This article is a nice summary of Brazil's current economic position. If you're interested in reviewing it, hold off until we go through the material on open economy IS/LM models - they are more relevant that what we've learned so far.
By the way, this article is also a nice target to shoot for in terms of style and quality. It is well written and explains several economic concepts rather cleanly.
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Darius Walker
Econ 3334 Sec. 04
Article Summary Assignment
Economy of Brazil
Brazil’s economic history is one of instability and unsteadiness. This is because Brazil is susceptible to changes around the world. So problems in other countries create set backs in economic growth. For instance, in 1994 a new currency (real) was introduced to help the economy grow in a positive direction. Year’s later growth was limited because of the Asian financial crisis and the bond default in Argentina. It seems that every time the future is bright, something comes long to shatter the light. Recently, Brazil’s stock market value increased 60% and the economy grew at a rate of 6% in the first quarter of last year. Many believe that Brazil will be able to sustain this new growth because domestic demand is strong (rose at a rate of 7% in the third quarter), structure in world markets (export distribution is spread out), and less vulnerability (due to the combination of a floating exchange rate and a central bank). Even with these new developments the country must invest more and spend wisely to become unresponsive to changes around the world.
In class, we talked about money supply. Money supply equals currency plus deposits. Banks are able to cycle money through loans and controlling the money supply and reserve ratio. Brazil could increase the money supply by borrowing or changing the reserve ratio so that banks could loan out more. This may be able to help improve the economy since individuals would be able to spend more. Also, investment could be a key factor in improving the economy. Depending on the interest rate (and the market for loanable funds), companies and the government could invest properly to positively affect the economy. Firms could purchase new plants and equipment while landlords could purchase new homes and land. Government spending is imperative to economic growth. Highways, services, and police equipment are a few examples of things that could have an effect on the economy.
I think there are other topics that the article should have touched on. A good measure of economic well-being is real GDP (which is the value of good and services measured using a constant set of prices). This would be a great way to measure Brazil’s economic output of good and service not affected by prices. As far as the future goes, I think if Brazil can manage money properly and use investment affectively, it will be able to stay the course and create a stable economy. One that will last for years to come.
Brazil’s economy has a history of turbulence; One that swayed from shocks imported outside their country, proven with 1998’s Asian financial crisis, 2001’s Argentinean bond default, and again in 2005’s rising inflation. However, the article aptly titled “Brazil’s economy: This time it will all be different” from the Economists believes that Brazil will fare better the next time the winds of misfortune blow.
Prior to 1999, Brazil did not have floating exchange rates so financial shocks left the central bank with no choice, but to raise the rates. When the shocks occur to the LM, the real interest rate should be targeted and for IS shock, output should be held constant. In general, shifts to the IS curve have a permanent effect on interest rates, but LM changes have none. Brazil’s government debt would worsen as their currency depreciated, because it was denominated in dollars rather than reais.
Brazil’s domestic demand is strong from a high of credit. While a real interest rate of seven percent would push a majority of countries to recession, for Brazil, seven percent is a low. The world markets and Brazil are incorporated considerably and evenly so that not any one country is too reliant on the other. Primary goods are the main export for foreign consumption in Brazil, but they do not export exclusively one commodity. If the consumption of one good were to decline in the world market, Brazil would expect the world consumption of their other goods to continue. Commodity prices are tied in with export growth.
Presently, the central bank makes their actions known publicly and acts as an autonomous entity. Brazil’s government debt has shrunk no less from the switch to a reais denomination from dollars. However, government debt is still high. The decision to invest depends on the real interest rate. High investment is associated with high income per person. Brazil now holds more money than they owe, but government spending is also high and often unnecessary doing little to improve their own economy. Though Brazil’s foreign direct investment is up, investment is still too low and is one of the main problems Brazil needs to improve on should they hope to maintain a steady growth. Inflation has been rising, but markets fluctuate and inflation is dependent on the money supply. Although currently a growth above five percent is a long shot, save for any further world shocks affecting Brazil, their future looks good as long as they can continue a stable growth.
Brazil had been through series of economic downturns in the past due to its vulnerability to world economic activities. In this article author studies Brazil’s current economic situation and how Brazil would be able to cope with any economic shock from the events happening in global economic arena. The author mentions that in recent times, after introduction of new currency in Brazil, growth did rise. Unfortunately each time Brazilians were hopeful that their economy would continue growing, some economic shock in the world market (Asian financial crisis in 1998, Argentina’s bond default in 2001 and rapid rise in inflation in 2005) derailed Brazilian economy from its path of growth. Brazil stumbled badly in the face of world economic downturns. In spite of these experiences, policymakers and people are hopeful again because Brazil’s stock market increased by 60 percent during 2007. Author quotes Brazil’s former Prime Minister, Malison da Nobrega, saying that Brazil’s is currently less vulnerable to world’s economic behavior and any change in negative shocks in world market would not significantly damage Brazil as it did in the past.
The author analyses the factors that shield Brazil from being bombarded by economic shocks in world market. He mentions that Brazil has undertaken some reform measures in recent past. Firstly, Brazil’s real interest rate is 7 percent which is does not drive Brazil in recession but low enough to attract credit. Increase in credit led domestic demand to grow by an annualized rate of 7 percent. The author thinks that it would require a sharp rise in interest rate to suppress the current rate of growth and such a possibility is unlikely to happen. Secondly, Brazil’s trade relation with rest of the world is well-balanced. Its exports are well distributed among America, Asia, Europe and rest of Latin America so if trade relation with any country is somehow hampered, it wont cause severe damage to Brazilian economy. Thirdly, Brazil is currently less vulnerable to financial shocks because its central bank has improved in efficiency level and Brazil has adopted a floating exchange rate. Moreover in the past Brazil’s debt was dollar denominated. Therefore whenever dollar value decreases Brazilian debt increased tremendously. Now government debt is denominated in reais. In 2007 when value of real dropped Brazil stock of dollar increased. In spite of all these reforms, the author thinks Brazil’s economy is not yet free from threats of changes in global economy. Government is still in too high debt, there is little investment, and government spending is too high on accounts which cause little development of economy. The author of is still hopeful that if Brazil continues in its path of growth without being severely affected by economic shock in the other countries or world as a whole, future of Brazil would look brighter.
In the article, author gives a clear picture of the past and the post reform Brazilian economy. However, it has been only few years after reform and it this period is too short to predict that the economic reforms will be effective in long term.
According to this Brazil’s economy article, the past economic events have led us to believe that economic history of Brazil is filled with instability and unsteadiness. The author tries to determine current economic condition in Brazil and Brazil would be able to sustain over economic shocks of global economic events. Economic growth rate in Brazil is relatively high (6%). What puzzles me is how resilient their economy is being that their real interest rate is at 7% they’re still growing. Also now, Brazil is ready to face economic downturns due to three different factors and they are strong domestic demand, became part of world markets and more resilient to financial shocks than before.
With strong direct foreign investment, Brazil now owns more dollars than it owes, and the development that has led to suggestions of setting up a sovereign wealth fund. The economy also seems to be moving into a steady phase. Inflation had been falling in Brazil but picked up toward the end of last year. And it’s been targeted by central bank, and forecasters expect inflation to increase only slightly this year.
My personal opinion is that Brazil is well positioned to weather a global downturn. First off, the Brazilian real has been appreciating vis-à-vis the U.S. Dollar and at the same time, Brazil’s exports of commodities are reaching all times. Besides, as it is mentioned in the article, Brazil’s exports are highly diversified across the globe, so say a recession in the US would not do as much economy damage to Brazil as say Mexico. Secondly, most of the commodities Brazil exports have gone up in prices but at the same time production in Brazil of these commodities is up. Most of Brazil exports are in high demand right now in places like China, where for example orange juice as the average Chinese grows richer, consumptions of these foodstuffs that in the US we take for granted will surely increase.
Brazil is a country with lot of experience in economic and financial crisis. They had been though such hard times in their history that the large economic problems facing both the United States and Europe could not even compare. The reason why Brazil has been affected so intensely and often is that Brazil has shown that this is quite vulnerable to the shocks taking place around the globe. Brazil has shown constant signs of growth and all the time believe that Brazil is finally on the “road to a bright future”, only to have some new problem arise. Now that Brazil is growing once again, will Brazil be ready to push though the problems or will history preside?
Things are now different in Brazil, which may give them hope. First, Brazil has now built up a strong domestic demand, which in turn has help to create a low real interest rate in Brazilian standards. In addition, Brazil has become much more involved in the global economy and the world markets. They are no longer entirely dependent on the United States for trade. This country is now highly engaged in trade and policy with many countries throughout Latin America, Europe, and Asia. Brazil has also proven that it is now much less vulnerable to the many financial shocks around the world. Proof for this statement can be traced back to the founding of their central bank and the creation of a flexible exchange rate in 1999. Now, Brazil has managed to minimize their dollar-debt and now have more dollars in reserves than they owe in debt.
All of these examples illustrate that Brazil is no longer as vulnerable to the economic shocks in other countries. They are become a more of a player in world economics by are increasing their net exports. More countries are investing in Brazilian products everyday. Brazil is also strengthening their exchange rate. The citizens of Brazil are now able to buy more goods from around the world. This means that the supply of the Brazilian Real has increased. In addition, something that is bound to increase the Brazilian economy, which was not mentioned in the article, is the estimated 30 billions of oil that was just discovered by Brazil. I have no doubt that this is the boost needed to insure that Brazil remain on the track to becoming a strong developing country.
This article in the Economist details how Brazil’s economy has been one historically full of turbulence. In 1998, the Brazilian economy was swayed by shocks from abroad caused by the Asian financial crisis, then again in 2001 by the Argentinean bond default and consequent collapse of the currency there and once more with rising inflation in 2005. The author is optimistic, though, and believes that Brazil will be more resistant to future shocks caused by foreign economies.
During the 1998 crisis, Brazil had a fixed exchange rate which had to be defended by the central bank. As such, when it was hit by the shock, it was forced to raise interest rates in order to defend its exchange rate, worsening the crisis. In 1999, Brazil adopted a floating exchange rate. Shocks to the LM curve should be treated by targeting the real interest rate and shocks to the IS curve should be treated by holding output constant. Shifts to the right or left of the IS curve have a long term effect on interest rates; such is not the case for the LM curve. In 1998, Brazil’s national debt increased as their currency depreciated instead of decreasing because their currency derived its value from dollars instead of economic output. Additionally, the central bank of Brazil now makes its actions known publicly and acts independently of the fiscal policy imposed by the government.
My reaction to this article is curiosity, especially after reading about the Argentinean economy and learning how maverick economists kept its growth well in line with Brazil’s while doing very unorthodox things. That article mentioned Brazil’s slow and stead approach to economic growth, which was further explained here and may prove to be a wise approach given the grave predictions for the immediate economic future.
grandslam
The Brazilian economic histroy is one of instabality. Compared to what the US economy is going through right now is not a very big deal compared to the economic stress the Brazilian economy has gone through in the past. And a lot of that has to do with the fact that the Brazilian economy is very sensitive to world economic fluctuations. So any hiccup the world economy throws toward Brazil and they feel it.
And ever since they apopted a new currency in 1994 they have seen some growth but nothing too significant. And everytime the Brazilian economy looked like it was about to be headed in the right direction something would happen to where they would go back to where they began and would have start all over. Most of the reasons for the set backs in their economy have from problems that have happend abroad, so that shows their vulnability to world economic stress.
grandslam
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