International Business - Brazils Economic Development - Essay Example

Brazil’s Economic Development

Introduction

The world’s fifth largest country, Brazil, has the largest economy in Latin America and is an important trading partner for different countries including the United States. Despite its top position in the Latin American economy and also as a visible player in the global economy, Brazil has not always enjoyed a brisk economic position or growth. The growth of the country’s economy was largely visible between 2000 and 2012, where its annual GDP averaged at an over 5 percent rate. As at 2012, the country’s economy had surpassed that of the United Kingdom and this made Brazil’s economy the sixth largest in the world.

The first development of the economy can be traced to the colonization period where Brazil was under the Portuguese. The Portuguese established a sugar economy by the mid 16th century on the northeastern coast while it sourced for a sugar market in Europe. Despite the monopoly that Portugal had on the sugar market, the Caribbean sugar boom brought about price declines that affected the Brazilian economy. Brazil’s economic troubles began following the decline of the sugar market, and since then, the country has been exploring ways to enhance economic growth during and even after colonization. In the 1980s and 90s, the country suffered widespread inflation that affected economic growth. As at 1994, the Plano Real was introduced as an approach to the structural transformation of the economy, and thus began the economic rise of Brazil. The 1990s saw the country take important steps towards liberalization of the economy and boosting the country’s competitiveness as well as fostering an environment for private sector development.

History of Brazil’s economy

At the time that the Portuguese explorers set foot in Brazil in the 15th century, the country had a population of 2.5 million people but had not made any advancements or progress in defining their economy. The Portuguese colonization of Brazil saw the rise of the country’s economy through reliance on primary products for exports. The mercantile policy instituted by the colonizers was based on the economic production cycles of sugar, gold, and later coffee. The reliance on primary products was enhanced by the fact that labor from enslaved Africans was readily available. The presence of the Portuguese in the country led to economic and demographic changes in the country where it experienced a rise in the number of emigrants.

In the 19th century, Portugal opened its Brazilian colony to trade with the rest of the world after Britain’s persuasion, where Portugal also rescinded the manufacturing prohibition. During this period, Brazil was the seat of the Portuguese empire and this led to reforms that transcended in the cultural, economic, and educational sectors. At the time of the country’s independence, the domestic economy was in depression while exports had also declined. The only vibrant sector during this time was the subsistence economy that had no substantial effect on the growth of the country’s economy. Despite these challenges, real economic growth and the impact of the country’s economy on the global economy was experienced in the 1990s under the presidency of Itamar Franco.

Economic policies and the Plano Real

Itamar Franco’s presidency between 1992 and 1994 following the impeachment of President Mello became a period of large economic transformations. Prior to the impeachment of President Mello, Brazil underwent a period of political instability that affected the country’ economy where real GDP declined by 4.0 percent in 1990 and declined by a further 0.9 percent in 1992 after a 1.1 percent increase in 1991 (Patrice, 2007). Inflation had largely affected the country under Mello’s presidency, and this became the concern of the interim government that put in place stabilization plans to spur back economic growth. The stabilization plan referred to as the Plano Real was developed by the finance minister with the aim of curbing inflation through an equilibrium budget and introduction of a new currency. The country had realized that inflation was a hindrance in the goal towards economic reforms and growth as the country’s currency was weak in the international market. Exports and imports would be highly affected, and hence the need for a stabilized economy.

In the post-Plan Real period, inflation was reduced to single digits even though the exchange rate had appreciated in the transition period. In July 1994, inflation in the country was at 5,150 percent while in December 2000, the rate was at 10 percent (Filho, 2001). The appreciated exchange rate was as a result of the activities in the international business environment and the global macroeconomic system. Brazilian goods became more expensive than goods from other countries and this led to current account deficits. Despite these issues, the country did not experience any shortage of foreign currency as there was renewed interest in the country’s markets due to the stabilization of inflation rates and the success of the Plan Real.

With the increased concern on transforming the economy, a fiscal adjustment program was crafted, while the government pledged structural reform progress. Through an international support program, the country received 41.5 billion dollars in 1998 and two months later, the Central Bank later indicated that the Real would stop being based on the dollar (Luna, Francisco, and Klein, 2014). Economic growth was thus reassured while the country showed the intent to maintain tight monetary and fiscal policies. In 2000, the country’s economy grew by 4.4 percent and though there were uncertainties due to the 2002 elections the economy continued growing. The new government under da Silva continued spurring growth through monetary policies, while the external markets were also favorable to the country. GDP growth in 2004 was by 5.7 percent, 2005 by 3.2 percent, 2006 by 4.0 percent, 2007 by 6.1 percent, and 5.1 percent growth in 2008 (Luna, Francisco, and Klein, 2014). The 2008-2010 global financial crisis did not affect economic growth patterns in the country despite the expectations of an economic slowdown. The country had amassed enough buffers to withstand the financial crisis, where the government stabilized the economy by lowering interest rates and increasing the public’s spending. Economic growth rate in 2010 was at 7.5 percent.

As much as internal monetary and fiscal policies played a role in transforming the country’s economy, the international market also favored economic progress in the country. China and other emerging markets were experiencing growth and this brought about a demand for commodities. Some of Brazil’s products that were in high demand were sugar, iron ore, meat, soy, and coffee. Consumption in the country also increased due to credit growth and high minimum wages.

Structural changes in the manufacturing sector

The Kaldorian view on economic growth places aggregates productivity as an outcome of a country’s manufacturing sector (Nassif, 2013). In line with supporting demand and fostering economic progress, Brazil undertook structural changes in its manufacturing sector and this meant a diversification of industrial production and the diversification of export products. Although there was large diversification of industrial production in the 1990s, Brazil began its diversified productive structure in the 1970s. The goods produced under the new manufacturing sector changes were the intermediary goods, capital goods, durable, and nondurable goods, thus marking the beginning of import substitution. In the 1990s, the liberalizing reforms in the country’s economy that included trade liberalization, the privation of enterprises, external financial openness boosted reforms in the manufacturing sector. The reforms contribute to increased production, as well as the availability of employment.

The changes in the manufacturing sector during the 90s period included movement towards more technological sophistication. The technological sophistication in the manufacturing sector furthered productivity as a diversified manufacturing structure has higher aggregate productivity than a non-diversified structure. Such changes and the growth in the manufacturing sector led to the placement of Brazil as the country with the third largest manufacturing sector in the Americas, where it accounts for over 28 percent of GDP.

Impacts

Brazil’s economic growth over the 20 year period had a profound impact on the global economy and the international market. From a WTO report in 2010, Brazil was in the top 30 merchandise exporters in the world, ranked at number 22 with China topping the list (Pio, 2013). As such, the implications is that Brazil is a major player in the international market, and has a large contribution in the dynamics affecting the global economy. The country’s economic growth saw its inclusion in the BRIC group that included Brazil, Russia, India, and China. The countries included in the group were seen as those likely to contribute to a new economic world order due to their impressive growth rates. As such, the country’s impressive economic growth meant that it had a major role in the global economic growth.

Since 2013, the country has been experiencing slumping economic growth as influenced by corruption, drought, and inflation. Brazil is currently the worst performer in the BRIC markets and this means that the interconnectedness of the different markets will bring about slumped growth in BRIC’s performance. Having been a major economic powerhouse due to its prolific growth from the 1990s, the declining state of the economy will affect major markets and negatively influence global economic progress.

Conclusion

Since the colonial period under the Portuguese, Brazil has been instituting reforms geared towards capturing economic growth and progress in Latin America and the world. The Portuguese first opened up Brazil to trading with other countries, and since independence, the country has continued to develop these trading ties while maximizing on its available resources. Although the country has seen different instances of economic growth and decline, the 90s marked the period of rapid economic growth and movement towards being a major economic player. Growth rates were continual even during the financial crisis in 2008-2010, and the maintenance of its economic growth was based on fiscal and monetary policies that strengthened the money market. More so, the manufacturing sector has undergone structural changes that have enhanced increased production and employment. Despite the economic slowdown experienced in the recent past, Brazil’s position as one of the top economic powerhouses remain.