Successful Policies of Economic Development in Brazil - Essay Example

?How successful have development policies been in Latin America? Select one country [Brazil] and assess its economic evolution from Import Substitution Industrialization (ISI) to date. The economic strategy which is known by the name “Import Substitution Industrialization” arose in relatively under-developed countries as a response to global markets. It was clear that many Latin American countries in particular could not keep up with the fluctuations and demands of a free market system. Many of the participants in the world markets possessed vastly superior technologies, infrastructure and buying power due to their more developed status and stronger currencies. This left weaker economies very vulnerable and so their governments stepped in to guide industrialization in ways which assisted in the development of the country as a whole, rather than just successful trade between individual companies and external customers. The focus was on the internal market rather than on the export market, and the aim of this strategy was to reduce reliance on foreign goods and at the same time encourage local manufacturers to supply more and more goods. In this way the state could retain more of the country’s wealth for internal developments and would not have to borrow to obtain currency for international purchases. As one of the larger South American states, Brazil has played an important part in the economic development of this sub-continent. In the period from the middle of the nineteenth century until the Great Depression in 1929-30 the majority of Latin America enjoyed a phase of export-propelled growth. (Hirschman, p. 1968, 3) The combination of reduced buying and selling capacity in industrialized countries and the huge disruption of the Second World War caused great fluctuations in the world markets and this in turn prompted countries like Brazil to focus more on expanding their own internal market. This is where import substitution was devised, as a method of driving forward industrialization while at the same time reducing the country’s need for outside goods and foreign currencies. This government led strategy was applied in Brazil from 1930 until about 1960. (Skikida, 2005, p. 2) Local manufacturers were encouraged to produce products which had previously been acquired by importation. This encouraged innovation, and schemes were set up that allowed foreign companies to invest in Brazil, and transfer technology into that country so that the demand for finished goods could be met. Hirschman notes that countries who come late to industrialization can benefit from the knowledge that other countries have learned before them, for example Britain and other European states, and as a result of this the introduction of new working practices is much smoother. By the early 1960s import substitution industrialization in Brazil was judged to be a considerable success in the short term, but with some rather negative effects in the longer term. (Macario, 1964) One long term effect was that Brazilian industrialists became complacent, and they got used to the lack of competition that ensured their continued success, regardless how efficient they were. There was no external incentive to improve quality or efficiency, and so when Brazil wanted to participate in the world markets to obtain modern goods, it was found that Brazilian products fell far behind those of competitors. There was also very little independent decision making in the industrial sector, since most of the leadership came from government initiatives. When looking at the import substitution period in Brazil from 1930 onwards it is important to understand the significance of political changes which were introduced by the charismatic leader Getulio Vargas. By setting up a Ministry of Labor he managed to get dialogue going between industrialists and government and this eventually cemented his control over all aspects of the economy. (Roett: 2010, p. 38) This central control deepened import substitution policies and allowed various beneficial reforms such as the creation of a new capital city in Brasilia and a national highway system. There were also some negative results such as human rights abuse and periods of very serious corruption and hyperinflation which in turn caused political turmoil. (Roett: 2010, pp. 14-16) The truth is that the authoritarian style of government brought both good and bad results, and unfortunately import substitution does require considerable control mechanisms to ensure that the collective plans are followed through and that resources flow inside the country and not into foreign banks. The geography of Brazil makes industrialization very difficult, since most of the population is located in or near coastal areas, while most of the resources are located inland with few transport links. By paying a lot of attention to road construction Vargas fostered better links and more encouragement for the development of a wider range of resources. Brazil has a huge land territory and many possibilities for exploitation of natural resources. Despite many different ethnic origins through generations of immigration to Brazil, and a dominant culture based on the Portuguese language, a considerable national unity has been achieved, and this is one of the reasons why this economy has seen many periods of extended growth. Some of the reasons for inflation in Brazil in the import substitution phase have been explored by Parkin, who suggests that many of them are structural and typical of most developing countries. (Parkin: 1991, pp. 38-84) At first agriculture was the dominant source of wealth, but as industrialization grew, so this changed and more people were employed in manufacturing. In 1940 about 70% of the population of Brazil were employed in the agricultural sector, but by 1930 this had dropped to only 31% (Cardoso and Helwege, 1995, p. 91). There were also important social consequences of this shift. Many people moved from villages into larger towns and cities. The gradually increasing need for more skilled workers meant that the government allocated more resources to education. With the building of large scale factories, organisations like trade unions developed in the larger companies. These are all positive developments that were helped along by increasing industrialisation. Thanks to its greater size Brazil also managed to make a success of heavy industries like steel production and automobile construction (Cardoso and Helwege:1995, p. 92). A larger population meant that there was a larger internal market for the goods that were produced internally. By subsidizing industry and not subsidizing agriculture the Brazilian government speeded up this aspect of the country’s development. Yet again this has both good and bad consequences. The good consequence is that industry expands faster, and more skilled jobs are produced, but the bad consequence is that government influence ensures that a natural balance between traditional and newer employment types does not develop. Over and under capacity arises, and the government gets locked into a system of subsidies, over capacities and generally poor productivity because of a lack of any competition. After thirty years of import substitution industrialization some of the internal markets for locally produced products became saturated and there was more and more pressure from the people and from manufacturers to free up the economy so that some of the benefits of free trade could be achieved. Distribution of jobs and wealth across the country was uneven, and there were calls for more diversification and more security for workers. Between 1968 and 1974 Brazil experienced a period of strong growth under an authoritarian government with strong links to the military, but this came to an end with the turbulence caused mainly by the oil crises of the mid-1970s. The 1980s are known as the “Lost Decade” in Brazil, in which “growth stagnated while the gap between rich and poor widened. (Amann: 2011, p. 32) At the end of the 1980s a deliberate attempt to open up Brazil to more trading opportunities was begun, in the hope that this would increase productivity growth. According Ferreira and Rossi this strategy worked: “Our data showed that after declining over the 1980s, both output per worker and total factory productivity (TFP) increased after trade liberalization.” (Ferreira and Rossi: 2003, p. 1384) This was observed to vary across different industries, however, and some sub-sectors such as automobiles, computers and freezers retained government subsidies long after other areas. The largest reductions in protection occurred in plastics, clothing, fabric products and footwear. (Ferreira and Rossi: 2003, p. 1388). The article concludes that productivity is stagnant from 1985 until 1900 and then it increases remarkably as a direct result to government policies such as reducing tariffs and eliminating measures such as import quotas and reserved market shares. (Ferreira and Rossi: 2003, p. 1399) These reforms were effective but they did not resolve all of Brazil’s problems since 1998 Brazil had to seek assistance from the IMF. This pattern of boom and bust seems to be characteristic of modern Brazil. The very latest indications are that Brazil has finally managed to gain control of its economy, and the figures from the last eight or nine years shows steady and even accelerating growth against a background of recession in North America and Europe. The currency is stable, and critics point out that modern leaders like Cardoso (1995-2002), Lula (2003-2010) and Rousseff (2011-) have used a more democratic style to introduce a wider dispersal of wealth across all sectors in society. (Amann: 2011, p. 33). Coffee is still one of the main products and this leaves Brazil open to risks due to the possibilities of local natural catastrophes and weather variations, as well as fluctuations in the world price for this and other commodities. The banking system has exercised a positive influence on inflation, with the result that in general Brazil has at last been able to bear the fruits of many decades of social and economic reform, so that in the new millennium it is beginning to take an increasingly confident role in both exporting and importing world class goods. Self-sufficiency in oil and investment in the means to produce it secures a good basis for on-going stability. Amann points out that Brazil has benefited also from the misfortune of more advanced economies, as for example in the wake of the dotcom crashes of the early 2000s: “Brazil, having cemented in place a stable macroeconomic framework and, benefiting from reformed and increasingly open domestic capital markets, received a surge of portfolio inflows.” (Amann: 2011, p. 34) The overall pattern of Brazil’s development in the last 80 years or so has been at times, wildly erratic, with longer periods of stability under various types of proactive government. Relatively poor physical infrastructure and dependence on a few basic commodities for a large volume of economic activity have always been problems in Brazil and they are still probably going to be a threat for Brazil long into the future, but there are signs that at least the political system is more stable, and the regulatory frameworks are beginning to be more effective. The fear that Brazilian industries cannot compete on a fully free market basis appears to be unfounded. Import substitution gave way to a centrally planned economic model and then finally to a much freer market economy. These stages were all necessary stepping stones to a modern, export-focused economy which takes its rightful place on the world stage. There is, however, one very pressing danger which seems to afflict all Latin American economies: the spectre of inflation. In the words of Cardoso and Helwege: “… 100 percent inflation per year is considered low in Latin America … this new breed of inflation runs faster, partly because the modern sector of the economy responds quickly to external shocks and policy errors by shifting assets abroad electronically. The poor are left behind in the dust.” (Cardoso and Helwege: 1995, p. 18) So far there is no sign of immediate returns to catastrophic inflation rates, and is still growing, although the expansion of GDP was slowing slightly from 8.8% in the second quarter of 2010 to only 5.0% in the fourth quarter. (Fick, 2011) It remains to be seen how well Brazil copes with its now greater integration, or perhaps rather reintegration after a spell of inwardness, into world affairs and world markets. There are some major opportunities for Brazil on the horizon like the plans to host the 2014 World Cup and the 2016 Olympics, both of which are a tremendous vote of confidence from outside the country on its ability to provide the finances and the infrastructure for such huge events. Government commitment to this is of course absolutely critical but a big part of the preparation for these events will be a drive to increase the amount of private investment both in the events themselves and in the longer term buildings and transport links that will ultimately benefit the local people. The ability to pull off this major achievement will be the best demonstration of all that Brazil has entered a new phase of stability and steady economic growth. References Amann, E. 2011. A New Brazilian Economic Miracle? CESifo Forum. Available at: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_Forum/zs-for-2011/zs-for-2011-1/forum1-11-focus5.pdf Baer, W. 2008. The Brazilian Economy: Growth and Development. Boulder, CO: Lynne Rienner. Ferreira, C. and Rossi, J.L. 2003. New Evidence from Brazil on Trade Liberalization and Productivity Growth. International Economic Review 44 (4), pp. 1383-1405. Cardoso, E.A. and Helwege. 1995. A. Latin America’s Economy: diversity, trends and conflicts. Cambridge, MA: MIT Press. Fick, J. 2011. As Brazil’s Economy Slows, Landing Concerns Grow. The Wall Street Journal. March 30th. Hirschman, A.O. (1968) The political economy of import-subsitution industrializatio in Latin America. The Quarterly Journal of Economics 82 (1), pp. 1-32. Macario, S. 1964. Protectionism and Industrialization in Latin America. Economic Bulletin for Latin America 9, pp. 61-101. Parkin, V. 1991. Chronic Inflation in an Industrializing Economy: The Brazilian Experience. Cambridge: Cambridge University Press. Roett, R. 2010. The New Brazil. Washington D.C.: The Brookings Institution. Skikida, C.D. (2005) Brazil: from import substitution to the 21st century. What is left to do? Ibmec MG Working Paper. WP30. Available at: http://www.ceaee.ibmecmg.br/wp/wp30.pdf Read More