Rocking, but not capsizing

Over the last 60 years, the Brazilian trade balance represented, on average, 1.4% of the GDP (year on year) and was not enough to cover international services (both financial and others). For the same period, the average yearly current account presented a deficit (-1.75% of the GDP per year). However, despite the Brazilian economy’s characteristic instability, the trade balance only presented a negative figure for two periods lasting longer than 4 years (as seen in Figure 1).

spacer.gifFigure 1 Share of the Trade Balance and of the Current Account in GDP Brazil, 1947-2008, (Percent)imagem1_512.jpg

During the first period (1971 to 1980), external credit allowed the government to avoid making the necessary adjustment for two oil shocks. The consequence? A debt crisis and deep recession between 1981 and 1983.

In the second period (1995 and 1998), external liquidity allowed for the use of the exchange rate anchor in order to stop inflation. Without a tax adjustment, the result was the collapse of the real, in 1999.

Since 2001, the trade balance has increased and, as a percentage of GDP, peaked between 2004 and 2005. Although it began to fall as a percentage of GDP from 2006 onwards, it remained positive until 2008. At the beginning of its climb, the devaluation of the real (from 1998 to 2003) had a positive impact on the exporting of manufactured goods (Figure 2). From 2004 onwards, total exports benefited from favorable terms of trade and the strong external demand.

Figure 2 Index of the Quantum of Exports of manufactures Divided by the Index of Real GDP, 2006 =100, And Index of the Effective Real Exchange Rate, 2000 = 100 (Depreciation up) Brazil, 1982 – 2007 imagem2_512.jpg

This scenario has changed. The trade balance fell sharply in 2008, due to falling export prices, a reduced global demand and the fact that the Latin American economies, which account for approximately 40% of Brazil’s manufactured goods exports, are also entering into recession.

There is little that the government can do, at least directly, to change this result. Brazil is already more protectionist than the average Latin American country. According to the TTRI – Trade Tariff Restriction Index calculated by the WTO (“World Tariff Profiles 2008”), on a scale of 125, Brazil’s score is 92. Although it enjoys a relatively low maximum tariff of 35%, its average tariff of 12% is higher than the average for both countries in its region, as for those with the same income level. Furthermore, Brazil applies non-tariff measures (quotas, licenses and safeguards) to 46% of its tariff lines. Its OTRI – Overall Trade Restrictiveness Index stands at 20%, contrasting with an average of 12% for Latin America (before measures taken in Argentina in 2008 and 2009), suggesting a regime that is significantly more protectionist than its comparators (except Argentina).

On the other hand, the arguments in favor of interventions that prop up exports are as problematic as those in favor of protectionism. Subsidies give rise to retaliation and result in lobby action and corruption. It is better to eliminate import tariffs than to try to compensate for them with export subsidies.

The government is left with two fronts on which it can act. The first is to improve the business atmosphere. Brazil’s classification (ranked 122 out of 178) according to the World Bank “Doing Business” index is poor because of the difficulties involved in starting and closing a company, as well as problems in ensuring that contracts are followed. The other front depends on international negotiations. Brazil still faces important external barriers. Its agricultural exports suffer from an average tariff of 12.8%, compared to 6.2% for countries in Latin America and the Caribbean and 8.1% for upper middle income countries.

Finally, it is worth remembering that the trade deficits for the periods between 1971-80 and 1995-98 were only made possible because of the available external financing. As external liquidity is still scarce, the current account deficit for 2009 will require the use of international reserves. Will we face new risks in the near future? The first years of the Dutra Government (1946-47) demonstrate that reserves can run out quickly. The Lula Government will have to ask itself what combination of tax and monetary policies will allow for a consistent rhythm of growth, whilst incurring only relatively small deficits, in order to avoid compromising future stability.

11 Responses to "Rocking, but not capsizing"

  1. sage   March 5, 2009 at 5:55 pm

    actually there has been significant improvement in the bureaucracy for starting/closing my humble opinion the govt. really needs to urgently implement a well thought thru comprehensive reform of the tax system/regime. it will do wonders for efficiency/productivity & reducing the ‘custo brasil’.additionally a steady decrease of the selic to below 10%, something that can be accomodated in today’s global financial environment (us – 0.5%, eurozone – 1.5%, japan – 0.25%, etc.)

  2. Guest   March 6, 2009 at 6:46 am

    I agree. But even if the new Tax Reform bill looks good on paper, it will probably fail to pass. Government is lost in the middle of the global crisis.

  3. Carlos   March 6, 2009 at 7:20 am

    recent measures taken by Argentina and Ecuador will change the regional OTRI and make Brazil look less protectionist than the rest of the region.

  4. Rocki   March 6, 2009 at 8:38 pm

    i think the govt. is more scared than lost. they believe tax revenues w/ decline drastically. actually a reform may have the opposite effect. they need to bite the bullet & do it.

  5. Anonymous   March 8, 2009 at 12:57 pm

    Brazil may be better than in the past but it is still extremely difficult to do business here.Taxation is extremely complex and very high. Assessments of overall taxation ignore where the bulk of the burden falls: on small to medium sized businesses.Corruption is still rife within government, the police and the Receita Federal. Workers rights tribunals make human resources a full time legal department. Pensions are generous and paid extremely early (50 year old retirement isn’t uncommon). The legal system does not work, period. Inter-state tax competition makes working across states costly and difficult with the Receita Federal always there ready to fine one if any small error is made. Simply trying to sell goods in another state requires opening offices there!The Civil Police think nothing of asking for bribes to watch your premises. Investment in education is being increased by Lula but not in line with the increase in students. Funding for University research has been cut by 60%. Finding employees with high levels of intelligence, education and motivation has proved extremely difficult and the consequence of errors highly expensive.My business had to pay out £2000 to a cleaner who did not clean properly because on firing her she went to the workers tribunal and argued that because she also cleaned an employee’s flat, one day a week, she actually worked 3 days a week and should be considered full-time.The extent of the worker problems here is demonstrated by the supermarkets who fire cashiers before three months are up and have very few registered workers. Their shops run on students doing ‘experience’.It is no accident that Brazil’s economy is predominantly the sale of commodities. Business costs and risks escalate with wages. The vast majority of businesses are dreamed up in such a way as to try to avoid the risks associated with hiring… and most definitely avoiding hiring anyone expensive. Even farmers refuse to hire farm hands, preferring instead to barter: you milk the cow and you get half the milk.

  6. Anonymous   March 8, 2009 at 1:13 pm

    The levels of bureaucracy in Brazil are infamous. A small business I saw, with a turnover of £300,000 annually, importing Asian tyres had 2 accounts clerks, 1 senior accounts adviser (part qualified), 1 internal accountant (fully qualified), 1 external accountant, advice from an auditor, weekly meeting with a lawyer, and inside help from the father of one partner: the father worked as a senior investigator for the Receita Federal in Minas Gerais. With all that help it still got in a muddle with it’s accounts and folded.Anyone working in the West would think that ridiculous until you learn that a Brazilian business usually has:Internal honest accounts – for the partner running the businessInternal fraudulent accounts – for the Receita Federal, should they turn upInternal fraudulent accounts – for the partner that’s being robbedExternal fraudulent accounts – final year end accountsThat is not the exception… that’s the rule. Any accountant, or auditor, here will tell you. Go to any skilled auditor/accountant here to open your business and they will advise you to do it: “Otherwise you will fail, because your competitors will do it.”

  7. Anonymous   March 8, 2009 at 1:27 pm

    About half of all Brazilian businesses are not even registered and pay no tax. They will not register and refuse to grow to the point at which they would have to because they know they are not capable of dealing with the bureaucracy that would ensue.How is that done? A local farm shop hands the inspector some food and sends him on his way. A restaurant invites him to sit and eat.The Brazilian economy exists at the unskilled, unregistered level, or at the level of Fiat who recently lobbied an exemption to the sales taxes payable when cars manufactured in Minas are sold in Sao Paulo… much to the chagrin of VW.Brazil is not a country to import into because of the small, highly taxed, middle class (sales tax is typically 45%) and the 100% importation tax. Neither is it a country to manufacture in and export out of because of, unless you are Aracruz, or Fiat, and get handed free land and tax exemptions.

  8. Anonymous   March 8, 2009 at 1:38 pm

    The five largest land owners in Brazil stole the land: bribed ownership registration. The two largest offenders have falsely registered over 12 million hectares: that’s significantly larger than Holland and Belgium combined.There is no evidence that the government is doing anything about it. The registrations took place in the 50s, 60s and 70s.Would you invest here with neighbours like that?The Mayor of Piaui recently handed 100,000 hectares of the last vestiges of the Atlantic forest to BioDiesel Brazil, to plant Castor oil plant… but not until they had first given a contract to another company to turn the forest into charcoal. No castor oil has been produced. You can see the hole in the forest via GoogleEarth.

  9. Anonymous   March 8, 2009 at 1:40 pm

    To clarify: the two largest land owners in Brazil stole over 12 million hectares EACH. The other three stole in the region of a further 9 million.

  10. Maria   March 9, 2009 at 7:39 am

    all this comments are much too pessimistic. Brazil’s institutions and government are more solid than those in other Latin American countries (except Chile, of course).

  11. sage   March 9, 2009 at 8:46 pm

    anonymous is obviously a limey w/ bad breath, terrible teeth & no critical thinking, problem solving or business skills. i suggest he go back to limeyland (where he belongs) & continue on his fish & chips diet. i wonder why despite all these problems, brazil’s economy is now larger than britain’s. in his spare time anonymous should practice singing deutsche uber alles!