This represent the first comment over BRIC Economies, analyzing large chunks of their economy, and comparing them among development and emerging nations, with the intention of giving snapshots of the economies, proving their pros and cons, and shedding some light towards potential distortion issues along the real economy.
Brazil it’s poised to take the Latin America light spot, yes, I know that it actually did already, but this is only the beginning as oil investment begins to be poured in the economy and all this during an election year.
Recent Background
Brazil economy soared in 2010, as a relative high taxed economy with lot of financial muscle thru development banks, allow it to use Chinese-like command over loans, to achieve Chinese-like economic growth, while notably constrained due choked port and clogged airports, a sharp rise in it’s currency, the real and some spare capacity in the economy thanks to 2009 slowdown, inflation remained under control in a somewhat high level.
While all this are good news in a crisis frightened world and let investors reap profits from an almost loss-proof market, on the real macroeconomy this it’s worrying.
So far given the point in which the recovery cycle encounters this easy growth did required much less investment and capital, and more re-hiring from the companies boosting consumption and enabling employees to take consumer loans and mortgages, but what about new investment in equipment and machinery and due a high consumption growth imports began to soar, in recents months Brazilian trade balanced shifted towards a deficit again, with commodities prices collapsed from a record high 2008, Commodities makes the bulk of Brazilian exports and a sizable share of the GDP compared with other economies of such size, other disadvantage of Brazil when reviewing the data it’s a low participation of trade as % GDP, this data intrigues me and a lot, as large economies with large populations tend to go a bit closed, to remark my point net exports to Japan are a real engine of growth, but exports remain about 15% of the economy, and remains far below from the German exports amounts, U.S is a well know exporter, but at 1.5 trillion dollars of imports pale in front a total economy of over 14 trillions, on the other had exports remain in the low 10’s compared with the overall economy, Germany remains awfully dependent from the European market, whom sucks the lion share of their sales, and Brazil seem to go the same road.
Seems yesterday when Brazil took a more export like approach, it’s volatile domestic market and cheap currency allowed it’s manufacturers to try out in the international field, while taking over shoes market share in Europe and assaulting the car market in Latin America with a focus on cheap prices and relative good quality, but as the decade past advanced and the commodity cycle progressed, exports zoomed, allowing a change in terms of trade, boosting growth and allowing a revaluation of the Real, this have been deadly to exporters.
“Sir, I see Un-Real prices on my Big Mac¡¡”
The current value of the Brazilian Real, it’s at spitting distance from the 2002-2003 levels, but what this seem like returning to the previous level and so, leaving the sensation that the currency it’s at a fair value, economist may remember if a currency fair value is defined for the inflation differential, such differential remain rather large with it’s main trade partners, Europe, U.S and more recently China, so in fact the currency boomerang-like swing, represents a sharp overvaluation of the currency, this contrast with the Mexican case, which remained more or less trailing the American inflation rate, as result the peso fair value (or PPP), remained rather steady along the decade, and by the time of the Great Recession, actually pushed the peso to subvaluation levels, another hint of this lies in the trade balance, rather small and stable for the Mexican case, while for the Brazilian the sharp rise in prices, allow it to control inflation and help to boost consumption, this actually helped to cut all incentives toward a diverse exports portafolio, and make exporters more likely to boost production at home to met consumption, also less incentives to exports means less pressure to boost technologic content and reach higher quality to be competitive in the markets abroad.
Unfortunately Brazilian policy makers don’t have any pressure to boost reform packages, as long as the economy sustains it’s robust economic path and inflation along the lines the central bank tolerance levels, this kind of reform fatigue may coause economic constraints in a few years, and the real fear is if Brazil can really mimic the oil fund scheme created by Norway, this scheme allows Norway to sterilize the money coming from oil sales, shielding the country from ageing population and financial crisis, Brazil potential fail to build such structure may lead the country towards the so called “Dutch Disease” and leave the nation crimpled by high inflation and deeper dependence on commodity prices.
Sources:
http://ragingdebate.com/economy/big-mac-index-highlights-chromic-under-valuation-of-chinese-currency http://ipsnews.net/news.asp?idnews=50401
http://seekingalpha.com/article/36488-currency-commodities-boost-brazil-s-bovespa-index
http://nationalaglawcenter.org/assets/crs/RL33699.pdf
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