that spanned four decades (1927-1973). His ascent meant the moderate, Cosmopolitan Castelistas or followers of Castelo Branco, were back in power. Castelo Branco had been the first president of the military dictatorship (1964-

1967) and represented a progressive and liberal branch of the military advocating the country’s transition back to democracy. The Castelista thought had lost preeminence during the subsequent presidencies of Generals Costa e Silva (1967-1969) and Medici

(1969-1974). During these presidencies, hardliners that believed more permanent military rule to be necessary to maintain communism and internal dissent at bay were entrenched in the military hierarchy and in key government posts. During his presidency, General

Geisel would need to tread lightly to maintain military support, including that from the opposing hard line faction. In addition, the dire global economic environment challenged

General Geisel’s desire to maintain high economic growth to underpin the military regime’s legitimacy. This confluence of political and economic difficulties would subsist through General Geisel’s presidency.

At the same time, this confluence of political and economic obstacles made

General Geisel’s presidency and his government’s policies more remarkable. Indeed,

General Geisel had arrived with a very ambitious agenda of political objectives.

Specifically, he sought to shepherd in a new political order under his regime. In his view, the political environment demanded liberalization, or an “opening” (abertura) as it was termed. Though in his view the 1964 coup had been a necessary but temporary

interruption,the military institution dominated by hardliners, needed to refocus and return to its original mission and role and in the process, correct the excesses that had slowly crept in after years of uncontrolled power and that were slowly undermining its credibility in the ranks. In addition, tensions had been building between the pro- government forces and the opposition and it was crucial to ease them; a process described as decompression (distensão).

Theoretical underpinnings of decompression

During the Medici presidential term, the military government had begun a discussion on the liberalization of authoritarianism. In mid-1972, Leitao de Abreu, the head of the civilian presidential staff, started a discussion on how the regime might transition into a more open system. That same year, Candido Mendes de Almeida, a notable catholic and political scientist, arranged for Harvard professor Samuel

Huntington, an expert of military politics in developing countries, to visit Brazil to meet

Leitao de Abreu and Delfim Netto, the star Minister of Finance responsible for the

Brazilian economic miracle. The next year, at Leitao’s request, Huntington published an essay titled Approaches to Political Decompression arguing that “the relaxation of controls in any authoritarian political system can often have an explosive effect in which the process gets out of the control of those who initiated it”. Instead, he favored regime institutionalization, such as in Mexico with one pro-government party system

(Huntington in Skidmore, 1988, p.165).

Huntington’s paper generated debate among Brazilian intellectuals and academics. Wanderley Guilherme dos Santos stood out among them. In an essay titled

Strategies of Political Decompression, Wanderley supported a gradual and highly- controlled liberalization through the reinstatement of six key rights:independence of the judiciary, freedom of speech and the press, habeas corpus and other individual rights, freedom to organize politically; orderly rules to govern political power, and legal procedures for the use of coercion. Liberalization, in his view, had to be incremental to avoid push-back that would result in recompression. Furthermore, it was essential to avoid “simultaneous pressure” by different political interest groups and avoid

“accumulation of challenges” that would undermine the regime’s ability to continue in its path. Wanderley’s ideas were novel in suggesting the process had to include the political opposition. They were also persuasive and appealing to the notion of the military’s role as a moderating power in politics, present since the Emperor’s time (Wanderley in

Skidmore, 1988, pp. 165-166).

Geisel’s Political Project

The election of General Geisel to the presidency in January 1974 created much anticipation in political circles as the return of the Castelistas seemed an opportune juncture for change in the military regime. A telegram from the U.S. embassy in Brazil to the Department of State reported on the political environment as follows:

“The two-month period between Geisel’s January 15 [1974]election and his

inauguration on March 15 was a kind of interregnum marked by growing

speculation and discussion, much of it public, about possible new directions in the

Geisel administration. One starting point was the idea that, having scored

unarguable successes in the economic, financial, and administrative fields,

notable (although criticized) achievements in the social field, and having virtually

eliminated the threat of subversion or widespread disorder, the revolution of 1964

could now turn its attention to the political sector. Perhaps a more basic impulse

was the revolution’s long-evident concern with its legitimacy, a concern which

has led it to ponder possible means of institutionalizing its power through normal

and democratically based political structures without seeing its achievements

frittered away and Brazil weakened by “unscrupulous and self-seeking”

politicians misleading a “politically unsophisticated mass” (U.S. Department of

State, Telegram 1850 From the Embassy in Brazil to the Department of State,

March 19, 1974).

General Geisel and his political team gave plenty of reasons for such optimistic speculation to occur. Indeed, during February 1974, very public and telling steps were taken by General Golbery do Couto e Silva, his closest political advisor and the appointed head of his civilian presidential staff. That month Professor Huntington visited

Brazil again. He met with various officials of the Geisel team, including General

Golbery. General Golbery also met with Cardinal Paulo Evaristo Arns. Up to that point the Church had been an important opposition actor and critical voice against the the military dictatorship and its human rights violations. Cardenal Arns reportedly was told

“not to expect any institutional changes during the first year of the Geisel administration beyond the initiation of a more open political dialogue”. Without being specific, however, Golbery reportedly led the Cardinal to expect “greater liberalization of the system during Geisel’s second year in office, particularly in the area of political rights

and civil liberties” (Skidmore, 1988, pp.166-167). Yet, General Golbery’s overtures were not necessarily limited or targeted. At the time the U.S. Consulate General in Brazil reported to the State Department:

“The revelations by Geisel representatives as to the new directions of the

incoming administration have not been made exclusively to the church leadership.

Our checks with local political leaders and top newspaper editors indicate that

they too have received the same message from Golbery, his lieutenants, or even

from Geisel himself.” (U.S. Department of State, Telegram 1850 From the

Embassy in Brazil to the Department of State, March 19, 1974)

Following the official presidential inauguration ceremony on March 15, 1974,

General Geisel confirmed his intentions to advance a political decompression project.

During his first cabinet meeting he indicated that “sincere efforts toward a gradual but sure democratic improvement” would be taken but with due attention to security concerns. Such overtures however, predictably created resistance from hardliner factions within the military. As early as February and in April 1974, anti-Golbery manifestos were circulated within the ranks. Early on it was understood, decompression would face fierce opposition (Skidmore, 1988, p.167). With this in mind, the Geisel government at its outset had three goals:

• Maintaining the support of the military coalition, including the hardline faction, that

had brought him to power;

• Maintaining high economic growth; and

• Shepherding conditions for a regime change.

Once in power, General Geisel and the Castelistas needed to counter the continuing influence of the hardliners. Hardliners held important positions in the hierarchy including in the security intelligence apparatus and the new government needed to be strategic on how it distributed assignments and promotions. In addition, Geisel needed to persuade the military that it was in its best interest to return to its original role within the political system as a professional armed force. The return would be appealing to members increasingly concerned with corruption and the growing influence and power of the intelligence service, and who were not partisan for Castelistas or hardliners.

Since 1964, hardliners had been effective in eliminating most of the guerrilla activity but were also responsible for human rights violations and widespread repression.

General Geisel suspected hardliners exaggerated the dangers to the regime in order to advance their political agenda. For this very reason, he could not entirely dismiss their concerns and risked looking weak to his opponents. Maintaining the coalition that had brought his government into power and the overall support of the armed forces required a delicate balancing act.

Maintaining economic growth was also essential.. Economic growth was needed to underpin his government’s legitimacy with the Brazilian masses. However, the quadrupling of oil prices impacted severely Brazil’s balance of payments, its macroeconomics stability and industrialization goals. Because the preceding hardliner government of General Medici had attained high economic growth rates (i.e. the

Brazilian Miracle), it was provided with legitimacy and support from the middle class

and the military. The same kind of rewards were expected from Geisel’s Castelista reform government, regardless of the international context.

Additionally, while previous military governments had not been successful at distributing the benefits of growth in equal measure among the Brazilian population,

Geisel’s government understood the need not only to grow the pie but to better distribute it. Maintaining growth and redistributing benefits to attain legitimacy and respect became a difficult mission to accomplish.

In order to moderate the political regime, Geisel’s government sought to combine a political opening (abertura) and a decompression (distensão) of the regime’s authoritarianism. With the assistance of Golbery, Geisel aspired to establish channels of consultation with civil society actors to gradually bring them into the political process, while strengthening existing institutions such as Congress and political parties. To do so, the regime needed to embark on a rapprochement with the political opposition civil society groups increasingly dissatisfied with the status quo; notably among them the

Church and the Bar Association. The regime had to reestablish civil liberties that had been curtailed such as habeas corpus, freedom of speech, freedom of the press and curb its unchecked powers in this regard. A return to a pre-coup d’etat style democracy however could not be immediate and uncontrolled.

Evolution of Geisel’s Goals during His Presidency

Thomas Skidmore’s description of Geisel’s military presidency (Skidmore, 1988), provides a summary of the main political developments that marked his government.

Political objectives set at the beginning of General Geisel’s mandate were accomplished progressively during the five years of his presidential term.

The first months of the Geisel presidency proved to be particularly challenging. Hardliner factions within the national intelligence service (Serviço Nacional de Informações or SNI), and the Internal Operations Department-Internal Defense

Operations Centers (DOI-CODI) were intent on embarrassing the government and undermining its promise of a new political era. Their opposition was formidable. The

SNI, created in 1964 and at one time headed by General Golbery, had by this time evolved into a cabinet-level and autonomous intelligence-gathering and operations institution with officers in every government agency and state-owned business. DOI-

CODIs in each armed force operated independently and had a presence throughout the country.

Two days before General Geisel’s presidential inauguration, the Fourth Army command arrested Carlo Garcia, the O Estado de São Paulo bureau chief in Recife. Mr.

Garcia was interrogated and tortured before being released. The O Estado de São Paulo newspaper had been a permanent critic of the military regime and the incident was embarrassing to the government. Thereafter in April 1974, well-known lawyer

Washington Rocha Cantral was also arrested and mistreated resulting in a lawsuit against the military and the vigorous protest of the Brazilian Bar Association (Ordem dos

Advogados do Brasil-OAB). The vocal protests of both the media and the Bar Association were an indication that the political environment was changing as civil society groups felt increasingly confident in advocating their rights. A growing concern was to determine the

whereabouts of missing persons, detained by armed forces but “disappeared” to frustrate formal legal inquiries. In July 1974, the Movimento Democrático Brasileiro or MDB, the country’s main opposition political party, demanded justice minister Armando Falcao account for them. Thereafter, Cardinal Arns presented General Golbery with a list of 22

“disappeared” persons; 21 of which had gone missing since General Geisel had assumed power. In August, during the National Bar Association’s national convention, its president Joao Ribeiro de Castro Filho also spoke out publicly against the regime’s security apparatus.

These developments presented a challenge to the Geisel government. The very civil society actors that the government was reaching out to, were demanding it to take control of an unaccountable security apparatus. The Geisel government however did not welcome this approach. Its position was to resist the pressure from civil society to act against the hardliners, and to only do so on its own terms and agenda. In a speech delivered in August of 1974, General Geisel insisted in his commitment to liberalization but made clear that civil society pressure “would only generate counter pressures of equal or greater weight, thereby reversing the slow, gradual, and secure decompression”. Two months later, it became evident the time was not ready for the government to move against the hardliner faction. An American missionary was arrested and tortured in

Recife, an incident that devolved into a full-blown crisis in U.S.-Brazil relations. That same month, an MDB deputy speaking against Augusto Pinochet’s September 11, 1973, coup in Chile was charged under the National Security Law.

The November 1974 Congressional elections however did provide an opportune moment for the government. These elections would be the first at a federal level since

1964 in which civil society would directly elect its representatives. The pro-government

ARENA party with regime support had through intimidation prevailed in governor and congressional elections four years earlier. General Geisel was confident ARENA would put forth the best candidates and the electorate would recognize ARENA’s preeminence in transparent and clean elections. The November results however left the government stunned as the electorate had recognized an opportunity to weigh-in on the dictatorship, its repression, and the unequal distribution of economic benefits. THE MDB had campaigned on a three-pronged program: social justice, civil liberties, and denationalization. The government had allowed candidates free access to television, an indication of transparency not lost in an electorate that had believed the political environment had indeed changed. The results were a shock to the government as the

MDB increased its representation in the lower house to 165 members (out of 364, and with 199 remaining with ARENA). In the Senate, MDB had gained 20 seats to ARENA’s

46. Finally, the MDB took control of key state legislatures in São Paulo, Rio Grande Do

Sul, and Rio de Janeiro. Most notably, ARENA had lost the two-thirds majority to amend the constitution and lost its potential role as a regime-institutionalization vehicle.

The Geisel government seemed to have taken the elections results in stride, continuing to straddle the line between authoritarianism and liberal decompression. In

January 1975, the regime removed censorship over the O Estado de São Paulo. While censorship over other media outlets remained, the Folha de São Paulo, a pro-government

newspaper began allowing criticism of the military regime in its editorial and opinion pages. During the first-half of 1975, the government also cracked-down on the

Communist Party to appease the hardliners, but also resorted to its arbitrary power to remove an ARENA senator involved in political extortion and other minor political figures involved in corruption. General Geisel reflected on this state of affairs in an

October 1975 speech by stating:

“What we desire for the country…is integrated and humanistic development

which combines –organically and homogenously- all sectors of the national

community – political, social, and economic. With that development we will

achieve distensão, i.e.., the attenuation, if not the elimination, of those multiple

and ever-present tensions, that obstruct our national progress and the well-being

of our people.” (Pronunciamento do Excelentíssimo Senhor Presidente da

República, pela televisão sobre a situação económica 9 de outubro de 1975).

This state of affairs took a turn for the worse with the death of Vladimir Herzog in

October 1975, a critical juncture in Geisel’s presidency. A well-known journalist in São

Paulo, he had taken the unusual decision to turn himself in upon learning that security forces of the Second Army were looking for him. A day after his arrest, Herzog was reported to have committed suicide in his cell. The outrage among Sao Paulo’s civil society was strong. At the University of São Paulo, students and faculty went on strike for three days, while the Journalist’s Union and the Bar Association demanded an inquiry. The Catholic Church undertook equally vocal protests. Forty-two bishops in São

Paulo denounced the government’s action and Cardinal Arns himself presided over an

ecumenical funeral service in the city’s cathedral. General Geisel stood by General

Ednardo d’Avila Melo, the highest-ranking official of the São Paulo battalion. He ordered an investigation by the military that wouldn’t amount to anything new, but privately warned Gen. d’Avila Melo from engaging in similar acts in the future. General d’Avila

Melo did not heed this warning and in January 1976, a metalworker’s union activist suffered the same fate. Placed in an unsustainable position in which the hardliners had challenged his preeminence, General Geisel, in an unprecedented act, dismissed General d’Avila Melo without consulting the army high-command. With this action, General

Geisel asserted his power over the hardliners.

By June 1976, the government’s attention had turned to the upcoming municipal elections of November. The 1974 elections had brought unanticipated difficulties to the government’s goal of pursuing a gradual and controlled political opening. Learning from experience, the government was successful in having Congress approve a law to limit radio and television campaigning (termed the “Falcao law” after the Minister of Justice).

The elections themselves yielded expected results. ARENA prevailed is less developed regions, while MDB gainied control of councils in the major urban centers (São Paulo,

Rio de Janeiro, Belo Horizonte, Porto Alegre, Salvador, Campinas and Santos). Yet the balance of power was inconvenient and foreshadowed risk for the government’s ability to remain fully in control of the political environment and its gradual opening. With the

1978 gubernatorial elections in the horizon, General Geisel feared his failure to intervene in an anticipated government defeat would tip the balance of power in favor of the MDB.

Lacking a two-thirds majority in Congress to amend the Constitution, General Geisel

opted to close Congress on April 1, 1977, and resorted to the extraordinary legislative powers the military regime had reserved for itself through the First Institutional Act or

AI-5. Under AI-5 powers, the government redrew the electoral rules to tip the balance of power in favor of ARENA: constitutional amendments would require a simple majority in Congress; state governors and a third of senators would be elected indirectly by state electoral colleges that included municipal councilors (most of which around the country were members of ARENA); federal deputies would again be allocated on the basis of population rather than on registered voters; and candidate access to television and radio would be strictly limited.

This left the question of presidential succession open. Though General Geisel had indicated he wanted no discussion in this regard until January 1978, Army Minister and hardliner leader, General Sylvio Frota had put his name forward by May 1977. Frota openly criticized General Geisel’s soft stance on regime subversives and communists.

Frota was said to have the support of 90 congressmen at one time. Having stared-down the hardliners before, General Geisel bid his time. However, on October 12, 1977, a public holiday, he decided to act by summarily dismissing Frota. He also communicated his decision to the army commands and asked them to join him in Brasilia. As Frota attempted to rally the army high command to his support, his efforts had been anticipated and thwarted. The hardliner ranks sided with General Geisel in a recognition that public opinion and the political environment had now decidedly changed to favor political liberalization.

In late 1977, civil society once again ramped-up the pressure against the military regime. In August 1977, a letter calling for re-democratization and the rule of law was circulated by a respected law professor of the São Paulo law school. His call was supported by a 3,000-strong march through downtown São Paulo without incident.

Thereafter, the movement was joined by two civil society interest groups that had previously been quiet: the industrialists and the worker unions. During the Fourth

National Congress of the Productive Classes in November 1977, they called for a new program of economic and social development to be achieved “with a desirable degree of political freedom, and in a pluralistic multiple society, one in which economic power had been decentralized”. Industrialists initially supporters of the regime, increasingly felt they had lost the power to influence public policy as state-owned enterprises and foreign business interest had been favored by the regime in industries such as petrochemicals and other basic industrial inputs. For their part, worker unions sensed the political environment was ripe to challenge the state supported corporatist union model which had long kept wage increases below inflation. In what would later be identified as the origins of the Workers’ Party (Partido dos Trabalhadores or PT) in May of 1978, the first large sit-down protest was held by the metalworkers’ union at the Saab-Scania truck and bus factory. In a ten-day period, the protest had spread to 90 factories involving close to

500,000 workers. In contrast to the industrialists however, the union worker protests and related concessions obtained in direct negotiations with employers were perceived as a positive result of the government’s liberalization.

In October 1978, indirect presidential elections were held in which predictably

General Geisel’s hand-picked successor; General João Baptista de Oliveira Figueiredo prevailed by an ARENA dominated electoral college. A month later in November 1978, congressional elections were held. General Geisel’s unilateral changes to the electoral rules under AI-5 in April 1977, all but guaranteed ARENA control of both houses. With this new majority, General Geisel delivered on his promise to phase out some elements of authoritarianism. Most notably, Congress abolished AI-5, stripping the Presidency of its power to arbitrarily deny citizens their political rights. The right of habeas corpus was reinstituted and prior censorship lifted from radio and television. The statute derogating

AI-5 did however give the executive branch new power to declare a “state of emergency”

(that could be renewed without congressional approval) and a revised National Security

Law (enacted in December) continued to allow political prisoners to be held incommunicado for a period after their detention. As his presidency came to an end, it was clear General Geisel had provided the conditions for further liberalization to take hold.

An Economic Strategy in Times of Crises

Following the 1973 oil crisis, Brazil, as a number of countries around the world, was pushed to make immediate economic adjustments and to chart a new economic course. In 1973, the country had grown at a 14% rate, enjoying feverish economic activity and what appeared to be a healthy balance of trade. Yet this balance disguised a heavy dependence on imported oil and basic industrial inputs. The crisis brought about a sudden and intense impact on the economy. Based on 1973 numbers, 1974 imports of oil

and petroleum products and raw materials increased by 158%. The impact on the country’s balance of payments was as severe, increasing its deficit by 322%. Faced with the same difficulties, a number of oil dependent developed countries chose to address similar imbalances by adopting an economic adjustment in which spending and imports were strongly curtailed (Ikenberry 1986, pp.110-116). As a developing country in the midst of rapid industrialization process and in a military dictatorship, Brazil and its military government were faced with a particularly stark choice.

Several factors weighed heavily on the Geisel government’s analysis of the available options. First, the perception was that oil prices would remain high for the foreseeable future. Brazil was in the midst of an industrialization process and the continued consumption of energy was inevitable. At the same time, the production of key industrial inputs such as steel, aluminum, petrochemicals, and fertilizers, was energy intensive. Additionally, the international price of these imported industrial inputs was also expected to increase in the long-term. Cutting-back on consumption was therefore considered an ineffective solution halting the country’s economic activity and failing to address the underlying structural causes of the trade deficit. While the country’s energy potential was uncertain, its mineral wealth was known. Maximizing its benefits with the domestic production of intermediate industrial goods would certainly help relieve pressure on the balance of payments. This discussion had predated the crisis. In 1973, a series of panels held to celebrate the 21st anniversary of the BNDES had examined this issue recommending the development of a productive capacity for intermediate industrial goods. The crisis itself had only simply accelerated the urgency with which to address

this need. This import substitution effort could be coupled with actions to develop indigenous sources of energy, though it was understood their success was uncertain and even found reserves would not reach the market for 5-7 years thereafter (Dos Reis

Velloso, 1977, pp.15-122).

A second factor weighing on the government’s policy analysis at this time was the social impact of its decisions. A contractionary policy would certainly bring about higher unemployment and overall lower standard of living for the working class, whose grievances over the minimum wage were already an issue before the crisis. These side effects would be inconvenient for a military regime that had underpinned its legitimacy on economic growth. A final and third factor crucial to the government’s thinking were its ambitious goals of liberalization and decompression of the political system. To be sure, the government was keenly aware it had a limited temporal mandate in which its goals would need to take root. A 1981 study of Brazil’s policy recipe by the Organization for Economic Cooperation and Development, together with the Fundação Getúlio Vargas and the Fundação Centro de Estudos de Comércio Exterior rightly commented:

“The economic strategy during the time of the Geisel government was strongly

conditioned by specific basic characteristics of the Brazilian socio-economic

structure, and by restrictions deriving from the political climate in the country at

the time” (FGV-Instituto de Documentação in dos Reis Velloso, 1986, p. 236).

In sum, the confluence of the oil crisis with these factors resulted in a choice to avoid an immediate deceleration of growth and to adopt a more moderate and gradual

“cooling off” strategy in which the structural pressure on the country’s balance of

payments would be eased by strengthening its capacity to increase and diversify its export supply and substitute capital imports. The country’s overall economic strategy was adopted in the Second National Development Plan (Segundo Plano Nacional de

Desenvolvimiento or II PND). The II PND described the country’s challenge as follows:

“Brazil will strive, until the end of the decade, to maintain the momentum that the

Revolution has been seeking to generate, to cover the border area between

underdevelopment and development. That next stage will be, necessarily, marked

by the influence of several factors related to the international situation, mainly

regarding the energy crisis. The country is conscious of the difficulties to

maintain the rapid growth of the previous years, yet it reaffirms its determination

to overcome them, in the expectation that an effort will be undertaken to walk,

progressively to the reasonable normalization of the international scenario. It will

be necessary to become accustomed to the idea that the world will face serious

problems, crisis probably. Brazil shall live with them, looking to preserve its

capacity to develop and exploring new paths and alternatives. The Nation will be

mobilized to grow rapidly but without overheating, to control inflation and to

maintain a reasonable equilibrium in the balance of payments with a high level of

reserves. In this regard, with conviction and simultaneously –without postponing

to the future- it will face the tasks to develop new frontiers, in the Northeast, in

the Amazon, in the Midwest, and to promote social development. The model to

consolidate, economically and, in particular, socially, is focused on the Brazilian

man, never losing sight the concern over society’s human destiny that we wish to

build. Performing this task proposed by the Fourth Revolutionary Government

(IV Governo da Revolução) will mean the attainment of important milestones in

the economic and social trajectory of the country before the end of the decade”

(Federal Republic of Brazil, 1974, II PND).

In line with the overall objective to slow economic growth and manage a gradual

“cooling off” of the economy, the II PND only proposed investment programs for key sectors and limited new spending to selected regional development projects. The key sectors encompassed energy saving related ventures (i.e. investments in infrastructure in rail transport, electricity, oil exploration, and ethanol) and the development of a basic industrial input productive capacity. Except for energy saving related ventures, investments in general infrastructure were curtailed. Capital good import substitution was mostly left to the private sector, which thrived under specific government incentives programs.

More concretely, according to João Paulo dos Reis Velloso, Minister of Planning during the Geisel presidency and the author of the II PND, the government set forth the following specific and ambitious economic goals for the 1974-1979 period (Dos Reis

Velloso, 1977, p.118):

• Increase exports at an annual rate of 20% while striving to diversify the country’s

export supply;

• Increase participation of domestic energy production to meet internal petroleum

demand;

• Strive for self-sufficiency in intermediate industrial inputs (steel, petrochemicals,

fertilizer, paper and cellulose) and on wheat; and

• Carry out import substitution on capital goods.

Assessment of the II PND

The II PND presented an unorthodox approach to the risks of inflationary stagnation and overwhelming economic depression in which oil and consumer goods import reductions would be coupled with support for intermediate and capital goods import substitution and investments in strategic sectors. According to Velloso’s justification and that of other scholars, the II PND sought to overcome the energy crisis by structurally redirecting the state’s development orientation with policies that exceeded short-term political expediency. This approach was supported years later in the influential analysis of Barros de Castro (1985), insisting that a classical macroeconomic approach to slowing down the economy would have only attended temporary symptoms of the oil crisis, rather than addressed the underlying causes of foreign dependency. Furthermore,

Barros de Castro indicated that at the time the country did not have the technological capacity to encourage exports of value-added machinery, equipment, and weapons. In his view the II PND investments, which in some instances could be deemed grandiose and extravagant, deserved to be evaluated at their maturity (Barros de Castro, 1985, p.10).

Critics on the other hand, believed that continued growth underpinned the government’s efforts to ease pent-up political pressure and highlighted the resulting over- indebtedness of the state. Early on Balassa criticized the distortions created by import substitution, the lack of rigor in project selection, and excessive indebtedness (1979:8).

Fishlow believed the domestic industry was unprepared, lacking spare productive capacity (1986:12, 13), and eventually more focused on obtaining the state’s favor than in productivity (1986: 14). According to Aguirre and Saddi the Geisel government was in fact focused on maintaining its legitimacy by establishing a new alliance with private sector financial and construction groups short on capital that the state would now facilitate (1997:15). A more recent analysis by Genta dos Santos and Perim Colistete concludes that in spite of the resulting diversification of the industrial structure, the II

PND policies ingrained systemic disequilibria in the years that followed (2009: 28, 29).

Conclusion

This chapter described the 1973 oil crisis, its specific impact on Brazil and the resulting economic and political complexity faced by policymakers. General Ernesto

Geisel assumed the presidency of Brazil with an ambitious set of political and economic goals. In order to decompress a system that since 1964 had been under military rule, the

Geisel administration planned to execute a gradual opening (abertura) to civil society.

Executing this opening required the maintenance of a delicate balance among factions within the Military and the management of expectations from civil society actors seeking a swifter opening process. Particularly the appeasement of the hardline faction in the

Military could prove costly for an incoming president in need of support and facing an economic crisis. Confronted with a stark choice on how to respond to economic pressures, the Geisel government chose to avoid an immediate deceleration of growth and to adopt a more moderate and gradual “cooling off” strategy in which the structural

pressure on the country’s balance of payments would be eased by strengthening its capacity to increase and diversify its export supply and substitute capital imports. Brazil’s energy policy response to the 1973 oil crisis must be understood and analyzed within the economic adjustment option and course chartered in the II PND.

While economic circumstances may not have been unique in the region or unexpected for an energy-scarce country, decisionmakers and policy entrepreneurs and the ideas and institutions through which Brazil operated are necessary to explain the country’s energy policy response. The following chapter explores the military institution, the development of military thought, and its relation to Developmentalism.

CHAPTER 3: BRAZILIAN MILITARY THOUGHT

In the early 20th century political, social, and economic conditions in Brazil were stagnant. The country was still largely a rural nation dependent on agricultural exports.

Landholders of large coffee, sugar, and cattle holdings in the preeminent states of São

Paulo and Minas Gerais were the economic and political elite of the country. Though the country was democratic in theory under the 1891 Constitution, elites in the regions would manipulate elections and influence gubernatorial and presidential politics through a system of political patronage to political bosses (Coroneis). As a result, power remained entrenched in local politics and allegiances remained with these regional centers of powers (pátrias) rather than with the nascent federal government. Governors supported the presidency in return for the ability to tend to their affairs without federal meddling.

Furthermore, an informal power-sharing agreement between the preeminent states of São

Paulo and Minas Gerais, described in terms of their production as “coffee with milk”

(café com leite), had yielded the majority of presidents since the end of the monarchy

(1889).

Yet, this state of affairs would soon be challenged by a nationalist group of young military officers who believed the prevailing regime was inept, corrupt, and generally out of step with the country’s potential as a great nation and its ability to modernize. This young officer class, later labelled the Lieutenants (Tenentes), at its outset favored political centralization to weaken the regional elites. After a number of unsuccessful uprisings through the 1920s, in 1930 in alliance with emerging classes of a modernizing

nation in the midst of rapid urbanization, they were able to bring about radical and long- lasting change to the nation.

The struggle against the landholding elites catalyzed the emergence of the military as a political force and influenced institutional thought. The belief in the moral turpitude of elites and professional ineptitude of politicians that served them buttressed the notion that the country had been ill-served and that disabused of those burdens could fulfill a destiny of greatness. Positivist thought with its emphasis on progress through order provided both a justification and a role for greater military involvement in politics and was enthusiastically embraced by a new generation of army officers making their way through professional military academies during the early 20th century.

The emergence of a cadre of confident and assertive military technocrats with the capacity to govern would eventually lead to the displacement of civilian authority.

Following World War II, the convergence of a national security doctrine encompassing both foreign and internal threats and the strengthening of the military institutions with US support, would erode the prevailing political order. Once in power in 1964 and for the next twenty-one years, the military mobilized the country’s productive resources for industrial development.

The Military and the End of the Empire

Since the birth of the Empire (1822-1889), the Brazilian military had experienced an uneasy relationship with the country’s elites. The military was expected to be an instrument of authority and defend the established order yet it was distrusted as an agent

of centralized federal power by the regional elites largely in control of the country’s political and economic governance. As a result, elites persistently sought to limit the military’s size, funding, and power. In spite of these limitations, the military in alliance with Argentina and Uruguay had managed to defeat a stronger and better prepared

Paraguayan army in the War of Triple Alliance (1864-1870). As the turn of the century approached, the military felt unappreciated, resented the power the elites held over the country, and more broadly blamed them for what they perceived was the country’s undeserved backwardness (Smallman, 2003, pp.9-12).

In contrast to the rural landholding elites, the officer ranks hailed from coastal, urban and middle-class families that could not afford private education in traditional disciplines such as law and medicine. Military schools provided an opportunity for advancement for young men outside the establishment. The military school in Rio de

Janeiro (Praia Vermelha) in particular would influence generations of future leaders and intellectuals. There, Lieutenant Colonel Benjamin Constant Botelho de Magalhaes, developed an ascendancy in military thought as an exponent of Positivism, which had developed a small but significant following. The positivist emphasis on science and authority, progress and order, was particularly appealing for men in uniform who saw themselves as technocrats called to lead greater state activism in political and economic governance (Smallman, 2003, pp.9-12. McCann, 2004, p.12). For this reason, Positivism, the military and Constant himself would play a central role in the republican movement to bring the Empire to an end (Nachman, 1977, pp.1-23).

In the 1880s, the role of the military in political life remained an open question.

The nation however was engrossed by the question of whether to abolish slavery, which

Positivist thought deemed to be an immoral and antiquated institution. In 1887, Marshal

Manuel Deodoro da Fonseca, then head of the Military Club, a Positivist stronghold, successfully appealed to Princess Isabel (as regent for her father Emperor Pedro II) to have the military relieved from its role of enforcing slavery. The absence of military support, added to a surging abolitionist movement dating back to 1950 brought slavery to an end by 1888. As a result having challenged the interest of the landholding elites, the army had emerged as an independent actor in the political arena. However, this was not enough to quell the dissatisfaction within the military with the established political system. The institution felt threatened by the entrenched interests in the governing cabinet who were rumored to want to destroy the army. The army’s angst found empathy in the republican movement, but also in the growing urban and middle classes, the

Church, the nationalists, and other interest groups disempowered by the status quo. In

November 1889, the army moved to overthrow the monarchy and establish a republic.

Following an interim period, Fonseca was formally elected President in February 1891

(Smallman, 2003, pp. 9-12. McCann, 2004, p.17).

The Military at the Dawn of the 20th Century and After WW I

The establishment of the First Republic (1889-1930) did not contribute to lessen the mutual distrust between the military and the regional elites that had persisted since

1822. During the First Republic, regional elites had proved to be resilient in maintaining

their privileged role in the political and economic governance of the country. Though military officers resented the persistent efforts of the regional elites to undermine their institution, over the years, its high officer class had become complacent and gradually corrupted through a system of lucrative commissions, anticipated promotions, and other prerogatives (Smallman, 2003, pp. 34-36).

World War I and its aftermath however brought about changes to the country’s economic system and the gradual erosion of the prevailing political arrangements.

Initially a neutral country, Brazil depended heavily on its exports of coffee and rubber to

Europe. Hostilities heavily impacted demand and exports fell sharply. Yet, it was

Germany’s policy of unrestricted submarine warfare against foes and neutrals that pushed

Brazil into an unsustainable position. The sinking of the steamship Paraná politically pushed Brazil to declare war on October 26, 1917. Brazil’s involvement in the actual hostilities was limited. In addition to patrolling the Atlantic, it sent a small preparatory mission of the army to France in 1918.

Devoid of the ability to import intermediate goods, the impact of the war compelled the country to develop new export supply in foodstuffs (meat and fish) and manufactured consumer goods. Indeed, from an industrial base heavily tilted towards the processing of locally-supplied vegetable and animal inputs, by the 1920s Brazil was producing cement, rubber products, agricultural machinery, iron and steel, pulp and paper, and silk and rayon textiles (Baer et al, 2011, p.42). The newfound economic activity also yielded two growing economic classes: the urban working and middle classes. Their economic and political interests progressively conflicted with those of the

landholding aristocracy, whose power and dominance they increasingly resented. Their interest also appealed to younger generations of military officers who hailed from states and social classes historically excluded from the political arrangement of the time and who were critical of the corruption among upper officer ranks.

The country’s vulnerability to foreign demand under the prevailing economic structure of the time, did not go unnoticed. In 1919, Brigadier General Alberto Cardoso de Aguiar emphasized "the absolute independence from foreign material resources" as a guarantee of military security. In his view behind the guise of peaceful economic cooperation lay serious national rivalries. In contrast to resource scarce developed countries with steel production capacity, Brazil was rich in iron and other minerals and had plentiful resources such as forests, waterfalls, and rivers. An organized industry, and more specifically steel production, was necessary for arms and munitions but also to reach remote regions through railroads and access foreign markets with vessels (McCann,

1984, pp.760-761).

Argentina- The Foreign Threat

In the early 20th century, the military’s mission was focused both on confronting internal and external threats. On the home front, military presence was meant to underpin the country’s territorial unity and impede regional interests from breaking the country apart. From an external perspective, an invasion by Argentina from the south was perceived to be the greatest threat. Brazil and Argentina, as other countries in the region, had tussled with each other over the past decades to settle boundaries, the delimitation of which had been uncertain since colonial times. Indeed, Argentina and Brazil had bickered

over the boundary between Misiones Argentina and the state of Santa Catarina (settled through arbitration in 1895). More recently the two had engaged in a naval arms race that had elevated tensions in 1910 (McCann, 2004, p.24).

Yet, it was mostly mutual suspicion and distrust that made Argentina such a formidable foe in theory rather than in practice. The two countries were simply moving in different directions. Argentina had been burdened by a similar system of party bosses dispensing patronage to regional interests in exchange for votes. By 1912 however the country enjoyed a high-level of national integration under an imperfect constitutional democracy that expanded the right to vote and increased popular participation in government of urban middle classes (Williamson, 2003, p. 279). Brazil was still immersed in a backward political arrangement in which racial and lower economic classes were ignored. Militarily, both countries were convinced of the military superiority of the other. For Brazil in particular, army thinking in this regard would be influenced by

Lt. Colonel Augusto Tasso Fragoso, a Positivist, who had served as military attaché in

Buenos Aires from 1909 to 1911. Tasso Fragoso, who would later help lead the 1930 revolution, laid out in detail how an Argentinean invasion would unfold and how Brazil would need to make a stand in Rio Grande Do Sul. His reports were echoed in military staff reports and infused military thinking. His concerns would also be validated by the

French military mission advising Brazil in the 1920s which organized maneuvers in Rio

Grande do Sul, to familiarize the army with the “terrain of your eventual conflicts”

(McCann, 2004, pp.15, 253).

Tasso Fragoso’s preoccupation was justified. Regional elites and interests had mostly kept the army underfunded and undermanned. The army had organized divisions, but was mostly composed of a number of regiments and battalions spread over great distances and scarcely populated regions. In contrast, the country’s states including São

Paulo, Minas Gerais, Rio Grande Do Sul and Bahia, kept well-equipped forces that had been built since the end of the monarchy. In theory, these state forces together with the federal military made Brazil a formidable foe for neighboring countries. In practice, standing state forces undermined a strong central government and the country’s ability to have influence beyond its borders (McCann, 2004, pp.15, 254).

Military Academy Education and Positivist Ideas

In the early 20th century, the military through the establishment of new schools of instruction for its officers sought to disassociate them from political activity. In the past, officers trained at the Praia Vermelha Military Academy had been involved in the deposition of the Emperor and the establishment of the First Republic (1889). That involvement and an uprising in 1904 against the civilian government had led to the decision to close it that same year. In its place, the Escola de Guerra in Porto Alegre

(1906-1910) and the Escola Militar do Realengo in Rio de Janeiro (1911-1944) had been established with an aim to professionalize the army and formalize officer instruction.

Officer education at Praia Vermelha had been notably lax in discipline and military content. The newly established schools reorganized officer education so that instruction

on military matters was paramount and allowed the pursuit of a military career under professional and meritocratic standards (Munhoz Svartman, 2012, pp.281-299).10

The academies however were equally successful in other areas of significant consequence. During the early years of the Republic, Benjamin Constant as Minister of

War had reformed the Praia Vermelha Military Academy and staffed it with Positivist professors. That faculty would prove to be particularly resilient. In 1891, one-quarter of the faculty supported positivist thought. In 1904, the year it closed, despite non-positivist curriculum changes, fifteen percent remained. Once the Realengo Military Academy had opened, the teaching staff remained unchanged. As a result, Positivism retained its influence over generation of graduating army officers. Instructors, cadets and existing officers (many of whom were sent for reeducation precisely because of their political inclinations) converged in the academy to celebrate Benjamin Constant and Positivist thought, rather than reject it as the government had intended (Nachman, 1977, pp.1-23).

Furthermore, attending the military academy instilled in the officer’s classes an esprit de corps that disassociated them from other social groups and that encouraged them to reinforce and perpetuate values and beliefs long held by the officer corps such as the moral and professional ineptitude of civilian elites. As a result, graduating officers would also develop an institutional fellowship and a group calling to guard the nation

10 Indeed, results in the academy began categorizing cadets by merits and determining the posts in which they would serve during their last year. 88

against the moral shortcomings of the entrenched political elites that would impact Brazil for decades to come (Munhoz Svartman, 2012, pp.281-299).

During this period, around half of the officer corps lived in the federal district

(nowadays Rio de Janeiro state) in proximity to civilians with most barracks within the city and officers living in private housing throughout the city. As such officers and their families were immersed in society and were attune to the same economic and political realities as other Brazilians. Sixty-five percent of officers were second or first lieutenants and many of the younger ones had attended recently created military schools. In the early

1920, in addition to low pay, promotions were an irritant. Lieutenants could wait up to

10-15 years to be promoted to captain. A faction within them began to organize and would eventually challenge the established order. Their ranks were comprised of about

325 members, all of whom had graduated from the Escola Militar do Realengo between

1913 and 1927.

The Tenentes Movement

In 1922, during the last year of the presidency of Epitácio Pessoa (1919-1922), and in the midst of a presidential contest, the rift between the military’s junior and senior ranks reached a critical point with the arrest of Marshal Hermes da Fonseca. Hermes da

Fonseca had formerly been the first military man elected by direct popular vote to the presidency (November 1910 – November 1914). Under his government, he had modernized the army garnering strong support within the institution. In 1922, as president of the Military Club he had tried to influence the outcome of the election by claiming the oligarchical regime’s candidate (Artur da Sivla Bernardes) had written letters published

in a local journal in which he criticized the military. These letters were shown to be a forgery and Hermes da Fonseca was arrested for his alleged involvement and for inciting military revolt. Upon his arrest, senior officers supported the government, while junior officers denounced it and called for a rebellion against a system they considered had corrupted the institution. On July 22, 1922, a faction of these junior officers took matters a step further, leading an uprising at Copacabana Fort in Rio de Janeiro. The uprising was quickly suppressed by senior officers that remained loyal to the government, but a movement with long lasting impact within the military and Brazilian political life was born. As the movement was led by the Tenentes it was described as Tenentismo.

President Bernardes assumed the presidency in November 1922 (through

November 1926). He took measures to quell instability in the military. He governed mostly in a legal state of emergency which granted him extraordinary powers and curtailed military enrollment by a quarter. In 1924 however, the Tenentes once again were involved in revolt. Major Miguel Costa, commander of the São Paulo provincial militia, initiated a revolt that captured the city and held it almost a month. In support, 26- year-old Luiz Carlos Prestes, a then captain influenced by positivist ideas serving in Rio

Grande Do Sul, initiated a revolt of his own.11 Prestes had taken part in the 1922 rebellion and had been sent to Rio Grande do Sul as punishment. The Costa and Prestes groups eventually joined forced near Iguazu Falls. Thereafter, the "Prestes Column"

11 According to Hentschke, Prestes’ father, Antonio Pereira Prestes was among the co-founders, in 1897, of Rio Grande do Sul’s Positivist Church. Hentschke, 2004, p.54. 90

sometimes numbering in the few hundreds marched 24,000 kilometers across the country; from its southern borders to the Amazon and to northeastern Brazil.

The Prestes column sought to rouse popular support in the country’s interior against the prevailing regime. The movement’s objectives were broad and ambitious.

Joao Alberto, one of its members described it in his memoirs as follows: "Each of us knew what the other thought, we felt the strong determination to fight for democratic rights, for freedom of thought, for electoral honesty, against corruption in all its forms, and against the prepotency of government" (Alexander, 1973, pp.221-248). More succinctly, the movement wanted an end to the oligarchical control of politics, through political centralization and an autonomous state. The Tenentes believed they could offer the Brazilian nation a less interested vision of the country that could assist in its modernization (Smallman, 2003, pp.36-37).

The Prestes column evaded capture for a period from April 1925 to February

1927. Loyal regime forces would engage the column if they encountered it, but had little interest in pursuing their rebellious comrades. The column was unable to gather support in rural areas with disaffected population that had previously shown willingness to embrace antiestablishment movements.12 The movement was also unable to gain the support of labor movements or other urban sectors that should have been open to alter the

12 It is unclear why considering the success of contemporaneous movements such as the War of Canudos in Bahía (Guerra de Canudos, 1895–1898), the Contestado War in Santa Caterina (Guerra do Contestado, 1910-1914), and the 1914 Juazeiro rebellion in Ceará, the Prestes columm was unable to garner support in rural areas. 91

social and political hierarchy. By 1927, the Prestes column had surrendered to Bolivian authorities and Prestes went into exile living in Buenos Aires (Alexander, 1973, pp.221-

248). Yet, Tenentismo remained a political force in the country’s politics.

The revolutionary tenentes, many of them Positivists (Hentschke, 2001, p. 61), would also have great influence in young cadets receiving instruction at military academic schools, among them Ernesto Geisel and Golbery do Couto e Silva.

The 1930 Revolution

The Tenentes movement would once again gain prominence under the presidency of Washington Luís Pereira de Sousa (November 1926 – October 1930). In 1929,

President Washington chose his friend Júlio Prestes de Albuquerque (not to be confused with Luiz Carlos Prestes) to succeed him in office. The choice of Prestes, also a Paulista and former governor of São Paulo broke the café com leite understanding in which Minas

Gerais would have been entitled to have one of its own ascend to power. As a result, elites in Minas Gerais and Rio Grande do Sul coalesced behind the candidacy of Getúlio

Vargas. Yet the election in May 1930, marred by fraud, saw Prestes elected. Prestes never took office.

In October 1930 a military coup deposed the government. The coup was the final step in the dismantling of the oligarchic landholding regime of the Old Republic that had controlled the country since 1889. Vargas had ably assembled a coalition made up of leaders in Rio Grande do Sul and Minas Gerais, anti-regime revolutionaries, and

Tenentista factions within the army that rallied to his cause.

By 1930 the Tenentista movement had awoken to the need to create internal coalitions within the army to face the generals and the entrenched Old Regime interests within the armed forces. The Tenentes were successful in subverting the institutional hierarchy to widen the appeal of their call beyond their faction and to reach a wider audience within the military. They infiltrated conspirators in preparation for the coup ensuring that once hostilities were underway, troops refused to obey officers or openly joined the coup by arresting their superiors. Though resistance within the army’s higher ranks and loyal troops remained, in November the army handed power to Vargas to avoid a civil war.

The 1930 Tenentista movement supported major social and political reforms and was influenced by Positivism. Their basic ideas which have been described as “reformist interventionism” called for agrarian reform, minimum-wage and strike legislation, and the development of a national steel industry. Though after the coup Vargas placed some

Tenentismo leaders in charge of state governments to ensure their loyalty, factional infighting and the resentment of other institutional factions diminished their influence over time. By July 1932, when regional elites in São Paulo unsuccessfully rebelled against the federal government, Vargas decided to reconsider many of the reforms advocated by the Tenentista movement (De Carvalho, 1982, pp.193-223).

Getúlio Vargas, Positivism and the Estado Novo

Getúlio Dornelles Vargas had pursued his political career in Rio Grande do Sul.

He had formerly been an enlisted member of the army. In Rio Grande do Sul, he had

experienced decades of Positivist-oriented rule under the governorships of Julio de

Castilhos (1893-1898) and Antônio Augusto Borges de Medeiros (1898-1907 and 1914-

1928). Vargas had been the latter’s protégé. Both governors had improved and expanded education and developed a technocratic elite to stimulate industrial progress. Their influence would bring positivist ideas into the administrative practice of Vargas’ authoritarian and interventionist state.

According to Jens Hentschke’s study of Positivism and its influence in Rio

Grande do Sul politics, Vargas ascendance to the presidency in 1930 signified the return of Positivism as the guiding philosophy behind state and nation building in Brazil.

Succinctly he argues that:

“[The] polity and policies of the authoritarian- corporatist Estado Novo can, to a

larger extend, already be identified in Rio Grande do Sul before the Great

Depression. The southern state’s Positivist developmental and educational

dictatorship, established by Julio de Castilhos, had represented an alternative

political model in Brazil’s Old Republic which was dominated by liberal

constitutionalist regional oligarchies. When Getúlio Vargas and his fellow

gauchos took over central government in 1930 and rebuilt the state and nation to

an extent never seen before, Rio Grande’s Positivist project remained their

guiding example.” (Hentschke, 2004: 5)

The 1930 reformist movement that had thrust Vargas into power had disparate interests and did not support a change in the nation’s social structure. They did however share an interest in an honest government that would promote modernization including

industrialization and economic development (McCann, 2004, p.308). According to Frank

McCann, the program was akin to Roosevelt’s New Deal but without the redistributive components. Yet, these aspirations would be interrupted and postponed until the new government dealt with conspiracies, rebellions, the São Paulo Civil War (1932), the advent of a new constitution (1934) and communist revolt (1935). Vargas also faced a formidable economic challenge at the outset. Prices of coffee, the preeminent export commodity, had crashed. Reliance on a single commodity made the country vulnerable and therefore it needed to diversify and industrialize to reduce its exposure both to the export and import markets (Burns, 1968, p.79).

From the military’s perspective, Brazil needed a modern army to defend its riches from greedy foreigners and narrow-minded regionalist politicians (McCann, 2004, p.308). In 1934, War Minister General Pedro Aurélio de Góes Monteiro outlined a plan of national reconstructions in a document he addressed to Vargas. He criticized liberalism and regionalism, exploitative elites and foreign interests, and impoverished and ignorant masses. He also described specific policies including the promotion of national industry

(particularly the steel industry), union organization, regulation of the press, development of civic and physical education; emphasis on national integration, regulation of economic life and, reform of the state apparatus. He also identified the army as a powerful instrument in the hands of the government to educate the people and consolidate the

“national spirit” (De Carvalho, 1982, pp.193-223). General Góes Monteiro had been a

Tenente leader (McCann, 2004, p.267), a 1930 revolution commander (then a Lt.

Colonel), and the 1934 Minister of War.

In 1937, Vargas with the support of Góes Monteiro declared a state of emergency, dissolved Congress, and proclaimed the establishment of a New State (Estado Novo) along authoritarian, developmentalist, and corporatist lines. The Estado Novo was in short, an agreement between Vargas and the military on national development under the initiative of the state and the support of the army. The arrangement would give rise to a civilian-military technocracy and include an emphasis on internal and external defense, the strengthening of the armed forces, economic development, basic industries, and export promotion (De Carvalho, 1982, pp.193-223). Under the Vargas government,

Brazil would construct its first steel mill (Volta Redonda) and establish a monopoly on iron-ore deposits (through state-owned company Companhia Vale do Rio Doce). Yet as

World War II drew to a close years later, the country’s efforts to defeat Fascism in

Europe brought about a wave of democratic sentiment in the country. Sensing a change in the political climate, President Vargas promised national and state elections but rapidly moved to undermine them by meddling with the political calendar. President Vargas further compromised his legitimacy with the military by embracing the Communist party and appointing his brother as the Rio de Janeiro’s Chief of Police without its acquiescence (Roett, 2011, pp.42-43). Fearing a brand of economic nationalism that politicized development choices, the army deposed him in October 1945 (Smallman,

2003, pp.81-83).

The ESG and a new national security doctrine

The 1964 coup was not the first for the Brazilian military. The military had removed presidents in 1945, 1954, and 1955 but had merely assumed a caretaker role

handing over power back to civilians once order had been reestablished. Yet the 1964 coup brought forth a cadre of officers, confident and assertive in their capacity to govern and encouraged by changes in the internal and external environment. The gradual erosion of civil society’s confidence in the existing political order, provided the military with a legitimacy they had previously lacked. In addition, the fear of the spread of communism in the region, resulted in the emergence of a national security doctrine that encompassed both social and political elements (Stepan, 1971).

The Unites States (U.S.) was integral both in promoting this new found confidence among Brazilian officers attending United States military schools and in assisting them to establish an institution to disseminate their ideas among the officer corps in Brazil. The early military relationship between the two countries had been strengthened during World War II. Brazil had been a late comer to the Allied Powers declaring war on Germany and Italy in August 1942. Though Brazil had initially wished to remain neutral, the U.S. concerned over hemispheric security and war strategic issues sought the use of Brazilian ports and airbases in the Northeast early in the war. President

Vargas had leveraged these concerns to obtain U.S. financial support for the development of the Volta Redonda steel plant in November 1940 and a promise that the Brazilian army would be reequipped (Smallman, 2003, p.73). Those promises would eventually develop into a May 1942 agreement that created the Joint Brazil-U.S. Defense Commission seated in Washington DC and the Joint Brazil-U.S. Military Commission seated in Rio de

Janeiro (the Commissions) (Davis, 1993, p. 33).

During the war, Brazil sent an expeditionary force (Força Expedicionária

Brasileira or FEB) that would reach 25,000 men in operations in Italy (June 1943-

February 1945) under U.S. command. Brazil had rejected a limited non-combat role as it would not reflect favorably on its own sense of national greatness (Grandeza) and the army’s prestige. In early 1943, Vargas lobbied and obtained approval of a combat role following an in-person meeting with U.S. President Roosevelt (Davis, 1993, pp.37-38).

In preparation for that meeting, Vargas’ Foreign Minister, Oswaldo Aranha, had briefed

Vargas insisting the U.S. would come out ahead after the war and it was in Brazil’s interest to stand with it. In Aranha’s view both nations were "cosmic and universal" with continental and global futures. He warned against frightening badly needed foreign capital and emphasized post-war policies should favor liberalization of international trade, enhancing U.S. support of Brazilian industrialization, and the free movement of capital and immigrants (McCann, 2015).

FEB officers were trained in U.S. military schools equipped by the U.S. and commanded by U.S. officers (Davis, 1993, p. 69). The FEB contributed to expelling

German forces from Italy and was considered a success both militarily and in terms of cementing the bilateral military friendship (McCann, 2015). The FEB was according to

Stepan (1971) and McCann (2015) also successful in embedding democratic and internationalist ideas within a faction of the military. Smallman (2003) in contrast highlights that the senior army leaders as early as 1943 had reconsidered their support for economic nationalism in light of the increasing likelihood that the military’s hope for improvement lied with the U.S. (80).

With the advent of the Cold War, the high command’s pragmatist ideological turn coincided with US interest in having an important doctrinal role in Brazilian affairs

(Davis, 1993, pp.93-94). As a result, the United States provided assistance. In 1946,

Brazil first requested U.S. assistance in creating a war college. Brazilian commanders considered that educating its officers in accordance with the standards of its closest ally was an important step towards national greatness. In July 1948, both countries agreed to a military mission (Davis, 1993, p.98). The military mission would assist General Osvaldo

Cordeiro de Farias, who had been appointed to head the college. Cordeiro was a former

Tenente and member of the FEB.

With U.S. assistance in 1950, Brazil established its war college, the Escola

Superior de Guerra (ESG).13 The US recommended that instead of simply mirroring of the U.S. National War College, the ESG should also encompass missions similar to those of the then U.S. Armed Forces Staff College and the Industrial College. Both of those institutions trained military and civilian staff in national defense matters (Davis, 1993, p.95).

Yet, the Brazilian military would infuse its own thinking into the ESG. General

Cordero de Farias, entrusted with building the school, endeavored to differentiate it with two key components. First, unlike the U.S. War College in which instruction was focused

13 To this end both countries entered into a contract in which three active duty officers of each US service branch would constitute the mission with Brazil assuming the financial costs. See Davis, 1996, p. 98. The ESG was formally established by presidential decree by General Eurico Dutra’s government on August 20, 1949. 99

on war, General Cordero de Farias sought to broaden the ESG’s mission to encompass all the country’s problems. Secondly, he opened the ESG to civilians outside the defense sphere. The ESG would be a national think tank in which civilian and military elites would exchange geopolitical and strategic ideas (Davis, 1993, p.1010). The school had students visiting sites such as industrial plants, hydroelectric plants and iron mines, and would encourage group projects in which officers and civilians collaborated. The military understood however that it needed to legitimize this collaboration within the military institution (Smallman, 2003, p.116-117). The national security ideology allowed it to bridge this gap.

In 1952, General Golbery do Couto e Silva was assigned to the ESG were he assumed a preeminent role in formulating the institutions school of thought and the country’s national security doctrine. He would later become chief of staff to General

Geisel during Geisel’s presidency (1974-1979). According to Stepan, the central idea underlying the national security doctrine was that security and development issues were inseparable (Stepan, 1971: 178) According to some commentators that ideology summarized in the school’s motto of Security and Development (Seguranca e

Desenvolvimento) was an updated version of the Positivist maxim Progress and Order

(Ordem e Progresso) in which modernization was pursued without the involvement of the masses (Markoff and Baretta, 1985, pp.175-191). According to De Carvalho, the school’s national security doctrine “only systematized and adapted to the new international circumstances ideas and practices that had a long tradition” (De Carvalho,

1982, pp.193-223).

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General do Couto e Silva believed there was a total and permanent state of war both on an external and internal planes that involved “the entire territorial space of the belligerent states, thus involving the whole economic, political, cultural, and military capacity of the nation... [and that]… above total war has eliminated the time scale, incorporating in itself the time of prewar and postwar, which are in fact now only extensions of one sole and continuing state of war.” In his view, during times of crisis, national security concerns enlarged “the area of strategy to the point where it almost absorbs all the national activities.” To be sure, this approach placed external and internal threats of an equal level; a notion that would later devolve into grave human rights violations against “subversives” during the dictatorship (Golbery de Couto in Alves,

1994, p.15).

On an economic level, General do Couto e Silva’s beliefs were further underpinned by the notion that a nation’s success was largely a function of geography.

Indeed, a country’s resource endowment and strategic alliances were determinant. Brazil was a large, populous and resource-rich country, which rendered it a well-positioned nation to “bargain at high prices and to use the fact that we, as a nation hold the trump card. We should use this to obtain the necessary means to develop our land…..and to carry out our mission”… “We may also invoke a ‘manifest destiny’ theory….” (Golbery de Couto in Alves, 1994, p.24).

This developmental approach to national security required the country to mobilize all of its productive resources for industrial development. By 1963 this approach establishing a link between the military and civilians and between development and

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national security was articulated in the school mandate to prepare “civilians and the military to perform executive and advisory functions especially in those organs responsible for the formulation, development, planning and execution of the politics of national security and development” (Stepan, 1971, p.176).

Based on a review of the general writings and ESG manuals, Maria Moreira Alves provided an insightful critique of General do Couto e Silva’s economic ideology and the economic model it supported, as follows:

“It is a model of capitalist development based on an alliance among state,

multinational and local capital. The ESG textbook explicitly considers the

contribution of multinational corporations to be large and positive in the

economic development of a nation, in spite of the fact that it may generate

considerable internal opposition. Security, as an element in the ‘development with

security’ concept, implies the need to control the social and political environment

so as to provide an attractive climate for multinational investment. Social peace is

also necessary for the achievement of maximum rates of capital accumulation in

order that rapid economic growth reach the “takeoff” stage of

development…Economic development is not geared to basic needs, and

development policy is not particular concerned with the establishment of

priorities for a rapid amelioration of the living standards of the majority of the

population. Education programs, according to the ESG, should be concerned

mainly with training technicians to participate in the process of economic growth

and industrialization… Ultimately, the economic model is designed to augment

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Brazil’s potential as a world power. For such primordial and all- important

goals, the ESG textbook emphasizes, the sacrifice of successive generations may

be necessary” (Alves, 1985, pp.27-28).

General do Couto e Silva’s authoritarian developmentalist ideas permeated both the ESG and the General Staff School (Escola de Comando e Estado-Maior do Exército–

ECEME), from which army officers eligible to rise to the rank of general had to graduate.

Both the ESG and ECEME’s curriculum extended far beyond core subjects to encompass others such as inflation, agrarian and banking reform, transportation, education and voting systems. As a result, almost all officers agreed that it was “legitimate and necessary” for the military to concern themselves with the country’s social, economic and political well-being. According to Stepan, during the 1964 coup of the generals who had attended the ESG, 60% had been active plotters (while only 15% of those not attending had been involved). Moreover, during the first years of military government, Generals

Costa e Silva and Castelo Branco who had held positions of note at the ESG, assumed key positions as head of intelligence (Servicio Nacional de Informações) and President, respectively (Stepan, 1971, pp. 178-179).

In any case, the reach of these ideas developed at the ESG went far beyond the military. The ESG’s open-door policy to civilians, effectively created a network of graduates. As a result, the number of notable and powerful ESG graduates in civil society was considerable. According to Alves between 1950 and 1967 of the 1,276 ESG graduates, 646 were civilians. Among these 224 had been major industrialists, 200 top- level bureaucrats and ministers of state, 97 heads of governmental agencies, 39

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congressmen and 107 professional technocrats (Alves, 1985, p.7). Years later, following the 1964 coup, General do Couto e Silva would succinctly summarize the breadth and reach of the institution’s ideas in Brazilian political life as follows: “Because the ESG is organized to analyze the country’s problems and to think up solutions, it is only natural that if a government is very weak the ESG will be against it.” (Stepan, 2015, p. 184)

Conclusion

In order to understand the ideas that permeated policymaking in the energy sector and to trace them through key institutions and actors in the Brazilian policy arena, this chapter described Brazilian military thought since the birth of the Republic in 1889, summarizing the political, economic, and social dynamics that spurred the rise of the military institution as a political actor, identifying the early influence of Positivism and its development into a national security doctrine, and highlighting its expression in decisive policy actors both in military and civilian elites.

Military thought inextricably linked security to development, positioning military decisionmakers in the 1970s to embrace Developmentalist ideas in policy that had gradually become embedded in key policy entrepreneurs and institutions since the 1930s.

The following chapter describes what those ideas were in the energy sector and traces them through the years until 1974.

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CHAPTER 4: DEVELOPMENTALIST THOUGHT AND ITS INSTITUTIONAL

CONSOLIDATION IN THE ENERGY SECTOR

The primary objective of this chapter is to trace the ideas that constitute the core of this dissertation’s argument. Four ideas, namely (1) national development through industrialization, (2) energy as a growing point, (3) the attainment of energy self- sufficiency, and (4) the development of an autonomous capacity for technological innovation, shaped policymaker preferences and facilitated the emergence of a consensus among policy entrepreneurs and decision makers on the importance of energy independence as a cornerstone for the country’s long-term development and economic growth.

While these ideas originated from different sources, including a military strongly influenced by Positivism, they were part of the Developmentalist ideology that permeated economic thought and policymaking starting in the 1930s. Unveiling how these ideas became embedded in key policy entrepreneurs and sectoral institutions, affecting their subsequent organizational expansion and performance is key to understanding Brazil’s policy response to the 1973 oil crisis.

The chapter first discusses the influence of Developmentalist ideas in the energy sector from the late 1930s to 1973. For Developmentalist, industrialization would solve underdevelopment by modernizing the economy and its archaic institutional setup.

Industrialization would be hampered without adequate energy supply. Developmentalism was present both in the public and private sector. In the public sector, two currents arose distinct by their nationalist inclination (or lack thereof). Though both camps defended the

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establishment of a modern industrialist economy, non-nationalist Developmentalists, or

Cosmopolitans, believed it was possible and desirable for foreign capital to participate and have a long-term interest in the industrialization process. For the Nationalist, expansion of energy supplies needed to be directed by the state and remain under its control. Dependency on foreign energy sources would leave Brazil vulnerable to the whims of foreigners who would rather seek profit than secure energy supplies for the country. Self-sufficiency thus became a goal.

The chapter then discusses the consolidation of Developmentalist ideas in institutions in the economic planning and energy sectors. Nationalists were concerned with energy security and fought to establish nationalistic policies for the development of the oil sector. Such policies were imprinted on institutions created to manage oil resources including the National Petroleum Council and the national oil company,

Petrobras. The chapter also discusses how the Cosmopolitan camp through its influence in the Brazilian national development bank, would greatly affect the development of the electricity sector’s expansion and the economic planning apparatus.

The chapter closes with a discussion on Developmentalist ideas in the science and technology sector. Developmentalist understood the country was rich in natural resources and had great potential for energy development. However, turning the materials (i.e. minerals, hydrocarbons, water, land, etc.) into modern energy supplies required not only capital but importantly an autonomous capacity for technological innovation. Starting in the late 1950s, state energy companies, public research centers, and the national development bank setup technical training and research and development related

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programs. These ideas became gradually embedded in science and technology institutions and starting in 1964, in the policy discourse permeating economic planning during the military government.

Developmentalist Thought (1930-1985)

The 1930 Revolution brought about a significant realignment of political and economic power in Brazil. The country had finally overcome the exclusionary interests of the entrenched landholding elites that had made Brazil overly reliant on coffee exports.

Yet the incoming revolutionaries and the policymakers in the decades that followed were not preoccupied with inclusion and redistribution. They were concerned with the country’s backwardness and vulnerability, which they believed to be undeserved and unfitting with its destiny as a great power. Brazil’s adoption of policies to develop industrial know-how and to cohesively mobilize the country’s resources and their resilience over the years was a testament to the importance of the ideas that underpinned them.

After emerging in the private sector under the work of Roberto Simonsen,

Developmentalist thought evolved into two distinct currents: Nationalist and

Cosmopolitan. The paragraphs below elaborate on the two currents, identifying their main proponents and mapping the institutional vehicles through which these ideas took root and traveled to the energy policy scene.

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Developmentalism Originates with Simonsen in the Private Sector

Roberto Simonsen is considered the father of Developmentalism in Brazil. He initially championed the ideas among the São Paulo industrialist class during the 1930s and 1940s. As head of some of its most important industry associations, he had an influential perch from which to disseminate his ideas among its membership. Simonsen was the head of Centro das Indústrias do Estado de São Paulo (CIESP); Confederação

Industrial do Brasil (CIB, later to become Confederação Nacional da Indústria or CNI) and the Federação das Indústrias do Estado de São Paulo (FIESP). These positions also allowed him to influence the public sector as the industry representative to government councils including the Conselho Federal de Comércio Exterior and Conselho Nacional de Política Industrial e Comercial (Bielschowsky, 1988, pp.97-106) Though Simonsen died in 1948 at age 59, an iteration of his ideas would form the basis of President

Juscelino Kubitschek’s developmentalist government in the late 1950s.

In Simonsen’s view, industrialization was the solution to Brazil’s underdevelopment. State intervention was necessary because market forces were at times insufficient and even detrimental. In sectors where private sector was lacking, the state could step in, even indirectly through protectionism and sectoral planning to make up for it. It was crucial to channel resources as “a country’s industrial development depends, above all, on the establishment of basic industries, instituted, mostly, by steelmaking and by the large chemical industry” (Bielschowsky, 1988, pp.98-100).

In the public sector these ideas took on different connotations based on whether foreign capital was necessary. Cosmopolitan Developmentalist in contrast to the

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Nationalist current, believed foreign capital was desirable for long-term success. Yet both currents defended the establishment of a modern capitalist economy.

The Developmentalist Nationalists

The following subsection describes the thinking and ideas of the

Developmentalist Nationalists in Brazil. It first summarizes the ideological tenets to which this group subscribed. Then, it describes the main proponents and institutional vehicles through which initially Developmentalist Nationalist ideas were disseminated.

These included a group of technocrats working for the presidency, renowned economist

Celso Furtado and Positivists such as Julio A. Barbosa Carneiro and General Horta

Barbosa.

Tenets

The Nationalists considered that the rate and timing of capital accumulation in strategic sectors could not be left to the whims of foreign interests. Foreign capital had little to contribute as experience had demonstrated in its historical involvement in sectors such as transportation, electricity, oil, and mining; or in the production of basic industrial goods such as petrochemicals and steel (yet they made an exception for certain sectors such as the automobile industry) (Bielschowsky, 1988, p.152). Rather it was domestic capitalists who were called to control and direct capital accumulation. However, as the domestic capitalist sector was weak, it was understood to mean state capitalist. To this end, they favored greater state intervention through direct investment and industrial promotion policies within an all-encompassing economic planning strategy (i.e. indicative macro-planning).

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Furthermore, Nationalists favored subjecting monetary concerns to development goals. In this respect, they adopted the United Nations Economic Commission for Latin

America and the Caribbean (ECLAC or CEPAL in its Spanish abbreviation) diagnosis and treatment of inflation and its structuralist approach. In this approach, an understanding of an economy’s structural factors is required to determine how it adjusts and responds to developmental policies. These factors encompass both internal and external disequilibria of the productive structure of the developing country and its interactions and dependent relationship with the developed world. Based on this approach, the Prebisch–Singer hypothesis argued the price of primary commodities declined relative to the price of manufactured goods over the long-term, which caused the terms of trade of primary-product-based economies to deteriorate. This thesis formed the basis of economic dependency theory, which provided the conceptual basis to the import substitution industrialization policies adopted by many Latin American countries during the second half of the twentieth century.

Finally, Nationalists were also considerate of social issues such as unemployment, poverty, and generally speaking, of the Brazilian cultural backwardness and archaic institutional setup.

The Economic Advisory Group to the Presidency of the Republic

The Economic Advisory Group to the Presidency of the Republic established during Getúlio Vargas’ third presidency (1951-1954) was an important institutional vehicle for the dissemination of Nationalist Developmentalist ideas in Brazil. Informally referred to as the Catete Group (Grupo Catete), it was conceived as a permanent planning

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organ affiliated to the presidency and charged with studying and formulating projects addressing the country’s main economic needs through technical, rather than political, criteria. The Catete group, together with the Mixed Brazil-United States Commission

(Comissão Mista Brasil- Estados Unidos - CMBUE), is credited for articulating the country’s key nationwide economic development projects in the 1950s. Some of its members would later emerge as key figures in the National Development Bank (Banco

Nacional de Desenvolvimento Econômico-BNDE)14 (BNDES, A bank with a history and a future, 2012, p.19).

The Catete Group was led by the economist Rômulo Almeida, who had succeeded

Simonsen at the CNI, the private sector industry association. He was joined by Ignácio de Mourão Rangel, Cleantho de Paiva Leite, Jesus Soares Pereira, and Tomás Pompeu

Acióli Borges, who were recruited from the Public Administration Department

(Departamento de Administração Pública - DASP) (CPDOC Dicionário Histórico-

Biográfico Brasileiro-DHBB15). They were also members of the Economists Club (Clube dos Economistas), a cultural association founded by Celso Furtado and Americo Barbosa do Olivera that convened state technocrats and private sector agents and that published the Brazilian Economic Journal (Revista Econômica Brasileira). The journal was the

14 Although the Bank only came to be called ‘BNDES’ when ‘Social’ had been added to its abbreviated name, in 1982, this text uses the current acronym. 15 This dictionary is available online at: http://cpdoc.fgv.br/acervo/dhbb 111

principal vehicle for dissemination of CEPAL’s ideas in Brazil during 1955-1960

(Campos 2004, p.196. Bielschowsky, 1988, p.154).

Celso Furtado

Celso Furtado served as the head of the BNDES-CEPAL Group that operated at the BNDES from 1953 to 1956. From this position, Furtado emerged as the most visible proponent of CEPAL’s ideas. In 1958, he became a director at the BNDES and was asked to work on development issues in the Brazilian northeast. His work outlined a policy to address underdevelopment in the region and resulted in the establishment of the

Superintendency for Northeastern Development (Superintendência de Desenvolvimento do Nordeste –SUDENE (Celso Furtado 2010, Campos Depoimento, pp. 49-50). Furtado served as SUDENE’s first director. In 1962, he was asked to become the first Minister of

Planning at the recently created ministry under the presidency of João Goulart. During that time, and together with Santiago Dantas, he is credited for having developed the failed Three-Year Plan for Economic and Social Development (Plano Trienal de

Desenvolvimento Econômico e Social) that guided the administration’s economic policy

(CPDOC- DHBB).

Nationalist Developmentalist Ideas in the Energy Sector

Nationalist Developmentalist ideas in the energy sector can be traced back to the late 1930s. According to Bielschowsky (1988, p.152), Julio A. Barbosa Carneiro, General

Horta Barbosa, and Maceado Soares, were among its original followers. Carneiro and

Horta Barbosa were both part of the second Getúlio Vargas government, known as the

Estado Novo era. Carneiro, a career diplomat, served as president of the Federal Council

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for International Trade (Conselho Federal de Comércio Exterior - C.F.C.E), a committee bringing together government and industry representatives. General Horta Barbosa was second in command of the Armed Force’s Joint Chiefs of Staff (Estado-Maior-General das Forças Armadas). The two were also cousins and followers of Positivist thought in

Brazil (Martin, 1976, p.405). Barbosa Carneiro and General Horta Barbosa would later be instrumental in the establishment of the National Petroleum Council (Conselho Nacional do Petróleo-CNP) in 1938. The CNP is the first state institution that formally developed a policy for the petroleum sector in Brazil.

Barbosa Carneiro and General Horta Barbosa maneuvered within the state bureaucracy to move past political opposition and advance a nationalistic policy for the control of oil refining in Brazil. In the late 1940s, Brazil was dependent on the importation of oil products. Horta and Carneiro believed it was imperative for the country to eliminate that dependency as in times of economic crisis or war, foreign oil companies would be guided by profits and sacrifice the country’s supply security (Martins, 1976.

Wirth, 1985, pp.110-114). Horta Barbosa advocated for state control of the refining and distribution of oil within the country and sourcing the resulting profits to advance oil exploration. Their views were at odds with influential voices within government. For example, for General Juarez Távora, World War II had seen Brazilian and American interests converge to defend the civilized world (Martins, 1976, p. 434).

In inconspicuous meetings at the C.F.C.E, Carneiro and Horta concluded a state monopoly was the ideal solution. Yet aware that having no oil reserves placed the country at the mercy of foreign oil companies, they opted for a less radical option. The

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Brazilian state would instead hold the exclusive right to authorize, regulate, and control the importation, refining, transportation, distribution and consumption of petroleum.

Their option was packaged as a C.F.C.E recommendation and presented to President

Vargas for approval. Pursuant to his approval, the C.F.C.E also recommended the creation of the CNP to direct the state’s involvement. Horta was chosen to head the CNP and would do so until 1943 (Martins, 1976, pp.374-383). In the 1950s, however he would once emerge at the center of a successful and far-reaching campaign that claimed the “Oil is Ours!” (O petróleo é nosso!). His efforts were integral in attaining the establishment of the state’s monopoly and the creation of the national oil company, Petrobras, in 1953. An idea that emerged from the Catete Group.

The Catete Group was also responsible for the development of projects including

(Dias Leite, 2014, p. 103):

• National Electricity Plan (Plano Nacional de Eletrificação): A proposal for federal

planning of electricity expansion that was submitted to Congress in 1954 but not

approved.

• The National Electricity Company (Eletrobras): A proposal for the establishment of a

state-owned company to administer the National Electricity Plan also submitted to

Congress in 1954 but not approved.

• National Coal Plan (Plano Nacional do Carvão): A 1953 proposal to establish a fund

with taxes on electricity to finance coal use expansion, approved by Congress in

1954.

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• National Electricity Fund (Fundo Nacional de Eletrificação): Managed by BNDES

followings its creation.16

It is reported that the National Electricity Plan provided an initial listing of projects to the CMBUE for its evaluation as part of the Commission’s work in the electricity sector (BNDES, A bank with a history and a future, 2012, p.19).

The Cosmopolitan Developmentalists

The Cosmopolitan Developmentalist camp was active prior to 1950, yet it gained cohesiveness and visibility through the work of the Mixed Brazil-United States

Commission -CMBUE (1951/1953) and that of its main proponent, Columbia University

Ph.D. economist and diplomat, Roberto Campos.17 The subsections below provide a brief description of Cosmopolitan Developmentalist thinking through an examination of

Roberto Campos and his work at the Commission with respect to energy.

16 The criteria for resources management and disbursement were only set two years later in 1956 (Law No 2,944 of 1956). The resources were to be distributed as follows: 40% for the Union (i.e. federal); 50% for states and 10% for municipalities. The law entrusted the management of the fund to BNDES and conditioned disbursements to the presentation of electricity expansion plans by the Brazilian states. This set up provided incentives for the states to actively participate in the planning and expansion of the electricity sector and established the BNDES as the organ that would supervise such expansion. BNDES perform these functions until 1962, when they were transferred to Centrais Elétricas Brasileiras (Eletrobras) (Dias Leite, 2014, pp.101-102). 17 Roberto Campos was derisively nicknamed by the political left as “Bobby Fields” for his anti-statist positions. 115

Cosmopolitan Developmentalism ideas and Roberto Campos

Campos justified Developmentalism due to the existence of weak private initiative, the lack of a modern and functioning capital market to accumulate capital (and the state’s ability to do so through fiscal measures), and the state’s capacity to pursue investments with long-term view (Campos, 2004, p.169). He was influenced by CEPAL’s recipe for industrialization, favoring state intervention and planning as a solution to economic problems created by external imbalances (i.e. the deterioration of terms of trade). However, he did not embrace CEPAL’s structuralism or views towards inflation, considering it to be a monetary phenomenon, nor did he support “integral planning” (i.e. planning at a macroeconomic level). Instead, Campos was partial to sectoral planning in those sectors most likely to generate economic growth. Furthermore, in contrast to

Nationalists, Roberto Campos described his Developmentalism as liberal: “a nationalism of goals, internationalism of means and/ or the supra-nationalism of the market”

(Campos, 2004, p.168). His approach was mostly on display through the work of the

CMBUE.

Mixed Brazil-United States Commission (CMBEU)

The CMBEU was officially established in July of 1951 as an entity attached to the

Brazilian Ministry of Finance. Its origins can be traced to the aftermath of World War II.

In 1945, the U.S. had successfully approached the Brazilian government to procure radioactive and rare minerals such as monazite and thorium oxide via a three-year exclusive export contract. By 1948, both the Brazilian bureaucracy and the military in particular balked at contract renewal, upset the country had not been considered for

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reconstruction assistance or military aid despite having contributed to the war effort

(Brazilian Senate Inquiry Report on Nuclear Energy, 1982, pp.91-92). As a condition for contract extension, Brazilian president Eurico Gaspar Dutra (1946-1951) sought U.S. assistance in financing of infrastructure and industrial development. The U.S. responded by suggesting aid be institutionalized through the Point Four Program, a technical assistance program of the Truman presidency for developing countries (CPDOC-DHBB).

In September 1948, a Joint Brazil-United States Technical Commission was established to determine the factors that could catalyze or impede Brazil’s development.

The Commission was constituted under the leadership of John Abbink, Chairman of

McGraw-Hill International Corporation (Abbink Mission), and had its counterpart in

Otávio Gouveia de Bulhões, a liberal thinking technocrat in the Brazilian ministry of

Finance.18 Its final report outlined a development strategy centered on key sectors identified as potential bottlenecks for growth, among them energy. Roberto Campos had an indirect influence in the Commission, channeling his suggestion through San Tiago

Dantas, a member of the Mission’s trade section and former colleague of Campos at

Itamaraty, the Brazilian Ministry of Foreign Affairs (CPDOC-DHBB). Following the

Abbink Mission, the Brazilian government once again pressured the U.S. for financing assistance for development projects under the government of Getúlio Vargas (1951-

1954).

18 Other members of the Brazilian delegation included: Ari Federico Torres, Glycon de Paiva Teixeira, San Tiago Dantas and Rômulo Almeida. 117

Luciano Martin’s analysis of this period indicates pressure to obtain a “fair” compensation for the sale of radioactive material came from different spheres of the state bureaucracy, including the ministries of finance and foreign affairs, and was guided by non-nationalists and to some degree liberal economic thinkers such as João Neves da

Fontoura and Horácio Lafer. They mediated talks with U.S. officials and crafted policy memos and recommendations for Vargas containing the outlines of the financing request tied to specific investments in basic infrastructure projects in the transport and energy sectors (Martin, 1976, pp.495-494). Obtaining financing was a priority and trumped other policy considerations such as the development of autonomous technology. As explained by Emmanuel Adler (1985) in his study of Brazilian science and technology policy, obtaining financing became one of the main obstacles in advancing the developments of an autonomous technological capability in the nuclear fuel cycle for it relied on the sale of radioactive material without the requisite technology transfer.

The Brazilian delegation to the CMBUE was carefully staffed with both technocrats and businessmen appointed by President Vargas. Ari Federico Torres, former director of São Paulo’s Institute for Technological Research (Instituto de Pesquisas

Tecnológicas-IPT) and an executive member of the Banco do Brasil’s trade division

(CEXIM), was the delegation’s leader.19 Torres had participated in the negotiations with the U.S. for the financing of the country’s first steel manufacturing complex, the National

Steel Company (Companhia Siderúrgica Nacional-CSN) and had served as a CSN Vice-

19 The Brazilian equivalent of an export promotion and financing institution such as the U.S. Exim Bank. 118

president. Three other important members included Glycon de Paiva Teixeira, Lucas

Lopes, and Roberto Campos. Campos had been brought in as an economic advisor and was one of few U.S. trained economists. For their part, Paiva and Lopes had technical backgrounds. Paiva, a geologist, was a specialist in mining issues and had served as director of the National Department of Mineral Production (Departamento Nacional da

Produção Mineral).20 Lopes, a civil engineer and economist, had been one of the founders of Minas Gerais state utility (Centrais Elétricas de Minas Gerais- CEMIG). In preparation for the establishment of the CMBUE, Lopez has been asked by the Itamaraty to prepare a study on the country’s energy situation (BNDES, A bank with a history and a future, 2012, p.17).

Ideas, Energy and Sectoral Planning at CMBUE

The CMBEU was integral in identifying the infrastructure bottlenecks that were impeding Brazil’s modernization and growth. The CMBEU proposed sectoral planning to transform bottlenecks into growing points.21 In 1952, Campos wrote that: “[T]he Joint

Commission has been confined to a more realistic form of planning, which is the

20 In 1961, Paiva became a member of the Social Studies and Research Center (Instituto de Pesquisas e Estudos Sociais –IPÊS), a private think tank organized by the industrialist class in Rio de Janeiro and São Paulo to defend free Enterprise, fight socialist currents and particularly the policies of the Goulart government. Paiva served as IPÊS vice-president from 1961 to 1967. 21 As Bielschowsky points out, it is interesting that CMBUE’s economic ideas about bottlenecks and growth points is similar to 1961 Albert Hirschman’s strategy of unbalanced growth and the concepts of backward and forward linkages. This is why The Plan de Metas that Campos and Lopes developed for the Kubitschek government later in the decade is usually associated with Hirschman’s theory and concepts (Bielschowsky, 1988, p.134). 119

identification and selection of growth or germination points capable to effect investment spillovers” (Campos in Bielschowsky, 1988, p.134).

In addition to sectorial planning, Campos and Lopes believed the CMBEU’s most significant contribution was the introduction of planning techniques like modern cost- benefit analysis and the calculation of net economic return, which greatly improved the capacity of technocrats to devise, evaluate, and execute projects (Centro International

Celso Furtado-Memorias do Desenvolvimento 2010, pp. 12,43).

Campos acknowledged this influence in his ideas about the role of the state in economic planning and in effecting economic growth. According to Lucas Lopes, the

Commission’s work was influenced by Rostow’s economic take-off, among other theories of economic growth (Martin, 1976, p.504). According to the take-off theory, once bottlenecks to growth could be resolved and growing points instilled through the development of new industries, capitalist development would find its own dynamism and a path toward self-sustainable growth would be established. The CMBEU identified energy and transportation as bottlenecks in Brazil as reflected in the funds it allocated to finance projects in these two sectors; as illustrated in Figure 2, electricity and railways accounted for 70% of the allocated funds. According to Campos, the emphasis on electricity and railways originated from Lopes (Campos, 2004, p. 163).

Figure 2: Approved Financing per Sector for CMBUE Projects

Sector US$ % share of total Agriculture 23,000 6% 120

Other 4,125 1% Electricity 129,746 33% Railways 144,683 37% Basic 16,860 4% industries Ports and 66,957 17% coastal navigation Highways 6,661 2% Total 392,032 100%

Prior to joining the CMBEU, Lopes had been responsible for expansionary energy policies in the state of Minas Gerais in 1946 and in 1949. In 1946 Lopes had coordinated a publication titled Guidelines for the Industrial Development of Minas Gerais (Diretrizes para o desenvolvimento industrial de Minas Gerais) which laid the foundation for the development of an industrialization strategy in the state. The chapters on electricity and railways were authored by Lopes. At that time, efforts to develop industrial parks in the state had been hindered by the lack of basic infrastructure in these two sectors (Dulci,

1999, p. 76). Lopes’ diagnosis had been that the lack of energy sources to power industrial activity was one of the main obstacles to industrial development. In 1949,

Lopes had also coordinated the state’s Electrification Plan (Plano de Eletrificação de

Minas Gerais) which resulted in the creation of CEMIG. This plan would serve as a starting point to structure energy policy at the federal level during Lopes’ service as

Minister of Finance during the presidency of Juscelino Kubitschek (1956-1961). During that time, Lopes is also credited with developing that government’s Targets Plan (Plano de Metas), a document that outlined Developmentalist ideas on a grand scale (Diniz,

Revista do Arquivo Público Minero, pp.85-90). The same techniques would later guide

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project identification and execution at the BNDES and particularly during the military governments in the 1964 to 1985 period.

According to Lopes, the ideas he developed with regards to infrastructure bottlenecks to his state’s industrial development and the need for economic planning found a home at CMBUE:

“Among the first projects were those for the Salto Grande do Santo Antônio and

Itutinga. We were already working on these projects through Companhia

Energética de Minas Gerais S.A. [CEMIG – Minas Gerais State Energy

Company], so it was easy to adapt our presentation to the Commission’s

guidelines. We developed our projects with expenditure agendas, considering the

effects of inflation and establishing the cash flow that would be required to

implement the project, guaranteeing the sources of the funds. At a later stage, all

this came together as a planning strategy in Brazil, but at that time it did not

exist” (BNDES, A bank with a history and a future, 2012, p. 19)

Consolidation of Developmentalist Thought: The building of an institutional

apparatus and its incidence in energy policy

Having traced the origins and initial dissemination vehicles for Developmentalist thought into the Brazilian state institutional setup, this section concerns itself with the specific economic planning and energy institutions where the four Developmentalist ideas that composed the main proposition took root. These institutions, along with key

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policy entrepreneurs, became the main carriers of ideas to the energy policy arena in

1974.

The section describes the consolidation of the four Developmentalist ideas in the following institutions:

• The national development bank- BNDES;

• The national oil company- Petrobras;

• The national electricity company- Eletrobras;

• The Ministry of Energy and Mines- MME;

• The Ministry of Economic Planning; and

• The Applied Economic Research Institute- IPEA.

For each institution, the narrative provides context on the ethos guiding the institution’s design highlighting the role played by Developmentalist proponents and their ideas. Additionally, for the state-owned energy companies, the narrative examines the impact of those ideas with respect to their mission and the development of human capital, value added chains and science and technology.

With respect to the economic planning apparatus, the narrative focus on the

Applied Economic Research Institute and the role it played in the development of economic plans. It also highlights its role as an institutional builder through which it helped propagate Developmentalist ideas.

The section closes with a brief description of the economic plans designed by military governments, which reflected the sectoral planning favored by Cosmopolitan

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Developmentalist and the embedment of Developmentalist ideas in the economic policy discourse.

BNDES: A Tool for Instrumenting Developmentalism

Upon its creation in 1952, the BNDES became a key institutional tool for advancing economic modernization and industrialization based on Cosmopolitan

Developmentalist ideas. In addition to its role as a financing entity, the Bank became a repository of talent, knowledge, and ideas. As a result, it developed into a technical body capable of generating applied economic analysis and policy solutions that contributed to energy policies for the expansion of the energy sector.

Creating a highly capable institution

The CMBEU’s final report called for the creation of a national development bank to serve as the counterpart to the foreign credit lines for projects identified by the

Commission (Campos, 2004, pp.169-170). Based on this recommendation, on June 18,

1952, the Brazilian Congress passed Law 1,628 creating the BNDE (later to become the

BNDES) with an initial capital of CR$ 20 million (BNDES, A bank with a history and a future, 2012, p. 21).

From its foundation, BNDES was endowed with a legal structure and make-up that insulated it from political interference and provided it with the level of operational autonomy and technical competency. A drive for technical competency and a professional ethos emanated from the Bank’s leadership (Colby, 2013). Bank’s staffing policies and procedures were designed to follow technical competency as the deciding criteria for hiring personnel (Campos, 2004, pp.194; 255-256).

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BNDES was initially staffed with many of the professionals that had worked at the CMBEU. Members of initial board of directors included Cleantho de Paiva Leite, a member of Getúlio Vargas’ Economic Advisory Group and Guilherme Arinos, Getúlio

Vargas’ Chief of Staff. Lucas Lopes served as a member of the board and later as its president. Campos was tasked with organizing the Bank’s economic department and initially served as managing director of this department. After a brief interlude back in the diplomatic service, in 1955, Campos assumed the post of BNDES’ Director

Superintendent (i.e. general managing director). In 1958, Campos was appointed as

BNDES’ president.

Over the years, the BNDES attracted professionals from other technical institutions including CEPAL. Shortly after its establishment, in 1953, BNDES and

CEPAL entered into a technical cooperation agreement for the collection and analysis of macroeconomic data to guide economic planning (Centro International Celso Furtado-

Memorias do Desenvolvimento, 2010, pp.103-107). CEPAL professionals, including

Celso Furtado who would head the resulting BNDES-CEPAL Mixed Group (Grupo

Misto BNDES-Cepal), held training sessions on economic planning techniques that disseminated CEPAL’s ideas within the BNDES staff. According to Furtado:

“Shortly after, the BNDE-ECLA Mixed Group was created. The idea was to

become a consistent center dedicated to all-embracing research on Brazil. All

Latin-American countries were in the initial stages of industrialization. Structural

changes needed to be made. We conducted a study, which took 18 to 20 months to

complete and which was published by the BNDE: Projeções da Economia

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Brasileira [Projection on the Brazilian Economy]. It was the first study focused

on a collective projection on the Brazilian economy and which revealed the need

for more significant financing efforts than were originally imagined. The economy

was headed towards an industrial system, which required more coordinated

efforts. The importance of this study is that it gave rise to a development plan”

(BNDES, A bank with a history and a future, 2012, p.29).

The Bank also produced the initial studies that would later become the foundation of Jucelino Kubitschek’s Target Plans (Plano de Metas). At the time, Lucas

Lopes served as BNDES president and Campos as his second in command. Both Lucas and Campos are credited with developing the Plano de Metas. This Plan would help immortalize Jucelino Kubitschek’s presidency as the first great attempt to industrialize

Brazil at a rapid pace focusing on strategic sectors. One of the priority sectors was energy. 43.4% of the investment contemplated in the Plan was dedicated to energy projects, 23.7% allocated to the electricity sector, and the remaining 19.7% to other energy sources (BNDES, O Setor Elétrico).

BNDES in the energy sector

In its first decade (1952-1962), BNDES mostly supported transportation and energy projects. BNDES played an instrumental role in the expansion of the electricity sector, particularly in developing its installed capacity. During this time, energy projects absorbing 32% of its loan activity, helped expand the country’s installed capacity by

1,475.1 MW (25.7% of the 5,729.3 MW total). These included large infrastructure projects such as the Furnas, Paulo Afonso and Três Marias hydroelectric plants in the

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state of Minas Gerais (BNDES, O Setor Elétrico). From 1956 to 1962, the BNDES also oversaw the sector’s expansion from 1956 to 1962 when it managed the National

Electricity Fund (Fundo Nacional de Eletrificação).

BNDES’ initial investment priorities resulted from CMBUE recommendations and

centered on the correction of bottlenecks to growth. According to Campos:

“Decisions on investment priorities in the early BNDE phase were easy, and in a

certain fashion pre -determined. In light of the scarcity of transport and energy,

resulting in under-utilization of existing industrial capacity and high agricultural

losses, the natural course would be the improvement of the capital/product

relationship while achieving an anti-inflationary effect.

The CMBUE had formulated the following criteria for projects: a) they should be

directed toward the elimination of bottlenecks, seeking to create the basis for

economic growth; b) they should complement rather than substitute private

investment; c) they should be susceptible to reasonable expedient implementation;

and d) they should be financed via non-inflationary means.

This corresponded to what was commonly coined as the bottlenecks theory, which

guided BNDES activities during almost one decade” (Campos 2004: 257).

Following this initial period, BNDES’ investment priorities shifted to projects with economic growth spill-over potential; what Campos described as “germination” of growth points. While energy infrastructure projects continued to be funded, the Bank targeted basic and intermediate industrial activity in the late 1960s and throughout the

1970s. These included energy intensive industries such as petrochemicals and fertilizers

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and others which supported the energy sector through equipment and parts production

(BNDES, O Setor Elétrico).

Petrobras: the Making of an Energy Giant

The establishment of the national oil company Petróleo Brasileiro S.A. -

Petrobras, was the culmination of a national debate over the administration and organization of the oil sector with far reaching consequences. Nationalist

Developmentalist ideas rooted in selected segments of the state bureaucracy and in the military were imprinted in Petrobras’ institutional makeup and mission. From then on, the company became a carrier of ideas impacting the development of the oil and gas sector, particularly with regards to human capital, science and technology and sectoral value chains.

Creation

The national oil company, Petrobras, was created by Congress as a state-owned enterprise in 1953 and tasked with running the state’s monopoly over the oil sector and ensuring the country’s oil supply. Its establishment can be traced back to President Eurico

Dutra’s attempt to settle the debate over the control of the country’s oil resources. Given that the country lacked the financial and technical resources to support oil exploration, the issue of foreign participation in the sector remained an open question. In 1947, he sent Congress a proposed Petroleum Statute (Estatuto do Petróleo) proposing a middle ground, which was successful only in upsetting both supporters and opponents of a state monopoly. The bill did not get very far in Congress. By 1948, the bill had been shelved and President Dutra had opted instead to ask Congress for funds to construct refineries in

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Mataripe (Bahia) and Cubatão (São Paulo), the Santos-São Paulo pipeline and to acquire a national fleet of tankers (CPDOC- DHBB).

The controversy over private participation did not abate. Indeed, it was only fueled by debate within the military between Nationalist and Cosmopolitan factions.

According to John Wirth, the military’s involvement in oil politics dated back to the

1930s and emerged from its concern that “[i]n the new era of mechanized warfare, Brazil was totally vulnerable to a cut off of fuel oil, lubricants and gasoline; its industries would begin to shut down in sixty days” (Wirth, 1985, p. 112).

The security dimension to oil supply resulted in greater military involvement that in countries such as in Argentina, Mexico, and Venezuela and a belief that the state had to step in and lead. Indeed, the domestic private sector lacked the will, determination, and capital resources while foreign oil companies were unreliable, unwilling to invest large sums in exploration, and motivated by their interest to sell their products. These concerns explained the military’s involvement in the creation of the CNP in 1938 and that of its first President, General Horta Barbosa, who had espoused Nationalist positions at the

CNP until 1943. John Wirth’s analysis of this time period highlights the broad-based consensus in favor of state-led petroleum development that had carried through time and weathered numerous crisis and changes. Wirth emphasizes the consensus:

“[R]est upon assumptions and beliefs that are deeply held and were shaped

during the formative years [of the Brazilian oil industry]… [Consensus] centers

on the view that the oil industry is vital to national security, a concept that

regards petroleum-based energy as a key to economic growth and as a military

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and strategic resource… The final element in this consensus is that the state is

adequate to the task” (Wirth, 1985, p.110).

Horta Barbosa had been called upon by the Nationalist to lead the opposition to the Cosmopolitan faction, led by General Juarez Távora (Martins, 1976). General Távora who had assisted Dutra’s efforts with the Petroleum Statute and was a deputy in the

Army’s General Staff believed that the entry of foreign capital was necessary and urgent to develop a sector that was strategic to the country’s national security and to the newly embraced alliance with the United States (Wirth, 1985, p.110). His counterpart, General

Horta Barbosa, who had headed Nationalist opposition in the CNP and himself had been a deputy in the Army’s General Staff until 1938, believed the country could develop a refined products capacity (instead of importing them) through a monopoly and capture significant revenue to finance oil exploration in the country. Their disagreement, which began through a number of speeches at the Military Club evolved into a struggle for control of the Club itself in which the Cosmopolitan faction prevailed (Smallman, 2003, pp. 169,170). Yet, Horta Barbosa was effective in garnering support for his position including that of the Center for Studies and Defense of Petroleum and National Economy

(Centro de Estudos e Defesa do Petróleo e da Economia Nacional- CEDPEN). Horta and

CEPDEN’s Petroleum Campaign (Campanha do Petróleo) and rallying cry, “Oil is

Ours!” (O petróleo é nosso!), would fuel public mobilizations and bring political pressure to the Vargas government through 1953.

The 1950 presidential election of Getúlio Vargas had given the Nationalist movement a new impetus. In 1951 Vargas’ Economic Advisory Group headed by

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Romulo de Almeida and Jesus Soares Pereira, advanced a new bill (1,516, of 1951) establishing a state-controlled mixed-economy company but that did not mention a state monopoly. In 1952 however, the always politically savvy President Vargas yielded to

Nationalist criticism and supported an amendment in the lower chamber by Eusébio

Rocha expressly excluding others from engaging activities such as those of the state controlled company. On October 3, 1953, President Vargas signed Law 2,004 establishing Petrobras and a state monopoly over the entire oil sector value chain other than distribution. The CNP was tasked with supervising the monopoly and remained responsible for the security of national oil supply. Once established, however President

Vargas appointed Coronel Juracy Magalhães as Petrobras’ president. Magalhães, who had participated in the Tenentes movement in the 1920s and in the 1930 Revolution that had brought Vargas to power, hailed from the Cosmopolitan faction and was close to

General Távora (CPDOC, A questão, 1993, pp.95-102). Magalhães was but the first of many officers that would head Petrobras thereafter until 1979, none of which were nationalists (except for a brief period in 1962) (Smallman, 2003, pp. 172-173). General

Ernesto Geisel served as Petrobras’ president from November of 1969 to July of 1973.

Petrobras Mission

The Cosmopolitan faction of the military ensured Petrobras would serve to address the country’s dependency of foreign sources of oil. They were not opposed to the state’s control of natural resources nor to state-led development, but concerned that dependency made the country vulnerable to a crippling interruption in the supply of imported oil or a sudden impact to its balance of payments (Wirth, 1985, p.107.

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Smallman, 2003, pp. 87-88, 172). Indeed, in the preceding eight years imports had grown at an average annual rate of 21, 6%. Petrobras was called upon to secure supply by purchasing crude oil from abroad, while expanding the country’s refining capacity to obtain resources to increase domestic exploration including developing an infrastructure for transportation, storage, and distribution (IPEA- Morais, 2013, pp.51-52). The paradox in Petrobras’ grand plans was that Brazil’s oil sector policies and institutions were in place before any significant reserves were found (Wirth, 1985, p.111). Yet given Brazil’s landmass and considerably sedimentary basins, a belief that the country had to have oil reserves emerged (Smith, 1976, p.77).

Keenly aware that profits from refining would also provide the company with budgetary independence, Petrobras first turned its attention to expanding refining capacity. In the years that followed, Petrobras completed the expansion of the Mataripe and Cubatão refineries in 1960 and in 1961 completed the Duque de Caixas refinery in

Rio de Janeiro state (1958-1961). The construction of the Caixas refinery had been a project in the Targets Plan (Plano de Metas) of the Jucelino Kubitschek presidency (1956

–1961). Over the two decades following its establishment, five more refineries would be built, allowing Brazil to achieve refining self-sufficiency in the early 1970s (CPDOC, A questão, 1993, pp.156-161). Yet, as illustrated in Figure 3, during the 1954-1967, Brazil remained unable to increase local oil production to meet its petroleum needs. At best, domestic production met 40% of total oil demand as onshore exploration campaigns were mostly unsuccessful due to inadequate funding, lack of technical knowledge, and unpromising mainland geology (Smith, 1976, pp.76-77).

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In 1959, after six years of work mapping the Brazilian territory and conducting seismic and geological studies, Walter Link,22 a former Standard Oil geologist, issued a report, informally known as the Link Report, disproving the public sentiment that until then had guided the institutional development of the national oil industry. Brazil was not rich in oil, at least not in its onshore basins (CPDOC, A questão, 1993, p.117).

22 Walter Link had been hired in 1953 to help establish the technical corps at Petrobras. Along with him, Petrobras management hired a substantial number of North American geologist to support the company’s effort to establish a technical competency in the exploration of oil (CPDOC, A questão, 1993, pp.114-118). 133

Figure 3 Brazilian Oil Production Growth and Its Relative Share in Total Oil

Consumption23

Disappointing exploration results impacted Petrobras’ strategy. From 1967 onwards, the company shifted its focus to explore for oil in the continental shelf. The

Link Report had suggested a greater potential in this unchartered part of the Brazilian sedimentary basins. According to interviews with technical personnel, exploration in the continental shelf was difficult, requiring technical knowledge, human capital and equipment not available in Brazil (CPDOC, A questão, 1993). These were resources that

23 Developed by author with data extracted from CPDOC, A questão, 1993: 136-137. 134

could be procured abroad but at a high cost and with an uncertain return given the aleatory nature of oil exploration activities. The decision to explore in the continental shelf had to be taken based on criteria other than financial or commercial viability

(Philip, 1982, p.383). The company would go forward with the understanding that it was investing in building indigenous technical capabilities, developing human capital, and adapting technology to the local environment. Soon thereafter in 1968, Petrobras discovered limited reserves at the Guaricema field in the Segipe- Algoas basin. Given the low cost of oil in the international market, developing those reserves was uneconomical.

However, the company, then under the leadership of General Ernesto Geisel, would again move forward. The decision was explained by Shigeaki Ueki24 in a 1977 interview to the newspaper O Estado de São Paulo:

“Let me give an example: when we found oil in Guaricema, a small reserve, we

concluded at the time that the cost of production would be three or four times the

market price. I think around US$3.60 or 3.70 a barrel. The Council of

Administration of Petrobras asked the question: if oil could be imported at $1.20,

why spend $3.60 to produce oil in Guaricema?.... Geisel said that even if the oil

cost three times as much, we had to invest for two reasons: first, in order to learn

to produce oil in deep water for Guaricema was in 20 meters of water, and

because on land the possibilities are fewer, and secondly, because the world price

will tend to rise” (Philip, 1982, p.383-384).

24 Mr. Ueki was at the time was director of Petrobras’ commercial department. 135

Mr. Ueki reiterated this same reasoning in March 2015 further explaining that they expected the price of oil to rise given the inflationary pressures the world had experienced since the late 1960s and which eventually led the United Stated to sever the link between the dollar and gold in 1971 for a fiat currency system. According to Ueki, they suspected Middle East oil producers would increase the price of oil to counter the effect on their foreign currency reserves (Interview with Shigeaki Ueki, Rio de Janeiro,

March 2, 2015).

Petrobras’ exploration efforts however continued to languish as demand continued to grow. Between 1970 and 1972, Petrobras completed the basic mapping of the Brazilian continental shelf but only made two additional small discoveries in the

Caioba and Camorin fields in the Sergipe basin.25 Further exploration was impeded by available technology as the depth of prospection increased. As a result, the company was compelled to once again readjust its priorities. Under the leadership of the Geisel corporate presidency, the company refocused on the following two areas: specializing in the purchase of oil supply to refine it domestically and exploring and producing foreign oil reserves (Philip, 1982, p. 227-242, 368-400). To this end, in 1972, Petrobras created

Petrobras International (or Braspetro), a subsidiary which entered into exploration and

25 The Brazilian Continental Margin Recognition Project (Projeto de Reconhecimento da Margem Continental Brasileira or REMAC) was a partnership among various state organizations including the Departamento Nacional da Produção Mineral or DNPM, the Companhia de Pesquisa de Recursos Minerais or CPRM, the Diretoria de Hidrografia e Navegação. The project also obtained assistance from the Conselho Nacional de Desenvolvimento Científico e Tecnológico or CNPq. 136

production contracts in Iraq, Iran, Algeria, and Colombia (CPDOC, A questão, 1993, p.127). While Braspetro’s activities would not necessarily mitigate Brazil’s dependency, they would allow a measure of control over supply. In addition, they would allow

Petrobras to continue acquiring sectoral know-how including technical, commercial, and contracting expertise (D ‘Araujo, 1997, pp. 235-246).

This strategic shift was criticized. Some, including the Minister of Energy and

Mines at the time, Antonio Dias Leite Jr., argued Petrobras was sacrificing oil production for profitability and in doing so, relegating its mission to attain self-sufficiency. The rivalry between Mr. Dias Leite and General Geisel is well documented (Dias Leite, 2014, pp.166-176). While Petrobras was formally under the Ministry’s authority and purview, in reality General Geisel dealt directly with the office of the Presidency. Neither the independence with which Geisel managed Petrobras’ affairs, nor his refusal to allow the

Ministry to opine or to be consulted on issues related to the petroleum sector, sat well with the Minister. For example, Mr. Dias Leite’s 1970 proposal to increase exploration efforts through risk contracts was fiercely opposed by General Geisel, his brother

Orlando Geisel, who at the time was the Minister of the Army; General Araken de

Oliveira, the president of the CNP, and General João Figueiredo, the head of the president's military staff; and ultimately was rejected (Dias Leite, 2014, p.173-177).

Geisel believed Petrobras had to be run as a private company seeking to be efficient, competitive, and importantly, profitable. With this in mind, the company needed to use its resources wisely and to develop a technical competency, even if it had to do so abroad (D ‘Araujo, 1997, p.235-246). This pragmatic approach suggested he did

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not blindly believe in attaining self-sufficiency. Indeed, in his last speech at Petrobras he indicated the following:

“... Oil self-sufficiency, however desirable as it may be, is not the basic mission of

the company and [something] that should be achieved at any price. This is

because [self-sufficiency] is a function of factors and random circumstances,

independent of our will; because it may require too onerous costs; because it is

difficult to obtain, harder still to maintain it, given the explosive expansion of the

consumer market, on the one hand, and the inexorable depletion of reserves on

the other; and finally, because the possibilities and conveniences of supply

through the exchange with other countries should not be excluded” (Tamer in

IPEA-Morais, 2013: fn 15 at p. 22).

The 1973 oil crisis during the Geisel presidency would provide a rude awakening that supply “through the exchange with other countries” was no longer a cost-effective solution. In fact, in reaction to the crisis Petrobras would again turn to self-sufficiency as its guiding mission (IPEA-Morais, 2013, p.24).

Investing in Human Capital and Technology Development

At its foundation, Petrobras’ most crucial limitation was the lack of technical know-how and personnel in geology, engineering, and chemistry (i.e. petroleum geologist; geophysicist; petroleum engineers; chemists). While expanding its reach under the monopoly, the company also sought to correct these deficiencies. However, this concern was not new for Brazil. Indeed, in the late 1940s, the CNP had identified it as a need of the oil industry and in 1952 established an umbrella institution, the Technical

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Improvement Supervision Sector (Setor de Supervisão do Aperfeiçoamento Técnico) and a Personnel Training Center (Centro de Aperfeiçoamento de Pessoal or CENAP). Upon

Petrobras’ establishment in 1953, the CENAP was renamed the Petroleum Research and

Training Center (Centro de Aperfeiçoamento e Pesquisas em Petróleo) with a mission to serve as an instruction center providing funding for training in laboratories and postgraduate programs abroad. It also had a very small research department and provided training courses in refining, geology, perforation and production, and equipment maintenance, among others. From 1955 to 1964, 676 Petrobras employees concluded such courses domestically while 138 received instruction abroad (IPEA-Morais, 2013, p.75). CENAP’s personnel (67 employees, with 18 having advanced postgraduate degrees) would become the nucleus of Petrobras’ reputed research and development center.

Founded in 1966, the Leopoldo Americo Miguêz de Mello Research and

Development Center (Centro de Pesquisas e Desenvolvimento Leopoldo Americo Miguêz de Mello–CENPES) was tasked with the promotion of Petrobras’ science and technology research. Specifically, it was tasked with consolidating all research and technology development initiatives in exploration, production, and refining, building a repository of studies and coordinating all work related to patents. 26 The idea for the CENPES arose

26 Petrobras’ Management Council approved the creation of CENPES in 1963, but only until 1966 it formally commenced operations. In 1975, the Center was renamed after Leopoldo Américo Miguez de Mello to honor an old professor of the Federal University of Rio de Janeiro who had been a member of the CNP, 139

from a 1963 report commissioned from two Russian geologists, who recommended the establishment of a body that would provide instruction both at technical and professional levels and enhance international know-how exchanges by partnering with more technologically advanced institutions. They suggested it be modeled after India’s Science and Technology Petroleum Center (Agencia Petrobras-60 years).

During its first years, CENPES focused on incremental innovation through the adaptation of foreign technology. This approach made sense within the import substitution model followed by Brazil at the time, which favored purchase of tested, ready-to-use technology to be quickly deployed internally (i.e. turnkey equipment) and facilitated learning from its operation and decoding its technology to both replicate and adapt it to local conditions (IPEA-Morais, 2013, p. 61).

At the outset, CENPES’ efforts were channeled towards oil refining processes and equipment (Randall, 1993, p.242). Its focus would shift in response to the 1973 crisis and reflect a decisive move towards oil exploration and production in the continental shelf starting in early 1974. As a result, CENPES developed organic infrastructure for offshore exploration including platforms and drilling and production equipment. Its efforts would be enhanced through the creation of a Basic Engineering Department in 1976. With it,

CENPES acquired the capacity to put knowledge into practice with designs and

strongly promoted science and technology research within Petrobras and advocated for CENPES establishment. Mr. Mello served as director of Petrobras R&D activities from 1964 to 1967 and 1969 to 1975. 140

drawings, specifications, construction, assembly, and operating instructions to serve or assist in the production process.

In 1979, with the company’s shift towards exploration in the continental shelf,

CENPES created an exclusive Exploration and Production Research Department

(Superintendência de Pesquisas de Exploração e Produção). In 1983, with deep water exploration activities beyond 400m demanding technology not available in the international market, CENPES established a dedicated offshore basic engineering department which developed novel solutions to platform and drilling activities.

Facilitating the development of a value chain

Developing oil exploration, production, and refining capabilities required the enhancement of technical capacity not only within Petrobras but also in the Brazilian oil services, engineering and equipment, and parts industries. However, at the time of

Petrobras’ establishment, the existing engineering firms and equipment industry in Brazil lacked technically skilled labor and were unable to design and produce sophisticated equipment. To resolve this situation, Petrobras set out to assist these industries to strengthen their production techniques and achieve better quality standards. Petrobras’ actions included the following (Hastenreiter, 2004, p.4):

• Facilitating technology transfer, including through the participation of Brazilian

engineering and manufacturing firms in joint projects with foreign firms;

• Facilitating the creation of an equipment manufacturer association (ABDIB), which

was initially tasked with promoting quality control standards and procedures within

the industry;

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• Establishing through its Materials Service (SERMAT), a pre-qualification system for

suppliers which in addition to evaluating their financial and managerial capacity,

provided them with guidance and technical assistance to support the development of a

technological capacity.

In late 1960s, as a result of this three-pronged approach, the national content of equipment and parts used in the development of refining equipment built during that decade reached 80% (Hastenreiter, 2004, p. 4). In the decades that followed, Petrobras through CENPES intensified its efforts to enhance the technical and technological capabilities of the Brazilian industries serving the oil sector, particularly those related to equipment used in offshore exploration and production (CPDOC, A questão, 1993, pp.124-126). As illustrated in Figure 4, by 1979, Petrobras locally sourced over 80% of the equipment and parts that it required.

Figure 4 Petrobras Equipment and Parts Purchases 1955-199727

27 Sourced from Relatório de Competitividade da Indústria Nacional de Petróleo – ANP/PUC-RJ, 1999 in Hastenreiter, 2004, p.5. 142

Eletrobras: Planning the Expansion of Electricity Supply

Nationalist Developmentalist ideas were also behind the establishment of

Eletrobras. Tasked with planning and executing the country’s electricity supply expansion, the electric holding company became the most important state organ for planning and investment channeling in the electricity sector. As a carrier of these ideas,

Eletrobras worked to develop human capital and autonomous technology capabilities beyond the confines of its institutional mandate and into the electricity sector as whole, including expanding into the parts and equipment heavy industry servicing the sector.

Creation

The establishment of Eletrobras in 1963 consolidated the federal government’s leadership role in the expansion of the electricity sector. However, as originally proposed

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it wasn’t intended to exist as a monopoly or push out private investment from the sector.

Indeed, as proposed to Congress in 1954, Eletrobras would be responsible for planning and overseeing the development of the Brazilian electricity sector and spurring the development of a domestic value chain through the creation of subsidiaries with a capacity to produce materials and equipment for the sector (Goncalves JR in Pinto, 2012, p. 17). The rationale behind this ambitious objective was articulated by Jesus Soares

Pereira, one of the Catete Group members, as follows:

“The essential thing was that the country would not be compelled to import all the

materials that would be needed to implement the energy program. Also, we

thought of the utmost importance that Brazil acquired the qualified labor in this

sector by assimilation of foreign technology” (Lima in Miranda Barreto, 2010, p.

24).

A number of conflicting interests delayed those plans. Foreign utilities that had served the São Paulo and Rio de Janeiro urban centers feared they would be nationalized.

Utilities at the state-level feared the concentration of power, particularly with regard to financial resources. Finally, the BNDES, had been until that time entrusted with the management and financing of the sector’s expansion and desired to maintain a voice

(Pinto, 2012, p. 17). After numerous iterations and amendments over the years, including removing its capacity to develop equipment and material production capacity, the

Eletrobras bill was passed through Law 3.890-A of April 1961. At its establishment on

June 11, 1962, during the Presidency of João Goulart (September 1961-April 1964), the state-owned holding company would encompass the FURNAS hydroelectric plant

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(Central Elétrica de FURNAS) in Rio de Janeiro, the San Francisco hydroelectric company (Companhia Hidro Elétrica do São Francisco- CHESF), the Vale do Paraíba hydroelectric company (Companhia Hidroelétrica do Vale do Paraíba – Chevap), and the Charqueadas thermal plant (Termoelétrica de Charqueadas S. A. –Termochar) and minority interests in public utilities at the state level.

Planning

Eletrobras was mainly entrusted with planning the expansion of the electricity sector to enhance electricity supply. Planning until that point had been performed irregularly at the state level. Eletrobras was also tasked with promoting studies and projects, building and operating power plants, and channeling investment into development of transmission lines and substations. To successfully expand the electricity supply, Eletrobras was required to connect the different generation and transmission systems operating in the country, including bringing the interconnected system into a single frequency. Up to that point, the regulatory framework for the electricity system allowed two frequencies 50 and 60 hertz (Pinto, 2012, p. 19-20).

The convergence into the 60-hertz frequency had been recommended by

Canambra, a consortium of consulting companies that in 1962 evaluated the country’s hydroelectricity potential under the auspices of a World Bank technical cooperation. The

Canambra final report was approved in 1967. In that year, Eletrobras was asked to coordinate the investment program outlined in the Canambra report which proposed the construction of hydroelectric generation projects, mostly for the southeast region. A year later, the Word Bank requested Eletrobras review and update the Canambra studies for

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regional electricity expansion in the southeast region. To that end, Eletrobras convened a working group bringing technicians from FURNAS, state companies such as CEMIG,

IPEA, and the Ministry of Planning, resulting in a 1969 report titled Power Market Study

& Forecast- South Central Brazil (Pinto, 2012, p. 20).

As Brazil’s rate of economic growth increased beyond the projections included in the 1969 electricity demand outlook, Eletrobras decided to undertake a new demand study by again convening technicians from other electricity companies and government planning organs. The working group issued a report in 1972, titled Review of the Energy

Balance 1972-1985 for the South-Central Region of Brazil (Revisão do Balanço

Energético 1972-1985 da região Sudeste do Brasil).28 By 1974 however, once again electricity growth rates had surpassed projections. Eletrobras developed the 1990

Expansion Plan for the South and Southeast Regions 1990 (Plano de Expansão para as

Regiões Sul e Sudeste 1990 or Plano 90). The Plano 90 was the first comprehensive global planning study seeking to develop electricity demand projections for all the interconnected systems covering a 15-year period. As with preceding expansion studies, it was undertaken through a coordinated effort between Eletrobras and the planning divisions of other electricity companies and federal planning organs, such as IPEA. The plan was considered ambitious. It assumed the country’s economy would grow at a 10% rate between 1974 and 1979 and 8% from 1980 to 1990, while electricity consumption

28 RBE-72. See also Pinto, 2012. 146

was forecasted to increase at a rate above 12% between 1975 and 1980 and to decrease to

10% between 1980 and 1990 (Pinto, 2012, pp. 20-26).

To meet expected demand, the Plano 90 called for the development of new generation plants. Among these projects were the Tucuruí Dam in the north; the

Itaparica, Sobradinho and Paulo Afonso IV dams in the northeast; the Itumbiara,

Emborcação and Porto Primavera dams in the southeast; and the Salto Santiago, Foz do

Areia and Ilha Grande dams in the south of the country. The Plano 90 also called for the development of a nuclear plant in Angra Do Reis in Rio de Janeiro (Centro da Memória da Eletricidade no Brasil). According to historical records kept by the CPDOC, including correspondence between the president of Eletrobras, the MME, and the office of the

Presidency, the demand projections included in the Plano 90 would later serve to justify the Geisel administration’s approval of two additional nuclear plants in Angra dos Reis

(CPDOC, Paulo Noguera Bastista personal archive PNB pn n 1974.07.00, pp. 90-112).

Facilitating the Development of a Value Chain

Eletrobras also played an important role in the development of investment plans for the electricity sector. In the late 1960s, Eletrobras started to collect information from its concessionaries and other development agencies with respect to investment plans for electricity expansion and to develop the Multiannual Budget for the Electricity Sector

(Orçamento Plurianual do Setor de Energia Elétrica or OPE). The OPE became an important investment planning and programing tool allowing Eletrobras to select the investment projects to which technical resources would be devoted. Importantly, it also permitted Eletrobras to collect information on the equipment and parts necessary for the

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expansion of the country’s generation capacity. Eletrobras played a coordination role by submitting collected information to manufacturing firms in the heavy equipment industry resulting in better planning and coordination in the electricity sector’s value chain.

While Eletrobras was not mandated to develop industrial capabilities to serve the infrastructure needs of the sector, it sought to increase the capacity of the Brazilian heavy equipment industry to produce equipment and parts and, therefore, increase the degree of local content in the electricity infrastructure being developed. During the 1974 to 1979 period, Eletrobras held seminars and workshops with equipment and parts manufacturers to discuss strategies for the local industry to better serve the rising demand. It also developed planning studies with regards to future industrial equipment needs that would serve as guide for local industry expansion plans. Finally, the state holding also developed methods and a set of criteria for quality improvement of locally produced equipment and parts with the idea to make Brazilian goods as competitive as imported ones. During the same period, Eletrobras and its subsidiaries increased the level of local content on their equipment and parts purchases from 64% to 71%.

Pursuing Technological Development

Starting in 1971, the Ministry of Mines under Antônio Dias Leite pursued a policy of establishing technology research centers with the objective of attaining an autonomous capacity for technology development (Dias Leite, 2014). This is reflected in the establishment in 1974 of Eletrobras’ Electricity Research Center (Centro de Pesquisas de

Energia Elétrica – CEPEL). CEPEL was created as a nonprofit organization ascribed to

Eletrobras and dependent on it for funding. In addition to promoting human capital

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development through in-house training programs and cooperation with universities,

CEPEL provided scientific and technological research and development support for electricity generation, transmission, and distribution companies as well as manufacturers of equipment and parts.

A Ministry to Oversee Mining and Energy

The idea of establishing an organ within the state’s administration to oversee mining and energy issues dated back to 1941 when technicians from the National

Department of Mineral Production (Departamento Nacional da Produção Mineral or

DNMP) suggested the creation of a Mining, Metallurgy and Energy Institute or Ministry, which would be composed of two departments, petroleum and water and energy. Two years later, in 1943, another proposal came from Army Colonel Bernardino C. de Mattos

Netto, a military engineer and a member of the National Council of Mines and

Metallurgy (Conselho Nacional de Minas e Metalurgia) who suggested the creation of a ministry of mines and energy that would bring into its institutional structure a diverse range of energy and mining related public entities including the National Department of

Industrialization (Departamento Nacional de Industrialização), the National Department of Fuels (Departamento Nacional de Combustíveis), the National Department of Water and Energy (Departamento Nacional de Águas e Energia), the Technical University

(Universidade Técnica, later to become Escola de Minas de Ouro Preto) and the National

Institute of Gemstones (Instituto Nacional de Pedras Preciosas) (Corrêa, 2007).

Ten years later the proposal to create a ministerial level institution resurfaced.

This time under the administrative reform proposed by the third Vargas administration in

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1953, which proposed the creation of three new ministries including industry and commerce, social affairs, and mines and energy. However, it was only during Juscelino

Kubitschek’s administration, and as a result of the Plano de Metas implementation, that the studies to structure the new ministry were concluded. The studies defined the

Ministry of Mines and Energy as an organ for the study and execution of economic and public administration policy related to mineral, metallurgic and energy production

(Corrêa, 2007, p. 229).

The Brazilian Ministry of Mines and Energy (MME) was formally established with the enactment of Law No 3,782 of July 22, 1960, as the ministerial organ responsible for mining and energy matters including policy design and implementation for these sectors. Issues related to the metallurgical sector were relocated to the nascent

Ministry of Industry and Commerce. The basic structure of the MME was established in

March of 1961 incorporating to it a plethora of state institutions including the CNP, the

National Council of Water and Electricity (Conselho Nacional de Águas e Energia

Elétrica or CNAEE); the National Council of Mines and Metallurgy; the National

Department of Mineral Production (Departamento Nacional da Produção Mineral or

DNMP; Commission for Strategic Materials Export (Comissão de Exportação de

Materiais Estratégicos; formerly linked to the foreign affairs ministry – Itamaraty).

Thereafter and upon their creation the MME was also given jurisdiction over Petrobras, the National Commission for Nuclear Energy (Comissão Nacional de Energia Nuclear),

Executive Commission for National Coal Plan (Comissão Nacional do Plano do Carvão) and CHESF. In 1965, a year after the start of the military governments, the final structure

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of the MME was set via decree. In addition to the entities already under its purview,

MME was mandated to exercise regulatory and supervisory authority over Eletrobras.

From Council to Ministry: Building a Formal Economic Planning Apparatus

The Development Council (Conselho de Desenvolvimento), created in 1956 under the presidency of Jucelino Kubitschek was the first formal planning institution created in

Brazil. Yet, the Brazilian government had experience with various economic plans in the preceding decade, but without a formal institutional structure. These included the Works and Equipment Plan (Plano de Obras e Equipamentos, 1944 to 1948) and the Health,

Food, Transportation, and Energy Plan (Plano Saúde, Alimentação, Transporte e

Energia, 1950 to 1954). Both plans had resulted from U.S. technical commissions which had conducted studies on Brazilian economic development issues and provided economic diagnostics and opinions on measures to be implemented.29

The Development Council was tasked with coordinating and planning economic policy. In fact, the Council was responsible for overseen the execution of Kubitschek’s

Plano de Metas. At the outset, the Council was headed by Lucas Lopes, who when appointed as Minister of Finance, ceded the post to Roberto Campos. In 1962, when the

Ministry of Planning was formally created, the functions entrusted to the Development

Council were transferred to the nascent Ministry. While the Development Council remained in existence, it was subordinated to the Ministry. In 1964, Roberto Campos

29 The technical assistance was conducted in 1942, Mission Taub; 1943, Mission Cook; and 1948, Mission Abbink. Centro International Celso Furtado, As Origens do BNDE, 2010, p.13. 151

was invited by the Government of Marshal Humberto de Alencar Castelo Branco, the first president during the military rule (April 1964-March 1967), to serve as minister of planning. In the same year, the attributions of the Ministry were expanded to include economic coordination and in 1965, a consultative body attached to the Ministry known as the Planning Consultative Council (Conselho Consultivo do Planejamento) was created.

Instituto de Pesquisa Econômica Aplicada (IPEA)

As the BNDES, the Applied Economic Research Institute (Instituto de Pesquisa

Econômica Aplicada or IPEA) is a child of Roberto Campos and his Cosmopolitan

Developmentalist thought. Under the tutelage of João Paulo dos Reis Velloso, a disciple of Campos, IPEA became a premier economic planning organ providing military government policymakers with applied economic research. Conceived as a Think Tank,

IPEA was tasked with thinking, formulating, and planning for the long-term. Through its analysis, studies, outlooks, and recommendations, the Research Center infused

Cosmopolitan Developmentalist ideas into policy circles and actual government sanctioned development plans. As an institutional builder, IPEA instilled ideas in other institutions that played a key role in the development of a autonomous technological capacity.

Creation

IPEA was created in 1964. According to João Paulo dos Reis Velloso, IPEA’s founder and first president, it was conceived by Roberto Campos who sought to create a pluralistic Think Tank dedicated to long-term economic planning. In his words:

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“[T]he idea was to establish a government thinking organ located outside the

administration because within the administration there were already groups of

sectorial planning. We wanted IPEA to develop applied economic research, i.e.,

policy-oriented, and to help the government formulate planning within a strategic

vision for the medium and long term” (D ‘Araujo, 2005, p.21).

Velloso has described how he became involved with IPEA in his books and numerous articles. Velloso was a graduate student at Yale pursuant to a U.S. technical cooperation grant for Brazilian government employees to attend American universities.

There he obtained a master’s degree in economics and worked closely with Yale’s

Economic Growth Center. Prior to his arrival in Yale, Velloso had taken a preparatory course at the Getúlio Vargas Foundation’s Center for the Development of Economists

(Centro de Aperfeiçoamento de Economistas da Fundação Getúlio Vargas- CAE).30

Mario Enrique Simonsen was among his instructors (Alberti- CPDOC, Mario Enrique

Simonen, 2002:87). Simonsen and Velloso would later serve as ministers of finance and planning, respectively, during the Geisel administration. During his time at New Haven,

Velloso briefly met Roberto Campos, who was serving as ambassador of Brazil to the

U.S. and had been invited to give a lecture at Yale.

In May 1964, Velloso returned home to visit, intending to return to Yale to continue his Ph.D. degree. There he was contacted by Campos, who was serving as

Minister of Planning, and persuaded to stay and assist in the creation of the Think Tank

30 CAE is the precursor of the Escola Brasileira de Economia e Finanças at the Fundação Getúlio Vargas. 153

that would evolve into the IPEA (D ‘Araujo, 2005, p.22). IPEA was initially created to assist the Ministry of Planning and the federal government with the formulation of economic policy through research, macroeconomic projections, and sectorial forecast. Its principal function was to conduct research and studies on the Brazilian economy and its society. In 1965, IPEA was linked to the Planning Consultative Council (Conselho

Consultivo do Planejamento) at the Ministry of Planning. In 1967, after an institutional reorganization, IPEA became a public federal foundation attached to the Ministry of

Planning. Today IPEA’s, mandate is to provide technical and institutional support to government actions, enabling the formulation and reformulation of public policies and

Brazilian development programs (IPEA website).

An Island of Technical Competency

Campos insisted IPEA’s personnel selection had to be strictly technical and to that end, IPEA was authorized to directly hire without submitting to public administration procedures. To attract and retain talent, the Think Tank paid relatively high salaries.

Velloso highlighted how non-political conditions and academic autonomy allowed IPEA to recruit an elite team:

“For an institution with such profile, founded to research and produce, and

seeking to plan the country’s economic and social development, the team was

everything. Fortunately, we managed to gather a group of economists, economic

engineers and social experts covering different areas, including trade, industry,

agriculture, energy, transport, human resources, health, sanitation and regional

development. They were innovative minds such that, especially from 1966

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onwards, sectoral programs were often devised at IPEA by teams composed of

IPEA technicians and the ministry concerned (D ‘Araujo, 2005, p.23).

Campos had also asked IPEA to hire two foreign consultants at its outset: Paul

Rosenstein-Rodan, known for his thesis of the “Big Push” and Benjamin Higgins, author of a celebrated development book in the 1960s titled “Economic development: principles, problems and policies.” In addition, IPEA also had access to a group of professors from the University of Berkeley through a USAID cooperation program that included Albert

Fishlow, known for his work on development economics and who later became a

Brazilianist; William Ellis, a well-known professor in the area of monetary policy; and

Samuel Morley and Joel Bergsman (D ‘Araujo, 2005, pp. 50-52). Albert Fishlow in particular over the years helped secure opportunities for more than 100 Brazilians to attend graduate programs and obtain PhDs in universities such as Berkeley and Stanford.

These two institutions would bring together many of the professionals that would make up the government after 1985 (D ‘Araujo, 2005, p. 263-278).

In 1966, IPEA created the Training Center for Economic and Social Development

(Centro de Treinamento para o Desenvolvimento Econômico e Social or CENDEC). The

CENDEC’s objective was to provide training and education to personnel from the general secretariats at the federal ministries and the planning secretariats at the state level. It was also tasked with the management of an advanced education program dedicated to sending economists to foreign universities to obtain doctoral degrees (D ‘Araujo, 2005, p. 26).

The organizational structure of IPEA ultimately reflected the pursuit of two objectives: production of actionable policy oriented research and support in the

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formulation of economic planning for the medium and long term. In the late 1960s,

IPEA was divided into two separate organizations: The Planning Institute (Instituto de

Planejamento or IPLAN) and the Research Institute (Instituto de Pesquisa or INPES).

The IPLAN, headquartered in Brasilia and made up of professionals working in sectoral groups, was placed in charge of the development and implementation of government plans and sectoral policies. The INPES, which remained in Rio de Janeiro, was tasked with the development of macroeconomic and comprehensive sectoral research and studies.

Walmir Barbosa’s analysis of IPEA’s historical trajectory (2011) indicates IPEA served as a diffuser of liberal economic ideas within the state bureaucracy and advanced educational institutions such as the Postgraduate School of Economics at the Getúlio

Vargas Foundation (Escola Brasileira de Economia e Finanças at the Fundação Getúlio

Vargas or EPGE-FGV). Barbosa argues that IPEA-INPES adopted liberal economic thought in light of the influence of Roberto Campos, its staff education in the U.S. and its work with the Berkeley Professors.

According to Barbosa, before the creation of the INPES, CEPAL’s economic thought had dominated among Brazilian economists. With the consolidation of INPES and the creation of postgraduate program in economics, the influence of CEPAL’s ideas among Brazilian economist declined drastically (Barbosa, 2011, p. 18-21).

INPES helped disseminate liberal economic ideas through its participation with the National Program of Economic Research (Programa Nacional de Pesquisa

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Econômica or PNPE).31 The PNPE financed the creation of postgraduate programs in economics such as the EPGE-FGV and the programs at the Pontifical Catholic University of Rio de Janeiro (Pontifícia Universidade Católica do Rio de Janeiro,) the State

University of Campinas (Universidade Estadual de Campinas or UNICAMP) and the

Federal University of Rio de Janeiro (Universidade Federal do Rio de Janeiro or UFRJ).

Institutional builder

IPEA also played an important institutional builder role. In 1965, IPEA created the Financing Fund for Project and Program Studies (Fundo de Financiamento de

Estudos de Projetos e Programas). According to Velloso, the idea for this institution came from Roberto Campos who had stated:

“[W]e are going to need an entity that finances the development of projects for

the public and private sector so that we can obtain financing from foreign

sources” (D ‘Araujo, 2005, pp. 29-30).

In 1967, the fund would be renamed the Studies and Projects Financer

(Financiadora de Estudos e Projetos or FINEP) and be transferred to the BNDES. There under the management of José Pelúcio Ferreira, FINEP financed the development of science and technology postgraduate programs. Nowadays, FINEP is attached to the

Ministry of Science, Technology, and Innovation (Ministério da Ciência, Tecnologia e

Inovação or MCTI) and is tasked with the promotion and financing of innovation and

31 INPES’ managing director served as PNPE executive secretary. 157

scientific research in private companies, universities, and private and public technology research institutes and centers.

FINEP’s financing has had a role in the development of:

• Embraer’s Tucano aircraft, which paved the way for this company’s airplanes to

become an important export;

• Major human resource programs at home and abroad and projects for the Brazilian

Agricultural Research Corporation (Empresa Brasileira de Pesquisa Agropecuária

orEMBRAPA) with universities, which were essential for the technological

development of the Brazilian agricultural system, making it one of the most

competitive in the world;

• Research projects and training of human resources at Petrobras, in partnership with

universities, which contributed to creating and enhancing deep-water oil exploration

technologies.

Economic Development Plans (1964-1979)

Economic policymaking during Brazil’s twenty-one-year military dictatorship was undertaken based on strategic and sectorial planning. With the exception of the regime’s first economic plan, development plans were devised and articulated based on research developed at IPEA. The sequential description of these plans below focuses on its main features but also on their impact on the Geisel administration’s Second

Development Plan.

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The Government Economic Action Program

At IPEA, Roberto Campos asked Velloso to first review the Government

Economic Action Program (Programa de Ação Econômica do Governo or PAEG). The

PAEG’s macroeconomic chapter had been written by Mario Enrique Simonsen, who at the time was a special advisor to the Ministries of Finance and Planning.32 The PAEG was a first attempt to outline a growth strategy that combined economic growth with low inflation. It was Velloso’s objective to develop sectoral plans. According to Velloso, the

PAEG received also insights from the Ministry of Finance, liberal thinker Otávio

Gouveia de Bulhões (D ‘Araujo, 2005, p. 23).

The Ten Year Plan

After working on the PAEG, Campos asked Velloso to develop “a kind of strategic plan for the government” (D ‘Araujo, 2005, p. 28). According to Velloso, the first phase of articulating the plan involved developing a diagnosis for each sector in the economy, which would then inform five-year sectorial strategic actions plans. The diagnoses guided the economic policy strategy designed and implemented by Velloso to counter the effect of the 1973 oil shock (IPEA, Velloso A Solidão do Corredor, 2001, pp.

89, 102). For the energy sector, two diagnostics were developed for the electricity and

32 Simonsen and Campos had a long-standing relationship. When Campos left the BNDES in 1959, he was invited by Lucas Lopes and his partners Mario Enrique Simonsen and Israel Kablin to join a private consulting outfit, known as Sociedade Civil de Planejamento e Consultas Técnicas Ltda or Consultec. There Campos and Simonsen worked providing economic analysis and advisory services for project identification and evaluation (Alberti- CPDOC Mario Enrique Simonsen, 2002, pp. 65-66). 159

petroleum subsectors. For the electricity subsector, the diagnosis was developed by two independent coordination groups formed by IPEA technicians, the Ministry of Mines and

Energy, and Eletrobras. For the petroleum subsector, it was undertaken by CNP and

Petrobras personnel (IPEA, Literatura Econômica, 1989, p. 25).

In the industrial sector, the diagnosis shed light on President Kubitschek’s rapid industrialization plan (Plano de Metas). It had produced low employment generation particularly in the industrial transformation segment. Coupled with a rapid urbanization process, a mismatch between available labor and employment had resulted. The diagnosis also demonstrated most imports had been of basic industrial inputs (42%) and capital goods (25%); some of which Brazil had a potential to produce domestically including fertilizers and aluminum. These finding would be further confirmed by a 1964 study by

Maria da Conceição Tavares de Almeida published in CEPAL’s Economic Bulletin for

Latin America that showed the country had reached a predominantly capital and intermediate-goods phase in its imports substitution industrialization (ISI) process in which levels of investments are constrained. In 1968, Furtado would find that labor- saving technology imported from developed countries were partly to blame (Bethell,

1996, pp.244-245).

PED

While the 10 Year plan was never implemented, the diagnostics developed by

IPEA proved successful and served as the basis for the Development Strategic Plan for the 1968-1970 period (Programa Estratégico de Desenvolvimento or PED) (D ‘Araujo,

2005, p. 28). The PED called for an increase of public investment in electricity,

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petroleum, and transportation and communications infrastructure through the expansion of state owned companies into conglomerates. It was the result of a study developed by

Fernando Fajnzylber, a member of CEPAL’s office in Brazil. Fajnzylber’s study outlined the need for financing or capitalization as well as access to technology and led to the establishment of the Fund for the Modernization and Industrial Reorganization (Fundo de

Modernização e Reorganização Industrial or FMRI) in 1970 at the BNDES.33 The PED was also the first development plan that encompassed science and technology development as a result of IPEA and the FINEP’s involvement (Barbosa, 2011, p. 13-14).

PNDs I and II

IPEA gained preeminence in late 1969 when Velloso was offered the post of

Minister of Planning by General Emílio Garrastazu Médici, the third military president of

Brazil (1969-1974).34 It was Velloso’s view:

“[T]hat BNDE should change its priorities and start looking on how to support

domestic private enterprise rather than infrastructure. IPEA should assume a

more important role and become the main state entity to assist in the

formulation of needed global and sectoral plans. FINEP, with the various

alterations that it had undergone when it became a public entity, could help assist

in the implementation of new ideas related to science and technology, including

33 Under the Geisel administration, the FMRI would receive a sizable infusion of resources to help execute the Second Development Plan. 34 By then, Velloso had moved from President of IPEA to serve as General Secretary of the Ministry of Planning (Ministério do Planejamento). 161

the expansion of postgraduate programs” (D ‘Araujo, 2005, p. 28) (Emphasis

added)

As a result, IPEA was integral in the design of the First National Development

Plan (I Plano Nacional de Desenvolvimento or I PND) for the 1972-1974 period. The I

PND would follow the same investment priorities outlined by the PED hoping to transform Brazil in a modern and developed country in a generation’s time. The I PND’s principal objectives were the reduction of industry costs and the diversification of exports, along with investments in agriculture, education and technology. In the technology area, the I PND articulated the National System of Science and Technology

Development (Sistema Nacional de Desenvolvimento Científico e Tecnológico or

SNDCT). The SNDCT, placed all of the government’s financing tools for scientific research under a single system for the first time.

The I PND would thereafter come undone with the disruption caused by the first oil crisis in 1973. Velloso was tasked with articulating the Second National Development

Plan (II Plano Nacional de Desenvolvimento or II PND) in response to the crisis

(Barbosa, 2011, p.30). He would rush to personally write it in a period of six-weeks following General Geisel’s assumption of power in March 1974. It was important to have it approved by General Geisel in July and sent to Congress in August. He was assisted by

Roberto Cavalcanti, the director of the IPLAN, who coordinated all the studies from the

BNDES, INPES, and other institutions that served as inputs (D ‘Araujo, 2005, p. 37;

CPDOC Personal Archive Ernesto Geisel Correspondence).

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In Search of Technological Autonomy: The Building of Brazil’s Science and

Technology Institutional Apparatus

Brazil’s quest for technological autonomy originated from its concern over nuclear energy. From a nationalistic desire to transform Brazil’s mineral riches into high value-added industries and products, evolved a related science and technology institutional apparatus. Developmentalist ideas held by scientists and state bureaucrats related to self-determination or autonomy in science and technology traveled through institutions such as the CNPq and BNDES and started to take root in new institutions established during the 1960s and 1970s. These nationalistic, yet pragmatic ideas became embedded in policy discourse and permeated economic planning thereafter.

A Genesis Guided by Nuclear Energy Concerns

Brazil is a country rich in minerals. This was a strategic consideration during war times in the past century. Brazil housed in its territory copious amounts of rare earth minerals needed for war related industrial processes and particularly for the type of technology that commanded the cold war: nuclear energy.

The first nuclear accord signed by Brazil dates back to 1945, when the Getúlio

Vargas administration signed a secret accord with the United States for the provision of monazite, a mineral rich in thorium (containing 5% to 6% of thO2), and present in abundant quantities in the beaches of Rio de Janeiro, Espirito Santo and Bahia. The accord was signed on February of 1945 for a three-year period, and included a clause for renewal for up to 10 consecutive years. Because of its secret nature, the accord did not cause any public concern at the time of its signature. Later, when General Eurico Dutra

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assumed the presidency, the benefits the accord afforded to Brazil became questionable and opposition mounted to demand “specific compensations” for the sale of Brazil’s rare earth minerals (Senado Federal CPI, 1982, p. 89-91).

Admiral Alvaro Alberto da Mota e Silva was a important opposition figure. The

Admiral was a man of science. He graduated in 1910 from the naval academy and shortly after commenced studies at the Escola Politécnica do Rio de Janeiro, where he obtained an engineering degree. He completed studies at the École Centrale Technique in Brussels.

Coming from a family of chemists, the Admiral served as president of the Sociedade

Brasileira de Química from 1920 a 1928. In 1925, he was part of the Brazilian delegation that hosted Albert Einstein on his visit to Brazil and is credited with promoting the visit of Enrico Fermi, the famous physicist responsible for first splitting the atom (CPDOC-

DHBB).

The idea of requesting “specific compensation” came from Admiral Mota e Silva.

By specific compensation he meant the right of countries rich in nuclear raw material to obtain not only financial compensation for the sale of rare minerals, but also the provision of reactors and other nuclear installations as well as access to technology required for their manufacturing and operation (CPDOC- DHBB).

During this time, the National Security Council and the Ministry of Foreign

Affairs were involved in a turf war over the renewal of the U.S. secret accord. The

Council wanted to impose restrictions to the export of nuclear minerals for national security concerns while the Ministry wanted the sale to continue in exchange for financial and trade-related compensations (as described in the CMBUE related paragraphs above).

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The National Research Council

The National Research Council (Conselho Nacional de Pesquisa or CNPq) was established in 1951 as the country’s principal science and technology research institution.

It had been the result of the efforts undertaken by Admiral Alvaro Alberto da Mota e

Silva, who had been asked by the President Eurico Gaspar Dutra administration (January

1946 – January 1951) to lead a commission that would define the country’s nuclear policy. The commission would eventually produce a blueprint on the exploitation and management of radioactive minerals in Brazil, which after minor revisions by the

National Security Council, was sent to Congress. It was approved by Congress Law No

1,310 in late 1950 and sanctioned by newly elected president Getúlio Vargas in January,

1951. The CNPq was conceived as a supervisory organ that would direct, develop, and coordinate nuclear science and technology research in Brazil and would manage the state’s monopoly over the exploitation of radioactive minerals. To do so, the CNPq would finance researcher education to form a cadre of professionals capable of designing and manufacturing nuclear reactors and would conduct prospection campaigns to maintain and develop Brazil’s radioactive minerals including its reserves of uranium, thorium, cadmium, and lithium. With this in mind, it would manage a national fund for science and technology research (CPDOC- DHBB).

Admiral Mota e Silva was appointed the CNPq’s first president in 1951, a post he held until 1955. Mota e Silva advocated for Brazil’s autonomy in the production of nuclear energy and he had succeeded in having the CNPq statute establish the principle of specific compensation, conditioning any exports of radioactive materials (CPDOC-

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DHBB). By October 1952, the CNPq had chosen enriched uranium as the nuclear fuel that would be used to pursue nuclear energy related research and development activities.

Aspiring to deploy uranium enrichment centrifuges, Mota e Silva had initially reached out to the U.S. Atomic Commission seeking a cooperation and technology transfer agreement but had been rebuffed. He then turned to Germany, where he was successful in purchasing three sets of ultracentrifuges to enrich uranium isotopically. In France, he was able to obtain both technology and financing for the extraction of uranium at the Poços de Caldas region in Minas Gerais. In 1953, the Vargas administration formally approved the development of a nuclear industry in Brazil (Senado Federal CPI, 1982, pp. 91-100).

Mota e Silva however had difficulties in importing the centrifuges he had purchased from Germany. The equipment which had been held-up by Franco-American forces occupying Germany, would finally arrive in Brazil in 1956. By then Mota e Silva had left the CNPq. The centrifuges remained in storage for two years and were then sent to the São PauloTechnology Research Institute (Instituto de Pesquisas Tecnológicas) where they would be used in the production of pure uranium (CPDOC- DHBB).

Following the creation of the National Commission for Nuclear Energy (Comissão

National de Energia Nuclear –CNEN) in 1956 during the Kubitschek presidency, and given the administration’s focus on turnkey technology, the CNPq’s mandate was circumscribed to developing human capital.

The CNEN and the First Attempt for a Nuclear Energy Power Plant

During the Juscelino Kubitschek presidency (January 1956-January 1961), a parliamentary inquiry was conducted to examine the rare earth mineral export accords

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with the United States. The inquiry elevated the profile of the nuclear energy question and impacted government policy. As a result, in August 1956 the presidency issued guidelines on nuclear energy policy and authorized an accord between the CNP and the

University of São Paulo (Universidade de São Paulo) for the installation of the country’s first research nuclear reactor. That same year, the Brazilian Atomic Energy Institute

(Instituto de Energia Atômica or IEA) and the CNEN were established. The IEA was tasked with the development of nuclear energy research for peaceful purposes.

A 1982 Senate inquiry later determined that the Kubitschek’s efforts were indeed undertaken for peaceful purposes; namely to investigate the potential of nuclear energy for electricity production. Indeed in 1958 the government had announced plans for a

10,000 MW nuclear power plant facility in Areal, Rio de Janeiro. However by 1959, difficulties had arisen and a special division within CNEN was established to coordinate and execute all the economic, financial, legal and administrative tasks related to the establishment of a nuclear power plant in Angra dos Reis (Senado Federal CPI, 1982, p.

101).

Crafting and Institutionalizing a Science and Technology Policy

In a comparative study that examines Brazil and Argentina’s quest for technological autonomy, titled The Power of Ideology, Emanuel Adler (1987) argues that the origins of a science and technology policy in Brazil date from the early 1960s. Prior to this, Brazil followed a technological laissez-faire approach that suited its overall economic development model of import substitution industrialization (Adler, 1987, p.

154). In the policy formation stage from early 1962 to 1967, Adler argues ideas regarding

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self-determination or autonomy in science and technology held by a group of scientist and state bureaucrats whom he calls pragmatic anti-dependent guerrillas were brought forward into economic policy circles. These ideas traveled through institutions such as the CNPq and BNDES and started to take root in new science and technology institutions establish during the 1960s and 1970s.

In May of 1964, the Science and Technology Development Fund (Fundo de

Desenvolvimento Científico e Tecnológico- FUNTEC) was established within the

BNDES to finance the implementation of post-graduate programs in Brazilian universities. FUNTEC originated from a failed BNDES program called Technic

Education and Training Quota (Cota de Educação e Treinamento Técnico). This program was first outlined in 1958 when Roberto Campos was BNDES’ president. The program consisted in an additional line of credit that companies obtaining resources from BNDES could use to finance training programs for their employees. BNDES rationale for offering this additional financing was the recognition that Brazilian companies lacked technically competent personnel, which made evident the fact that Brazilian technology was incipient. If no action was taken to promote the country’s science and technology development, Brazil’s entrance into more sophisticated technology sectors would be hampered.

Given the failure to incite companies to use this financing opportunity, in 1963

BNDES’ management sought other avenue to tackle the problem. Its economic department was tasked with formulating a proposal for an alternative program that could effectively support the development of science and technology. The task was entrusted to

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economist José Pelúcio Ferreira. Within BNDES Pelúcio was recognized as a nationalist and someone influenced by CEPAL ideas about dependency. As an economist, Pelúcio was aware of the linkages between economic development and technology and arguments on how import substitution industrialization degenerated in science and technology dependency resonated with him. Adler’s study of Pelúcio characterizes him as a technocrat that looked forward to self- determination and autonomy when it came to science and technology, but who understood technology transfer was necessary until

Brazil could develop the human capital necessary to overcome dependency in this field

(Adler, 1987, p. 210).

In the thirty-four page report produced by Pelúcio in early 1964, while identifying the root causes that led to the failure of BNDES’ Training Quota program, Pelúcio confirmed the initial diagnostic that industrial expansion would be conditioned by the qualification level of the Brazilian labor force and that Brazil’s science and technology base needed to be developed. The report recommended the creation of FUNTEC. Since

FUNTEC establishment in May of 1964, the number of graduates from funding recipient post-graduated programs increased substantially. In 1961, these universities granted only five master degrees. In the first year FUNTEC operated, that number increased to forty- one and by 1970 to 203 (Albuquerque de Araujo Lima, 2006, pp. 30-33).

In 1971, FUNTEC was put under the umbrella of the FINEP, the institution created at IPEA by Velloso in 1965. With this reorganization, BNDES consolidated under FINEP the main government financing tool for promoting science, technology and related post graduate education activities in Brazil.

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Other changes started to take place after the Brazilian military took power in

1964. The CNPq regained its preeminence during the military governments. Law No

4,533 passed in December of 1964, under the presidency of Marshal Castelo Branco, broadened CNPq’s scope of action to include the formulation and coordination of science and technology policy through its articulation with ministries and governmental entities; the promotion of research aimed at developing the potential riches of the country; the promotion of research within universities and private research centers through the provision of financial support; the formulation, along with the National Security Council and the Arm Forces General Staff, of Brazil’s national interests with respect to science and technology issues; and finally, a mandate to cooperate with and support Brazilian industrial organizations in issues related to science and technology (Planalto, Law No

4.533, December 8, 1964).

With this reorganization, the military governments seemed to have started a movement toward integrating science and technology as part of the economic policy discourse and importantly, as a strategic development goal. Starting in 1967, science and technology was frequently mentioned in official speeches as a necessary element for the construction of the Brazil superpower (Brasil potência) project (CPDOC- DHBB). In the same year, the government issued the Development Strategic Plan or PED for the period

1968-1970, which for the first time outlined a science and technology policy for Brazil.

According to Velloso, the idea to include a chapter in science and technology in the PED came from Helio Beltrão who was the Minister of Planning at time. This was made

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possible because IPEA, under Velloso’s guidance had been working on the topic in conjunction with BNDES-FINEP, where Pelúcio led the effort (D ‘Araujo, 2005, p.33).

With the PED, science and technology activities were articulated within the general economic policy project for the country. The main objective of this policy was to enhance the ability of the country to generate autonomous technology capabilities.

Specifically, the PED called for the strengthening of the financing mechanisms for science and technology managed by the CNPq and BNDES; the creation of the National

Fund for Science and Technology Development (Fundo Nacional de Desenvolvimento

Científico e Tecnológico or FNDCT); and the formulation of a specific plan for science and technology.

FNDTC was established in July of 1969 to support financially science and technology programs and projects and specifically to support the implementation of the

Basic Plan for Science and Technology Development (Plano Básico de Desenvolvimento

Científico Tecnológico or PBDCT). FNDCT’s management was entrusted to FINEP in

1971.

The first PBDCT covering the period for 1973-1974 outlined Brazil’s science and technology strategy by calling for the development of new technologies; strengthening industry’s technology absorption and development capabilities; consolidation of the science and technology research infrastructure; consolidation of the support system for science and technology development; and the integration of research activities at universities and domestic enterprise within overall research and development system

(Lemos & Cário, 2013, pp.4-5).

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Conclusion

This chapter examined the Developmentalist ideology that underpinned Brazilian economic thought by describing its origins, the two streams of thought within it

(Nationalist and Cosmopolitan), its main proponents and the initial institutional vehicles used for its dissemination in the energy sector. Both Nationalist and Cosmopolitan firmly believed industrialization was the solution to Brazil’s underdevelopment, favored state intervention and economic planning. Both defended the establishment of a modern capitalist economy. Yet, in contrast to the Nationalists, Cosmopolitan Developmentalist believed the involvement of foreign capital in the industrialization process was desirable for long-term success.

Developmentalist ideas took root in important economic planning and energy institutions including the BNDES, Petrobras, Eletrobras, the Ministries of Planning and

Energy and Mines as well as the IPEA. Developmentalist ideas molded their institutional design and mission. For example, Petrobras, born out of the struggle between the

Cosmopolitan and Nationalist within the military, was created as a state-owned company and entrusted with the mission to secure petroleum self-sufficiency. The national oil giant worked to develop the technical know-how and capabilities to find, extract, process and refine oil. Even when that meant to develop those capabilities to explore and exploit

Brazil’ offshore deposits. In doing so, it propelled the development of human capital, research and technology and importantly, added value chains within the Brazilian oil industry

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The Cosmopolitan ideas of Roberto Campos and his disciple and protégé João

Paulo dos Reis Velloso found a home at BNDES and IPEA, two key institutions that supported the development of applied economic policy in the energy sector. BNDES became the first and preferred tool to instrument Developmentalism in Brazil. The Bank was the first institution to coordinate the development of the Brazilian electricity sector, a mandate that was later transferred to Eletrobras in 1962. Thereafter, it continued to support the sector’s expansion through financing of electricity generation projects and the part and equipment’s industry. BNDES was also instrumental in the financing of science and technology activities.

IPEA was created to support policymaking through the development of actionable policy research and economic plans. All economic plans designed during the 1964 to

1979 period were produced with inputs from IPEA and thus, they were infused with sectoral planning recipes and Developmentalist ideas. Under Velloso’s tutelage, IPEA became an institutional builder for Brazilian science and technology disseminating the idea of an autonomous capacity for technological innovation.

From a nationalistic desire to transform Brazil’s mineral riches into high value- added industries and products, evolved a related science and technology institutional apparatus. The quest for autonomy in science and technology originated from a nuclear energy concern. It arose from the demand to obtain “specific compensation” for the sale of rare earth minerals needed for war related industrial processes and for the type of technology that commanded the cold war: nuclear energy. The specific compensation idea was advanced by Admiral Alvaro Alberto da Mota e Silva, a military officer and a

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man of science. The Admiral fought for the establishment of a nuclear policy and the country’s principal science and technology research institution, the CNPq. After failed attempts to design a science and technology policy and related institutional apparatus, in

1962-1964, with the assistance of IPEA, BNDES created the first funds for financing science and technology activities, including the development of human capital.

Considered a necessary element for the construction of the Brazil superpower project, the development of indigenous science and technology became a strategic goal of military governments. Soon, science and technology became embedded in economic policy discourse through its inclusion in economic development plans.

As the chapter shows, the four Developmentalist ideas that composed the main working proposition in this research were rooted and traveled through important institutions in the economic planning and energy sectors to the 1974 policy arena. These ideas shaped the policy response following the 1973 oil crisis. The following chapter identifies the policy entrepreneurs and institutional context in which the Brazilian energy policy was crafted in response to this crisis.

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CHAPTER 5: POLICY ENTREPRENEURS AND INSTITUTIONAL

REORGANIZATION

Introduction

Four ideas are central to the argument explored in this dissertation and that I argue help explain the Brazilian energy policy response to the first oil crisis. These ideas regard: (1) national development through industrialization; (2) energy as a growing point for the economy; (3) self-sufficiency and; (4) technological autonomy. In order to understand how these ideas affected the policymaking process that led to the energy diversification policies it is necessary to establish how these ideas traveled to the policy arena. The preceding chapter examined how these ideas, traced back to a military strongly influenced by Positivism and a Developmentalist ideology that permeated economic thought and policymaking starting in the 1930s, became embedded in key institutions in the economic planning and energy sectors.

This chapter seeks to further refine this process by examining the institutional context in which the actual policy process for the energy policies unfolded. To do so, I first identify the policy entrepreneurs, Ernesto Geisel and João Paulo dos Reis Velloso, who not only carried these ideas into the policy decision making process, but also acted as bricoleurs recombining ideational elements in innovative ways to respond to a crisis situation. I argue that the Developmentalist ideas these policy entrepreneurs held impacted their public service, the government institutions they established, headed or expanded and ultimately, the policies they pursued. The chapter offers a short biographical narrative of these characters. By examining their life stories, it becomes

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clear how they acquired and diffused these ideas through key government institutions which played a role in the development and implementation of the energy diversification policies pursued during the Geisel administration (1974-1979).

Next, I briefly describe the institutional reorganization carried out at the beginning of the Geisel administration. This reorganization brought the locus of decision for public policy matters under the office of the Presidency and the president himself through the establishment of the Economic Development Council. It effectively cleared out any veto gates that could have potentially hindered progress for policy decisions favored or sponsored by Geisel and the Council’s close circle of advisors. It also limited the range of programmatic ideas that could affected the policymaking process.

I argue that policy decisions were permeated by the Developmentalists ideas

Geisel and Velloso held and that were ingrained in key energy sector institutions, as shown in chapter 4. Further, by concentrating economic and political resources in the

Presidency, through the elevation of the Ministry of Planning into a Secretariat attached to it, the Geisel administration was able to unify its planning and financing institutional resources to implement the energy goals outlined in the II PND.

Key Characters: Policy Entrepreneurs

Ideas do not emerge spontaneously or become influential without actors. It is actors who bring ideas to the policy arena, either because they have been embedded in institutions created by actors or because actors themselves are the carriers.

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Actors are particularly important when it comes to understanding the type of bricolage that leads to revolutionary change. This dissertation relies on the figure of bricolage to explain how old ideas can produce revolutionary change. According to John

Campbell, a key element in the process of bricolage is creative and innovative people.

These individuals or bricoleurs are often referred to as policy entrepreneurs. Policy entrepreneurs are the ones responsible for recombining institutional and ideational elements in innovative ways. They are expected to be located at the epicenter of various networks, have far reaching influence and have at their disposal tangible resources such as political clout and money (Campbell, 2004, pp.74-76).

Two men, Ernesto Geisel and João Paulo dos Reis Velloso were the most influential actors in the Brazilian energy policy scene in the 1970s. The short biographical narrative presented in the section below provides information on who

Ernesto Geisel and João Paulo dos Reis Velloso were, how their origins, upbringing, education, and work experiences affected the ideas they supported. I argue that the

Developmentalist ideas they championed, acquired from life and educational experiences, among other sources, impacted their public service, the government institutions they established or led and ultimately, the policies they pursued.

By the time General Ernesto Geisel assumed the presidency of Brazil in March of

1974, he already had a long and distinguished career in high ranking civilian administrative posts in the energy sector. This fortuitous background prepared him to handle energy issues head on. As a military man, he had come to develop a sense of responsibility for the motherland, not only to protect it, but to make sure its potential was

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fulfilled. He was a nationalist to the core who believed the solution to Brazil underdevelopment rested on the exploitation of its many resources by Brazilians for the betterment of Brazilians. In the energy sector, he was convinced that Brazil could turn its mineral, hydrocarbon, water, and biomass riches into energy added value chains. He did not favor self-sufficiency goals that were too costly to attain, but believed Brazil ought to develop its resources to reduce dependence. He believed in the capacity of the Brazilian people to innovate and favored a long-term view toward the development of indigenous science and technology.

João Paulo dos Reis Velloso, a highly qualified technocrat and an economist by training, had a distinguished career as an economic planner capable of transforming plans into action. He believed in strategic planning with a long-term horizons and understood .

science and technology were key ingredients for economic transformation . As a disciple of Roberto Campos, Velloso was a Cosmopolitan Developmentalist. He believed foreign capital could help Brazil in developing its industry and potential.

Velloso was not an energy specialist, but understood that dependence on foreign energy supplies was too costly for Brazil. He saw the 1973 oil crisis as an opportunity for economic transformation, particularly with regards to the country’s balance of trade. He set to develop a strategy to radically change it by investing in the development of energy intensive industries that would transform Brazil’s riches into export goods such as steel and aluminum. Such strategy was outlined in the PND II he wrote for the Geisel administration. As the head of the Planning Secretariat and the secretary of the Economic

Development Council, Velloso was involved in all policy decisions. He coordinated all

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inputs that came to the CDE, either for discussion or approval. He was also at the helm of key planning institutions such as IPEA, BNDES and the CNPq, which provided him with the applied policy research, financing, and technical resources needed to support policy design. Finally, he was trusted by Ernesto Geisel.

Ernesto Geisel, “the Institution”

Ernesto Geisel was born on August 3, 1907, in Bento Gonçalves, a small city in

Rio Grande do Sul, a southern state bordering Argentina. At the turn of the century Bento

Gonçalves had attracted a large Italian immigrant community encouraged (but not supported) by the government which was concerned with colonization to revert the labor shortfall in agriculture with the abolition of slavery (1898). Geisel’s parents, Augusto and

Lydia, had immigrated from Germany in the 1880s, first residing in a number of municipalities and later settling in Bento Gonçalves, as one of only two German families.

Augusto had first worked as a school teacher and later as a notary’s clerk; Lydia was a homemaker. Together they tried to provide a middle-class upbringing to their five children: Amália, Bernardo, Henrique, Orlando and Ernesto. The Geisel family was not particularly religious, though they occasionally attended a Lutheran church. Augusto

Geisel would tell his children that once grown they should choose the religion that they preferred (D ‘Araujo, 1997, pp. 15-17. Falcão, 1995, pp.17-28).

Following the establishment of the Republic (1889), Rio Grande do Sul had been mainly governed by administrations of Positivist orientation that supported widespread and free education. Ernesto Geisel attended public primary school starting in 1913 at no cost and graduated in 1919. Children attended school for five hours per day, six days per

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week, for 10 months out of the year. Geisel would later attribute his academic success in life to the rigors and excellence of primary education. He would also resminisce of his mother’s desire to instill a passion for reading and acquiring general culture. He recounted reading works by Julius Verne, whom he found to be very creative (D ‘Araujo,

1997, p.16).

Bento Gonçalves had no secondary education school at the time. As a result,

Ernesto’s two older siblings, Henrique and Orlando, were sent to the state capital Porto

Alegre to attend the military school (Colégio Militar de Porto Alegre). The federal military academy was the family’s preferred choice, for it was both a boarding school and reasonably priced (D ‘Araujo, 1997, p.18). Military school was also held in high regard in

Rio Grande Do Sul, a state with a proud military tradition. Ernesto Geisel attended the

Colégio Militar de Porto Alegre from 1921-1924 and graduated first in his class. Every

President during the dictatorship from 1964 to 1985 (Humberto de Alencar Castelo

Branco, Artur da Costa e Silva, Emilio Garrastazu Médici, Ernesto Geisel and João

Figueiredo) attended this military school (1912-1938).

At the Porto Alegre Military School, the Geisel brothers were influenced by a number of insurrections in the 1920s in which junior officers called for a rebellion against an oligarchic system they considered had corrupted the military institution. These insurrections included the 1922 Tenentista movement, the 1923 revolt against Governor

Antonio Augusto Borges de Medeiros in Rio Grande Do Sul, and the 1924 Prestes march.

As covered in Chapter 3, the appeal of insurrection for cadets of that generation was a

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function of youth and of the prevailing sentiment that entrenched civilian elites were inept and corrupt.

In 1925, Ernesto Geisel would again follow his brothers and attend the Realengo

Military Academy (Escola Militar do Realengo) in Rio de Janeiro (1925-1927). The

Realengo Military Academy (1911-1944) had been reformed as an attempt to professionalize instruction and depoliticize the school. Indeed, starting in 1919 the government had hired a French military mission to that effect. Education at the academy was free but strict and living conditions were very modest. These shared conditions equalized social and economic differences among cadets and encouraged camaraderie among them. In 1927, Ernesto Geisel graduated first in his class (D ‘Araujo, 1997, pp.27-

29, 36-37, 88).

Thereafter Geisel held artillery appointments in Rio de Janeiro (1928) and Rio

Grande Do Sul (1929). While in Rio de Janeiro he met Juarez do Nascimento Fernandes

Távora, a revolutionary who participated in the rebellions that had inspired the Geisel brothers, most notably the 1924 Prestes march. Távora would thereafter command the

1930 revolution rebellious troops in the Northeast, help depose President Vargas in 1945 and head the military’s War College (Escola Superior the Guerra or ESG) in the early

1950s. Geisel, Távora and other young officers from their generation shared the frustration of a country reliant on coffee exports but unable to produce the most basic of staples. For example, Ernesto Geisel would later recall how he grew up consuming

French butter and imported mineral water (D ‘Araujo, 1997, p.46).

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Following the 1930 Revolution, Geisel would first experience a number of civilian administrative engagements during his career. At the time, states were governed by interventors, appointed officials with broad and extraordinary powers over local affairs. In 1931, Távora asked Geisel to support a weak interventor in Rio Grande do

Norte by serving as head of the public security department and secretary of the administration. A fall-out with the interventor cut his time short there after three months

(D ‘Araujo, 1997, p.53). Thereafter, Geisel was appointed by the state interventor of the state of Paraiba to a consultative role and in 1932 he was pointed to be Secretary of

Treasury, Agriculture, and Public Works in Paraiba (1932-1933). During his time in state government, he became acquainted with managing government bureaucracies and was closely involved in solving administrative and financial problems. In 1935, Geisel returned to Rio de Janeiro to an artillery position and was promoted to captain. There he assisted in extinguishing a number of uprisings including the 1935 communist rebellion.

In 1938, Geisel attended the Military’s Officer School (Escola de

Aperfeiçoamento de Oficiais or ESAO) and placed first among his peers. From 1939 to

1941, he returned to Realengo to serve as an artillery commander and instructor. In 1940, he married Lucy, a primary school teacher and a cousin on his mother’s side, and enjoyed the birth of his eldest child, Orlando. In 1941, Ernesto attended the army’s Command and

General Staff College and was promoted to major (1941-1944). There he met General

Golbery do Couto e Silva, the architect of Brazil’s national security doctrine. In 1944, he spent time at the US Army Command and General Staff College in Fort Leavenworth,

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Kansas (October 44-May 1945). During that time his younger child, Amália Lucy, was born in Brazil.

During the ouster of Getúlio Vargas in 1945, Geisel was actively involved behind the scenes supporting the efforts of the Coronel Jose Ulhoa Cintra responsible for securing the Guranabana Palace, the Vargas residence, and deflecting any uprising (D

‘Araujo, 1997, p.95). Thereafter he served as general secretary of the National Security

Council (1946-1947) and as a military adjunct of the Brazilian embassy in Uruguay

(1947-1950). Upon his return to Brazil, he served as Deputy Chief of the Armed Forces

General Staff (1950-1952). During this time, he rejected the nationalist factions in the

Military Club that supported a call for national control of oil, believing self-sufficiency was necessary but military radicalism to achieve it was not. In 1952, he entered the ESG and was promoted to Colonel in 1953. At the ESG, in addition to being a student, he was part of the permanent staff at the same time as Golbery. According to Geisel, he often agreed with Golbery on the long-term national security problems confronting Brazil. In

February 1954, however, he refused to sign a manifesto that Golbery and other officers issued to denounce the lack of material support for the military by the Vargas government

(the Colonel Manifesto). Following a series of political scandals, the Vargas government ended end with Getúlio Vargas’ suicide on August 1954 (D ‘Araujo, 1997, pp. 103-109).

Early into the presidency of caretaker President João Fernandes Campos Café

Filho (August 1954-November 1955), Geisel served as Deputy Chief of his Military

Cabinet (February 1955). He shared the government with Távora, who headed the military cabinet. In September of that year, he was asked to assume the role of

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Superintendent of the Presidente Bernardes refinery in Cubatão in the state of São Paulo

(September 1955-January 1956). The Cubatão refinery had been built in April 1955 by

Petrobras and was to supply 50% of demand of refined fuels (45 thousand barrels per day). Yet, the refinery soon ran into problems as tensions between local and foreign personnel emerged. Geisel, then an active duty colonel was asked to resolve them

(Falcão, 1995, pp. 101-106). Geisel later recalled this appointment as one that gave him the opportunity to learn about the technical problems of refining and of oil generally (D

‘Araujo, 1997, p.103). The refinery was undergoing a crucial capacity expansion and the construction of an asphalt plant. During his time there, Geisel would showcase his managerial skills and his attention to detail. For example, he walked through the plant several times a day constantly speaking to the personnel. He also ordered the managerial personnel to be transferred from the city of Santos to Cubatão to be closer to the operations.

During the November 1955 coup against President Café Filho, his refusal to support it put him at odds with his brother Orlando. Yet starting in March 1956 and through early 1964, he occupied a number of military posts during the presidencies of

Juscelino Kubitschek (January 1956 –January 1961), Jânio da Silva Quadros (January

1961 – August 1961) and João Goulart (September 1961–April 1964). In early 1964, he joined the military opposition to President Goulart under the leadership of General

Castelo Branco, then chief of the army. Geisel disliked Goulart’s measures to establish a presidential regime concentrating power in the presidency and his tendencies toward communism (D ‘Araujo, 1997, p.p.148-149). After Castelo Branco’s assumption of the

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presidency, in April 1964, he headed the president’s military cabinet (April 1964-March

1967). In 1966, he was promoted to General. As part of the Castelo Branco administration, he witnessed the increasing ascendance of hardliner factions of the military, which he did not support. Shortly after General Costa e Silva assumed the presidency in March 1967, Ernesto Geisel was appointed to the Superior Military

Tribunal.

In November 1969, during the Médici government, Geisel was appointed to be the president of the national oil company – Petróleo Brasileiro or Petrobras (November

1969-July 1973). Geisel had known General Médici since their time at the Porto Alegre

Military School and at the Realengo Military Academy but it was his brother Orlando that held a close relationship with President Médici. To this post, Ernesto Geisel brought his former experience with the Presidente Bernardes refinery in Cubatão and with the

National Petroleum Council (Conselho Nacional do Petróleo, 1957-1958), which made him a good choice. While at Petrobras, Geisel was afforded by President Médici wide discretion to manage the company during a time of strategic complexity; Petrobras was aggressively enhancing its refining capacity, developing offshore exploration activities, and expanding into petrochemical production, and foreign oil exploration. As had been his practice at Cubatão, Geisel was a hands-on administrator. He would meet with his managerial team every morning at 9 a.m. to discuss developments, problems, solutions, and solve disagreements. Among his team at that time was Shigeaki Ueki, who was serving as director of the commercial and financial area. Geisel found Ueki, a technocrat whom Geisel had not previously known, to be efficient, creative, and capable. Ueki

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would later become Minister of Energy and Mines during Geisel’s presidency and thereafter President of Petrobras (D ‘Araujo, 1997, pp.220-237; 266-267).

Ernesto Geisel was a frugal man. That frugality applied equally to his personal affairs as well as to government business. For him, because resources were limited, efficiency was paramount and waste was not permitted. Even as president of Petrobras, he lived frugally in a small apartment by the beach and dedicated about a third of his income to the family’s sustenance. In official business, he practiced the same frugality.

For example, he would enforce the maxim that to accomplish the goal of supplying the internal market Petrobras had to pursue the lowest cost and greatest efficiency option. He would complain of the waste in refining a barrel of imported crude into gasoline to fuel transport. That same barrel could be refined to produce petrochemical inputs with higher value and allow the development of actual products that could help the Brazilian population at large, such as plastics (Interview with Humberto Barreto, Rio de Janeiro,

March 2015).

In June 1973, Ernesto Geisel was announced as General Médici’s choice to succeed him as president. The announcement hastened the end of Geisel’s time at

Petrobras in July 1973.35 After leaving Petrobras, General Geisel huddled with a core team to prepare to lead the national government and met with a number of Médici’s ministers to prepare a seamless transition. During these months, Geisel decided on his

35 The reasons behind Ernesto Geisel’s candidacy are unclear, though once again, his brother Orlando’s influence, who served as the head of the Armed Forces Chief of Staff in the Médici government, may have played an important role. 186

cabinet. Geisel’s cabinet composition was guided by meritocratic criteria. Cabinet posts in his government went mostly to well-established technocrats with little political weight; many of which Geisel had not met previously (D ‘Araujo, 1997, pp. 258, 271-273).

Indeed, even his brother Orlando was passed over, greatly straining their relationship.

One notable exception was João Paulo dos Reis Velloso, who remained as head of the

Planning Ministry, having served in the same position in the previous administration

(1969-1974).

Ernesto Geisel brought forth a new approach to governance upon the presidential inauguration in March 1974. Geisel was put at the helm of the country and he planned to run it, immersing himself in every key topic and decision. His predecessor (Médici) had been “hands-off” and had given rise to criticism that his chief of staff João Leitão de

Abreu ran the government (D ‘Araujo, 1997, p.284). In contrast, Geisel was immersed in the administrative details of governing. He was known for micromanaging tendencies.

His style was not without criticism. It was described as solitary and overly centralized within the office of the presidency. His rigid demeanor and his distaste for the give-and- take and self-promotion of politics did not help but did garner respect. He was informally called by his staff and close advisors as the “institution”. His closest friend and advisor,

Humberto Barreto, in an interview conducted in 2015, would explain that the word institution was a nickname that evolved from the executive presence and authority that

Ernesto Geisel exuded every time he came into a room. He was seen by his advisors as knowledgeable, demanding, and severe, yet able to elicit respect and loyalty (Interview with Humberto Barreto, Rio de Janeiro, March 2015).

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Geisel was concerned with achieving cohesion and coherence in public policy and avoiding disagreements from being ventilated publicly. In his view, “dirty laundry” was washed at home without having anyone resort to the press to “gossip” (fofoca). With this in mind, he elevated the chiefs of staff for civil and military matters (General Golbery and Hugo Abreu respectively), the head of the intelligence service (SNI; João Baptista de

Oliveira Figueiredo) and the Head of General Staff of the Armed Forces (Estado Maior das Forças Armadas; Vicente de Paulo Dale Coutinho, succeeded by Silvio Frota upon his death) to the minister level. In addition, he held social and economic sectoral councils with relevant ministers once a month under the coordination of Velloso, the planning minister. Finally, during his presidential tenure, he met with each minister every fifteen days for an hour. He was known for subjecting them to intense questioning (D ‘Araujo,

1997, pp.279-280).

Ernesto Geisel was a staunch nationalist military man committed to the Brazil potential as a superpower,. He had an acute sense of responsibility for the protection and development of the motherland. Because of his record as an administrator in the energy sector, he was soon elevated to public positions of great status and responsibility such as the presidency of Petrobras. By the time he became Brazil’s 39th president, he knew the country’s energy sector and understood the implications of dependency on foreign energy sources. He was accustomed to wielding power and resources to produce change. In sum, he had the knowledge, resources, and experience to effectively become a successful policy entrepreneur in the articulation of Brazil’s policy response to the 1973 oil crisis.

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João Paulo dos Reis Velloso, a long a term planner

João Paulo dos Reis Velloso, an academic and technocrat who served as planning minister and presidential advisor during successive military governments in the 1964 to

1985 period, is known as the founder of Brazil’s science and technology research institutional setup and as an effective administrator of the country’s Developmentalist planning efforts during that period.

From a humble middle-class origin, João Paulo dos Reis Velloso was born on July

12, 1931, in the city of Piauí in the Northeast state of Paraiba. His father was an employee of the post office and his mother a seamstress. After completing high school in

Piauí, he pursued a technical course in trade and worked as a school teacher. In 1950, at age 19, Velloso made his first inroads into politics by participating in the campaign of

Brigadier Eduardo Gomes, the National Democratic Union (UDN)’s presidential candidate. A year later, he moved to Rio de Janeiro to serve as secretary of UDN federal deputy Jorge Lacerda, a position he held until the following year. Thereafter, Velloso had a brief stint with the industry workers retirement and pension institute (Instituto de

Aposentadoria e Pensões dos Industriários – IAPI; 1952-1954) and in 1955, he transitioned to the Bank of Brazil (Banco do Brasil), a premier financing state institution, where he remained until 1962. During his time at the Bank of Brazil, he studied at the federal university of Rio de Janeiro (UERJ) and received a degree in economics.

In 1962, Velloso became a graduate student at Yale University pursuant to a US technical cooperation grant for Brazilian government employees to attend American universities. Prior to his arrival in Yale, Velloso had taken a preparatory course at the

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Getúlio Vargas Foundation’s Center for the Development of Economists (Centro de

Aperfeiçoamento de Economistas da Fundação Getúlio Vargas). This was a pre-requisite for government officials who desired to pursue graduate degrees in economics abroad.

Mario Enrique Simonsen was among his instructors (Alberti- CPDOC Mario Enrique

Simonen, 2002, p.87). Simonsen and Velloso would later serve as ministers of finance and planning, respectively, during the Geisel administration

At Yale, Velloso obtained a master’s degree in economics and worked closely with Yale’s Economic Growth Center (D ‘Araujo, 2005, pp.22; 1962-1964). According to him, he was greatly influenced by the work and ideas of James Tobin, who taught

Keynesian economics at Yale (Interview with João Paulo dos Reis Velloso, Rio de

Janeiro, March 10, 2015). Velloso believed in the efficiency of market allocation resources; but understood economic transformation was a long-term project that given the lack of private domestic capital in Brazil, only the state could plan and execute.

Velloso first joined the Castelo Branco military government in 1964 when he was recruited by Roberto Campos (then Minister of Planning) during a hiatus from pursing a

Ph.D. in economics at Yale. He was tasked by Campos to establish the Applied

Economic Research Institute (Instituto de Planejamento Econômico e Social or IPEA).36

He served as IPEA’s president until 1968. IPEA was conceived as an applied economics research think tank that would assist policymakers at the Ministry of Planning and the federal government with long-term economic planning. In 1965, Velloso also helped

36 See Chapter 4 for details on IPEA’s creation. 190

establish a government fund to finance the development of projects both for the public and private sectors (Fundo de Financiamento de Estudos de Projetos e Programas or

FINEP) (D ‘Araujo, 2005, pp. 29-30). IPEA and FINEP would later allow Velloso to place scientific and technological development at the forefront of a Developmentalist policy agenda.

Velloso was integral in the establishment of the country’s science and technology institutional arrangement. In 1968, under the government of Costa e Silva, Velloso became general secretary at the Ministry of Planning. During this time, he wrote and coordinated the government’s 1968-1970 Strategic Development Plan (Programa

Estratégico de Desenvolvimento or PED). FINEP would be the PED’s executing agency.

In 1969, together with José Pelúcio Ferreira, who headed the BNDES’ Technology

Financing Fund (Fundo de Financiamento Tecnológico or FUNTEC), Velloso created the National Technology and Scientific Development Fund (Fundo Nacional de

Desenvolvimento Científico e Tecnológico – FNDCT). The FNDCT’s mission was to financially support science and technology programs and projects and to support the implementation of the Basic Plan for Science and Technology Development (Plano

Básico de Desenvolvimento Científico Tecnológico or PBDCT), which Velloso coordinated.

Velloso was also responsible for articulating and implementing the country’s key development plans during the Médici (1969-1974) and Geisel (1974-1979) governments.

During the Médici government, as Minister of Planning, Velloso worked closely with

Delfim Netto, the Ministry of Finance. Their collaboration yielded high growth rates

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during the 1970-1971 period, but was also criticized for failing to make gains in income inequality. In 1972, Velloso wrote the First National Development Plan (I Plano

Nacional de Desenvolvimento or I PND) for the 1972-1974 period. The I PND called for the strengthening of industry and exports and for investments in agriculture, education and technology.

By early 1974, President-elect Geisel had gone through various iterations of his cabinet composition. Initially, he had considered General Golbery do Couto e Silva as the best option to lead the Ministry of Planning. He visited Velloso, who was the current

Ministry of Planning at the time at his home for he had fallen ill. Geisel wanted to invite him to remain as part of the cabinet leading the Ministry of the Interior. From his bed,

Velloso kindly refused the offer and stated he would remain if he was to lead the planning effort. Notwithstanding his preference for Golbery, whom he knew and trusted,

President-elect Geisel conceded and Velloso remained at the helm of the Ministry of

Planning (Interview with João Paulo dos Reis Velloso, Rio de Janeiro, March 10, 2015).

Shortly after President Geisel came to power in March 1974, Velloso was entrusted with the development of the II PND in response to the 1973 crisis (Barbosa,

2011, p.30. D ‘Araujo, 2005, p.37). The II PND prioritized the reduction of the country’s foreign energy dependence and the development of Brazilian basic industries. Two months later, in May 1974, Velloso’s ministry was transformed into a secretariat attached to the office of the presidency, bringing him into the president’s decision-making inner circle. He remained a close advisor to President Geisel through March 1979.

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João Paulo dos Reis Velloso was an economic planner guided by long-term and transformative goals. He was an institutional builder, a meticulous and efficient resource manager, and policy coordinator. His firm belief that science and technology played a pivotal role in Brazil’s economic transformation led him to fight for the establishment of an institutional setup that favored the development of an autonomous capacity for innovation.

The Centralization of Institutional Veto Gates during the Geisel Administration

By concentrating decision making and economic and political resources under the office of the presidency, the Geisel administration effectively not only cleared any veto gates for policy design and implementation, but also provided the state bureaucracy with the tools necessary to coordinate, formulate, and implement a course of action in the energy sphere. The following paragraphs describe the institutional reorganization that took place and how this consolidation of political and economic resources was channeled through two specific institutions: the Economic Development Council and the Planning

Secretariat.

In May 1974, shortly after General Ernesto Geisel became president, Velloso suggested the establishment of the Economic Development Council (Conselho de

Desenvolvimento Econômico or CDE) as a consultative organ attached to the presidency.

The CDE was responsible for the formulation of economic policy and the implementation of a development strategy. This Council, along with the National Security Council

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(Conselho de Segurança Nacional or CSN), was the most important decision-making body during the Geisel administration (1974-1979).

The CDE was presided over by President Geisel and was composed by the

Ministers of Finance (Mário Henrique Simonsen), Industry and Trade (Severo Gomes),

Agriculture (Alysson Paulinelli), Interior (Rangel Reis) and Planning (Velloso), who served as its general secretary (Law 6036, May 1st of 1974). The CDE met regularly to discuss issues such as the approval of annual guidelines for economic policy, government budgetary and financial program issues, and investment projects envisioned by the II

PND as well as reports regarding their implementation (Velloso, 1998, p.18). Based on the objectives and functions entrusted, the CDE was very similar to the Development

Council established by former president Jucelino Kubitschek in 1956 to oversee the implementation of the Plano de Metas.37

Up until 1974, policy formulation and decision making related to industrial development matters were under the purview of the Industrial Development Council

(Conselho de Desenvolvimento Industrial or CDI), created during the Castelo Branco administration (CPDOC- DBHH). This was changed in the Geisel administration. The

CDI was brought under the purview of the CDE, and the CDE assumed the power to approve and grant incentives to projects presented by private companies to the CDI. The

37 The literature does not suggest a direct influence from this Council to the creation of the CDE. However, Robert Campos, Velloso’s mentor, was privy to this Council during his tenure at the BNDES. 194

CDI became, in turn, the organ that supported the implementation of the II PND sectoral incentive programs, including the ethanol program.

The CDE met twice a month or more regularly if required. Discussions in the

CDE were open and frank. According to Velloso:

“Decisions were the President’s to make, but they were made in an environment

of free discussion among the ministers and with the receptiveness of the President

for the opinions expressed by all.”

Final decision-making power though resided with President Geisel, particularly on anything related to energy matters.38

The centralization of decision-making power in the presidency executed by the

Geisel administration distinguished it from the Médici administration, whose decentralized approach was said to have weakened its execution. As explained by Marco

Aurelio Cabral Pinto:

“It is worth noting that the institutional arrangement then executed [by the Geisel

administration] promoted centralization of decision making compared to the

Médici government, where greater decentralization of ministries existed that

although accommodating a broader base of interest, made it difficult to attain the

required coordination to implement the Brazil Great Power project” (Cabral–

Revista do BNDES, 2004, p. 61).

38 This fact was also confirmed by Shigeaki Ueki, Minister of Energy and Mines during the Geisel administration (Interview with Shigeaki Ueki, Rio de Janeiro, March 10, 2015). 195

To go along with the CDE and complement it, Velloso suggested to President

Geisel another innovative reorganization. Having been offered the post of Minister of

Planning in January/ February of 1974, Velloso had made clear to President Geisel that to succeed in planning and coordinating economic policy, the strategic planning effort needed to be executed by an institution with a greater degree of authority over other ministries. In other words, for the Ministry of Planning as one of many ministries, it would be difficult, if not impossible, to coordinate effectively the action of the other ministries. Consequently, 45 days after Geisel assumed the presidency, the Ministry of

Planning was reorganized into a secretariat attached to the office of the presidency and renamed the Planning Secretariat (Secretaría de Planejamiento da Presidencia or

SEPLAN). SEPLAN continued to enjoy the rank of a ministry, but its importance was elevated to act as coordination organ for economic planning and policy formulation answering directly to the President (Law 6036, May 1st of 1974).

Velloso was thereafter also successful in bringing the BNDES, the FINEP, and the CNPq under the purview of the SEPLAN (IPEA, Velloso A Solidão do Corredor,

2001, pp.108-109). Because the IPEA was an organ attached to the Ministry of Planning, with this reorganization Velloso effectively had gathered at the SEPLAN and had at his disposal the state’s applied economic research and policymaking, financial, technical and technological acumen and resources, and controlled the state’s financing arm for development of economic transformation projects. In essence, with this institutional arrangement the Geisel administration was able to unify its decision-making power as

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well as its planning institutional and financing resources under the office of the presidency to implement the II PND.

The institutional reorganization described in this chapter shows how the Geisel administration brought the locus of decision for public policy matters and the required resources for policy design and implementation under the office of the Presidency.

Having described the institutional context in which energy policy was designed, the next chapter identifies how ideas impacted policymaker preferences and the resulting policy outcomes through a detailed account of the policymaking process.

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CHAPTER 6: IDEAS AND THE POLICYMAKING PROCESS IN THE

BRAZILIAN ENERGY SECTOR

Introduction

As the central tenet of this dissertation, I argue that four ideas, namely: 1. national development through industrialization; 2. energy as a growing point for the economy; 3. self-sufficiency and; 4. technological autonomy are necessary to explain the Brazilian energy policy response to the first oil crisis. To test this hypothesis, as a first step, the preceding chapters outlined the means through which these ideas became embedded in key policy entrepreneurs and institutions and traveled to the policy arena. To further refine this analysis, it is necessary to examine the actual policymaking process to identify how these ideas in fact shaped policymaker preferences and the resulting policy outcomes.

This chapter provides a detailed account of the policy process that culminated in the development of the energy diversification policies advanced by the Geisel administration in response to the 1973 oil crisis. The policies’ principal goal was to undercut Brazil’s energy dependency on foreign energy sources. They were structured to attain energy self-sufficiency and technological autonomy and implemented as a long- term strategy responding to Brazil’s aspiration to use its natural resources to develop oil, electricity- from hydraulic and nuclear sources-, and ethanol value chains.

As outlined in Chapter 1, to accomplish the task, the government launched a large-scale investment program geared toward increased energy production from diversified sources. The program included investments in cleaner energy sources such as

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nuclear and hydropower for electricity generation, the design and implementation of a sugar-based ethanol program seeking to spur the creation of a market and industry that would provide an alternative to petroleum-based fuels in the transport sector, and the exploration and production of indigenous off-shore, deep-water petroleum reserves to increase the availability of oil supplies.

The narrative developed in this chapter describes how decisions unfolded with respect to this three-pronged approach for diversification. Through a detailed account, the narrative sheds light on the policy process for decisions related to Petrobras’ exploration and production activities in the continental shelf; the national ethanol program; the hydroelectricity expansion program; and Brazil’s nuclear policy and accord with

Germany. Each section pays careful attention to the sequence of events and tries to identify critical decision-making points as well as the main characters in the policy scene.

Finally, the narrative also examines the mainstream explanations for Brazil’s energy diversification policies in light of recently released military archives, particularly

Ernesto Geisel’s personal files and correspondence with cabinet ministers made available at the Getúlio Vargas Foundation Contemporary Brazilian History Research and

Documentation Center (CPDOC). This is important because to this researcher knowledge, no academic study has examined this documentation to provide an account of the policy process. Mainstream explanations offered rest mostly on examination of secondary sources. Therefore, the present research endeavor has the potential to enrich these mainstream explanations and to contribute to the understanding of this important time in the life of Brazil.

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Tracing the Policy Making Process for Energy Diversification

In the wake of the 1973 oil crisis, increasing use of indigenous energy sources became an objective of paramount importance for the Geisel administration. The selected economic option by the Geisel team required gradually decelerating economic growth while tackling structural balance of payments issues through the deepening of import substitution in basic industrial inputs and the revival of the agricultural sector. For this ambitious option to work, the issue of foreign dependence on energy resources needed to be solved.

In this environment, the ideas of self-sufficiency and technological autonomy in energy became central. Ernesto Geisel and João Paulo dos Reis Velloso championed a policy course of action that favored the development of an autonomous capacity for technological innovation in the energy sector while working to lessen the dependence on foreign energy sources through the increase of indigenous energy supplies.

In the oil sector, self-sufficiency struck a chord of long desired energy independence. While before October 1973, self-sufficiency objectives in the oil sector were rationalized and tempered, the rapid increase in oil prices and the strain this placed in Brazil’s balance of payments quickly acted to change the sentiment. President Geisel devoted not only copious resources to Petrobras’ offshore exploration and production activities; but—against his personal preference--allowed for the participation of foreign capital in exploration activities in order to increase domestic oil production and thereby reduce dependence on external energy sources.

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These policy entrepreneurs pursued policies that led them to invest heavily in the development of an institutional setup for science and technology in Brazil, to dedicate copious resources to the development of human capital and related energy infrastructure, and to outline ambitious plans for the development of new markets and industries in the nuclear and biofuel sectors. In the biofuels sector, President Geisel provided strong support and fought for the establishment of a value chain in the sugarcane industry through a government-financed program which capitalized on Brazil’s long tradition as a sugar producer to develop an ethanol market and the related production (ethanol plants) and consumption (ethanol motor vehicles) infrastructure. In the nuclear energy arena, the desire to turn Brazil’s mineral riches into higher value-added products and spur an industrial value chain led President Geisel, assisted by his capable Minister of Energy,

Shigeaki Ueki, to outline and propose a collaborative effort with Germany for the development and implementation of nuclear energy and joint technology development programs. Finally, aware of Brazil’s vast hydroelectricity potential and the urgency to increase electricity supply, the Geisel administration devoted copious resources to the development of large hydropower projects that sought to secure cheap and reliable electricity supply to support industrial expansion and the development of an industrial capability and value chain in equipment and parts for the electricity sector.

This impetus for self-sufficiency and technological autonomy was present in the development of Petrobras’ exploration and production actives in the continental shelf, the national ethanol program, the hydroelectricity expansion program and the Brazil-

Germany nuclear accord. The sections below elaborate on the policy process for each of

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these individual policies. Each section pays careful attention to the sequence of events and tries to identify critical decision points as well as the main characters in the policy scene. The narrative also elaborates on how the ideas I argue permeated the policy process in fact traveled to the policy arena and impacted the design and formulation of the diversification strategy.

Policy 1: Increasing indigenous oil supply

In his September 15, 1973, speech as the presidential candidate of the government affiliated ARENA party at its national convention, General Geisel provided insight into his future governing style. He was surprisingly candid, falling short of setting forth grand schemes and bold proposals. Rather, he outlined a pragmatic style, governed by objective assessments rather than ideology:

“I don’t bring you, of course, a new government program, complete and finished,

not even a simple sketch. It would be unreasonable to do so, premature and

pretentious, of the kind in which everything is possible and everything is known,

and in which the best intentions and the most altruistic intentions often fail. A

government program must be objective and thoughtful, demanding an exhaustive

analysis of reality, a judicious assessment of what has been done, and the

innumerable yet to be done; choosing between valid alternatives; setting

priorities; awareness of resource limitation and allocation, and available

techniques and instruments” (Discurso perante a Convenção Nacional da

ARENA, Brasília, September 15, 1973).

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The October 1973 oil crisis put that governing style to the test. On January 15,

1974, upon being elected, President Geisel addressed the country and outlined an approach using “pragmatic and careful sense of the fairest priorities of action” that would govern his decisions:

“….the whole world around us has begun to face a very difficult period in the

history of mankind…because of the general crisis in the energy sector which

manifests itself, serious in terms of scarcity and enormously increased costs, and

in a chain reaction for a number of raw materials and other essential

products….It is necessary to appeal, without excessive sacrifice, to a pragmatic

and careful sense of the fairest priorities of action, in a rational and coherent

manner that does not harm our future in exchange for shortsighted benefits,

persevering and continuing in the coordinated execution of the guiding plans and

an austere conduct, inimical to ostentation and irresponsible waste.” (Saudação

ao Povo Brasileiro, pela televisão após a decisão do Colégio Eleitoral, January 15,

1974)

Upon President Geisel’s assumption of power, the government’s 1975-1979 national development plan (II PND) called for the reduction of the country’s dependence on foreign sources of energy by increasing internal supply. Oil and gas exploration in the continental shelf was identified as one of several strategies. The following section describes how this oil related strategy was crafted and implemented during the 1974 to

1979 years by examining aspects related to exploration and production of offshore oil

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deposits, investment and risk levels, technology development, and strategies for rapid increases in production, including an overture to foreign capital.

Petroleum in the Continental Shelf: from Guaricema to Garoupa

In the late 1960s, following the disappointing results of oil and gas exploration campaigns in Brazil’s onshore basins and the advice of the 1959 Link Report39,

Petrobras’ technical personnel advocated a change of strategy by directing exploration efforts toward shallow waters in the Brazilian continental shelf. The changewas sealed with the launching of seismic and geological survey campaigns along the continental shelf and the commissioning of Petrobras’ first offshore drilling platform, Petrobras 1.

Armed with the Petrobras 1 platform, which operated at a depth of 30 meters under water, in late 1968 Petrobras located a small deposit of oil in the coast of Sergipe, the

Guaricema field. The Guaricema find, at shallow depth of 28 meters under water, was followed by small discoveries in Campos de Dourado (1969), Camorim, (1970) and

Caioba (1971), all in the Sergipe Basin’s shallow waters (IPEA-Morais, 2013, pp.12-

113).

At the time of the Guaricema discovery, offshore exploration in the North Sea was already reaching a depth of 300 meters under water. In Brazil, exploring for oil at

39 As covered in Chapter 4, this 1959 report was produced by Walter Link, a former Standard Oil geologist, who was hired to map the Brazilian territory and conduct seismic and geological studies. After six years of work, Mr. Link issued a report that suggested the likelihood of finding oil in the Brazilian onshore sedimentary basins was low and instead, suggested oil deposits where likely located offshore (CPDOC, A questão, 1993:117) 204

shallow water levels was already difficult given the lack of technical knowledge, qualified personnel and equipment. For this reason, the decision to produce the small

Guaricema find became a critical juncture for the development of Brazil’s offshore oil and gas technical expertise. In 1970, when General Geisel was president of Petrobras, the company’s Exploration and Production Department, DEXPRO, produced a report assessing production of oil from Guaricema. At the time, a barrel of imported oil into

Brazil cost around $1.20, while cost estimates for oil produced from Guaricema were around $3.60 to $3.70 per barrel. Because of the uneconomic nature of the offshore production enterprise, the decision to produce oil from Guaricema was predicated on the strategic need to develop technical know-how and capabilities for hydrocarbon production at sea (IPEA -Morais, 2013, p.113). The reasoning behind the decision was explained by Shigeaki Ueki in a 1977 interview to the newspaper O Estado de São Paulo as follows:

“Geisel said that even if the oil cost three times as much, we had to invest for two

reasons: first, in order to learn to produce oil in deep water for Guaricema was in

20 meters of water, and because on land the possibilities are fewer, and secondly,

because the world price will tend to rise” (Philip, 1982, pp. 383-384).

Oil from Guaricema started to flow in 1973. To produce this oil, Petrobras imported the entire production system from the United States, including the platform, the oil production system, and the onshore processing station. Along with the other small but significant discoveries in the Sergipe basin, the Guaricema find propelled further seismic and geological studies in the Brazilian continental shelf, which generated data to be

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processed and interpreted in Houston. As a result of further exploration in the Northeast shallow waters, in 1973, Petrobras found oil in Ubarana in Rio Grande do Norte; Robalo in Alagoas and Mero in Sergipe in 1974 (IPEA-Morais, 2013, p.113).

Down south, one of these exploration campaigns commenced in the Campos basin, southeast of Rio de Janeiro. Data collected since 1968 in Campos indicated “the existence of likely oil-bearing structures, associated with salt features” (Priest in

Schneider, 2016, p.61). The first exploratory well was drilled in 1971 with a jack-up platform at a depth of 49 meters of water below sea surface. Up until 1973, eight wells had been drilled, reaching water depths a bit above 60 meters. The wells turned up dry.

Petrobras technical personnel began to lose faith and recommended relocating the exploration equipment. However, the head of exploration, Carlos Walter Marinho

Campos, following a visit to Iraq, insisted on drilling 200 meters further. In a 1988 interview given to the CPDOC for their Petrobras Memory project, Mr. Campos Marinho explained why he insisted on drilling further:

“I remember well that General Geisel thought that I, as chief of exploration,

should get to know other parts of the world, talk to other people, and sent me on a

trip with the Director of Braspetro, Jose Inacio Fonseca… We went to Iraq,

[then] if I am not mistaken to Tehran, went to Egypt and later to Madagascar…

In this long trip, I became impressed in Iraq with production of oil in limestone

layers at depths around four, five thousand meters… practically, there was no

known production of oil at those depths and that really impressed me. When I

arrived home… the head of surface geology, the man who controlled wells and

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drilling wells, put on my table a telex: “Abandon the Rio de Janeiro No 7 drilling

well”. I thought no, that drilling should continue for another 200 meters. Indeed,

by drilling 200 meters more, a magnificent indication of oil in the top of the

Macae limestone layer, from where oil in Campos comes, became known”

(CPDOC Interview Marinho Campos, 1988, pp. 146-147).

Mr. Marinho Campos’ stubbornness paid off. The first indication of a possible sizable oil deposit in the Campos basin was obtained in late 1973. The news was extremely positive, given that the October 1973 oil embargo had surprised the world with a sheer and precipitous oil price increase (the price of oil rose 44% from USD$ 23.43 per barrel in October of 1973 to USD$ 53.09 per barrel in February of 1974 and continued a consistent upward trend until early 1980 when it almost reached USD$ 120 per barrel, equivalent to a 412% increase).

In September of 1973, based on hearsay, the Brazilian press, perhaps prematurely, reported on the promise of oil at Campos (Jornal do Brazil, “Campos da sinal de petróleo e importações podem disminuir”, September 22, 1973. “Petrobras amplia as pequisas junto a plataforma de Campos”, September 29, 1973). Two months later, a short press article described specifically the results of drilling at the RJS No. 7 well, stating the prospects for oil reserves were substantial (Jornal do Brasil, “Petrobras desloca navio- sonda para o sul”, November 2, 1973). During the first two months of 1974, similar press reports surfaced. This time, the discussion was around possible oil finds in the Rio

Grande Do Norte and Sergipe Basins. The timid and incomplete press reports responded

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to Petrobras’ policy to maintain discretion regarding oil finds until tests were completed and hard facts supported any excitement.

Reportedly, General Geisel was informed of these early indications and urged

Petrobras to withhold releasing any information. He did not want the news to be interpreted as a political maneuver before the Electoral College announced its decision on who was to become Brazil’s 39th president. However, a week before the presidential inauguration ceremony, the insistence of the press was overwhelming, and news on oil finds were released. The Jornal do Brasil’s March 6, 1974 edition reported on the impending confirmation of new oil finds to be detailed at Petrobras’ general assembly the week after (Jornal do Brasil “Petrobras pode anunciar dia 11 novas descobertas de petróleo”, March 6, 1974). A week later, citing declarations by Petrobras’ president,

Admiral Floriano Peixoto Faria Lima, the press reported the company had found oil in

Ubarana in Rio Grande do Norte, in Robalo in Alagoas, and an expanded deposit at

Camorin in Sergipe. The article estimated production from these oil finds would represent about US$20 million savings in avoided crude imports (Jornal do Brasil,

“Petrobras descobre petróleo no Brasil e no exterior”, March 12, 1974).

The lucky streak continued. A few days after the presidential inauguration ceremony in March 15, 1974, President Geisel hosted an evening meeting at the Alvorada

Palace with Admiral Faria Lima and some of Petrobras’ technical corps to be briefed on exploration activities in the Campos basin. The Ministers of Planning, Finance and

Energy were also summoned to the meeting. According to Minister Velloso, at that meeting, Petrobras’s personnel noted the probability of a sizable oil deposit in Campos as

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very high, but requested more time to run tests and confirm its size (Interview with João

Paulo dos Reis Velloso, March 10, 2015).

By the time the Second Development Plan (II PND) was being written (May to

July 1974), the Geisel administration knew that oil deposits at the continental shelf could be substantial. Consequently, the language and the investment figures related to oil exploration included in the Plan reflected this knowledge. On July 23, 1974, the press reported on a meeting hosted at the Ministry of Energy to discuss energy policy within the II PND framework. The meeting was attended by the Ministers of Energy

(Ueki),Planning (Reis Velloso), and by the presidents of Petrobras (Faria Lima), CNEN

(Hervasio Guimaraes), and Eletrobras (Mário Bhering). The high ranking officials discussed basic points covered by the Plan, including hydroelectricity investments at

Itaipu and Tucuruí, the nuclear facility at Angra dos Reis, and investment in oil exploration at the continental shelf (Jornal do Brasil, “Velloso discute política de energia do II PND com Ueki, Faria Lima e Mario Bhering”, July 23, 1974). According to

Minister Velloso, the investment figures related to oil exploration that appeared on the

Plan were provided by Petrobras (Interview with João Paulo dos Reis Velloso, March 10,

2015).

By August 1974, a month before the II PND was sent to Congress, in a meeting with President Geisel, Petrobras’ president, Admiral Faria Lima, officially announced the discovery of a new field in the coast of Alagoas. The Mero field, with 12 thousand barrels of oil, 400 thousand cubic meters of gas and 1,500 barrels of condensate, was the third oil

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find registered in 1974 (Jornal do Brasil, “Faria Lima acha possiveil comprar petróleo da

China”, August 13, 1974).

The II PND was approved in Congress with minor, cosmetic amendments in

October of 1974. To reduce oil import dependency, the Geisel administration committed to investing 26 billion cruzeiros during the 1974-1979 period in the development of a massive hydrocarbon exploration and production program, mostly directed toward the continental shelf. This represented an increase of 225% from the level of investment in oil exploration and production registered in the previous five years. The Plan specifically stated that efforts would be directed at reducing the time between field discovery and commencement of production so that local production would help meet demand (Federal

Republic of Brazil, 1974, Second Development Plan, p.63).

On November 5, 1974, President Geisel hosted a second evening meeting at the

Alvorada Palace to discuss issues related to petroleum exploration at Campos with

Petrobras officials (CPDOC, Ernesto Geisel personal archive, EG rem.s 1979.03.14). A few weeks later, on November 26, the news on the big oil find at Campos made headlines. That day, an official communique from Petrobras was released to the press with the announcement that the 1-RJS-9A exploratory drilling well, located 80 kilometers from the coast of the city of Campos, in the state of Rio de Janeiro, had found an oil deposit at a depth of 124 meters under water. As was customary, the communiqué had a cautious tone and warned that more drilling would be required to establish the true size of the oil field. After this announcement, euphoria took over. The next day, press reports started to speak about self-sufficiency. For example, a newspaper argued that with the

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Campos find, and the other recent discoveries, Brazil was expected to stop oil imports by

1979 (Jornal do Brasil, “Brasil até 79 deixa de comprar petróleo”, November 27, 1974).

The first oil commercial discovery at Campos, later christened as the Garoupa field, was estimated to contain 100 million barrels of oil, effectively doubling the country’s oil reserves. It was discovered at a depth of 3,750 meters below the sea surface using the Petrobras II, a drillship built in Japan in 1971 and owned by Petrobras. The

Garoupa field rested on a column of petroleum of more than 100 meters thickness, in the limestone layers of the ocean floor. Until then, oil deposits in Brazil had been located in the sandstone layer. Garoupa was the first well to be produced in the limestone layer in

Brazil, a far more complex geological structure (IPEA-Morais, 2013, p.116).

Petrobras was not immune to the general euphoria feeling provoked by the first

Campos discovery. In fact, because the geological mapping had detected similar geological structures around the Garoupa field, from the outset a belief that the Garoupa discovery “pointed to the existence of a new oil province and not only an isolated oil field” became firmly grounded among the company’s technical corps. Exploratory campaigns in the Campos basin continued in earnest and by 1977, drilling was completed at a depth of 300 meters below the sea surface. By 1982, drilling achieved 500 meters

(IPEA-Morais, 2013, p.116).

These exploration efforts in the Campos basin paid off. Petrobras discovered the

Pargo, Badejo, and Namorado fields in 1975 (Namorado being the first giant field in

Brazil); the Enchova field in 1976, and the Bonito and Pampo fields in 1977 (IPEA-

Morais, 2013, p.114-15). All Petrobras required then was the ability to shorten the

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discovery to production lead times. To do this, however, the company had to develop its own know-how and technology.

Developing the Campos Basin Oil Deposits

December 1974 was a happy month for the Geisel administration. Despite the dire economic situation and difficulties created by the loss of seats to the opposition party in the prior month’s congressional elections, news of the Garoupa discovery provided hope.

The December 11, 1974, edition of Veja magazine described it as follows:

“Perhaps last Wednesday was the happiest day for the 10 month Geisel

administration. After all, no one better than the President knows the political

force of oil and the capacity that Petrobras has to gather the dreams of grandeur

(grandeza) of the country.” (Veja, “As notaveis virtudes do petróleo”, December

11, 1974)

“The benign discovery made viable the Second Development Plan” (Veja,

“Planos agora viáveis”, December 11, 1974)

Certainly, news of a sizable oil deposit helped keep a dream alive. However, because discoveries do not turn into production instantly, and Brazil’s oil consumption continued to rise dramatically, the Geisel administration and Petrobras faced the challenge to increase oil production from offshore fields at a rapid pace.

According to Adilson De Oliveira, a professor of economics at the University of

Rio de Janeiro (UFRJ) who has written extensively on innovation in the Brazilian oil industry, oil price and production costs are the two factors that drive oil company strategy. Because of the globalized nature of oil trade, oil prices are mostly set by market

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forces. Costs, on the other hand, are largely a function of the knowledge base and the innovation capabilities commanded by the oil company. Petrobras aware of these facts and unable to control the oil price, was organized to minimize costs, develop its knowledge base, and to govern the innovation process of the Brazilian oil and gas industry (Oliveira, 2011, p.6). This process commenced in 1954, but was dramatically furthered during the 1969 to 1973 period, when General Geisel served as Petrobras president.

When General Geisel first arrived at Petrobras he set three priorities. First,

Petrobras needed to make sure the goal of supplying Brazil’s domestic market with crude oil and refined products was met. Second, this goal needed to be accomplished always at the lowest cost and with the greatest efficiency. Finally, Petrobras needed to be run as a for-profit company to avoid inefficiencies associated with typical state-owned companies

(Interview with Sergio Barcellos, Rio de Janeiro, November 15, 2016). To accomplish this, he restructured the company and established the use of business plans.

General Geisel organized Petrobras as a vertically integrated hierarchy with four departments: Exploration and Production, Industrial Activities (Refining and

Petrochemicals), Transportation Activities, and Marketing. Additionally, he organized three support services for engineering, technology, and equipment. As covered in

Chapter 4, for the acquisition of technological capabilities, he created a research center

(CENPES); to develop the domestic supply of its equipment and materials needs, he established the technical division (SERMAT); and finally, for engineering needs, he created the engineering service (SEGEN). The restructuring oriented the company toward

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innovation and autonomy. According to Sergio Barcellos, a close advisor of General

Geisel during his time at Petrobras, this structure and orientation was maintained for years thereafter (Interview with Sergio Barcellos, Rio de Janeiro, November 15, 2016).

From 1969 to 1974, while inroads were made in the developing of technical capabilities and know-how for downstream technologies and processes (i.e. refining and petrochemical), for the upstream sector (i.e. exploration and production), given the high capital investment required and the low success of exploratory campaigns, most of the services and equipment required were being purchased from abroad. For example, all the marine seismic data collected was processed in Houston (Priest in Schneider, 2016, p. 61) and platforms and equipment were mostly imported (Morais-IPEA, 2013, p.112. D

‘Araujo, 1997, p.307).

To reduce the discovery to production lead times and bring the Campos oil fields on-stream fast, it was clear that Petrobras needed to reevaluate the late adopter (rather than developer) technological strategy that it had adopted so far. Petrobras first began the construction of fixed production platformsin Brazil using consortia composed of domestic and foreign firms. CENPES and SERMAT became key institutions in this endeavor. As a result of this technological effort, three distinct fixed exploratory platforms were developed. The first-generation of platforms could be installed in up to 60 meters of water depth and had a small module for personnel accommodation. The second-generation accommodated production of up to nine wells, allowed for the primary separation of fluids (water—natural gas-oil) and were equipped with an oil transfer system to transport oil to land. The third-generation platforms could operate as central

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platforms, allowing the drilling and completion of up to fifteen wells, were equipped with a complete process plant for testing, separation, treatment and transfer of fluids, safety systems and accommodation of personnel. Its dimensions were 26x29 meters, and operated at depth levels of up to 150 meters under water (IPEA-Morais, 2013, p.114).

However, cognizant that installing fixed production platforms in the Campos fields would take between four and eight years and require a sizable amount of capital investment that it truly could not afford at the moment, Petrobras looked at other possible solutions to help expedite the production process. Early Production Systems (EPS)40, an approach adopted by international oil companies for the oil fields in the North Sea, became highly attractive as an interim solution to develop the Campos fields in a short period of time.

In a 2016 edited volume by Ross Schneider, titled New Order and Progress,

Development and Democracy in Brazil, Tyler Priest provides an elegant rendition of the adoption of EPS by Petrobras and the subsequent development of the floating production storage and offloading (FPSO)41 concept by the Brazilian national oil company:

“Petrobras adopted production concepts pioneered in the North Sea and the

Mediterranean Sea to bring its Campos Basin finds on production. In 1977 at

40 EPS involves producing oil through a temporary processing system and exporting the processed crude to a storage vessel for subsequent transport to market. The benefits of an EPS include acquisition of better reservoir data, field development planning, investment optimization, and cash flow generation. 41 FPSOs are offshore production facilities that house both processing equipment and storage for produced hydrocarbons. After processing, an FPSO stores oil or gas before offloading periodically to shuttle tankers or transmitting processed petroleum via pipelines. 215

Enchova, Petrobras deployed an ‘early production system’ comprised of a semi-

submersible production facility and subsea wells successfully demonstrated by a

small US independent, Hamilton Brothers, to produce the first oil from the North

Sea. Two years later, following a precedent set by Shell España in the Eastern

Mediterranean in using a converted tanker to gather oil, Petrobras began

operating the world's second floating, production, storage and offloading facility

(FPSO), the P.P. Moraes, to develop the Garoupa discovery. Garoupa was a

much more trying project than Enchova, suffering one technical setback after

another (complications with wellhead chambers, the production tower, downhole

safety valves, etc.). This resulted in long delays and contributed to the escalation

in Campos Basin development costs, but Garoupa established a vital learning

curve for Petrobras” (Priest in Schneider, 2016, p.63)

Regardless of EPS cost and delays, Petrobras was able to bring the Enchova field on-stream five months after EPS installation. This was a record time given that Enchova field was located at a depth of 120 meters below the sea surface. Thereafter, Petrobras moved on to deeper waters, first assimilating standard technologies and later developing its own.

The first steps taken in the mid-1970s toward the development of an autonomous technological capability enabled Petrobras’ technical corps, and particularly its research center personnel, to continue developing innovative approaches to offshore oil and gas exploration and production techniques and equipment. By the mid-1980s, with the discoveries of the deep-water Albacora (1984) and Marlim (1985) fields (beyond 400

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depth), a new challenge arose. To extract oil at depths ranging from 400 to 1,000 meters,

Petrobras had to enter into a new technological development phase. Jacques Braile Saliés, former coordinator of Petrobras ultra-deep-water R&D program, described it as follows:

"We discovered Marlim and then, [we asked ourselves] what we are going do?

We have a giant field, in a water depth of 800 to 1,200 meters, and how is that we

are going to produce this? We lived with a generation of Christmas trees with

diving up to 300 meters, and how are we going to do that without a diver, how

will our risers be, how will we anchor the platform, What kind of platform will be

the ideal? Then, Petrobras began to see that it would have to "change" in several

areas to face the challenge, because Brazil needed the oil. "'We looked at each

other [and said]:' Let's buy technology from whom, from the North Sea? They did

not have it… Did not exist. 'Let's buy in the Gulf of Mexico.' Didn’t have it. How

are we going to do it? We will have to change, we will have to develop our

technology and, along with this, we will have to leverage a technology worldwide

so that it has the capacity to supply us'. We needed build a national industry that

could meet our needs” (Braile –Sailes in IPEA- Morais, 2013, p.193 at fn. 125).

Nowadays that pursuit of technological autonomy has Petrobras exploring atworld record depths of 2,500 meters below the sea surface in the Gulf of Mexico and leading bothindeep and ultra-deep production.

Risks and Investment

Investing large amounts in the exploration and production of domestic off-shore, deep-water petroleum reserves was a risky proposition. Given the nature of oil extraction,

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investments had a long-term maturity and an uncertain rate of return. The endeavour also required pouring copious resources into the development of technology and expertise not available in the market at the time. To justify the investment, a firm belief that Brazil ought to develop an autonomous capacity for technological innovation was required; otherwise judged by conventional standards for risk and reward, resources would not have been committed. The narrative below further describes the nature of the risk and levels of investment poured into the Campos basin .

According to a 2013 IPEA study on offshore oil and gas technology development, the investments made and the risks assumed in the production of the Campos basin were among the highest when compared to other investments taking place around the world.

As Figure 5 below demonstrates, Petrobras’ capital investment in exploration and production- expressed in 2017 US Dollars- grew at an impressive rate between 1973 and

1980, registering a compounded annual growth rate of 16% during this period.

Effectively, these investments almost tripled, increasing from $1,347 million in 1973 to

$3,790 million in 1980. Seen as a share of total investment, which includes the downstream and other categories of investment, investment allocated to exploration and production grew substantially in participation, displacing the downstream as the premier recipient of capital allocation (the participation of exploration and production category in total investment grew from 34% in 1973 to 77% in 1980). These investments reflected the Geisel administration’s strategy laid out in the II PND to to reduce dependency from oil imports.

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Figure 5 Petrobras Capital Investment 1973-198042

From an economic sector perspective, oil and gas exploration differs from the vast majority of other economic sectors; more so if exploration is carried out offshore. This is because of the greater inherent economic risks and the requirement to channel copious financial and human resources in advance toward geotechnical surveys and drilling. In spite of significant up-front investments, exploration often results in dry wells or in small,

42 Data from Petrobras. Available at http://www.investidorpetrobras.com.br/en/operational- highlights/investments

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uneconomic deposits. Notwithstanding evaluation technologies such as subsurface geology surveys, gravimetric surveys, and the acquisition of seismic images assist in evaluating an oil find, whether an oil deposit is economic to produce cannot be established until at least one well as been drilled . In addition to high risk on the exploration side, in the specific case of the Campos fields, equipment inexperience (with platforms, subsea christmas trees, manifolds and ducts), made the decision to invest massive amounts of money in the production of these offshore fields carried additional economic and technological risk (IPEA- Morais 2013, p.25).

This random feature of oil exploration and production makes investment decisions daunting. Since uncertainty is so high and the possibility of mitigating risks is low, these decisions are usually taken parsimoniously. Only an impending need, such as that faced by Brazil to increase indigenous oil reserves and production in the mid-1970s at a fast pace, would justify accelerating this process and pouring hefty resources into such uncertain venture. I argue this catalyzing need was necessary but not sufficient to justify the investment itself. To justify the investment, a firm belief that Brazil ought to develop an autonomous capacity for technological innovation was required. This idea, I argue, shaped policymaker preferences and facilitated the emergence of a consensus among policy entrepreneurs (i.e. President Geisel and Velloso) and decision-makers that these investments, though highly risky, were the appropriate course of action.

As covered in paragraphs above, this idea was present during the critical juncture that represented the decision to produce the Guaricema oil field in 1970. It was also embedded in Petrobras through the creation of its research center, CENPES, and its parts

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and equipment service, SERMAT, both of which played key roles in the development of incremental innovations on offshore exploration and production parts and equipment.

Despite Success in Exploration, the Import Gap Continues to Rise

The typical depiction of the risk and reward relationship is as follows: on the one hand, high-risk investments represent a greater degree of uncertainty; on the other hand, they are associated with the probability of higher returns.

In the case of Brazil, the decision to risk investments in the new frontiers at sea paid handsomely. The country experienced continued growth of its hydrocarbon reserves

(oil, gas and natural gas liquids), which went from 969 million barrels of oil equivalent

(Mmboe) in 1973 to 1,718 Mmboe in 1980, as illustrated in Figure 6.

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Figure 6 Brazil Proven Reserves (Oil, Gas and NGLs) 1973-198043

As described in the preceding paragraphs, these investments also spurred research and development activities that culminated in incremental improvements and modifications of technologies and equipment to the Brazilian continental shelf requirements. The domestic equipment and parts industry benefited creating a virtuous cycle unfolding through the SERMAT in which domestic equipment manufacturers were equipped with the capabilities and technical know-how required to manufacture complex

43 Data from Petrobras. Available at http://www.investidorpetrobras.com.br/en/operational- highlights/investments

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pieces of equipment to serve the needs of the expanding Brazilian oil and gas industry

(See Chapter 4 for details on the creation for an equipment value chain through

SERMAT).

Notwithstanding the positive returns on increased reserves and technological advancement, during these years, production of oil stagnated (as illustrated in Figure 7).

While the Geisel administration and Petrobras worked tirelessly to reduce the lead time between field discovery and production in the Campos basin fields, contemporaneous production from onshore wells declined due to field maturation. Despite the increase in price and the consequent enlargement of the oil import bill, domestic demand for oil continued to rise steadily. Whereas consumption rose from 804 thousand barrels of oil per day (kbd) in 1973 to 1,134 kbd in 1980, local production oscillated between 174 kbd and 188 kbd during the same period. Consequently, the gap between demand and local supply grew substantially (represented by the pink color wedge in Figure 7 below), requiring an increase in imports. Oil imports to Brazil grew at a 6% annual compounded growth rate during this period.

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Figure 7 Brazilian Oil Supply and Demand Balance 1973-198044

As the price of oil continued its steady rise, Brazil’s balance of payments situation deteriorated. As illustrated in Figure 8, the current account deficit tripled in 1974, increasing from $2,085 million in 1973 to $ 7,504 million in 1974, mostly due to the doubling of imports (composed mostly of crude oil and basic industrial goods), which went from $ 6,192 million to $ 12,641 million in the same years. Because exports could not keep pace with the growing import bill, during the 1974 to 1979 period, foreign loans

44 Data from the British Petroleum Statistical Review of World Energy- Workbook. Available at: http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html 224

were used to cover the mounting deficit. Brazil’s foreign debt stock rose steadily from

$17, 165 million in 1974 to $49,904 million in 1979 (Genta dos Santos e Colistete, 2009, p.5).

Figure 8 Brazil Balance of Payments 1970-198045

Given the dire balance of payments situation stemming from a negative current account balance on account of rising oil imports, once again the Geisel administration was faced with a difficult policy decision. Despite his aversion to foreign capital in the

45 Data from the Brazilian Central Bank, available at: http://www.bcb.gov.br/ingles/economic/seriehist_i_bpm5.asp

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Brazilian oil and gas sector, President Geisel, a pragmatist, change his stance and in mid-

1975 announced Brazil would allow risk service contracts for exploration of oil and gas.

Adjusting to Reality: Risk Contracts

In his October 1975 speech to the nation, President Geisel announced his decision to allow Petrobras to sign service contracts with a risk clause with international oil companies. It was a stunning course adjustment for the country and a policy reversal for

President Geisel, who had been partial to the State monopoly (D ‘Araujo, 1997, p.307).

This also demonstrated his staunch belief about the need to develop indigenous resources to lessen dependency from foreign energy sources.

The 1967 Brazilian Constitution (as amended in 1969) provided “the exploration and development of petroleum in the national territory constitutes a monopoly of the

Union, in accordance with the law.” The monopoly had existed since 1953 by law (Law

2004). Yet the oil crisis and the crushing oil import bill had brought President Geisel and his administration to the edge, and a means to circumvent the monopoly was crafted to allow foreign capital to participate in the exploration for oil in the continental shelf.

Under the risk service contracts for exploration of oil and gas, foreign oil companies would assume the financial risk of exploration. In the case of a commercial oil discovery, the companies would be reimbursed for a share of the revenues from the production, while Petrobras would act as sole operator of the field. If the exploratory drilling campaigns were unsuccessful, the foreign company would get nothing in return.

As President of Petrobras, President Geisel had opposed risk contracts in 1972 when under the Médici government (1969-1974), the superstar minister of Finance,

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Delfim Netto and the minister of Energy, Antônio Dias Leite Júnior, in seeking to increase the level of oil exploration in the country, had proposed these type of contracts

(Dias Leite, 2014, pp.173-177). President Geisel’s distaste for this proposal was well known. Yet, as news of the potential of the continental shelf resources started to flow, the press reported increased interest from foreign oil companies. In early 1973, Texaco, Esso,

Shell, and Chevron reportedly sent proposals to Petrobras outlining their interest to participate in continental shelf exploration (Jornal do Brasil, “Petróleo da platafoma podera solucionar a crise de energia”, January 25, 1973). However, it was clear that

Petrobras was not interested. In June 1973, a month before General Geisel left Petrobras, the Company’s director of exploration, Mr. Haroldo Ramos de Silva, confirmed in declarations to the press that Petrobras had no intention to open the continental shelf to foreign interest (Jornal do Brasil, “Petrobras não pensa abrir plataforma a estrangeiros”,

June 2, 1973).

This posture with respect to foreign capital was not necessarily shared by some of

President Geisel’s cabinet. Reportedly, the ministers of Finance (Mario Enrique

Simonsen) and Planning (Velloso) – both considered as Cosmopolitan Developmentalist- as well as the Brazilian ambassador to the United Kingdom, Mr. Roberto Campos – the principal advocate of Cosmopolitan Developmentalist thought-, advocated a more open stance and hoped to relax the monopoly by allowing foreign oil companies in the oil sector (Cupertino 1976).46 A few days after the Garoupa field discovery was announced,

46 This fact was confirmed to me by the Minister of Energy, Shigeaki Ueki. 227

Ambassador Campos requested a meeting to discuss the oil find and offered his good offices to establish contact with oil companies such as Shell and British Petroleum. Mr.

Campos thought foreign capital could help in the development of the oil discovery. The meeting was denied. According to Mr. Ueki, President Geisel despised the proposal

(Interview with Shigeaki Ueki, Rio de Janeiro, March 2, 2015).

While excitement was high regarding the prospects of the continental shelf, the fact that oil consumption continued to rise despite discrete gasoline price increases with the consequent impact on the balance of payments, led the Geisel administration, in

September 29, 1975, to discuss the issue of foreign capital in the petroleum sector at the

CDE. A few days later, in October 2, 1975, an extraordinary session of the CDE was held to discuss balance of payments issues, oil and distillate prices and a strategy to ration the consumption of oil and fossil fuels. By October 7, 1975, President Geisel was already meeting with personnel at Petrobras during the day and Congressmen in the evening to explain the risk contracts. President Geisel spoke to the Brazilian people on October 9,

1975, to announce the risk contracts and address any issues of nationalist sentiment

(CPDOC, Ernesto Geisel personal archive, EG rem.s 1979.03.14).

On announcing the risk contracts, President Geisel left the controversial decision for the latter part of his speech, first focusing on his government efforts to reduce oil consumption. He then described his decision as “authorizing Petrobras, without breaking the monopoly, to enter into service contracts with a risk clause incumbent on the performing company in previously selected areas”. He explained the contradiction of the new policy vis-á-vis the state monopoly by describing the Petrobras monopoly not as an

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end to itself but as a means to fulfill the company’s objective to ensure the country’s oil supply under the best possible conditions and the risk contracts as an “indirect performance modality undertaken within the purview of the company and under its jurisdiction and full control” (Pronunciamento pela televisão sobre a situação econômica,

October 9, 1975).

Keenly aware of the strength of nationalist sentiment, President Geisel concluded by recognizing the efforts of those who had opposed risk contracts since 1954 and assuring the country that his decision had been made “in light of the current circumstances and [the decision] was which best attended to the greater interests of

Brazil”. Reflecting on his decision years later, and given his prior refusal to allow risk contracts, President Geisel expounded on his motivations in terms of national security:

“Is it possible to imagine Brazil without oil? For its transportation system. I am

not speaking of individual transportation, but of the collective, of the

transportation of goods and products. What would happen with our aeronautics?

Can you imagine the paralysis of the country? This unresolved problem

constitutes today the greatest vulnerability of our nation. Brazil cannot be

dependent on imports in any emergency” (D ‘Araujo, 1997, p.308).

To manage the risk contracts, Petrobras created a special supervisory agency

(Superintendência de Contratos de Exploração or SUPEX). The SUPEX carried out four tenders from 1976 to 1979. Notwithstanding the general excitement the Campos finds brought about, only six proposals were received in the first tender. After some relaxation of terms, in 1977, interest from foreign oil companies increased. By 1980, investments

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linked to the risk contracts were said to be around $1.2 billion. However, the results were dismal. Only a small natural gas discovery in the Santos Basin, made by Pecten (Shell) in

1981, was recorded. Some analysis suggested the reasons for the scant results were linked to Petrobras’ dislike of the contracts and the fact the national oil company was in charge of selecting the areas offered to the foreign competitors. Others suggest it was due to the difficult Brazilian geology, for which foreign operators were unprepared (Priest in

Schneider, 2016, p.62).

Conclusion

During the five year period that Ernesto Geisel presided over Brazil, Petrobras managed to increase the country’s proven oil and gas reserves by 80%. Remarkably the bulk of this increase was in reserves found in shallow waters in the Brazilian continental shelf. As the detailed narrative demonstrated, the positive outcome can be traced back to decisions made during the late 1960s, when Ernesto Geisel was at the helm of Petrobras.

The emphasis he imprinted on efficiency, developing in-house knowledge, and an autonomous capacity for innovation permeated every sphere of the company. Equally the decision to pour hefty resources into the development of indigenous production methods and facilities that could shorten the time from discovery to production of the Campos basin fields rested on the idea that Brazil needed to develop an autonomous capacity for innovation. Finally, the fact that a staunch nationalist such as Ernesto Geisel consented to the opening of the Brazilian petroleum sector to foreign concerns through the risk service contracts for exploration indicates that pursuing a policy for the enhancement of

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indigenous energy production and thereby the reduction of energy dependence, trumped any other consideration.

Policy 2: The Ethanol Program (Pró-Álcool)

Introduction

This section examines the policy process that culminated with the enactment of the “National Alcohol Program” (Programa Nacional do Álcool or Pro-Álcool) in late

1975. The section first explores how an agricultural based solution to an energy problem fitted within the overall government strategy. It then describes the type of ideas and institutional setup that gave birth to ethanol as a solution to the impending energy crisis.

Next, the section examines the decision-making process that led to the creation of the

Brazilian ethanol program. The section ends with a discussion of alternative explanations that have been offered and elaborates on how an idea based explanation seems to fit better to the historical record.

An Agricultural Based Solution

Sugarcane, a longstanding staple of Brazilian agriculture, experienced significant growth in the late 1960s (Barzelay, 1986). The expansion of land cultivation around growing urban centers, particularly São Paulo and the growth of the international sugar market following the US embargo of Cuban production, slowly reoriented the local industry from local demand towards exports (Barzelay, 1986, p.133). This growth was nurtured and supported by the Institute of Sugar and Alcohol (Instituto do Açúcar e do

Álcool- IAA), an entity established by President Getúlio Vargas in 1933 to serve as a

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price regulator and buyer of last resort (Hira et. al., 2009). More specifically, the IAA was tasked, among other things, with ensuring the:

“internal balance between the annual cane harvests and the consumption of

sugar, by compulsory application of a quantity of raw material, to be determined,

to the manufacture of alcohol” and encouraging “the manufacture of anhydrous

alcohol, by installing central distilleries by assisting… cooperatives and unions of

‘uzineiros’… to install distilleries or to improve their current facilities” (Decreto

nº 22.789, 1933).

The creation of the IAA had been accompanied by a number of governmental efforts to incentivize the production of anhydrous alcohol and its mix with gasoline

(Eaglin, 2015). As a result, by the 1973 oil crisis, the country’s experience with the production of ethanol was significant but at a small and irregular scale contingent of the price of sugar (D ‘Araujo, 1997, p.309).

When the price of oil spiked in late 1973 following the Arab embargo, Ernesto

Geisel had already been nominated by the pro-government ARENA party as presidential candidate. Because the presidential election was indirect- administered by an electoral body dominated by ARENA-, the endorsement by ARENA meant Ernesto Geisel was in fact already elected president. The actual presidential election results were disclosed by the Electoral College in January 15, 1974, and from this point forward Ernesto Geisel was officially the 29th president of Brazil.

Aware that time was short, Ernesto Geisel wasted no time and spent the months between August 1973 and February 1974 structuring his government’s team and agenda.

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He formed his ministerial team in 67 days between December 1973 and February 1974.

For the Ministry of Agriculture, President Geisel picked an unknown agronomist and scientist, Alysson Paulinelli. According to Elio Gaspari’s journalistic trilogy on Brazil’s

1964-1985 military dictatorship, Mr. Paulinelli was suggested to President Geisel by an unknown and unimportant general. Nonetheless, Paulinelli was called to meet the president-elect in early 1974 (Gaspari, 2003, p.303).

Mr. Paulinelli confirmed this chronology of events, and added that President

Geisel invited him to his interim office at the Botanical Gardens in January 2, 1974 to discuss the agricultural science and technology projects that Paulinelli had helped established in the Minas Gerais state since 1971. President Geisel was interested in whether similar programs could be replicated at a federal level and asked Paulinelli to provide a written proposal. During this hour and half conversation, Mr. Paulinelli noticed

President Geisel was well-versed in agricultural topics and keenly aware of the disadvantages Brazil faced in making its agriculture competitive. President Geisel seemed to have read all Paulinelli’s reports in preparation for the meeting. Two weeks after this first meeting, Paulinelli was asked back to the Botanical Gardens headquarters and offered the post of Minister of Agriculture. According to Paulinelli, after this invitation was made, he met with President Geisel and his chosen ministerial team, particularly Simonsen (Finance), Velloso (Planning), Ueki (Energy) and Golbery (Chief of Staff of the Presidency), at various opportunities at the interim headquarters during the afternoons to discuss the government’s strategy for tackling the challenges brought by the

1973 oil crises (Interview with Alysson Paulinelli, November 14, 2016).

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Out of these afternoon sessions came the idea that in order to propel the economy and cover the increased fuel import bill, the agriculture sector needed to become more competitive. With this in mind, the Geisel administration focused on funding science and technology activities that would provide Brazil with agricultural solutions for a tropical country. In this regard, Paulinelli explained that soybean cultivation was a great example.

Until the early 1980s, soybean seed planted in Brazil had very low productivity because it was developed for a different soil and climate, more akin to Northern Hemisphere needs.

Brazil required the capacity to develop seeds that would flourish in tropical conditions.

With this in mind, under the tutelage of Paulinelli and with the full support of President

Geisel, the Brazilian Agricultural Research Corporation (Empresa Brasileira de Pesquisa

Agropecuária -EMBRAPA) became the center of agricultural research and development, receiving substantial federal funding during the 1974-1979 period (Interview with

Alysson Paulinelli, November 14, 2016).

According to Paulinelli, the Brazilian ethanol project was conceived under the umbrella of the agricultural solution described above. By the time Geisel assumed the presidency, ethanol from sugar cane had already been discussed as a partial transportation fuel substitute solution that would help reduce crude oil and gasoline import bills in the short-term (Interview with Alysson Paulinelli, November 14, 1016).

In search of technological autonomy and the ideas of José Walter Bautista Vidal

José Walter Bautista Vidal (1934-2013) is credited with developing the Brazilian

Program of Alternative Energy Sources that gave birth to the Ethanol Program. Educated as a civil engineer in Brazil in his native state of Bahia and as a physicist at Stanford

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University, Bautista Vidal began his technocratic career in the late 1960s when the

Governor of Bahia, Luiz Vianna Pilho (1967-1971), tasked him with the development of the first Science and Technology Secretariat in the country. His success developing science and technology research centers and institutional capabilities propelled him to become known in high policy circles (Moura, 2015. Relatório – Bautista Vidal, 1980).

When the 1973 oil crisis hit, Bautista Vidal was at the University of Texas at

Austin as a visiting professor. Between October and December of 1973, Bautista Vidal visited various U.S. research centers dedicated to the study of alternative energy sources.

Upon his return to Brazil in early 1974, the incoming Minister of Trade and Industry,

Severo Gomes, whom Bautista Vidal had come to befriend, suggested the Bahia professor to President Geisel as the person to lead the government’s efforts to develop a technology program for renewable energy sources. Geisel had met Gomes as Minister of

Agriculture during the Castelo Branco government (1964-1969) (D ‘Araujo, 1997, pp.265,309) and knew he favored a nationalistic economic policy that sought to strengthen the domestic producers and the internal market (Skidmore,1988, p.201).

Bautista Vidal himself was also a highly reputed and known “nationalist” scientist, having been an advisor to the Planning Ministry, the BNDES, and having contributed to the creation of the National Fund for Scientific and Technological Development

(FNDCT) and the first two National Science and Technology Plans (Relatório – Bautista

Vidal, 1980).

Bautista Vidal was a believer in the country’s potential to develop indigenous technological capacity (Moura, 2015). He believed Brazil possessed human and financial

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“critical mass” to develop technology on the basic engineering processes for the industrial sector that would avoid furthering dependency on foreign capacity. He referred to this as the “technological autonomy challenge” (Relatório – Bautista Vidal, 1980). In his view, Brazil had taken important steps to tackle the autonomy challenge by establishing the national steel company (Companhia Siderúrgica Nacional or CSN) in

1941 and Petrobras in 1953. However, he believed Cosmopolitan Developmentalist thinking, sponsored by Roberto Campos, undermined that progress by allowing foreign interests to participate in the industrialization process, particularly in the automobile industry (Moura, 2015). Regardless of his distaste for the cosmopolitan aspects, he admired the Developmentalist unrestrained belief in the future of Brazil (Moura, 2015).

Indeed, Bautista Vidal was himself a dreamer, leading many who later opposed his ideas to dismiss him as such (Barzelay, 1986, p.175).

In March 1974, Bautista Vidal was appointed as the head of the Ministry of

Trade’s Industrial Technology Secretariat (Secretária de Tecnologia Industrial or STI) and tasked with coordinating the technical and scientific studies across 27 science and technology institutions that would support policy decisions (Moura and Ribeiro Filho,

2016). Over a four-month period, from March to June of 1974, Bautista Vidal gathered together a substantial number of scientists and with their help completed an effort to develop a global study on possible solutions to the oil crisis in Brazil. According to

Bautista Vidal, it was during this time that the overall strategy for the Brazilian technology program for renewable energy sources was structured. This technology program included:

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• Establishment of a technology research group for ethanol fueled motors and turbines

at the Aerospace Technical Center (Centro Técnico Aeroespacial or CTA)

• Realignment of the activities at the National Institute of Technology (Instituto

Nacional de Tecnologia) toward the study of fermentation, organic chemistry, etc.

Research objectives included studies of ethanol production from various biomass

options such as wood and cassava (mandioca) (Relatório – Bautista Vidal, 1980).

In 1975, the program was expanded with the establishment of two engineer working teams for the development of basic engineering processes that could take the research prototypes into commercial developments. It was under this umbrella that the

National Alcohol Program (Pró-Álcool) originated.

According to Bautista Vidal, between March 1974 and March 1979, he was personally responsible for developing the program, which he presented in a September

1975 document to President Geisel that outlined "the research on the use of ethyl alcohol as self-propelled fuel substitute for petroleum derivatives". This study informed the establishment of the program that same year (Moura, 2015. Relatório – Bautista Vidal,

1980) (see section below for further detail on the study).

In Bautista Vidal’s view, in spite of the contradictions within the government between Severo Gomes (Nationalist Developmentalist) on the one hand and Ueki and

Velloso (Cosmopolitan Developmentalist) on the other, the program had nonetheless been created “in a sound way, based on a totally national technological base, against the dependent model" (Moura, 2015).

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Forming an ethanol policy: private and public actors and the president’s primacy

In a 726-page dissertation on the political economy of the ethanol policy in Brazil, titled “Alcohol as Fuel in Brazil: An Alternative Energy Policy and Politics” (1985),

Maria Helena de Castro Santos describes the first steps taken by the Geisel administration to develop a policy for the production of ethanol as a carburant (i.e. additive to gasoline).

According to her description, in early 1974, President-elect Geisel asked the incoming ministers of energy and industry, Shigeaki Ueki and Severo Gomes, respectively, to formulate a policy which would alleviate the adverse effects of oil price hikes in the economy. As a result, the ministers are said to have prepared a document proposing a policy built around a blend target of ethanol into gasoline of up to 30%. Approved by

Geisel, the document was allegedly sent to the IAA for implementation (Santos, 1985, p.257). The IAA reacted to the alleged ministerial proposal by preparing an alternative document in July 1974, titled “Fuel Alcohol Policy” (Política do Alcool Carburante). In this document, a lower blend target was proposed because the 30% endorsed by the ministers was considered unattainable and uneconomic. In contrast, achieving a 10% target blend within two years was feasible using autonomous distilleries. Citing a 1981 interview with Nicodemous de Andrade, Director of the Data Processing Department at

IAA, Santos states the July 1974 IAA document along with a draft decree-law to establish a comprehensive alcohol policy was presented to President Geisel by Alvaro

Tavares de Carmo, the president of the IAA (Santos, 1985, p.257).

Regarding the participation of the private sector, Santos traced the first contribution of private actors linked to sugar or ethanol production to a March 1974 study

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performed by Lamartini Navarro Jr, Cicero J. Franco, and other private sector actors, entitled “Photosynthesis as an energy source” (Fotossíntese como Fonte Energetica). The study’s main proposal was to blend sugarcane ethanol with gasoline to reduce petroleum imports (Santos, 1985, p.255). This is confirmed by a speech delivered by Ruy Silva, a

Lower House representative in April of 1979, in which he stated the 1974 March study was performed at the request of Minister Ueki and provided to the National Petroleum

Council, the IAA, the Ministries of Energy and Mines, Industry and Trade, and

Agriculture. According to Ruy Silva, the study suggested a blend target of ethanol/gasoline of up to 25%; price parity between ethanol and sugar; and a plan for the financing of sugarcane based autonomous distilleries (CPDOC, Ernesto Geisel personal archive- EG 6f).

Santos did not link the private sector study with the proposal the ministers allegedly put forward to President Geisel. Nor did she provide a date for submission of the Ministers’ proposal to the IAA. The agendas for the ministerial debrief sessions between the Ministers of Energy and Industry with President Geisel do not provide any indication of talks related to ethanol during the first semester of 1974, nor does the chronology of main events kept by President Geisel’s personal secretary, Heitor Aquino.

The first mention of ethanol in this correspondence appears on June 4, 1974, on a note titled “Alcohol for Carburant Mix” (Álcool para Mistura Carburante), in which Minister

Ueki informs President Geisel of failed efforts to incentivize the production of ethanol via an increase in price. Ueki writes that the IAA, the entity in charge of fixing the price of ethanol, did not accept the price increase originally proposed, suggesting that this price

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was not enough. The Ministry of Energy responded with a new plan which doubled the original price estimate in order to incentivize the production of sugarcane to be used in the production of ethanol. Ueki told President Geisel he intended to call a meeting with the IAA, the National Petroleum Council and the Ministries of Industry and Trade and

Agriculture, to discuss the ethanol issue (CPDOC, Ernesto Geisel personal archive, EG pr

1974.03.26/2, p. 137). A press article from July 12, 1974 confirms that such meeting took place. In this meeting, the ministers and the IAA president agreed to promote an expansion of sugarcane production directed to ethanol or sugar production (Santos, 1985, p.261).

According to Santos, in October of 1974 Minister Gomes presented an alternative draft decree to the IAA’s version. In this draft decree, the Ministry of Industry proposed a target blend ranging from 10% to 25%; price parity between sugar and ethanol; and the use of annexed distilleries for ethanol production. As for price setting, the draft decree proposed to have the CDE in charge of supervising sugarcane crop and alcohol production financing, setting the price parity between sugar and anhydrous alcohol and be the ultimate decision maker with regards to the quantity, place and price at which the

IAA would sell anhydrous ethanol to Petrobras. These suggestions effectively stripped the IAA of the authority to set prices and conditions for purchase of ethanol transferring them to the CDE, over which President Geisel presided (Santos, 1985, p.259). The draft decree presented by Minister Gomes underwent very minor alterations and was in fact made into a decree-law in July of 1975 (Decree No. 75,966 of July 11, 1975) (Santos,

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1985, p.262). This decree was considered the first attempt to develop a policy for ethanol production to serve as fuel.

President Geisel’s acute perception of the potential of the alcohol program was on full display on his June 1975 visit to Brazil’s space agency (CTA) in São Jose dos

Campos in São Paulo.47 Since 1972 and with government financing, the CTA had developed and experimented with ethanol combustion engines under the direction of engineer Ernesto Stumpf. Stumpf’s work in this regard can be dated back to 1952 when he published his findings in various journals, including that of the IAA’s Brasil

Açucareiro (Eaglin, 2015, p. 159). Reportedly it was Professor Bautista Vidal who in early 1974 upon taking charge of the STI had encouraged Stumpf’s research and had asked him to present the results of his research (Bennertz, 2014, pp. 27, 86). During

Geisel’s June 1975 visit to the CTA, Stumpf had led what turned from ceremonial event to a prolonged visit. From the 40 minutes scheduled, the visit turned into an open question and answer section that lasted six hours. (Eaglin, 2015, p. 159. Hammond in

Barzelay, 1986, p.139).

Shortly thereafter, in September 1975, the CTA findings were incorporated in an

STI report to policymakers titled Ethanol as Fuel (O etanol como combustível) (Bennertz,

2014, p.27). The report provided an analysis of economic, technical and industrial aspects of ethanol and presented a comprehensive program for ethanol production, as a viable alternative to gasoline used as a blending fuel or as a replacement. The document

47 Today it is called the Departamento de Ciência e Tecnologia Aeroespacial – DCTA 241

advocated an action focused on structured agriculture and in a highly optimistic tone called for prioritizing cassava (mandioca) (although it acknowledged the need for studies on the use of other plants).

The justification for cassava took into account, on the one hand, the risks of substituting dependence on oil for dependence on sugar, whose international prices were subject to great fluctuations. On the other hand, it took into account the socio-economic benefits of cassava, which could be planted on less fertile soils, such as the Northeast and the Cerrado, allowing extensive use of unskilled labor, and the use of small scale operations without significant cost increases (Castro and Schwartzman, 2008, p.95).

According to a 1980 report published by the National Research Council (CNPq), titled “Technological Assessment of Ethylic Alcohol” (Avaliação Tecnológica do Álcool

Etílico), the STI report was enthusiastically received by the Ministries of Industry,

Energy and Agriculture and provided to President Geisel (CNPq Avaliação, cited in

Castro and Schwartzman, 2008, p. 95). President Geisel reviewed this document in deciding on the National Alcohol Program (Interview with Shigeaki Ueki, March 2,

2015). In fact, shortly after receiving the document, the CDE met on September 18, 1975 to discuss the issue of ethanol. The CDE decided to form an inter-ministerial working group, composed of personnel from the Ministries of Energy, Industry and Trade,

Agriculture and the SEPLAN, to outline a policy for ethanol production for its use as carburant and as a petrochemical feedstock. The working group had 30 days to perform the pertinent analysis and present its conclusions. To increase ethanol supply, the government was to incentivize the development of sugarcane and cassava crops to be

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used as feedstock, without jeopardizing other crops or increasing the need for import of agricultural products. Because ethanol production was expected to help curb petroleum consumption, reducing the need for gasoline or petrochemical feedstock such as ethylene, the project acquired priority status (a urgencia urgentisima) and once the studies were performed, the CDE was expected to quickly decide on a policy (O Estado de São Paulo,

“CDE adianta os estudos para adicionar o álcool á gasolina”, September 18, 1975).

Less than a month later, on October 9, 1975, the National Alcohol Program was announced to the Brazilian people, in a televised presidential speech in which President

Geisel stated:

“The Government has also decided to approve a National Alcohol Program,

designed to enable use of ethanol, progressively, as fuel with a target blend up to

20%, and as raw material for the chemical industry.

The set of measures to be soon announced for this purpose include the purchase

of alcohol, by PETROBRÁS, at the new price levels (parity with the price of

crystal sugar), the financial stimulus to the production of additional sugarcane

and the construction of annexed or autonomous distilleries.

There will also be special support programs to the production of alcohol from

other sources, - manioc and sweet potatoes - notably in new areas.”

(Pronunciamento do Excelentíssimo Senhor Presidente da República, pela

televisão sobre a situação económica 9 de outubro de 1975)

The October announcement of the National Alcohol Program generated diverse reactions from the public and particularly from the sugar industry. Several press articles

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weighed in on the program’s design, goals and, economics (JB articles 10/23/1975,

10/28/1975). A copy of a draft decree for the National Alcohol Program appeared in the

Jornal de Brasil’s November 1st edition. The article containing the leaked draft decree presented conflicting views from the sugar industry with respect to the proposed program. Specifically, the São Paulo sugar and ethanol industry association (Copersucar) rejected the proposed state monopoly on the trade and distribution of ethanol granted to the IAA in the draft decree. Additionally, for Copersucar, it would be only possible to meet the production goals set for the National Alcohol Program by relying on sugarcane as feedstock and annexed distilleries. Based on this information, Santos argues sugar industry associations via public pressure succeeded in adapting the Alcohol Program to their advantage before it was formally enacted (Santos, 1985, pp. 278-280). However,

Santos’ claim is contradicted by government declarations made to the press. Three days later, on November 4, the Minister of Industry and Trade stated the leaked draft decree did not correspond to the decree to be presented by him and the Ministers of Energy and

Agriculture to President Geisel at the CDE (Jornal do Brasil, “Ministerio desmente o decreto divulgado”, November 4, 1975). Further, an article on November 7, 1975 edition of the Jornal de la Tarde, titled Gasoline: petroleum plus ethanol (sugarcane or cassava), the government will not accept any pressure to decide on the National Alcohol Program

(Gasolina: petróleo + álcool (cana ou mandioca), o Governo nao vai aceitar pressos para decidir o Programa Nacional do Alcool), elaborates on the negative of the government to acquiesce to Copersucar’s position (cited in Santos, 1985, p.280).

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The CDE met in November 5 of 1975 to discuss the ethanol policy. For this meeting, the Ministers of Agriculture, Energy, Trade, and Industry had prepared a formal proposal on the Alcohol Program (Exposição de Motivos), accompanied by a draft decree

(Diário Oficial da União, November 14, 1975). The meeting reportedly lasted over three hours, but no resolution was achieved regarding the final decree. The ministers were asked to continue working on the draft proposal and a new CDE meeting was called. A chronology of events kept by Heitor Aquino Ferreira, President Geisel’s personal secretary, demonstrates that President Geisel held a CDE meeting at his weekend house in Rio Fundo on November 8, 1975 to discuss the ethanol program (CPDOC, Ernesto

Geisel personal archive, EG rem.s 1979 03.14). Six days later, the National Alcohol

Program was officially established through a presidential decree on November 14, 1975.

This decree superseded the July 1975 decree (Decree No. 75,966 of July 11, 1975).

By the time president Geisel decided to formally launch the ethanol program, he knew that in terms of technological advancement it was possible to develop this renewable fuel not only to blend with gasoline (i.e. a partial substitution with the use of anhydrous ethanol), but as a fuel with the capacity for full substitution (i.e. hydrous ethanol). He also knew that cassava was a suitable, competitive feedstock for ethanol production, but time was needed to develop the related infrastructure, logistics apparatus and know-how required. Given the celerity with which the Geisel administration needed to produce ethanol to reduce petroleum imports, starting the ethanol program with annexed distillers to sugar production seemed to be the best alternative.

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The Decree

On November 14, 1975, Decree No. 76,593 was issued establishing the “National

Alcohol Program” (Programa Nacional do Álcool or Pro-Álcool) to attend to the “needs of the internal and external market and the automotive fuel policy” (Article 1). To that end, the “production of alcohol from sugarcane, cassava or any other inputs” would be encouraged with an increased supply of raw materials through increased cultivation of feedstock, distillery expansion and modernization and the installation of new production and storage plants (Art 2). Both feedstock supply and distillery “modernization, expansion or deployment” would be financed by the National Rural Credit System

(Sistema Nacional de Crédito Rural) and the BNDES and other government-controlled banks respectively (Arts 4, 5). Finally, the government, specifically the National

Petroleum Council, would provide a guaranteed market and price for ethanol for both fuel and petrochemical uses (Art. 6). Taken together, the Program effectively established a production value chain (Shayegh, 2015, p.330).

The decree itself was accompanied by an explanation of its motives (Exposição de

Motivos) that stated its goal as follows: economize foreign currency through the substitution of imports for combustibles and primary materials derived from petroleum; reduce regional and individual income disparities; increase internal income through the expansion of domestic jobs; and expand the production of capital goods through “highly nationalized” equipment contracts, going toward the expansion, modernization, and implantation of distilleries (Eaglin, 2015, p.167).

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Pro-Álcool was implemented in two phases. In the first, which ran through 1978, anhydrous ethanol-gasoline blend came into use, annexed distilleries to sugar producing mills were constructed and the automotive industry was encouraged to begin producing automobiles with motors exclusively using ethanol. The target was a 20% mix, but while increased ethanol production of a total of 3 billion liters was reached in 1977 (three years ahead of schedule), the mix did not happen until 1983 (Ferraz Dias de Moraes, 2014, p.30).

The second stage of implementation began in 1979 under the presidency of João

Batista de Oliveira Figueiredo (1979-1985) and followed that year’s oil shock. It was established through Decree No. 83,700 of 1979 and focused on the large production of hydrous ethanol for ethanol-only vehicles, which grew from 395 million liters for the

1978/79 crop, reaching 1.7 billion liters for the 1991/92 crop for a vehicle fleet that increased from 240,638 in 1980 to 698,564 units in 1986 (96% of all new vehicles sold that year) (UNICA, 2007, p.22).

The contrast between ideas and other explanations

The narrative above put forward an ideational based explanation to the development of Brazil ethanol program. An alternative explanation was offered by

Michael Barzelay through his study of the political economy of ethanol in Brazil (1986).

He suggests that historical state interventionism in the Brazilian sugar industry coupled with low sugar prices in the world market and political expediency with regards to an influential economic sector explain the National Alcohol Program. He downplays the impact of the 1973 oil crises as an explanatory factor:

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“While the OPEC shock surely added to the probability of the 1975 decree, this

second threat to the Brazilian model of politico-economic development may not

have been necessary for the launching of the National Alcohol Program”.

Barzelay argues that the rapidly declining value of the Brazilian sugar exports was itself a pressing problem for central decision makers not only because sugar had become a major credit item in the balance of trade helping generate needed reserves, but because of the political clout the sugar industry had over a military regime in need of legitimacy.

To secure the support of this important industrial group, the military government needed to find a way to rescue the sugar producers, particularly because the industry had gone into an expansion mode, investing heavily in installed capacity that needed to be put to use in order to amortize the investments (Barzelay, 1986, p.147).

However, a closer look at the chronology of events does not support the above interpretation. Both Minister Ueki and Bautista Vidal indicated that in 1974 and 1975, when the National Alcohol Program was being designed, the price of sugar in the international market became a disincentive for the program (Interview with Shigeaki

Ueki, March 2, 2015. Relatório – Bautista Vidal, 1980). According to Bautista Vidal, the annual average price of sugar in the international market in 1973 was $199 per ton; in

1974 it climbed to $576 per ton; and in 1975 it reached $608 per ton. It was in the

1976/77 sugar crop year that sugar prices in the international market drastically declined to around $120 per ton (Relatório – Bautista Vidal, 1980, pp. 4-5), causing distress in the

Brazilian sugar industry.

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The data confirm Bautista Vidal’s assertions. Figure 9 below plots the monthly price of sugar in the international market from January 1973 to December 1979.

Noticeably, the price of sugar spiked in early 1974, and not until September of 1976 did it reach 0.2 US$/kg, the same price level before the spike.

Figure 9 World Price of Sugar48

1.4

1.2

0.8

US $/kg US 0.6

0.4

0.2

Jan-75 Jan-73 Jan-74 Jan-76 Jan-77 Jan-78 Jan-79

Sep-73 Sep-74 Sep-75 Sep-76 Sep-77 Sep-78 Sep-79

May-74 May-75 May-76 May-77 May-78 May-79 May-73

48 Figure constructed with data from Word Bank, Global Economic Monitoring Database- Commodity Prices. Available at: http://www.worldbank.org/en/research/brief/economic-monitoring

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By the time the price of sugar collapsed in the international market, Brazil’s

National Alcohol Program had already been designed and sanctioned by presidential decree.

Additionally, in addressing the thesis that the Pró-Álcool Program was launched to rescue the sugar producers, Minister Ueki noted the ethanol program presented a holistic solution for sugarcane use. The idea was to create a sugarcane value-added chain and for ethanol production to be part of this chain along with the production of sugar.

Importantly, the program was intended to break with the traditional system the sugar industry had implemented to produce and sell sugar for the international market.

According to Ueki, Brazilian sugar producers lobbied to have the small producers’ production cost be part of the average producer cost figures used to establish the price of sugar. Because small producers tended to have higher costs, the price of sugar was usually set high. Large sugar mill companies, which enjoyed lower production cost, benefited largely from this price scheme. President Geisel did not consider that maintaining high prices, for sugar or any commodity that Brazil produced, was beneficial for Brazil as a whole because it only benefited the exporters in the short term. High prices also acted as signals for other producing countries to ramp up supply, which traditionally resulted in over-production, low prices and the loss of market share for Brazil in the international market (Interview with Shigeaki Ueki, March 2, 2015).

For the Geisel Administration, what the Brazilian sugar industry needed was to increase its competitiveness. Through strategic planning, the Geisel government sought to develop sugarcane harvesting plans that encompassed various uses: sugar production,

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ethanol, and bioenergy. Economies of scale in production as a result of the multiuse strategy would make the Brazilian sugar industry competitive while helping meet the energy needs of the domestic market (Interview with Shigeaki Ueki, March 2, 2015).

Notwithstanding his main explanation for the Pró-Álcool Program, Barzelay notes the military’s “long-standing concern with petroleum supply” and Geisel’s energy expertise as factors that may be relevant in explaining the Brazilian Ethanol program raison d'être (Barzelay, 1986, p.147). In his work, borrowing from Flynn, Barzelay describes President Geisel as “a man at the helm familiar with the problems of oil and energy at just the time when soaring oil prices represented the most serious external threat to the balance of payments and the continued success of the Brazilian ‘model’”

(Flynn, 1978, p. 473 in Barzelay, 1986, p.148).

Geisel’s experience in the energy sector made him keenly aware of the country’s comparative disadvantages in energy resources and the cost of imported fuel. Indeed, recalling his experience at the helm of the Cubatão refinery, Geisel described a neighboring power plant running on imported fuel oil as an “aberration” (D ‘Araujo,

1997, p.303). Later as president of Petrobras, he evaluated substituting tetraethyl lead for ethanol as a gasoline oxygenator in order to lower the importation of this gasoline additive (Interview with Shigeaki Ueki, March 2, 2015). This confluence of interests may also help to explain the motivation behind the National Alcohol Program as one of a set of strategies to save the country’s foreign exchange by reducing gasoline imports for transportation fuel and petrochemical feedstock (Barzelay, 1986, p.139. D ‘Araujo, 1997, p.309).

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The above reasoning is supported by Geisel’s pronouncements. In his September

1974 remarks to his cabinet of ministers, President Geisel explained that it was imperative to:

“consolidate the growing and diverse field of domestic production that we had

already been able to create, and that we will expand to new sectors – nonferrous

metals, fertilizers, new sources of energy and scarce capital goods- with regards

to which there is still a realistic import substitution policy favored by the

availability of resources and the new international costs scales that offer real

prospective of competitiveness abroad” (Pronunciamento do Excelentíssimo

Senhor Presidente da República, reunião ministerial de 10 de setembro de 1974).

Shortly thereafter in December 1974, the Geisel government’s II PND vowed to:

“[L]imit the consumption of oil to a minimum, particularly in transportation: a

pricing policy for gasoline without any subsidy (an increase of which exceeded

100% in the past year, creation of a mass transportations system, the

electrification of railways, the addition of alcohol to gasoline and the elimination

of waste” (República Federativa do Brasil, II PND, p. 17).

Barzelay also analyzed the slow pace with which the Pró-Álcool Program evolved during the Geisel presidency. Barzelay argues it was due to various important actors opposing the program and working to limit its expansion. Among those actors were

Petrobras and its former Director of Finance, Shigeaki Ueki. Fueled by concerns about potential competition for liquid fuel sales in the domestic market, Petrobras would have tried to gain control of ethanol production by launching a pilot unit for the production of

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ethanol based on cassava. The enterprise failed and Petrobras desisted; however,

Barzelay contends the absence of Petrobras support to the ethanol program thereafter worked to undermine Pró-Álcool progress (Barzelay, 1986, pp.160-161). Further,

Barzelay argues that regardless of President Geisel’s directive to provide funding to ethanol producing projects, important financing institutions such as the Central Bank and the Bank of Brazil did not lend credence to the program and provided meager finance for the development of ethanol distilleries because they did not see these investments as economically sound (Barzelay, 1986, pp.156-165).

In two interviews with Mr. Ukei, the Geisel Administration’s Minister of Energy,

I explicitly asked him to comment on the reasons for the slow development of ethanol production installed capacity (i.e. distilleries) during the Geisel administration and the opposition from important economic actors mentioned by Barzelay. Mr. Ueki explained that because it typically took 1.5 years for sugarcane to complete its growth cycle and approximately 3.5 years to establish the industrial processing facilities, the strategy chosen initially was to finance associated distilleries through an already-existing sugar production operation. This strategy allowed the Geisel administration to secure that ethanol production targets for gasoline blending were met and the bill for imported gasoline lowered in the short term. He also commented on the reduced pool of financial resources available at the time and how government financing institutions had to limit the number of projects financed to meet available resources (Interview with Shigeaki Ueki,

March 2, 2015).

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As for Petrobras’ obstructionism, Ueki confirmed the oil company desired to have a larger role in the production of ethanol, but that its poor results with cassava made it desist. However, he said that had it not been for Petrobras’ assistance in the gathering and storage of ethanol, using its own infrastructure, the commercialization of ethanol would not have been possible (Interview with Shigeaki Ueki, March 2, 2015).

Perhaps the most important piece of information offered by Mr. Ueki was the confirmation that assertions put forward by Barzelay, Santos, and Eaglin regarding his distaste for the Pró-Álcool program, were untrue. He stated that being part of the Geisel cabinet meant ministers were to present a united policy stand, more so when a decision by the president had already being taken. Indeed, in Geisel’s own words, dirty laundry was to be washed behind closed doors and no one was to contradict the president

(Interview with Shigeaki Ueki, March 2, 2015).

Conclusion

Ethanol as a partial substitute for gasoline in the transport sector was an option already on the table even before Ernesto Geisel assumed the presidency of Brazil in

March of 1974. However, the massive use of sugarcane for ethanol production only came to be a fully-fledged policy after President Geisel visited the ITA center and learned of the potential to develop an ethanol production chain using indigenous resources and technology including the development of a suitable motor engine that could run exclusively on ethanol. The ITA visit was illuminating and more so, the document prepared by Bautista Vidal, a scientist whose ideas on self-sufficiency and autonomous technology solutions accorded well with president Geisel’s own ideas.

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Soon after these episodes, the structuring of the Brazilian National Alcohol

Program acquired a pressing urgency (urgencia urgentisisma). The Program enacted in

November of 1975 effectively established a production value chain for ethanol for its use as carburant and as a petrochemical feedstock. While mainstream explanations emphasize the politicized birth of the program, the review of primary sources indicates that Pró-Álcool was born because it provided a solution to an energy problem built on indigenous resources and technology as well as the possibility to further the sugarcane industry by adding yet another link in this value chain.

Policy 3: The Brazilian Nuclear Energy Program and Cooperation Accord with

Germany

Introduction

The Brazilian Nuclear Program designed by the Geisel administration found its roots in a long desire to turn Brazilian mineral riches into high added value products.

While the idea of attaining self-sufficiency in the nuclear fuel production cycle was already ingrained in key science and technology government institutions since the 1940s,

Brazil’s ability to further this aspiration was undercut by its technological backwardness.

As this narrative discusses in the background section, the first efforts to develop nuclear power for electricity use were limited to the purchase of equipment and technology without any assurance of technology or know how transfer. Increasing demand for electricity coupled with rising oil prices drove the Geisel administration to devise a nuclear energy solution to the energy crisis and to approve the development of large

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nuclear power plants, Angra Dos Reis Units 2 and 3. Developing these facilities required the provision of equipment, technology, and fuel.

As the narrative details, Brazilian nuclear needs encountered a peculiar international context in which uranium riches and nuclear technology were in demand.

Both the U.S. and West Germany advanced efforts to secure Brazil’s nuclear cooperation.

Against this backdrop, the Geisel administration sought to fulfil Brazil’s long desire for self-sufficiency by establishing a partnership for the development of the country’s nuclear industry. The narrative details the policy process that led to the refusal of the U.S. proposal to provide fuel and equipment and the acceptance of the German option, which included a proposal for joint development of technology and an industrial value chain.

This policy process culminated with the signing of the Brazil- German nuclear accord in

1975 and the official launching of the country’s nuclear program two years later. Both reflected on Geisel’s desire to reduce dependence on foreign energy sources by developing a domestic industry and an autonomous capacity for innovation.

Background

As described in Chapter 4, Brazil’s pursuit of self-sufficiency in the entire nuclear fuel production cycle began shortly after the end of World War II under the tutelage of

Admiral Alvaro Alberto (Adler, 1998, p.71). Admiral Alberto’s ideas were imprinted in

Brazil’s first science and technology institution, the National Research Council (CNPq), and the country’s first national nuclear energy development program, created both in

1947. Specifically, Alberto sought to obtain a “compensatory price” for Brazil’s raw materials, “improved quotas” for supplier countries and the “setting up in Brazilian

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territory of a metalwork plant for the processing of thorium and uranium and reactor facilities” (Minutes of the Tenth Session of the Brazilian National Security Council,

Alvaro Alberto’s Proposal To Establish A Brazilian Atomic Energy Program, August

1947). According to Adler, upon Alberto’s resignation from the Council in 1955, self- sufficiency efforts were hindered by the absence of political and ideological consensus in the country (Adler,1998, pp.317-326).

By the late 1960s, the national consensus over technological self-sufficiency had re-emerged among the technocrat bureaucracy and the military governments that began governing the country in 1964. Beginning the early 1960s, economists working for the

BNDES linked underdevelopment with technological dependency (Adler, 2005, pp.210).

The National Commission for Nuclear Energy (Comissão Nacional de Energia Nuclear or CNEN) began behind-the-scenes efforts that brought scientists into the policy-making process (Adler, 2005, pp.130). The CNEN, which had been placed under the purview of the Ministry of Energy and Mines, had also recovered its independence with administrative and financial management under the purview of the president (Diário Do

Congresso Nacional, 1982). As a result, self-sufficiency efforts were revived with intent to acquire natural-uranium reactors and develop a capacity to control the nuclear fuel cycle (Adler, 2005, p.130).

In December of 1971, in fulfillment of a I PND directive that a national nuclear program be developed, the government of General Emílio Garrastazu Médici (1969-

1974) established the Brazilian Nuclear Technology Company (Companhia Brasileira de

Tecnologia Nuclear or CBTN), with the mission to explore nuclear mineral deposits,

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promote the development of nuclear technology for the treatment of ores and fuel production, and install uranium enrichment plants and components for reactors.

Following the 1973 oil crisis and given the massive expenditures in fuel imports that the country’s balance of payments could hardly afford, the Geisel government was pressed to find suitable alternative energy sources. After hydropower, nuclear energy became the next logical alternative given Brazil’s ample radioactive mineral reserves and the progress military governments had made in outlining a nuclear policy for the country.

The high electricity demand growth rates projected in the Plano 90 (see Chapter 4,

Eletrobras- Planning Section) calling for the development of substantial nuclear installed capacity (10 nuclear power units by 1990), prompted the Geisel administration to act fast in order to avoid dire economic disruption due to electricity shortages.

Brazil had the mineral wealth and a domestic market in need of substantial nuclear energy. All the country lacked was an autonomous technological capacity to control the nuclear fuel cycle. To attain this, the Geisel government devised and implemented a nuclear program. This program aimed not only to furnish Brazil with energy self-sufficiency, but to place it in the world stage as an industrialized country capable of transforming its mineral riches into high added value products. In the government’s written explanation of the “Brazilian Nuclear Program”, President Geisel described it as having “the unanimous support of national will and is based on our own efforts, together with external cooperation and the acceptance of safeguards that guarantee strictly peaceful application”. In his view, the program was the result of a joint responsibility of the country’s government and its people to promote its social, economic

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and, political development and for which the availability of “adequate energy sources was indispensable”. The oil crisis had demonstrated that the country could no longer rely on an “expensive fuel of dubious availability”. Indeed, Brazil’s search for an alternative

“at competitive prices, technically viable and above all else secure in its supply” was at the core of Brazil’s energy policy launched in 1974. To that end, given the country’s considerable uranium reserves, “Brazil’s right to enrich uranium in its own country to ensure local supply could not be denied” (O Programa Nuclear Brasileiro, 1977).

Angra Dos Reis Units 2 and 3

In 1968, the Brazilian government authorized the development of the country’s first nuclear power plant and by 1971, Brazil had purchased a pressurized water reactor

(PWR) manufactured by Westinghouse for a nuclear power plant to be located in Angra

Dos Reis, in the state of Rio de Janeiro. The contract encompassed simply an equipment purchase, without any transfer of technology. To ameliorate Brazilian concerns over energy security and fuel dependence, the Westinghouse deal had been assisted by the

U.S. government commitment to guarantee the supply of enriched uranium for the

Brazilian power plant (Skidmore, 1990, p.193) via a cooperation contract signed with the

U.S. Atomic Energy Commission in 1972 (CPDOC, Ernesto Geisel personal archive, EG pr 1974.03.26/2, p. 80).

Supported by electricity demand projections for the 1974 to 1979 period (included in the Plano 90), which called for the development of additional nuclear power plant capacity to meet rising yearly demand growth of over 10%, in May 1974, the Ministry of

Energy and Mines requested and obtained presidential authorization for the construction

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of a second 1,200 MW power plant to be located at Angra Dos Reis. A third 1.200 MW nuclear power plant unit was also discussed in May 1974, but formal presidential authorization for this unit only came a year later in May 1975. These nuclear units were expected to come online in the mid-1980s to avoid forecasted electricity deficits

(CPDOC, Paulo Noguera Bastista personal archive, PNB pn n 1974.07.00, pp. 90-112).

Fuel Provision for New Nuclear Plants and the US- Brazilian Nuclear Relation in

1974

As authorization for capacity expansion was secured, the issue of fuel provision for Angra 2 and 3 acquired relevance. Documents housed with the CDPOC from Ernesto

Geisel’s personal archives indicate that Brazil sought to obtain the fuel provision for the new plants from the U.S. In May 1974, the agenda of the by-monthly meetings between

President Geisel and the Minister of Energy, Mr. Shigeaki Ueki, demonstrate that besides discussing the required nuclear power plant capacity expansion, the Minister recommended an amendment to the 1972 agreement with the U.S. Atomic Energy

Commission to secure the necessary enriched uranium for Angra Dos Reis Units 2 and 3, since it was beneficial to Brazil in terms of cost.

Following a series of communications and the visit of personnel from the U.S.

Atomic Energy Commission in June, 1974, the Brazilian government formally requested the amendment to the contract, sending along a $ 36 million check deposit to the

Commission to secure additional enriched uranium quantities (CPDOC, Ernesto Geisel personal archive EG pr 1974.03.26/2, pp. 80, 87, 132). According to Mr. Ueki, the check

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was later returned as a result of the Atomic Energy Commission’s decision to suspend the supply of enriched uranium to new plants (Interview with Shigeaki Ueki, March 2, 2015).

In July 2, 1974, the Atomic Commission announced a temporary suspension of uranium enrichment contracting. However, the Commission announced its intention to sign on a conditional basis the long-term contracts that were requested prior to July 1974, including the Brazilian contract amendment (U.S. Congress, Joint Committee on Atomic

Energy, 1974, pp. 1347- 1353).

In July 1974, Minister Ueki confirmed the signature of the amended contract with the Atomic Energy Commission, and in August he reported to President Geisel the

Atomic Energy Commission had agreed to specific requests regarding fuel provision for the two new nuclear plants from its own stocks or from private U.S. producers to which the commission would transfer the enriching technology. On October 2, 1974, the head of the CNEN received a letter from his American counterpart detailing a proposal to expand the technical cooperation program. Notwithstanding the enthusiasm shown by the

U.S. to engage in further cooperation, by October 18, 1974, Mr. Ueki reported to

President Geisel possible changes in U.S. nuclear policy that could potentially delay the provision of enriched uranium to Brazil and recommended diversifying options to include other possible European suppliers such as Urenco.

In December of 1974, the Minister briefed President Geisel on an offer from

Westinghouse to provide all services needed by Brazil for its nuclear program, including the two additional units at Angra Dois Reis. By January of 1975, Westinghouse included in its proposal an offer for partial technology transfer for uranium enrichment. In March

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of 1975, Minister Ueki briefed President Geisel on an invitation from the American government to visit Washington, D.C., in order to discuss the Brazilian nuclear energy program. While the Brazilian Ministry of Foreign Affairsurged President Geisel to accept the invitation, his hand-written notes on the ministerial meeting agenda showed he did not find the invitation appealing49 (CPDOC, Ernesto Geisel personal archive EG pr

1974.03.26/2, pp. 212, 308, 417, 419, 437, 475, 480, 492-527, 678, 725).

This chronology of events stands in contrast to the usual accounts with respect to the evolution of U.S.- Brazilian relations on nuclear issues in 1974 and early 1975. This narrative emphasizes concerns over Brazilian military ambitions and nuclear proliferation as the main reason for tensions between the two countries, and ties such tensions to

Brazil’s decision to favor a deal with Germany in 1975, after negotiations with the U.S. had failed. According to Thomas Skidmore, in 1974, the U.S. government undermined the contract amendment with Westinghouse to build the additional nuclear plants, over concerns that Brazil would attain the technology to enrich uranium (Skidmore, 1990, p.

193).

A 1976 research paper by Norman Gall examining the Brazilian- German nuclear accord presents a similar view with respect to U.S. concerns about Brazil’s nuclear ambitions. Gall references the U.S. Atomic Energy Commission Temporary Contracting

Suspension as a reason and opportunity for Brazil to seek an accord with Germany. Gall further stated that “[a]pparently, intensive negotiations with the Germans did not begin

49 The notes, however, do not specify the undelying motive guiding President Geisel’s reticence. 262

until after the U.S. cutoff of future contracts for enriched uranium in July 1974” (Gall,

Norman. “Atoms for Brazil, Dangers for All”, 1976, pp.164, 166).

In 1967, Brazil, intending to demonstrate that its nuclear program had no military objectives, had joined other contracting parties in the Treaty for the Prohibition of

Nuclear Weapons in Latin America and the Caribbean (Treaty of Tlatelolco), subject to

U.S. agreement to the armed denuclearization of the region. In 1968, however, it had refused to join the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), arguing it was discriminatory impinging on its ability to develop a nuclear program for peaceful purposes while allowing nuclear powers to continue to build their nuclear arsenal (O

Programa Nuclear Brasileiro, 1977).

Brazil’s refusal to adhere to the NTP accord did not sit well with the U.S., which since 1945 had campaigned to prevent the proliferation of nuclear weapons technology.

Thus, Brazil’s renewed interest in the development of an autonomous nuclear technology capability in the early 1970s was met with opposition. Some of the fear arose from the suspicion that Brazil’s nuclear program was not necessarily only aimed at peaceful purposes- i.e. the production of electricity-, but also for military/defense aims. Analysts cite the fact that India had exploded its first nuclear bomb in May of 1974 and that

Argentina already had a nuclear reactor by then as factors that drove Brazil to wish to develop a nuclear program (Adler, 1987, p.316).

The primary source evidence consulted along with the interviews with Mr. Ueki demonstrate that throughout 1974 and up to the first semester of 1975, the U.S. government and American companies were deeply interested in being part of Brazil’s

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nuclear program. However, it was clear that the U.S. did not wish to transfer the technology and know-how that would have enabled Brazil to acquire self-sufficiency in the uranium enrichment cycle. Both Skidmore and Gall cite the 1973 oil price shock as a catalyst for Brazil’s renewed desire for self-sufficiency in the nuclear arena. Having already been made aware of the cost of dependence on external fuel sources, Brazil and more specifically the Geisel administration did not see in the U.S. efforts a genuine intention to help Brazil secure its self-sufficiency goals. When presented with invitations to enhance cooperation efforts and visit Washington, D.C. to hold talks about Brazil’s nuclear program or comprehensive proposals with partial technology transfer, the Geisel administration preferred to hold back and explore other avenues, namely cooperation with European partners.

The German Option

To implement the Brazilian Nuclear Program, the Geisel government necessitated a partner willing to establish a relationship of equals, and importantly, to transfer technology and know-how and not simply make available equipment and services for purchase.

By the time Ernesto Geisel ascended to the presidency, Brazil had signed several technical cooperation agreements with countries that already had or were seeking to develop nuclear capabilities, including the U.S., France, Germany, Spain, India (Memoria

CNEN, Biblioteca Digital, Cronologia Brasil). According to Minister Ueki, all these technical accords were limited to the exchange of information (CPDOC, Ernesto Geisel personal archive EG pr 1974.03.26/2, p. 212) and did not offer the possibility of joint

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technology development. In describing the Brazilian- US nuclear relations, Skidmore stressed the fact that having been unable to stop the large industrialized countries from developing atomic technology, the U.S. campaigned hard to maintain small countries (in technology terms) such as Brazil from developing atomic power as an energy source. The

U.S. did so by encouraging request for nuclear technology services and making sure such services were made available to the small countries (Skidmore, 1990, p.193). This strategy was implemented with the various cooperation and technical assistance accords signed with Brazil in 1965, 1967 and particularly in 1972 with the enriched uranium fuel supply accord that secured the supply for Brazil’s first nuclear power plant (Memoria

CNEN, Biblioteca Digital, Cronologia Brasil).

As industrialized countries acquired nuclear capabilities and could build their own reactors, countries like West Germany found themselves quickly losing customers for their nuclear industry. Gall argues this situation drove West Germany to target Brazil as a suitable potential customer for German nuclear technology, equipment, and services.

Approaches began in 1968, when West Germany’s Foreign Minister, Willy Brandt, during a visit to Brazil publicly expressed German interest in supplying Brazil with nuclear technology (Gall, 1976, p. 165). A bilateral agreement for scientific and technical cooperation between Brazil and West Germany was reached in 1969. Negotiations for this accord for the Brazilian side were led by Paulo Nogueira Batista, who then was appointed as minister-counselor of the Brazilian embassy in Bonn and tasked with the implementation of the accord. Nogueira Batista would later become the first president of

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Nuclebras and be in charge of implementing the 1975 nuclear accord between the two countries.

Under the umbrella of the 1969 accord, Brazilian technicians were sent to West

Germany for training and in 1971, a formal relationship between CNEN and the German

Center for Nuclear Energy in Julich was established. When the 1973 oil criss hit, like many other countries dependent on hydrocarbons, West Germany was prompted to find a solution. Nuclear energy was an alternative solution, but West Germany lacked the basic mineral riches needed for energy security. Brazil, a country rich in radioactive minerals and with the potential to provide Germany with an ample uranium supply, presented itself as a suitable partner. For Brazil, West Germany’s willingness to supply technology and jointly develop a nuclear value chain, from uranium prospection to reactor/heavy equipment development to fuel enrichment, made it a suitable partner.

The Nuclear Accord with the Federal Republic of Germany

On October 3 of 1974, Brazil entered into the Brasilia Protocol to a 1969

Agreement for Scientific Research and Technological Development with the Federal

Republic of Germany (West Germany). This Protocol was negotiated and signed in secret and became the basis for the controversial 1975 nuclear accord between Brazil and West

Germany.

As early as March 23, 1974 (one week after the Presidential inauguration),

Minister Ueki briefed President Geisel on the global uranium enrichment business context, stating there were clear indications it would be a sellers’ market for those who controlled enrichment services and suggesting Brazil to take action. In fact a

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communication from General Hugo de Andrade Abreu, General Secretary of the

Brazilian National Security Council and Head of the Military Presidential Staff confirmed that Minister Ueki,

“By Exposição de Motivos no. 245/74, dated April 23 1974…following a general

appraisal of the situation and the prospects for uranium enrichment in the world

and in the country, requested presidential permission for the National Nuclear

Energy Commission (CNEN) to promote understanding with countries in a

position to join Brazil in a joint endeavor with the aim of installing, on Brazilian

soil, a plant to obtain enriched uranium” (CPDOC, Azeredo da Silveira personal

archive, AAS1974.o8.15 mre/pn).

By April 18, 1974, the Minister of Energy also reported on various proposals received by Brazil to form joint ventures to develop uranium enriching capabilities. One of these proposals came from West Germany. The ministerial agenda for April 30, 1974, shows the proposal included “prospection and mining of uranium, technology transfer and the construction of an enrichment plant in Brazil” (CPDOC, Ernesto Geisel personal archive EG pr 1974.03.26/2, p. 41). Later, on June 18, 1974, the head of CNEN met with

German technicians to discuss enrichment technology issues, including the joint development of jet nozzle technology and a possible joint venture among France,

Germany, and Brazil for the development of gaseous diffusion technology. In of July

1974, Minister Ueki reported to President Geisel on impending meetings of a German-

Brazilian commission. A July 22, 1974, memorandum, labeled as top secret, detailed the agenda for a secret meeting “on technical and financial cooperation in the nuclear field”

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between the Brazilian Minister of Mines and Energy and the Under Secretary of the

Ministry of Research and Technology of the Federal Republic of Germany, with the participation of the German ambassador to Brazil and the Brazilian Foreign Affairs

Ministry personnel. Some of the topics discussed included the following (CPDOC,

Ernesto Geisel personal archive EG pr 1974.03.26/2, pp. 252-253):

• “Joint -ventures between German and Brazilian firms to develop an

industrial capacity in heavy components, turbo generators and high-

technology component for nuclear reactors”

• “Technical assistance of German firms to CBTN in the setting up of a

uranium concentration plant for commercial purposes”

• “Joint-venture in Brazil between German firms and CBTH for the

construction of a 3,000 ton plant for the conversion for U308 into UF6”

[uranium oxide to uranium hexafluoride]

• “Joint-venture in Brazil for the construction and operation of centrifuge

uranium enrichment plant for the production of 200 tons of UTS yearly…”

• “Technical assistance of German firms to CBTN in the prospection of

uranium in Brazil”

Thereafter on August 1st, 1974, Minister Ukei reported to President Geisel

German representatives welcome Brazil’s proposed joint venture approach in the nuclear field. The agenda for this ministerial debrief indicates that German officials were expected to visit in early September to “further discuss the matter”, and Ueki requested

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permission from President Geisel to inform the National Security Council of the ongoing negotiations with Germany.

In early September 1974, President Geisel was informed of the schedule for the joint venture negotiations with a 12-person high-level German commission. The German contingent included high ranking government officials as well as personnel from

Kraftwerk Union AG (KWU), a large German utility with nuclear capabilities. The negotiations were held from September 30 to October 3, 1974. (CPDOC, Ernesto Geisel personal archive EG pr 1974.03.26/2, pp. 373, 399). By mid-October 1974, the Brazilian

Foreign Affairs Ministry was seeking presidential authorization for the interim accord reached with Germany on October 3, 1974. This accord came to be known as the Brasilia

Protocol between Germany and Brazil. This protocol encompassed cooperation on a number of fronts, including industrial development of nuclear capabilities, which would later be detailed formally and officially in a 1975 agreement between the two countries.

Shortly thereafter, the Geisel government commenced preparations to adapt the

Brazilian institutional framework to the new nuclear accord. It abolished the CBTN and established the Brazilian Nuclear Companies (Empresas Nucleares Brasileiras S.A or

Nuclebras) in December of 1974 in order to manage the creation of the fuel cycle industry, the building of nuclear plants and the production of their components while

CNEN continued to operate as a supervisory and scientific research organism (Lei 6.189,

1974).

Six months later, on June 27, 1975, Brazil and West Germany signed a “peaceful uses of nuclear energy” cooperation agreement (Acordo sobre Cooperação no Campo dos

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Usos Pacíficos da Energia Nuclear Brasil-República Federal da Alemanha). The agreement provided for the development of enriched uranium reactors and technology to undertake the different stages of the nuclear fuel cycle. More specifically the agreement provided the signatories would:

“[E]ncourage cooperation between research, scientific and technological

institutions and enterprises of the two countries, encompassing the following:

• Prospecting, extraction and processing of uranium ore, as well as

production of uranium compound;

• Production of nuclear reactors from other nuclear installations and their

components;

• Enrichment of uranium and enrichment services;

• Production of fuel elements and reprocessing of irradiated fuels” (Acordo

sobre Cooperação no Campo dos Usos Pacíficos da Energia Nuclear

Brasil-República Federal da Alemanha)

In addition to the agreement, Brazil’s Ministry of Mines and Energy and West

Germany’s Ministry of Research and Technology agreed to industrial protocols for each area of cooperation provide in it; Nuclebrás (or its subsidiaries) and various German enterprises entered into joint ventures that provided for the transfer of technology and equipment. Finally, the 1975 agreement called for both countries to enter a safeguards agreement with the International Atomic Energy Agency (IAEA) ensuring that such nuclear material, equipment and facilities would not be used for nuclear weapons or other nuclear explosives (O Programa Nuclear Brasileiro, 1977). The safeguards agreement

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with the IAEA was concluded in February 1976. The nuclear accord between Brazil and

West Germany was touted as “the largest technology transfer agreement from an industrialized to an industrializing country ever signed” (Patti, 2012.)

A Failed Nuclear Dream

A 1980 governmental accountability report on the Brazilian Nuclear Program indicated that pursuant to government’s plans, the joint development of eight reactors, in addition to the two already in construction at the time, were expected to allow the country to achieve technological autonomy over a 15-year period ending in 1989. These plans were supported by considerable growth in uranium reserves which since 1974 had increased from eleven thousand tons to two hundred fifteen thousand tons by 1979

(Programa Nuclear Brasiliero-Governo Presta a Contas, 1980).

Yet, as of 1987, Brazil had not achieved capabilities in conversion to uranium hexafluoride nor in enrichment. The first Angra Dos Reis plant became operational in

1982 at five times the originally estimated price. Both evidence to some extent the mismagement for which the military governments of the time have been criticized for.

Today, Brazil has two nuclear reactors generating three percent of its electricity, and a third plant is still under construction.

An interview with Mr. David Zylberstajn, a former head of the National

Hydrocarbons Agency, the main regulatory body for oil and gas activity in Brazil does put a positive gloss on the failed effort. Zylberstajn indicated the 1975 nuclear accord was still successful in the development of technical capabilities and human capital in

Brazil. He, in fact, was the recipient of a scholarship funded through the Nuclear Accord

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allowing him to pursue a Ph.D at the Institut d'Economie et de Politique de L'Energie in

France (Interview with David Zylberstajn, November 26, 2015).

Conclusion

The Brazilian Nuclear program became a symbol of a long-term aspiration of

Brazil and its military institution: to turn its mineral riches into high value-added products while attaining self-sufficiency in the nuclear fuel production cycle. Faced with an impending need to develop indigenous sources of electricity to power industry and curtail fuel imports, the Geisel government chose to pursue a nuclear alternative by authorizing the development of two 1,200 MW nuclear power plants. In choosing how to secure the construction, equipment, and fuel source for the nuclear facilities, the Geisel administration decided to seek a partner willing to jointly develop a nuclear program and industry in Brazil. From Brazil’s perspective, a partnership required the transfer of technology and know-how, which were necessary to correct Brazil’s technological backwardness in the nuclear space. As this chapter has highlighted, the U.S. was uninterested in such an arrangement, while West Germany offered not only the capital investment but the technology transfer to develop Brazil’s autonomous capacity for innovation and an industrial value chain.

Policy 4: Hydropower Expansion

Introduction

Exploiting Brazil’s vast hydraulic energy potential became an imperative when the 1973 oil crisis hit the country. This section describes the policy formulated by the

Geisel administration to further develop Brazil’s hydroelectricity potential in order to

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secure reliable and cheap electricity nondependent on imported fossil fuels. The section first describes the rising energy demand requirement faced by this administration, which was further compounded by the II PND import substitution scheme in basic industrial inputs. Then, it elaborates on the reasoning behind the development of large and complex hydroelectric power plants far from consumption centers. Next, the narrative presents the institutional framework developed during this administration geared towards the development of indigenous technology and an industrial value chain in the production of electric equipment and parts. To close, this section examines policy options with regards to financing and revenue generation in the electricity sector.

Rising Electricity Demand

By the early 1970s, Brazil had only developed a meager portion of the estimated

150,000 MW of hydroelectricity potential (about17 MW). Accelerating the development of this vast resource, therefore, seemed a logical policy to pursue in response to the 1973 oil crisis.

According to the minister of Energy, Shigeaki Ueki, the principal policy objective sought by the Geisel administration in the wake of the 1973 oil price shock and subsequent economic crisis, was to reduce energy imports in a progressive way in order to reduce dependency on external energy sources. To do so, the energy policy designed by the administration sought to accelerate research on fossil and nuclear fuels and discover new hydroelectricity reserves; increase electricity, nuclear, and fossil fuel production;and reduce electricity losses via enhancements in its use and elimination of wasteful consumption.

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In the electric sector, these objectives were further developed to outline the following goals (Shigeaki Ueki, 1974):

• Develop hydroelectricity potential and reserve studies in the Amazon;

• Expand electricity supply through the development of generation, transmission and

distribution installed capacity;

• Introduce progressively nuclear power plants into the capacity and generation mix;

• Construct thermal power plants to complement hydro generation;

• Strengthen technology development efforts for electricity systems;

• Establish a realistic tariff policy for the electricity sector that secured the sector’s self-

sufficiency and provided adequate return on invested capital;

• Connect the various regional grids to reduce vulnerability of supply, improve

distribution and reduce cost; and,

• Develop regional integration studies with neighboring countries.

As described in Chapter 4, from 1962 until 1973, the Brazilian government through Eletrobras had already made great strides in mapping hydroelectricity resources, conducting electricity supply planning studies, and developing a hydro generation fleet and the related transmission and distribution infrastructure to bring hydro generated electricity to consumption centers.

Strong economic growth during the Brazilian miracle years (1968-1974) propelled electricity consumption beyond expectations. From 1972 to 1973, electricity consumption grew at a 14.6% rate, the highest registered up to then. The rate of growth even surpassed the projections for electricity demand included in the I PND, which 274

estimated demand during the 1970-1974 period to grow 12% annually. In light of this growth, in 1974 Eletrobras developed a 15-year global planning study called the Plano

90. Centered on the assumption that the economy would continue growing at a rapid pace50, the Plano 90 projected electricity consumption to increase at a 12% clip between

1975 and 1980 and to then grow at a 10% rate between 1980 and 1990 (Pinto, 2012, pp.20-26). This meant an increase of 86% on the amount of electricity required

(measured in terawatt hours- TWh), from 59.2 TWh in 1974 to 412 TWh in 1990 as illustrated in Figure 10. This figure also provides the regional breakdown for the electricity demand projections, where noticeably, Eletrobras’ expectation was to achieve a better distribution of demand among regions. Up to that point, the southeast had been the main electricity consumption center, housing large urban and industrial areas.

Figure 10 Electricity Consumption Projections51

1974 1990 Region (TWh) (TWh)

North 0.8 18

Northeast 5.7 73

Southeast 45.2 265

South 6.3 44

50 10% rate (1974- 1979) and 8% rate (1980 to 1990).

51 Data taken from Almeida Magalhaes, Claudio. “O Problema Energético Brasileiro”. Conference Presentation at the Escola Superior de Guerra, September 9, 1975. 275

Center-

West 1.2 12

Total 59.2 412

To meet this projected demand, planning studies called for the development of thermal, nuclear, and hydropower plants. While thermal plants- mostly coal based- were expected to serve a minor complementary role, nuclear power plant facilities were expected to balance Brazil’s hydroelectric fleet and provide the Brazilian power system with needed baseload capacity. The largest increase in generation capacity, however, was in hydroelectricity, whose large, unexploited potential, and lower cost made it the logical option for greater expansion.

In light of the above, the PND II outlined an electricity expansion program representing an increase of 60% of the power generation installed capacity in 1974 and the related needed transmission and distribution infrastructure. To accomplish this, the

Plan proposed investments of approximately 200 billion Brazilian cruzeiros, which already included amounts for the planned investment in Itaipu and other large hydropower developments (Federal Republic of Brazil, 1974, Second Development Plan, p. 84). The investment amounts and related project listing were provided by Eletrobras through the Ministry of Energy to SEPLAN in May of 1974 as input to the II PND

(CPDOC, Ernesto Geisel personal archive EG pr 1974.03.26/2, p. 99).

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Developing large hydro projects and furthering industrial development for basic inputs

Until the mid-1970s, Brazil had enjoyed low-cost electricity coming from hydro developments installed in the preceding two decades, which had provided an advantage to industrial activity in the country. Much of the exploited hydroelectric resources until then were located in the southeast of the country, closer to urban consumption and industrial centers. The remaining, large and unexploited hydroelectricity potential though was located in the north, particularly in the Amazon region, and far from the established consumption centers. This posed a problem since it was difficult and costly to transport electricity output over long distances without incurring in large losses.

During the Geisel presidency, it was imperative to continue providing cheap electricity to industrial users, particularly to those new energy intensive industries integral to the import substitution strategy in basic industrial outputs, such as steel, aluminum, petrochemicals, and fertilizers, enshrined in the II PND. This II PND strategy was predicated on its potential to curtail imports of the produced industrial goods and also provide Brazil with an expanded export capacity thereafter, thereby helping fix the dire balance of payment situation (Federal Republic of Brazil, 1974, Second

Development Plan, pp.16-17).

Given the long distance between the hydroelectric resource and the consumption centers, the size of the hydroelectric projects became important. Large projects were expected to generate economies of scale and therefore help in maintaining the cost of electricity low. As illustrated in

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Figure 11, out of the 27 hydroelectricity plants that were expected to be developed during the 1975-1990 period, 13 of them had capacities above 1,000 MW. The aggregated capacity of these 13 plants was around 37,000 MW. Among them were Itaipu and Tucuruí.

Figure 11 Planned Hydroelectricity Plants 1975-199052

Plant MW Salto da Divisa 480 Itapebi 600 Promissão 264 Salto Osório 1,050 Maribondo 1,440 Capivara 640 Igarapé 125 Paraibuna 86 Sao Simão 2,680 Itaubá 500 Agua Vermelha 1,380 Itumbiara 2,100 Foz de Areia 2,250 Salto Santiago 2,000 São Felix 1,300 Emboracação 600 Itaipu 12,600 Threcho Jupiá- 4300 Guaria Segredo 1,540 Nova Ponte 320 Gamela 122 Corumbá 300 Fecho do Onça 250

52 Data taken from Almeida Magalhaes, Claudio. “O Problema Energético Brasileiro”. Conference Presentation at the Escola Superior de Guerra, September 9, 1975. 278

Sapucaia 270 Salto Caxias 624 Pinheiro 1,080 Tcucuruí 3,600

The 3,600 MW Tucuruí plant in the Tocantins River was developed to meet the needs, among others, of the large, energy intensive aluminum smelter activity developed by Vale do Rio Doce in conjunction with Japanese investors. On March 26, 1974, during the second ministerial debrief meeting with President Geisel, Minister Ueki provided some insight into the economics of the hydroelectric plant considered as a part of an aluminum production scheme. The Tucuruí investment, at 1974 US$ 0.3 per MW, was expected to provide a yearly return rate of almost 50% because all energy produced would be used in the aluminum production process (CPDOC, Ernesto Geisel personal archive, EG pr 1974.03.26/2, pp. 9-10).

The Itaipu dam project started almost a decade before the first oil crisis in 1973 hit Brazil. Through an Act signed in 1966, Brazil and Paraguay agreed to explore the

Parana River as a potential source of energy and established that electricity production generated from the River’s stretch that goes from Siete Quebradas, in Paraguay to Foz do

Iguazu, in Brazil, would be divided equally between the two countries. Later, in the first semester of 1973, Brazil and Paraguay signed a treaty and created a binational entity entrusted with the development of the civil and engineering works and the financing for the construction of the world’s largest hydroelectricity plant.The binational entity, Itaipu

Binacional, was formally established in May of 1974, a month after General Geisel

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became the 39th president of Brazil (Assesoria de Relações Públicas da Presidência da

República do Brasil, “O Brasil que os brasileiros estão fazendo”, p.2).

Originally, the hydroelectric plant was projected as a 12.6 Gigawatt (GW) facility at a cost of USD$9.4 billion. The plant was to be financed almost entirely through loans

(98%) given the need to reduce equity participation to 2% to allow for Paraguay’s participation (Dos Reis Velloso, 1986, p.318). The actual cost of the plant was double the initial estimate, $18 billion. Among other factors, the cost increase resulted from the general price increases in the wake of the 1973 oil crisis for basic construction inputs such as steel and the fact that electricity produced had to be adapted to the national grids, which operate in different frequencies (the Paraguayan grid operated in a 50 Hz while the

Brazilian grid did so at 60 Hz).

Civil works in Itaipu commenced in mid-1975. However, from March 1974 until the date construction commenced, as shown in the ministerial meeting agendas with the

Minister of Energy, President Geisel was regularly briefed and participated on a diverse set of decisions related to the enormous hydroelectric project ranging from personnel appointments; equity financing; length of terrain to be flooded; negotiations with

Uruguay on the frequency to be used in power transmission; and civil work and other related services contracts. In this last category, discussions revolved around the different biding processes for civil and construction works that Itaipu Binacional tendered. After receiving proposals from various consortiums, some of them formed by international firms such as Westinghouse, the binational entity resolved to award the initial construction contract to a Brazilian/ Paraguayan consortium composed of five firms. The

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memorandum prepared by the Minister of Energy stated it was the best solution because it would solve the frictions with the Paraguayans and also made use of equipment already available locally, thereby curtailing a need for imports by 50% (CPDOC, Ernesto Geisel personal archive, EG pr 1974.03.26/2, pp. 1084, 1111).

Developing a value chain in the electricity sector

Given the lack of foreign reserves to cover imports, the massive hydroelectricity expansion was expected to spur industrial activity in the development of local manufacturing of hydroelectric power plant equipment and parts. The hope was that the first plant units would be imported, but thereafter production of turbines and all related equipment would take place in Brazil (Interview with Shigeaki Ueki, March 2, 2015, Rio de Janeiro).

As covered in Chapter 4, during the early 1970s, through its planning efforts,

Eletrobras had assisted in the development of a domestic electrical equipment and part manufacturing capacity. However, it was with the commencement of the large hydropower plants projects in the north of the country that issues of local manufacturing and technological capacity gained ground. Conscious that the planned electric system expansion would need a concerted effort in the development of technological know-how, the Geisel administration, through the Second Basic Plan for Science and Technology

Development (Segundo Plano Básico de Desenvolvimento Científico e Tecnológico or

PBDCT II), approved in March 1976, set specific guidelines for a science and technology policy for the electricity sector.

The PBDCT II established the following goals:

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• Develop a unified infrastructure for basic and applied research within the federal

system, under the control of Eletrobras;

• Increase local capabilities in the execution of projects and the development of

operational methods for electricity generation, transmission and distribution;

• Develop a domestic electric equipment and parts manufacturing industrial park, as

well as the standardization of products and components.

• To advance the ambitious goals, the Geisel administration had created for Eletrobras’

Electricity Research Center (Centro de Pesquisas de Energia Elétrica – CEPEL).

CEPEL’s mission was to (1) promote human capital development through in-house

training programs and cooperation with universities and (2) provide scientific and

technological research and development support for electricity generation,

transmission and distribution companies as well as manufacturers of equipment and

parts.

To tackle issues of engineering and equipment, the PBDCT II called for the establishment of an Electric Systems Lab (Laboratório de Sistemas Elétricos) and an

Electric Equipment Lab (Laboratório de Equipamentos Elétricos). Both labs were extremely important because they worked to develop the technology and equipment necessary to overcome issues of distance in electricity transmission. Eletrobras had already started investing in programs to develop transmission studies for extra high voltage, but the labs worked on the basic engineering and part manufacturing for high tension voltage lines. CEPEL and the labs also work in assimilating technologies for

770MW turbines, which were to be used at Itaipu.

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The PBDCT II allocated 738 million of cruzerios for the period 1975-1977 to the three institutions to fund their operations (Presidência da República, II Plano Básico de

Desenvolvimento Científico e Tecnológico, p.56).

In 1974, the Geisel administration also made important changes at BNDES that impacted the Bank’s ability to assist in the development of an industrial value chain in the electricity sector. First BNDES was brought into SEPLAN’s purview and therefore under Minister Velloso’s authority. Additionally, the Geisel administration executed three specific changes:

• Granted an expansion of funding by allocating specific resources to the Bank, which

until that point it had not enjoyed;53

• Outlined the Bank’s role as the premier private sector financing institution; and

• Executed an institutional reorganization process, with the creation of new subsidiaries

to participate and assist in the capitalization of domestic companies in strategic

sectors of the economy. Through the subsidiaries, the Bank acted as a holding

company for Brazilian enterprises, taking minority stakes via venture capital, equity,

debenture or warrants. The three new subsidiaries were designed to finance different

industrial sectors. EMBRAMEC focusing on capital goods, FIBASE focusing on

basic inputs, and IBRASA focusing on other sectors provided financing using some

53 The Geisel administration through a decree-law assured the transfer of resources from two social trust funds, the Programa de Integração Social (PIS) and Program de Formação do Patrimonio do Servidor (Pasep). 283

equity–based financing (Memorias do Desenvolvimento- Interview with Marcos

Viana, 2009, pp.72-75).

It has been argued the Geisel administration shifted the Bank’s priorities so that it could become the preferred financing tool to implement the II PND because the Bank not only had the technical capabilities to select economically sound projects and oversee project implementation, but it also had access to international financial markets, which the Geisel administration needed in order to finance the ambitious II PND investment package (Colby, 2013, p.170).

According to a whitepaper developed by the BNDES examining its role in the development of the Brazilian electricity sector, the Bank through subsidized credit for investment, along with FINAME, with subsidized credits for the purchase of machinery and equipment; and EMBRAMEC, with venture capital contributions to companies in the capital good producing sector, were decisive instruments for the development of a domestic industrial park in the production of capital goods, particularly for equipment used in the electricity sector (BNDES, O Setor Elétrico, p. 10).

By 1978, a government-sponsored publication boasted that the equipment and parts used in developing the Itaipu hydroelectric plant had reached a high percentage of local content, as follows:

“In addition to the benefits generated in the civil construction sector, Itaipu is

contributing to the development of national technology, through development of

engineering executive projects and the manufacturing of various equipment,

including the so-called permanent electromechanical - notably turbines and

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generators - whose Index of nationalization is estimated to be 70%” (Assesoria de

Relações Públicas da Presidência da República do Brasil, “O Brasil que os

brasileiros estão fazendo”, p.5).

Inflation, Tariffs and Indebtedness

Responding to inflationary pressures, in early 1975, the Geisel administration through a resolution of the Economic Development Council (CDE) limited increases in electricity tariffs. From that year onwards, tariffs suffered a significant lost in real terms, which greatly affected the ability of Eletrobras and its subsidiaries to obtain enough resources to finance the electric sector expansion program. The issue of funding was solved through the use of domestic and foreign credit. The availability of financing resources in the international markets made it easy for the Brazilian electricity companies to obtain credit lines to finance the large hydropower projects and so investment grew tremendously despite the lack of internal generated resources. With the substantial increase in interest rates in the late 1970s, debt levels grew precipitously. Coupled with the inability of the sector to increase resources through increases in tariffs, sectorial crises ensued during the 1980s (Pinto, 2012, pp.27-28).

Conclusion

Continental-sized Brazil is blessed with water resources and its potential for hydraulic electricity generation is vast. As demonstrated in Chapter 4, this fact was known to energy planners since at least the early 1940s. Exploiting this potential became a policy imperative in the late 1960s when the rapid pace of economic growth necessitated increased energy supplies to power industrial activity and expanding

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urbanization. By the time Ernesto Geisel assumed the presidency; electricity sector planning called for the development of large hydropower facilities to meet expected rising and sustained demand for electricity. Further, the ambitious import substitution scheme in basic industrial inputs advanced by the Geisel administration required abundant and cheap electricity. Only large scale hydroelectric plants would be able to provide the needed low cost electricity. In this context, the Geisel administration saw an opportunity to develop a value chain in the electricity sector, particularly in the equipment and parts electric sector industry.

As the detailed narrative demonstrates, the idea to curtail dependence from foreign sources by enhancing indigenous supply of electricity coupled with a desire to develop an autonomous capacity for innovation led the Geisel administration to invest in developing the institutional capacity required for the development of these large scale and complex hydroelectric projects with Brazilian technology and parts.

Conclusion

The evidence presented in this chapter demonstrates that the policy response adjustment to the 1973 oil crisis in the energy sector was crafted by individuals who strongly believed in national development through industrialization; energy as a growing point for the economy; self-sufficiency; and technological autonomy. These ideas, originated from Positivism and a Developmentalist ideology, were also ingrained in most of the key sectoral institutions such as Petrobras, Eletrobras, IPEA, CNPq and the

BNDES. When crisis struck Brazil, rather than implementing policies to arrest rising energy demand and thus reduce the oil import bill, Ernesto Geisel and João Paulo dos

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Reis Velloso, the key policy entrepreneurs, recombined these old ideas in innovative ways to present a solution that could transform the energy sector and radically change the country’s energy profile: from scarcity to abundance.

As illustrated in Chapter 1, while structural, exogenous, and institutional factors affected the energy diversification policymaking process and thus the resulting policies; I have argued ideas are necessary and in conjunction with institutions and other exogenous factors sufficient to understand Brazil’s chosen path. The narrative developed in this chapter demonstrates Developmentalist ideas are central to understanding Brazil’s risky and unique energy policy response to the 1973 oil crisis.

Faced with a dire balance of payments deficit brought about by the rising oil import bill, Ernesto Geisel and João Paulo dos Reis Velloso outlined an economic strategy seeking to transform the balance of payments structure. Their strategy sought not only to correct the dependence on foreign energy sources, but also to deepen Brazil’s industrialization process. Velloso argued that by investing in the development of a basic industrial import substitution strategy, Brazil would turn its mineral riches into the intermediate inputs needed to develop high value-added products for exports, such as steel, aluminum, and fertilizers. In the minds of these policy entrepreneurs’ minds only industrialization would fulfil Brazil’spotential and help it attain superpower status.

To power these new industries, reliable and cheap electricity was a must. In this context, developing Brazil’s vast hydroelectricity potential became an imperative. But rather than contracting the development of large and complex hydroelectric plants to foreign concerns, these policy entrepreneurs sought to develop a value chain in the

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production of equipment, parts, and technology in the electricity sector so that the large infrastructure projects would be built by Brazilians with Brazilian equipment and parts.

The same can be said of the nuclear program. Faced with a need to quickly develop baseload capacity to meet rising and sustained electricity demand, the Geisel administration approved the development of large nuclear energy plants. Only a desire for technological autonomy and self-sufficiency can explain how a technological backward country with limited capabilities and resources would fight to secure a deal that included technology transfer and joint development of an industrial value chain.

At the same time, to lessen the impact of rising oil prices, the Geisel administration launched a herculean effort to explore and produce indigenous off-shore, deep-water petroleum resources to increase availability of oil supplies. The efforts were fruitful as Brazil was able to increase its oil reserves by 80%. Petrobras’ prowess in exploring and producing offshore oil and gas deposits can be traced back to a decision taken in 1969 when Petrobras, under the helm of Ernesto Geisel, decided to produce the first commercially viable offshore discovery in shallow waters in the Brazilian continental shelf, the Guaricema field. The belief that Petrobras needed to develop an autonomous capacity for innovation led him to pour resources into the production of this field, at a cost three times higher than simply importing equivalent quantities.

Furthermore, Petrobras’ research and development center (CENPES) and its part and equipment division (SEMART), both stemming from restructuring under Geisel, played a fundamental role in allowing the company to move from technology adapter to technology innovator.

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Asimilar belief in self-sufficiency led the Geisel administrationto open exploration and production to foreign investors by authorizing Petrobras to sign service contracts with a risk clause in 1976.

Finally, Brazil’s ethanol program, Pró-Álcool, was also driven by ideas of self- sufficiency and autonomous technology that permeated the structuring and implementation of an agricultural-based solution to an energy problem. The ideas of a nationalistic Brazilian scientist accorded well with those of the President Geisel. Pró-

Álcool provided a solution to an energy problem built on indigenous resources and technology as well as the possibility to further the sugar cane industry by adding yet another link in this value chain.

In sum, the analytical effort to trace the energy policymaking process in this chapter evidences, through the detailed chronology and review of primary sources, the pivotal role played by Developmentalist ideas in the design of policies for the oil, ethanol, nuclear energy and hydroelectricity sectors to implement a diversification strategy in response to the 1973 oil crisis. A review of similarly situated countries and their policy responses to the oil crisis can provide further credence to this finding. In the next chapter, a limited thesis validation effort examining two case studies and two counterfactual scenarios assist in this endeavor.

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CHAPTER 7: VALIDATION

Introduction

This dissertation argues that four ideas, namely national development through industrialization; energy as a growing point for the economy; self-sufficiency; and technological autonomy are necessary to explain the Brazilian energy policy response to the first oil crisis. Having traced both how these ideas became embedded in key policy entrepreneurs and institutions in the energy policy sphere, and how these ideas shaped policymaker preferences and the resulting energy diversification policies undertaken by the Geisel administration, this chapter sets forth a limited scope validation.

The chapter provides two channels for validation: case studies and counterfactual scenarios. The case studies briefly examine India and Chile’s policy response to the 1973 oil crisis. I compare the experience of Brazil with that of India and Chile, two countries facing similar conditions, in order to show that despite their similarities,

Developmentalist ideas were not embedded in key policy entrepreneurs and institutions in these countries and therefore their policy response to the 1973 oil crisis did not lead to revolutionary change in the energy sector.

First, the chapter provides the rationale for the case selection. The choice of India and Chile as comparative cases is grounded in the similarities and differences they shared with Brazil, most importantly a heavy dependence on imported oil and a need to enhance domestic energy supply. Next, the chapter presents a narrative for each country detailing the economic principles and ideas that guided their economic policy and industrialization

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process and describes their energy profile and energy sector structure as well as the specific energy policies pursued during the 1974-79 period.

In response to the 1973 oil crisis, India advocated a fuel substitution approach away from oil to lessen the dependence on imported energy. However, India chose coal, a less technologically complex fuel. India’s strategy was not predicated on diversity of fuels for having the capabilities to integrate nuclear power and hydroelectricity into its electricity mix, and it did not seek to expand these resources to the extent it could have.

While it sought to enhance domestic oil and gas production with offshore reserves prospects (as Brazil did), it did not invest in developing an autonomous capacity to exploit these resources. Instead, it relied on procuring foreign know-how and equipment to bring these reserves to production.

Chile took a market-oriented approach in line with the overall economic policy favored by the military government. Through the increase of domestic fuel prices and the consequent erosion of energy demand, Chile tempered the economic strain of high oil prices. Its energy policy was guided by energy pricing reflective of economic costs and resource allocation directed by market forces. While energy continued to be a sector managed by the state, expansion of domestic energy supplies was expected to be eventually undertaken by foreign investors.

Regarding counterfactuals, by building such “what if” scenarios against Brazil’s decision to produce the uneconomical reserves of the Guaricema oil field in the 1970s and to maintain João Paulo dos Reis Velloso as Minister of Planning in early 1974, I provide another avenue for hypothesis testing. The resulting analysis shows that actions

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by policy entrepreneurs who championed the ideas developed in this dissertation had a profound effect in how Brazil framed its policy response to the 1973 oil crisis. Had these choices not been taken, Brazil’s subsequent path would have likely been different.

Notwithstanding its limited scope, this validation effort provides sufficient assurance that ideas regarding national development through industrialization; energy as a growing point for the economy; self-sufficiency and technological autonomy, and their embeddedness in key policy entrepreneurs and institutions, are necessary to explain the

Brazilian energy policy response to the first oil crisis.

Case Selection

I agree with social science methodology according to which single case studies do not allow for generalization and therefore my research findings regarding the role and impact of ideas in the Brazilian energy sector policymaking process during the Geisel administration can only aim to provide an informed inference applicable to the Brazilian energy sector during the 1974-1979 period. I have devised a limited validation exercise to test the main proposition advanced in this dissertation. This exercise includes an examination of similarly situated country responses to the 1973 oil crisis and a counterfactual analysis for the Brazilian case.

The examination of these case studies is a limited effort. A broader research endeavor similar to the breadth and depth of detail offered for the Brazilian case, is necessary for a complete comparative analysis. This limited comparative analysis however allows for identification and disqualification of competing explanations and therefore provides an initial basis for hypothesis testing.

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To determine suitable cases for comparison to the Brazilian case, I employed John

Stuart Mill’s method of agreement and difference. Mill’s method uses experimental reasoning to investigate the causal factors of a specific effect in a singular set of circumstances. In his agreement method, the examination focuses on establishing which factors are present every time the specific effect occurs. In the difference method, the examination centers on establishing the presence of a factor when the specific effect occurs and on occasion when it does not. The combination of these two methods serves to isolate the factors that may explain the occurrence of the specific event in consideration.

The two countries I determined as suitable comparisons with Brazil are India and

Chile. Like Brazil, both countries were highly dependent on imported oil supplies when the 1973 oil crisis erupted. While Argentina has often been chosen as a case used for comparison with Brazil in the literature, including in Katherine Sikkink’s study of

Developmentalist ideas, I decided against its inclusion because at the time of the 1973 oil crisis Argentina did not face the same challenge of energy scarcity and high oil import dependence as Brazil. Enjoying a sizable resource base and an organized oil and gas industry with a history of oil production, Argentina after briefly reaching self-sufficiency in the 1960s, expected to become a crude exporter in the 1970s. This expectation did not materialize given the political and economic reversals suffered by the country in the next two decades, but underlying conditions in Argentina did not lead to the level of economic stress and dislocation created by the oil shock in Brazil.

In the early 1970s, India and Brazil were similar in many respects. They were

(and continue to be) countries of continental size with large populations. They both

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enjoyed tropical weather and abundant natural resources. Because of their large territory, they had federal political systems in which provincial governments played a large role in national politics. They both had a drive toward industrialization and inclination for

Developmentalist policies and economic planning. India and Brazil differed in their political regimes. After independence, India was constituted as a parliamentary democracy. During two decades starting in 1964, Brazil was governed by authoritarian military governments.

In turn, Chile and Brazil during the 1970s were both governed by authoritarian military rregimes. While located in the same region and thus exposed to the same regional dynamics, Chile had a much smaller territory and population. Yet, before the

1973 oil crisis, both the Brazilian and Chilean regimes were driven by an industrialization desire and their technocratic class was influenced by Developmentalist ideas. Overall, these two countries possessed some similar features and exhibited similar conditions to

Brazil during the 1973 oil shock that make them comparable. As a result, the comparison can assist in the identification of causal factors.

I close this validation chapter with an examination of a couple counterfactual scenarios for the Brazilian case. In the counterfactual analysis, I focus on key events to analyze an alternative outcome had key policy entrepreneurs or decisions not been present. I chose two decisions that I have deemed as critical junctures because they had important ramifications for events that ensued. These are:

• The decision taken by Petrobras under the direction of General Geisel to produce the

uneconomical reserves of the Guaricema oil field in 1970.

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• The decision taken by President-elect Geisel to maintain João Paulo dos Reis Velloso

as Minister of Planning in early 1974.

Case studies

This section briefly elaborates on the economic principles and ideas that guided

India and Chile’s economic policy and industrialization process, their energy profile and energy sector structure, as well as the specific energy policies pursued by these countries during the 1974-79 period.

Brazil, India, and Chile shared many features that made them suitable for comparison with respect to their policy response adjustment to the 1973 oil crisis:

• all three advocated industrialization as a means for economic development;

• up to 1973, all three favored economic planning and promoted state intervention in

the economy;

• all considered energy as a core input and sector for industrialization, and up to 1973,

all three favored state control of the energy industry;

• Faced with steep oil price increases from 1973 onwards, all three faced the challenge

of developing available indigenous energy resources to enhance domestic commercial

energy supplies as they were highly dependent on crude oil imports.

Yet, each country’s policy response to the 1973 oil crisis was different. Like

Brazil, India advocated a fuel substitution approach away from oil to lessen the dependence on imported energy while seeking to enhance domestic hydrocarbon production. Both countries continued to entrust the management of energy resources to the state. While Brazil concentrated in developing hydropower, ethanol, and nuclear

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energy supplies as substitutes, India chose coal and to lesser extent, hydropower, given the technological barriers posed by resource location. Both countries ventured into oil and gas offshore exploration and production, but Brazil purposely worked to develop indigenous know-how, equipment and technology in order to exploit their offshore reserves. India, on the other hand, seems to have relied mostly on imported technology and equipment to exploit its offshore reserves.

Chile’s policy response was different. While aware of the need to diversify away from imported oil, in line with the overall economic policy favored by the Military Junta,

Chile took a market-oriented approach. Through the increase of domestic fuel prices and the consequent erosion of demand, Chile tried reducing the import bill and the pressure on its balance of payments. While government policy sought to enhance domestic energy supplies through the engagement of foreign investors mostly taking advantage of existing coal and hydrocarbon reserves, it was only in 1978 that the military government setup an institutional framework allowing for coordinated action in the energy sphere. Thus, during the 1974 to 1978 period, energy initiatives were pursued by the different state- owned concerns and institutions in charge of oil and gas, coal, and electricity in an almost independent manner.

Today Chile and India remain highly dependent on imported hydrocarbons to power their industry. Brazil, on the other hand, is the world’s 10th largest producer of liquid fuels and is nearly energy self-sufficient.

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India

The following paragraphs first present a brief narrative of India’s energy profile and sector structure, followed by a presentation of the context and ideas underlying economic policy and industrialization in a centrally planned economy. The section closes with a brief examination of India’s energy policy and the policy course chosen in response to the 1973 oil crisis.

India’s energy profile in the early 1970s

In many respects, India and Brazil in the 1970s had similar energy profiles.

Despite its continental size, energy consumption per capita in India, estimated at about

800 KW/hr per year, was low compared to the world’s average. Importantly, the Indian metric accounted for both commercial and non-commercial energy. Non-commercial energy supplies such as firewood, agricultural waste, and animal dung were used as fuels in vast rural areas and supplied nearly 50% of total energy consumed in the country.

Commercial sources of energy supplied the remaining energy demand (Ramachandram &

Gururaja, 1977, p. 366).

The approximate breakdown of energy consumption per modern fuel was as follows: oil constituted 50% of the total, followed by coal and hydroelectricity with a

25% share each. The use of nuclear energy for electricity production was still very minor then. Use of oil had increased substantially in the last two decades. In the early 1950s, oil and coal contributed equally to commercial energy consumption. Growing at an annual rate of 7.5 % , oil had managed to double its share. Most oil consumption was driven by transportation and industrial activities (Ramachandram & Gururaja, 1977, p. 366).

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As in the case of Brazil, rising oil consumption placed a heavy strain on the

Indian economy because approximately two-thirds of oil demand was met through imports. Oil imports represented a third of the total import bill (Ramachandram &

Gururaja, 1977, p. 367).

While coal reserves were estimated to be vast, at around 80,950 million tons, they were of varying quality and geographically unevenly distributed. A substantial portion of coal reserves had very high ash and moisture content. Also, the majority of coal resources were in the eastern part of the country in the states of Bengal and Bihar. Therefore, transportation of coal over long distances to other parts of the country depended on the ability to develop the market for it (Henderson, 1975, p. 7-11).

India, as Brazil, enjoyed significant hydraulic energy resources. However, by the early 1970s, only about 20% of the hydroelectricity potential had been exploited. Around

30% of the remaining potential was located in regions of difficult access and far from consumption centers.

Unlike Brazil, India was one of the few countries that had a “strong scientific and technological base for the utilization of nuclear energy sources” (Ramachandram &

Gururaja, 1977, p. 367). By 1973, India had considerable uranium reserves and already had two working nuclear power plants, the 210 MW Tarapur and the 90 MW Rajasthan

Power Stations. Two more nuclear plans were on the drawing board. As in the case of

Brazil, the expectation was that nuclear energy could potentially grow to meet demand and assuage the dwindling hydrocarbons supply, if issues of technological backwardness

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and disposal of radioactive waste material could be resolved (Ramachandram &

Gururaja, 1977, p. 367).

Planning Industrialization

Indian industrialization took place within a planning framework that had been encouraged before the country declared its independence in 1947. Like Brazil, India favored a planned industrialization strategy. However, its preference was for central planning at the macro level, calling for specific output goals set through five-year plans.

India’s planning effort however was different from the command economy instituted in the Soviet Union or China.

According to Vivek Chibber’s examination of India’s state building and late industrialization (Chibber, 2008), India had already embraced the state’s role in controlling industrialization before declaring independence from British rule. As early as

1935, the Indian National Congress (INC) passed the Government of India Act, which allowed for the administration of the country’s provinces through popularly-elected ministries and led to the formation of the National Planning Committee in 1939. With

Jawaharlal Nehru54 as its Chairman, the 14-member body of mostly businessmen and

Congress experts was a significant first planning experience. During its brief two-year

54 Jawaharlal Nehru was born on November 14, 1889, in Allahabad, India. After returning from England armed with a law degree, in 1919, Nehru joined the Indian National Congress, one of India's two major political parties. Nehru was deeply influenced by the party's leader, Mahatma Gandhi and joined Gandhi’s independence movement. A prominent figure in Indian politics, Nehru ruled India from its establishment as an independent nation in 1947 until his death in 1964. 299

tenure, the National Planning Committee evidenced deep divisions between industrialists and the experts on whether government should own or merely control key development industries (notably those related to capital goods). This division was stressed by the massive protests in 1942 over the unilateral inclusion of India in the war effort, which was perceived by some sectors as threatening socialist-type planning (Chibber, 2008, pp.

86-92).

The end of the war foreshadowed not only greater self-government but also an opportunity for Indian industrialists to step into sectors vacated by British capital. In

January of 1944, a group of high-profile industrialists released an initial portion of a document called the Bombay Plan as a cunning strategy to maneuver the state away from socialist and towards capitalist economic planning. The document, titled “A Brief

Memorandum Outlining a Plan of Economic Development for India,” fell short of being a planning blueprint simply calling for fiscal expenditures, but was nevertheless a public relations success and fell in line with the colonial government’s post-war plans to increase indigenous involvement in the economy. As a result, in early 1945, the state’s role in industrial development through direct assistance was a settled issue (Chibber,

2008, pp. 85-107).

In 1945, a second portion of the Bombay Plan was put forward by the industrialists. It emphasized state control rather than ownership of industry, and outlined powers that included licensing of investment projects, price controls, allocation of foreign exchange, setting of wages, control of trade, among other measures. Shortly after its issuance, the government put forward its own “Industrial Policy Statement” in April 1945

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with a similar approach resulting from its discussion with Bombay Plan industrialists.

Yet, this iteration of the plan was not as well-received by the wider capitalist class. In general terms, they feared specific control mechanisms over the industry would favor

British interests, but more specifically they sought to thwart any limitations to their ability to expand into new business sectors without restriction (Chibber, 2008, pp. 103-

107).

In August of 1947, India declared its independence from British rule. The last

Viceroy, Lord Mountbatten of Burma, was asked by the Indian leaders to remain as the

Governor-General of India. Nehru became the Prime Minister.

From the outset, economic policy in independent India was guided by a desire to rapidly industrialize. Industrialization was deemed not only central to economic development but also to economic sovereignty. The first attempt to outline a strategy for industrial development came shortly after in 1948 with the first Industrial Policy

Resolution. Notwithstanding the Resolution’s broad scope and direction, the policy laid the ground for differentiating what industries were to be kept under the exclusive ownership of the state.

The Indian Planning Commission was established in 1950 as an advisory body to the Cabinet. It was chaired by Prime Minister Nehru who enjoyed considerable de facto powers. The Commission formulated and supervised the implementation of Five-Year

Plans. In essence, the Commission was tasked with deciding the size of government sector investment and its allocation among different private sectors (agriculture vs. industry; light vs. heavy industry). The Commission would present policy alternatives to

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the National Development Council created in 1952, where the Prime Minister, the Chief

Ministers of the states and members of the Commission would adjust the submitted plans according to the “needs, pressures, prejudices and, capabilities of the states”.

Domestically, policy instruments mainly encompassed an industrial licensing system, combined with price and distributional controls and targeted investments buttressed by quantitative restrictions to protect domestic production and import and export policies for non-target industries (Bhagwati and Desai, 1970, pp. 111-122)

In April of 1956, the Indian Parliament passed the Industrial Policy Resolution. It was the first comprehensive statement on industrial development of India. The resolution’s objective was to accelerate economic growth and boost the process of industrialization as a means of achieving a socialist pattern of society. This view reflected the socialism that Nehru sponsored, which was reported to have been based on the socialist philosophy promulgated by the Fabian Society.

To achieve the objective, and given the scarce capital and limited and inadequate domestic entrepreneurial base, the resolution widened the scope of the public sector by calling on the state to assume direct responsibility for industrial development.

Consequently, industries of basic and strategic importance, public utility service and those requiring large scale investments were reserved for the public sector. Among these industries, the oil and gas, coal, and atomic industries were considered of strategic importance.

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Energy Policy in a Centrally Planned Economy

Starting in the early 1950s with the creation of a state-centered economic planning apparatus, energy policy in India was crafted following a macro planning approach.

Planning was aided by the fact that energy industries had been catalogued as of strategic importance for the industrialization process and a policy of state ownership and control was put in place for each of the energy sources available and in use. To set the production targets that would meet expected energy demand, the Indian government studied each energy source. The paragraphs below briefly describe the institutional framework and the policies pursued for the relevant modern energy sources available to India.

As a response to the 1973 oil crisis, India launched a policy that sought to diversify away from imported oil through enhancement of indigenous energy supplies.

Coal, in high abundance, was the favored energy source to accomplish this diversification. Prior to the increase in oil prices, coal had already been chosen as the preferred option to help transition hundreds of millions of the poor, rural population into using modern fuels. Hydropower, on the other hand, did not appear to be a source that could serve both purposes, since the potential was mostly located in remote areas and the investment and technology developments required for its exploitation would make the energy supplies coming from this source unaffordable to the population. Therefore, while promoted by the state, hydropower was not a key source of energy development.

Despite India’s ability to develop nuclear power plants with indigenous capabilities, India’s energy policy, as detailed in the Fifth Energy Program, did not consider nuclear energy as a suitable diversification fuel. Last but not least, India saw to

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enhance domestic oil production to undercut its oil import needs. Oil and gas production increased substantially after the state consolidated its control of the industry in the early

1960s. Prospects for enhanced production were positive following the discovery of a prolific offshore field in the High Bombay area in early 1974. Yet India was unable to lessen its dependency on imported oil and in fact, it is still paying the price of such dependence today.

Institutional framework

In the 1977 edited volume titled the Energy Syndrome: Comparing National

Responses to the Energy Crises, Thiruvengadam Lakshman Sankar describes in detail the institutional framework in which India’s energy policy was crafted (Sankar in

Linderberg, 1977). Sankar was a member of India’s Administrative Service and served as the Secretary of the Fuel Policy Committee from 1970 to 1975 and the Principal

Secretary of the Working Group on Energy Policy from 1978 to 1979.

According to Sankar, while India’s Planning Commission appeared to be the principal agency that determined the energy plan, in reality the “views of the Planning

Commission on energy production in each plan period are shaped by the interaction of various agencies concerned with the different stages of fuel production, transportation, and distribution” (Sankar in Linderberg, 1977, p. 214). These agencies not only included the ministries of the central government in charge of coal, petroleum, power, atomic

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energy and the railway,55 but the relevant agencies within the central government’s apparatus, including state owned companies, and state governments. Each ministry prepared a proposal with its vision of the appropriate plan for its industry and through a consultation process tried to find common ground with other ministries and agencies to buy their support. The proposals were submitted to the Planning Commission, which developed its own independent study to assess the best course of action for the overall energy sector and enacted the overall energy plan for each five-year period (Sankar in

Linderberg, 1977, p. 215).

Systemic structural issues with this policymaking process made substantive change inviable in the energy sphere. Policies had to be accommodated to five-year plans with inconsistent short-term goals. For example, the Energy Survey Committee called for increasing coal production. Yet the 1969-1973 Five-Year Plan considered that the transportation of coal over long distances would pose significant problems, and supported the introduction of furnace oil over coal for the industrial sector in western and southern

India and provided grants for equipment conversion. Furthermore, energy policy implementation was directed by different ministries, and a large number of public sector undertakings governed by their own objectives and efforts to introduce greater coordination were unsuccessful, opposed by large organizations interested in attending the needs of specific sectors (Sankar in Mangone, 1979, pp. 49-65). Overall it seems that

55 Mr. Sankar detailed the various iterations for the “ministries” as some of them evolved from various institutional forms including statutory boards or agencies appended to the Prime Minister’s office (Sankar in Linderberg, 1977, p. 214) 305

the centrally planned and macro approach taken by India for development of its energy policy hindered the ability of the government to effect substantive change in the energy sector.

Coal

As illustrated in the energy profile section, by the early 1970s over half of the energy consumption in India was met by non-commercial energy sources. The country’s concern over the widespread use of unprocessed biomass such as dung and firewood as sources of fuel began before independence. As early as 1947 national leaders were preoccupied with having dung prioritized as an agricultural fertilizer and avoiding forest depletion. Given its abundance, coal became the preferred alternative energy supply source to transition the rural population to a modern fuel source. Soft coke produced from low grade coking coals was considered for cooking purposes by the rural poor population in the early 1950s (Sankar in Mangone, 1979, pp 35-36).

By 1962, the government’s Energy Survey Committee concluded that increasing electricity demand would require increased reliance on coal by-products for the country’s thermal plants. Yet, no specific government plans were put forth and coal consumption during the 1965-69 period stagnated. It was only until 1974, after the oil crises had impacted India’s energy market, with the establishment of the Fuel Policy Committee of

India, that specific fuel substitution policies from oil products to coal by-products were recommended (Sankar in Mangone, 1979, p. 35-41). By this time, following the

Industrial Resolution of 1956 and with the creation of the National Coal Development

Corporation (later merged into the Coal Mines Authority), the state had assumed

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ownership and control of all mining operations and was therefore responsible for the country’s overall coal production (Henderson, 1977, p. 49). For the Fifth Plan Program

(1974-1979), the Indian government expected to raise coal production from 78 million of tons to 135 million of tons, or an increase of 73% (Henderson, 1975, p. 119). The largest increase of participation in coal consumption was expected to come from the electricity sector, whose share was expected to go from 20 million tons in 1974 to 45 million tons in

1979 (125% growth) (Henderson, 1977, p. 120).

Hydropower

Hydropower was another alternative for the transition to modern fuels and diversification away from oil given its significant potential. A survey of the country’s hydropower resources carried out by the Central Water and Power Commission in the

1953-60 period established India’s hydropower potential at 216 TWh (41 million KW at

60 % capacity factor). A significant portion of potential was located in the north of the country, which posed difficulties for its exploitation due to “its remoteness, the difficulties of communication, and the lack of raw materials” (Henderson, 1975, p. 19).

Therefore, exploitation of the resources depended on “the technology of extra high voltage transmission lines which would reduce the losses from conveying power from long distances” (Henderson, 1975, p. 19). Thus, the cost to further exploit the available hydro potential seemed to be high and possibly out of reach for a population transitioning from noncommercial fuels accustomed to not paying for fuel. In the early 1970s, hydropower generation amounted to an eighth of the estimated potential. Given the

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remaining potential, the target generation level for the last year of the Fifth Plan Program

(1974-1979) was set at 46 TWh, or 21% of available potential (Henderson, 1975, p. 18).

Nuclear

A 1975 World Bank survey of the energy sector in India highlighted the emphasis given by India’s authorities to the “development of a strong nuclear power industry with a full supporting research program and with the greatest possible reliance on indigenous technology” (Henderson, 1975, p. 82). Therefore, as Brazil, India’s goal to control the entire atomic fuel cycle was guided by a desire to develop an industrial value chain and an autonomous capacity to innovate.

The basic strategy for the development of nuclear power in India was put forward by Homi Jehangir Bhabha in 1950. Dr. Bhabha was an Indian nuclear physicist and founding director of the Tata Institute of Fundamental Research and the Atomic Energy

Commission. He was a Cambridge-educated scientist who in 1939 joined the Physics

Department of the Indian Institute of Science. After independence, Dr. Bhabha was entrusted with complete authority over all nuclear-related affairs and programs and answerable only to Prime Minister Nehru, with whom he developed a close personal relationship. It is said that all Indian nuclear policy was set by unwritten personal understandings between Nehru and Dr. Bhabha (Nuclear Weapon Archive website- Dr.

Homi Jehangir Bhabha entry).

The first nuclear power plant installed in India in Tarapur used boiling water reactors. In the early 1960s it was decided that subsequent plants would use the CANDU design, which relied on natural uranium rather than enriched uranium and therefore fuel

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could be sourced domestically. A partnership of sorts was signed between Canada, which built the CANDU reactors, and India for financing of equipment and technical assistance.

The first power plant constructed under this agreement was the Rajasthan facility, which came online in 1973.

The goal of self-sufficiency within India with respect to design, fabrication and manufacturing of fuel and equipment was identified since the beginning of the nuclear collaboration with Canada. India’s first nuclear test explosion in May 1974 led to the end of the collaboration agreement, but by then India had almost accomplished the self- sufficiency goal in the production of nuclear power plant facilities (Henderson, 1975, p.

83).

Notwithstanding the technical and technological prowess demonstrated with the nuclear test bomb and the expected increase in installed capacity with the additional two nuclear power plant facilities already in construction in the state of Tamil Nadu, the share of participation of nuclear energy in electricity production was expected to be less than 4 percent by 1979 (Henderson, 1975, p. 140). This suggests nuclear energy was not necessarily considered a suitable replacement fuel for hydrocarbons.

Oil and Gas

Catalogued as a core industry in 1956, the oil and gas industry was reserved for public sector undertakings following the recognition that “the majority ownership and effective control of critical industries such as petroleum should always rest in Indian hands and the need for developing an independent and self-reliant petroleum industry was felt” (Integrated Energy Policy Report of Expert Committee, 2006, p. 123). To

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further this mandate, the Indian government did not create a vertically integrated national oil company. Instead, the Oil & Natural Gas Commission (ONGC) for exploration and production and the Indian Oil Corporation (IOC) for refining and marketing were created in 1956 and 1959, respectively. IOC was set up as a joint venture with the Burmah Shell

Company, who held 50% ownership. Additionally, the Indian government nationalized the Anglo-American multinational companies that up to the late 1950s controlled the

Indian oil and gas industry and thus, assumed control of exploration and production activities (Integrated Energy Policy Report of Expert Committee, 2006, p. 123).

Given the rapid increase in oil consumption experienced from 1950 to 1970 (over

7% annual growth rate), the Indian government made great efforts to incentivize hydrocarbon exploration and production. ONGC had brought in Soviet and Rumanian rigs and crews to prospect for oil. The two areas chosen were the Cambay area in Gujarat and the Jawalapuri-Janaur area in what is now Himachal Pradesh. The Soviet surveys had shown the oil-bearing structures of Gujarat extending into the sea in 1964-67. A series of oil discoveries had taken place through the 1960s and production had increased from 513 thousand tons in 1961 to 7,490 thousand tons in 1974 (Henderson, 1975, p. 56).

Notwithstanding the increases in domestic production, by 1973, Indian’s dependence on crude and oil product imports, calculated as a ratio of imports of crude and products to total availability, was a staggering 71% (Henderson, 1975, p. 61).

Besides concentrating on fuel substitution strategies to alleviate the heavy burden on the economy due to an escalating oil import bill, in 1974 the Indian government sought to increase indigenous production of hydrocarbons, and their accelerated exploitation

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became the key element of planning and development strategies. The Fifth Planning

Program set a target production of 11.4 million tons of crude, a 58% increase over the baseline in 1974 (Henderson, 1975, p. 119). The majority of the production was expected to come from ONGC fields following a promising discovery in the High Bombay area controlled by ONGC. In February 1974, a Japanese survey ship leased by ONGC discovered the prolific Bombay High offshore field in a limestone formation. The High

Bombay discovery led to substantial increase in the production of crude oil, thereby reducing the oil import bill considerably when the field came online in May 1976.

The High Bombay field was developed by ONGC. Because ONGC geologists were not familiar with limestone formations, ONGC entered into a four-year contract with a French company Compagnie Française des Pétroles, who assisted ONGC staff with seismic data interpretation, reserved modeling and production optimization. Most of the exploratory and development drilling for the first two phases of development completed in 1977 was carried out by foreign contractors. Construction of the well platforms and of two production platforms was carried out by McDermott, a U.S. contractor (World Bank Appraisal of Bombay High Offshore Development Project India

1977, pp. 10-11). Following the Bombay High offshore field discovery, the government of India, in a departure from stated policy, signed two agreements with U.S. companies to undertake exploratory work in offshore areas in the Gulf of Kutch and in the Bay of

Bengal. This change in policy course recognized the need for alternative approaches for oil exploration in the post 1973 oil crisis energy environment (Henderson, 1975, p. 161).

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Conclusion

While India was able to quickly bring the High Bombay field to to production to meet oil demand and reduce imports, this was done at a cost. Further exploration and production activities in this and other promising hydrocarbon rich regions did not rely on the development of indigenous know-how, technology, and capabilities. Despite promising geology and efforts to undercut dependence on foreign energy sources, as of

September 2017, India’s oil import dependence was reported by news outlets at 82%

(Bloomberg, “India Plans Larger Oil Auctions as Modi Pursues Import Cuts”, September

14, 2017).

Unlike Brazil, India’s policy response to the 1973 favored a known energy source that required little development of technology or know-how for its exploitation: coal.

Despite having mastered the nuclear fuel cycle and having the capabilities to develop nuclear energy plants, India did not promote the increase of nuclear based electricity to fuel its industry. Nor did it invest in the development of electricity generation and transmission technology and equipment that would have allowed it to exploit is hydraulic resources. Being so similar to Brazil in so many respects, a plausible explanation for the different policy response to the 1973 oil crisis adopted in India is that ideas regarding self-sufficiency and technological autonomy do not seem to have been institutionalized or embedded in key sectoral institutions and key policy entrepreneurs to the extent that they were in the Brazilian case.

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Chile

The following paragraphs first present Chile’s energy panorama in the early

1970s. The section then elaborates on the ideas that permeated economic policy and industrialization in Chile from the late 1930s through the late 1970s. The section closes with a brief examination of Chile’s energy policy and the policy course chosen in response to the 1973 oil crisis.

Chile’s energy profile in the early 1970s

Chile and Brazil’s energy profile in the early 1970 were similar. Both countries faced energy scarcity and a low level of indigenous modern fuel supply and were therefore highly dependent on imported energy. At the time, Chile was importing 45% of its total energy requirement. Imports were almost exclusively of oil and oil-refined products since coal imports were very minor.

Chile’s per-capita energy consumption, estimated at 700 KW/hr per year, was low compared to the world’s average, but considered in line with that of its peers in the Latin

American region. Starting in 1960, energy demand in Chile had outpaced domestic energy production, increasing the level of imports. By 1973, a significant portion of demand (67%) was met with oil and gas, while coal and hydropower were responsible for the remainder (14% and 20% respectively). Yet only 35% of oil and gas demand was supplied domestically, leaving the country heavily reliant on imports (Olivares Gutiérrez-

ENAP 1977, pp. 208-209). The largest portion of energy demand originated from the mining and mineral industry, which accounted for roughly 30% of total consumption.

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The transport, residential and commercial and other industries sectors accounted for 26%,

26% and 19%, respectively (World Bank Chile 1980, p. 217).

The Chilean coal industry had suffered a decline due to the competition with cheap oil during the twenty years prior to 1973. Production lagged and was inefficient.

According to the World Bank, annual coal production in 1974 was approximately 1,500 metric tons. Approximately two-thirds of total production took place in the central part of the country in the Lota-Schwager mine complex, which at the time housed 5% to 10% of the country’s reserves. Chile had significant coal reserves, yet they were geographically unevenly distributed. A 1974 study from ENACAR, the Chilean state-owned mining company in charge of the coal sector, established recoverable reserves from known prospects in the country at 107 million tons (ENACAR 1974, pp.7-9). The greatest portion of the country’s coal reserves, approximately 70%, was located in the southern province of Magallanes where exploitation and demand were minimal at the time given the distance to consumption centers. The remaining reserves (possibly 20% to 30%) were located in the Osorno-Chiloe area, where again production and consumption were negligible at the time. The quality of coal was different. The Osorno-Chiloe seams were subbituminous and high in moisture and ash content, while the bituminous Magallanes deposits were close to the surface and near deep water bodies with access to the ocean, making them attractive for commercial exploitation (World Bank Chile 1980, p. 224).

Chile also enjoyed plentiful hydroelectricity resources. As with coal, they were however geographically unevenly distributed. Of the 168, 280 GWh of known technical hydropower potential, about 60% of hydropower reserves were located in the central

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zone, with the remaining 40% in the Austral zone, including the region of Magallanes y

Antarctica. While the Austral resources were economic, they were located far from consumption centers, and therefore faced technical and technological barriers for their exploitation as the endeavor would require the development of technology in high voltage transmission to transport the electricity to the central and northern consumption centers.

In the north, where most of the large mineral mining operations took place, the hydroelectricity potential was negligible. As of 1973, Chile had 1,440 MW of hydropower installed capacity in the central region of the country, utilizing about 5,900

GWh of the available technical potential. Thus, Chile’s remaining hydraulic potential was approximately 106,000 GWh or 17,500 MW, equating to 90% of the total potential

(Arias- ENDESA 1974, pp. 1-10).

Chile did not have an integrated electricity grid serving the country. As of 2018 this remains the case. Given the population distribution, it had three separate grids working independently. In the north of the country where most of the mineral extractive activities took place, private mining concerns produced and used electricity to power their operations. Their electricity production accounted for about 30% of total electricity in the country. Because of the isolated nature of their operation and the fact that coal resources from the south were costly to transport, private producers in the north relied heavily on imported fuel to produce electricity. The National Energy Company

(ENDESA), a state-owned company created in 1944, was the largest producer of electricity. The second most important player was the Chilean Electric Company

(CHILECTRA), which served the Santiago and Valparaiso regions and was partly owned

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by CORFO, a state-owned planning and development entity. Both ENDESA and

CHILECTRA generated electricity to power the central region relying mostly on hydropower facilities and in a lesser degree on coal.

According to the World Bank, in 1973 Chile consumed 5,458 million barrels of oil. Of this, about 30% was produced domestically. In that year, Chile produced 1,871 million barrels of oil and 7,376 million of cubic meters of natural gas. Since 1971 domestic oil production had been failing at a 9% annual average rate due to field maturation, but gas production remained consistent at around 7 billion cubic meters. This was reflective of the distribution of resources, since, when measured in energy units, the reservoirs in production contained approximately two thirds of natural gas and only one third of crude oil.

Chile’s exploitation of its domestic oil and gas deposits commenced in the early

1900s with sporadic exploration conducted by private concerns in the southern province of Magallanes where most oil and gas reserves were located. Due to the lack of success of private enterprise, in 1932 the state assumed full control of the hydrocarbon exploration and production operations and shifted the responsibility to the sector to its

Production Development Corporation (known as CORFO) following its creation in 1939.

However, it was in the early 1950s with the creation of the National Petroleum Company

(ENAP), as a subsidiary of CORFO, that the state formally articulated a monopoly over the exploration and production of oil and gas and entrusted it to ENAP. The monopoly would later be extended into trade and refining when ENAP completed the first refineries in central Chile in 1967. Thus, ENAP controlled the hydrocarbons value chain producing

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and importing crude oil, refining it into products and selling refined petroleum products in bulk to large consumers and to the retailers. The Chilean government controlled the prices of both bulk and retail sales (World Bank Chile 1980, pp. 218-219).

This was Chile’s energy sector make up and profile in October of 1973 when the sudden increase in oil prices brought the global economy into recession. Given its dependence on imported oil, like Brazil and India, Chile had to respond to the new scenario with an adjustment to its economic and energy policy.

Economic Planning, Industrialization and Ideas in Chile

According to Patricio Silva’s examination of the role played by the Chilean technocratic elite in the twentieth century (Silva 2008), together with political parties, technocrats and their ideas had a central role in Chilean modern political history and industrialization (Silva, 2008, p. 2). Even before industrialization had begun in Chile, the impact of Positivism and the idea of “scientific government” gained favor with Chilean intellectuals in the late nineteenth century (Silva, 2008, pp. 25-43). The technocrats who emerged from this background became the main architects designing the industrial policies of the state.

Starting in 1938, industrialization became a key objective of the governing coalition that came to power with Pedro Aguirre Cerda (1938-41). Their efforts were channeled through the Chilean Development Corporation (CORFO), a planning agency created in 1939 and tasked with planning, making investments and coordinating the interests of productive sectors. Its technocratic corps of engineers, bound together by a common academic training and a belief that Chile would only overcome economic crisis

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and stagnation through industrial development, formulated and implemented specific tasks for the government, the industrial sector and supportive social sectors. These arrangements during the Ibañez government (1952-58) resulted in industrial production increasing at an annual average of 7.5% and the industrial sector’s share of GDP growing from 13.4% in 1940 to almost 23% in 1955. At the same time, the balance of payments was negatively impacted by increasing fuel and capital goods imports, a severe contraction of foreign trade starting in 1952 and a sharp inflation increase during the

1954-1955 period. This led to political disillusionment with the prevailing party system

(Silva, 2008, pp. 91-103).

The Alessandri government (1958-1964) sought thereafter to reduce state intervention in the economy by placing private industrialists at the helm of industrialization. CORFO’s success over the past decades had allowed the constitution of industrial and financial conglomerates, whose members were well-positioned to take a leadership role. In contrast to the existing CORFO corps, the incoming technocrats were mainly economists, and were placed to head the Central Bank and CORFO itself.

Though Alessandri did not privatize state enterprises, CORFO was restricted to providing credit to the private sector. These corporate technocrats, however, would ultimately lack the experience and the ideological conviction to pursue policies that attended to the needs of not only the industrialists but also the middle and lower classes (Silva, 2008, pp. 104-

111).

With this imbalance between government and social demands, the Frei government (1964-1970) enlisted a cadre of structuralist economists, influenced by the

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Santiago-headquartered United Nations Economic Commission for Latin America and the Caribbean (CEPAL by its acronym in Spanish), which advocated national industry protection, agrarian reform and state administrative structure modernization. CEPAL economists sponsored a structuralist approach to the understanding of economic development in less developed countries. In this approach, an understanding of an economy’s structural factors was encouraged to determine how it adjusted and responded to developmental policies. These factors encompassed both internal and external disequilibria of the productive structure of the developing country and its interactions and dependent relationship with the developed world. Based on this approach, the Prebisch–

Singer hypothesis argued the price of primary commodities declined relative to the price of manufactured goods over the long-term, which caused the terms of trade of primary- product-based economies to deteriorate. This thesis formed one of the basis of economic dependency theory, which provided the conceptual framework for the import substitution industrialization policy adopted by many Latin American countries during the second half of the twentieth century, including Chile.

Starting in 1965, Frei built upon an existing division within CORFO to create a national planning agency, insulated from political meddling, that would respond directly to the president, and that would later become the National Planning Office (Oficina de

Planificación Nacional – ODEPLAN) in 1967. ODEPLAN prepared annual government work plans and designed regional policies based on the gathering of statistical data. It also quantified shortfalls in housing, employment, education and other areas. In addition, the government created an “Economic Committee,” chaired by the president, which met

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weekly to decide on short-term economic measures. Regularly attended by Frei’s economic adviser, his Ministers of Finance, Labor, Agriculture, the director of the Budget

Office and others, the Committee’s focus was initially concentrated on preserving fiscal equilibrium, but gradually began considering the problems of the urban and rural poor, including expropriation of large landholdings and the organization of agricultural unions.

By the end of the Frei government, the economic policy-making elite had been insulated from key social political actors such as entrepreneurial organizations, trade union federations and opposition parties (Silva, 2008, pp.112- 131).

Thereafter, left-wing political forces were successful in bringing Salvador Allende to the presidency (1970-73). In terms of economic planning, the Allende government sought to put an end to the elitist productive and social structures. However, the administration’s structure was left intact. ODEPLAN operated as a technical secretariat responsible for the production of medium and short-term development plans. It was supervised by an Executive Economic Policy Committee composed of President Allende, a coordinating vice president, the minister of finance, the minister of economy and the minister of planning as an advisor. The overall planning effort at the national level was coordinated through the National Development Council, which was chaired by Gonzalo

Martner, an influential presidential adviser, and included the ministers of social and economic affairs and representatives of both the industrialist and worker sectors (Silva,

2008, p. 133).

Though politically the Allende government was very different to its predecessor, its economic program was similar in calling for a deepening of the state’s role in the

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economy and the industrialization process through import substitution. Like Frei, Allende was partial to CEPAL’s ideas and favored insulating technocrats from political meddling; indeed, that was the case with the minister of economy and the head of CORFO during his presidency. Yet CORFO rapidly lost its autonomy, having been required to administer a significant number of industries, banks and financial service companies expropriated by the government. Economic problems starting in 1972 further eroded the technocratic corps (Silva, 2008, pp.136-140).

The coup that brought the military to power in 1973 (1973-1990) permitted the rise of a new generation of monetarist economists who rejected state intervention in the economy and supported a market economy as an engine of economic growth and prosperity (Silva, 2008, pp. 112 and 139). These technocrats (later known as neoliberal) provided the regime with an ideology in which economic liberalism was compatible with political authoritarianism. Influenced by the ideas of Frederick Von Hayek (Road to

Serfdom, 1944), they dismissed past regimes as pseudo democracies in which political parties and unions had promoted their interests to the detriment of the rest of society, and advocated economic liberty as a precondition of genuine liberty. Individual freedom was redefined as access to open markets, and consumption as individual achievement facilitated by lower tariffs, easy credit and overvalued currency favoring imports. In a manner similar to the original technocratic corps during the Ibañez government, this cadre shared similar academic backgrounds and an identity as a group, resulting in most cases from their training in economics at the University of Chicago through an agreement

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with the Catholic University of Chile (Universidad Católica de Chile). They were informally known as the “Chicago Boys” (Silva, 2008, pp. 143-164).

In contrast to the former technocratic corps, however, the “Chicago Boys” were featured prominently as responsible for rational and coherent policies that legitimized the regime. Though initially relegated to secondary positions, they eventually came to control

ODEPLAN and from there the rest of key planning agencies by 1974. Through

ODEPLAN, economic reforms were prepared and officials were recruited and trained to become an executing “technocracy”. Their economic policies reduced three-figure inflation in 1975 to 9% by 1981, produced an average economic growth of 7.5% in the

1977-81 period, a boom of exports and foreign investment and a disappearing fiscal deficit.

Furthermore, their prescriptions percolated the social sphere resulting in new labor legislation, the privatization of the social security system and health care and the municipalization of education. Yet, devoid of government control, private conglomerates actively borrowed and speculated in foreign currencies, leading to a crisis of confidence in early 1981. The crisis gave way to pragmatist neoliberalism under the Minister of

Economy Hernán Buchi. Buchi, a technocrat, would ably restore economic stability and eventually become the regime’s candidate for the presidential elections of 1989; a political tip of the hat to the technocracy (Silva, 2008, pp. 145- 157).

Economic Policy under the Military Junta in the 1970s

Following an extended period of social unrest and political confrontation between the right-wing Congress and the socialist President Salvador Allende, on September 11 of

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1973, the Chilean military deposed President Allende and took control of the country.

Two days later, a Military Junta headed by General Augusto Pinochet dissolved

Congress, outlawed left leaning political parties and declared all political activity illegal.

The toppled government of Salvador Allende had followed a socialist, redistributive agenda. It attempted to reorganize the distribution of resources of social and economic interest groups through its intervention in the economy. In addition to a number of fiscal measures for the copper industry and price controls of agricultural foodstuffs, industrial production was protected through tariffs, import licenses and prohibitions, and subsidies (Fontaine, 1993, pp. 231-233). The results of this economic program had been less than stellar. Chile was mired in high inflation and its balance of payments situation was critical.

The incoming military government sought to reinvigorate lagging production and economic growth by withdrawing as the industrialization catalyst and gradually ceding economic initiative to an open and competitive private sector. Following the monetarist approach sponsored by the Chicago Boys to address inflation, the government initially liberalized prices and devalued the currency in an attempt to temper the balance of payments crisis, reinvigorate the country’s productive sector and normalize the country’s terms of trade and access to the international financial markets (Moulian and Vergara,

1981, pp. 851- 852).

While the price liberalization policies negatively impacted the income of salaried employees and the interest of trade unions, they had a modest success in reducing inflation. In April 21 of 1975, General Pinochet received a letter from renowned U.S.

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economist and father of the monetarist doctrine, Milton Friedman. In his letter Friedman took aim at inflation:

“The source of inflation in Chile is crystal clear: government spending is roughly

40 percent of the national income; roughly one-quarter of this spending is not

matched by explicit taxes; it must therefore be financed by creating new money,

which is to say, by the hidden tax of inflation.”

As a result, he suggested, the fiscal deficit should be reduced by cutting government spending. In his view, the cut backs would strengthen the private sector and provide the foundation for economic growth. For that reason, they had to be swift, accompanied by measures to lessen the burden on private enterprises and quickly give way to economic recovery.

These measures included removing obstacles to establishing new financial enterprises, to firing new employees at will, and eliminating wage and price controls and subsidies. Friedman believed this shock treatment would eliminate inflation in months and provide the basis for the rapid expansion of capital markets that would facilitate the continued privatization of state enterprises. Together with the liberalization of international trade to enhance competition for domestic enterprises and promote exports and imports, the country’s dependence on copper exports would be lessened and Chileans would be able to consume lower cost products (Friedman and Friedman 1998, Letter to

Augusto Pinochet).

In that same month, the government announced the Economic Recovery Program

(ERP; Programa de Recuperación Económica), a shock treatment to face inflation. The

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ERP sought to reduce the budget deficit by cutting government expenditures between 15 and 25% focusing on reducing capital investments. In contrast to the initial gradualism, with the ERP the state hurriedly withdrew from certain sectors in which it had held preeminence. CORFO sold its interests in financial entities and in a number of commercial and industrial companies, increasing the private sector’s scope of action.

Coupled with continued aggressive trade liberalization, import substitution industrialization gave way to large financial interests and a commodity-based export sector upon which the government increasingly looked for political support. Yet, the ERP had limited success in tempering inflation in spite of having improved the balance of payments. By June 1976, the government’s austerity measures had resulted in an impatient corporate sector, expecting lower interest rates and an economic recovery

(Moulian and Vergara, 1981, pp. 868-881).

Chilean industrialists, who had historically enjoyed governmental support and protection, understood inefficient and uncompetitive production would disappear, but trusted it would be replaced with new and expanded production fueled by cheaper capital and imports. By 1978, however, a reduced number of conglomerates had successfully engaged in export market competition, and an even more reduced number were engaged in higher value-added production. In the absence of government support, small and medium-sized enterprises failed to access the capital and engage in the capital accumulation necessary for higher added-value production (Vergara, 1981, pp. 481-488).

According to Alejandro Foxley, a leading Chilean economist and politician, the newly empowered economic agents in finance and commodity-based industries were

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successful in boosting primary productive sectors (mining, forestry, agriculture), but were less effective in catalyzing more generally industrial production, investment and employment. Indeed, though there were instances of specialization and increased productive efficiency by large conglomerates, significant swathes of the manufacturing sector failed to adjust to lower domestic demand and foreign competition, including the textiles, clothing, footwear, metallic products, machinery and equipment subsectors.

Consequently, the importance of manufacturing, a protected sector before liberalization, decreased relative to that of commerce and services (Foxley, 1982, pp. 19-28).

Energy Policy in a Market Oriented Economy

The arrival of the military government provided little change to the existing

Chilean energy policy. According to a 1980 World Bank Country Study:

“[D]espite the Government's extraordinary influence over the sector, by virtue of

its monopoly of energy sources and ownership of the largest energy users, a

coherent energy policy has been slow to develop, and little coordination has been

exercised over the activities of the responsible agencies and enterprises” (World

Bank Chile, 1980, p. 217).

Following the oil crisis, economic activity crashed specifically in the transportation and mining sectors, and an economic recession followed. By June 1974, to ameliorate the impact of the growing oil import bill, domestic fuel prices (particularly of fuel oil) had been adjusted to reflect world market oil prices, with some minor exceptions to encourage oil fuel substitution in favor of LPG and kerosene (World Bank Chile 1980, p. 218-222). The government’s written address for the September 1973 to September

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1974 period stressed the economic crisis in terms of the resulting inflation, and highlighted its efforts to control it (Republic of Chile, Presidential Message 1973-74, p.

89). The government’s anti-inflationary austerity program provided limited resources for the exploration and development of energy resources (World Bank Chile 1980, p. 217).

A year later, General Pinochet’s written address for the September 1975-

September 1976 period provided a summary of the government’s energy policy response through the following developments:

• Law 1089 of July 1975 (DL 1089) authorizing the state to enter into joint ventures

with foreign companies to explore and production hydrocarbon reserves;

• The National Plan of Radioactive Resources presented by the Chilean Commission of

Nuclear Energy to explore radioactive resources, technically and economically

evaluate reserves, encourage recovery of radioactive materials in copper minerals and

to develop individually or with other institutions the development of those minerals;

• A draft bill proposed by the executive to authorize contracts by the Chilean

Commission of Nuclear Energy with the private sector to explore and develop

radioactive minerals reserves;

• The maximum utilization of United National Development Program funds to survey

the country’s energy resources;

• Search foreign joint ventures for the exploration and production of coal resources in

the Magellan region for their use as coal, hydrocarbons, or gas;

• Setting liquid and gas fuel processing plants in accordance with the government’s

economic policy (Republic of Chile, Presidential Message 1975-76, pp. 303- 307).

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• Developing nuclear energy facilities to enhance electricity supply had been

recommended by a study developed by the International Atomic Energy Agency in

1972 (Comisión Chilena de Energia Nuclear, 1974, p. 19). By 1980, the World Bank

reported that a 600 MW nuclear plant was proposed to enter into operation in 1987;

however, it questioned its certainty as the project had not received official sanctioning

(World Bank Chile, 1980, p. 228).

In June of 1978, the Government established the National Energy Commission.

The Commission was composed of the Ministers of Finance, Economy, Planning,

Defense, and Mining, as well as a representative of the Presidency, and given the authority to intervene in all the large investment decisions of public energy corporations.

It was initially tasked with collecting historical information on energy uses, sources, and prices and consolidating and reviewing all energy legislation. Its mandate was later expanded to provide the Government with advice on short-term policy issues as well as reviews of energy feasibility studies (World Bank Chile, 1980, p. 230).

By 1988, a World Bank report summarized the government policy as “based on pricing according to economic costs and the application of market mechanisms for resource allocation” (World Bank Chile Energy Sector Review, 1988, p. xvi). Yet the report reiterated some of the same challenges that had been present since the oil crisis.

Domestic production supplied about 33% of demand, while significant levels of oil imports were still necessary to support growing demand and economic development. The country would need to embark on costly and risky exploration to change that balance (xx) but it would run counter to the government’s resource development strategy focused on

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reducing fiscal expenditures and risk both for the government and ENAP (xxi). Finally, natural gas and hydropower resources were still considered viable substitutes but were far from urban centers and required large investments (xvi,).

Conclusion

While Chile’s energy policy response to the 1973-1974 oil crisis was different from Brazil’s and relied on a market approach to rebalance supply and demand, the ideational explanation provided for the Brazilian case is perhaps fitting to understand

Chile’s response as well. The strength of neoliberal ideas working through the institutions headed or molded by the Chicago Boys can help understand why presented with options for domestic supply enhancement and fuel diversification, the Military government decided on a market oriented solution. To enhance domestic energy supplies, the government sought the engagement of foreign investors. While this option contributed to maintaining fiscal expenditure at a minimum, it meant that the status quo would remain until foreign concerns would be enticed to make the required investments. The hope was that a house in order, with low inflation and clear rules, would reflect in increased levels of investment in the development of indigenous energy resources.

Similar Antecedent Conditions, Different Outcomes

The material reviewed for the case studies of India and Chile provide enough information to ascertain that Developmentalist ideas regarding national development through industrialization and energy as a locus for national economic growth were present in the state institutional framework for economic policy and planning. However, unlike in the Brazilian case, in these countries the ideas regarding self-sufficiency and

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technological autonomy do not seem to have been institutionalized or embedded in key sectoral institutions and key policy entrepreneurs to the extent that they were in the

Brazilian case. The policies crafted in these countries as a response to the 1973 crisis indicates that a long-term solution to the energy dependence problem while desirable was, nonetheless, not a priority for policy makers.

Before 1973, Brazil, India, and Chile advocated industrialization as a means for economic development, and considered energy as a core input and sector for industrialization. They also promoted state intervention in the economy and favored state control of the energy industry. Importantly all three faced the challenge of developing available indigenous energy resources to enhance domestic commercial energy supplies as they were highly dependent on crude oil imports.

In response to the oil price hike, Brazil and India favored a fuel diversification strategy to lessen the dependence on imported energy. Both countries continued to entrust the management of energy resources to the state. India’s policy choices however suggest that in deciding which fuel mix to promote a short-term and technologically less complex solution was favored. While Brazil concentrated in developing hydropower, ethanol, and nuclear energy supplies as substitutes, India invested mainly in the development of its coal resources, which did not require the development of technology or new markets.

Both countries sought the enhancement of domestic hydrocarbon production and ventured into oil and gas offshore exploration and production. To exploit its offshore reserves, Brazil purposely worked to develop indigenous know-how, equipment, and technology. India, on the other hand, chose to rely on foreign technology and equipment.

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While the traditional Chilean technocratic class (since the 1930s) was infused with the same Positivist and Developmentalist ideas regarding industrialization, these ideas were not sufficiently embedded in key institutions in the energy sector to withstand the forced change in ideological paradigm carried out by the military regime under

General Pinochet and the Chicago boys he appointed to transform the Chilean economy in a market-oriented direction. Therefore, it is not surprising to find that Chile took a market-oriented approach to solving the energy crisis. In essence, this approach consisted in a rebalancing of supply and demand by allowing prices to rise. Expanding domestic energy supplies became a lesser priority in a government besieged by a desire to rein in inflation. In fact, the task of exploiting available energy resources to enhance domestic supplies was passed on to foreign investors. This was in agreement with the neoliberal paradigm according to which the most efficient producer, regardless of nationality or private/public character, should be in charge of production and growth.

Counterfactual Scenarios for the Brazilian Case

As with any moment of policy flux such as the critical juncture of the Brazilian energy sector after 1973, the reconstruction of key decisions and choices in the policymaking process has the potential to enhance the understanding of the various factors at play, and to isolate the effects of each factor on the observed outcome (i.e. policy decision).

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In developing the historical narrative that traces key decisions and choices in the policymaking process in the Brazilian energy sector, I identified two events that lend themselves to counterfactual analysis. These are:

• The decision taken by Petrobras under the direction of General Geisel to produce the

uneconomical reserves of the Guaricema oil deposit in 1970.

• The decision taken by President-elect Geisel to maintain João Paulo dos Reis Velloso

as Minister of Planning in early 1974.

I chose these decisions because they were causally decisive for the selection of one path over possible alternatives. As the narratives in Chapters 5 and 6 show, these decisions set a specific path of institutional development and consolidation that was difficult to reverse creating a path dependence cycle characterized by these links: lock in; positive feedback; increasing returns; and self-reinforcement.

The Decision to Develop the Guaricema Field

As detailed in Chapter 6, in late 1968, after Petrobras had initiated exploratory campaigns in the continental shelf, the company located a small oil offshore deposit, later christened the Guaricema field. Two years later, when General Geisel was president of

Petrobras, a decision to produce oil from this deposit was taken. In preparation for this decision, Petrobras’ Exploration and Production Department (DEXPRO) had produced a report assessing the cost of oil production from Guaricema. At the time, a barrel of imported oil in Brazil cost around $1.20, while cost estimates for Guaricema were three times higher, around $3.60 to $3.70 per barrel. Notwithstanding the uneconomic proposition, General Geisel decided to devote resources to the production of oil from

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Guaricema arguing Petrobras needed to develop knowledge and capabilities for production of offshore fields.

Had this decision not been taken by General Geisel, it is reasonable to assume that

Petrobras might have not continued to engage in offshore exploration and production.

This would have negatively affected both the likelihood of further discoveries and

Petrobras’ ability to internally develop sectoral know-how. Because of the commitment to produce this small deposit, Petrobras imported machinery and know- how that it later adapted to Brazilian requirements, leading ultimately to indigenous innovation in extraction technologies and equipment. Importantly, the exploratory campaign in the

Campos basin may have not advanced at the same pace or at all, precluding Brazil’s chances to increase its oil and gas reserves and production levels.

Based on this counterfactual scenario analysis, it is rational to argue that the presence of a policy entrepreneur such as General Geisel, who sponsored Developmental ideas, was a staunch nationalist, and viewed technological backwardness as a great deterrent for Brazil’s progress toward “potencia” status greatly impacted the policy course of action taken as a response to the 1973 oil crisis.

Decision to Maintain Velloso as Minister of Planning

As described in Chapter 5, João Paulo dos Reis Velloso fought to continue serving in the Ministry of Planning during the Geisel administration. General Golbery do

Couto e Silva, a close and trusted advisor to President–elect Geisel, was the initial pick to lead the Ministry of Planning. However, because of Velloso’s refusal to remain as part of

Geisel’s cabinet if not allowed to continue at the helm of the economic planning effort

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and Geisel’s acquiescence, Velloso continued in his role as Minister of Planning, controlling the economic planning apparatus.

As covered in Chapter 5, Velloso was a champion of Cosmopolitan

Developmentalist ideas, particularly those related to the development of an autonomous capacity for technological innovation and the attainment of self-sufficiency. He created institutions such as IPEA and the state institutional network for research and development financing in which he infused these ideas. Had Velloso not remained as Minister of

Planning, it is highly unlikely that the institutional reorganization and the centralization of institutional veto gates executed during the Geisel administration would have taken place. It is also unlikely that Velloso would have written the II PND, which prioritized the reduction of the country’s foreign energy dependence. Last but not least, it is unlikely that the impetus for the development of autonomous capacity for technological innovation would have remained as strong and gained so much support as it did during the Geisel administration.

Based on this counterfactual scenario analysis, it is logical to argue that the presence of a policy entrepreneur such as João Paulo dos Reis Velloso, who championed

Cosmopolitan Developmental ideas, advocated for long-term sectoral economic planning, and believed in the development of indigenous science and technology greatly affected the policy course of action taken as a response to the 1973 oil crisis.

The two counterfactual scenarios demonstrate that actions in key moments by policy entrepreneurs who championed the ideas that are central to the argument

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developed in this dissertation had a profound effect in the way Brazil framed its policy response adjustment to the 1973 oil crisis.

Conclusion

This chapter engaged with material capable of helping to validate (or disqualify) the main proposition advanced in this dissertation. While the effort is constrained by the limited scope of the country case studies comparative analysis, it has been complemented with two counterfactual scenarios on the Brazilian case. Overall, the validation effort provides reasonable assurance that ideas regarding national development through industrialization; energy as a growing point for the economy; self-sufficiency and technological autonomy, embedded in key policy entrepreneurs and institutions, are necessary to explain the Brazilian energy policy response to the oil crisis of 1973-74

In the case of India and Chile, while a drive to industrialize and a preference for economic planning were embedded in the institutional framework, and a technocratic class participated in economic and energy policy design up to 1973; the policy preferences for self-sufficiency and technological autonomy were not evident in the policies crafted thereafter. Many examples support this statement:

• While both Chile and India had sizable hydroelectricity potential, its location far from

consumption centers prevented its development. Brazil had the same problem, yet,

through its state holding company Eletrobras and its research center, CEPEL, it

invested in the development of high-voltage transmission technology and equipment.

The objective for the Brazilian policy makers was to develop large hydroelectricity

facilities that would help produce electricity reliably and at low cost to power

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industry, thus reducing the amount of oil imports required to power industrial activity

and helping Brazil attain self-sufficiency.

• While Brazil saw in the development of a nuclear industry as an opportunity to

capitalize its mineral riches and create a value chain, India having already acquired

self-sufficiency in the development of power plant facilities by 1974, hardly

envisioned a role for nuclear energy in its future electricity mix. Instead, it advocated

a policy centered on coal development, a fuel source that hardly required much

technological advancement for its exploitation.

• While Brazil advocated a state-led approach in the development of its domestic

energy resources and made the required investments itself, Chile advocated a market

approach and opted to focus on promoting foreign investment in its energy sector,

hoping foreign concerns would help develop Chile’s indigenous fuel sources.

The counterfactual scenarios presented in the chapter also provide reassurance regarding the explanatory power of ideas in the design of Brazil’s policy response to the

1973 oil crisis. Both scenarios speak to the importance of key policy entrepreneurs in advancing those ideas. Indeed, had these entrepreneurs not had the conviction to implement them, the course chosen by Brazil in the energy sphere would have most likely be different from what it turned out to be.

Thus, while this validation effort is limited, it serves to test the soundness of the main proposition advanced in this dissertation. It also stands as a first step before more complete and refined testing can help to ascertain the extent to which the explanation offered in this work is applicable beyond the Brazilian case.

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CHAPTER 8: CONCLUSIONS, LIMITATIONS AND CONTRIBUTION

Summary conclusions

This dissertation has examined Brazil’s unique energy policy response to the first oil crisis (1973-74) during the presidency of General Ernesto Geisel (1974-1979).

Against the backdrop of an aggressive industrialization process, Brazil faced the formidable challenge of energy scarcity. The country imported nearly eighty percent of the oil it consumed. This challenge became more acute when the price of oil quadrupled as a result of the 1973 oil embargo imposed by OPEC Arab members to countries that supported Israel, including the United States. The embargo banned petroleum exports to the targeted nations and introduced cuts in oil production. Oil price increases placed considerable strain on Brazil’s economy and threatened its industrialization goals.

In response, Brazil designed and implemented an ambitious policy which while on one hand tried to diversify away from oil, on the other it also sought to develop a cleaner and diversified energy matrix; to enhance domestic energy production; and to restructure the energy sector through a large-scale investment program. The program was geared toward increased energy production from diversified sources, including the development of nuclear and hydropower resources for electricity generation, and the design and implementation of a sugar-based ethanol program seeking to spur the creation of a market and industry that would provide an alternative to petroleum-based fuels in the transport sector. It was also intended to enhance the exploration and production of indigenous off-shore, deep-water petroleum reserves to increase availability of oil supply..

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The policy’s principal goal was to undercut Brazil’s energy dependency on foreign energy sources. It was structured to attain energy self-sufficiency and technological autonomy. It was implemented as a long-term strategy responding to

Brazil’s aspiration to use its natural resources to develop oil, electricity – from hydro and nuclear sources- and ethanol value chains.

To my knowledge, no other country embarked in a similar quest for self- sufficiency and autonomy via the development of untested technology and requiring the creation of new markets and industries. Since no other oil importing country seemed to have chosen Brazil’s radical policy response, it is interesting and important to understand why Brazil embarked on such a risky strategy in response to the 1973-74 oil shocks. Why would a developing country with no technological edge, poor in capital and state capabilities relative to the advanced industrialized countries decide on such a strategy?

What prompted Brazilian policy makers to consider such a risky strategy as a sound course of action for the country?

Preeminent social scientists and historians such as Thomas Skidmore, Fernando

Henrique Cardoso, Peter Evans and Luciano Martins have studied the Brazilian economic model instituted during the military governments that ruled Brazil for 21 years between

1964 and 1985. Based on these explanations, the energy policy and investment program advanced by the Geisel administration responded to either a need by the military to garner legitimacy and support from a constituency accustomed to high economic growth rates (a political survival explanation); the concerted effort of local capitalist and multinationals to find a solution to rising energy prices to salvage their investments and

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profits (an economic interest group/ class alliance explanation); or the actions of a cadre of civilian technocrats with the capacity and shared interests to influence policymaking by persuading decision makers to make large investments in the energy sector (an autonomous technocracy explanation).

My research has taken a different approach and offered an explanation based on constructivist theory, specifically the role and impact of ideas in policymaking in a time of crisis. I argued that four old ideas, namely,1) national development through industrialization;2) energy as a growing point for the economy; 3) self-sufficiency; and 4) technological autonomy recombined by able policy entrepreneurs who acted through centralized institutions and also through the creation of new institutions explain the policy course adopted by Brazil in the energy sector. The end result was revolutionary or transformational change in Brazil’s energy sector. Indeed, from a scarcity, import- dependent position, Brazil became a significant energy player, globally attaining a top-10 liquid fuels producer status.

The analytical model developed in this research suggests that exogenous and structural factors acted as catalysts and enablers of Brazil’s energy policy response.

These forces were channeled through an institutional network that, given its state- centered make-up, highly constrained the menu of energy policy options available and limited it to solutions in which the state played a significant role as regulator and producer of energy, and thus the resulting policies. Ideas became the lens through which interests were interpreted. Hence it was the ideas held by policymakers and engrained in the institutional framework and the institutional innovations which allowed actors to

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coalesce around and ultimately lend support to such bold and radical policy response.

Ideas therefore are necessary to explain the Brazilian energy policy response to the first oil crisis.

Tracing ideas

Given the focus on understanding the role played by ideas, the research method used was an institutional interpretative approach, which as described in Chapter 1, encompasses both an analysis of formal institutions and the ideas that through them permeated policy design and outcomes. Chapter 2 briefly provides a context to international and domestic issues impacting the Geisel’s presidency and therefore, this government’s public policy design and implementation. To trace the ideas and its carriers through key institutions in the Brazilian state, in Chapter 3 the dissertation examined

Brazilian military thought, focusing primarily on the influence of Positivist ideas in

Brazil’s military institutions. Key and powerful military actors such as Generals Ernesto

Geisel and Golbery do Couto e Silva acquired these ideas through shared experiences at military academies, including the Brazilian war college (ESG), where the country’s national security doctrine originated. The central idea underlying the doctrine was that security and development issues were inseparable and that to fulfil Brazil’s destiny, the country required to mobilize all of its productive resources for industrial development.

The military doctrine fit well with the Developmentalist ideology that permeated

Brazilian economic thought and policymaking starting in the 1930s. As detailed in

Chapter 4, Developmentalist Industrialization in theory would solve underdevelopment by modernizing the economy and its archaic institutional setup. Industrialization would

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be hampered without adequate energy supply.. In fact, since the 1940s, energy had been identified not only as a bottleneck to development but as a growing point for the economy with the potential to create positive linkages. This idea was embedded in the

Brazilian development bank (BNDES), which exerted considerable influence in the development of the country’s future economic planning institutions, the electricity sector, and the science and technology funding apparatus.

For those Developmentalists who advocated a nationalist stance, expansion of energy supplies needed to be directed by the state and remain under its purview.

Dependence on foreign energy sources would leave Brazil vulnerable to the whims of foreigners, who would rather seek profit than secure energy supplies for the country. In contrast, for Developmentalists advocating a cosmopolitan view, it was possible and desirable for foreign capital to participate and have a long-term interest in the industrialization process, including the development of modern energy sources. Both streams of Developmentalist thought molded key state institutions in the planning and energy sphere, many times providing a justification for their creation.

Developmentalist ideas were imprinted in the overall economic planning apparatus, the BNDES, institutions created to manage oil and electricity resources including the National Petroleum Council, Petrobras and Eletrobras, and -- last but not least -- in the science and technology state apparatus, including the National Research

Council or CNPq. Through these institutions, the four ideas that composed this research’s main proposition traveled to the policy arena. Some of these institutions were created, expanded, and headed by prominent Developmentalists such as Celso Furtado, General

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Horta Barbosa, Roberto Campos, Admiral Alvaro Alberto da Mota e Silva, João Paulo dos Reis Velloso and General Ernesto Geisel.

Notably, the Brazilian military exerted considerable influence in the development and management of the Brazilian oil and gas sector. Often, leadership positions at the National Petroleum Council and Petrobras were reserved for military personnel. In fact, from its creation in 1954 up to 1979, Petrobras presidents were all military men. For the Brazilian military, energy dependence on foreign sources placed a considerable threat to national security. Self-sufficiency was therefore seen as a precondition for ensuring national security. By framing the availability of oil as a national security and economic development concern, the Brazilian military successfully promoted among state bureaucrats and economic and political actors the idea that the development of a national oil industry that sought self-sufficiency was the appropriate course of action.

A Bold Strategy

Economic policymaking during Brazil’s twenty-one-year dictatorship was undertaken based on strategic and sectoral planning. With the exception of the regime’s first economic plan, development plans were devised and articulated based on research developed at IPEA, the applied economic research center dedicated to long-term economic planning created by João Paulo dos Reis Velloso. This center had a profound influence on the way the Geisel administration framed its overall economic strategy in response to the first oil crisis. The Second National Development Plan, or II PND, written by Velloso, was the document that articulated this strategy.

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Because of the economic difficulties and the dire balance of payments situation, as detailed in Chapter 2, the II PND only proposed investment programs for key sectors and limited new spending to selected regional development projects. The key sectors encompassed energy saving related ventures (i.e. investments in infrastructure in rail transport, electricity, oil exploration, and ethanol) and the development of a basic industrial input productive capacity. Notably, the plan ambitiously set out to correct the structural problem in the balance of payments by developing the productive capacity that would allow Brazil to export the intermediate industrial inputs that it was importing in

1974 such as steel, petrochemicals, fertilizer, paper, and cellulose. The underlying idea was to turn Brazil’s natural resource abundance into value added production chains. In order to accomplish this, the energy dependence situation had to be resolved.

Following the II PND, the Brazilian government launched a large-scale investment program. This program was geared toward increased energy production from diversified sources, including investments in exploration and production of indigenous off-shore, deep-water petroleum reserves, a sugar based ethanol program, and nuclear and hydropower installed capacity for electricity generation.

The Execution

The execution of the energy investment scheme was facilitated by the institutional reorganization and centralization of veto gates implemented at the start of the Geisel administration. As described in Chapter 5, the reorganization brought the locus of public policy decision-making to the office of the Presidency and the president himself through the establishment of the Economic Development Council. This concentration of decision

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making limited the range of programmatic ideas that could affect the policymaking process, leaving ample room for the Developmentalists ideas, championed by Geisel and

Velloso and ingrained in key sectoral institutions, to affect the policy process and the resulting policies. Skillfully, Velloso also concentrated economic and technical resources under the Planning Secretariat -- including the BNDES, IPEA and the CNPq -- which provided him with the required knowledge and resources to design and implement applied economic policy in the energy sector.

From the brief biographies included in Chapter 5, we can discern that Ernesto

Geisel and João Paulo dos Reis Velloso were two powerful actors (policy entrepreneurs) at the epicenter of decisionmaking who held considerable power and resources. This dissertation argued that these individuals were the policy entrepreneurs that acted as bricoleurs, recombining old ideas in innovative ways to respond to a crisis situation.

They championed an action policy course that favored the development of an autonomous capacity for technological innovation in the energy sector while working to lessen the dependence on foreign energy sources through the increase of indigenous energy supplies. Under their tutelage, Brazil invested heavily in the development of an institutional set up for science and technology, dedicated copious resources to the development of human capital and related energy infrastructure, and outlined ambitious plans for the development of new markets and industries in the energy sector.

As shown in Chapter 6, this impetus for self-sufficiency and technological autonomy was present in the development of Petrobras’ exploration and production activities in the continental shelf, the national ethanol program, the hydroelectricity

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expansion program and the Brazil- Germany nuclear accord. During the five-year period that Ernesto Geisel ruled Brazil, Petrobras managed to increase the country’s proven oil and gas reserves by 80 percent. Remarkably the bulk of this increase was in offshore reserves. President Geisel devoted copious resources to Petrobras’ offshore exploration and production activities. The aleatory nature of oil exploration and the long-term maturity of the projects made this investment decision the more remarkable due to their high risk. The decision to pour hefty resources not only in exploration but also in the development of indigenous production methods and facilities that could shorten the time from discovery to production of the Campos deposits rested on the idea that Brazil needed to develop an autonomous capacity for innovation. The need to secure self- sufficiency led President Geisel, against his personal preference, to allow participation of foreign capital in exploration activities through risk contracts. However, as a pragmatist he allowed these contract in order to increase domestic oil production and thereby reduce dependence on external energy sources. Energy self-sufficiency trumped any other consideration.

In the biofuels sector, President Geisel personally supported and fought for the establishment of a value chain in the sugar cane industry through a government financed program which capitalized on Brazil’s long tradition as a sugar producer to develop an ethanol market and the related production (ethanol plants) and consumption (ethanol motor vehicles) infrastructure. Ethanol as a partial substitute for gasoline in the transport sector had been an option since the 1930s. However, the massive use of sugar cane for ethanol production only came to be a full-fledged policy after president Geisel learned of

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the potential to develop an ethanol production chain using indigenous resources and technology including the development of a suitable motor engine that could run exclusively on ethanol. This knowledge was packaged in a report titled “Ethanol as

Fuel,” produced by José Walter Bautista Vidal, a reputed nationalist scientist who strongly believed in Brazil’s ability to develop autonomous technology solutions. Only a month after President Geisel had read this report, the National Alcohol Program was officially announced to the Brazilian people.

When the first oil crisis hit, Brazil had the mineral abundance and a domestic market in need of substantial nuclear energy. All the country lacked was an autonomous technological capacity to control the nuclear fuel cycle. Brazil’s pursuit of self- sufficiency throughout the entire nuclear fuel production cycle began shortly after the end of World War II under the tutelage of Admiral Alvaro Alberto, a military man and scientist who strongly advocated the development of an autonomous capacity for innovation. Efforts to develop a coordinated nuclear policy since then had seen meager success.

The desire to turn Brazil’s mineral riches into higher value-added products and spur an industrial value chain led the Geisel administration to propose a collaborative effort with Germany for the development and implementation of nuclear energy and joint technology development programs. The Brazilian–German nuclear accord, touted by many as “the largest technology transfer agreement from an industrialized to an industrializing country ever signed” was born out of this strategy. This accord was the culmination of a long struggle to find a partner willing to go into business with Brazil as

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equal partners and importantly, to transfer technology and know-how necessary to correct

Brazil’s technological backwardness in the nuclear sector. Unlike the U.S., the German option offered technology transfer and capital investment, which became extremely appealing to a president and ministerial cabinet seeking to develop Brazil’s autonomous capacity for innovation and the development of a nuclear energy industrial value chain during a time of economic crisis.

Finally, aware of Brazil’s vast hydroelectricity potential and the urgency to increase electricity supply, the Geisel administration devoted copious resources to the development of large hydropower projects that sought to secure cheap and reliable electricity supply to support industrial expansion. The idea to curtail dependence from foreign sources by enhancing indigenous supply of electricity, coupled with a desire to develop an autonomous capacity for innovation, led the Geisel administration to invest in setting up and funding the research and development institutions required to develop the large scale and complex hydroelectric projects with Brazilian know-how and technology.

This helped to spur the development of an industrial capability and value chain in equipment and parts for the electricity sector.

Strengths of the Analysis

To measure the strength of the explanation offered in this research, it was necessary to contrast it with other plausible explanations and to conduct a hypothesis falsifying exercise. In essence, what this exercise implies is to inquire whether ideas and their embeddedness in institutions truly provide the most explanatory power for understanding the Brazilian policy response to the oil crisis of 1973-74. To help answer

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this question and validate the main proposition of this research, the dissertation provided a brief analysis of alternative explanations and a limited validation effort using country comparative analyses and counterfactual scenarios.

Chapter 1 discussed alternative theoretical frames, including the economic interest groups or class alliance thesis put forward by Fernando Henrique Cardoso (1973) and

Peter Evans (1979); a political survival explanation underpinned by rational choice theory; and an autonomous technocracy explanation sponsored by Luciano Martins

(1985). These explanations fail to account for basic features of the energy policies advanced during the Geisel administration. For example, the Triple Alliance formula had openly embraced foreign technology. In the energy sector, the policy course required large and long-term investment with high risk and uncertain return. Nowhere was this risk mode evident than in Petrobras’ decision to explore in offshore basins and invest in developing indigenous exploration and production capacity. Yet, no foreign participation was allowed until the partial opening via risk contracts took place in 1977, three years after the policies were crafted.

A political survival explanation is unable to account for how the actual choices regarding energy diversification were made. The three-pronged approach chosen by

Brazilian policy makers was rather specific and required investments in long-term projects with uncertain pay-offs. Therefore, the investment program was not necessarily based only on the need to expand fiscal expenses to maintain economic growth. If that had been the case, one can hypothesize that investments in known and proved technologies would have been preferable, as financial resources would have been

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channeled to the expansion of installed capacity and the construction of public works spurring economic activity through enhanced employment, rather than to the development of cutting edge technologies that depended on research and innovation.

An autonomous technocracy explanation fails to recognize the impact of the institutional reorganization and centralization of veto gates that took place at the beginning of the Geisel administration. President Geisel centralized decision-making power through the Economic Development Council. The oil crisis, occurring a few months after he had left Petrobras, garnered his full attention. It would be incorrect to assume otherwise. Energy solutions responding to this crisis were primarily decided by

President Geisel.

The limited validation analysis presented in Chapter 7 provides further assurance that ideas offer the most plausible explanation to the courses of action chosen and implemented by the policy entrepreneurs and their agents in Brazil. The comparative analysis of Brazil against India and Chile showed that while a strong drive for industrialization and a preference for economic planning were embedded in their institutional framework and in a technocratic class that participated in economic and energy policy design until 1973, the desire for self-sufficiency and technological autonomy were not evident in the energy policies enacted in these countries thereafter.

These countries opted for the development of less technologically complex solutions such as furthering the development of coal over hydropower and nuclear potential in India.

This country reserved the management of its prolific offshore oil and gas deposits to the state, but opted for the procurement of foreign technology and equipment to produce

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these reserves. In turn, Chile advocated a market-oriented approach and opted to focus on promoting foreign investment in its energy sector while mitigating energy demand during a period of high energy prices via market pricing in the hope that foreign concerns would help develop Chile’s indigenous fuel sources.

Finally, the two counterfactual scenarios developed in Chapter 7 speak to the importance of key policy entrepreneurs and the ideas they championed. Had the decisions to develop the Guaricema field and to maintain Velloso as Minister of Planning been different, the course chosen by Brazil in the energy sphere would have been probably different to the course followed. Thus, actions in key moments by policy entrepreneurs who championed the ideas central to the main proposition in this dissertation help to explain Brazil’s policy response and adjustment to the 1973 oil crisis.

Limits of the Analysis

The explanation offered in this research rests heavily on the role played by key policy entrepreneurs and their use of existing institutions or their modification to enable the pursuit of their policy agenda. This is a major limitation of the analysis because as the counterfactual scenarios in Chapter 7 show, much of the policy course of action chosen by Brazil depended on these policy entrepreneurs.

These policy entrepreneurs are the bricoleurs that I argue ably recombined old ideas regarding national development through industrialization; energy as a growing point for the economy; self-sufficiency and technological autonomy to produce revolutionary or transformational change in the energy sector. As detailed in Chapter 5, these actors acquired the ideas through their formative years in education institutions as

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well as during their public service careers. They acted as vehicles of these ideas, imprinting them in the institutions they created, expanded or headed such as Petrobras,

IPEA, the science and technology state funding apparatus, as well as the strategic development plans they formulated to face the challenges imposed by increased oil prices.

The narrative underpinning the dissertation portrays Ernesto Geisel and João

Paulo dos Reis Velloso as policy actors guided by Developmentalist ideas and a strong belief in Brazil’s Grandeza (greatness). In the case of João Paulo dos Reis Velloso, the evidence that backed up a similar contention includes not only personal interviews with him, but a detailed review of the various manuscripts he produced in his years as Minister of Planning. In the case of Ernesto Geisel, information was collected through interviews with Amália Lucia Geisel, his daughter, and with Humberto Barreto, one of his closest friends and advisors, review of the office of the Presidency’s correspondence, particularly with his ministers, and a 1997 personal interview conducted by Celina D ‘Araujo edited as a book published by the Getúlio Vargas Foundation’s Center for Research and

Documentation of Contemporary History of Brazil. In sum, the representation of these actors as champions of Developmentalist ideas is well supported.

The general implication of this work is that ideas gave structure to these policy entrepreneurs’ behavior, affecting their policy preferences, and their decisions and actions within the institutions they operated in as well as changes to these institutions and creation of new ones in pursuit of their objectives. The main objective was the implementation of energy diversification policies and the creation of indigenous sources

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of know-how and technology, which allowed Brazil a measure of energy self-sufficiency, as well as becoming a world leader in areas such as deep-water oil exploration and drilling as well as the creation of a mass transportation system that aside from gasoline can also be powered by ethanol. From this perspective, without these actors, the likelihood of ideas exerting strong explanatory power would be significantly weaker.

From a historical institutional perspective, Daniel Beland (2009) argues that

“ideational processes impact the ways policy actors perceive their interests and the environment in which they mobilize” and that “ideas only become a decisive causal factor under specific institutional and political conditions” (p. 702). What he means by this is that in order for ideas to be the lens through which interest are interpreted and act as weapons in reducing uncertainty and as coalition-building resources leading to the emergence of a consensus, the right context needs to be present. This was certainly true in the Brazilian case where the concentration of decision making power in the office of the presidency not only favored the policy course aligned with the ultimate decision maker’s preferences, but effectively vetoed any alternative solution that deviated from a

Developmentalist approach (i.e. for example, a market base solution like Chile followed).

In the case of the Brazilian energy policy making process, Beland’s statement could be expanded to include the “right actors”. In the Brazilian case, General Geisel and

Velloso played a key role because had these bricoleurs not being part of the policy scene or had they lacked the power, resources and decision-making capabilities they enjoyed, the centralization of institutional veto gates that provided the right institutional context would not have materialized. Also, the institutional set up for economic planning and

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science and technology at the federal level and within key energy institutions such as

Petrobras would have been hampered or developed differently.

Another limitation of the analysis is the fact that its conclusions are derived from a single case study. While the limited comparative analysis presented in Chapter 7 provides a degree of validation to the main proposition advanced in the research, abstracting a generalization from the case study is not possible. On a positive note, this limitation may serve as the starting point for a future research agenda that examines the role and impact of ideas in policymaking in energy import dependent countries.

Contribution

This research sheds light on an important episode of the Brazilian energy sector history that has received little attention to date. The issue of how Brazil crafted an energy policy response to the first oil crisis usually has been studied as part of broader analyses of Brazil’s political economy and contemporary history. This dissertation has focused just on the critical juncture created by the world oil shocks of 1973-74, and identified the drivers of a long-term strategy that essentially changed the energy profile of the country.

I contend this research has helped to fill a knowledge gap in the academic literature on

Brazil.

The research is also novel in that it examines ideas, institutions and institutional change by studying the experience of a developing country under a military dictatorship. Much of the available literature on ideas and ideational change examines the experience of industrialized, democratic societies. The analysis presented in this dissertation has uncovered and analyzed primary sources information regarding the inner

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workings of an authoritarian regime in a major developing country, and how a long-term strategy to lessen energy dependence was crafted amidst a political decompression and opening and during a challenging economic period and in a challenging politico- economic environment. Therefore, the analysis and conclusions derived from this dissertation contribute to the understanding of the role and impact of ideas in effecting institutional change under a different set of conditions, those of a less developed country under an authoritarian military regime.

This dissertation also explored the issue of institutional continuity and change from a new angle. As covered in the literature review provided in Chapter 1, much of the body of scholarly work on ideas posits that institutional change is brought about by new ideas. Rather than investigating the explanatory power of new ideas, this dissertation examined the role of old ideas in time of crises. By applying the concept of bricolage and the theoretical framework developed by Carstensen, this dissertation postulated an understanding about how old ideas and their recombination contributed to explaining revolutionary change in the Brazilian energy sector following the 1973 oil crisis. This research may be the first step to examining a subject that has received limited attention so far and in doing so, it has contributed toward the development of a new research agenda.

Additionally, the research provided a fresh take on the overall economic strategy pursued by the Geisel administration as it pertained to the energy sector. Most of the relevant literature that describes economic policy in Brazil during the 1970s is contemporaneous or conditioned by the 1980s debt crisis. As explained in Chapter 2, the view presented in many of the works consulted emphasized the negative effects of state

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intervention in the economy and the large investments made during the Geisel administration, including the energy investment scheme, which contributed to high levels of foreign indebtedness and the subsequent debt crisis. These works further emphasized the negative outcome as a result of the failed Brazilian Developmental state.

Unlike the mainstream literature on the Developmental state in Brazil, the findings of this research suggest that state intervention in the energy sector was not detrimental to Brazil’s long term economic prospects. In fact, the large-scale investment program geared toward increased energy production from diversified sources resulted in the enhancement of domestic energy production and the development of a cleaner and diversified energy matrix. Through the energy investment program, Brazil developed new markets and technology while drastically reducing its dependence on foreign energy supplies. Given this outcome, state intervention in the energy sector seems to have been positive. This is a conclusion that former critics such as Ben Ross Schneider agree with today (Schneider, 2015, pp. 119-130).

In sum, the long-term strategy pursued by the Geisel administration, while counterintuitive and risky given the political and economic context in which it was crafted, yielded transformative results. The diversification policies designed and implemented during this administration structured the energy sector to attain energy self- sufficiency and technological autonomy while leveraging the country’s natural resources to develop oil, electricity- from hydro and nuclear sources- and ethanol value chains.

Today Brazil’s energy import dependence is reported at 2.1%. Brazil is the only country in the world that has a functioning ethanol market that produces fuel for transport and

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power generation. Petrobras is recognized as a global leader in offshore deep-water exploration and production. In spite of its many problems, Brazil has indeed become an energy powerhouse.

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BIBLIOGRAPHY

List of Interviews

Name Position Date João Paulo dos Reis Minister of Planning - Geisel 03/10/2015 (First) Velloso 11/27/2015 (Second) Shigeaki Ueki, Minister of Energy and Mines – 03/02/2015 (First) Geisel and President of Petrobras 11/19/2015 (Second) Alysson Paulinelli Minister of Agriculture - Geisel 11/14/2016 Pablo Belloti General Secretary – Ministry of 11/9/2016 Industry- Geisel Antônio Dias Leite Júnior Minister of Energy and Mines – 03/03/2015 Médici Antônio Delfim Netto Minister of Finance - Médici 11/18/2015 Amália Lucy Geisel Daughter – Ernesto Geisel 03/12/2015 Humberto Esmeraldo Press Secretary and Closest 11/23/2015 Barreto Friend - Geisel Sergio Barcellos Petrobras Advisor/ President of 11/15/2016 Interbras - Geisel Joel Mendes Rennó Petrobras President -Cardoso term 03/06/2015 David Zylbersztajn Former ANP director 11/26/2015 Elio Gaspari Journalist 11/20/105 Gleuber Vieira Army Commander - Cardoso term 03/15/2015 Edmar Luiz Fagundes de UFRJ Professor- Energy 03/13/2015 Almeida