Brazils Post WWII Development Path - Essay Example

School: Topic: BRAZIL’S POST WWII DEVELOPMENT PATH Lecturer: Executive summary The period after the World WarII has been a moment of great economic recovery for most countries including Brazil. For a country like Brazil, the real responsibility for its development was to move from an underdeveloped country into a developing one. With the use of four major development approaches, it has been noted that Brazil’s development path has been one that has fitted into most economic models. First, in terms of the linear stages of growth, Brazil needed gradual and systematic levels of growth just as suggested by the Rostow’s Stages of Growth Model and Harrod-Domar growth model. Second, the structural change models have a major shift from moments of subsistence-sector dominated economy to a capitalist-dominated economy. As a result of the structural change, Brazil has benefited immensely from increased investment and government revenue which have been directed towards infrastructural development in the country. In terms of the international dependence revolution, there was a goodness of fit for neocolonial dependence model and dualistic-development thesis because as a result of Brazil’s dependence on rich countries, it has recorded an ever increasing external debt to GDP ratio since 1945, which has resulted in the widening of developmental gap between Brazil and other rich countries like USA and Japan. There has however not been a fit for the false-paradigm model because Brazil’s focus for international relations has been largely centered on neighboring South American countries. Finally, the neoclassical counterrevolution model has explained reasons Brazil continues to be the major foreign investment destination in Latin America as the country has practiced a free market approach backed by a strong public choice approach and traditional neoclassical growth theory. The market-friendly approach has also been used as an avenue for expanding development of local business. Contents Executive summary 1 Introduction 5 Linear Stages of Growth for Brazil 6 How Brazil rose through Rostow’s Stages of Growth Model 6 Brazil through Harrod-Domar Growth Model 8 Structural Patterns of Development for Brazil 10 Analysis of Lewis theory of development 10 Brazil’s structural change and patterns of development 11 Brazil’s International Dependence Revolution 13 Impact of The Neocolonial Dependence Model on Brazil’s development 13 Analyzing The False-Paradigm Model in the context of Brazil’s development 14 Impact of The Dualistic-Development Thesis on Brazil’s development 15 Neoclassical Counterrevolution 18 How Brazil has used the Free Market Approach 18 How Brazil has used the Public Choice Approach 20 How Brazil has used the “Market-friendly” Approach 21 How the Traditional Neoclassical Growth Theory has affected Brazil’s development 22 Conclusion 23 References 25 List of Figures Figure 1: Rostows Model of Development 7 Figure 2: Brazils industrial production from 1992 to 2015 8 Figure 3: Brazils FDI in Millions of USD 10 Figure 4: Brazils general government revenue % of GDP 1996 to 2015 12 Figure 5: Brazils external debt 1980 to 2015 14 Figure 6: GDP in USD trillion between Brazil, USA, Japan, and UK 17 Figure 7: GDP of Brazil according to geographic locations 18 Figure 8Brazils FDI net inflows % of GDP 19 Figure 9: Brazil unemployment rate 22 List of Table Table 1: Recent Foreign investment performance of Brazil 21 Introduction After the industrial revolution in the period between 1760 and 1840, most countries had been set on a century long drive of national development, powered by strong industrial awaking till one world war came and then another. The World War II (WW II) thus became a major event that drew most countries aback in terms of development (Bacha & Klein, 1989). As a major panacea of the global economy, Brazil was also affected by events leading to, and after the WW II. Bahca & Klein (1989) however noted that the period after the WW II became a major test case for most countries to quickly recover from the economic setbacks and get back on the development path. This paper therefore analyses Brazil’s post WW II development path with the use of four major development approaches. These approaches are the linear stages of growth, structural patterns of development, international dependence revolution, and neoclassical counterrevolution. The diversity in approaches is to ensure that there can be fairness of claim on the real post WW II development path that Brazil has been on since the war ended in 1945. For each of the approaches, developmental obstacles, constraints, critiques, and achievements shall be revealed to draw a goodness of fit for each approach and its models. Linear Stages of Growth for Brazil The linear growth theories suggest that national growth takes place in a steady and systematic manner comprising of stages (Rostow, 1962). Two of these theories that can best be used to determine Brazil’s linear stages of growth are Rostow’s stages of growth model and Harrod-Domar growth model. How Brazil rose through Rostow’s Stages of Growth Model As depicted in figure 1, Bostow suggested that countries develop through five stages, each of which must be completed before getting unto the next stage. Figure 1: Rostows Model of Development Source: Image Arcade (2015) From the mid 1940s when the WW II ended, Brazil can be said to have successfully gone through all the stages and is currently at the fifth stage which is high mass consumption stages. Some facts that support this position include that Brazil has crossed the traditional society where agriculture was mainly done through subsistence farming (Bacha & Klein, 1989). Again, the country has passed the pre-conditions for take-off because the saving and investment growth of the country has passed 5% of GDP as suggested by the model (Balassa, 1982). This is because according to the Economy Watch (2015), Brazil’s average investment percentage of GDP is 17.032%. Indeed the model puts the investment growth to GDP for take-off stage at 15%, which means Brazil has crossed this stage also. Today, the diversity in Brazil’s industry with growth spreading to different parts of the country is a clear manifestation of growth beyond dive to maturity as technology has also improved in that country. With all these points made, Brazil’s age of mass consumption will be criticized as beings a non-steady one but a volatile one. From figure 2, it can be seen that from 1992 that the country was believed by most analysts to have reached the last stage, industrial production has been decreasing along the line, reaching record low of -17.47% in January 2009 (Trading Economics, 2015). Figure 2: Brazils industrial production from 1992 to 2015 Source: Trading Economics (2015) Brazil through Harrod-Domar Growth Model According to Harrod-Domar’s growth model, there are two major determinants of the rate of a country’s growth. These are capital-output ratio and savings ratio (Mishra, 2010). Since the capital-output ratio shows how much new capital is needed to create a given amount of new national income, and savings ratio represent the relationship between savings and national income, it can be said that the model places a lot of importance on savings and investment (Mishra, 2010). Chen (1979) also opined that investment, labor force growth and technological progress are three important variables to knowing a country’s linear growth. With this background, Balassa (1982) noted that in the first two decades after the WW II, Brazil rode a steady developmental path while sparsely focusing on technological expansion. By the mid 1960s, the country’s technological progression had improved, giving rise to a new wake of industrialization which enhanced massive labor force growth to cater for industrial demand (Chen, 1979). as can be seen in figure 3, Brazil is today considered one of the world’s best recipient of foreign direct investment (FDI) resulting in a steady growth in the country’s FDI which has increased from $429.22 million in 1996 to $4,263 million as of March 2015. Figure 3: Brazils FDI in Millions of USD Source: Trading Economics (2015b) Structural Patterns of Development for Brazil Structural change economists have suggested that there are long term shift in the fundamental structure of any country’s economy, which is caused by growth and economic development (Sharp, 1980). For Brazil’s development post WW II, the structural patterns of development are analyzed from two theoretical perspectives as given below. Analysis of Lewis theory of development Also known as the dual-sector model, Lewis divided the economy of developing countries such as Brazil into two, which are capitalist sector and subsistence sector (Lewis, 1954). Analyzing the economic variables of Brazil’s economy from 1945 to 1954, Fields (2004) described most part of that period of the economy as being dominated by the subsistence sector. This is because greater part of the economy within the period was not using reproducible capital (Misra & Puri, 2010). Within the period, most parts of Brazil were considered rural with several unskilled laborers, whose major input to the nation’s economy was non-reproducible. For most of these people in the rural communities, farming and livestock was their major means of sustenance. The period after 1955 is however said to have experienced massive industrial expansion with much focus on commercial agriculture such as mass production of cassava, sugar cane, cocoa, and palm produce (Alves, 1985). In the estimation of Fields (2004), even though subsistence sector dominated for long, Brazil is today at a point where there is a perfect relationship between the two sectors as the capitalist sector has expanded and extracted labor from the subsistence sector. Those who have not been absorbed into the capitalist sector are however still involved in active subsistence labor. Brazil’s structural change and patterns of development Chenery and Syrquin (1975) identified five major categories of variables that define economic structure. These include investment, government revenues, education, urbanization, and demographic transition. For each of these, there have been interesting patterns of change that Brazil has experienced. Some of these areas have also been major achievement areas whiles others have come as major obstacles and constraint to national development. In terms of investment, figure 3 has confirmed that Brazil has become a major attraction market for FDI since the war ended in 1945. In terms of government revenue, Chenery and Syrquin (1975) focused on the use of total government expenditure as percentage, total revenue as percentage, tax revenue as percentage, and fiscal deficit as percentage. In figure 4, Brazil’s general government revenue percentage of GDP is analyzed from 1996 when data was made available by Economy Watch (2015b). Figure 4: Brazils general government revenue % of GDP 1996 to 2015 Source: Economy Watch (2015b) From the figure, it can be seen that Brazil’s government revenue % of GDP has averaged at 35.25 since 1996. Based on this performance, Brazil is said to rank 48 in the world ranking for general government revenue % of GDP, exceeding the world average by 6.59% (Economy Watch, 2015b). This is certainly a very good structural outlook for the country. Because of Brazil’s ability to generate as much revenue to GDP as needed, the country has seen major expansion in education, urbanization, and demographic transition. Brazil’s International Dependence Revolution Generally, the international dependence revolution models reject the emphasis on gross national product (GNP) growth rate as the principal index of development (Paul, 1997). Rather, developing countries such as Brazil are viewed as having both domestic and international institutional, political and economic rigidities. Some of these models are thus discussed in the context of Brazil’s post WW II development. Impact of The Neocolonial Dependence Model on Brazil’s development The neocolonial dependence model argues that underdevelopment is caused as a result of high unequal international capitalist systems where there is rich-poor country relationship (Sharp, 1980). This because in such relation the elite ruling class which is the developed country strives for the achievement of its development by taking from the poor country whiles giving little incentives as loans. To understand how this model has impacted on Brazil’s development, it is important to look at the historical account of Brazil’s dependence on international donors and lenders, which has manifested in external debt. Giving a historical account of this, Amin (1976) observed that Brazil was highly dependent on elite economies, leading to very high external debt in periods between 1950 and 1980. From figure 5, it would be noted that this trend has not improved as the country’s external debt has increased steadily, reaching $347 billion as of the fourth quarter of 2014 as against GDP of $3.259 trillion (Trading Economics, 2015c). It can therefore be said that the neocolonial dependence model has impacted on Brazil’s development negatively with high and increasing external debt. Figure 5: Brazils external debt 1980 to 2015 Source: Trading Economics 2015c Analyzing The False-Paradigm Model in the context of Brazil’s development The false-paradigm model also posits that underdevelopment of third world countries is caused by wrong and irrelevant advice that international expert advisers give to countries (Mishra, 2010). Some of these international expert advisers are considered to include the international monetary fund (IMF), World Bank, and United Nations Development Program. The explanation of this model brings to discussion of Brazil’s post WW II international relations policy as a means of understanding the impact of false-paradigm model on the country’s development path. As far as Brazil’s dependence on international expert advisers is concerned, Landau (2003) identified the period between 1945 and 1960 as a national building period, a reason for which the country had very little option in its international relations than to run to IMF and the World Bank for economic strategizing for most of the period. This trend however changed from that period when the country’s reliance on these bodies led to higher rates of external debt as outlined earlier (Landau, 2003). From 1990, Brazil international relation became one described as having positive global role since it achieved greater regional integration through the formation of the Mercosur common market, which included Argentina, Uruguay, Paraguay and, Venezuela (Burton, 2011). 2008 also saw the coming of the South America-wide Unasur in 2008 (Burton, 2011). All these international participation have given Brazil an international rise because it is an active international figure rather than a passive one which is dogmatized to advice from international expert advisers. Impact of The Dualistic-Development Thesis on Brazil’s development As the name suggest, the dualistic-development thesis proposes that different sets of conditions such as superior and inferior can all co-exist in a given space (Meier, 1989). It is however lamentable that when the interrelations occur between superior and inferior elements, the superior elements do nothing to pull up the inferior (Meier, 1989). For Brazil, this thesis can be discussed in terms of the gap between the country’s economic development and other rich nations such as United States, Japan and UK. It is also possible to look at the thesis from the context of the living standards of the poor peasants and rich industrial sector who have has coexisted in Brazil since 1945. With the former, Nation Master (2013) observes a clear manifestation of the dualistic-development thesis between Brazil and rich countries as the gap in terms of GDP between these countries has widened since 1960. For example figure 6 shows that from 1960, Brazil has only closed up the gap of GDP with one out of three named countries. Figure 6: GDP in USD trillion between Brazil, USA, Japan, and UK Source: Nation Master (2013) Whiles Brazil struggles to close the gap of development with rich countries, the poor within that country have also struggled to close their wealth gap with the rich (Hirst & Hurrell, 2005). This situation has been attributed to the dispersed developmental landscape of Brazil where greater part of the country’s development is focused on the Southeastern and Northeastern regions where up to 64.12% of the country’s population lives (Hirst & Hurrell, 2005). The discrepancy in the rich and poor is showed in figure 7 with GDP according to major cities in Brazil. Figure 7: GDP of Brazil according to geographic locations Source: The Economist (2015) Neoclassical Counterrevolution How Brazil has used the Free Market Approach Neoclassical counterrevolution theorist explain a free market to be a market system in which goods and services prices are determined by consent between sellers and consumers (Rothbard, 2008). As a result of this the law of demand and supply is not hampered by any governmental interventions or monopoly (Block & Somers, 2014). In terms of development path of countries, Rothbard (2008) explained that countries that practice free market do not have laws that create barriers to market entry and so there is a market-based economy. To measure the real impact of the free market approach to Brazil’s post WW II development, it will be important to assess the net inflow percentage of GDP in the country. For this, the Santander Trade (2014) observes that Brazil has for several decades after the WW II become the largest recipient of FDI in Latin America due to its free market approach. This situation is further highlighted in figure 8. Figure 8Brazils FDI net inflows % of GDP Source: Trading Economics, 2015d How Brazil has used the Public Choice Approach In both public choice theory and new political economy, the reliance on economic principles is limited as the real outcomes of national development (Mayer, 1987). Rather, proponents believe that the study of political behavior and political economy are said to be fundamental in interrogating economic doctrines that regards economic ideas and behavior (Gamble, 1996). To understand how the public choice theory and new political economy approach has impacted on Brazil’s development path therefore, it will be necessary to relate the country’s political ideologies and political systems in the post WW II to its national development. Since the WW II, Brazil has maintained its Federal Republic political system, making it operate Federation of States which holds a Republic form of government (The Brazil Business, 2013). Even though this has not changed for all this period, actions of self-interested agents such as voters, politicians and bureaucrats have changed significantly. For example, the country rejected military dictatorship which it experienced from 1945 to 185 and embraced a two party political system (The Brazil Business, 2013). From 1988 however, multiparty democracy has been practiced and attributed to the economic development achieved over the period. This is because politicians are seen to be accountable to the people and non-performing ones are removed through election. How Brazil has used the “Market-friendly” Approach As a proponent of the World Bank, the Market friendly approach embraces free markets but advocates for some form of government interventions to fix imperfections in the economy (Easterly, 2002). Once this is done, the market friendly approach will lead to countries to putting in place policies, programs, incentives and initiatives that make them attractive not just foreign investors but local business growth as well (Easterly, 2002). Based on table 1 however, the country may be criticized for recent declines in FDI inflows, which could be an indication of changes in friendly market variables that used to exist for foreign investors such as tax reliefs. Table 1: Recent Foreign investment performance of Brazil Source: Santander Trade (2014) Even though table 1 shows declining values in recent times, some analysts have maintained that as the country is now at the high-mass consumption stage of development, minimizing incentives for the growth of foreign investment to make local businesses grow is an important developmental strategy (Santander Trade, 2014). How the Traditional Neoclassical Growth Theory has affected Brazil’s development The traditional neoclassical growth theory attributes the steady growth of a country to three forces which are labor, capital and technology (Haran & Hobsbawm, 1961). To have a perfect understanding of how this theory has affected Brazil’s development, it will be important to look into issues of unemployment and cost of doing business in the country. This is because when unemployment is labor, there is significant cut in the amount of labor supplied to industries. From figure 9, it would be seen that in the last 15 years, Brazil has significantly brought its unemployment rate down, showing strong commitment to gain from the traditional neoclassical growth theory. Figure 9: Brazil unemployment rate Source: Trading Economics (2015e) In terms of doing business, the World Bank has ranked the country low for most variables such as dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, and paying taxes (World Bank, 2015). These are major constraints against Brazil’s development. Conclusion Based on the analysis of Brazil’s development path based on the four approaches discussed above, it is possible to draw various conclusions on the goodness of fit for each approach. This will be done by summarizing the discrepancies between the real values attained by Brazil in its post WW II development as against what the approaches and their models suggested should have been the case. First, the linear stage of growth suggested a systematic transition of Brazil’s development from a generally traditional based to a commercial or industrialized one. The study has indeed established that attainment of a fit between the approach and Brazil’s development path since the end of the WW II. This is because the period immediately after the war was characterized with low economic performance resulting from over dependence on subsistence agriculture. Today, even though agriculture is still dominant component of Brazil’s economy, it has been so commercialized like that Brazil is a leading exporter of most agric products including coffee. In terms of structural patterns of development, the goodness of fit established for the linear stages of growth can be said to have positively translated into the structural change of the country. The reason for this conclusion is that as part of Brazil’s agricultural industrialization, it has achieved massive investment, growth in government revenue, expanded education, urbanization, and demographic transition. In terms of international dependence revolution however, the goodness of fit shows that Brazil has been negatively impacted by two models which are neocolonial dependence model and dualistic-development thesis. This is because as part of Brazil’s reliance on international partners and funders, its external debt has been increasing for the entire post WW II period. Brazil’s economic growth gap with major global economic competitors such as Japan and USA has also been increasing with time. The false-paradigm model has however not affected the country’s development because Brazil has made its international relations highly regional based, ensuring that it deals mainly with equally ranked countries within the South American continent. 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