Brazil: An Economy Recovering From Chaos Essay, Research Paper

Brazil earned the reputation of being a ?miracle economy? in the late 1960s when double-digit annual growth rates were recorded and the structure of the economy underwent rapid change. Since 1981, however, Brazil?s economic performance has been poor in comparison to its potential. The country?s dramatic reduction in output growth, which averaged an annual GDP growth of only 1.5 percent over 1980-93, reflected its inability to respond to the events of the late 1970s and 1980s. Some events that took place during this period were: the oil shock, increases in real interest rates, the debt crisis, and the resulting cutoff of foreign credit and foreign direct investment.

These shocks, in combination with poor management of public finances and heavy state intervention, resulted in large fiscal deficits at state and federal levels. Even if the fiscal deficits were reduced after 1990, deviating policies generalized indexation, and exchange rate management contributed to keeping inflation high and increasing. Monthly inflation skyrocketed from 3 percent in the late 1970s to 50 percent in mid-1994. The country?s income distribution, already poor, worsened drastically in the 1980s. Against these conditions, the success of the Real Stabilization Plan in effect since mid-1994, which has reduced inflation to an annualized rate of about 15 percent, stand out noticeably. Growth rates were satisfactory in 1994 and 1995 at 5.8 and 4.2 percent, respectively (Page 45-47).

From Portugal?s discovery in 1500 until the late 1930s, the economy relied on the production of primary products, such as sugar cane for exports. Portugal subjected it to a strict enforced colonial pact, or imperial mercantile policy, which for three centuries heavily restricted development. The colonial phase left strong marks on the country?s economy and society, lasting long after independence in 1882. Significant changes began occurring only late in the eighteenth century, when slavery was eliminated and wage labor was adopted. Important structural transformations began only in the 1930s, when the first steps were taken to change it into a modern, semi-industrialized economy. These transformations were particularly strong between 1950 and 1981, when the growth rates of the economy remained quite high and a diversified manufacturing base was established.

However, since the early 1980s, the economy has experienced substantial difficulties, including slow growth and stagnation. Nevertheless, the country still has the potential to regain its former dynamism. In the mid-1990s, it had a large and quite diversified economy, but one with considerable structural, as well as short-term problems. Socioeconomic transformations came about rapidly after World War II. In the 1940s, only 31.3 percent of its 41.2 million inhabitants resided in towns and cities. By 1991 its population had reached 146.9 million and 75.5 percent lived in cities, therefore creating two of the world?s largest metropolitan centers ? Sao Paulo and Rio de Janeiro. The rate of population growth decreased for about 3 percent annually in the transition. By mid-1999 it had an estimated population of 166 million (Levine 200).

The share of its primary sector in the gross national product declined from 28 percent in 1947 to 11 percent in 1992. Despite this reduction, the agricultural sector remains important. Although part of it is primitive and demanding, part is modern and vigorous. Brazil remains one of the world?s largest exporters of agricultural products.

In the same 1947-92 period, the contribution of industry to GNP increased from less than 20 percent to 39 percent. Its GNP per capita in 1999 was of $4,750 per year. The industrial sector produces a wide range of products for the domestic market and for export, including consumer goods, intermediate goods, and capital goods. By the early 1990s, it was producing about 1 million motor vehicles annually and about 32,000 units of motor-driven farming machines. On an annual basis, it was also producing 1.8 million tons of fertilizers, 4.7 million tons of cardboard and paper, 20 million tons of steel, 26 million tons of cement, 3.5 million television sets, and 3 million refrigerators. In addition, about 70 million cubic meters of petroleum were being processed yearly into fuels, lubricants, propane gas, and a wide range of petrochemicals. Besides, Brazil has at least 161,500 kilometers of paved roads and more 63 million megawatts of installed electric power capacity (Becker 88-90).

Even with these figures, the economy cannot be considered developed. While the economic changes since 1947 raised the country?s per capita income above US$2,000 in 1980, per capita income in 1995 was still only US$4,630. Growth and structural change have not altered significantly the country?s extreme unequal distribution of wealth, income, and opportunity. Regardless of impressive rise in economic growth and output, the number of poor has increased sharply. Most of the poor are concentrated in the rural areas of Northeast (Nordeste) Region, or in the country?s large cities or metropolitan areas. The economic and political troubles of the 1980s and early 1990s have only complicated the task of correcting its developmental pattern.

Since early 1994 it has implemented a successful stabilization program, the Real Plan, named after the new currency introduced in mid-1994. Inflation was contained at less than 70 percent in 1995. The program was based on an initial adjustment, a nominal exchange rate anchor, and tight monetary policy. An external debt restructuring agreement with commercial creditors was reached before the beginning of the stabilization plan. The Real Plan started with the real at equality with the dollar. There was no law fixing the parity but the central bank undertook to support the domestic currency at this level. No limit was placed on currency appreciation, and capital inflows drove the real to appreciate by over 15 percent.

Since March 1995, as a result of trade deficits and international capital instability, the exchange rate policy has been modified to a managed climb and the currency has been allowed to depreciate against the dollar. Monetary policy has been gradually relaxed following a fall in output growth after the first quarter of 1995. This stresses the policy of gradual depreciation and shows clearly that the authorities did not attach any special importance to dollar equality.

The authorities had targeted a positive balance in the operational account of the consolidated public sector budgeted in 1995, but the final result was an estimated operational deficit of 5 percent of GDP. This was caused by a substantial rise in federal and state wage bills and high interest payments on the public debt (DuQuette 40). Expansion of 3.9% in 2000 (compared with 0.8% in 1999) will be led by exports and private investment. This will more than offset another year of public-sector austerity. Also, a recovery in wages, declining interest rates and an expansion of bank credit will encourage private consumption, although this will lag behind the other drivers of growth. Industrial production grew in February for the fifth time in seven months, the first time Brazil has posted such a broad expansion since late 1997 (LaitnFocus)

Public debt growth accelerated after mid-1995 due to the need to stabilize short-term capital inflows drawn by high domestic interest rates. This policy together with the need to extend central bank credit to the financial sector to help troubled banks has also led to a growing quasi-fiscal deficit. The Real’s value has held well below its weakest point early in 1999 (around R2: $1), ending 1999 at R1.79: $1. Although debt repayments are forecast to be higher in the second half of the year, overall trends in the balance of payments, including healthy foreign investment inflows, should strengthen the Real further. We forecast a year-end exchange rate of around R1.71: $1(World Bank Group).

CONCLUSION

The economic experience of the 1980s served as a contribution to Brazil. Government is much less likely to be seen as a solution, and many more Brazilians see the public sector as the problem. The somewhat tiresome debate between the monetarists and the structuralists that dominated discussions of inflation in the 1970s has been superseded by recognition that more supply growth does have a close relation to inflation, but that the essential problem is the fiscal deficit that drives the money supply process. The external shocks of the 1980s have also shown Brazilians that their country cannot be isolated from the rest of the world. By the early 1990s, Brazil was on the path to becoming more open to trade than it had been for several decades. Despite the loss of Brazilians access to world capital markets in the early 1980s, external capital was beginning to return to Brazil by the early 1990s.

Brazilians also learned that price stabilization is not easy and that ?magic? solutions centered on price freezes do not work without the more difficult fiscal adjustments that appear from a political agreement. That the early 1990s had not created general agreement, even though political leaders and economists admitted that fiscal adjustment was necessary for macroeconomics stability. The failure of successive stabilization plans that ignored the underlying fiscal disequilibrium also forced long-term costs, because the credibility of government economics policies was hurt. The fall of Collor de Mello government in 1992 under changes of enormous corruption and the economically unrealistic terms of the 1988 constitution have made the job of recovering government credibility even harder (Stephan 210).

For Brazil to return to the kind of economic growth that many of its people once considered as their birthright, a lot of changes must take place. First, the public sector deficit must be lessen significantly. This can be done in a variety of ways without putting heavy costs in Brazilian society. Privatization of economically inefficient state companies is one way, and in the first half of the 1990s some progress was made in that area. The complex system of tax and credit subsidies that was created in past decades suggests many opportunities for some sort of reform, which would also lower the fiscal deficit.

Secondly, Brazil recent moves toward becoming a more open economy offer the hope that it can achieve some sort of economic efficiency and make sure that its resources flow into certain areas where Brazil has a strong international position. Also, cease the protection of certain sectors that have only cost the Brazilian consumers. Opening their market to the world will contribute to the economic welfare of the country.

Finally, Brazil can be become an economically prosperous country if it can address the inequalities of the distribution of income. To help the ones who are not privileged, the country must focus on education and provide other basic services to this class. Without great efforts to try to even out this problem, the government may find it harder to govern and may reduce the hopes for successful and sustainable price stabilization, because of their fiscal disequilibrium (Tulchin 90-100).

Brazil, Economic Indicators, 1995 ? 2000

199519961997199819992000

Real Sector

GDP (real annual %-change)4.22.73.6-0.10.83.1Q1 2000

Industry (real annual %-change)1.81.73.9-2.1-0.76.7Apr-00

Unemployment (%)4.75.55.77.77.67.8Apr-00

Fiscal Balance (% of GDP)-4.9-3.8-4.3-7.6-5.6-1999

Monetary Sector

Money (annual variation of M1 in %)25.14.658.97.122.716.5Apr-00

Money (annual variation of M3 in %)45.439.825.520.027.629.0Apr-00

Inflation (CPI, annual variation in %)22.09.14.32.58.45.4Apr-00

Inflation (PPI, annual variation in %)6.48.17.80.628.917.0Apr-00

Interest Rate (SELIC rate in %)38.923.942.031.219.0

18.5May-00

Markets

Stock Market (ytd in US$-terms in %)-31.620.2-43.066.9-11.431-May-00

Stock Market (Bovespa ytd in %)-1.363.844.8-33.5151.9-12.531-May-00

Bond Market (EMBI Plus var. in %)21.234.612.6-15.440.7-0.331-May-00

Bond Market (C-Bond over UST)-5315391,12464078531-May-00

External Sector

Exchange Rate (Real/US$)0.9731.0391.1161.2081.7891.827May-00

Balance of Payments (US$ m)13,4809,017-7,845-17,285-10,759-10,194Apr-00

Current Account Balance (US$ m)-17,972-23,136-30,916-33,611-24,375-3,078Apr-00

Trade Balance (US$ m)-3,466-5,554-6,757-6,593-1,206-133May-00

Exports (US$ m)46,50647,74752,99051,14048,01151,165May-00

Imports (US$ m)49,97253,30159,74757,73349,21851,298May-00

Int. Reserves (US$ m)51,84060,11052,17344,55636,34228,581May-00

Int. Reserves (months of imports)12.413.510.59.38.97.0May-00

External Debt (US$ m)159,398180,003193,698235,082236,945242,511Mar-00

Ratings

Sov. Rating Moody’s—B2B2B231-May-00

Sov. Rating S & P—BB-B+B+31-May-00

Sov. Rating Fitch—B+BB31-May-00

Sov. Rating DCR—BB-BB-BB-31-May-00

? Copyright LatinFocus 2000

Last updated on 06 June 2000

Page, Joseph A. The Brazilians. New York, NY: Addison Wesley Longman Inc., 1996.

Levine, Robert M., and John J. Crocitti. The Brazil Reader: History, Culture, Politics. Durham, NC: Duke University Press, 1999.

Becker, Bertha K., and Claudio A.G. Egler. Brazil: A New Regional Power in the World Economy. Cambridge: Cambridge University Press, 1992.

Tulchin, Joseph S., and Warner Baer. Brazil and the Challenge of Economic Reform. Washington, D.C.: Woodrow Wilson Center Press, 1997.

DuQuette, Michel. Building New Democracies: Economic and Social Reform in Brazil, Chile, and Mexico. Toronto, Canada: University of Toronto Press, 1999.

Stephan, Alfred C. Authoritarian Brazil: Origins, Policies, and Future. New Haven, CT: Yale University Press, 1993.

?LatinFocus.? Brazil Homepage: Economic Indicators, Forecasts, Briefing, Calendar, and the Most Essential Links to Government. 2000 Online. Internet. Available

http://www.latin-focus.com/countries/brazil/brazil.htm

?World Bank Group.? Brazil. 2000 Online. Internet. Available http://www.worldbank.org/