Brazil Economic History: Why it was the country of the future that always would be

by Dave

Brazil has been described as a slumbering economic giant waiting to awake. It is the fifth largest and most populous country in the world, the ninth largest economy (in terms of purchasing power), and the largest market in South America, accounting for up to 60% of South America’s total Gross Domestic Product (GDP) during the 1990’s. Brazil is highly integrated in the global economy. The country is among the world’s top three exporters of tobacco, sugar, orange juice concentrate, soy, beef, chicken, iron, and tin.

Much of Brazil’s trade was done with the United States, and Brazil was a larger trade partner to the U.S. than Italy, Spain, or India throughout the 1990’s. Despite its impressive accomplishments, many commentators argue that Brazil has failed to fully realize its potential. “Brazil is the country of the future,” as the old joke goes, “and always will be”. Annual growth in GDP averaged a modest 2.5% between 1980 and 2000 versus 10.2% for China, 7.8% for South Korea and 5.7% for India.

Brazil’s progress in recent decades has tended to come in jubilant bursts, including president Juscelino Kubitchek’s “Program of Targets” (1956-1961), the “Economic Miracle” years (1968-1973), and more recently Fernando Henrique Cardoso’s “Golden Years” (1993-1997). Each growth spurt, however, has been followed by a period of slow growth.

Brazil’s National Federation of Industries coined the term “Custo Brazil” to describe the costs incurred by Brazilian firms because of their location. These costs include Brazil’s high tax burden, which averages 36% of GDP versus 21% in South Korea, 17% in Mexico, and 8% in China. These high taxes encourage economic activity to shift into the “informal” (i.e. non tax-paying) sector. The informal sector accounts for up to 60% of all non-government jobs by some estimates.

The most significant “Custo Brazil”, however, has been the constant series of shocks that have buffeted the Brazilian economy in recent decades. They started with the boom and bust cycles of its leading exports: sugar, gold and coffee. One of the most devastating shocks occurred in 1929, when coffee exports represented 70% of all exports and 10% of the total GDP.The Great Depression caused the collapse of the world coffee market, and Brazil’s annual exports declined by 60% from 1929 to 1932, forcing the government to devalue its currency and impose exchange rate controls.

Between 1967 and 2003, world coffee prices have experienced monthly declines greater than 20% on 17 separate occasions. In the past, another source of vulnerability was Brazil’s dependence on the import of energy, primarily oil. During the 1973 oil shock, when the price of oil quadrupled, Brazil was importing approximately 80% of its oil.

via FT DonSull Blog