The Brazilian Economy: Past and Present Economic Conditions - Research Paper Example

?RUNNING HEADER: The Brazilian Economy The Brazilian Economy: An Analysis of Past and Present Economic Conditions BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS 1. Executive Summary……………………………………………………………… 3 2. Background on Brazil and its Economy…………………………………………. 3 2.1 The Catalyst for Mid and Late 20th Century Failures…………………... 5 2.2 Current Economic Status……………………………………………….. 6 2.3 Recommendations/ Conclusions/Consequences………………………... 7 3. Summary………………………………………………………………………….. 9 4. References………………………………………………………………………… 10 APPENDIX The Brazilian Economy 1. Executive Summary Brazil has maintained considerable economic difficulties from 1900 to 2012 due to ineffective financial policy construction, government reforms, and an over-reliance on commodities to drive economic sustainability and growth. Historically, coffee and oil have been staple export products; however, these commodities are subject to unpredictable spikes or decline in prices. At the same time, the CPI in Brazil is affected by higher-than-average inflation due to rising supply chain prices and interest rate fluctuations that limit consumer spending and investment. It is recommended that Brazil diversify its economy and return to the crawling peg monetary policy now that industrialization and consumerism are beginning to develop effectively in this country. 2. Background on Brazil and its Economy Brazil is currently experiencing significant economic growth due to changes governmental and economic reforms as well as its current position as a major contributor to the global trade system. The country, once overly reliant on coffee production and rail system transportation to promote economic growth and job security, now maintains a growing industrial base in consumer products, industrial products and commodity development that contributes to a high GDP comparatively to other countries around the globe. Sixty seven percent of total GDP is attributed to the service sector, as it relates to health care, hospitality, beauty provision and restaurant (to name only a few). The rest of gross domestic product is allocated in agricultural development and industrial-based employment. Unfortunately, Brazil currently has a debt to GDP ratio of approximately 50 percent, which is much higher than that of other emerging or developing nations (Blanchard, 2005). At the same time, the inflation rate in Brazil is approximately four percent annually which impacts disposable income for consumers and also cash flow availability for companies in the industrial and agricultural sectors. High prices throughout the commodity supply chain, as one example, are offset by rising prices on corn, coffee and other commodity products used in the household sector. High inflation occurring annually since 2003, when the country experienced over 17 percent hyperinflation, continues to erode the government’s ability to stimulate more economic and job growth. The provision of public services, such as electric, telephone services, and water consumption experienced inflation rates of 8.38 percent with supplementary tariff increases of over 15 percent on all of these services (Business News Americas, 2004). Brazil has not, even during years where inflation was reduced through economic policy and infrastructure development, experienced any significant decreases from these cost levels. As such, consumerism is reduced due to lowered disposable income for consumer products. From 1990 to 1997, Brazil experienced inflation to the level where gross national product was consumed up to 40 percent due to rising prices (Selva, 2010). Further, credit card companies, in response to decreased consumer savings in banking institutions, began charging upwards of 25 percent for consumer and industrial purchases (Selva, 2010). The lack of controlled and knowledgeable economic policy contributed to this scenario that provided Brazil with a rather unproductive and costly decade in the 1990s. These problems were the product of lack of foresight about trade imperatives that were constructed by government statesmen in the 1960s and 1970s in a failed effort to stimulate economic growth through inferior economic policy. Today, current President Dilma Rouseff works diligently with the Central Bank to establish fixed exchange rate monetary policies as a means of stimulating further growth in trade and foreign investment. The leader also recognizes the importance of maintaining a healthy stock market as a means of diversifying methods of economic growth and to improve international relationships with the United States, a country in which there is considerable contention related to agricultural trade and fiscal policy differences (Klom, 2003). A healthy and operational stock market, based on regression analysis related to fiscal policy-making, is beneficial for Brazil’s economic strength (Budden, Cope, Hsing, & Zee, 2010) due to the country’s reliance on foreign investment to stimulate growth. Further, Brazil is highly reliant on trade relationships with China, with this country currently contributing to 14 percent of total trade flows and export growth of 37 percent annually from 1999 to 2010. Over-reliance on Chinese imports and exports suggests a potential need to diversify its trade partnerships globally as a means to stimulate further domestic economic growth. 2.1 The Catalyst for Mid and Late XX Century Failures The failed economic policies in the 1960s and 1970s were reforms that stemmed from a failure to diversify industry and import/export activities after the Great Depression in 1929. In the 1930s, with the country’s currency weakened by the falling value of the U.S. dollar, the country attempted to create price hikes in its largest export commodity, coffee. The government at the time began buying up large amounts of the product and then summarily destroying it as a means to promote higher revenue with export partners (San Jose University, 2010). These actions set the pattern for mistrust with global trade partners and reduced the country’s influence in trade activities which lingered until the 1940s. It was not until the 1960s that Brazil was able to develop effective distribution infrastructures and industry catering to consumer products, thus the country maintained an imbalance between export volume and import volume in order to sustain a growing population. In the 1990s, as an effort to curb widespread inflation and higher interest rates, the country enacted a crawling peg monetary policy in which the country fixed its interest rate against the dollar and a few additional baskets of currencies to reduce volatility in exchange rates (Startz, 2005). However, the Brazilian policy-makers soon realized that this strategy was not leading to higher economic gains as the currencies in which the country was pegging central bank rate of exchange continued to fluctuate wildly due to their own economic problems or sudden appreciation of currency value. This crawling peg system was ultimately abandoned during the first few years of the XXI century, but the damage to debt versus GDP had already been done, leading to the hyperinflation of 2003 that is still being felt today. 2.2 Current Economic Status Today, Brazil still experiences an average annual inflation rate of approximately 4 percent, however monetary policy is strongly influenced by a growing dependency on oil refinement and procurement due to new discoveries of this valuable national asset (Conceicao, 2010). Fiscal policy recognizes that oil revenues are subject to sudden and unpredictable fluctuations and has therefore moved to a fixed exchange rate policy to stimulate more international trade relationships and offset losses associated with fluctuating oil prices. Figure 1 illustrates the consumer price index related to inflation occurring in Brazil between 2006 and 2012. Figure 1: Annual Changes to Inflation Rate on Consumer Price Index (CPI) Source: Tradingeconomics.com. http://global-rates.com/economic-indicators/inflation/consumer-prices/cpi/brazil.aspx 2.3 Recommendations/ Conclusions/Consequences Brazil maintains a high dependency on imports to satisfy the consumer lifestyle which creates trade imbalances that affect GDP and the consumer price index. Brazil requires a diversification approach that stimulates economic growth by developing less service sector jobs and providing stimulation for development of consumer product production. The government relies too heavily on commodities to stimulate growth, coffee and other agriculture as well as oil, which are all heavily influenced by stock market activity and speculation by investors and investment firms. If the government promotes growth through resource allocation toward manufacturing of consumer products, it will provide further growth in the service sector (thus creating more jobs and economic independence for workers) and also provide new export opportunities with current trade partners such as China. Growth in domestic production will strengthen the currency of Brazil and make it more competitive for currency traders and investment partners looking to retrieve returns with direct foreign investment and other trade-related objectives. An appreciated Brazilian currency would lead to more expensive foreign imports and therefore consumer demand would be reduced for imported products, thus leading to more domestic purchasing. Manufactured, domestic products would also be stimulated for cost reduction, thus reducing inflation which is an ongoing problem in this country. Higher revenues in the government stemming from corporate taxation for manufacturing domestic products would also have the ability to reduce the interest rate paid on debt by improving the credit rating of Brazil. When this occurs, it could stimulate credit card companies and other institutions providing loans to loosen their interest rate policies, thereby giving consumers more credit availability to stimulate further economic growth. Better options for consumer credit would be a long-term outcome of an appreciated Brazilian currency. Brazil needs a long-run strategy to improve consumerism in the country without an excessive reliance on foreign-manufactured products. In the early 1900s, Brazil failed to develop diversification strategies, believing that one industry or a small basket of industries and commodity systems would continue to bring long-term economic growth to the country. In 1913, after decades of reliance on railroad systems to bring economic growth and infrastructure development, the country failed to utilize its extensive shipping capabilities and exploit more domestic growth or export opportunities (Summerhill, 2003). Further, in reference to coffee destruction to stimulate pricing in the 1930s, it reflects an ongoing complacency in economic policy development and diversification that continues to have significantly-negative long-run consequences on economic strength in this country. Brazil could also return, as a secondary option, to establishing a crawling peg monetary policy using the gold standard whereby the currency rates are adjusted according to the value of gold. Since gold is at its near highest in history, this would provide Brazil with a more stable security in monetary policy without reliance on the country’s Central Bank to intervene regularly to change interest rates against other foreign currencies. It would still provide the fixed exchange rate needed to make investment and trade more inviting and also stabilize the country’s currency to provide more stability for consumer-based savings and bank utilization. 3. Summary Whatever strategy suggested that Brazil might accept and implement, the long run benefits to consumers are increased financial independence and avoid the high inflation that continues to plague the country financially. Inflation as measured by the consumer price index is clearly affected by decades-old reforms and monetary policy that has impacted GDP and increased prices for high cost public services. The nation needs a forward-thinking strategy to improve trade and to build a surplus of domestically-produced resources that are competitively priced on the trade markets globally. Through diversification, and stimulation with government spending, Brazil can emerge victorious in stabilizing its interest rates and reducing prices throughout the consumer and industrial supply chains. 4. References Blanchard, O. (2005). Fiscal Dominance and Inflation Targeting: Lessons from Brazil. In Inflation Targeting, Debt and the Brazilian Experience, 1999 to 2003. MIT Press. Budden, M. C.,Cope, R. F., Hsing, Y., & Zee, S. M. L. (2010). Stock market performance, the exchange rate, and the Brazilian economy. Research in Applied Economics, 2(2), 1-10. Business News Americas. (2004). Electricity, telephony, water tariffs drove 2003 inflation. Retrieved August 4, 2012, from http://www.bnamericas.com/news/electricpower/Electricity,_telephony,_water_tariffs_drove_2003_inflation Conceicao, C. (2010). The Brazilian Economy. Economy, Politics and Policy Issues, 1(12). Klom, A. (2003). Mercosur and Brazil: a European perspective. International Affairs, 79(2), 351- 368. San Jose State University. (2010). Synopsis of Brazilian Political History. Retrieved August 8, 2012, from http://www.sjsu.edu/faculty/watkins/brazil0.htm Selva, R. (2010). A Short History of Inflation in Brazil. Retrieved August 3, 2012, from http://ezinearticles.com/?A-Short-History-of-Inflation-in-Brazil&id=3817254 Startz, R. (2005). Macroeconomics (11th ed.). McGraw-Hill. Summerhill, W. R. (2003). Order against Progress Government, Foreign Investment and Railroads in Brazil: 1854 – 1913. Stanford Publishing. Appendix A: Current Economic Environment by Sector in Brazil Read More