Macro Economics in Brazil - Essay Example

Trade balance, Exchange rate policy, Growth rate of economy in Brazil of the of the Trade balance Till the start of the 20th century the economy of Brazil was characterized by a no. of cycles. Each of these cycles was characterized by a particular export commodity that was exported in that period. For example in the early periods of Colonization the commodity that was exported was Timber wood. This was followed by the export of Sugarcane in the 16th and the 17th century. In the 18th century precious metals and other gems was the main export commodity. In the 19th century the commodity that was exported was coffee (Embassy of Brazil in Wellington, 2015). For the production of the commodities Brazil mainly used Slave labors for the production of the commodities. Industrialization in Brazil took place in the year 1930 and onwards. The first steel plant was built in the country in 1940.During the 1950s to 1970s other important sectors of the economy such as fertilizers, automobile, petrochemical and steel expanded. It was in this time that the growth rate of Brazil was at the record high levels in the world. During 1970s the countries in Latin America along with Brazil was a favorite destination for absorbing the excess liquidity of banks in the United States, Japan etc. As investments started flowing in there was a rapid development of the infrastructure facilities. During this period the economy of Brazil grew at a rate of about 8.4% per annum. In was during this period that per capita income of the Brazilians raised 4 fold. Trade policies in Brazil have undergone several changes in the past decade. The trade policies during the 1930s and 1940s, was characterized by great depression. During this time Brazil followed protectionist policies which isolated the country from rest of the world. The country experienced trade growth during 1960s and 1970s and this led to the opening of the doors related to agrarian and tax reforms. Several banks participated in this period to the reforms. As cheap credit was available government and private sector participated in heavy borrowing and this led to the fact that economic growth was high and unstable. Then in the 1980s as the interest rates rose sharply the accumulated debt proved to be unstable for the country and this resulted in the country going into debt crisis. This resulted in the fact that the country had to suffer almost 15 years of low growth and hyper inflation. In the 19990s there was a beginning of privatization and liberalization. As Brazil had followed protectionist policies for about half a century, this resulted in the fact that the country’s share in the world trade was less than 1%. When this is compared with the fact that the population of the country was about 3% of the world population in the year 1990 the result is really disappointing. In case of Brazil it is found that the trade balance of the country was positive during 2001 to 2012. This was due to the fact that the country exported mining and agricultural goods in high amount. The country recorded negative trade balances for the first time in the year 2014. This is due to the fact that value of commodities that were exported declined at a faster rate compared to the decline of the import of the consumption goods. Brazil recorded a trade surplus in May in year 2015 at around US$ 2.7 billion (Brazil Arab News Agency, 2015). Despite this fact the overall trade balance of the country remained negative at $2.305 billion (Reuters, 2015). However the exports fell from the corresponding period in 2014. The drop in exports was contributed by the drop in the sales of iron ore, airplanes, cellulose etc. Whereas during the period of 1947 to 2008 trade balance was positive it was noted that trade surplus of the country were not enough to pay for financial and other services. Figure 1: variation of trade balance and current account from 1947 to 2007 (Cardoso, 2009) Figure 2: Balance of trade growth from 2000 to 2015 Exchange rate policy After 1964 the exchange market of Brazil has operated unchanged in a formal legal sense. The exchange market of Brazil is operated by the central bank of the country and other commercial banks that are authorized by the central bank to conduct foreign exchange transactions. However it is seen that there have been important changes in the exchange rate regimes and policy over the years. During 1968 for example Brazil adopted an exchange rate system that is known as the crawling peg. Under this regime the nominal exchange rate of the country was pegged to the difference in between the Brazilian and foreign inflation. It was done so that the country could escape from the hold of hyper inflation that existed in Brazil as compared to the trading partners of the nation. Before the country implemented crawling peg it was found that the there was large variations in the real exchange rate that was unintended while the nominal exchange rate remained fixed. This resulted in the fact that the prices at the domestic levels increased by double digits. Or in other words Brazil experienced double digit inflation during that period. It was found that the real exchange rate largely remained stable in between the years 1968 and 1982. This stability in the exchange rate led to the fact that the Brazil economy grew at a tremendous rate during this period. This is also suggested by recent researches in this field which states that negative growth in productivity is related to volatility in exchange rate (Aghion, Bacchetta and Rogoff, 2006). However it would have been better if the country had switched to market determined exchange rate post the oil crisis in 1970. However it is found that despite the country following the crawling peg system during this period there is hardly any impact on the exchange rate. In 1979 in order to increase the competitiveness of Brazilian goods the government of the country announced a steep devaluation of the exchange rate by 32% and determined to remove the subsidy on certain export items. However the plan failed as inflation rose by 100% in 19802 and in 1983 the government had to again devalue the currency. Then in the year 1986 nominal exchange rate was also fixed by the country. The real exchange rate of the country was extremely unstable since 1983. Finally in the year 1999 the domestic currency of the country collapsed and it forced the country to move towards flexible exchange rate regime. The country is slated to increase the interest rate that is Selic to about 13.75% (Alves, 2015). This is being done in order to contain inflation in the country. The government has a set a target of 4.5% for the inflation. However the current rate of inflation is much more than the target. This is why the government is increasing the interest rate prevalent in the country. The IMF in its recent report in April estimated that the country’s GDP will likely to decrease due to the strong fiscal and monetary policies of the government. In the report it was also stated that inflation would be around 7.8 % and Forex rate would be R$3.14/US$ at year end. Figure 3: Fluctuation of real exchange rate in between 1965 and 1983 (Cardoso, 2009) Figure 4: Fluctuation of real exchange rate in between 1982 and 2008 (Cardoso, 2009) Growth rate of the economy Annual growth rate of the country has been averaging at 2.93% from 1991 to the year 2015. The GDP growth rate was highest during the 1st quarter of the year 1995 at about 10.01%. The country registered a record low of GDP at -3.15% in the first quarter of the year 1992. The country is the 7th largest in the world and largest in the continent of Latin America. The main contribution to the GDP of the country comes from the service sector. The contribution of the service sector to the GDP of the country stands at 69%. Within the service sector main contributors to the GDP are Government education and health at 18% of total GDP. Contribution by the real estate stands at 8%, construction contributes 5% and mining contributes 4% to the GDP of the country. The contribution by the agriculture and livestock to the GDP stands at 6%. In the first quarter of 2015 the GDP of the country contracted to 1.6% compared to the GDP growth in the same period in previous year. During the period of 1930s to the early 1960s that dominant economic strategy that was followed in Brazil was import substituting industrialization. The policies that were adopted by the country during that period had a profound impact of the economy of the country. The main tools that were used to implement the economic strategy of ISI were related to the policies such as import licensing, tariffs, overvalued exchange rate, import prohibition etc. The policies implemented by the country during the period led to the stimulation of industrialization. In this period the resources of the economy were increasingly allocated to the manufacturing processes and this resulted in the fact that contribution of agriculture to GDP decreased and contribution of industrial sector to GDP increased. Although the policy led to the development of several industries it also caused and led to the induction of external and economic imbalances. Figure 5: Contribution of Agriculture (red) industrial sector (blue) in terms of value added to GDP (Cardoso, 2009) Figure 6: GDP growth rate of Brazil References Aghion, P., Bacchetta, R. and Rogoff, K., (2006). Exchange Rate Volatility and Productivity Growth: The Role of Financial Development. Working paper 12117, Cambridge MA: National Bureau of Economic Research. Alves, L., (2015). Interest rates in Brazil expected to increase again to 13.75% . Retrieved from http://riotimesonline.com/brazil-news/rio-business/interest-rates-in-brazil-expected-to-increase-again/# Brazil Arab News Agency., (2015). Trade balance registers surplus of US$ 2.7 billion. Retrieved from http://www2.anba.com.br/noticia/21867911/global-trade/trade-balance-registers-surplus-of-us-27-billion/ Cardoso, E., (2009). A brief history of trade policies in Brazil: from ISI, export promotion and import liberalization to multilateral and regional agreements. Retrieved from http://www.tulane.edu/~dnelson/PEBricsConf/cardoso-trade.pdf Embassy of Brazil in Wellington., (2015). Brazilian Economy. Retrieved from http://www.brazil.org.nz/page/brazilian-economy.aspx Reuters., (2015). Brazil posts trade surplus of $2.761 bln in May. Retrieved from http://www.reuters.com/article/2015/06/01/brazil-economy-trade-idUSE4N0WY00420150601 Trading Econimics., (2015). Brazil | Economic Indicators. Retrieved from http://www.tradingeconomics.com/brazil/indicators Read More