Economy of Brazil

For more information go to Economic history of Brazil.

According to the CIA World Factbook, Brazil has the ninth largest economy in the world at purchasing power parity as of 2006. Brazil has a diversified middle income economy with wide variations in levels of development. Brazil embarked on a successful economic stabilization program, the Real Plan (named for the new currency, the real; plural: reais) in July 1994. Inflation, which had reached an annual level of nearly 5,000% at the end of 1993, fell sharply, reaching a low of 2.5% in 1998; it was 6% in 2000. Brazil successfully shifted from an essentially fixed exchange rate regime to a floating regime in January 1999.

Macro-economic trend

This is a chart of trend of gross domestic product of Brazil at market prices estimated by the International Monetary Fund with figures in millions of ruling currency.

Year	Gross Domestic Product	US Dollar Exchange
1980	7,846,331	52.69 second cruzeiros
1985	1,436,276,926	6,197.34 second cruzeiros
1990	31,759,773	68.30 third cruzeiros
1995	646,192	0.91 reais
2000	1,101,253	1.83 reais
2005	1,930,335	2.43 reals

For purchasing power parity comparisons, the U.S. Dollar is exchanged at 1.24 Reals only.

The Cardoso administration introduced to Congress a series of constitutional reform proposals to replace a state-dominated economy with a market-oriented one and to restructure all levels of government on a sound fiscal basis. Congress has approved several amendments to open the economy to greater private sector participation, including the involvement of foreign investors. By the end of 2003, Brazil's privatization program, which included the sale of steel and telecommunications firms, had generated proceeds of more than $90 billion. Passage of the Fiscal Responsibility Law in mid-2000 improved fiscal discipline at all three levels - federal, state, and municipal - and all three branches of government. Some measures have been adopted to address large deficits in Brazil's pension programs, but more remains to be done. Tax reform - simplification - has been under debate for over 2 years, but there has not yet been sufficient closure for final legislative action. Despite fiscal austerity, the administration has acknowledged the need to invest more in education and health to redress social inequity.

Market opening and economic stabilization have significantly enhanced Brazil's growth prospects. Brazil's trade has almost doubled since 1990. U.S. direct foreign investment has increased from less than $19 billion in 1994 to an estimated $35 billion through 2000. The United States is the largest foreign investor in Brazil. Upcoming privatizations in the power and banking sectors will likely elicit strong interest from U.S. firms.

Economy - overview

Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other Latin America countries and is expanding its presence in world markets.

For several decades, Brazilian development was based on an import substitution strategy. The main economic problem in the 1980s was enormous inflation.

During the 80's, high inflation and uncontrolled state spending brought years of slugish growth and recession. Successive attempts to reduce inflation in the secong half of the 80's failed, mainly because those attempts didn't address the biggest problem which was state overspending and distributive conflict. During 1986 and 1994 Brazil had 6 different currencies: Cruzeiro, Cruzado, Cruzeiro Novo, Cruzeiro, Cruzeiro Real, Real [2].

In 1990, after a few years of an informal and slow opening of the economy, the country has made some dramatic changes, strongly reducing the import tariff and emphasizing the need for quality (read ISO 9000 series adoption). Also During the early 90's 2 new attempts to control inflation failed, but the third attempt in the srping of 1994 was a success.

The Plano Real, instituted in the spring of 1994, sought to break inflationary expectations [3] by pegging the real to the U.S. dollar. Inflation was brought down to single digit annual figures, but not fast enough to avoid substantial real exchange rate appreciation during the transition phase of the Real Plan. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community's renewed interest in Brazilian markets as inflation rates stabilized and memories of the debt crisis of the 1980s faded.

The Real Plan successfully eliminated inflation, after many failed attempts to control it. As a result, Brazilian purchasing power has dramatically improved. Almost 25 million people turned into consumers "overnight".

The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil's debt to GDP ratio of 48% for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency.

The economy grew 4.4% in 2000, but problems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, leftist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. During his first year as president, in 2003, President da Silva decided to take an austere approach to the economy by controlling inflation and seeking current account surpluses in order to meet Brazil's debt obligations. This strategy caused a GDP decrease during 2003, but helped the country to attain robust GDP growth of 5.2% during 2004. The country paid off its IMF debt pre-schedule on December 29 (2.04 billion) and December 30 (13.46 billion), 2005.

Current events

After decades of high inflation and several attempts to control it, Brazil embarked on an economic stabilization program, the Real Plan (named after the new currency it's introduced, the Real) in July 1994, during the Itamar Franco administration. The inflation rates, which had reached an annual level of nearly 5,000% at the end of 1993, fell sharply, reaching a low of 2.5% in 1998. The passing of the Fiscal Responsibility Law in 2000 has improved the fiscal discipline of the local and federal governments, albeit in detriment of much needed investment in infrastructure and improvement of social services.

During the Fernando Henrique Cardoso administration (1995-2002), the government led efforts to replace a state-dominated economy with a market-oriented one. The Congress has approved several amendments opening the economy to greater private sector participation, and fostering the involvement of foreign investors. By the end of 2003, Brazil's privatisation program, which included the sale of steel, electricity and telecommunications firms, had generated proceeds of more than US$90 billion.

In January 1999, the Brazilian Central Bank announced that the Real would no longer be pegged to the U.S. dollar, which entailed a major devaluation of the Brazilian currency. The economy grew 4.4% in 2000, but growth decreased to 1.3% in 2001. In 2002, growing speculation that the presidential candidate considered most likely to win, Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. However once elected Lula resumed the economic policies of his predecessor. In 2003, President Lula took an austere approach to the economy by controlling inflation and seeking current account surpluses in order to meet Brazil's debt obligations.

After a GDP increase of 0.05% in 2003, Brazil showed robust growth in 2004 of 4.9%, decreasing to the pace of 2.3% (2005); international economic growth and, consequentially, expansion of exports, contributed to this performance.

Major issues

Brazil's economy has been experiencing more than 26 years of small economic growth, due to insufficient savings from both the private and state sectors. An annual budget deficit of around 2,5% of GNP makes the problem worse, because the state requires private saving in order to fill the budget gap. Those budget deficits force the government to keep interest rate high in order to hold aggregate demand under control, high interest rate on their turn discourage private investment.

The goverment therefore not only require private saving to pay its bills but also discourage private investment. This situation is the main cause for Brazil's 26 years old economic stagnation.

The economy still has great, challenges to face and important reforms are still to be implemented. Serious problems involving poor infrastructure, income concentration, low quality public services, corruption, social conflicts and government bureaucracy persist and threaten to hamper economic growth, compared to other emerging countries.

The internal public debt has reached the all time record and public expenses have been increased. Taxes already represent a considerable part of national income and are a serious burden to all social classes, diminishing opportunities for investment. In addition, entrepreneurship is burdened by high licensing costs, bureaucracy and corruption.

Current economic growth is below that of comparable Latin American countries and of China and India. Brazil has dropped 11 positions on the WEF Growth Competitiveness Index ranking from 2003 to 2005. [4].

Statistical Tables

Inflation - IPCA is the official inflation index used by the government and Central Bank

Inflation (IPCA)[5]
Year	1980	1985	1990	1995	2002	2003	2004	2005
%	99.25%	242.23%	1,620.97%	22.41%	12.53%	9.30%	7.60%	5.69%

Gross Fixed Capital Formation [6]
Year	1999	2000	2001	2002	2003	2004	2005
% Of GDP	18.90%	19.29%	19.47%	18.32%	17.78%	19.58%	19.93%

GDP Growth [7]
Year	1999	2000	2001	2002	2003	2004	2005
% Change	0.08%	4.04%	1.30%	1.90%	0.05%	4.90%	2.30%

Average Exchange Rate[8]
Year	1999	2000	2001	2002	2003	2004	2005
Reals for US$ 1,00 Dollar	1.813	1.830	2.349	2.920	3.077	2.925	2.434

The next table shows the Income Distribution situation in Brazil and the the Gini coefficient of Brazil. As a comparison, Germany and Sweden have a Gini coefficient of around 0.25.

Income Distribution [9]
Year	1976	1986	1996	2002	2003	2004	2005
Richest 10%	51.04%	46.95%	47.52%	47.02%	46.19%	45.31%	45.31%
Poorest 50%	11.58%	13.02%	12.09%	12.98%	13.22%	13.85%	14.07%
Gini Coefficient	0.623	0.588	0.602	0.589	0.583	0.572	0.569

The above table indicates that in 2005, for example, the bottom 50% of the population earned only 14,07% of the total income while the richest 10% of the population earned 45.31% of the total national income.

Current account balance: $8 billion (2004 est.)

Exports - commodities: transport equipment, iron ore, soybeans, footwear, coffee, autos

Imports - commodities: machinery, electrical and transport equipment, chemical products, oil

Reserves of foreign exchange & gold: $52.94 billion (2004 est.)

See also

• List of Brazil-related topics
• Economic history of Brazil
• History
• Agriculture
• Industry
• Geography
• Politics
• Communications
• Transportation
• Foreign relations
• Economy of South America

Lists

• List of Brazilian companies

External links

• Brazilian Public Debt
• [10]
• Policy note: "The Informality Trap: Tax Evasion, Finance, and Productivity in Brazil"
• Travel Guide