ANNEX A
BRAZIL AND GLOBALISATION
GLOBAL CONTEXT
A1. The past decade has seen an increase
in the pace of global economic activity, underpinned by the rise
of key emerging markets, which account for over 37% of the planet's
population. China and India have spearheaded the charge, growing
on average at 9.0% and 6.4% per year since 1996. The BRICS[5]
countries now account for 28.3% of world GDP (PPP).[6]
By contrast the G-7[7]
economies account for 41% of the total. In the past year, the
emerging economies have continued to increase their already significant
contributions to world growth. World trade has almost doubled
in value, with total trade at around $10 trillion in 2005, up
from $5.5 trillion in 1997. Migratory flows have also increased
with the world migrant stock increasing from 81.5 million in 1970
to 174.9 in 2000.
A2. The global economy has grown strongly
since 2002, averaging 4.3% between 2002 and 2005. This compares
very favourably with the growth averages from the 1990's (3.4%)
and the "long run" average from 1970-2005 (3.8%). In
fact, one has to go back to the period 1976-79 to find a comparable
growth average over four years. World CPI inflation has fallen
from 8.5% in1996 to 3.8% in 2005. Stock indices worldwide have
reached record highs, although as recent events have shown, this
may well reflect an asset bubble. Commodities demand has soared,
galvanised by the rapid industrialisation of China and the insatiable
thirst for oil from the US. Metals and oil have seen the largest
price gains. As an example, the price of copper rose by 60% and
the price of tin by 20% between 1996 and 2005. Inflation in this
area has been demand driven and output has risen with price.
A3. However, there are a number of increasing
risks to the strong global picture. Many of these risks centre
on the US economy, which has accumulated large amounts of debt
and has created severe imbalances in global spending patterns.
The risk is that a rapid unwinding of these will force a fast
decline in the dollar, with negative consequences for world trade
and investment. With an increasing number of analysts fearing
recession in 2007, one of the principal engines of global growth
looks to be slowing. Inflationary pressures are also mounting
as supply side constraints start to bite. This is leading to monetary
tightening and a fall in the ease of access to global funds. Housing
and asset bubbles are looking like they may burst in many countries.
There is also the possibility of a rising danger of increased
protectionist sentiment in the future, especially the US, should
economic conditions sour.[8]
With risks to the downside, times look to be becoming more testing.
So one key question is has Brazil made sufficient use of the good
times to progress?
REGIONAL CONTEXT
A4. Latin America is becoming more open
to the world economy. The region is commodity rich and thanks
to the boom, has experienced its first period of export led growth
in 20 years. Total trade has risen from $610.7 billion in 1997
to $909.3 billion. Latin America's economies have been much stronger
in the last three years since the period of crises and instability
between 1998 and 2002. The region seemed in the 1990's to have
shaken off its historical reputation for severe economic volatility,
characterised by hyper inflation and currency crises, the latter
as a result of large capital outflows and fixed exchange rate
commitments. But economic liberalisation was matched by generally
low trend growth after the "lost decade" of the 1980s.
Economic mismanagement, and in some cases extensive corruption,
produced a series of negative shocks that have set the region's
development back severely. GDP per capita comparisons reveal sometimes
sharp divergence with the developed world.
A5. Total FDI flows into the region provides
another telling indicator. After expanding rapidly in the mid
1990s off the back of several capital account liberalisations,
these have readjusted. Between 2000 and 2005 inflows decreased
significantly from $79 billion to $61.5 billion. By contrast China
alone has seen its inflows rise from $38 billion in 2000 to $54.9
billion in 2004. South America is the world's most economically
unequal continent. Poverty and inequality have barely improved
in the last 15 years and were the main economic driver behind
the rise of the more populist leaders in the region, sometimes
simplistically dubbed a "Shift to the Left". Economic
policy direction is currently uncertain, with some countries pursuing
more orthodox, market-based approaches and others adopting increasing
measures of distorting intervention and control.
A6. The region is still an economic lightweight,
accounting for only 7% of world GDP. By contrast Emerging Asia
now accounts for 27% and Africa for only 3%. The US, with over
200 million fewer people than Latin America, accounts for 20%
of the world total. Trade and financial channels have opened over
the past decade. However, domestic financial markets still remain
underdeveloped, so the scale of cross border financing within
the region still remains small. The last few years have seen a
return of external investor money, and recent financial returns
have been some of the best performing in the world. Colombia,
Argentina, Brazil and Mexico all placed in the top 10 best performing
stock markets in 2005. Mexico, Brazil, Colombia, Ecuador and Venezuela
were all in the top eight for returns on bonds.
BRAZIL
A7. Brazil accounts for 51% of South America's
GDP (PPP).[9]
Its economy has grown more slowly than the more dynamic emerging
markets like China, India and Russia. Average growth since 2000
has been 2.6%, whereas the Chinese average has been 9.3%, the
Indian average 6.2% and the Russian 6.8%. However, this relatively
poor growth performance does not complete the picture. The stage
of development and recent history of the Brazilian economy, as
well as the political realities that face the country have led
to another direction and self imposed metric of success. Brazil's
policy stance under the previous, current and likely future governments
is the pursuit of macroeconomic stability. President Lula has
stated in interviews, that he wants policy to aim at consolidating
a base for healthy, but not spectacular growth. He wishes for
the country to aim for a trend growth rate of 4-4.5%. Current
potential growth is 3-3.5%. This is the political backdrop we
must refer to when assessing how Brazil is approaching and coping
with globalisation.
Table 1
SUMMARY STATISTICS ON BRAZIL
|
| 1996
| 2005 |
|
| GDP (PPP US$ billion) | 1,081.2
| 1,576.7 |
| Population (million) | 163.8
| 181.4 |
| Government Consumption (as % of GDP) | 10.8
| 19.9 |
| Total Trade (US$ billion) | 101.1
| 191.8 |
| Investment (% of GDP) | 19.2
| 20 |
| FDI (% of GDP) | n/a
| 1.9 |
| Inflation (%) | 16.0
| 6.9 |
| Interest Rate (%) | | 18.0
|
|
| Sources: IMF and EIU. |
A8. Brazil remains one of the largest emerging markets
(see Table 2) and a leading voice among developing countries.
It is in a clear "second tier" alongside India, Mexico
and Russia in terms of market size. Even if it continued to grow
constantly at 6.6% (2.6% real + 4% inflation)[10]
it would take 24 years for the nearest "third tier"
economy, Turkey to catch up, assuming that Turkey grows at 10%
(6% real + 4% inflation) every year between now and then. So even
if it does not undergo a growth explosion in the same way that
say, India and Turkey have, it is unlikely to drop out of the
top six for a quarter of a century or so. This serves to add emphasis
to the importance of stability in Brazil. At 4% real growth, as
desired by Lula, the 24 years figure increases to 43 years. So
even if Brazil is not meeting the globalisation challenge in a
manner comparable to China and India, one must not lose perspective
about its place in the world.
Table 2
LEADING EMERGING MARKETS 2005 AS INDICATED BY NOMINAL
GDP AS A PROXY FOR MARKET SIZE. SCALE: US$ BILLIONS
|
| China | 2,224.8
|
|
| Brazil | 792.7
|
| India | 775.4
|
| Mexico | 768.4
|
| Russia | 766.2
|
| Turkey | 362.5
|
| Saudi Arabia | 307.8
|
| Poland | 300.5
|
| Indonesia | 276.0
|
| South Africa | 239.1
|
|
| Source: IMF. |
FINANCIAL GLOBALISATION
AND MACROECONOMIC
STABILITY
A9. Brazil has consolidated macro stability built upon
the pillars of a strong primary budget surplus, a flexible exchange
rate and a non politicised, although not officially independent,
central bank. As a result of strong performances in these areas,
Brazil has seen the volatility of its GDP growth fall in the 2000s,
as compared to the 1980s and 1990s[11]
It is running healthy "twin surpluses" with positive
current account (1.8% of GDP in 2005) and government primary balances
(4.75% of GDP in 2005). Also, as table 1 shows, it has succeeded
in taming inflation. In fact, the Central Bank has been so aggressive
on this, that it looks set to undershoot its inflation target
for 2006. Further to this, it has managed its high debt burden
skilfully and has paid back its IMF and Paris Club debts. It is
now seeking to become a member of the Paris Club and the OECD
and is continuing its engagement on IMF reform issues in earnest.
It is also a G-8 outreach country. Sovereign debt risk has fallen
to record lows as indicated by JP Morgan's EMBI[12]
measure and foreign exchange linked debt has been eliminated.
A10. Hence the country has become a highly desirable
destination for portfolio investors. These are easily reversible
investment flows and are a mark both of increased stability, but
also of the highest real interest rates in the world. In 2005
Brazil attracted around $6.4 billion of new foreign equity investment.
Its stock market index was the seventh best performing in the
world in 2005, with gains of 60%. Portfolio debt inflows were
also high and the small final figure for this of $204 million
reflects the government's aggressive debt reduction policy. Brazilian
bonds were the 5th best performers, according to investment bank
Credit Suisse.
A11. However, the longer-term foreign investment picture,
as reflected by FDI, is not as spectacular. FDI flows surged in
the 1990s after the capital account was liberalised. Average annual
inflows went from $2.2 billion between 1990-95 to $24.8 billion
between 1996 and 2000. Table 3 shows the evolution of FDI from
2000-05. Also shown are FDI figures for the other BRICS over the
same period. Brazil remains comparable to some of the other BRICS,
but unlike the others, it has seen FDI inflows fall. However,
looking at Table 4 shows that relative to the leading emerging
markets, Brazil is still comparable. However, once again, one
must address the issue of decline in inflows at a time where other
countries are seeing significant growth.
Table 3
FDI INTO BRICS COUNTRIES. SCALE: US$ BILLIONS
|
| 2000
| 2001 | 2002
| 2003 | 2004
| 2005 |
|
| Brazil | 32.7
| 22.5 | 16.6
| 10.1 | 18.2
| 15.2 |
| Russia | 2.7
| 2.7 | 3.5
| 7.9 | 15.4
| 14.6 |
| India | 3.6 |
5.5 | 5.6
| 4.6 | Unavailable
| Unavailable |
| China | 38.4
| 44.2 | 49.3
| 47.1 | 54.9
| Unavailable |
| South Africa | 43.5
| 30.6 | 29.6
| 45.8 | 63.0
| Unavailable |
|
| Source: IMF. |
| | | |
|
A12. This is not to say that Brazil has become a worse
place to do business, in fact it has made significant strides,
especially in consolidating stability. However, key challenges
remain. The poor fiscal structure has led to a high and increasing
tax burden on business (36% of GDP) and when compared to China's
tax burden (17% of GDP), it is over twice the size. China, India,
Mexico, Russia and Turkey all have lower tax burdens as a proportion
of GDP. This same fiscal structure has put a squeeze on public
investment spending and as a result, the quality of the country's
infrastructure is at risk. Also, comparatively low economic growth
is lowering the country's desirability as an investment destination,
outside of the resources sectors.
A13. As has been made clear above, while Brazil is growing
well relative to its own history, it still lags many "competitors"
by quite some margin and stability by itself may not be attractive
enough. However, owing to its sheer economic size, it still compares
favourably at the moment, especially when we compare it to many
non-BRICS economies (see Table 4). The country still suffers from
high levels of regulation. This is as much a burden to its own
investment as to attracting foreigners in. A recent World Bank
study[13] rated Brazil
as the 119th easiest place in the world to do business. Particularly
weak areas cited were paying taxes, closing a business and employing
workers. However, Brazil was cited as being very good at protecting
investors. The message is clear—despite any problems, Brazil
is open and welcomes investment.
Table 4
FDI INTO TOP 10 LEADING EMERGING MARKETS. SCALE: US$ BILLIONS
|
| | 2000
| 2001 | 2002
| 2003 | 2004
| 2005 |
|
| China | 38.4
| 44.2 | 49.3
| 47.1 | 54.9
| Unavailable |
| Brazil | 32.7
| 22.5 | 16.6
| 10.1 | 18.2
| 15.2 |
| India | 3.6 |
5.5 | 5.6
| 4.6 | Unavailable
| Unavailable |
| Mexico | 17.2
| 27.5 | 17.3
| 12.9 | 18.2
| 17.8 |
| Russia | 2.7
| 2.7 | 3.5
| 7.9 | 15.4
| 14.6 |
| Turkey | 1.0
| 3.3 | 1.1
| 1.8 | 2.7
| 8.6 |
| Saudi Arabia | -1.9
| 20 | -.6
| -.6 | -.3
| -2.4 |
| Poland | 9.3
| 5.7 | 4.1
| 4.6 | 12.9
| 7.7 |
| Indonesia | Unavailable
| 15.2 | 31.0
| 10.3 | Unavailable
| Unavailable |
| South Africa | 43.5
| 30.6 | 29.6
| 45.8 | 63.0
| Unavailable |
|
| Source: IMF. |
A14. Brazil's key macroeconomic challenge, which has
implications for all aspects of the economy lies in the quality
of its fiscal structure. Challenges remain on the flexibility
of government expenditure, as Brazil's 1988 constitution has installed
a series of unrealistic social guarantees. The two principal challenges
are the indexation of pension payments to final salaries. This
means that a pensioner receives 100% of his final salary and that
should the job that he has retired from see an increase in pay,
he will have his pay increased. Thus the effects of a rise in
the minimum wage carries implications for government spending.
The second problem is earmarking of spending. This effectively
guarantees a minimum spend for various areas of government. Thus
the possibilities for reducing spending are limited. Some of the
consequences of this have been described above. This is the most
significant area, where a strong reform agenda can have extremely
beneficial aggregate effects.
TRADE AND
ENERGY
A15. Brazil has become much more open to trade over the
past few years. Total trade in 2004 was 26% of GDP, up from around
13% in 1996. The country's abundance of natural resources have
helped it experience its first period of export led growth in
over 20 years. Metallurgical products and Soybeans, meal and oil
accounted for 18% of exports in 2005. The country's principal
imports are machinery, chemicals and oil. Brazil's main trading
partners are the US (20%) and the EU (25.2%), and trade with China
is also rapidly growing (5.7% in 2004 up from 2% in 2000). Given
the country's sheer scale, it is somewhat surprising that it accounts
for so little of the UK's total trade (see Table 5). Of the BRICS
countries, it is clearly the lowest. Brazil is also a leading
voice for developing countries in multilateral arenas, such as
the WTO. Along with the EU and US, it is one of the three principal
actors in the current round of negotiations.
A16. Within South America, Brazil accounts for one third
of the region's total trade. It is the dominant trading partner
for many countries within the region and the leading nation in
the Mercosur/l trading bloc. At present, it continues to struggle
to establish a stable regional trading agreement. This was most
notably seen when the two smaller countries in the bloc, Paraguay
and Uruguay, announced their unhappiness with the arrangement
and a desire to pursue bilateral agreements with the US. The proposed
Free Trade Area of the Americas was quashed at a heated summit
earlier this year, with Brazil among those countries that voted
against the proposed agreement. This reflects its desire to retain
its leadership role on economic issues in the region. Struggling
to establish a stable regional trading environment. Benefits from
trade very uneven.
Table 5
LEADING EMERGING MARKETS TOTAL TRADE WITH THE UK AS PROPORTIONS
OF UK TOTAL TRADE USING 2004 DATA. SCALE: %
|
| China | 3.0
|
| Brazil | 0.5
|
| India | 1.1
|
| Mexico | 0.2
|
| Russia | 1.2
|
| Turkey | 1.2
|
| Saudi Arabia | 0.6
|
| Poland | 0.7
|
| Indonesia | 0.3
|
| South Africa | 1.2
|
|
| Source: IMF. |
A17. One important area where Brazil is having noticeable
success is energy. The country is net self sufficient in oil and
this year has struck significant offshore reserves, which will
come on line in the near future. The partly state owned oil company
Petrobras, does not suffer from the under investment problems
that plague Pemex in Mexico or PDVSA in Venezuela. However, Brazil's
self sufficiency owes much to its status as the world's leading
bio-ethanol producer. Most promisingly this area, despite its
scale and efficiency within Brazil, has the potential to expand
significantly. This is because it currently has to contend with
high barriers to trade imposed by the US and the EU. In both cases,
this is to protect less efficient domestic farmers, with powerful
lobbies. Should the price of oil continue to rise, the incentives
for these governments to diversify supply may begin to contend
with the incentives to stifle trade that currently exist.
INFORMATION AND
TECHNOLOGY
A18. Owing to its high levels of inequality and poverty,
Brazil is not as much of a high tech country as its economic size
might suggest. According to the UN,[14]
research and development expenditure as a proportion of GDP amounts
to 1%. By contrast, the UK spends 1.9% on R&D, Korea spends
2.5%, Turkey 0.7%, Russia 1.2%, China 1.2% and India 0.8%. In
terms of patents granted, Brazil also has scope for improvement.
In 2002, patents granted per million residents in Brazil were
4. The UK figure was 88, Korea was 633, Turkey was 1, Russia 105,
China 5 and India none. The problem in Brazil is that despite
its world class universities, many of which are private, spending
on quality primary and secondary schooling is insufficient to
affect a broad swathe of the population. This despite a fairly
favourable 4.3% of GDP spent on public education. Thus, Brazil
still has substantial potential for improvement. The upshot of
this is that aggregate productivity still remains a challenge
and has declined since the beginning of the 1980s. The most recent
evidence, up to 2000, does not yet suggest a reversal in this
trend. However, the world class universities and abundant natural
resources have meant that Brazil's science base is growing. Indeed,
Brazil and the UK will be collaborating in a "Year of Science"
this and next year.
PEOPLE
A19. Brazil currently has around 180 million inhabitants.
By 2015, this is expected to rise to around 200 million. The country's
population is growing at a healthy rate of around 1.8% per year.
Projections are that it will age, but slowly, with the proportion
over 65 in 2015 expected to be around 6.4%. This compares favourably
with projections for China (9.6%), Russia (13.3%), Korea (13.2%)
and is about the same as India (6.2%). Demography is very much
on Brazil's side in the future. Rates of urbanisation are already
quite high, with 83% of the population living in urban areas and
this is projected to rise to 88.5% by 2015. Brazil also boasts
some of the most populous cities in the world, with Sao Paolo
being the fifth largest (20 million people) and Rio the 19th largest
(12.2 million). This obviously throws up challenges as well as
opportunities and cities such as Rio have to deal with very concentrated
areas of inequality and poverty. The most famous example of the
latter are the famous "Favelas", built on many of the
city's hills. The country has a diverse population, including
German, Japanese and Portuguese communities.
A20. There are around 700,000 migrants living in Brazil
(about 0.3% of the population). Unofficially, on average 100,000
Brazilians emigrate each year and around 75,000 foreigners migrate
to Brazil. It is estimated that there are currently around two
million Brazilians living abroad. Remittances from abroad are
estimated to be around $3.5 billion or about 0.5% of GDP. According
to the UN, Brazil's policy attitude towards migration is generally
non-interventionist and the country makes an effort to integrate
new citizens.
BRAZIL'S
POLITICAL ECONOMY
GOING FORWARD
The domestic situation
A21. The 2002 election of President Lula and his centre-left
party, the PT, marked the first shift to the left in Brazilian
politics since democracy was restored in the early 80s. In the
months leading up to his victory, there was a great deal of market
instability, leading to spikes in both the exchange rate and Brazil
risk. The source of this was a loss of confidence that, under
a centre-left government, Brazil would maintain fiscal and monetary
discipline. This had been reinforced by campaign speeches by Lula
suggesting, amongst other things, that he would suspend repayments
to the IMF.
A22. The reality after nearly four years of PT government
is that economic orthodoxy has been maintained, and even reinforced.
Central Bank (de facto) independence has been preserved
(even in the face of stiff opposition). Targets for the primary
fiscal surplus have been raised (and then exceeded), and debt
obligations have not only been met, but IMF and Paris Club loans
have been repaid early and debt profiles improved (all to the
applause of markets). While growth has been lethargic when compared
to other Emerging Markets (an average of only 2.6%), it has been
a welcome dose of stability to an otherwise volatile economy.
A23. What we have seen in Brazil is a greater emphasis
on social justice goals, carried out by a left-of-centre leader—without
a corresponding increase in economic interventionism. There have
been some doses of nationalism, for example the decision to cancel
foreign contracts for two new oil platforms and build them in
Brazil instead, but this has been the exception rather than the
norm. The core of Lula's message has been job creation, increased
incomes (particularly for the poor), and tackling hunger and poverty.
Critically, however, despite the mass appeal of such messages,
their realisation has not hinged on economic intervention, but
rather on solid economic policies and subsequent growth (particularly
in government revenues).
A24. As presidential elections come round again in 2006,
we should recognise that Brazil is likely to remain an economic
moderate. With 2002's transition from right to left of the political
spectrum, Brazil showed that it was maturing as a democracy. With
its subsequent performance under Lula, it showed that orthodox
market-economics is also taking root. The battleground in 2006's
elections will be on morality (ie the recent corruption scandals)
and government delivery. This reflects the political reality in
Brazil that whatever brand of populism or "leftism"
that is peddled on the soapbox, the population prefers stability
and growth to ideological rhetoric.
Regional implications
A25. Brazil has already shown itself to be a moderating
force within the region, and every indication is that it will
continue to be into the next presidential term. On an economic
level, it has attempted (though not always with success) to curb
the worst excesses of Argentine belligerence with the IFIs. On
a political (and economic level) it has done the same with both
Chavez, and more successfully with Morales, with whom Brazil shares
a symbiotic relationship in the production and consumption of
natural gas.
A26. Brazil is the dominant economic force in the region
(the state of Sao Paulo alone is bigger than any other South American
economy). Although it is a major exporter of commodities, it also
has a diversified manufacturing base, which is increasingly looking
to the export market for growth. It is in Brazil's long-term strategic
interests to promote stability in the region (both economic and
political). Such a policy is good for growth in the region as
a whole, and in Brazil in particular.
A27. Brazil offers many in the region an economic third-way
between outright populism or "leftism" in the Chavez
or Castro mould (which in any case is not possible for most economies
in the region, lacking sufficient resources or backers), and full-blooded
capitalism embodied by the US (politically unacceptable). In political
terms, Brazil will continue to search for a middle road with the
"bete-noires" of the region as pragmatism demands. In
economic terms, however, the evidence is clear that they want
to do business in an open market economy, but at the same time,
that social justice goals will not be ignored. The fact that BNDES
(the State Development Bank) has invested in both Peru and Bolivia
in recent years to expand Brazilian export opportunities reinforces
this trend on a regional level.
A28. Brazil in 2007, and for the foreseeable future,
will likely be a very familiar place. It will be open for business
and trade, but bogged down with bureaucracy and outdated legislation
that hamper the realisation of its full potential. It is, along
with Chile, one of the most mature economies and democracies in
Latin America, despite its relative youth, with every indication
that it is on the right track. Brazil is a reminder that development
in the region is a process, and within that process, Brazil remains
the strongest engine for change.
5
BRICS-Brazil, Russia, India, China and South Africa. Back
6
Purchasing Power Parity. Back
7
G-7-US, UK, Germany, France, Italy, Canada and Japan. Back
8
The Dubai Ports case is often cited as an example of what might
happen. Back
9
Purchasing Power Parity-A method of measuring the relative purchasing
power of different countries' currencies over the same types of
goods and services. Back
10
For simplicity I have assumed that both countries have the same
long run inflation over the period in question and I have assumed
away exchange rate complications. Back
11
Using standard deviation as a volatility measure, the standard
deviation of GDP growth in the 1980s was 4.7, in the 1990s it
was 3.0 and from 2000-05 it was 1.7. Back
12
EMBI-Emerging Market Bond Index. Back
13
http://www.doingbusiness.org Back
14
Figures are for the period 1997-2002. Back
|
