Political Economy of Brazil

Muskan Moazam

Brazil is a Country in east-central South America. The Capital of Brazil is Brasília. Brazil is one of the largest developing economies having strong economic specialty in mining, manufacturing and agriculture. Its service sector is also rapidly growing. Brazilian city of Saopaulo is one of the world’s major industrial and commercial sectors. Brazilian economy has seen many booms and crisis from 16 -20 centuries. In this era the economy of Brazil was heavily dependent on few agriculture products whose prices in international market were continuously fluctuating. In 18 century Brazil had a mineral boom especially in gold and diamonds and then in 19 century there was a coffee boom in Brazil and then in 20 century, Brazil enjoyed a rubber boom but by the mid or last half of 20 century, Brazil expanded its industrial production and became economically less dependent on agricultural products.

The role of government and interventionist policies to facilitate growth and development of Brazil

The Brazilian economy was privatized till 1980 but the role of government in economic sector was dominant. The government had major role in financial sector, industrial sector and even the natural resources were owned by government hence they had 70% major role in steel industry which were owned by steel enterprises. A survey conducted revealed that 39% of the assets of 5000 farms were belongings of state owned enterprises which later on increased to 48% within 10 years similarly the banking even commercial banking was under surveillance of state and 24% funds of commercial banks were owned by state and similarly  70% loans of banks for investment purposes were owned by government.

Such large scale presence of state in Brazilian economy was in the best interest of domestic and even in foreign and international owned private sector similarly it was so wise of Brazilian governments to provide the local companies with cheap inputs which would later on help to turn the best quality product similarly the government would provide them with the cheap electricity with pretty cheap cost.[1] Hence these were also considered to be the major loopholes to the national savings which lead to privatization drive in brazil for essence Brazilian state used to pressurize the state companies to low the prices for suppressing inflationary pressures which resulted in large deficit especially in enterprises and these enterprises forced the state to subsidise them which increased the government deficit also the state owned enterprises were overemployed by political pressures.

In 1980 officially privatization started initially in the country which initially started in steel and chemicals sector which later on dominated towards public utilities for example rail ,roads , ports and even later on exceeded towards telecommunication and major communication zones and later on lead towards inclusion of constitutional amendments which lead to foreign firms and their participation in public utility. Even till 2002, Brazil was privatized for about 63%.

Brazil privatization was that the privatization of public utility was carried out on the basis of granting concessions not the permanent transfer of assets so basically there were concession contracts for limited period of time and at the end of these assets would again return back to state despite privatization, state had regulatory role which allowed states to have a significant influence on economic activity. The most important regulatory role of state was setting tariffs. State prioritised the interested of investors by increasing tariffs and this attracted maximum investors for concession auction. So state adopted lenient policies towards newly privatised firms which increased the profitability of public utility for example after the privatization of electricity distribution section the profitability increased from4.3 % to 5.9%.[2]

So that’s how Brazilian government still regulate states economy.

The macro-economic policies of Brazil is called macro-economic tripod which include inflation targeting, fiscal surplus and exchange rate. Brazil implemented these policies after 1999.

Role of economic and political elite

The economic and business elite of Brazil has significant influence over politics since 2002. When Lula was elected as president in 2002, the Brazil economic elite was against him so they didn’t support Brazilian economy.[3] They were reluctant to invest which lead to tumbling of stock market, collapse of currency and increase in government borrowing  then Lula had to recognise the interest of economic elite, Lula started  an economic agenda named as “new developmentalism “ to provide support  for Brazilian multi-national corporations by giving them loans from state bank at low interests . The relation between government and economic elite declined from 2012 onwards. Brazilian exports were damaged due to less favourable global economy, this caused increase in state expenditure and decline in state revenue leading to high level of borrowing and tax increasing. When poor infrastructure projects like 2014 football world cup and Olympics of 2016 demonstrated corruption of government causing mass protests then the business elite along with media shaped the narrative blaming the corruption of government as the cause of failure of economy. The business elite and the public used the proverb of “pager o pato (to pay the duck, which meant that public and business elite are paying for government mistake) then bolsonaro rose, he had a record of supporting protectionism he assured economic elite that under his government the interest of business elite will be safeguarded then members of business elite declared their support for bolsonaro and then the bolsonaro became the president of brazil with the help of economic elite.

The petroleum firm, petropras, banco (largest bank), JBSS.A (meat processing firm having 191 enterprises around the world), AMBAV, b2w etc.

Degree of liberalization or protectionism

Although Brazil went for privatization or liberalisation but still in Brazil the government adopt protectionist policies.[4] Under Lula government, the Brazil one of the biggest economy were closed.  There were tariffs on around 2400products and local industries were not exposed to foreign competition. The cause of Protectionism in Brazil is that they lack trade dynamism in domestic level. There are less than 20,000 exporters in Brazil so Brazil still has protectionist policies for most of its goods. As current Bolsanaro government has lifted tariffs on about 2400 products but still subsidies are given to local products. Also in Brazil, the economic policy can be termed as economic nationalism, as people of Brazil prefer local products over the foreign products. For example almost all the cars on the roads of Brazil are produced in Brazil. Similarly people of Brazil prefer the cold drinks made in Brazil so Coca Cola had to come up with “Fanta Guarana” to increase their business because that drink was made in Brazil.  Another reason for which scholars call the Brazilian market as closed is the low entry rate of new business exporters. Already established exporters have monopoly over the exports. The trades barriers are relatively high so small companies with less valuable goods are unable to overcome trade barriers but only those firms and businesses with economies of scale can overcome these trade barriers.  These protectionist policies have benefitted the Brazil infant industries like the textile and computer industry which was not competitive enough to compete with foreign firms flourished under the protectionist policies of Brazilian government. Despite liberalization, protectionism is still a cornerstone of Brazilian economy. For example the iPhone price in Brazil is 50% more than in US. Due to these trade barriers, many foreign manufacturers are forced to start manufacturing inside the Brazil. Now the Bolsonaro’s government is committed to remove tariffs and open the Brazilian economy for the world.[5] According to world heritage foundation’s Index of economic Freedom, Brazil is mostly unfree and comes at 150^th in number. Brazil has tariffs rate of 8.59% which is much higher than the average 2.59% in world. Protectionist measures are in form of tariffs and quotas which make the foreign good relatively costly and out of the purchasing power of domestic consumers. That’s the reason that there are less international firms in Brazil and even less then in Norway which has 2.5% of Brazil’s population.

Trade Specialization

Due to protectionist policies, there are fewer companies that are willing to invest in Brazil, which decreases the chances of innovation. Brazil main trade specialization is in oil seeds which account for its 13.8% of total exports with worth of US$29 billion. Also the mineral fuels like crude oil is one of the top exports of Brazil accounting for 11.8% of total exports. Meat industry is also one of the industries where Brazil has acquired the economies of scale with annual export of $15billion. Brazil has acquired economies of scale in production of Soybean. Brazil is the largest producer of Soybean that accounts for the 36% of the world production of Soybeans. Oil reserves of Brazil ranks 15^th in world. So there are two main exports where Brazil can further develop trade specialization. The export model of Brazil faces criticism because it is based on the exports of basic or semi-manufactured products which decrease the chances of further industrial growth.  The problem of less advanced industries causes a hindrance in making Brazil an efficient economy although it is a resource rich country.

Role of international corporations/ economic linkages / globalization

Brazilian economy is largest in Latin America. Years of economy growth, credible macroeconomic policies and a rise of middle-class have made the country one of the leading recipient of foreign investment and one of the global and regional emerging power in global commerce. These factors make the Brazilian economy one of the most dynamic and promising forces in contemporary emerging markets. It is said that Brazil will be the third most for future FDI, behind China and India. During 1980s Brazil was one of the first countries having large protected markets and protected by all sorts of trade barrier which was the main reason that FDI was attracted to Brazil.

In the early days foreign investment were regulated by markets seeking and protectionist trade policies so hence there were restrictions on the activity of foreign companies including I finance and insurance sector but in 1990 liberalizing reforms were introduced so Brazilian development policy shifted from a focus on isolating the economy from international trade into integrating global economy through enhanced trade.

Through FDI in 1990s Brazil came to open its street later in the globalization process. Collar administration in 1990 and real plan in 1994 was introduced, foreign investment skyrocketed so the former president opened the economy to private investors and state-owned companies. The Asian financial crisis and 2001 crisis made Brazil one of the major developing and a gem for the foreign investors to invest in Brazil.[6]

So Brazil trade is mainly restricted to market access and dominance in the regional trade where they are ready to complete. Their liberation policies allow them for economic adjustment which is in favor of Brazil strategy. Brazil main trading partner are European Union, China, United States, Argentina, and Japan so the Brazil trading countries are with developed economies and the world power including emerging economies. The expansion of Brazil foreign-trade has helped the country to integrate into global economy although Brazil is still 1% of world trade.

Brazil exports increased when they joined world trade organization but overall north and South America as well as Europe were substantially benefiting to Brazil helping them in globalizing and balancing their trade.

[1] Helland Hauge, Gina Marie, and Marie Therese Mahnusson. “Globalization in Brazil.” Master’s thesis, Copenhagen Business School, 2011.

[2] Ibid

[3] Ibid

[4] Carneiro, Rafael D., and Brian Kovak. “The Evolving Impact of Trade Liberalisation on Wages and Employment in Brazil.” VoxDev. Last modified 2017. https://voxdev.org/topic/firms-trade/evolving-impact-trade-liberalisation-wages-and-employment-brazil#:~:text=Trade%20liberalisation%20in%20Brazil%20involved,in%20between%201990%20and%201994.&text=Because%20tariff%20reductions%20were%20different,its%20unique%20mix%20of%20industries.

[5] Helland Hauge, Gina Marie, and Marie Therese Mahnusson. “Globalization in Brazil.” Master’s thesis, Copenhagen Business School, 2011.

[6] Helland Hauge, Gina Marie, and Marie Therese Mahnusson. “Globalization in Brazil.” Master’s thesis, Copenhagen Business School, 2011.