BRAZIL ECONOMY

A key feature of technological progress in the last three decades has been the contrast between the accelerated decline in information costs and the relative stability of transportation costs. This disparity fuels the concurrent trends toward the globalization of markets and the regionalization of the productive apparatus, which have characterized the world economy in the recent past. These trends have also redefined the pattern of the integration of national economies into the international economy and the priorities of the multilateral trade agenda.

The new patterns of international competition have increased the importance of the provision of services, technological innovation, and direct investment abroad as supporting pillars of the export performance of national economies. These patterns have reduced the effectiveness of conventional instruments of trade policy, such as tariffs, quotas, and safeguards. They have also added new issues to the multilateral trade agenda, such as the use of domestic regulations to protect industries on the technological frontier and anticompetitive practices of an international scope.

The new patterns of international competition have increased the importance of the provision of services, technological innovation, and direct investment abroad as supporting pillars of the export performance of national economies. These patterns have reduced the effectiveness of conventional instruments of trade policy, such as tariffs, quotas, and safeguards. They have also added new issues to the multilateral trade agenda, such as the use of domestic regulations to protect industries on the technological frontier and anticompetitive practices of an international scope.

From the standpoint of national economies, the pursuit of productive efficiency, encouragement of innovation, and better conditions for the participation of domestic enterprises in the world economy have become complementary elements of a common challenge. For the government, this implies the convergence of the industrial, technological, and foreign trade policies as well as the consistency of these policies with other government initiatives in the sphere of macroeconomic plans and the regulation of competition conditions on the domestic markets.

A further challenge implicit in today’s scenario lies in the fact that the World Trade Organization-WTO does not yet have the necessary regulatory instruments to address the prevailing competition patterns. Although the ministerial meeting held in Doha in November 2001 ratified the international community’s consensus on the need to strengthen the WTO, in practice this consensus has meant only that the member countries are committed to proceed with the round of negotiations, but does not warrant any optimistic forecast of the results of this endeavor in the near future, given the magnitude of the challenges faced by the WTO at the moment

A good illustration of WTO’s current limitations is the competition policy, which has taken on a key role on the international plane, with respect not only to fighting monopolies and surveying the conduct of transnational corporations but above all to settling conflicts stemming from the protection of high technology industries. The discussion of these issues at the WTO has been intense since December 1966, when the Work Group on the Interaction between Trade and Competition Policy was set up. In the following years, 170 government documents were submitted to the Work Group covering a substantive agenda that went far beyond the relations between trade and competition. Despite active participation by all WTO members that have competition legislation, the debate has been limited to two kinds of restrictions. On the one hand, any multilateral agreement on competition rules will be meaningful only to the extent that all WTO members, or at least their great majority, are able to apply those rules at home. On the other hand, the WTO is an institution designed to deal essentially with government actions while the main focus of he competition policy is the conduct of economic agents.

In sum, it is not likely that WTO’s main weaknesses will be overcome in the near future. Nevertheless, Brazil’s activity at that forum in the 1990s has shown that despite this—and particularly after the recent surge of protectionist pressures by the United States—it is in the developing countries’ interest to promote the multilateral trade system. Cases such as the Embraer/Bombardier occurrence and the controversy about pharmaceutical patents have already become symbols of situations in which well-grounded negotiating strategies can preserve legitimate national interests. In addition to enhancing WTO’s credibility, those cases have also proven instrumental in fomenting bilateral dialogue with several major partners, including Japan, China, India, Australia, and South Africa.

In addition to WTO’s promotion, another priority of Brazil’s foreign policy is the reconstruction of Mercosur, which has played a strategic role in defending Brazilian interests in the multilateral sphere, in the negotiations for the establishment of a Free Trade Area of the Americas-FTAA, and in the dialogue with the European Union. Mercosur is important for reasons of economic geography: current international competition patterns are no ephemeral anomalies; they have been formed in the course of several decades owing to the dichotomy between information costs and transportation costs that was pointed out above. This being the case, unless the current competition patterns are redefined by another technological revolution, regional integration objectives shall remain a priority for Brazil.

Historical Perspective

Brazil's economic history is marked by a succession of cycles, each of them based on the exploitation of a single export commodity: timber (brazilwood) in the first years of colonization; sugar cane in the 16th and 17th centuries; precious metals (gold and silver) and gems (diamonds and emeralds) in the 18th century; and finally, after a series of inland expeditions, coffee in the 19th and beginning of the 20th centuries. Slave labor was used for production, a situation that would continue until the last quarter of the 19th century. Paralleling these cycles, small scale agriculture and cattle tailing were developed for local consumption.

Small factories, basically textile factories, started to pop up in the mid 19th century. Under Emperor Pedro II new technologies were introduced, the fledgling industrial base was enlarged, and modern financial practices were adopted. With the collapse of the slave economy (it was cheaper to pay wages to new immigrants than to maintain slaves), the abolition of slavery in 1888, and the replacement of the monarchy by the republican regime in 1889, Brazil's economy suffered severe disruption. The endeavors by the first republican governments to stabilize the financial environment and revitalize production had barely succeeded when the worldwide effects of the 1929 depression forced the country into new readjustments.

A first surge of industrialization took place during the years of World War I, but it was only from the 1930's onwards that Brazil reached a level of modern economic behavior. In the 1940's, the first steel factory was built in the state of Rio de Janeiro at Volta Redonda with US Eximbank financing.

The industrialization process from the 1950's to the 1970's led to the expansion of important sectors of the economy such as the automobile industry, petrochemicals, all steel, as well as to the initiation and completion of large infrastructure projects. In the decades after World War II, the annual Gross National Product (GNP growth rate for :Brazil was among the highest in the world averaging, until 1974, 7.4 percent.

During the 1970's Brazil, like many other countries in Latin America, absorbed excessive liquidity from U.S., European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment. The result of this capital infusion was impressive: Brazil's Gross Domestic Product (GDP) increased at an average rate of 8. percent per annum from 1970 to 1980 despite the impact of the 1970's world oil crisis. Per capita income rose fourfold during the decade, to US $2,200 in 1980.

In the early 1980's. however, a sudden, substantial increase in interest rates in the world economy coinciding with lower commodity prices precipitated Latin America's debt crisis. Brazil was forced into strict economic adjustment which brought about negative growth rates. The unexpected suspension of capital inflows reduced Brazil's capacity to invest. The burden of its debt affected public finances and contributed to an acceleration of inflation. In 1987, the government suspended Brazilian interest payments on foreign commercial debt.

The 1980's crisis signaled the exhaustion of Brazil's import substitution" model and it contributed to the opening up of the country's economy. ("import substitution" is a policy that nurtures local industry by prohibiting the purchase of certain manufactures abroad.) In the early 1990's, Brazil's economic policies were centered on economic stabilization, opening up the economy to international trade and investment, and normalizing relations with the international financial community. The latter two were quickly achieved: Import tariffs were reduced (the average is now 12 percent), and quantitative restrictions were eliminated, making Brazil one of the very few countries in the world that does not impose quotas on its imports. In 1992, Brazil reached an agreement with both public and commercial creditors to reschedule its foreign debt payments, exchanging old debt for new bonds. This rescheduling marked Brazil's return to the international financial markets. The turning point in the stabilization process came with the launching of the Real Plan in June 1994. (Brazil's new unit of currency is the Real, pronounced ree-ál.)

The Real Plan has three main objectives: (1) keeping inflation under control; (2) obtaining a steady and substantial reduction of social imbalances; and (3) achieving long-term sustainable growth of GDP, investment, employment and productivity. In 1998, price increases have been the lower in four decades, around 2 percent, down from more than 2,100 percent in 1993 before the launching of the Plan. Since inflation constitutes a form of tax on the poor, price stabilization represented a significant redistribution of income in favor of the most needy. In the period 1995-97 cumulative GDP growth was 17 percent, na average of 4 percent per year, while per capita income average growth was 2.6 percent. The increase of industrial productivity, which has averaged 7 percent a year in the 1990's, is very important to ensure sustained growth in the future. Since the implementation of the Plan, net flows of direct foreign investment have jumped tem-fold, from US $2.2 billion in 1994 to over US $22 billion in 1998.

With a GDP of US $800 billion in 1997, the Brazilian economy is dynamic and diversified. In 1997 industry was responsible for 36 percent of economic output, agriculture for 14 percent, and services accounted for 50 percent. The performance of exports, among other areas, reflects the dynamism of the country's economy. From 1992 to 1997 Brazilian exports have increased from US $35.7 billion to US $53 billion. Over 70 percent of these exports are manufactured goods. The European Union absorbs 31 percent of Brazilian exports, the United States 20 percent, the Southern Commom Market (MERCOSUL) 10 percent, Asia absorbs 12 percent, Latin America (non-MERCOSUL) 10 percent, and the remaining exports are distributed over a variety of smaller markets.

MERCOSUL

On March 26, 1991, the Southern Common Market (MERCOSUL) was created when Brazil, Argentina, Paraguay, and Uruguay signed the Treaty of Asunción. The trade pact took effect as a customs union and partial free-trade zone on January 1, 1995.The aim of MERCOSUL is to allow for the free movement of capital, labor, and services among the four countries. Since 1991, trade among the MERCOSUL countries has more than tripled. Brazil's trade with the MERCOSUL countries reached US $18.7 billion in 1997, up from US $3.6 billion in 1990.

Statistical Overview

During the last fifty years, the distribution of the Brazilian population by age groups has shifted. The fraction under 14 years of age has fallen from 43 percent to 31 percent, while the fraction over 60 years of age has risen from four percent to 7.3 percent. Life expectancy at birth has increased rom 46 years in 1950 to 67 years. The literacy rate was 50 percent in 1950. Today it is 84 percent.The Brazilian workforce totaled an estimated 72 million, or 46 percent of the population in 1996.Overall, the workforce expanded at an average annual rate of 3.2 percent during the 1980's. Currently the workforce is expanding at a rate roughly equal to the population growth rate. Women account for 35 percent of the total Brazilian workforce, up from 28 percent in 1980.

The basic sanitation system in Brazil has improved substantially in the past 25 years. In 1995, 73 percent of households were served by a sewage system of some kind; 96 percent of households had potable water and 88 percent of all households were connected to the electric power grid. There are approximately one installed telephone and one automobile for every ten Brazilians. Production and sales of home appliances and consumer electronics increased significantly between 1994 and 1996, with growth averaging about 20 percent per year. In 1996 sales were up 81 percent compared to 1993. This extraordinary performance is attributed to increased disposable income and to wider consumer credit availability - factors that resulted from the implementation of the Real Plan. For the first time low-income families became consumers of color televisions and electrical appliances. By 1997, however, the cycle of growth in home appliances had run its course and the industry is expected to expand far more slowly in the coming years.

Going into the 21st century, Brazil is the eighth largest economy in the world.