Economic Health
Recent History
An economic downturn in the late eighties and high levels of inflation in
the early nineties prevented economic growth, however the “The Real Plan”
instituted in 1994, was an attempt to slow the inflation by pegging the real
to the US dollar. Inflation was curbed, however not fast enough to
prevent the considerable real exchange rate appreciation that occurred during
the transition period. This appreciation caused the price index of
domestic goods to rise in relation to the price index of foreign goods.
This contributed to large annual current account deficits. In spite
of this, foreign capital continued to flow into the country as inflation
rates stabilized and the instability of the eighties subsided. In the
late nineties, the Asian financial crisis and the Russian bond default reduced
the risks that foreign investors were willing to take, causing capital account
surpluses to drop, preventing adequate current account maintenance.
In 1998, Brazil received a $41.5 billion IMF-led international support program
after creating a fiscal adjustment program and promising structural reform.
The real became independent of the dollar in January of 1999, causing devaluation
but moderating the slowdown of economic growth that began in the summer of
1998. Brazil’s debt to GDP ratio was lower than the IMF target in 1999
and economic recovery continued into 2000, with foreign direct investment
running at more than $30 billion dollars. The economy began to
falter again this year, prompting the IMP to pledge the largest government
bailout in history, a loan of $30 billion. The economic troubles in
recent months have been mostly due to international fears that the new leftist
President Luiz Inacio Lula da Silva will reject the free-trade and anti-inflation
policies of the former president Fernando Cardoso. These claims remain
to be either confirmed or disproved as the new president becomes situated,
for presently the future of the economy is unclear.
Position
Brazil’s nominal GDP is currently projected at $650 billion, while its peak
occurred in 19997/98 at $800 billion, prior to the currency crisis of 1999.
Overall, the Brazilian economy is by far the largest in South America, the
second in the Western Hemisphere only to the United States, and second in
the developing world to the People’s Republic of China. It is consistently
listed as one of the ten largest economies in the world.
Currently
Indicators
The growth of the the GDP has fluctuated over recent years, at 3.3% in 1997,
4.5% in 2000 and a mere 1.5% in 2001 (World Bank Group). Current projections
for 2002 lie around 2.3% (Santander Central Hispano Investment).
GNP per capita has fallen in recent times, hitting US$4,740 in 1997, US$3,590
in 2000 and dropping to US$3,060 in 2001 (World Bank Group). The GNP
fell as well from US$776.6 billion in 1997 to US$611.2 billion in 2000 and
all the way to US$528.5 billion in 2001.
*
As of the 1990 estimate, 17.4% of the the population lies below the poverty
line, with an unemployment rate of 7.1% (2000). The tenth of the population
with highest income receives 47.6% of capital earned, while the bottom tenth
receives only 1% (Central Intelligence Agency). This type of wealth
distribution has been a significant contributor to social conflict and the
recent regime change.
Debt
The national debt of Brazil has been a topic of significant controversy.
The debt to GDP ratio rose 26% between 1994 and 2002, with the Net Consolidated
Public Debt of R$708.45 billion, i.e. 56% of the GDP. The majority
of this debt lies in the Net Federal Government Debt (including the National
Treasury and Social Security System) recorded at R$455 billion in May of
2002, 36% of the GDP, but also includes the state and local government debts
at around R$235 billion (18.6% of GDP) and the Net Public Enterprises Debt
at R$27 billion (2.1% of GDP) (Banco Central do Brasil).
*
(Courtesy of The Central Bank of Brazil and Ilan Goldfajn)
Many economist are concerned over whether Brazil can be held accountable
for this debt over the long run, however Brazil states that it has made substantial
reforms in recent years to reduce inflation, stabilize the economy and increase
transparency and debt recognition. Adjustments to the real exchange rate
have been made to improve external accounts, but did produce an increase
in the Debt to GDP ratio, an effect that the Brazilian Government claims
should not reoccur after the initial spike. Apart from these, the government
claims that its current primary surplus of 3.75% of the GDP is high enough
to handle the debt without serious problems, that fiscal discipline has been
achieved at all levels of government (i.e. the federal, state and local governments
are not generating structural primary surpluses), the recent Fiscal Responsibility
Law ensures “a sound and more permanent fiscal regime” (Goldfajn 8) by placing
limits on all government borrowing and a Constitutional ban on any law that
modifies existing financial contracts through forced restructuring are enough
to ensure that Brazil will meet it debt, given the time to do so. Included
below are projections by the Banco Central do Brasil.
*
(Courtesy of Ilan Goldfajn)
Conclusion
The health of the Brazilian economy has been improving by most standards
over the last half decade, however recent political events have cast doubt
over its future. It is the policies and reforms of this incoming government
that will determine the health of the entire Brazilian economy and thereby
the willingness of its people to support conservation efforts in the Amazon
River Basin.
-Solomon Hsiang
group 10
*