The Brazilian economy was once one of the fastest growing economies in the world, being the fifth largest country by land area, with a huge population of 209 million people. Brazil which forms the ‘B’ in ‘BRICS’ which stands for Brazil, Russia , India, China and South Africa, countries which had high rates of growth in the 2000s and were touted to be emerging economic powerhouses with large labour forces. However, in 2014 Brazil fell off from this growth pedestal despite having an arguably stable economy. Thus, it is important for us the understand the causes and consequences of the economic crisis that took place in Brazil and the impact it had on the Brazilian economy.
Causes
The Brazilian GNI per capita calculated using the atlas method as of 2016 was 8,930 US dollars dropping from 12,810 US dollars per capita. This significant change was a result of a drop in domestic production as Brazil was highly dependent on foreign markets such as China and the US for goods and services. Despite being gifted with natural resources throughout Brazil, the lack of utilization of these resource and over dependence on the Chinese market coupled with growing political instability resulted in the financial crisis of 2014.
Brazil was plagued with corruption throughout the 20th century and the 21st century. Dilma Rouseff who was appointed as president in 2011. As a political ploy, she increased the minimum wage as well increased the lending rates of local banks. She reduced the discount rates from 11.5% to 7.25%. The rise in minimum wages caused the Brazilian economy to be induced with inflation as more people had more money in their hands. The central bank of brazil then raised the interest rates to combat this inflation to 8%. This further aggravated the crisis as borrowing became lesser than before and further reduced the capital investment required for infrastructure and development projects that Brazil required to pick itself out of the monetary crisis.
The Brazilian political system is plagued by politicians who do not aim for economic stability but merely run a system of vote buying. They are fundamentally corrupt and profit off the public through scams and scandals which ultimately drain the economy. Brazil, which overthrew military rule in 1985 resorted to a votes-for-cash system that was adopted by politicians. This system endangered the economy as scams and scandals rocked the foundations of the Brazilian economy. This system was once again adopted by the Rouseff government with its vote bank politics which lacked fundamental economic backing.
The Brazilian economy also has a large number of pensioners which do not add to the productivity but add more and more pressure on the already faltering economy. As of 2018, there are nearly 27 million pensioners in Brazil, which makes up 13.1% of the Brazilian economy burdening the Brazilian economy which comes under the low income category. The average real rise in pensions has increased almost 90% over the last 10 years according to OECD reports. The average income as of 2017 is R$935 which classifies Brazil in the low income category of countries furthering the burden of the pensioners on the economy. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. By 2014 the government was running a primary deficit (ie, before interest payments) of 32.5 billion reais ($13.9 billion)
(The economist, 2016)
The Brazilian economy also hosted the Olympic games in 2016 as well as the FIFA world cup in 2014. These tournaments require a massive capital expenditure to build stadiums and infrastructure facilities for athletes burdening an economy which is already in a state of turmoil.
Brazil’s projected budget for hosting the World Cup is $13.3 billion and $18 billion for the Olympics (not counting the projected amount of public and private investment that will be needed before). The problem is that based on recent games, the World Cup generates approximately $3.5 billion in revenue (with most going to FIFA) and the Summer Olympics generate around $5 billion (with most going to the IOC). Simple arithmetic says that the games will be net losers for the host country unless the host makes up the difference with increased income from tourism and investment during the games or—as a result of the games—in the future.
(Zimbalist, 2011)
Another major reason for the Brazilian economy crashing was the Petrobas scandal commonly called ‘Operation Car Wash’. The extent of this scam was not felt just monetarily, ex-president Lula da Silva, who had kept Brazil on a path of economic stability and growth along with president Dilma Rouseff who were believed to be untouchable were convicted in the scandal. Operation Car wash, so-named from a car wash in Brasilia that was used to illegally clean and transfer money. Since the scheme came to light in 2014, it’s reported that large construction companies in Brazil overcharged Petrobras—a state-owned oil company—for contracts and the money that was later given to Petrobras executives and politicians. A total of R$30 billion ($8.9 billion USD) was laundered, leaving a devastating effect on the Brazilian economy.
(Brown, 2017)
Dilma Rouseff further lowered tax rates on essential commodities such as food, gasoline and services such as transportation. This further reduced the government income of an already overburdened economy. The new interventionist approach that the Rouseff government adopted in all sectors of the economy cause disruptions in all industries from banking to road and railways.
Consequences
The Brazilian GDP fell from 2.45 trillion US dollars in 2013 to 1.8 billion US dollars in 2014. Th inflation rose 6.5% and in 2015 averaged to 9.1% despite being much higher at different points in the year. This was mainly due to two reasons. The first being that Brazil is over dependent on foreign nations. Brazil is rich in iron ore, gold, crude oil, chemicals and other large number of minerals found naturally in its land mass. The largest exporters of crude oil crude oil were China and US. The Brazilian economy exports about 43% of its crude oil to China, thus making it over dependent on the Chinese economy for its exports according to OEC reports. The Chinese economy faced a slowdown in demand thus impacting the Brazilian economy whose number one export is petroleum. On top of this already lingering crisis, the slowdown and drop of other commodity prices further extended the impact of this crisis. The drop in exports resulted in large scale unemployment in Brazil. As a result investments declined by 10.2%, major industries such as agriculture fell about 7.5%, the services sector also declined by 3.5%. The Brazilian economy lost almost 2.8 million jobs across all sectors of the economy.
Except for electrical energy, gas and sanitation, both industrial (manufacturing plus mineral extraction industries) and construction sectors continued to register high negative growth rates. While the construction industry continued to contract in the end of 2016, the manufacturing sector, which together with the former could be the main drivers of Brazilian economic recovery, signalized, at best, that it has already reached its bottoming out point, as discussed earlier.
(Nassif, 2017)
| 2012 | 2013 | 2014 | 2015 | 2016 | |
| GDP | 2.49E+12 | 2.45599E+12 | 1.80221E+12 | 1.79628E+12 | 2.05359E+12 |
| GNI ($) | 12,360 | 12,810 | 12,100 | 10,160 | 8,930 |
| real gdp growth | 1.8 | 2.7 | 0.1 | -3.1 | -1.2 |
| potential gdp growth | 3.1 | 2.9 | 2.6 | 2.1 | 1.9 |
| inflation (average for the year) | 5.8 | 5.9 | 6.4 | 9.1 | 6.7 |
| inflation (end of the year) | 5.6 | 5.8 | 6.5 | 9.4 | 4.9 |
| unemployment | 5.5 | 5.4 | 4.8 | 6.7 | 7.2 |
| Fiscal balance (per cent of GDP) | -2.3 | -3.1 | -6.2 | -7.4 | -7.2 |
| Primary balance (per cent of GDP) | 2.2 | 1.8 | -0.6 | 0.1 | 0.7 |
| Current account balance (per cent of GDP) | -2.2 | -3.4 | -3.9 | -3.4 | -2.7 |
| Labour productivity | -0.47 | 1.39 | -0.88 | -3.3 | -0.8 |
(world bank, n.d.) (data.oecd.org, n.d.)
| 2000 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Agriculture | 2.7 | 5.8 | 5.6 | -2.5 | 7.9 | 0.4 |
| Industry | 4.4 | 10.4 | 4.1 | 0.1 | 1.8 | -1.2 |
| Services | 3.8 | 5.8 | 3.4 | 2.4 | 2.5 | 0.7 |
| Private consumption | 4 | 17.8 | 6.6 | -0.6 | 6.1 | -4.4 |
| Public Consumption | -0.2 | 3.9 | 2.2 | 3.2 | 2.2 | 1.3 |
| gross Fixed investment | 4.8 | 17.8 | 6.6 | -0.6 | 6.1 | -4.4 |
| exports | 12.9 | 11.7 | 4.8 | 0.5 | 2.1 | -1.1 |
| imports | 10.8 | 33.6 | 9.4 | 0.7 | 7.5 | -1 |
The Brazilian economic crisis also caused an even larger divide in the budgetary deficit of the country. The deficit reached almost 6 billion reais which estimates to about 2 billion USD at the start of 2016. This is the second reason why the Brazilian GDP fell. This was due to the tax exemption that the Rouseff government enforced on various commodities. The Rouseff government sapped tax collection along with the internationl market slumping This was particularly bad for the economy as the government is spending more than it receives. The spending is further finances by borrowers which increases the government debt. In the Brazilian case, the deficit was financed by selling government securities which raised the interest rates in the economy making borrowing for the everyday individual tougher.
Conclusion.
The Brazilian economy faced a crisis which was primarily self-induced due to errors in macroeconomic policy formulation throughout the 21st century causing stagflation.
The overdependence on foreign nations and lack of political stability in Brazil were major causes of the crisis. The impeachment of Dilma Rouseff further added to this widespread economic crisis that prevailed in Brazil. The crisis that took place in Brazil is a wonderful example of the importance of not having a lax fiscal policy as well as the importance of independently manufacturing within the country and not building the economy in a way that it is dependent on external market forces. Economies should be built on strong foundations, with external factors playing a minimal part in the economies vitality. The Brazil crisis showed us that all economies no matter how big have certain fundamental flaws which can be exploited through impractical economic decisions. The case in Brazil created a foundation for other economies such as India to follow with the ‘Make in India’ initiative which aims to bloster local production and prevent India from global dependence.
Bibliography
ZIMBALIST, A. (n.d.). Americas Quarterly.
Zimbalist, A. (2011). Americas Quarterly. Retrieved from https://www.americasquarterly.org/zimbalist
The economist. (2016, january 2). Brazil’s cris irredemable? the economist.
Brown, S. (2017, May 9). Brazil’s Economic Crisis: 6 Things You Need to Know. Retrieved from Culture Trip: https://theculturetrip.com/south-america/brazil/articles/brazils-economic-crisis-6-things-you-need-to-know/
Nassif, A. (2017). An analysis of Brazil’s economic situation: 2014-2017, the short-term outlook and policy alternatives. Rio: BRAZILIAN KEYNESIAN REVIEW.
world bank. (n.d.). Retrieved from World Development Indicators: https://databank.worldbank.org/reports.aspx?source=2&country=BRA
data.oecd.org. (n.d.). Retrieved from OECD data: https://data.oecd.org/price/price-level-indices.htm#indicator-chart
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