Presentation on theme: "Paulo Vicente LCDR/USN"— Presentation transcript:
1 Paulo Vicente LCDR/USN BRAZILAn Economic Success Story?IntroductionSince I have only 10 slides, I will do my briefing differently by providing opportunity for questions after briefing each slide.My presentation explores the Brazilian economy and tries to answer the question presented: “Is Brazil an economic success story?”Paulo VicenteLCDR/USN
2 Presentation Overview BackgroundCountry ProfilePolitical SystemEconomyMacroeconomic IndicatorsImport SubstitutionExport OrientedPerformanceChallengesEconomic OutlookMy presentation will cover these four major topic areas. But the focus will be the Brazilian economy.
3 Background: Country Profile Former Portuguese ColonyIndependence Sep 1822188 MillionW-53% M-38% B-6%Roman Catholic½ Latin America Landmass½ S. America Population81% Live in Urban Areas5th Largest Country9th Largest EconomyMap Source:Self explanatory.W= White M=Mixed race B=Afro-Brazilians
4 Background: Political System 3 Branches of Government5 Administrative Regions26 States + 1 Federal District81 Federal Senate513 Chamber of DeputiesMilitary RegimeVoting Mandatory15 Parties RepresentedDual Transition (Political & Economic)Map Source:1985 Democratization; 1988 Constitution is the 7th since 1824Fragmented party system; Undisciplined parties; Frequent party switching while serving; Lack of vertical & horizontal accountabilityThere are about 15 parties represented in congress, but usually there are only 5-7 effective parties. The key here, is that unless an effective coalition can be build economic reforms would be difficultBoth Cardoso (the former President) and “Lula” (the current President) have done a great job in maintaining an effective 10-party coalitionAlso, the Brazilian economy has performed relatively well, especially given the fact that most most countries that have attempted dual reform path have not done so successfully
5 Economy: Macroeconomic Indicators Diversified EconomyIndustry & Manufacturing (37% GDP)Agriculture (9% GDP)Services (53% GDP)EnergyHydropower PowerNuclear PowerEthanolForeign OilThe shift toward market economy has also meant more Foreign Direct Investment in BrazilThe government has managed to keep the inflation low; Inflation currently holding at about 5 percent; They have done it through fiscal discipline and sound monetary policies (interest rate)Brazil has a strong diversified economyThe informal economy accounts for roughly 40% GDP and 50% of urban employment (mostly in the city slums called “Favelas”), resulting in a loss of taxable incomeEnergyHydropower provides 92% of the nation's electricityTwo Nuclear Reactors (3rd in Construction)40% Vehicles Powered by EthanolDependency on foreign oil has dropped from more than 70% to about 33%On the right sideHuman Development Index (HDI) measures the standard of Living (i.e., literacy, life expectancy, education) the higher the number the better the conditionsGini index measures inequality of income distribution. A scale of 0-1 is used, with 0 indicating perfect equality. The current score of 57 is actually an improvement – from 1989 to 2004 is Gini has been around 63.
6 Brazil’s Economic Transition Economy: Import SubstitutionBrazil’s Economic TransitionImport Substitution IndustrializationExport-Oriented IndustrializationNeoliberalismMercantile EconomySource:$8B$46BISIProtectionismProductivityConsequencesEOITradeInvestmentImport Substitution IndustrializationPrior to 1994 Brazil strategy and policy favored Import Substitution Industrialization form of MercantilismISI strategy shielded Brazilian state-sponsored enterprises from foreign competition; and for a while, economic growth was sustainable because of Protectionism (tariffs, restrictions, and other forms of market barriers)While ISP might result in healthy short-term growth, it diminishes incentives to innovate and become more efficientLike the other Latin American countries, Brazil had accumulated huge amount of debt in order to sustain its inefficient government-sponsored enterprisesHowever, as the global market changes began to shake the foundation Brazil’s import substitution model, the government-sponsored enterprises could not effectively compete because of Low productivity and poorer quality products. In 2004 Brazil’s productivity per hour worked was only 18 percent of the US level. There is a 60% productivity gap between Brazil and the U.S.Furthermore, the high inflation caused exports to become less competitive and imports more so, leading to growing deficits in tradeThe combination of regional financial crises, high debt, excessive spending and poor monetary eventually led hyper-inflation (which I will brief later)Export-Oriented IndustrializationBrazil is one of the last countries in the region to shift from a state-led economy to market economyToday, it has a relatively strong export-oriented economy. Monthly exports total about $12 billion USD; has over $105Bil USD in reserves, and $46B USD Surplus (2005)Interest rate is about 9%, down from 18% in January 2001, and about 60% during the periodThe shift toward market economy has also meant more Foreign Direct Investment in Brazil; U.S. and MERCOSUL are the major trading partnersMajor ExportsAgriculture World’s number one producer of Coffee, Sugar Cane, and OrangesMining Number four producer of Tin, #6 in Gold, and #6 in AluminumIndustrial Sector Major exporter of Aircraft, electrical equipment, motor vehicles & parts
7 Economy: Performance (GDP) Shock TherapyCruzado PlanBresser PlanSummer PlanCollor PlanCollor Plan IIReal PlanRecessionThis chart shows some of the major factors impacting the Brazilian economy from 1986 to 2004.IMF financing played a significant role in shaping the Brazilian economyIn the early 1970s Brazil seemed to be the model for the developing world. However in the 1980’s, that all changed as the fallout of the 1970s oil crisis began to impact it import substitution economic model. A series of economic plans and force devaluation did not significantly affect the high inflationMeanwhile, as Brazil continued to carry out both political and economic reforms, it had to deal with several unexpected external crises.Serious economic reforms did not occur until 1994, when the economy was in really bad shape with hyperinflation reaching 2500 percent.In 1994, the newly elected president Fernando Cardoso (former finance minister) implemented the “Real Plan,” which address three key areas:Fiscal Policies (reducing big government budget, including pension and social security for government workers)Monetary (eliminate hyperinflation through higher interest rate and adopt floating exchange rate). Currently inflation is held at about 3%Market Economy (privatized some of the government-sponsored industries, allow more foreign investment)87-94: HyperinflationInflation400%1700%2600%<50%Russian CrisisPolitical ReformsMexican Peso CrisisAsian CrisisArgentine Crisis
8 Challenges 22% Poverty Afro-Brazilians Poorest Literacy Rate 89% 1% Control 45% Farmland1% gets 50% GDPRising Crime RatesPublic SecurityWealthy Brazilians have an income 18 times higher than poor Brazilians; 1% of the rich population receives 10 per cent of total national income50% of the poor population receives 10% of the national income.Sustainable development is undermined by crime; Five Brazilian Cities are among Latin America’s top fifteen violent crimes citiesThe murder rate in the US is about 5 per 100,000 people, whereas in Brazil it is roughly 26 per 100,000 (that is also more than double its 1980 rate).Although raising the interest rate strengthens the currency, it continues to hurt the poorer Brazilians by increasing the cost of borrowing moneyA new family stipend called “Bolsa Familia” was created to provide low-income families a minimum income. It is uncertain what long-term effects this will have
9 Concentration of Industries Poorer RegionHalf of Brazil’s Economy
10 Economic Outlook Opportunities Domestic Challenges Global Challenges Regional IntegrationGlobalizationDomestic ChallengesFragile Political SystemBureaucratic BarriersPublic DebtProductivityPoverty & InequalityGlobal ChallengesBarriers to TradeRegional CompetitorsUS & Global EconomyOpportunitiesBasic Macroeconomic data have been promisingEconomic growth target is 5%. Estimated 2007 growth is 4.5%Brazil’s economic strategy for sustaining the desired economic growth is focused on two key componentsRegional economic organizations, in particular MERCOSUL and FTAA – Free Trade Area of the AmericasWorld economic organizations, such as WTO and G-20Whether political or economic Brazil’s strategy is centered on regional integration and international engagementKey domestic challenges facing BrazilHigh debt (50% GDP). Foreign debt approx. $150 billionHigh business taxation (Businesses account for as much as 85 percent of the tax burden – 41% in the U.S.)High interest rate among (currently about 9%)Fragmented political parties, which could potentially derail economic reformsLow productivity continues to hurt the economy. Government-sponsored enterprises are also less productive than their private domestic counterparts.Government bureaucracy also hurt the Brazilian economy. For instance, it takes about 150 to establish a business in Brazil (5 days in the US); and the cost of firing an employee is about 165 weeks pay (8 weeks in the US)And of course unless the issue of poverty & inequality is addressed, it could threaten internal stability thereby affecting economic performanceGlobal Challenges
11 Is Brazil an Economic Success Story? CONCLUSIONIs Brazil an Economic Success Story?Economic PerformanceSource: Bertelsmann Transformation Atlas (BTA)This slide shows a macro-level comparison of Brazil and China’s economic performance.For those who are not familiar with the Bertelsmann Transformation Atlas, the closer the red or blue line is to the outer grey circle the better the performance.Thus, if you believe that China is an economic success story, then so is Brazil.As you can see on this chart, Brazil’s overall economic performance is equal to or exceeds that of China. This is consistent with Goldman Sach’s “BRIC” report, which predicts that Brazil could become the world’s fifth largest economy by the year 2050.However, Brazil is also faced with significant socioeconomic challenges, such as violent crimes, poverty and income inequality, which could undermine its economic growth.