The economic growth and financial development relating to brazil - Essay Example

? THE ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT RELATING TO BRAZIL (Word counts: 3299) …………………. College/ ………….. …………. TABLE OF CONTENTS Index …………………………………………………………………………. 4 Introduction …………………………………………………………………. 4 Framing the research…………………………………………………………. 5 Economic notion of Economic Growth ……………………………………….. 6 An overview of Brazil’s Economic Growth …………………………………… 6 Brazil’s Economic Growth Indicators and Driving forces …………………… 8 Growing through Industrialization……………………………………… 8 Growing through Productivity………………………………………….. 9 Growing through better investment in people………………………….. 11 Growing economy through developing the resources…………………. 13 Growing economy through technology advances……………………… 14 Growing economy through increased foreign investment……………… 15 Conclusion………………………………………………………………………. 16 References……………………………………………………………………….. 18 Index Agricultural production in Brazil Industrialization Brazil Luiz Inacio Lula da Silva Brazilian Miracle period Macroeconomic indicators BRIC Unemployment Consumer Price Vertical integration Economic Growth of Brazil Technology advance in Brazil Foreign Direct Investment 2008 crisis and Brazil GDP GNP Growing through productivity Inflation Investment in people Introduction The economies of rapidly emerging countries widely known as BRIC (Brazil, Russia, India and China) have recently become the objects of fascination and speculation for international investors, policy makers, economists and academics worldwide. Brazil, as a country that is affluent of sufficient natural resources, home to various increasingly dynamic global corporations and endowed with a large international market, has emerged to be one of the four very large and rapidly emerging economies. The economic potential of Brazil, the strong global demand for its products, steady results from its economic policies and success factors of its major global players have eventually helped the country become one of the brightest starts in the world economy (Brainard, 2009, p. 1- 2) This piece of research paper presents a literature review on the economic growth and financial development in Brazil, based on various economic theory and developmental concepts. This paper analyzes success factors of the economic indicators that helped Brazil become one of the fastest growing economies. Framing the research The macroeconomic concepts regarding Economic growth will be detailed and explained in the paper in order to compare and contrast empirical results and theory in relation to the economic growth in Brazil. Different views regarding economic growth are detailed and these are applied with the case of the economic growth of Brazil. When it comes to Brazil’s economic growth it has very different times of economic growth, one if high rate of economic growth in the early 1960s and 1970s, and relatively less rate of economic growth from 1980s till date. Brazil’s macroeconomic indicators of its economic growth and driving forces are also detailed. The major indicators were productivity, industrialization, investing in people and developing the resources and technological advances. This paper reviews various literatures on these macroeconomic indicators in relation to the economic growth of Brazil. Economic notion of Economic Growth Economists defined economic growth as either: An increase in the real GDP occurring within a certain period of time, or An increase in real GDP per capita occurring within a period of time. Both these definitions indicate that economic growth is calculated as a percentage rate of growth per year or per quarter- every 3 months period (McConnell and Brue, 2004, p. 131). As Tucker (p. 37) noted, economic growth is the ability of the economy to produce greater levels of output, represented by an outward shift in its production possibility curve. According to this definition, a country may experience economic growth when its resource base increases or its technology gets advanced. For an economy, growth will be a goal because it can help the economy expand total output and thus to increase real wages which in turn to increase the standard of living. Achieving rapid but relatively smooth economic growth with less inflation and low unemployment rate is one of the general goals of macroeconomic policy (Baumol and Blinder, 2011, p. 488). To be more specific, an economy that is growing would be able to meet its people’s wants and needs and to resolve macroeconomic problems. When the economy grows, real wages will increase and people’s income also as a result increases causing richer opportunities for individuals as well as families. According to the very basic concept of economics, scarcity is the central problem of economics and the burden of scarcity can be reduced by economic growth. From different definitions of economic growth detailed above, it can be understood that basically there are two sources that an economy can grow, 1) by increasing the inputs of resources, or 2) by increasing the productivity of those resources through technology advances or through labor efficiency etc. An overview of Brazil’s Economic Growth Brazil’s economy represents an illuminating example for an economy that has experienced problems associated with evaluating development process. The past three- to- four decades of Brazil’s economic factors show that it has been experiencing serious problems of poverty, rising unemployment and extreme income inequality whilst it has also experienced periods of repaid economic growth as measured in GNP (Todaro, 2002, p. 60). In a speech delivered by C. Fred Bergsten in 1977 before the American Chambers of Commerce in Brazil, he highlighted that Brazil had apparently become one of the most important participants in international economic system, being the world’s tenth largest economy by that time. Brazil was one of the few countries that maintained an impressive rate of economic growth through the world’s recession between 1974 and 1975. Brazil, by 1977, was eleventh highest in maintaining the international monetary reserve, thirteenth largest importer, fifteenth largest exporter, second to United States as an exporter of food products and seventh among all countries as a host to direct investments (Bergsten, 1977, p. 261). In early years of 1960s and 1970s, the economic growth of Brazil and the economic stability that it maintained for years have been widely noticed. Between 1960s and 1970s, Brazil has been experiencing economic growth because it has been able to produce greater levels of output and it was able to utilize its resources more economically and effectively. Economically, an economy experiences growth when its people’s income increases, and this was very evident from Brazil as it was fifteenth largest exporter and this had caused it improve the standard of living of its people. As Baumol and Blinder (2011, p. 488) noted, less inflation and low unemployment rate are some of the apparent signs of economic growth and those have been very obvious from Brazil case. Between 1947 and 1962, Brazil’s economy has grown on an average rate of 6 percent annually and has been found to be one of the most emerging economies. The period between 1968 and 1973 has been renowned as Brazilian Miracle period as the country enjoyed economic growth of more than 10 percent a year showing the highest record in the world. This miracle growth has been fueled by the agricultural export that has doubled between the years of 1962 to 1971 (Brainard, 2009, p. 2). Increased agricultural production helped Brazil gain large volume of money inflow from other countries and this in turn to growth the economy as well. Though the time between 1960s and 1970s were very fascinating for Brazil since it achieved almost 10 percent economic growth, after this Brazilian Miracle period the country hasn’t been as successful as it was earlier. Within the last few years, Brazil has implemented a number of strategic economic policies and taken measures to develop the economy and improve its people’s standard of living. As the Economist (2011) observed, a number of growth and progressive social policies have brought success in the economy of Brazil. This is very evident from the facts that Brazil’s credit was booming, the unemployment rate of last April has been recorded to be 6.4% which was the lowest on record, and the income inequality among its people has fallen sharply (The Economist, 2011). As compared to many other developing countries and to other BRIC countries, Brazil has been maintaining a growing pace of economic growth in the recent years, but as compared to the Brazilian Miracle period of its own economic growth, the growth rate was less. Many countries have been severely hit by the recent 2008 financial crisis. Brazil remained far positive despite the fact that almost all the industries and a large number of economies worldwide have been affected by the crisis. Brazil has been successful in maintaining a fortunate economic stability that has truly helped it navigate the 2008 financial crisis. Though inflation was estimated as 6.5% and still rising, there is tightness in Brazil’s labor market causing workers to expect higher prices and demand higher wages. The tighter macroeconomic policies have been the main cornerstones that helped Brazil counter the risk of inflation. Overall, macroeconomic indicators of Brazil seem to be strong as to make Brazil an economic superpower, but still, as the Economist observed, the inflation rate is rising and the consumer prices are steadily increasing and these show that Brazil’s economy is quite fragile than it looks like (The Economist.com, 2011). Brazil’s Economic Growth Indicators and Driving forces Growing through Industrialization Brazil’s industrial development has been one of the major driving forces that helped it achieve economic growth in the last few decades. Brazil is one of the newly industrializing countries (Todaro, 2002, p. 60) and this has been the greatest contributor to the economic growth in Brazil. Major sectors have been industrialized including transportation, power and communication such as radio and television and these have greatly improved within the last years. Brazil’s economic growth has been caused by its developments and industrialization in major sectors like steel, chemicals and petrochemicals. Wesson (1984, p. 53) noted that Brazil’s government had placed import-substitution industrialization at the centre of its economic development and political reform strategy. This policy contained strategically important and practically effective tools such as 1) Protection of new industries through tariffs and exchange control, 2) Special incentives for foreign capital to establish and enhance grater production facilities in Brazil, 3) Encouraging maximum vertical integration of industrial enterprises, mainly to foster launching of many new domestic supplier firms, and 4) Creation and the expansion of state enterprises in basic sectors like steel. Some literatures highlighted that industrialization and import substitution industrialization have been major keystones in helping Brazil grow its economy, but Oliveria and Nakatani (2007, 39) are of the opinion that Brazil witnessed a true economic development and growth under the economic reforms led by Luiz Inacio Lula da Silva and his government between 2002 and 2006. According to them, the second half of the 1980s and the first few years of 1990s saw dramatic deployment of successive anti-inflationary plans. This period has been marked as the end of the industrialization strategy and the emerging of neoliberal policies in Brazil. Growing through Productivity According to the very basic concept of Economics, productivity growth is crucial for generating an improved standard of living and for the economic growth itself. The Output Per Capita can grow as a result of increased labor participation or longer work time (Stone and Sawhill, 1984, p. 74). Economic growth is more closely concerned with the expansion of any particular economy’s capacity to produce over a specific period of time. As Salvatore and Diulio (2003, p. 81) emphasized, economic growth of a country occurs when there is an increase in its natural resources, human resources, capital or when there are technological advances. The most two common measures or indicators of the economic growth of any country are 1) an increase in the real GDP and 2) an increase in the out put per capita. When it comes to the case of economic growth that Brazil achieved within the last few decades, it has maintained a better pace of economic growth in early years of 1960s and 1970s as compared to that of recent decades. World Bank (2004, p. 52) found that as compared to Brazil’s growth, Argentina and Chile, both belonging to Latin America and many other neighboring countries to Brazil have done better in increasing the productivity. When comparing and analyzing the economic growth indicators and the economic growth levels of Brazil, it can be understood that Brazil had one of the highest economic growth rates in the mid-twentieth century. Brazil was then behind only Japan and Korea. The debt crisis during the period of 1980s and 1990s affected the pace of economic growth in Brazil as it had soon created a drag on economic growth in Brazil and through out some countries in Latin America (Thomas, 2006, p. 12). The growth constraints in Brazil have included mainly the burden of previous fiscal deficits and large burden of debt as well as debt payments. Social security transfer and the inflexibility of the budget have also contributed to the constraints of economic growth in Brazil (Thomas, 2006, p. 12). Between 1930 and 1980, Brazilian economy grew at an average rate of 7 percent a year, but in 1980s, GDP growth has been collapsed and the country experienced a long term structural change. Between 1981 and 1993, the growth has fallen to an average growth rate of 1.7 percent, mainly following the oil shock of 1979 and Brazil’s debt crisis in 1981. Rodriguez, Dahlman and Salmi (2008, p. 16) emphasized that the very recent era, from about 1994 to 2008 was a period of limited economic recovery for Brazil. When Brazil’s economic performance and growth are compared to that of currently fastest growing economies like China, India etc, the weakness that Brazil witnessed in its growth become more apparent. During 1960s, economies like China, India and Indonesia have been growing mush more slowly that Brazil. In short, though Brazil was one of the fastest growing economies in 1970s, its economy now grows much lower than other three BRIC countries, Russia, India and China, despite that it has been able to fortunately recover from the worldwide financial crisis. Growing through better investment in people As mentioned earlier, a country’s economy can be grown by increasing the human resources or improving efficiency of human capital. There are large numbers of literatures that talk about closer relation between human capital and economic growth. Fernandez and Mauro (2000, p. 3) stressed that human capital accumulation is one of the key determinants of economic growth. Better education, training, enhancing maximum efficiency of labors and all other strategic activities that can improve the work-efficiency of labors can help an economy grow because it not only increase the income distribution but also improves the standard of living. World Bank (2004, 38) found that Brazil had made greater efforts in education since 1990s. Percentage of children ages 7 to 14 attending schools has been increased from 80.5 percent in 1991 to 96. 5 percent in 2000. Education creates human capital and better training and education improve the efficiency of the prevailing human capital. Investments in education thus helps create better social culture as well as to helps individuals earn more and thus to increase the overall productivity of the economy. Brazil has often considered as a model for good practice in education reform as part of economic growth, but its system and educational level still lags behind many other countries in the region. Normally, a young Brazilian enters the labor market just with an average of around 6 years of schooling, which is less than 11 years in OECD countries and 8 years in most East Asian countries (World Bank, 2004, 38). Educational policies and education programs considerably vary from country to country, because education is a fundamental determinant for economic growth and each country has its own perspective in relation to bringing economic growth through improving education. Brazil’s schooling system comprised of 3 years’ preschool, 4 years’ primary school, 7 years’ secondary school and higher education. Students between 6 to 14 years old are targeted for compulsory education for 8 years. According to the 1988 Brazilian Constitution, education is the right of all and duty of the state and of the family. It should be promoted and fostered along with the cooperation of the society, in order to make full development of the person, to get him prepared for the exercise of citizenship and to make him qualified to work (Sheng-jun, 2011, p. 192). Generally, it is presumed that educational participation in Brazil, mainly due to the compulsory education for children between 6 to 14, is comparatively better than other countries in BRIC. The table above shows the participation of BRIC countries in education. Growing economy through developing the resources A country’s natural and other resources are crucial to help it attain economic potentiality to grow more. A country that is rich in natural resources can actively involve in trading of those materials or to use them as inputs for various production processes and thus to enhance economic growth to the nation. Broadman, Paas and Welfens (2005, p. 202) highlighted that natural-resources-rich countries are generally found to have inhibited economic growth. An economy can grow further by increasing the output and thus making positive changes in the real GDP. If there are sufficient natural resources that the country can solely depend on to produce what it requires and to export them to other countries as well, it can certainly grow its economy. When it comes to the case of Brazil, the country has long been fortunate to be well gifted of mineral resources such as iron ore, manganese, tin, chromite, bauxite, beryllium, tungsten, copper, lead, zinc and gold. All these natural resources have long been serving as raw material to a number of different local firms producing different items and also to export them to other countries (Todaro, 2002, p. 61). The rich supplies of natural resources such as oil, gas and minerals do not only serve as raw materials for local production but also serve as major attraction for many investors from various countries like China, Middle East, Europe and North America. In 2011, the FDI flow in to Brazil has been increasing even in times of renewed global slowdown. Latin Trade Supplement (2010) opined that Brazil is rich in mineral and natural resources and this can attract major global players to invest in Brazil. For example, Petroleio Brasileiro agreed to issue 42.5 billion dollars in new stock to Brazilian government in exchange for 5 billions of barrels of oil in off-shore regions. Apart from the abundant natural resources Brazil is rich with, it is also fortunate to be well endowed with agricultural fields and agricultural opportunities. The agricultural sector in Brazil incorporates almost 42 percent of Brazil’s total population, representing around 8 percent of its GDP and approximately 40 and above percentage of total exports. Today, Brazil is the world’s largest exporter of coffee and the second largest exporter of cocoa and soy beans. Brazil also exports sugar, meat, and cotton and remains to be the largest exporter of orange juice concentrates(Todaro, 2002, p. 61).. Growing economy through technology advances Technology is more often considered as an essentially important element for economic growth. The relation between macroeconomic policy, technology and economic growth is an important debate among academics. Aghion and Durlauf (2005, p. 1116) wrote that economists have become accustomed to associating long term economic growth with technology advances. Earlier, economic growth literatures have regarded technology as a dues ex machine that helps productivity grow miraculously each year. No matter how earlier or recent literatures view the technology in relation to production and economic growth, it is very evident that the technology is very central to the dynamic of the economy. Human capital can be more and more productive when the circumstances are right, and this can be when technology is fit for the purpose. Technology, its advances and innovation can work well with bringing tremendous changes in the economy and thus to bring economic growth as well. Technology improvements in brazil have always helped the economy grow. Various technologies have been used to extract mineral resources and to process them further and these have increased the efficiency of the operation. Technology and advances have thus been a major help in the economic growth Brazil attained. Growing economy through increased foreign investment FDI is one of the best economic opportunities for any economy to grow with. Foreign Direct Investment has grown dramatically as a major tool for international capital transfer and is playing an important role in the growth of emerging economies including Brazil. Razin and Sadka ( 2007, p. 1) pointed Economists’ view on FDI. Foreign Direct investment allows free flow of capital across national borders by seeking high rate of returns and it reduces the risks faced by owners of capital because FDI diversifies the lending and investment. FDI has been playing pivotal role in the economic growth of Brazil. Brazilian economy is characterized by high level of internationalization, as major foreign corporations play leading roles in many sectors. FDI inflows and leading roles of MNCs have been playing key roles in Brazilian economy were evident from the early years of 1970s when MNCs affiliated and connected to public as well as private domestic companies. In February 2008, Foreign investors represent 34.7 percent of all the transactions taken place in the Sao Paulo Stock exchange market, which is considerably a highest level in the world market (Reis, Meurer and Silva, 2010, p. 1351). It shows the significance of FDI in Brazil and the role it could play in the economic growth of this emerging economy. Ocampo (2010, p. 35) estimated that Brazil has attracted to an approximately 1.5 billion US Dollars annually in the 1980s and early years of 1990s, and the FDI inflows have been increased to an average level of 24 billion US Dollars annually between 1995 to 2000. The FDI inflows have thus been continued to grow from year to year, even despite the Asian crisis in 1997 and Brazilian crisis of 1999. Figure above depicts the inward flows of FDI in Brazil between 1990 and 2005. Conclusion Brazil is one of the fastest growing and emerging economies, being well known as B in the BRIC. If it could have maintained the pace of economic growth that it had once attained between 1930s to 1980s, its economy would have become the number one superpower in today’s world economic arena. Brazil’s economic growth has thus different levels, the fastest growing pace in early 1930 to 1980s, and now it’s lagging just behind China and India. This paper has presented economic growth and developmental economic principles in relation to the economic growth perspectives of Brazil. Various macroeconomic indicators have been detailed in this paper, including major indicators of Brazil’s economic growth such as investing in human capital, growing through productivity, technology advances, foreign direct investment etc. References Aghion, P and Durlauf, SN 2005, Handbook of economic growth, Volume 1, Revised reprint, Elsevier, Baumol, WJ and Blinder, AS 2011, Economics: Principles and Policy, Twelfth edition, Cengage Learning Bergsten, CF 1977, Brazil and the United States in the world economy, EBSCO data base. 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