Brazil`s Economic Growth Performance in a Historical Perspective

Tableof Contents

Introduction 3

Brazil`s Overview of the Current Economic and Political Conditions 4

Historical Background Performance 6

Reasons for the Historical Economic Performance 10

Brazil`s Gross Domestic Product structure 10

Agriculture 11

The Government 12

The industry 13

Factors Underlying the Current Economic Situation 15

Future Path of the Economy 15

Conclusion 16

References 17

Introduction

The country`s GDP (Gross Domestic Product) is the most fundamentalaspect for scrutinizing the economic development and performancebecause the government uses the GDP information to define and reviewmonetary policies (Weil, 2013). Consumer index, money supply,producer index, employment rate and consumer confidence are amongother important aspects that define a nation`s economy. Nationsexperience different waves of economic and political conditions thatinfluence their performance relatively. Brazil is amongst the largestdeveloped economies of the world that currently suffers a stagnationof the economic growth attributed to a series of hyperinflation andother economic conditions (World Bank, 2015). In this regards, theanalysis assesses Brazil`s historical economic growth performance andthe factors underlying this performance in terms of agriculture, GDPstructure, industry makeup and the government as well as proffer aninterpretation of the nation’s future economy.

Brazil`sOverview of the Current Economic and Political Conditions

The largest economy of the Latin America continues to show signs oflittle or no improvement at all in a prolonged recession. The currentrecession and the contraction witnessed in the first quarters of 2015do not offer future encouragement of both external and domesticeconomic conditions. According to OECD Economic Surveys of Brazil(2015), the prediction of swift improvements on the fiscal balancehas deteriorated leading Brazil`s sovereign debt to a lowered statebelow an investment grade in 2015. As a result, the reconstruction ofconfidence in macroeconomic guidelines remains priority although therecession tightens the fiscal into a difficult financial scenario(Porzecanski, 2015). In fact, the country current account has slumpedfrom 1% in 2006 to -4.5% in the current year (see figure 1)

Figure1: Brazil`s Current Economic Situation (World Bank, 2015)

Recent projections reveal that the Brazil`s economic recovery remainelusive after sharp falls recorded in the past six years. Moreover,consumer confidence levels continue to languish in the low records.It is unlikely that the Brazil`s economy will witness a significantrebound without some effective economic reforms even though thepolitical movement attempts some relative schemes (OECD EconomicSurveys of Brazil, 2015). The current president, Dilma Rousseff facesa strong Congress opposition resulting from her unpopularity. Thissituation waters the strict potential measures that would revive theeconomy. Poor growth prospects, numerous challenges in fiscalconsolidation and the rising government debt result to Brazil`sdowngrade (Porzecanski, 2015). These influences have a negativeoutcome on the GDP especially with the growth the country hasexperienced in the past.

HistoricalBackground Performance

Since its independence from Portugal, Brazil suffered a cycle of boomand bust for the good part of two centuries. This succession ofcycles characterised the Brazilian economy all through to thebeginning of the twentieth century (Weisbrot,Johnston, &amp Lefebvre, 2014). In the sixteenth andseventeenth century, sugarcane and precious metals were the basicexploitation for the nation`s economy respectively. Coffee was theleading economic commodity during the eighteenth and ninetiethcentury especially due to the use of slaves during production untilthat first quarter (DeWitt, 2012). Brazil experienced the first surgeof industrialisation after World War I that enabled her to reach amodern economic performance. She received her first steel plant in1940, and the industrialization process proceeded to the 1970sleading to the expansion of the important economic sectors such asthe petrochemicals and automobile industries (Heise, 2012). AfterWorld War II, Brazil`s Gross National Product was the highestaveraging up to 7.4% globally.

The absorption of liquidity in 1970 directed to investments ininfrastructure resulted in the capital infusion that gave rise toBrazil`s Gross Domestic Product to an average of 8.5% in 1970 and1980. During the mid-1980, the country experienced sequences ofswings in interest rates that affected capital inflows to the countryand led to the implementation of strict rules to enhance the growthrates (Weisbrot et.al., 2014). This debt burden translated toinflation acceleration, end of indexing and suspension of interestpayments. Even though the measures failed to work, Brazil recordedsurpluses in trades sufficient to cover the debt (Heise, 2012). Theexhaustion of import substitutions in the same year createdfar-reaching economic strategies that involved deregulation, theabolition of monopolies and liberalization among others that openedthe economy more. The introduction of Real Plan successfullystabilised the currency bringing to an end thirty years of chronicinflation the country had experienced. In 2000, the inflation ratestood at 4.38% (DeWitt, 2012). In this regards, the country has seenmixed reaction in its sectors and GDP (see Table 1)

Table1: Average Annual Rates (percentages) of Brazil Economic Growth (UNData, 2015)

During the year 1999 to 2008 before the global economic crisis,Brazil`s gross domestic product grew by an average of 3.4% every year(Rosenbaum &amp Tyler, 2012). The global demand for Brazilcommodities drove part of the success and the formidable growth ofthe economy between the years 2007 and 2008. However, in 2009, theeconomy shrank by 0.3% as a result of declining demand for Braziliancommodities particularly exports and yet again the foreign creditwaned (Wesibrot, 2014). In 2010, Brazil`s economy strongly reboundedto grow by 7.5% the highest that Brazil had recorded in twenty-fiveyears. Since 2009, the Brazil`s economic growth has partially slowedowing to the rising inflation. The years 2011, 2012 and 2013witnessed an average yearly economic growth of 2.1%. Brazil`s economyslugged to stagnation from the year 2011 to 2014 advanced by anaverage of less than 0.5% throughout making the growth officiallystagnant (Basic Statistics of Brazil, 2015). Economic projectionsindicate a contraction during this year, 2015 and 2016 (World Bank,2015).

As of 2014, half of Brazil`s exports included raw materials implyingthat its economy success was equally sensitive to the volatilechanges in the commodities market (Basic Statistics of Brazil, 2015).Contributors to the economic performance comprise of its offshore oilreserves especially the Western hemisphere discovered in 1976, theworld`s second largest iron-ore reserve, world`s second largestsoybean producer and the world`s third leading maker of corn. On theother hand, despite the existence of industrial companies, Brazil isone of the globe`s least carbon-polluted economies owing to more than80% generation and uses of electricity from hydroelectric dams thatproduce ethanol (Porzecanski, 2015). The Bolsa Familia social programassisted millions of the population crossing the poverty line andbecame the international model for poverty eradication. The middleclass grows with the sputtering industry and the drop in commodityprices (OECD Economic Surveys: Brazil, 2015).

Brazil currently stands at 56.6 in its economic freedom at 118th in2015 (Porzecanski, 2015). It is the world`s seventh largest economywith a population of approximately two hundred million people heavilyoccupying the Atlantic Coast. This figure is 0.3 worse than 2014owing to the decline in almost half of the investment freedom,monetary freedom and government management of spending (World Bank,2015). Out of the 29 nations in the Central and South Caribbeanregion, Brazil ranks at 21 positions and its general score is beneaththe world`s average. Their currency fell by more than 60% in 2011when President Rousseff came to power (OECD Economic Surveys, 2015).Table two shows the country’s economic data between 2010 and 2014

Table 2: Brazil Economy Data (UN Data, 2015)

Currently, consumer and business confidence levels are at theirlowest records in years. The inflation rates have recorded higherrates than the official targeted figure of 4.5%, growing at a fasterrate contrary to the planned five years to exceed more than ten years(Basic Statistics of Brazil, 2015). President Rousseff scarcely won are-election in 2014 in a bid to conserve social, progress as well asfight the inflation. This presidential term begins with a record of adeficit in the budget and an appointment of finance minister taskedto cut government spending and to raise taxes. According to thenation`s auditor, Brazil used techniques that breach the fiscal law,and eminent impeachment proceedings will not be a surprise(Porzecanski, 2015). Nevertheless, improvements in corruption andfinancial freedom offset the deteriorations of the regulatoryefficiency, labor, and business freedoms. Strong growth powered byincreased commodity prices in the last ten years mask the economicnegative, stagnant effect, but the falling international factors andfewer hopes for growth bring the structural considerations to thefront position. Long-term economic development requires additionalwide-based and consistent changes.

Reasonsfor the Historical Economic PerformanceBrazil`sGross Domestic Product structure

The growth of private consumption over the past decade drove theBrazil`s economic. Recent years have seen a significant number ofpeople reach wealth statutes, some recorded as new millionaires andbillionaires in the Forbes list creating an almost equal anddeveloped society (Roett, 2014). Between the years 2010 and 2012,Brazil was a net importer contributing to a GDP value of only fewerthan twenty percent during the period. The service sector, on theother hand, accounted for over sixty-five percent of the entireeconomic activities that employed the majority of the Brazilian labormarket. These major economic activities include commerce,telecommunications, energy and banking among others. The industriesthat shape this country`s economy include aircraft, petrochemicals,steel and computers. Both mineral and agriculture play a significantrole in shaping the country`s economy. Agriculture corresponds to sixpercent of the overall GDP and takes up twenty percent of thenation`s labor force (Rosenbaum and Tyler, 2012).

Figure2: Brazil GDP performance 2002 to 2015 (IMF, 2015)

Agriculture

Agriculture has been the largest contributor to the Brazilian economyfor years. The Brazilian economy relied on exports and primaryproducts production ever since its colonisation period to1930s.Well-developed large-scale agriculture, manufacturing sectors,mining sectors and service sectors characterised the economy (Dewitt,2012). By 2005, Brazil`s population had increased from 51 million toone 187million leading to the creation and expansion of agribusiness.With over 600,000 kilometres squares of land, Brazil divides 5000 ofrural area that produce more than 110 million tonnes of grain cropsevery year. Soya beans only yield 50 million tonnes yearly. From2005, agribusiness has been contributing to Brazil`s economic tradebalance despite the subsidised policies and trade barriers adopted bymany developed nations (Roett, 2014). A specific subsidiary programguarantees more than 800 thousand rural producers with agriculturalequipment, extension programs, research, finances regarding credit,and encourage them using new technology by the market trends.

The land reform program provides sustainable working and livingconditions capable of creating two million jobs that contributesignificantly to the impressive figures of the economy performance.Government international partnerships and public policies guaranteeinfrastructure regarding health outlets, access roads and schoolsthereby covering key areas that have been principally driving theeconomy (Weil, 2013). Brazil cattle herds are the largest in theworld counting approximately 199 million heads contributing andsurpassing the annual one billion U.S dollars exports mark. Thecattle market conquered the Americas, Asia and Europe`s market evenduring the mad cow diseases. In addition to farming and rearing,Brazil is the pioneer manufacturer of cellulose that has beenobtaining positive outcomes within the packaging industry of whichstands fifth internationally. In the global markets celluloseaccounts for 25 percent of the international raw cane and processedsugar exports. The country also produces around 8% of the globe`sorange juice as well as export chicken and beef (Weisbrot et al.,2014).

TheGovernment

The Brazilian government controls a significant part of the economy.For instance, it controls many strategic sectors of the economy suchas oil extraction, power generation, telecommunications, water supplyand natural resources mining among others. Policies adopted byCardoso aimed at ending monopolies and included deregulation of themining industries and energy sectors as well as privatising thestate-run companies have contributed to the country’s growth. Therise of Fernando Henrique Cardoso led to the establishment of astrong economic policy in 1994 (Heise, 2012). During this period,Brazil`s inflation went down and decreased government spending tomeet the International Monetary Fund standards to receive loans. Thecountry maintained a constant exchange rate tied to the U.S dollar.Stabilisation of inflation worked but generated a recession resultingfrom the government expense cuts. Tax payments contributed to anestimated 61 percent of the government income and improved more aftera tax evasion attack in 2000. The government undertook on a strategyto reduce dependency on imports such as petroleum that account forover seventy percent of the nation`s demand and successfully becameself-sufficient in 2006 and 2007(Rosenbaum &amp Tyler, 2012).

Theindustry

Brazil has a complicated and assorted industrial set up with some ofthe largest companies operating within this setup. The country hasthe third largest manufacturing sector accounting for approximately29% of the GDP. In the 1990s, it accounted for 16 percent of GDP.Main industries include consumer durables, machinery, automobileindustry, aircraft, mining, tourism, textiles, petrochemicals,electronics, food and beverages, cement and construction (BasicStatistics of Brazil, 2015). Economic stability and multinationalbusinesses shape the technological industries with intense investmentin innovation such as computers and purchases from the U.S firms. Thenation is one of the principal producers of hydroelectric power withan approximate 260 thousand Megawatts of hydroelectric power. Thenational financial service industry serves the local businesses witha broad range of product that continuously attract new entrants atglobal levels. The 2008 union of São Paulo Stock Exchange andBrazilian Mercantile and Futures Exchange established one of thebiggest Stock Exchanges internationally. In fact, the Forbes GlobalList enlisted thirty-six Brazilian companies among the top twothousand public companies in 2011. Thirteen of the companies shareamong banking sector, beverage, utilities, mining, oil and gasoperations (Roett, 2014). The assessment below shows the country’syearly growth rate (Table 3)

Table3:YearlyGrowth Rate with some components of GDP between 1995 and 2010 (IMF,2015)

FactorsUnderlying the Current Economic Situation

High inflation rates slow down the export sectors. When the inflationrates are high, citizens shy away from consumption and purchases,which imply a drop in the personal consumption and a slag in anyattempts to revamps the GDP. Decreased investment reduces theconsumer confidence levels. The government spending seems to balanceout the economy, but it is not strong enough to level other economysectors. The currency has lost ten percent worth against the U.Sdollar in a row of months further complicating domestic production.Even though the government plans to increase minimum wages, theunemployment rate continues persisting in the fifth year and athigher figures (Porzecanski, 2015).

FuturePath of the Economy

In the mid-term, Brazil`s economy can find strength on the successesof structural changes that comprise of lowering trade barriers,indirect taxes as well as mitigating administrative burdens. Thefuture will depend on reviving this economy by applying a combinationof strategic reforms aimed at promoting domestic growth, improvingthe currency and exploring other economic activities. Robustdevelopment will centre on the realization of structuralreorganizations, comprising a comprehensive reform aimed atincreasing confidence level. It is likely that the recession willcontinue to 2016 because the fiscal adjustment needs to be put inaction a tight monetary policy and sustain the investor confidencealong with inflation linked to political uncertainties. During 2015,unemployment is set to rise further. The expectation is that Brazil`seconomy will slowly recover in 2017 with improved macroeconomicpolicies (World Bank, 2015). The country projects inflation to slowdown, but such diminishing may be delayed given the recent quickcurrency depreciation. The nation will see a probable better futuregiven that it still holds a top position in the world economy with agrowing active population. It is possible that it can utilise more ofits abundant and varied agriculture and mineral resources to improveproducts demands and supply.

Conclusion

Brazil has had an impressive economic performance in the past. Thecurrent economic situation poses difficulty in improvements due toconsumer low power, high inflation rates, unemployment rates,sovereign debt and low production index. However, the country endowswith resistance to external shocks and can still maintain majormacroeconomic balances in the fields of advanced manufacturing ofchemicals, aerospace, engineering and oil among others. If Brazilmakes an access to a new global market, she can realign the economicactivities into tapping more GDP without fears of either extensiveresources or military threats. Utilising the underutilised tourismsector can be a move to try new viable ideas that attract theeconomy. The future of Brazil will largely depend on the formulatedsurplus schemes targeted to revitalise growth in 2016 onwards and thereduction in entitlement, Treasury support and the cut of expenditure(OECD Economic Surveys of Brazil, 2015).The outcome of the changeswill directly reflect the country economic performance.

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