Is Brazil still emerging or struggling?
Posted on 22 december 2014
In the last six decades (1950-2010), the Brazilian economy has grown and quadrupled its GDP per capita (GDPpc) from approximately 1,700 to 6,900 measured in International dollars (Bolt & van Zanden, 2013). All amounts that are mentioned in this blog are measured in International dollars (sometimes called Geary-Khamis dollar), except as otherwise provided. The International dollar is a currency developed by economists to compare countries internationally and have been adjusted to deviations in currency exchange rates, purchasing power parity (PPP) per country, and average commodity prices within each country (Schmidt, 2010).
With respect to the United States, whose economy tripled from approximately 9,600 to 30,000 (Bolt & van Zanden, 2013), Brazil came relatively closer to USA in GDPpc, as seen when comparing the ratio of GDPpc (GDPpc in Brazil divided by GDPpc in the US). This ratio has slightly grown from 0.175 in 1950 to 0.226 in 2010. However, during this period, economic growth in Brazil was not constant at all; there were periods of high growth and periods of negligible growth. For example, in the period 1965-1980, GDPpc in Brazil increased from 2,448 to 5,195, which increased the ratio of GDP relative to the US from 0.182 to 0.280. However, in the period 1980-2000, growth was relatively constant and even sometimes negative. During the latter mentioned period, GDPpc increased from 5,195 to 5,418, which decreased the ratio of GDP relative to the US from 0.280 to 0.189 in 1980 and 2000 respectively.
The Gross National Income per capita (GNIpc) in Brazil in 2013 measured in 2011 PPP$ was 14,275 (United Nations Development Programme, 2014). However, the most valuable measure is the Human Development Index (HDI) on a scale from 0 (very low) to 1 (very high), conveying key dimensions about living standards such as a long and healthy life, being knowledgeable and have a decent standard of living (United Nations Development Programme, 2014). “The HDI does not reflect on inequalities, poverty, human security, empowerment, etc.” (United Nations Development Programme, 2014). Brazil has a HDI value of 0.744 in 2013, ranking 79th in the world. Furthermore, the GINI coefficient, which reflects the deviation of the distribution of income among individuals within in country, is 54.7 on a scale from 1 (absolute equality) and 100 (absolute inequality). This coefficient is relatively high, meaning that incomes (and so living standards) vary a lot among Brazilian individuals. Moreover, the Multidimensional Poverty Index (MPI), which reflects people who live in poverty, must be taken into consideration. According to the MPI, the percentage of the Brazilian population that lives below the income poverty line of PPP $1.25 a day was 6.14 in 2012, which is remarkable. For simplicity, the aforementioned percentage is used instead of the percentage of the population that is multidimensionality poor adjusted by the intensity of the deprivations.
In the second half of the twentieth century, the Brazilian economy faced a period of exceptionally rapid growth, a bust and subsequent period of low growth. During the so-called golden age of developmentalism (1945-1980), average GDP per annum reached 7.3 per cent (Aldrighi & Colistete, 2013), which is consistent with the high growth mentioned before. Domestic investments in Brazil rapidly grew due to the growth of foreign direct investment and heavy external borrowing. External debt grew as well, causing a heavy burden on the government budget and making macroeconomic policy-making more difficult. In 1980, the era of prosperous growth came to an end by constantly rising international interest rates. The Brazilian economy came trapped and plugged into a deep crisis which has been known as “the lost decade of Brazil” (Aldrighi & Colistete, 2013).
During the boom (period till 1980), Brazil industrialized rapidly yet exported mainly unmanufactured and agricultural goods. During the 1960s, the composition of exports began to change which led to a larger share of manufactured goods and a smaller share of agricultural goods, increasing export income significantly. This gradually shift was largely caused by government’s domestic policies. The exchange rate became more competitive and exports were stimulated, but the competitive exchange rate caused a higher inflation rate as well. Furthermore, incentives were implemented that increased the profitability of export sales, stimulating Brazilian manufacturers to look for overseas markets (Aldrighi & Colistete, 2013). Moreover, firms became more competitive by raising labour productivity, which grew at 4.5 per cent per annum. However, there were also some institutional constrains such as high import protection. Nevertheless, Brazil caught up with the United States, comparing levels of Brazil’s labour productivity that reached 56 per cent of the United States’ in 1973 (Aldrighi & Colistete, 2013). As mentioned earlier, there was a labour shift to higher productivity industries such as manufacturing. An important dimension that can be addressed with labour productivity is the relationship between productivity and wages, which is demonstrated by the unit labour cost (ULC). The ULC is a ratio of wage per worker and the labour productivity (Aldrighi & Colistete, 2013). This ULC ratio is adjusted by the exchange rate and is internationally used to compare a country’s international cost competiveness. Considering the ULC figures, one can assess that the trend of unit labour costs was more sensitive to exchange rate fluctuations than shifts in real wages (Aldrighi & Colistete, 2013). In the bust period, new structural reforms were needed, because the economy declined the government faced problems such as an overvalued exchange rate and a decrease in productivity growth (Aldrighi & Colistete, 2013).
In the subsequent period, the public debt crisis remained unsolved, despite new policies undertaken by the new administration. In 1994, the Real Plan was launched, a new macroeconomic policy which tackled the high inflation rates. The high inflation rate created a lot of uncertainty for businesses and people, who lost money due to frequent price increases. Fortunately, the Real Plan managed to reduce the inflation rate from 2,708 per cent (!) in 1993 to less than 15 per cent in 1995 (Aldrighi & Colistete, 2013). Part of this Real Plan was the new Brazilian currency: the Real, and a new stabilization program with a tight monetary policy. If this Real Plan had not been launched, the Brazilian economy would have stayed in a trap and would have suffered significantly. Hyperinflation is one of the worst economic situations that can destroy output and investments (and FDI). John Maynard Keynes recognised the risk of hyperinflation and said (1919): “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency … [he] was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” (Keynes, 1919) The German government faced hyperinflation in the 1920s as well, and, as a result, banknotes became sufficiently useless and the economy came in a large crisis. Furthermore, the instability of Germany partly induced the Adolf Hitler’s rise to power (Jung, 2009). The German people became desperate and thought that Hitler could change the state of affairs. The inflation rate is a significant economic measure; therefore, many central banks (ECB in Europe, FED in USA and RBA in Australia) in the world set inflation targets to prevent such circumstances as in Germany and Brazil.
In conclusion, the expansion of the Brazilian economy during the last decades was a remarkable process. In spite of inadequate macroeconomic policies and trade rigidities, Brazil has industrialized its economy with a diversified industrial structure. (Aldrighi & Colistete, 2013). The lost decade was succeeded by a new currency, a strengthened macroeconomic policy and new incentives to invest. Furthermore, labour productivity has grown significantly. However, Brazil has not achieved the high income or HDI levels of the United States or other developed countries yet. Additionally, income inequality is still significantly large in Brazil and poverty remains an issue in current Brazil. Brazil’s economy could grow faster but, according to Aldrighi et al, it has to improve its manufacturing performance and expenditures on research and development. Manufacturing competitiveness can improve when costs other than labour, such as capital, infrastructure and taxes, are lower. Expenditures on R&D can be higher because the current R&D level is relatively low. Considering these factors, one can conclude that Brazil is on its way but is still a developing country.
Aldrighi, D., & Colistete, R. (2013). Industrial Growth and Structural Change: Brazil in a Long-Run Perspective. São Paulo: Department of Economics – FEA/USP.
Bolt, J., & van Zanden, J. (2013). The First Update of the Maddison Project; Re-Estimating Growth Before 1820. Groningen: Maddison Project Working Paper 4.
Jung, A. (2009). Millions, Billions, Trillions: Germany in the Era of Hyperinflation. Retrieved October 12, 2014, from Der Spiegel: http://www.spiegel.de/international/germany/millions-billions-trillions-germany-in-the-era-of-hyperinflation-a-641758.html
Keynes, J. (1919). The Economic Consequences of the Peace. In J. Keynes, The Economic Consequences of the Peace. London: Macmillan.
Schmidt, M. (2010). International Dollar, Geary-Khamis Dollar Explained. Retrieved October 10, 2014, from Business Case Analysis: https://www.business-case-analysis.com/international-dollar.html
United Nations Development Programme. (2014). Human Development Reports. Retrieved October 11, 2014, from United Nations Development Programme: http://hdr.undp.org/en/data