Achieving Economic Growth in Brazil
Alexander "Wild Bill" Lindsay
As a student of economics and international business, I was delighted when, during our first week in Rio de Janiero, we had the opportunity to hear a speaker give us an informative overview of the Brazilian economic structure. Louis gave us some background information Brazil 's economic history dating back to the days of slavery (which actually ended in 1888). Throughout it's history the Brazilian economy has been driven at times by, sugar, gold, coffee, and rubber. Due to the rise of these industries elsewhere around the globe, Brazil can no longer expect to sufficiently support itself with these exports. In the last 50 years, Brazil has become more like the US in that the majority of the labor force is employed in the service sector. Also Brazil has followed the lead of the U.S. and many western countries in an attempt to achieve a true democracy. The election of President Luiz Inacio 'Lula' da Silva in 2003 is proof of this change and also has numerous effects on the country's economic structure. While Brazil is attempting to match the prosperity achieved by the wealthier western nations, there exist structural economic differences, which will render this type of growth challenging yet hopefully rewarding.
Brazil currently has a GDP (in US $) of 452 billion. Obviously this is a huge figure, and makes Brazil a major factor in worldwide trade, but is considerably less impressive when compared to the 10 trillion dollar US economy. This huge gap is due to much more than just the fact that the US population is one third greater than that of Brazil . In fact, Brazil has a per capita GDP of $7,640 while that of the U.S. is $36,410. Based on this comparison, one can conclude that the average American is almost 4 times as wealthy as the average Brazilian. Based on the fact that Brazil has the world's largest gap between rich and poor, it's worth noting that the lower class (most Brazilians) earn significantly less than the nation's per capita GDP. This was evident throughout our travels in Rio de Janiero. During our trip to the favelas we got a close look at the poverty in which the majority of Brazilians live. Furthermore, statistics report that the unemployment rate is consistently above 10 percent. Based on my experiences, I have to question the accuracy of these statistics. Many of the Cariocas lacked formal employment, but made a living as street venders or through work that lacks formal documentation. Nevertheless, the skill level and wages of most Brazilian workers are very low.
Undoubtedly, a major portion in the GDP gap between the countries is due to a disparity in available resources. Brazil lacks many of the finances and technologies that make it possible for us to run such profitable businesses and provide healthcare benefits to the majority of our population. Brazil simply doesn't have the capital in place to invest at the same rate as the US . While acknowledging the effect of the capital disparity, I have chosen to focus instead on how the Brazilian economy is being managed and the effects of differences in fiscal structures and procedures on the well being of Brazil .
Two of our guides, both Christian and Louis mentioned that Brazil has an extremely high interest rate. The country has recently seen nominal interest rates surpass 20%, which is an astronomically high figure. Nominal US interest rates rarely have risen above 10%, and are currently closer to one or two percent. The problem with high interest rates is that they prevent the borrowing of money to fund businesses or provide research. The finance used on expansion of business and researching new technologies is one of the main factors in long run economic growth. High interest rates can slow this growth. It's just too expensive to borrow money when the payback costs rise with increased interest. This slows down investment and makes economic growth difficult. This leads to a very low annual GDP growth like the 1.6 percent annual rate that the Brazilian economy has grown over the past few years. In contrast, the US experienced 8.3% annualized GDP growth in the third fiscal quarter of 2003. This figure is abnormally high, (2-3% is the long-run average) but came at a time when the Brazilian economy was stagnant. In general, an economy cannot grow with interest rates as high as that of Brazil . Furthermore, this lack of new investment, new technologies, and new businesses keeps the money from changing hands and actually widens the gap between rich and poor. It's just not probable that a typical Brazilian could get a loan to start up a business or build a home.
Much of the reason for high nominal interest rates can be attributed to inflation. More specifically, over the past 5 years, Brazil has experienced an average of 6.1% The Real suffered a sharp decline in value back in 1999, and is still in a state of recovery. Another reason for these high interest rates is the risk factor involved here. Frankly, Brazilians aren't as confident as Americans are at saving money in the banks. Because Brazilians face somewhat of a risk on their savings accounts, a higher interest rate is needed to entice saving. The demand for loanable funds far exceeds the supply of funds, making Brazilian interest rates gigantic in comparison to US rates.
While the interest rates are a hindering factor in Brazil 's ability for economic growth, it is difficult to decide how the leaders of the country should best manage this problem. One option here is the use of monetary policy. In the US , Alan Greenspan and the Federal Reserve can lower interest rates by buying up Treasury bonds and putting more money into the economy. This stimulates the economy by making it less expensive to borrow money. Brazil could possibly enact this type of policy, but not without drawbacks. Increasing the money supply will ultimately lead to either inflation or the issuance of more debt, neither of which is something that the Brazilian leaders want to do. Brazil 's Monetary Policy makers, like those in the United States , currently believe keeping inflation low to be a top priority.
Brazil has explored fiscal policy as a means of accelerating economic growth. Lawmakers have come up with several possible options for this. The government could increase the tax rate for the wealthiest Brazilians, which would redistribute funds more evenly across the population. This would definitely give Brazilian citizens more of an equal opportunity to succeed. Mike gave a presentation on the Trans Amazonian Highway. Completion of this project would definitely make the country much more accessible for trade and ultimately offer a substantial economic boost. This would easier for both distribution of goods within the country and for importing and exporting goods with Brazil 's South American neighbors. Lauren also mentioned that the government is now giving a financial incentive for parents to send their children to school until they reach a given age. This will have multifactor benefits. Poor families will get money they need to live on, while the quality of education will increase across the country eventually leading to higher wages, and increased employment. More creative policies such as this these would definitely go a long way to providing long run economic growth to Brazil .
Abel, Andrew B. and Benjamin S. Bernanke "Macroeconomics" Addison Wesley Publishing
"The Economist Online Magazine" www.economist.com