Brazils Post-WWII Trade Policies, Patterns, and Performances - Essay Example

?An Evaluation of Brazil’s Post-WWII Trade Policies, Patterns, and Performances Brazil is one of the countries that took part in World War II. Even though the war had a negative impact on the economies of most of the countries that took part in the war, the opposite happened to Brazil. Instead of experiencing economic downturn, Brazil experienced significant economic growth just after the war. Gill, Pinheiro and Thomas (2004, p. 6) argue that Brazil managed to experience growth after the end of world war due to the trade policies that the government initiated just after the war. The policies included high protection of imports, low concern for stability of prices, as well as government intervention in the economy among other raft of trade policies. The implementation of these trade policies made Brazil become the fastest growing economy after World War II. However, the changes in trade policies witnessed in the past decade have had a negative effect on the Brazilian economy. This follows the fact that these policies have seen the Brazilian economy decline, which has resulted in trade deficits, currency depreciation, and high inflation. The aim of this paper is to analyze the Brazilian post World War II trade policies, pattern, and performance. Brazil is one of the South American economic giants. It is one of the largest economies in South American region. The Brazilian economy depends very much on trade with other countries. Brazil export a variety of commodities, including coffee, sugar, soybeans, transport equipment, footwear, autos, and iron ore among others (Bacha, Bonelli and 2010, p. 12). These exports earn the country billions of dollars, which help it maintain balance of payment and economic growth. For instance, in 2012, Brazil exported products worth $242 billion. However, since Brazil is not self sufficient, its economy also depends on the goods it imports from it trade partners. Some of Brazils major import products include chemical products, electrical and chemical products, oil, machinery, and automotive parts. For instance, according to the 2012 estimates, Brazil imported goods worth $238.8 billion. This shows the extent to which trade is an important contributor to the Brazilian economy. As earlier noted, Brazil is one of the largest economies in South America. Brazil began registering economic growth since the beginning of 21st century. This follows effective trade policies formulated by the government at this time. At this time, Brazil maintained a strong balance of trade. This is because its exports far exceeded its import. However, the Brazilian economy significantly decline immediately the World War II began in 1939. The effects of the war saw the Brazil made it difficult for Brazil to access foreign capital. In addition, the war resulted in the loss of export market that Brazil depended on for export of its Products. For instance, Germany, Britain, and the U.S., which were some of Brazil’s major trading partners, were heavily involved in the war, effectively affecting its export markets. For instance, the Brazilian economy declined significantly from 1940 and 1942 when its GDP declined significantly (Considera and Pessoa 2012). However, unlike many other countries that took part in the war, the Brazil managed to recover from the effects of the war shortly after the decline. This follows the government’s proactive move to initiate monetary, fiscal and credit policies that helped stabilize the economy. In fact, the Brazilian economy registered a growth of 6.3% annually from 1943-to 1945 despite the ongoing war. The government measure also stimulated the industrial output, which rose by approximately 9.8% annually (Considera and Pessoa 2012). Even though Brazil experienced growth during the war, the country suffered from high inflation compounded by a decline in import caused by the ragging war. However, just after the end of the WW II, Brazil elected a new government into office in 1946 that embarked on initiating trade policies aimed at stimulating the country’s economic growth. The government’s first priority was to contain inflation by initiative strong and effective economic policies. In 1944, inflation rate had risen to 20.6%, which made life difficult for Brazilians due to high prices of basic commodities (Romanelli1982, p. 36). The economic policies initiated by the government, which included restriction of imports helped low, the inflation rate to 14.9% by 1945. In addition, the government also initiated trade policies that aimed at improving import of good in the country. The policies included increasing output, repressed demand of import demand, as well as overvalued exchange rate. This saw imports in the country more than double in 1948. However, the country’s exports were no longer benefiting from the effects of WW II. Research shows that trade account declined from $391 million surplus recorded in 1946 to $59 million deficit in 1948, according to Romanelli (1982, p. 37). Analysts claim that the trouble signs were evident in 1947. However, the Brazilian government failed to take proactive measures to contain the situation. As a result, Brazil suffered a balance of payment deficit of $182 million, financed by losses in convertible reserves of $59 million, $80 million from the Federal Reserve Fund and $72 million from accumulation of commercial dues (Ramos, and Zonnenschain 2000, p. 21). This forced the Brazilian government to reintroduce foreign exchange controls in mid 1947 to help solve the situation. The foreign exchange controls included the formulation of new import-licensing systems, which successfully brought the trade account back to surplus accompanied by declining import prices, as well as increasing coffee prices. These trade policies enabled trade in the country to experience growth once again after the end of World War II, with an annual average growth rate estimated at 8.1% in the 1940s and rising by 7.5% annually (Ramos, and Zonnenschain 2000, p. 22). In addition, the industrial structure also experienced growth with a 7.5% increase in the intermediate goods part of the manufacturing output from the beginning of WW II in 1939 to 1949. Naim (1995, p. 28) claims that the government introduced foreign exchange controls and import-licensing schemes of the 1931 to 1950 aimed mainly at controlling foreign exchange spending, as a means of minimizing the disequilibrium of balance of payments. However, it took a couple of years until 1940s that the country began realizing its potential as a stimulant of industrialization. Naim (1995, p. 28) noted that, from 1940-1950, the Brazilian government started to depend much on tariffs and the provision of import licenses in the sector to promote industrialization through the substitution of imports. In addition, the Brazilian government also formulated a raft of measures, which included the introduction of instruments to promote industrialization in the country. The instruments included increasing public credit to manufacturers, an increasing access to imports of capital goods, as well as overvalued exchange rates. Even though import licensing had been in place throughout the 1940s, it was relaxed in 1951 to 1953 following the Korean War. A number of factors contributed to the relaxation of import licensing scheme during this time. These included the fear that the Korean War might result in the shortage of capital goods and raw materials; hope that the liberalization of imports would help in containing inflation, which by 1950s had jumped to 18.1% up from the previous year’s 9.2% (Moreira and Correa 1998, p. 33). Moreira and Correa believed that the imports would not only increase the availability of goods in the country, but also that the trade surplus, which had already begun declining, would reduce the upward pressure on the supply of money in the country. This resulted in significant output growth, repressed demand of imports and excessively overvalued exchange rate similar to the trade opening of 1946. To no amassment, the effects were similar, including an import boom of 52% growth between 1951 and 1952 and a decline in trade account. Research shows that the deficit of current account rose to $624 million dollars, according to Moreira and Correa (1998, p. 34). The increase in deficit created an uproar that forced the Brazilian government to change its strategies, by now tightening its import-licensing schemes. In addition, the government introduced a five-tier exchange rate system that penalized nonessential import, traditional exporters, as well as most profit remittances (McKinsey Global Institute Report 1998, p. 64). However, due to complexity associated with this system, the government had to simplify it later on by determining the fee rate for auctions of foreign exchange. However, the same the underlying principles of multiple exchange rate system remained intact. The Brazilian government implemented trade policies that involved liberalization of trade that opened up of trade between 1951 and 1952. Trade opening had a positive result for the country since it resulted in an increase in the investment rate to 21.1% in 1952, up from the previous year’s 18% (Malan et al. 1980, p. 92). Imports of capital good also increased to more than twice the average level reported in between 1948 and 1950. The trade liberalization policy also resulted in the private sector growth with its investment rate increasing to 78 percent in 1952 up from the previous year’s 66 percent. The growth in the private sector investment was enhanced by the expansionist public credit policy. Some of the most notable improvement was glistered in the agricultural sector, which registered a 9.1% increase in output in 1952 (McKinsey Global Institute Report 1998, p. 66). At the time, the country experienced a growth rate of about 6.1 percent. As much as the changes in policies had profound benefits in accelerating growth in Brazil, these inconsistencies also had a negative consequence. The inconsistencies in trade policy initiatives resulted in increase in inflation rates in the country. The change of the trade policies escalated inflation to 27.1% in 1954 up from 9.3% registered in 1952 (Malan et al. 1980, p. 93). This was the worst ever inflation rate recorded in Brazil since 1923. Other factors that contributed to the rise in inflation rate at this time included a decline in imports, and a large increase in minimum wages from 1952 all the way to 1954. The Brazilian economy also suffered from increased power shortages intensified by severe drought. As time progressed, the Brazilian government introduced rationing devices in phases. For instance, in 1953, the government introduced the auction system as a replacement of the quantitative methods it employed earlier (Hay1997, p. 16). The auction system worked in a similar manner to the variable tariff system in which the level of different categories relied largely on the amount of exchange made at any given time. At the same time, there were certain good whose imports were considered much important for the country. These included products such as petroleum, wheat and other essential capital goods. As such, the government facilitated the import of these products below the auction rate. On the other end was consumer product on which the government charged a premium of at least 500% at the time of abolition of the system in 1957 (Gordon 2001, p. 74). According to Gordon, the system enabled the Brazilian government to confiscate excess resulting from quantitative controls. Some of the confiscated surpluses were used to subsidize the country’s nontraditional exports. The Brazilian government introduced tariff reforms again in 1957 that resulted in the simplification of the multiple exchange rate system. The simplification of the multiple exchange rate system resulted in the establishment of new tariffs, including 0-10%, 10-60%, and 60-150% (Hay1997, p. 16). The introduction of these basic tariffs implied that in case one wanted to create a surcharge, buying several items needed an exchange procured a large premium and special auction relative to the normal rate. In addition, the government formed a special administrative structure to provide traders with optional adjustments to the predetermined tariffs. The government also reactivated the Law of Similars, which restricted importation of goods that were produced domestically in Brazil. The system of giving preference to domestic industries worked exceptionally well throughout the 1950s. Overvalued exchange rates ensured that primary exports are taxed after which the gains were used to promote imports. Hay (1997, p. 19) claimed that this was one of the most effective means of allocating resources when the Brazilian government was not able to tax directly. In this regard, whenever exports proved inelastic in their supply, then overvalued exchange policy was the solution. However, at time passed, the country began experiencing increased elasticity as the balance of trade continued to deteriorate due to few export. This forced the Brazilian government to encourage foreign direct investment in the country (Gordon 2001, p. 76). This helped in compensate trade balance, but balance of payment continued to become problematic. As the balance of payment continued to deteriorate, so was the fiscal position. In this regard, whenever the government subsidized its import by imposing direct taxes, losses were avoided. From 1964 to 1967 just after the March 1964 coup, the new government embarked more on liberalization than it had done earlier. The |Brazilian government focused much on incentives for export and exchange rates. However, import liberalization was not widespread. The liberalization policy helped promote export, which effectively solved the balance of trade and payment problems. Quite a number of trade policies and instruments were introduced between 1964 and 1967. These included the introduction of the drawback system in 1964; exemption of IPI and VAT paid for export commodities in 1965; exemption of ICM and VAT paid on export commodities in 1967; and income tax credit in 1967 (Cline1981, p. 82). In 1971, the Brazilian introduced an ICM subsidy to prove the U.S. However, the tax subsidy had to be abolished few years later. However, the government had to reintroduce the subsidy payment in 1980 in response to the debt crisis that rocked the country (Cline1981, p. 82). These policies helped solve the debt crisis that rocked the country. However, the Brazilian government has since maintained the liberal policy that appears to work well, thus helping in maintaining strong balance of payment. In conclusion, Brazil is one of the South American economic giants. The country has been able to maintain strong economic growth since the end of World War II. The country owes its success mainly to the trade policies that have promoted direct foreign investment and encouraging exports of its products. Nevertheless, the inconsistencies in trade policies also appear to work against the economy since it has increased inflation rate every now and them. Therefore, it would be highly recommended for the Brazilian government to find a working trade policy that can spur economic growth, while maintaining inflation rates as low as possible. References Bacha, E., & Bonelli, R 2010, Accounting for the rise and fall of post-WW-II Brazil's growth. Pp. 1- 19. Cline, W. 1981, Brazil’s aggressive response to external shocks. In Cline, W., and associates. World inflation and the developing countries. Washington, D.C.: Brookings Institution. Considera, C., & Pessoa, S 2012, “A distribuicao funcional da renda no Brasil”. Texto para Discussao IBRE, viewed www.portalibre.fgv.br. Gill, I. S., Pinheiro, A. C., & Thomas, M. R 2004, Brazilian economic growth, 1900-2000: Lessons and policy implications. Economic and Social Study Series, p. 3-76. Gordon, L. 2001, Brazil’s second chance: En route to the first world. Washington D.C.: Brookings Institution. Hay, D 1997, The post-1990 Brazilian trade liberalization and the performance of large manufacturing firms. Discussion Paper No. 523. IPEA. Malan, P., Bonelli, R., Abreu, M., & Pereira, J. 1980. Politica economica externa e industrializacao no Brasil (1939–52). Rio de Janeiro: IPEA. McKinsey Global Institute Report, 1998, Productivity — the key to an accelerated development path for Brazil. Sao Paulo: IPEA. Moreira, M. M., & Correa, P. G 1998, “A first look at the impact of trade liberalization on Brazilian manufacturing industry. World Development 26 (10): 1859–74. Naim, M 1995, “Latin America: The second stage of reform” in economic reform and democracy. A Journal of Democracy Book, 13(2), 2-35. Romanelli, O 1982. Historia da Educacao no Brasil (1930–73). Petropolis, Brazil: Editora Vozes. Ramos, R., & Zonnenschain, C 2000, The performance of Brazilian imports and exports based on a systemof national accounts: 1980–98. Paper presented at the 13th International Conference on Input-Output Techniques, Macerata, Italy. Read More