Transcript Brazil - University of Minnesota

Brad Behrens
Kyle Borchardt
Kai Du
Robert Entwistle
 Intro- (General info and early policies)
 Late 70’s to 90’s- (Policies and trade approach)
 Trade Liberalization (90’s and on)
 Future economic picture (21st Century)
 Capital:
Brasilia
 Population:198,739,269 (5th Largest)
 Area: slightly smaller than the United States
 Labor Force:
 agriculture: 20%
 industry: 14%
 services: 66%
 Exports:
 $158.9 billion (24th) - 2009
 Imports:
 136 Billion (26th) - 2009
 After WWII, Brazil was heavily dependent upon two
countries (USA and United Kingdom)
 Expanding ToT (commodities vs. manufactured)
 Over reliance on few Agricultural Goods
 Cotton, Coffee, Cocoa (60% of total export value)
 Their dependency on these two countries and few
commodities left them susceptible to economic shocks
 Balance of payments (Import, Export)
 Market problems (Recessions)
 Import Substitution Industrialization (ISI) dominated Brazil from
1930’s to 1960’s
 Main tools (ISI)
 Import licensing
 Tariff
 Quotas
 Overvalued exchange rates
 Direct government investment in key industries.
 Implemented because of problem with “comparative
advantage” (expanding gap between ToT)
 Tariffs created room for small domestic industries to
prosper
 Government shifted attention to growth of goods
(automotive, cement, steel and heavy machinery)
 Implemented because of problem with “comparative
advantage”
 Promotion of Domestic manufacturing through high
trade barriers began to hurt the Brazilian Economy.
Source: Instituto Brasileiro de Geografia e Estatística, Sistema de Contas Nacionais (IBGE/SCN
2000 Annual)
 Between 1950 and 1961
 The average annual rate of growth of the GDP exceeded 7
percent
 Industry was key to growth
 9% increase in Industrial products vs. 4.5% increase in
agricultural products during this period
 Advantages
 Increase in domestic employment
 Resistant to global economic shocks (recessions)
 Disadvantages
 Inefficient (not exposed to internationally competitive
markets)
Decade
Urban Industrial Jobs
Urban Labor Force
1950-60
2.6%
3.5%
1960-70
3.2%
3.5%
1970-80
3.0%
4.3%
-Although the Brazilian Economy experienced growth it was not
as high as hoped by government officials
 Because of this relatively “close minded” approach to
their Economy. Brazil struggled and was not attaining
they’re desired output.
 Change was necessary, but was not “liberated” till the
early 90’s
 During the mid 60’s average rate of growth dropped to
4%
 Brazil’s political troubles negatively effected the ISI
and eventually led to a coup
 The new Military reforms of 1964 targeted high
inflation and led to a period of extreme growth from
1968 to 1973
 Steep oil prices in the 1970’s ended Brazil’s attempt at
greater trade openness
 In 1974, the trade deficit was $4.7 billion and policy
makers responded by restricting imports
 They doubled tariff rates on over 900 items (June 1974)
 In 1975, the government required that imports be paid
for in advance
 Further measures were taken to promote exports,
especially for manufacturing
 However, the trade balance remained in a deficit for
most of the late 1970’s
 The deficit worsened in the 1980’s and forced the
government to try other policy changes
 Trade restrictions were not relaxed, and the Mexican
debt crisis had a large affect on Brazil’s trade
 The combination of tight import controls, real




depreciation and the fall in domestic demand led to a
shift in external accounts
Brazil was now running a trade surplus
In 1984, exports were about double imports
However, inflation accelerated to around 200%
In 1986, prices accelerated at an average of 500%
 The Cruzado plan was put in place in 1986 to wipe out
inflation
 Prices rose sharply from this plan and affected the
trade balance
 The trade surplus soon turned into a trade deficit once
again
 Towards the end of the decade, the balance turned
back into a surplus, following different plans
 The improving external payments situation allowed for
the start of a new liberalization program
 Tariffs were reduced by about 10% in 1987
 Export values were at record levels in 1988
 In Jan. 1989, the Summer plan was announced
 Temporary freeze of wages/exchange rate
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Deg. Openness
0
-1E+12
-2E+12
-3E+12
-4E+12
-5E+12
-6E+12
Trade Balance
50000.000
40000.000
30000.000
20000.000
10000.000
0.000
-10000.000
 Brazil’s Trade Liberalization and Growth: Has it
Failed?
 By: Mauricio Mesquita Moreira
 2 of the main drivers of growth are productivity and
investment in physical capital
 This paper shows that a trade liberalization policy has a
positive effect
 This paper also claims that Brazil could have
experienced more gains from trade if it used more
aggressive policy
Direct Investment Abroad
4000.000
2000.000
0.000
-2000.000
-4000.000
-6000.000
-8000.000
-10000.000
-12000.000
 Does Trade Cause Growth?
 By Jeffery A. Frankel and David Romer
 Geographic characteristics have important effects on
trade
 This paper measures the effects of trade on income
 And finds that trade has a large, positive effect on
income.
 The effect is large quantitatively, but moderately small
statistically
GDP
2500000
2000000
1500000
1000000
500000
0
CPI (2005=100)
120.000
100.000
80.000
60.000
40.000
20.000
0.000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
 Half a century of trade protectionist policies had major
effects on Brazil’s foreign trade:
 Brazil had less than a 1% share in global trade, despite its
population representing almost 3% of the world’s
population in 1990.
 Due to this, Brazil experienced significant changes in
their foreign trade policy during the 1990’s.
 Inflation rates were at the threshold of hyperinflation,
with the monthly rates in the first two months of 1990
at over 70 percent.
 On top of this, the trade balance had fallen to about a
third of the level of the preceding year
 Brazil’s policy makers were focused on stopping
inflation and trade policy reform
 In response, the new Industrial and Foreign Trade
Policy was introduced in late 1990.
 This policy included:
 abolishing most non-tariff barriers left over from
import substitution
 gradually reducing import tariffs between 1990-94
Year
1990
1991
1992
1993
1994
1995
Average
Basic
Tariff Rate
32.1
25.2
20.8
16.5
14.0
13.1
 Trading Blocs
 In 1991, Brazil joined
Mercado Comun del Sur,
or MERCOSUR, a
regional trading bloc
with Argentina,
Paraguay and Uruguay.
 This was to promote free
trade and the fluid
movement of goods,
people, and currency
 The new foreign trade policy was only maintained
until October of 1992 due to political turmoil.
 in 1992 President Fernando Collor de Mello was
impeached on charges of corruption
 Vice President Itamar Franco was sworn in as president
after the impeachment of Collor de Mello
 this interim administration prevented Brazil from
tackling many problems in the economy, mainly
inflation
 President Franco soon put together a high-level team
to develop a new stabilization program
 The Plano Real, or The Real Plan, was instituted in
spring of 1994
 The main goal of this plan was to eliminate inflation
by pegging the real to the U.S. dollar
 After some controversy during the transition phase of
the plan, the plan worked and eventually killed
inflation in Brazil.
 This eliminating of inflation, along with the
abolishing of protectionist measures and joining
MERCOSUR, turned Brazil into a very open country by
the mid-1990’s.
Openness: Exports plus Imports divided by GDP is the total trade as a percentage of GDP
 This increased openness lead to an increase in both
imports and exports for Brazil:
 Between 1988-97, Brazilian exports rose from US$ 33.8
billion to US$ 53 billion, an increase of 57%.
 During the same period, imports quadrupled, growing
by an average of 15.4% to reach US$ 61.3 billion
 Tariffs stayed relatively low until 1996 where there was
a slight increase in the tariff rate
 This was in attempt to contain the constant increase in
the current account deficit.
 These high deficits would soon be problematic after
financial crisis in both Asia and Russia:
 Investors more risk averse to emerging market exposure.
 With foreign investors hesitant to invest in Brazil, the
economy saw a downturn, and growth slowed to a
crawl.
 This downward trend needed to be stopped because
many Brazilians were having memories of the debt
crisis resurface.
 With foreign investors hesitant to invest in Brazil, the
economy saw a downturn, and growth slowed to a
crawl.
 This downward trend needed to be stopped because
many Brazilians were having memories of the debt
crisis resurface.
 Overall trade liberalization helped and Brazil saw
growth in its economy as a result:
 Between 1988-97 Brazil had an average annual growth
rate of 4.6%
 This growth continued into the future as Brazil saw 5.7%
growth in GDP in 2004
 The poverty rate had decreased to below 16% by 2000
Brazil GDP: 1990-2000
1800
1700
GDP (in billion R$)
1600
1500
1400
1300
1200
1100
1000
1990
1991
1992
1993
1994
1995
Year
1996
1997
1998
1999
2000
 This period of trade liberalization has opened Brazil to
foreign trade and integrated them into the world
economy
 With an opening to foreign trade, and investment,
Brazil has given itself many options for the future
 This also allowed Brazil to become one of the top
economic countries in the world today (8th Overall in
GDP)
 Brazil’s economic openness has improved the nation
drastically. What can we expect from Brazil in years to
come?
 Brazil’s Economy is the 9th Largest in the world.
(Measured by Purchasing Power Parity)
 Predicted to grow to become one of five largest in the
world in decades to come.
Economic Forecast

Brazil’s industrial output is expected to increase by
8%

Public net expected to decrease to 41% by 2011

Foreign and direct investments predicted to reach
45 billion
 Part of the government welfare program Fome Zero
(Zero Hunger)
 Provides financial aid to poor and indigent Brazilian
families as long as their children are in school and
vaccinated
 Program has been a main factor in the decrease in
poverty. (27.7% in 2003-2006)
 Discovered October 2006
 Largest deep-water oil field, 5-8 Billion barrels of
crude oil and natural gas
 Total Value = 410 – 656 Billion dollars
 Obama financed 2 billion dollars to Petrobas for
exploration of Tupi Fields
2016 Summer Olympics
 Summer Olympics will put the spotlight on Brazil,
helping promote the nation’s tourism
 Jobs will be created to construct sports venues
 Crime in Rio de Janeiro will be cleaned up to help
ensure a safe Olympics
World Cup





Brazil is to hold the 2014 World Cup
The World Cup, like the Olympics, stimulates the
Economy
Berlin, 1994 – Tourism Revenue ~ 400 Mil
Japan/Korea, 2002 – Ticket sales alone~ 1.2 Bil
South Africa, 2010- Approx 160,000 new jobs
 International attention during the World Cup and the
Olympics will distinguish Brazil as a new international
power.
 New oil reserves will help give Brazil some political
power
 Government funded programs are helping build
human capital








http://www.imfstatistics.org.floyd.lib.umn.edu/imf/
http://countrystudies.us/brazil/
http://ideas.repec.org/p/wpa/wuwpit/0412008.html
http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnu
m=1802265
http://www.kellogg.northwestern.edu/faculty/dranove/ht
m/dranove/coursepages/Mgmt%20469/Does%20Trade%2
0Cause%20Growth%20%28causality%29.pdf
http://www.usitc.gov/prublications/332/journals/openness
_growth_link.pdf
http://www.ecomod.org/files/papers/343.pdf
http://www.jstor.org/stable/3663656?cookieSet=1