Economic Comparison between Brazil and Argentina - Term Paper Example

Brazil’s economy is larger, stronger and more stable. on the other hand, Argentina’s economy is resilient and quite fragile. Brazil and Argentina are countries in Latin America, which have nearly similar economic activities. However, Brazil is three times larger in area coverage Argentina with population that is nearly five times that of Argentina. Furthermore, Brazil is five times larger in real GDP than Argentina. Economic indicators used include availability of natural resources, Gross Domestic Product (GDP), unemployment rates, budget, inflation rate, international trade, exchange rate regime, interest rates, sectors, country’s investment and energy. Introduction Population and economic size Brazil became independent on September 7, 1822. It covers 8,511,965 sq. km with a population size of 203.4 million1. Its population growth rate is 1.02 percent per annum. Brazil is the leading economic powerhouse and regional leader in South America. It is the eight world largest economy in the world. However, the country is bedeviled by high unequal income distribution and crime. Brazil continues to pursue industrial and agricultural growth and development strategy. The country has a well developed service, manufacturing, agriculture and mining sectors. The Brazilian economy experienced solid economic performance even in the face of global financial crisis. The economy recovered early as compared to other countries. It was during Lula’s reign when the country experienced high economic growth and improved social programs that improved lives of millions of Brazilian citizens. Domestic consumption is the key driver of the country’s economic growth. However, the country experiences rising unemployment rates. Sound fiscal management, inflation control and floating exchange rate provided strong impetus for Brazilian economy to grow and develop over the years. The currency of Brazil is Brazilian reais. On the other hand, Argentina became independent on July 9, 1816. Its area coverage is 2.8 million sq. km with a population of 41,769, 7262. Its population growth rate is 1.017 percent annually. Argentina’s economy has experienced both good and bad times3. The country has suffered hyperinflation, currency depreciation, domestic debt default worth $85 billion, World Bank’s loan default and frozen banking system among others. This is because of poor governance by government officials. Between 1975 and 1990, Argentina paid interest on foreign debt. Furthermore, during the same period, the country experienced capital flights and tax evasion. In 2002, unemployment was 25 percent. The government also started repaying defaulted bonds worth $100 billion in an attempt to end shame from 2003. The Argentina’s economy grew at the rate of 9 percent annually from 2003 to 2007 following expansionary policies adopted by the government. The growth was negatively affected by global credit crunch between 2007 and 2009, which reduced growth rate to 0.8 percent. However, the economy rebounded and 8.5 percent growth in GDP was experienced in 2010. The Argentine currency is Argentina pesos. In fact, Brazilian geographical area, population, and economy is larger than that of Argentina. Argentina’s economy is less stable and volatile as compared to that of Brazil due to many past economic hardships. In 2008-2010 global financial turmoil, Argentina experienced diminished domestic growth as well as reduced domestic and global demand, which caused a mild recession in 2009. In 2008, many more people in Argentina are poorer than those in Brazil. In 2008, the population below poverty line in Brazil was 26 percent while there are 30 percent in Argentina. Section one outlines each country’s natural resource deposits; section two indicates Gross Domestic Product; section three indicates unemployment rates; section four shows the budget; section five shows the inflation and section six shows foreign direct investment. In addition, section seven indicates international trade; section eight outlines exchange rate regime; section nine outlines interest rates; section ten indicates sectors in the two economies; and section eleven shows energy production in both countries. Natural resources Brazil has substantial deposits of Iron ore, oil, uranium, manganese, aluminum, nickel, tin, zinc, gold, beryllium, copper, lead, tungsten, Chromite bauxite and gemstones. The country has extensive forest cover, which is a source of timber and wood. Brazil discovered new oil reserves in Tupi and Carioca oil fields estimated to yield between 30 billion and 80 billion barrels off the coast of Rio de Janeiro. New oil deposits will make the country among the 10 leading producers of oil in the world. Brazil is also among the largest producers of hydroelectric power. Hydroelectric power in Brazil accounts for 69 percent of the total electricity generated. Brazil is largest exporter of biodiesel. Argentina has coal, oil, natural gas, copper, zinc, magnesium, uranium, silver, tungsten, gold and sulfur. therefore, both countries has deposits of oil, zinc, gold, copper and tungsten. However, Brazil has more deposits than Argentina due to its large geographical area. Furthermore, Brazil has more natural resource deposit than Argentina. Gross Domestic Product Brazil has a larger real GDP as compared to that of Argentina. In 2010, real GDP was US$2,024 billion and US$380 billion for Brazil and Argentina respectively. Brazilian GDP real growth has been greater than that of Argentina. For example, Brazilian GDP real growth was 5.2 percent, -0.7 percent and 7.5 percent in 2008, 2009 and 2010 respectively while that of Argentina was 5 percent, -3 percent and 7.5 percent in 2008, 2009 and 2010 respectively. In 2010, per capita GDP of Argentina and Brazil were US$9,400 and US$10,900 respectively. Therefore, Argentine economy is weaker as compared to that of Brazil. Unemployment rates Brazil has a large pool of labour force numbering over 103.6 million people. The unemployment rate reduced from 8.1 percent to 7 percent in 2009 and 2010 respectively. Argentine population is highly educated and they are over 16.62 million people. The unemployment rate in Argentina was 7.9 % in 2010 against 8.7 percent of 2009. Improved public governance led to fall in unemployment rates to about 9 percent in 2007 from 25 percent in 2002 in Argentina4. Budget The Brazilian budget revenues and expenditures were $464.4 billion and $552.6 billion in 2010. The country had a fiscal deficit of $88.2 billion. As a result, current balance account increased from $24.3 billion in 2009 to $52.73 billion in 2010. Furthermore, Brazil’s external debt increased from $273.7 billion in 2009 to $310.8 billion in 2010. Argentine’s budget revenues and expenditures were $87.63 billion and $86.85 billion in 2010. The country had a fiscal deficit of $88.2 billion. as a result, current balance account increased from $11.29 billion in 2009 to $6.976billion in 2010. Furthermore, Brazil’s external debt increased from $147.1 billion in 2009 to $160.9 billion in 2010. Argentina achieved positive fiscal balance and stopped borrowing money from external sources. This has insulated Argentina’s economy against external shocks. Inflation Inflation rate was 4.3 percent and 5.9 percent in 2009 and 2010 respectively in Brazil. Rising unemployment as well as increasing strong domestic demand is driving inflation high in Brazil. In fact, inflation was about 6 percent in 2010. Brazilian increasing inflation rates is being contained through increase in interest rates and reduction in government spending. Inflation in Argentina was tackled using price controls, export taxes and controls. The government uses expansionary fiscal policy and monetary policy, which increased country’s inflation. Inflation rate was 16 percent and 22 percent in 2009 and 2010 respectively. In 2010, the Brazilian real effective exchange rate appreciated by about 9 percent5. Price hikes in house rates, currency appreciation and surge in food and beverages fueled Brazil’s inflation. To tame inflation, Brazilian government through the central bank raised tax on consumer credit, tightened capital and reserve requirements and lifted policy rate to 12 percent. The country also reduced fiscal spending by BRL 50 billion in the year 2011 to curb rising inflation. To speed up economic recovery, the country undertook fiscal expansionary measures, which led to increased domestic demand. However, expansionary measures led to deterioration of country’s current account. Foreign direct investment United States is the top foreign direct investor in Brazil. Foreign direct investment is channeled to offshore oil extraction, nuclear power generation and communication infrastructure. Brazil has entered into trade agreements with the United States, through Overseas Private Investment Corporation agreement. in fact united States investors enjoy fair treatment as nationals except in ship building, uranium production, fishing and nuclear generation. Brazil Foreign direct investment increased to US$25.9 billion from US$15.1 billion in 2009 and 2005 respectively. There are about 500 United States companies operating in Argentina, which employee’s more than 155,000. Foreign direct investment in Argentina covers financial, manufacturing and informational sectors. However, Argentina has experienced increased levels of capital flights. In addition, Brazil has become significant investors in Argentina. Argentina attracted about $ 3.4 billion foreign direct investment in 2006. Foreign direct investment increased to US$ 8 billion, US $ 4 billion, and US$ 6.2 billion in 2008, 2009, and 2010 respectively. Argentina has less foreign direct investor than Brazil. International trade Brazil is export oriented. Brazil is a member of economic trade blocks such as Unasul, G8+5, G20, the Cairns Group and WTO. To further its export ambitions, the country is actively involved in World Trade Organization negotiations, especially in Doha. In addition, the country is trying to strengthen Mercosul Customs Union with Paraguay, Uruguay and Argentina. It is also trying to expand trade with developing countries across the globe. The country has also concluded free trade arrangement with Israel and Egypt in 2008 and 2010 respectively. The country exports slag and ash, sugars, meat, oilseed, oleagic fruits, grains, seeds, exports vehicles, aircrafts ( Embraer RJ 145 jet), auto parts, iron ore, footwear, soybeans, nuclear reactors, boilers, mate, spices, coffee, tea, electronic equipments. Exports grew to US$233.3 billion in 2010 from US$58.29 billion in 20016. Country’s imports were US$254 billion. Brazil has trade payment balance of US$ -20.7 billion. The country’s major export partners in 2009 include China (12.5 percent), United States (10.5 percent), Argentina (8.4 percent), Netherlands (5.4 percent) and Germany (4.1 percent). Brazil Agribusiness accounted for about 33.3 percent of all exports. The country imports auto parts, oil, chemical products, electrical equipments and machinery. Imports include distillation products, boilers, nuclear reactors, organic chemicals, optical and photo apparatus and fertilizers. In 2009, the country imported goods from United States (16.1 percent), Argentina (8.8 percent), Germany (7.7 percent) and Japan (4.3 percent). Argentina’s trade policy has been undergoing changes since late 2008 into 2009. However, this changes led to diminished exports and imports if 20 percent and 32 percent in 2009. Poor policies led to significant reduction in country’s exports until 2002 when the country adopted floating exchange rate regime. In Early 2011, Argentina recorded $1.82 billion trade surplus. International trade was about 31% of GDP in 2009, which was about three times more than that of 1990. Argentina exports vehicles, natural gas, petroleum and gas, corn, grapes, honey, corn, yerba mate, sorghum, wheat as well as soybeans and its associated finished products. Argentina exported about 448,000 vehicles, mostly to Brazil. Agricultural products (raw material and finished products) accounted for about 50 percent of all exports while industrial goods accounted for about 33.3 percent of Argentines exports in 2009. The country’s major export partners in 2009 include Brazil (20.5 percent), Chile (7.9 percent), United States (6.6 percent), China (6.6 percent), and Netherlands (4.3 percent). The country imports machinery, petroleum and natural gas, plastics, organic chemicals and motor vehicles. In 2009, the country imported goods from Brazil (31.1 percent), United States (13.3 percent), China (12.4 percent), and Germany (5.1 percent). Argentina total exports and imports in 2010 was US$ 68.5 billion and US$ 56.44 billion in 2010, which indicated US$12.06 billion balance of payment. Both countries experienced growth in international trade. For example, Brazil’s Imports and exports increased by US$55.1 billion and US$74.1 billion respectively in 2010 while Argentine Imports and exports increased by US$12.83 billion and US$17.66 billion respectively in 20107. Brazil has larger international trade than Argentina. However, Argentina had a positive balance of payment as compared to that of Brazil. Exchange rate regime Brazil has been building stable economy and foreign reserves since 2003. In addition, it is using domestic financing to finance its budget. This is a strategy to reduce its debt profile. In 2008, Brazil was a net external creditor. Brazil experienced large capital inflows that led to reduction appreciation of its currency. The country has raised tax rates on specific foreign investment to reverse increasing currency appreciation. Brazilian exchange rate against the US$ was 2 and 1.77 in 2009 and 2010 respectively. Argentina adopted managed flexible exchange rate following 2001-2002 economic crisis. The peso’s real exchange rate was undervalued to increase exports volumes. Argentine exchange rate against the US$ was 3.7 and 3.9 in 2009 and 2010 respectively. Interest rates Brazil experiences high interest rates. The Brazilian strong economy coupled with very high interest rates (47.25% and 44.65% in 2009 and 2010 respectively) has attracted increased levels of foreign direct investment. Increased foreign direct investment has led to appreciation of the country’s Brazilian reais currency against the United States dollar. The country is increasing its capital reserves and controls foreign capital inflows through increased taxation to tame Brazilian reais appreciation. Argentina’s commercial bank prime lending rate was 10% and 11.3% in 2009 and 2010 respectively. This shows that Brazil has higher interest rates as compared to that of Argentina. Economic sectors Agricultural sector in Brazil contributes 6 percent of the total GDP. Agricultural products include coffee, soybeans, sugarcane, cocoa, wheat, oranges, livestock, corn, rice, cotton, tobacco and wheat. Brazil is the world largest producer of sugarcane, coffee, tropical fruits, frozen concentrated orange juice (FCOJ), and has the world's largest commercial cattle herd (50% larger than that of the U.S.) at 170 million head. Industrial sector contributes 28 percent of the total GDP. The country has established industries that produce machineries and equipment; motor vehicles and spare parts; aircraft and parts; textile and foot wear; sawmills and lumber; chemicals and petrochemicals; cement and steel; and consumer durables. The service sector in the Brazil contributes 66 percent of the total GDP. The service sector is comprised of banking, commerce, information communication telecommunication, computing, mail and energy8. Agriculture contributes 5 percent; industrial sector 23 percent and service sector contributes 72 percent of the total GDP in Argentina. In Argentina, agricultural products include tea, soybeans, sunflower seeds, grapes, lemons, livestock, corn, peanuts, tobacco and wheat. The country has established industries that produce chemicals and petrochemicals; motor vehicles: food processing; consumer durables; textiles, printing; steel; and metallurgy9. Industrial sector in Argentina produces chemicals, pharmaceuticals, motor vehicles, machinery, iron, steel, home appliances, tires, plastics, textiles, and leather. In addition, it produces cobalt-60, which is used in cancer treatment therapy. Industrial growth rate in 2010, for Brazil was 11.5 percent and Argentina was 8.9 percent. Energy Since 2006, Brazil has been one of the leading producers of hydroelectric power and producing about 260,000 megawatts, which is equivalent to 90 percent of its total electricity. Since 2006, Brazil produces sufficient energy to meet its needs. Argentina is third largest electricity generator in Latin America. The electricity is generated from thermal (54 percent) and hydropower (41 percent). Argentina produced 117 billion KWH in 2010. The country is one of the largest producers and exporters of nuclear power. Largely, Brazil produces more hydroelectric power than Argentina. Hydroelectric power constitutes 90 percent in Brazil and 41 percent in Argentina. Bibliography Central Intelligence Agency1.World Fact Book South America: Brazil. https://www.cia.gov/library/publications/the-world-factbook/geos/br.html (accessed August 5, 2012). Central Intelligence Agency2. South America: Argentina. https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html (accessed August 5, 2012). Kopka, Deborah. Passport Series: Central and South America. ST. Louis, Missouri: Lorenz Educational Press, 2011. NTZE. Exporter guide: Brazil. http://www.nzte.govt.nz/explore-export-markets/South-America/Doing-business-in-Brazil/Documents/Brazil-country-brief-March-2011.pdf (accessed August 5, 2012). OECD. OECD Economic Outlook, Volume 2011, Issue 1. France: OECD Publishing, 2011. United States Department of State 2. Background Note: Argentina. Bureau of Western Hemisphere Affairs http://www.state.gov/r/pa/ei/bgn/26516.htm (accessed August 5, 2012). United States Department of State1. Background Note: Brazil. Bureau of Western Hemisphere Affairs http://www.state.gov/r/pa/ei/bgn/35640.htm (accessed August 5, 2012). Zonis, Marvin, Dan Lefkovitz, Sam Wilkin and Joseph Yackley. Risk Rules: How Local Politics Threaten the Global Economy. Evanston: Agate Publishing, 2011. Table 1: Economic indicators Economic indicators Brazil Argentina 2009 2010 2009 2010 Unemployment rate: 8.1 7 8.7 7.9 Budget revenues in billions - $464.4 - $87.63 Expenditures in billions - $552.6 - $86.85 Inflation rate (CPI) 4.3 5.9 16 22 Commercial bank prime lending rate 47.25 44.65 10 11.3 Current account balance $24.3 $52.73 $11.29 $6.976 Exports in billions $178.2 $233.3 $55.67 $68.5 Imports in billions $179.9 $254 $38.78 $56.44 External Debt in billions $273.7 $310.8 $147.1 $160.9 Exchange rate 2 1.77 3.7101 3.8983 Source: OECD 2011 Read More