In our quest to know more about the macroeconomic policies in detail of one of the
emerging economies, we have selected Brazil as the country to dwell more into. Although
the study list is an exhaustive one we nailed down on four key aspects we thought would
help us in this study. We define those key aspects as CCCF which resounds the erstwhile
CCCP. They are Capital Flows, Competitive advantage, Communication and Fiscal policy
(synonymous to Politics is many aspects). The history and other aspects of Brazil would be
covered in each of the parts based on the relevance.
Brazil’s achievement of macroeconomic stability and its success in strengthening its flexibility to
external shocks help explain the growth of the country’s attractiveness as a destination for foreign
The Brazilian economy has been open to foreign capital inflows since a long time now. In fact it is of
significance importance to the country has the domestic savings only account of 20% of the total
GDP. The economy of Brazil has grown from 3.2% in 2005 to 6% till June 2008 but its current account
as a percentage of its GDP has shrunk to a deficit of 1.2% from a surplus of 1.6%.
Brazil continued to have foreign inflow growth through the year of 2000 despite the Asian crisis of
1997, the Russian crisis of 1998 & the Brazilian crisis of 1999. But it started seeing a turnaround from
the year 2001 with the shrinkage of trade & investment flows due to a world economic slowdown
with the Foreign Direct Investment (FDI) inflows reaching a new low in 2003 at US$ 10.1 billion. But
this slightly improved in the year 2004 only to see it fall again in 2005.
The net FDI liabilities reached $328.5 billion in 2007 which was as much as 1/3rd of its gross external
liabilities. The increase of FDI inflows coupled with the increase of outflows of the income has seen
to have a relation with the non-resident investments. The outflows had almost doubled from 2005
as compared to the previous years, touching $11 billion. Since then Brazil has seen an upward trend
and has also resulted in the appreciation of Brazilian real (BRL).
This growth in the domestic market along with the predictability of policies has made Brazil an
attractive place for the foreign investors and thereby resulted in increased foreign capital flows.
The increased flows have also been largely due to the increased mergers and acquisitions which
have taken place in Brazil. It has been observed that since the privatization process in the second
half of the 1990’s the number of mergers and acquisitions have substantially increased. But in spite
of this increase these inflows have not contributed significantly to the development of new
Thus since the change in the economic policies in the second half of 1990s Brazil has seen immense
flexibility in its financial sector. The macroeconomic stabilization along with higher inflation had led
to the rapid growth of the country. The country has seen strong inflows on account of increased
exports and imports which have led to trade surpluses contributing to the growing trends.
These growing inflows combined with decrease in debts have changed the capital structure of the
balance of payments of Brazil. The country has overall reduced its risk through its public sector
developments. Therefore these developments will make the economy stronger and sturdy which will
result in making it more resilient to shocks due to external factors.
Tax rates Fiscal Policies Government
Blast from the past
Politics and fiscal policies go hand in hand, hence the political winds of change Brazil has gone
through is of prime importance. It had a democratic stint and a military regime from the 1950’s to
mid 1980’s. The kind of growth Brazil achieved by a mix of higher exports and protectionism (Import-
substitution industrialization) was enviable. The country used to achieve consistently nearly 7.5%
growth. During this high growth phase there was a period of five years when Brazil experienced
stagnation in the growth. This led to some of the important reforms in Brazil which included the
creation of BACEN (central bank).
Since the high growth phase had its cons and one of that was the overvaluation of its currency. The
currency which was pegged to dollar had overvalued and this affected the exports. The only measure
to undervalue the currency then was to increase the money supply which led to the hyper inflation
which hit the spine of the economy of Brazil. The 1980’s period is also known as the lost decade in
Brazil because of stagflation.
Since then a slew of measures including the real plan of 1994 helped the economy sustain and
withstand many crisis which hit the world economy since then.
Tastes of Today
The present fiscal policy is an expansionary one. The government set out a new policy initiative in
January 2007 which was nearly 3 billion USD and would increase to around 5 billion USD. The
investment is planned by mainly through tax cuts. The primary concentration was infrastructure
development and housing. This coupled with rising commodity prices was helping Brazil in growing
at a sustained rate of 4.5-5% and increasing their surplus till 2008, however this downturn has cut
that growth prospects to nearly 0.5 percent. Since the interest rates were high in Brazil a lot of carry
trade also helped bolster the economy of the country. Brazil is able to keep the neck out of water
and achieve some positive growth is only because of the sound economic policies of the government
led by Luiz Inancio Lula Da Silva.
The current Forex Reserve of Brazil is a sound 200 billion USD which helps in providing a cushion for
the government to roll out expansionary fiscal policies which can help the country tide over this
recession. As always the only fear in infusing more fiscal spending is the threat of Inflation. Brazil
was wrecked during the hyper inflation period and under the Lula governance the inflation has come
down and has been stable around the 4 – 5 % mark which is a healthy rate.
"'In this world nothing can be said to be certain, except death and taxes."-Benjamin Franklin
Brazil follows a progressive tax system wherein the individual tax rates vary between 0% and 27.5%
and is based on the income levels. People with an Annual income less than BRL 15764 are exempt
from taxes and henceforth progressive. Tax deductions are directly from the salaries. There are
several types of deductions like payments for educational expense, pension plans etc. In the wake of
recession Brazil has taken proactive steps in cutting tax rates where tax on financial transactions was
cut from 3% to 1.5%. Income taxes were also lowered and the costs of these cuts were estimated to
be 0.5% of GDP.
The nominal budget deficit for the year 2008 fell to nearly 1.2 percentage of the GDP. The debts
which were accumulated might not be wiped out as soon as the government had predicted when
the going was good due to the current situation. Government expenditures are on the rise in Brazil
since the public payroll bill has been escalating ever since. This would only add to the woes of the
government in the wake of this recession.
Fantasies of the Future
B for basement
If the B of the BRIC stands for Brazil in the books of Goldmansachs then one could also consider the
B as basement. Hence for the success story to continue a proactive fiscal policy is imperative Brazil
could infuse a lot of government spending in to the economy by means of fiscal stimulus. Lula is a
proactive president and in the wake of the current recession Brazil might have to pull up their socks
if they have to sustain their growth story. The government could bail the country out by means of
infrastructure spending which would mean that the economy would get a boost if Keynes equation
of aggregate demand is considered. The income levels would rise which means there is a chance of
inflation in the long run.
A suggestion to the government would be to increase the individual tax rates from the present
27.5% to nearly 40% by introducing another slab of income tax rates. Since it is progressive the levels
of income and slabs could be increased as a strategy so that Government could increase its
revenues. This would ensure that the disparity in the distribution of income comes down and also
the government can reduce the fiscal deficit they would encounter by infusing more fiscal spending.
In the long run as the economy revives Brazil would be better off following Keynes advice of levying
higher tax rates so as to reduce the deficits which was a nightmare for them in the 1980’s.
Stability in the Government is also an important factor to be considered for a stable macroeconomic
policy. The growth story would be better off if Brazil gets a single party majority to rule the
government. The present story is quite different since Lula who is a proactive president is unable to
Brazil contributes to more than 45% of IT markets in Latin America. This number is projected to grow
at a rate of 11 percent for the coming years. It can be said that Brazil has a very diverse market with
expenditures evenly segmented in the software, hardware and the services sectors. The south of
Brazil is one for the fastest growing region and it can be said that it is prospering due to various
incentives by the Brazilian government. In contrast, the northern Brazil contributes only 8.3 % of the
In 2007, around 20 percent of Brazils IT spending was on financial sector, and most of this was
invested into banks. Brazil also has a huge market for mobile phones, with 3 of the biggest players in
the mobile phone market being foreign investors. It has 143 million mobile phone subscribers, ad
this number is growing steadily. Also, several broadband operators and fixed lines are also owned by
Brazil is in the process of expanding IT in various segments in a big way. In 2009, a 300,000 PC units
tender will be implemented which will be used in the education sector. The government has special
facilities through which teachers and schools are eligible for easy financing when they buy laptops or
other PC equipments. Also growth in the consumer segment for PC and laptops is expected to be
stronger due to a wide array of financing schemes and flexible payment options. In general, Brazil’s
economy has shown a considerable growth in finances for IT products and services.
Currently Brazil is 12th positioned in the software development and services sector. Although
software piracy rate in Brazil is very high, there are some stringent anti-piracy laws in place due to
which this industry is beginning to gain grounds in Brazil. There are around 8000 software companies
in Brazil, but most of them are small and mid-sized companies, and none of them have an
The market leaders in PC hardware in Brazil is the local company Positivo Informatica and it owns
around 15% of the market share. As a matter of fact, it sold more than twice the number of units
sold in 2008 by its closest competitors Dell and HP. Philips is also planning to invest into the Brazilian
IT market with its line of notebook computers. As the PC penetration is limited to below 25 percent
currently, there is a lot of scope for growth in this sector over the coming 5 years in Brazil. It is
estimated that currently there are around 30 million PCs in Brazil and this number is expected to
grow to at least 100 million in the next decade.
The tremendous projected growth in the PC industry is also reflected number of broadband
subscribers. The number of broadband subscribers is expected to grow to 22 million in the next 5
year. With the various applications requiring higher and higher bandwidths, the operators are
constantly challenged to offer high speed connections to the consumers. Due to this stiff
competition, fixed line operators are also encouraged to offer better and more competitive services.
Brazil has more than 40 million Internet users which is around 20 percent of Brazilian population.
This number is expected to increase steadily over the next few years. The government has also
started a lot of projects which are aimed at increasing the population of internet users.
The Brazilian economy is expected to grow at 3 percent despite the current economic crisis. The
electronic industry is expected to grow at an even better rate because of the increase in competition
and the favorable exchange rate. As a result of the infrastructure projects announced in recent
times, the generation, transmission and consumption of electric energy is expected to grow over the
years. The employment trend in this sector is also stable with 166,000 employees in this segment in
the current year.
Some of the key market indicators in Brazil are as follows:
• The PC penetration rate is below 25 percent and the government has plans of equipping all
the elementary schools with computers – this shows that there is a lot of scope for
expansion in this sector.
• The government has a Growth Acceleration Plan (PAC) through which US$ 23 billion will be
invested on science and technology.
• There is a very competitive scenario between fixed-line and mobile wherein both seek to
remain ahead of each other through investments and providing new services.
• Telecoms regulator is looking at ways of accessing Brazil’s more remote areas with
CDMA450 networks are being used to provide access to Brazil’s more remote area by the
• There is plenty of opportunity for growth in broadband market – the penetration in 2008
was 5 percent.
One of the major sectors which has potential for growth in IT and telecom services is the banking
sector. This is because of the scope of growth in the wide portfolio in terms of branches, ATMs,
internet banking etc. Technologies like IP-based solutions, digital signature, WLAN, and mobile data
transmission, has found enormous potential in specific market segments, and is expected to raise
the overall level of technology investments by the Brazilian financial market.
The PC market leader in Brazil Positivo is expanding and the growth is expected to continue
extending its reach to the retail segment and the SME segment. IBM is the leading company and has
the largest market share in the IT services sector.
The mobile operators have a challenge to reach to new markets by extending their subscribers by
reaching into the rural market by providing new services. Vivo, TIM and Claro are the top three
operators and Oi is expected to experience a significant gain in terms of market share.
The world’s tenth largest economy Brazil is the largest and most populous country of South America.
Brazil has today emerged as one of the fastest growing countries in the world, and stands as a part
of BRIC nation fueling world growth. Till 1985 Brazil was under military rule until 1988 when a new
constitution was ratified, and biggest challenge for the country that time was to arrest
Hyperinflation and advance reforms to liberalize
Till 2003 Brazil has huge external debt and Inflation rate, but today it has been able to arrest both
External debt to GDP Ratio and Inflation. Brazil emerged as one of the visionary nation of the world,
and it first focused on macroeconomic stability as pre-condition for growth. Today, the
macroeconomic conditions of Brazil are more favorable then they have been for decades. Some of
the key macroeconomic conditions favorable for Brazil as compared to other BRIC (Brazil, Russia,
India and China) are –
• Inflation is stabilized at 4% since 2006
• Huge forex reserve of $203 billion USD as of Mar-2009
• Unlike other BRIC nation, Brazil don’t have any serious disputes with its neighbors
Brazil biggest strength is commodity trading ranging from Beef to Soybean. Today Brazil economy is
regarded as Investment grade economy (credit Rating of BBB-) driven by diverse range of economic
activities such as agriculture, industry and a multitude of services. The opening of Brazil economy
after formation of federal republic in 1988 was a turnaround for Brazil success. Brazil maintains good
trade relationship with United States, China, Germany and Argentina.
Competitive Advantage of Nations Diamond Model
Let’s now use Porter’s Diamond model to analyze the competitive advantage for Brazil. Comparative
Advantage factors for Brazil are as follow –
Land- Occupying more than 50% of South America, Brazil is the fifth largest country in the
world. It has diverse topography, including hills, mountains, plains and scrublands. Brazil
occupies area along the shores Atlantic Ocean, with continuous supply of water and acting
as hinterland for trade activities.
Location – Brazil due to its location and different time zones is rapidly emerging as a global
offshore service destination.
Natural Resources- Perhaps the biggest advantage for Brazil over other nation is its natural
resources. Brazil is a natural resource rich country. Brazil exports with little effort export
around $90million worth of pine every year, and still around 600 varieties of palm trees -
source of fiber, sacking, fuel, cattle-feed and oils stand unused. Other natural strengths of
Brazil are Iron ore, Bauxite, Rubber and Seafood. Brazil soil is so rich that it can grow any
crop, with potential to make Brazil world greatest agriculture nation. Currently, Brazil is
major exporter of Coffee, Soya bean, Rice, Tomatoes, jute and cotton. Brazil grows more
banana and Pineapple than any other country of the world but export very little (a untapped
area for Brazil to focus)
Labor – With huge population base and Brazil provides cheap labor to develop economies of
the world. Labor in Brazil is cheaper than most of European and North American countries.
Demography – Brazil population is a diverse mix of all races and ethnic groups. Genetically,
most Brazilian has some degree of European, African and Amerindian origin. Such a wide
diversity provides Brazil a comparative advantage over other nations.
Above factors are of no benefit for Brazil, if they are not used for competitive advantage over other
emerging countries having similar comparative advantage. Today Brazil Government and Industry
are working together to establish competitive advantage for Brazil.
• Factor Condition- Skilled Labor, Capital, Infrastructure facilities along with comparative
advantage factors acts as a specialized factor for growth. And as Brazil has started investing
huge on education, Infrastructure etc, these specialized factors are providing Brazil a
• Demand Condition- Due to growing consumerism and education, people of Brazil have
become more informed and demanding. And so the industries are under high pressure to for
innovation and high quality products.
• Related and Supporting Industries- Major Industries in Brazil are automobiles, steel and
petrochemicals, accounting one-third of Brazil’s GDP ($1.9 trillion). All these industries are
related to abundant supply of natural resources of Iron ore, Bauxite, Rubber etc.
• Firm Strategy, Structure and Rivalry – Brazil firms have today become more informed and
structured. Today Brazil has the second most advanced industrial sector in American sub
continent. Brazil has highly diversified and sophisticated service industry with intention
The government of Brazil with help from International agencies such as IMF and World Bank are
fueling the growth of Brazil by investing big time on infrastructure and education. Moreover, trade
liberalization policy since 1990, along with large devaluation of BRL twice in 1999 and 2002, has
helped Brazil to maintain competitive advantage in the world market.
Brazil exhibits a competitive advantage in many fronts. Of course, this is a non-exhaustive list, but
some light is shed upon on some of the fronts below
(1) Agricultural/Farm produce
(2) Automobile industry
(3) Possession of a Strategic Satellite Launching Centre
(7) Forestry Products
(1) Agriculture/Farm produce
Brazil is a major producer and exporter of agricultural/farm produce such as sugar, soybean, orange
juice, coffee, beef, chicken etc. Brazil has a major competitive advantage on export of these products
owing to country’s core competency in agriculture, and its dependency on agriculture for
development of the country. The government backs the country in promoting food production with
credit, research and extension programs8. Further the abundance of land, availability of a favourable
climate, availability of cheap labour and the abundance of water, and fertile soil all contribute to
greater volumes of production. Brazil also extensively makes use of new technology in agriculture to
achieve increased productivity. Let’s analyze its position with respect to other countries in the
production and export of some of these food produce.
Brazil is 2nd in place in terms of soybean production and exports only to the U.S. The pie chart below
illustrates the soybean production percentage of Brazil for 2008.
Brazil leads in world sugar production and export. The pie charts below depicts Brazil is 1st in
ranking when in comes to producing and exporting sugar in 2007/2008.
Brazil is ranked 1st in the production and export of orange juice. The graph below shows the
comparison with its’ closest competitor U.S.
Brazil is the 2nd largest producer of beef in the world, but ranks 1st in the export of beef. The graph
below shows the comparison between four countries.
Brazil rank no. 1 in world’s coffee production and export. The graph below depicts the comparison of
Brazil with its’ closest competitors.
(2) Automobile industry
The auto car industry in Brazil has attracted has attracted ten largest car manufacturers in the world.
This is because of the conducive government policy that attracts many automobile manufacturers
into the country. The availability of cheap labour is also another driver for the foreign automobile
investors to expand into the Brazil’s auto industry. Another important factor is the huge population
and the associated buying capacity of the people.
For the period 2004 to 2007 Brazil’s vehicle production has increased, and by 2007 Brazil has
becomes the 07th largest vehicle manufacturer in the world.
The main reason for foreign automobile giants to setup manufacturing plants in Brazil is that in
1990’s Brazilian government eliminated economic restrictions by opening up the economy.
Production of cars in 2003 in Brazil stood at 1.72 million out of which 1.23 million is for domestic
requirement. Brazilian auto industry follows the Order To Delivery (OTD) strategy to maximize
customer satisfaction thereby increasing its competitive advantage. They also practice supply chain
optimization strategies for achieving economies of scale.
The domestic automobile market is Brazil is growing due to its’ economic stability, growing
economy, and access to favourable credit. However, the outlook for exports in automobile industry
is not promising because of the current economic crisis.
The growth of the export of automobiles in Brazil from 2000 to 2007e is given by the following
(3) Possession of a Strategic Satellite Launching Centre
Brazil has in possession of a strategic Satellite launching centre named Alcantara Launch Centre
(ALC) which is a unique launch pad for satellites. Its strategic location makes it attractive for mant
countries around the world to launch satellites. Its strategic importance comes from its locality, i.e.,
being the closest launch centre to the equator. It is the best location among the other launch centres
in the world. Due to its nearness to the equator the advantages gained are rapid orbit entry and fuel
savings. Additionally, the climate at the site also is a plus point for its operation. The location can be
accessed by both sea as well as air making it attractive for many countries to request the services of
ALC for satellite launches. Because of its strategic location ALC has attracted many satellite launches
from NASA, Russia, China etc. It is the only satellite launch pad in the Southern Hemisphere. Brazil
plans to upgrade ALC into an International Rocket Launching Centre. The many successes that ALC
has had in the past have made it possible to explore space research. Brazil hopes to launch its first
satellite rocket in 2011.This will open up its possibilities to enter into “Orbital Tourism” thereby
obtaining a competitive edge to earn more revenue to the country.
Brazil has been able to diversify from commodity-based and agricultural sectors to entrepreneurship
and innovation, which has given Brazil to become competitive in an emerging economy. To illustrate,
Brazil is going ahead with flex-fuel vehicles based on ethanol. Brazil produces more than 33% or
world’s ethanol and this is a classis example of Brazil innovation and entrepreneurship. This effort
can also be seen as an effort for use of renewable energy due to the scarcity and also the
environmental impact of fossil based fuels.
Even though, not falling to the top ten mostly visited countries in the world Brazil attracts many
tourists. In 2008 alone, Brazil attracts 5.2 million visitors. It is the sixth largest tourism industry in the
Americas. The reason for attraction of such amounts of tourists is that Brazil offers a lot of
attractions to the tourists such as historic and cultural tourism, ecotourism and adventure travel.
The competitive advantages for attracting tourism are attributed to natural, cultural, and human
resources that Brazil possesses. Brazil can progress still better in its ranking by developing the
information and communication technology infrastructure, land transport infrastructure, and
Brazil has a extremely sophisticated technology industry, and is the second most industrialized
nation in the Americas. Some of the most prominent industries in Brazil are petrochemicals,
automobile, cement and construction, banking, electronics, food and beverages, mining, textiles,
consumer durables, space research, submarine, and tourism. The reasons for the vast development
of industry are that talented workforce, abundant resources, government backing, improved
lending, innovation, and so forth.
(7) Forestry Products
Brazil has the third largest remaining forest frontier in the world. Brazilian Amazon forest provides
the largest stock of forestry products. Brazil forests are rich with timber, gums, resins, waxes,
cellulose, nuts, fibres, etc. Brazilian wood is of highest quality in the world which is its competitive
advantage in the wood industry. Brazil exports value added products such as lumber, hardboard,
Ranking Economy millions
1 States 13,811,200
2 Japan 4,376,705
3 Germany 3,297,233
4 China 3,280,053
5 Kingdom 2,727,806
6 France 2,562,288
7 Italy 2,107,481
8 Spain 1,429,226
9 Canada 1,326,376
10 Brazil 1,314,170
11 Federation 1,291,011
12 India 1,170,968
13 Korea, Rep 969,795
14 Mexico 893,364
15 Australia 821,716
Soybean production in the world
2008 2007 2006 2004
Million Millio Million Million Million Million Million Milli
Bushels Metric Bushels Metric Bushel Metric Bushel Metr
Tons Tons s Tons s c
United States 2,677 72.9 2,585 70.4 3,188 86.8 3,141 85
Brazil 2,241 61 2,241 61 2,057 56 1,947 5
Argentina 1,697 46.2 1,727 47 1,617 44 1,433 3
China 514 14 525 14.3 595 16.2 661 1
India 342 9.3 342 9.3 268 7.3 220
Paraguay 250 6.8 257 7 173 4.7 140 3
Canada 99 2.7 99 2.7 129 3.5
Other 295 8 301 8.2 365 9.9 426 11
. . . . . .
Total 8,115 220.9 8,077 219.8 8,391 228.4 7,968 216
Soybean exports in the world
2008 2007 2006 2004
Million Millio Million Million Million Million Million Milli
Bushels Metric Bushels Metric Bushel Metric Bushel Metr
Tons Tons s Tons s c
United States 1,161 31.6 1,025 27.9 1,100 29.9 1,100 29
Brazil 932 25.4 1,017 27.7 946 25.8 744 20
Argentina 508 13.8 423 11.5 270 7.4 278 7
Paraguay 187 5.1 169 4.6 121 3.3 77 2
Canada 65 1.8 54 1.5
Other 67 1.8 56 1.5 121 3.3 88 2
Total 2,920 79.5 2,743 74.7 2,558 69.6 2,287 62
World Sugar Production and Exports 2007/2008
PRODUCTION EXPORTS POPULATION PER CAPITA
MILLION MILLION CONSUMPTION
TONS TONS MILLIONS KGS
BRAZIL 31.355  190 58
INDIA 28.804 3.298  1 117 20
EU 17.567 1.400  490 34
CHINA 14.674 - 1 314 11
THAILAND 8.033 5.288  65 36
STATES 7.701 - 301 29
MEXICO 5.978  107 52
SADC 5.834 2.410  157 22
AUSTRALIA 5.013 3.750  20 47
PAKISTAN 4.891 - 165 25
[#] = World export ranking
World Orange Juice Production, Imports, Exports, Consumption
Marketin Productio Total Ending
Country Imports Exports Consumptio
g Year n Supply Stocks
2006/07 10,461 32,500 44,122 1,600 41,500 1,022
2007/08 11,538 30,000 42,560 1,750 40,000 810
2008/09 12,700 29,500 43,010 1,800 40,500 710