Brazil: Barriers to Success

Considered one of the world’s most promising emerging economies, Brazil has come a long way from its long volatile past of hyper inflation and severe debt. However, the recent arrest of ex-president Michel Temer for corruption charges is a reminder that the country still has a long way to go before it reaches the stability held by more developed countries. Although Brazil’s economic future looks bright, it must overcome its reputation of an isolated economy engulfed in uncertain fluctuations. If Brazil can step away from its history of protectionism, there is considerable economic growth to be gained from more open trade policies.

Throughout the 20th century Brazil underwent a variety of economic reforms that would have the bulk of it citizens leave starvation levels of poverty and produce one of the largest middle class markets there is today. In 1989, while still living with the consequences of high inflation and severe government debt dating back decades, the people of Brazil voted in their first democratic presidential elections. The economic reform brought by this shift would set the country on a new path towards prosperity and further away from the state-control of the economy held since 1930. After the great depression, Brazil adopted an import substitution industrialization policy and took on state ownership of key industrial sectors. Tariffs, restrictions on imports, and large state investment led to an increase in aggregate demand and produced bouts of economic growth in the 1960’s. However, it proved unsustainable for Brazil to subsidize such policies. Increased deficit spending, foreign debt, money creation and the 1970’s oil crisis led to uncontrollable rates of inflation between 1980-1994, reaching a high of 2,477% in 1993. Brazil had become so accustomed to such rates that shop owners often used a chart system referring to the current level of inflation instead of price tags, since the price of goods frequently changed throughout a week. The key turning point for the economy was “The Plano Real” program, which was introduced in 1994. The program established a new currency, a pegged exchange rate regime, and budget austerity. This led inflation rates to drop from approximately 50%/month in January 1994 to just 1.7%/month by the end of the year. Brazil’s economic prosperity continued to grow, and between 2003 and 2014 nearly 29 million people rose above the poverty line.

Despite being one of the “poster childs” for economic reform in developing countries, Brazil has yet to adopt a program that can lead to sustainable economic growth. Brazil’s current economy

has become stagnant and is still recovering from the deep recession it faced in 2016. Despite having the 9th largest nominal GDP in the world, Brazil is only the 25th largest importer and exporter of merchandise goods. This disparity is largely due to Brazil still implementing closed-market trade policies. A study in 2014 found that the prices of imported buses and trucks were 132% greater after tariffs. Such policies have caused Brazil’s productivity to lag behind that of other emerging economies, such as China and Mexico. An open trade policy is necessary to encourage the competitiveness required for economic growth. Knocking down trade barriers and reducing tariffs would allow for easier investment in capital goods, leading to increased innovation and productivity. Lower trading costs are also necessary if Brazil wishes to reap the gains of partaking in global supply chains. Such measures would reduce Brazil’s reliance on internal demand and further increase its trade surplus.

Although Brazil’s protectionist policies have had some success in the past, trade liberalization is crucial for their economic growth in the future. Despite an increase of citizens entering the lower-middle class, their new positions remain vulnerable to slight shifts in the markets. At the end of 2018, Brazil’s unemployment rate was 11.7%. Of those employed, four out of ten are informal workers who do not receive benefits or protection. With precarious levels of income and unreliable levels of spending, Brazil can no longer rely solely on internal demand to stimulate growth. Instead, Brazil must look for other ways such as trade to increase their income capacity. Brazil still has one foot stuck in its past corruption and instability, but if it can make the leap towards trade liberalization, the future of Brazil’s economy looks open and bright.