An Overview of the Economy of Brazil

Question: Discuss about the Overview of the Economy of Brazil. Answer: Introduction Brazil, a country that is mostly covered by the amazon, is the fifth largest economy in the world and the largest in the Latin America. It has a population of over 200 million people, who live mostly along the coastline of the Atlantic Ocean. The economy is bigger than that of all the countries in South America because it has established large and well-developed sectors that include agriculture, mining, manufacturing, and service provision sectors. Furthermore, its working middle class is expanding at a fast rate(Ellis, 2012). The presence of Brazil in the international market has been expanding rapidly. Due to the steady improvement in the stability of its economy, Brazil has experienced macroeconomic growth characterised by increase in foreign reserves and reduction in foreign debt by relying more on the domestic borrowing. In fact, in 2008, Brazils debt was awarded the investor grade and Brazil is now considered a net external creditor. Context Between 2003 and 2014, Brazil experienced social and economic growth that resulted in reduction in inequality and more than 29 million people were elevated from poverty(World Bank, 2017). During this period, income for the entire population grew steadily by a rate of 4.4%. In real terms, income attributed to 40% of the poorest people in the economy grew by an average 7.1%. Despite these steps, since 2015, the economy has stagnated in reducing poverty and inequality levels remain high. The nation achieved universal coverage in elementary education but is now facing challenges in improving the quality and productivity of the education system. These challenges mainly affect both the lower and tertiary levels of education. Brazil is undergoing a deep recession now. Its economic growth rate has been reducing consistently since 2010. In 2006, the country had a strong growth of an average annual growth rate of 4.5% up until 2010. However, in 2008, the global financial crisis hit the economy hard. Global demand for Brazilian exports fell and eternal sources of funds dried up. In 2010, Brazil recovered from the crisis and was among the first emerging economies to begin recovery. Investors and consumers revived their confidence leading to the GDP to grow to a rate of 7.5%. This has been the highest rate the country has been able to achieve in the past 25 years. However, this rate fell to 2.1% by 2014. In addition, the GDP has been reducing in the past two years. In 2015, the GDP fell by 3.8% and was followed by another decline of 3.6% in 2016. Several factors have led to this decline. These factors include high inflation rates, low productivity that is characterised by high costs of operation, depending heav ily on raw commodities exports, and high, persistent inflation rates, and low investment levels ("Brazil Economy - overview - Economy", 2017). With its population of over 200 million, the last records of the GDP per Capita in brazil were at $7627.67 in 2015. This GDP per capita equals to 88% of the global average. Brazil achieved an all-time high of $11797.45 in 2013(World Bank, 2017). Unemployment is continually increasing in Brazil. The unemployment rate was at a high of 11.9% in 2016. This translated to an increase of 33.1% from 2015. Unemployment is worst in the capital Rio de Janeiro forcing the public employees to rely on government handouts. Currently, the unemployment rates in Rio are at 11.7%, while that of the entire nation is 11.4%. Most of the sectors that have been largely affected by the unemployment are agribusiness, manufacturing, construction, and professional services including finance and real estate (Rapoza, 2017). In 2015, the government implemented tight monetary policies and elevated the interest rates in a bid to ease inflation. It realigned prices and passed through the depreciation of the exchange rate causing the inflation rate to peak at 10.7% in December. This was way above the upper limit of the governments target of 4.5 2%. Presently, the inflation rates have decelerated. The rates fell to a low of less than 6% in 3 years. This made the bets on the market stronger hence a high reduction of interest rates by 75 basis points by the central bank. It is expected that by June 2017, the inflation rates should have gone to the governments target of 4.5%. This will enable policy makers to reduce the target for the first time in more than 10 years ("Brazil Economy - GDP, Inflation, CPI and Interest Rate", 2017). Monetary policy is the main tool used to ease inflation in the goods and service provision sector. After President Dilma Rouseff was impeached in August 2016, the vice president Michel Termer took office and directed the policy makers to look for monetary and fiscal adjustments that would restore investor confidence and ensure that the environment was conducive for investment. This move has however faced challenges and opposition. The difficult political environment and a rigid budget has undermined the modifications on the fiscal policy. There is no way to reduce public expenditure because of the rigidity of the bind by the constitution and other legislation. This imposes a burden of payment on the subnational government exposing them to a risk of insolvency. International trade is of great significance to the economy of Brazil although trade and investment face challenges in bureaucracy and regulation. The sum total of the value of imports and exports accounts for 27% of the GDP. The government applies an average tariff of 7.8%. The government plays an important role in the diverse and competitive financial sector and 50% of funds in the private sector are financed by public banks ("Brazil Economy - GDP, Inflation, CPI and Interest Rate", 2017). The economic crisis that Brazil is facing has led to major changes in the BOP current account. In response to the reduction of the GDP in 2016, the current account deficit fell to 1.6% of the GDP. This was a significant fall when compared to the 4.3% deficit that was recorded in 2014. By the end of 2015, 135% of the current account deficit was funded by direct foreign investments thus accounting for 4.2% of the GDP. Brazils Economy Outlook Putting in place growth enhancing changes the success of the adjustments that have been put in place will determine the outlook of the medium to long-term economic advancements. The drivers of growth have been stunted in the past. These drivers such as expansion of labour and commodity boom, and consumption that is fuelled by credit availability are important for the advancement of the economy. It is important that the government increase investment and gains from productivity in the effort to raise competitiveness and achieve growth in future. The government is seeking to reinforce the economy and the workforce in particular in the long run. To do this, it has imposed local content and made it necessary for foreign businesses to transfer technology. In addition to this, further research is being done in energy, healthcare and technology, with further investment in education through programs such as Bolsa Familia and the Brazil Science Mobility Program(World Bank, 2017). Conclusion Brazil has undergone a turbulent economic time in the past. The global financial crisis, economic recession, the political crisis in the country, and a fall in the prices of commodities has made the economy to contract sharply. These events reduces the confidence of the investors and consumers in the economy. High inflation rates, a wide deficit in the budget and balance of payments accounts, and political paralysis have compromised the fiscal and monetary policies in the country leading to a heavy burden of public debt. There is an excessive interference by the state on the economy coupled with poor and inefficient service from the government. Despite these challenges on the economy, the future looks bright if the reforms are successful. 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