Economics of Globalization Essay

Economics of Globalization:

 

BRAZIL

 

Economic Evolutionary Efforts

As the holder of the largest part of the land area in Latin America, Brazil is categorically the 5th world most populated country.  It contributes 3/5 to the overall economic indicators of South America.  The Gross Domestic Product purchasing power parity of Brazil is a front runner in Latin American economic performances.  The International Monetary Fund and The World Bank ranks Brazil as the 9th largest economy in the world by purchasing power parity and 10th largest at market exchange rates. “Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil’s economy outweighs that of all other South American countries and is expanding its presence in world markets”    (World Factbook, 2008)

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Brazil indeed boasts of tremendous assets and capabilities.  Its political turmoil should have been appeased by the ascension to the Presidency of Lula da Silva – but, Brazil went through the deterring effects of the 2001 worldwide terrorism that rounded off with financial turmoil in 2003.  Capital inflows came thru that appreciated the Real.  But export trade quieted down.  Then in 2004, Brazil picked up a growth pattern; job opportunities dawned; real wages stabilized; current account surplus was realized.  Furthermore, the government systematized macroeconomic polices resulting to an impressive improvement in international reserves.  As such, public debt diminished with the resultant effect in real interest rates declining.

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Brazil’s 3-prong economic program focused on floating exchange rate; modulating inflation; and tightening the rein on its fiscal policy.  The ensuing years until year ending 2007, and reflecting even first quarter 2008 performance, Brazil is nothing but on a sustainable growth pattern.  Balance of trade record a surplus.  And most of all, its debt obligations have dynamically shifted to internally denominated instruments.

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But how the Brazilian economy has evolved into its present strength is a case in point considering that it went thru tremendous and constant trials in the past.  A working paper on “Brazil’s Long-Term Growth Performance” analyzed its growth determinants.  “…..macroeconomic stability and several reforms have helped raise per capita growth in Brazil since the mid-1990s..… Reducing the high level of government consumption would help lower the overall consumption level in the economy and lower its inter-temporal price – the real interest rate – thus helping to foster investment and growth.” (Adrogue, et al, 2006)

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The need to do better was narrated in a 1996 report of the International Development Research Centre.  “The nation is on the threshold of negotiating a functional and prosperous economic integration arrangement for the entire continent, on an equal footing with North America. ….. The country is opening up to the world —. this continental integration will avoid the trap of “downward” integration…..the Brazilian labour movement [must be included] in the mechanisms that will design and set up the integration structures.”  (Beaudet, 1996)

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A US$.30.4 billion 15-month stand-by credit was issued by the International Monetary Fund in September 2002 to support Brazil’s economic and financial reforms.  The loan was paid off in 2005, ahead of its schedule in 2006.

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Forging Fundamental Variables.

·         Long Run Economic Growth

Income and poverty

The International Monetary Fund records that Brazil’s Gross Domestic Product annual percentage went from 4.3% (2000) to 2.9% (2005) to 3.7% (2006).  The Banco Central do Brasil recorded the track of its Gross Domestic Product at 1.9% in 1999 to 4.6% for the first quarter ending of 2008.  Banco Central forecasts that Year 2008 will end at 4.8% gross domestic product.

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The World Bank reported Brazil’s Gross National Income per capita transcended from Year 2000 at US$.3,870 million; to 2005 at US$.3,880 million and in 2006 at US$.4,710. Poverty in IMF records show 22% of population in 2006 and 31% in 2005.  There was therefore a recognizable decrease.

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The main engine of growth: capital, labor or total factor productivity?
Total factor productivity contributed is the main engine of growth of Brazil.  The economic growth of Brazil is proven by the early payment of its IMF loan.  The first factor that triggered the growth is the remarkable improvement in the exports of Brazil since 2002.  Foreign currency revenue from exports increased the international reserves of the country.  The government likewise kept inflation under control.  Jobs were continually created that helped reduce unemployment.  And as such, together with intensified social programs, Brazil reduced poverty and inequality.  The country likewise implemented strong macroeconomic and fiscal policies aiming towards reduction of public debt in relation to the gross domestic product.

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Research and development
Banco Central do Brasil is tasked to solidify the gains of the country, inasmuch as it must prepared and identify challenges that might come along. It creates and reviews and even re-design their data and strategic plans for development.  “The Plano Plurianual (PPA, Multi-Year Plan), established by the 1988 Brazilian Federal Constitution (Article 165, Paragraph 1), defines the government planning process structure and connects itself to the budget process (more specifically, to the Federal Budget – the LOA, Lei Orçamentária Federal). PPA establishes strategic directives, challenges, goals and guidelines for government action in a four-year timeframe.”  (Banco Central de Brasil)

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Infrastructure and institutions

Brazil’s industrial production encompasses the greater activity of the entire South American continent.  Foreign investors are lured to the scientific and technological development of the country.  Brazil augments this capability thru the dynamics and diversity of its industries.  Beginning of this decade, Brazil entertained an average foreign direct investment of about US$.20 billion per annum.  Its technological expertise ranges from manufacturing of submarines and aircraft and car assembly.  It is involved in space research; deep water oil research

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Business cycles
Recessions and booms: frequency, duration, severity.

Within Brazil’s political struggles in the 80’s, the economy and doing business were not attractive.  With the longest transition to democracy and having set up its constitution only in 1988, Brazil went thru hurdles and debacles that test the resolve of the country and its people.  With the election of a Fernando Collor government in the first elections of 1990,  the first step was to confiscate all current and savings accounts of Brazilians.   Collor tried an “ambitious economic stabilization program”, but failed.  Inflation and recession stayed on.  He was impeached because of corruption.

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Then the Real Plan was introduced in 1994 to stabilize the currency by pegging the Real to the U.S. Dollar; constitutional reform took effect from 1995 to 1998 to halt fiscal crisis from internal and foreign debt; monopolies were curtailed – with Fernando Cardoso holding the rein. Fiscal and current account problems continue to linger especially when Argentina likewise faced an economic problem.  It was exacerbated in 2002’s election year in Brazil.  The business outlook was not conducive.

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The latest Global Perspective presentation of the Banco Central do Brazil indicated business confidence (on a level up to 100 points), to have marked 62 points during first quarter of 2004, the same during the first quarter of 2008.  The height of business confidence was during the first quarter of 2005, at 65 points.
The macroeconomic confidence and eminence that Brazil has achieved the past 5 years will improve the business environment.  There is better domestic financing climate.  “But the  tax system will remain complex and burdensome, the pension system will weigh on public-sector finances and vested interests will continue to distort productivity gains.”  (The Economist, 2008)

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Trade
Free trade or tariffs?

Brazil observes free trade.  Brazil’s total exports (US$ millions, FOB) 22,394 (1986);  46,925 (1996); 118,308 (2005) 127,305 (2006).  The growth in exports resulted to a positive shift in current accounts.  It is because in relation to imports, Brazil total external purchases were (US$ millions, CIF) 14,044 (1986); 53,346 (1996); 73,560 (2005); 96,835 (2006).  (World Bank, 2007).  The World Factbook showed a 2007 export performance at US$.159.2 billion FOB, and imports at US$.115.6 billion FOB.  (The World Factbook, 2008).

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Trade blocks: regional trade arrangements and multilateral trade regulation

The favorable trade balance of Brazil created healthy reserves.  External financing requirements and government debt have reduced and domestic debt settlement improved.  Balance of trade is conducted with EEC (26%); United States (24%); Mercosur and Latin America (21%) and Asia (12%).

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In its international trade activities Brazil denounced U.S. and EU agricultural subsidies and protection.  The World Trade Organization cited in favor of Brazil their points of complaints. Brazil sought redress in the protectionism sought against their products.  “Brazil’s quest for development through global trade depends on less protection and greater economic integration, challenging the private roots of U.S. trade policy.”  (Langevin, 2005)

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Labor markets
Labor Force:

The labor force participation in Brazil ranged from 73.72 million in the Year 2000 to 80.66

million in 2003 and 99.47 million in 2007.   The present unemployment rate stands at 9.8% for year ending 2007.  The real wage is R$310.00

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Outsourcing and/or off-shoring to/from this country: examples, effects
Brazil is positioning itself to join the bandwagon of the business process outsourcing global industry.  It triggered their local software companies to sell their information technology overseas.  The Ministry of Trade has announced that it will “suspend federal taxes on exports of computer hardware and software and telecommunication services for 5 years”.  (Benson 2005).  The government is providing incentives to Brazilian technology companies who will focus on global markets.

“Brazil is a newcomer to outsourcing. The country exported only about $400 million in software and information technology services last year, according to industry estimates. Though the government expects that to rise to $2 billion by the end of 2006, it would still be low – compared with an estimated $15 billion in Indian outsourcing last year.”  (Benson, 2005).  As such, the effect of the country’s venture into outsourcing is experiencing positive response and is getting a good share of the global market.

Exchange Rates
Exchange Rates Regimes (fixed, flexible or other arrangements)

The Real is pegged with the US Dollars and the exchange rates transcended as:  Reals per US Dollar – 1.85 (2007 est.), 2.1761 (2006), 2.4344 (2005), 2.9251 (2004), 3.0771 (2003).  Brazil implemented floating exchange rate whenever market conditions become volatile.  Simultaneously, Brazil utilizes “opportunities to replenish international reserves and reduce vulnerabilities through skillful liabilities management.”  (Rato, 2006)

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Currency Crises: examples, timing, reasons, development
Brazil got caught in the East Asian financial crisis in 1997 and the Russian default in 1998.  In response, it adopted a managed float scheme to momentarily buffer the situation then.  Thus, the loan package of the International Monetary fund in 2002 provided the assistance.

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Brazil adopted prudent and brave policies.  They controlled and disciplined each and every institutional spending.  Their unanimous objective is to relieve poverty.  Brazil balanced out their credibility in meeting their obligations by means of increasing their primary surplus.  The Banco Central instilled a proactive interest rate policy.  This tamed the country’s inflation.  Brazil likewise adopted progressive structural reforms in their pension programme and taxation.  Most of all, Brazil implemented an astute bankruptcy law.

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The involvement of large economic institutions in this country’s economic
decisions (IMF, World Bank, etc)
The World Bank puts on a great amount of faith on the efforts and initiatives of Brazil to sustain its remarkable growth the past six years.  The Bank focuses on:

“Fiscal and Public Sector Reform. Overcoming constrains to growth and combining short and long term actions which may cause immediate impact.
Private Sector Development. Creating a favorable environment for investment and private sector-lead growth.
Infra-structure for Development and Poverty Reduction. Increasing the institutional framework and investment in priority infra-structure within the country’s fiscal constraints.
Human Development. Strengthening human capital and labor force, with higher impact of social services and efficiency in public expenditures.
Rural and Agriculture Development. Reducing the disparity between agribusiness and family agriculture in Brazil.
The Amazon: Economic Development and Environmental Sustainability. Coordinating infra-structure, energy, agriculture and the environment.” (World Bank, 2008)
Currency Crises: examples, timing, reasons, development

The focal presence and assistance of the International Monetary Fund to Brazil, as said, came through its loan in 2002 to:  “help reduce current market uncertainties and volatility; facilitate an orderly transition to the new administration; and, contribute toward ensuring the maintenance of sound economic policies beyond 2002.” (IMF Press Release, 2002)

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Monetary Policy
The role of central bank

The Banco Central do Brasil is faced and challenged with issues that require a extremely dynamic organizational and operational set-up.  The august governing body of the financial and banking industry of the country is set and stable with its mission, vision and code of ethics and conduct of values that will augment the desired sustainable growth of Brazil.  It pursues strategic planning and dynamic concepts of financial governance and are schedule for constant monitoring and review.  It will design and institute suitable projects and processes that will augment the economy’s track.

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Monetary policy
The strategic objectives of Banco Central do Brasil for the year 2007 till 2011 are:

“To ensure compliance with the inflation targets set by the Conselho Monetário Nacional (CMN, National Monetary Council).
To promote the efficiency and to ensure the soundness and normal operation of the national financial system.
To stimulate competition within the national financial system and increased access to financial products and services.
To ensure the currency supply with the quality and reliability needed to meet the demand of the population.
To improve the regulatory framework so as to fulfill the institutional mission.
To improve and to strengthen the communication and the relationship with internal and external stakeholders.
To improve the management and corporate governance structure of the institution.”  (Banco Central do Brasil)
Priorities, if any, which the central bank officially puts on inflation and the
unemployment rate

The World Bank records the annual inflation, GDP deflator of Brazil at 6.2% in the Year 2000; 7.5% in 2005 and 4.3% in 2006.  Banco Central do Brasil reported a monetary policy easing that started in Sept 2005 by reducing basic rate target by 450 basis points.  And additional 50 basis points in 2006 followed.

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The Globalisation Perspective

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The interesting thing about the raved about growth of Brazil and the contented position of international bodies like the World Bank and the IMF, is that there is that hidden scar of inequality that the government has not resolved.  Globalization and the successful international trade that Brazil has been undertaking is not contributing any remedy.

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“Remedying this inequality is a challenge requiring patience and good judgment, for history imposes constraints and poorly conceived attempts to rectify past injustices can do more harm than good. Overly aggressive policies can cause major economic dislocation by undermining property rights and business confidence upon which the economic system rests. The net result is that redistribution can shrink the economic cake so much that even though the poor get a larger share, they are worse off because the absolute size of their piece falls.”  (Palley, 2006)

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The government of Brazil must therefore balance out its opportunities vis-à-vis the welfare of its citizenry.  Not everything that shines is gold – hence, a review of their investment incentives parameters and guidelines must be reviewed.  In the same token, their export potentials must likewise be further studied and not even their impressive balance of trade could make the country and its thinkers and administrators complacent and rest on their laurels.

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References:

“Brazil”  The Central Intelligence Agency World Factbook.  15 April 2008

http://www.cia.gov/library/publications/the-world-factbook/geos/br.html

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Adrogue, Ricardo; Cerisola, Martin; Gelos, Gaston.  “Brazil’s Long-Term Growth Performance –

Trying to Explain the Puzzle”.  December 2006

IMF Working Paper.  Western Hemisphere Department.  International Monetary Fund

http://www.imf.org/external/pubs/ft/wp/2006/wp06282.pdf

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Beaudet, Pierre.  “Brazil’s Economy and the Social Challenges of Continental Integration”

The Globalization of Brazil:  Two Sides of the Economic Miracle.  31 Jan 1996

IDRC Reports.  Internatinal Development Research Centre

http://www.archive.idrc.ca/books/reports/1997/05-01e.html

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Meirelles, Henrique de Campos.  “Brazil’s Global Prospects”. Presentation.  9 April 2008

Perspectives from the Central Bank.  Banco Central do Brasil.

http://www4.bcb.gov.br/pec/approx/apres/Presentation_Meirelles_April_2008_Brazil_s_Global_Prospects_Perspectives_from_the_ Central_Bank.pdf

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Brazil Economic Data.  Economist Intelligence Unit.  The Economist.  23 April 2008

http://www.economist.com/countries/Brazil/profile.cfm?folder=Profile%2DEconomic%20Data

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Benson, Todd.  “Brazil Aims To Be Outsourcing Giant”.  18 May 2005

Technology ; Media.  International Herald Tribune

http://www.iht.com/articles/2005/05/17/business/outsource.php

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“Overview:  Brazil”.  Diversified Economy.  2005

Federative Republic of Brazil

http://www.brasil.gov.br/ingles/about_brazil/

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Langevin, Mark S.  “Brazil:  Navigating the Straits of Globalization”.  17 March 2005

Global Perspective.  Global Economy.  The Globalist.

http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=4457

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“World Bank Partnership With Brazil”.  Brazil Country Brief.   The World Bank.  2008

http://web.worldbank.org/WBSIE/EXTERNAL/COUNTRIES/LACEXT/BRAZILEXTN/0,,contentMDK:20189430~pagePK:141137~theSitePK:322341,00.htm

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“IMF Approves US$30.4 Billion Stand-By Credit for Brazil”.  Press Release 02/40. 6 Sept 2002

http://www.imf.org/external/np/sec/pr/2002/pr0240.htm

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“Strategic Planning”.  Banco Central do Brasil.

http://www.bcb.gov.br/?PLAN

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Palley, Thomas I.  “Globalization Tames the Left in Brazil”.  5 Sept 2006

Yale Center for the Study of Globalization

http://www.yaleglobal.yale.ed/display.article?id=8105

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