Taxation and the stagnation of cotton exports in Brazil, 1800 – 1860

The full article from this post was published on The Economic History Society and it is now available on Early View at this link

by Thales Zamberlan Pereira (Getúlio Vargas Foundation, São Paulo School of Economics)

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Brazil supplied 40 per cent of cotton imports in Liverpool during the last decade of the eighteenth century (Krichtal 2013). By the first half of the nineteenth century, however, cotton exports stagnated, and Brazil became the only major international cotton producer that decreased its exports to European countries. The reason for decline in production, despite increasing international demand during the 19^th century, is not generally agreed on. Scholars have attributed the decline to high transport costs, competition from sugar and coffee plantations for slaves, Dutch disease from the increase in coffee exports, among others (Leff 1972; Stein 1979; Canabrava 2011). There is disagreement in part because previous research largely relies on data after 1850, which was after the decline of cotton plantations in Brazil.

In a new paper, I argue that cotton profitability was restricted by the fiscal policy implemented by the Portuguese (and, later, Brazilian) government after 1808. To make this argue I first show new patterns on the timing of the decline of Brazilian cotton. Specifically, using new data of cotton productivity for the 1800-1860 period, this research shows that Brazil’s stagnation began in the first decades of the nineteenth century.

The decline therefore cannot be explained by a number of factors. It took place before the United States managed to increase its productivity in cotton production and became the world export leader (Olmstead and Rhode 2008). Cotton regions in Brazil did not have a labour supply problem nor suffered from a Dutch disease phenomenon during the early nineteenth century (Pereira 2018). The new evidence also suggests that external factors, such as declining international prices or maritime transport costs, were not responsible for the stagnation of cotton exports in Brazil. As any other commodity at the time, falls in international prices would have to be offset by increases in productivity. In fact, Figure 1 shows that Brazilian cotton prices were competitive in Liverpool. From the staples presented in the Figure, the standard cotton from the provinces of Pernambuco and Maranhão had higher quality than from New Orleans and Georgia (and, hence, achieved higher prices), but “Maranhão saw-ginned”, which achieved similar prices, used the same seeds as the ones in US plantations.

Figure 1: Cotton prices in Liverpool 1825 – 1850

So, what caused the stagnation of cotton exports in Brazil? I argue that the fiscal policy implemented by the Portuguese government after 1808 restricted cotton profitability. High export taxes, whose funds were transferred to Rio de Janeiro, explain the ‘profitability paradox’ that British consuls in Brazil reported at the time. They remarked that even in periods with high prices and foreign demand, Brazilian planters had limited profitability. Favourable market conditions after the Napoleonic wars allowed production in Brazil to continue growing at least until the early 1830s.

Figure 2 shows that when international prices started to decline after 1835, cotton was no longer a profitable crop in many Brazilian regions. This was especially pronounced for regions where plantations were far from the coast, which had to pay higher transport costs in addition to the export tax. To support that the tax burden decreased profitability, I calculate an “optimal tax rate”, which maximized government revenues, and the “effective tax rate”, which was the amount that exporters paid. Figure 2 illustrates that, while the tax rate by law was low, the effective tax rate for cotton producers was significantly greater than the optimal tax rate after 1835.

Figure 2 – Rate of cotton export tariffs, 1809-1850.

Facing lower prices, cotton producers in Brazil could have shifted production to varieties of cotton produced in the United States, which had higher productivity and were in increasing demand in British markets. As presented in Figure 1, some regions in Brazil tried to follow this route (with saw-ginned cotton in Maranhão), but this type of production was not profitable with an export tax that reached 20 percent. Brazil, therefore, was stuck in the market for long-staple cotton, for which demand remained relatively stable during the nineteenth century. Regions that could not produce long-staple cotton practically abandoned production.

Not only do the results provide insight to the cotton decline, but the paper contributes to a better understanding of the roots of regional inequality in Brazil and the political economy of taxation. Cotton production before 1850 was concentrated in the northeast region, which continues to lag in economic conditions to this day. As I argue in the paper, the export taxes implemented after 1808 largely targeted commodities from the northeast. Production of commodities from southeast regions, such as coffee, paid lower tax rates. Parliamentary debates at the time show cotton producers in the Northeast did demand tax reform. Their demands, however, were not met quickly enough to prevent Brazilian cotton plantations from being priced-out from the international market.

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To contact the author: thales.pereira@fgv.br

References:

Canabrava, Alice P. 2011. O Desenvolvimento Da Cultura Do Algodão Na Província de São Paulo, 1861-1875. São Paulo: EDUSP.

Krichtal, Alexey. 2013. “Liverpool and the Raw Cotton Trade: A Study of the Port and Its Merchant Community, 1770-1815.” Victoria University of Wellington.

Leff, Nathaniel H. 1972. “Economic Development and Regional Inequality: Origins of the Brazilian Case.” The Quarterly Journal of Economics 86 (2): 243–62. https://doi.org/10.2307/1880562.

Olmstead, Alan L., and Paul W. Rhode. 2008. “Biological Innovation and Productivity Growth in the Antebellum Cotton Economy.” The Journal of Economic History 68 (04): 1123–1171. https://doi.org/10.1017/S0022050708000831.

Pereira, Thales A. Zamberlan. 2018. “Poor Man’s Crop? Slavery in Cotton Regions in Brazil (1800-1850).” Estudos Econômicos (São Paulo) 48 (4).

Stein, Stanley J. 1979. Origens e evolução da indústria têxtil no Brasil: 1850-1950. Rio de Janeiro: Editora Campus.