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The Brazilian Economy

Globalisation is the process of increased integration between different countries and


economies and the impact of international influences on all aspects of life and economic
activity. Globalisation has affected economies in both positive and negative ways. Brazil
is the largest economy in Latin America (which is the second largest merging economy after East Asian
countries). Brazil is linked with Russia, India and china as a member of the BRIC group of emerging
economies which are likely to dominate the global economy in few decades.
Brazil is the worlds forth largest in land are and has a population of 191.6 million people [according to
2008 estimates]. The gross National Income is 662 [US billion according into to 2005], the GNI per
capita is US$ 8230, the GINI index is 50.5 [according to 2008 estimates], the GDP [purchasing power
parity] is $1,837 trillion and the GDP per capita is $9,703 [according to 2007 estimates], the Human
development Index is 0.807 [according to 2007 estimates], the population living below US$ 1 per day is
about 7.5%, the adult literacy rate in 2006 was 88% and the life expectancy rate in 2005 was 71.2%.
The GDP growth rate is 6.3% in 2008, the inflation rate was 4.46% in 2007, the population below
poverty line is 14% in 2008, the labour force was 101.77 million in 2008 and the unemployment rate
was 7.6% in 2008. The table below summarizes the Brazilian economies statistics of 2000, 2005, 2006
and 2007.

Brazils Economic Performance


Population, total (millions)

2000

2005

2006

2007

174.16

186.83

189.32

191.60

1.5

1.4

1.3

1.2

Surface area (sq. km)

8,514.9

8,514.9

8,514.9

8,514.9

GNI per capita, (US$)

3,870

3,880

4,720

5,910

GNI, PPP (l $) (billions)

1,191.80

1,517.56

1,647.50

1,795.65

GNI per capita, PPP ($)

6,840

8,120

8,700

9,370

Life expectancy at birth, total (years)

70

72

72

..

Fertility rate, (births per woman)

2.4

2.3

2.3

..

Adolescent fertility rate (births per 1,000 women ages 15-19)

90

89

89

..

Primary completion rate, total (% of relevant age group)

108

106

..

..

Ratio of girls to boys in primary and secondary education (%)

103

103

..

..

..

..

..

0.6

Population growth (annual %)

People

Prevalence of HIV, total (% of population ages 15-49)


Environment
Forest area (sq. km)

4932.
1

4,777.0

..

..

Agricultural land (% of land area)

30.9

31.2

..

..

Improved water source (% of population with access)

89

..

91

..

Improved sanitation facilities urban (% of urban population with access)

83

..

84

..

1,066

1,122

..

..

1.9

..

..

..

1,894

2,008

..

..

644.4
8

882.47

1067.82

1314.17

GDP growth (annual %)

4.3

2.9

3.7

5.4

Inflation, (annual %)

6.2

7.5

4.3

4.5

Agriculture, (% of GDP)

Industry, (% of GDP)

28

30

31

31

Exports of goods and services (% of GDP)

10

15

15

13

Imports of goods and services (% of GDP)

12

12

12

11

22

22

22

Energy use (kg of oil equivalent per capita)


CO2 emissions (metric tons per capita)
Electric power consumption (kWh per capita)
Economy
GDP (US$) (billions)

Global links
Merchandise trade (% of GDP)

18

External debt, total (US$) (millions)

241552

187301

194150

..

Foreign direct investment, net inflows (US$) (millions)

32,779

15,193

18,782

..

232

196

82

..

Official development assistance and official aid (US$) (millions)


Mortality rate, under-5 (per 1,000)

84

74

72

..

Malnutrition prevalence, weight for age (% of children under 5)

..

..

24

..

Immunization, measles (% of children ages 12-23 months)

73

78

80

Source: World Development Indicators database, September 2008, WORD BANK

From the table above, it can be concluded that over the years the Brazilian economy is improving and
growing at a faster rates.
The main industries in Brazil are iron ore, coal; machine building; armaments; textiles and apparel;
petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics;
food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and
aircraft; electronics; telecommunications equipment, commercial space launch vehicles, satellites, real
state, brewing, tourism.
Exports contribute to about US$ 218.6 billion in 2008. The main exports for Brazil are transport
equipment, iron ore, soybeans, footwear, coffee, autos, automotive parts, machinery. The main export
partners are United States 15.8%, Argentina 9.9%, China 7.9%, Netherlands 5.4%, and Germany 4.7%.
Imports contribute to about US$ 145.7 billion in 2008. The main imported goods are machinery,
electrical and transport equipment, chemical products, oil, automotive parts, and electronics. The major
export partners are United States 11.9%, China 10.6%, Argentina 9,0%, Germany 7,5%, Nigeria 4.5%,
and Japan 4.0%.
Brazil has improved substantially in the past decades, with and average economic growth of 6% in
19960s and 9% in 1970s. In the 1980s, the economic growth in Brazil was affected by the growth of the
Asian economies. In 1990 and 2000 the average economic growth of the Brazilian economy was only
2.2% and which seemed to improve to an average 3.1% between 2000 and 2006. This economic growth
was below the 7.2% average of the developing nations as a whole. The East Asian economies alone had
a growth of 7.7% alone. This growth of the Asian economies compared to the Brazilian economies has
questioned the economic policies adopted by the Brazilian government. The Asian economies focused
on exports led development and the Brazilian economies protected its domestic producers from overseas
competition using high protection policies like tariffs etc. This led to a lack of international
competitiveness among the domestic producers and resulted in a slow economic growth.
The Brazilian government has reduced imports and sought to create an industrialised base. This will
make Brazil more self sufficient. To increase its self sufficiency, Brazil borrowed from foreign countries
to fund its industries. This increase in borrowed fund led to and increase in its foreign debt. When the
interest rates increased in 1980s, this increased the costs of servicing Brazils foreign debt. Since it was
unable to pay its debt, the currency value depreciated. Brazil has reduced its overall debt and shifted a
proportion of its debt from foreign currency dominated debt to real dominated debt. This has reduced the
vulnerability of the Brazilian economy to financial crisis. In recent years the debt level fell, due to the
trade surpluses. The debt level reached 85% in 2002 and fell to 41% in 2006 due to trade surpluses.
Around 70% of the debt is owned to foreigners & is denominated in foreign currency, more than half of
the debt is owned by public sector & servicing the debt costs 5% of GDP, as a result it is vulnerable to
international interest rates.
To increase the attention of foreign investors, the Brazilian government has deregulated most of the
industries, abolished state monopolies and given low inflation as a macroeconomic objective. This has

increases the number of foreign investors in Brazil. The TNCs are important to Brazil as they help
telecommunications, chemical, pharmaceutical, automotive & mechanical industries. The number of
FDIs was about 2.3% of the GDP in 1994-2004. This figure in FDI fell in 2002-2003 due to a slowdown
in the global economy. This fall was recovered and was about $18 billion in 2004-2005, due to an
increase in investor confidence, strong global economic growth & improving sentiment towards
emerging economies.
One negative impact of globalisation is that Brazil currency has been frequently been affected by
exchange rate crisis. The currency crisis was mainly due to the failure of import substitution
industrialization strategy in 1980s, which made the export sector unable to cover the servicing costs of
its foreign liabilities. This led to a downward pressure in the currency and caused investors to pull out
their money.
Because of the very high inflation rates which Brazil had in the 1980s and early 1990s, the country had
to change currency several times: Brazilians were used to dealing with Cruzeiros until 1986; that year, a
change in economic plan changed the currency to Cruzado; Brazilians were introduced to the Cruzados
Novos. In 1990, the Cruzados Novos were retired, and the Cruzeiros were back; in 1993, was replaced
by Cruzeiros Reais. In 1994, after the deployment of a new monetary plan, the new currency, called Real
[plural Reais]. This real plan bought inflation under control and strengthened the purchasing power of
incomes, particularly for low income earners. [Brazil travel, http://www.v-brazil.com/information/
currency.html, accessed on 30th November08].
In 1999, due to the crisis of investor confidence in developing countries made investors pull out money
from the Brazilian economy, these financial outflows put enormous pressure on the Central Bank as it
tried to defend the real, which fixed against the US dollar. This forced Brazil to abandon it fixed
exchange rates & float it currency. The real has depreciated from 2 to 3.9 against US dollars in 2002 and
in May 2007 reached 2.02 against US dollars. This recovery of the real in 2007 was due to the high
demand of Brazilian commodity exports & increased price for these commodities in the global market.
The Floating exchange system has allowed Brazil to accept its currency volatility and allowed greater
flexibility in interest rates and adapt to falling demand for its exports in its global market.
The economic development of a countrys economy is a broad measure of welfare in a nation that
includes indicators of health, education and environmental quality, as well as material living standards.
On of the factors considered in economic development is quality of life and health. Brazils HDI index
[rank 69th in 2004] has outpaced its income per capita [rank 89th in 2004], due to a rapid progress in
economic development. Brazil has a population of 191.6 million people in 2007 and an annual
population growth of 1.2% in 2007. The table below indicates that there is decrease in the population
growth from 2000 to 2007. [Source: World Development Indicators database, September 2008, WORD BANK]
Population, total (millions)
Population growth (annual %)

2000

2005

2006

2007

174.16

186.83

189.32

191.60

1.5

1.4

1.3

1.2

In some rural areas and metropolitan areas, females outnumber males. The 1996 count showed that there
were 97 men for every 100 women and that the total number of women exceeded the number of men by
5 million.
The average age of the Brazilian population has increased as a result of a continued decrease in
mortality and fertility. The proportion of elderly (age sixty-five or greater) increased from 4.0 to 4.2
percent and is projected to reach 9.0 percent by the year 2020. In all regions of the country, there has
been an increase in the number of people of people between fifteen & sixty-four and people over sixtyfour years old. Declines in mortality rate lead to the decline in fertility rate in Brazil. Brazil had a

fertility rate per woman of 2.4 in 2000, 2.3 in 2005 & 2006. The adolescent fertility rate [i.e. births per
1000 women aged 15-19] was 34 per 1000 in 2005.
The death rate started to fall in the 1940s because of the expanding public health system, urbanization,
and sanitation. The crude death rate in 1995 was eight per 1000 people, a notable decrease from the
1960-65 rates of 12.3. This level resulted in an age structure that has relatively younger population. Life
expectancy at birth, which is a measure of mortality that is not affected by different age structures, began
to rise in Brazil in the 1940s. It increased from 70 years in 2000 to 72 years in 2005 and 2006 and is
expected to be 75.5 years in 2020. Life expectancy for women is about seven years greater than that for
men, but this gap is decreasing is decreasing.
Higher life expectancy is strongly associated with higher family income. Mortality is generally higher in
rural than in urban areas, except for the lowest income groups. In the past, the main causes of death in
Brazil were infectious and contagious diseases, especially diarrhoea and intestinal parasites among
infants & tuberculosis, measles, and respiratory diseases as these were brought under control through
better health system, and sanitation. In the more developed regions, diseases such as cardiovascular
disorders and cancer became more common along with external death from violence and traffic
accidents.
Brazil's total fertility rate dropped from 2.4 in 2000, 2.3 in 2005 & 2006 and is predicted to be 1.8 in
2020. The birth-rate began to decline noticeably in the 1970s, as the cost of raising a child increased.
New methods of birth control, primarily pills and female sterilization, became widely available; oral
contraceptives are sold without prescription. Surgical sterilization is carried out by doctors, who are paid
for the caesarean section by the public health system and receive private payment for extra services on
the side.
The number of Brazilian couples opting for sterilization as a means of contraception increased by more
than 40 percent during the 2000-04 period, based on the Demographic and Health Survey carried out by
Bemfam, an NGO. About 65 percent of Brazilian women used contraceptives, which is comparable with
levels in developed countries 44 percent were sterilized.
Abortion in Brazil is significant which is not legal in Brazil. The only cases in which abortion is not
subject to legal sanctions are rape and danger to the mother's life. The practice of unsafe, abortions
explains why Brazil a high maternal mortality rate in Latin America, estimated at 141 deaths per 1,000
births.
In the 1980s, the Ministry of Health included family planning services as part of an integrated women's
health program. However, because of a severe lack of funds, the direct effects of the program were
limited. The 1988 constitution included the right to plan freely the number of children. A Family
Planning Law took effect in 1997 in order to regulate sterilization, making it available in the public
health network but forbidding it during deliveries, as well as provide birth-control alternatives through
the same network.
Brazils population is subject is income inequality. After the election of President Da Silva, the
government policies prioritised to reduce income inequality, by raising the minimum wage and cash
payments to poor families. These changes led to the improvement in Brazils income inequality, with a
4.7% fall in GINI [measure of income inequality] between 200-2006, that is from .596 to .568. The
GINI value is approximated to be .505 in 2008. In 2004 the government merged four income transfers to
family fund and started a zero hunger program give nearly 11.4 million families 95 Reais per month. By
merging the income distribution payments, the governments main aim is to cut resource wastage and
reduce income inequality. The pension system has guaranteed the public workers an annual salary same
as their final years salary before retirement. This pension system costs 5% of GDP and as a result

amendments were done to raised retirement age & introduced tax on pensions on retired public servants.
This amended pension system expects to save 56 Brazilian Reais over 20 years.
Education in Brazil is also subject to great inequalities. Education is regulated by the Federal
Government, through the Ministry of Education. Local governments are responsible for establishing
state and educational programs following the guidelines and using the funding supplied by the Federal
Government. Nearly 5 million children do not attend school between the ages of 7-17 years.
The 1988 Brazilian Constitution states that "education" is "a right for all, a duty of the State and of the
family due to the economic and social changes that have occurred in Brazil in recent decades, parents
now place high value on education for their children.
Fundamental Education is mandatory for children ages 6-14. The only prerequisite for enrolling in first
year is that a child should be 6 years old, but some educational systems allow children younger than 6 to
enrol in first year older students who, for whatever reason have not completed their fundamental
education are allowed to attend, though those over 18 are separated from the younger children. The
Federal Council of Education sets a core curriculum. Brazil has received a 97% enrolment in primary
education in 2004.
Pre-School education is entirely optional, and exists to aid in the development of children under 6. It
aims to assist in all areas of child development. Secondary schooling takes 3 years. Students must have
finished their Fundamental education before they are allowed Secondary education. It is possible to take
professional training along with mainstream Secondary education. Such trainings usually last 2 years
and can be taken during the 2nd and 3rd years of Secondary education. Some Secondary schools provide
professional training in Agriculture.
Secondary education is mandatory for those wishing to pursue higher education. In addition, students
must pass a competitive entrance examination for their specific course of study. Higher education in
Brazil can be divided into both undergraduate and graduate work. University degree is required however
to qualify an individual to teach High School classes.
In 2006 it was estimated that the adult literacy rate was 88% for those above age fifteen & 12% illiterate.
Public universities are free and do not charge tuition, whereas private colleges and universities, which
charge tuition, grew very rapidly to meet the enormous demands of a growing middle class.
Because of the great demand for higher education and the limited resources, both public and private
colleges & universities in Brazil require an entrance examination
According to IPEA study, concluded that four out of ten students dropped out before graduation and that
those who graduated took an average of eight years to finish. Many of these had difficulty paying for
tuition, or living expenses, and many who gave up before graduation realized that they were not being
well prepared for the job market. Graduate study grew rapidly due to this growth, the government
restricted fellowships for university study abroad, which had
made it possible for about 20,000 Brazilians to obtain their
advanced degrees in the United States and Europe.
The environmental problem that attracted most international
attention in Brazil was the deforestation in the Amazon. Of all
Latin American countries, Brazil still has the largest portion (66
percent) of its territory covered by forests, but clearing and
burning in the Amazon proceeded at alarming rates. Most of the
clearing resulted from the activities of ranchers, including large
corporate operations, and a smaller portion resulted from slash-and-burn techniques used by small
farmers.

Deforestation in the Amazon declined forest area from 4932 sq km in 2000 to 4777 sq km in 2005.
There has been a small decrease in deforestation due to insufficient capital, credit. More effective
enforcement of government regulations and bad publicity for large offenders, both of which were
associated with changes in public opinion about the environment, played an important role in reducing
deforestation.
Desertification is another important environmental problem in Brazil. Desertification means that the
soils and vegetation of dry lands are severely degraded. In areas where agriculture is more intense and
developed, there are serious problems of soil erosion, sedimentation of streams and rivers, and pollution
with pesticides. In parts of the savannas, where irrigated soybean production expanded in the 1980s, the
water table has been affected. Expansion of pastures for cattle-raising has reduced natural biodiversity in
the savannas.
In urban areas, at least in the largest cities, levels of air pollution and congestion are at their high with
carbon dioxide emission at 1.9 metric ton per capita. According to many critics, the economic crisis in
the 1980s worsened environmental degradation in Brazil because it led to over exploitation of natural
resources and weakened environmental protection. However, the lower level of economic activity has
reduced pressure on the environment, such as the decreased level of investment in large-scale clearing in
the Amazon. This pressure could increase if economic growth accelerates.
Laws regarding forests, water, and wildlife have been in effect since the 1930s. Specialized
environmental agencies were organized at the federal level and in some states, and many national parks
and reserves were established. By 1992 Brazil had established thirty-four national parks and fifty-six
biological reserves. In 1981 the National Environment Policy was defined, and the National System for
the Environment was created, with the National Environmental Council at its apex, municipal councils
at its base, and state-level councils in between. In addition to government authorities, all of these
councils include representatives of civil society.
In 1992 Brazil played a key role at the Earth Summit, on sustainable development agreements, including
the conventions on climate and biodiversity.
Some of the major environmental projects with international funding were, National Environmental
Plan, which received a US$ 117 million loan from the World Bank, The National Environmental Fund
received US$ 20 million from the Inter-American Development Bank to finance the environmental
activities of NGOs and The Pilot Program for the Conservation of the Brazilian Rain Forests was
supported by the world's seven richest countries and the European Community, which allocated US$ 258
million for projects in the Amazon and Atlantic Forest regions.
Brazil is currently using biofuels and using ethanol as a fuel which is made from agricultural products
such as sugar cane and corns. This was due to the increase in the world oil price and the Government
wanted Brazilian economy to be less volatile to world oil prices. This reduced Brazils oil imports and
ethanol production being environmentally friendlier than oil, reduces the air pollution in Brazil. This
has reduced Brazils greenhouse effect by 30% and reduced respiratory diseases. Eventhough, Brazil has
opted for an environmentally friendly fuel, Brazil has been criticised for its poor infrastructure,
industrialisation and deforestation of the Amazon & Atlantic coast. Nearly 26000 sq km of land was
cleared in 2004 alone, due to political pressure; the deforestation fell by 12000 sq km in 2006. The
pressures from NGOs have resulted in better government policies being implemented.
Brazilian government has relatively slow in liberalising trade flows. Brazil has focused on its domestic
markets that can substitute for the imported goods; this was implemented through tariffs and subsidies.
Since, it kept its import level less, this made it less competitive in the global market & less developing in
the global developing market. Due to its low import levels, the Asian economies that focus on both
imports and exports benefited high level of economic growth compared to Brazil.

Due to the lack of growth in its economy, Brazil implemented strategies to reduce protection policies in
1990s. During 1990s and 2004 the tariffs fell down to 32.2 to 10.8% and quantitative restrictions like
import quotas were abolished. By reducing its protection policies and opening its markets for foreign
markets Brazil, benefited from an economic growth of 10% in 1995 to 25% in 2005. This also has led to
the growth in exports, as it now comprises 13% of GDP in 2007, 15% in both 2006 & 2006 and 10% in
2000. Brazil is still under pressure to further reduce its protection policies. Brazil has loosened its
protection polices without expecting anything in return from other countries. This will give more
bargaining power to Brazil in trade negotiations.
The
Due to the reduction in its protection polices, Brazil has increased its integration with the global market.
This integration has caused its manufacturing sector, to become more competitive internationally.
Brazils export has grown to US$ 137 billion in 2006, 34% in 2004 and a further 22% in 2005, due to its
increased competitiveness. This helped Brazil gain a trade surplus of US$ 46 billion in 2006.
Eventhough, Brazil received a trade surplus; its export level is below other developing countries.
Trade negotiations play a crucial role in Brazils trade against the heavily subsidised agricultural
exporters in the developing countries. Brazil is a supporter of regional economic integrations with its
neighbours and the entire Latin America. It has supported the formation of Mercosur, a union with
Argentina, Uruguay and Paraguay. The trade within the Mercosur members are mostly tariff free and
nearly 14% of the Brazilian exports go to Mercosur members.
Brazils trade prospects lie regional integrations. In 2001, 34 countries in the American continent formed
the free Trade Area of the Americans [FTAA]. This trade bloc was seen as a greater opportunity to
access the US markets. However, Brazil & other Latin American countries are not ready to integrate
without improvement in the agricultural market.
The president of Brazil has used economic policies that target inflation and gain fiscal surpluses and to
encourage business investment with tax concessions and incentives. Due to high level of foreign debt,
the Fiscal Responsibility Law makes sure that fiscal policy is used to reduce the debt level. The foreign
debt has fallen from 59% in 2003 to 20% in 2007. The government is forced to target a primary fiscal
surplus [fiscal surplus before interest payment] pf 4.25% of GDP. This target was exceeded in 2006 as
the primary fiscal surplus was 4.3% of GDP. The increase in minimum wage indicated the Governments
relaxed fiscal policies. Eventhough, the tax rate is high, the government expenditure is high. The tax rate
cannot be increased as he existing rates are high with taxes being 35% of the GDP. The Brazilian central
Bank has used high interest rates to maintain inflationary threats, and has been reduced from 5.5% in
2004 to 4.5% in 2007. in 2004, due to the economic growth, the inflation increased, this caused the
central Bank to raise their overnight cash rate by 3.25 percentage points to 19.75. As the inflation
pressure reduced the overnight cash rate was 12.5% in 2007.
In January 2007, the government unveiled the programme PAC growth acceleration programme. The
main aim of this programme is to raise the annual average economic growth to 5% a yea. This involves a
planned US$ 250 billion in public infrastructure project; stimulate private investment in infrastructure
through tax exemptions and granting government finance help in some areas. This will build up the
Brazilian infrastructure in construction, digital technology, transport logistics and electricity generation,
to stimulate the productivity growth.
JUST a few months ago, Brazils economy was growing at its fastest pace since the
mid-1990s, driven by record commodity prices and record credit growth. The
countrys president, Luiz Incio Lula da Silva, declared confidently that Bushs
crisis in the United States would not affect Brazil. It all looks very different now.
Credit is becoming scarcer and banks more suspicious of each other.

Two of the largest, Ita and Unibanco, announced a merger on November 3rd,
creating a bank with combined assets of 575 billion reais ($263 billion). This will
be the biggest bank in Latin America, the sixth-largest in the Americas and in the
worlds top 20. The news pleased the merging banks shareholders but did not
divert anyone else from the general gloom. In the free-trade zone around Manaus,
in the Amazon, a dozen companies have told their staff to take unpaid leave, the
first time this has happened in three decades.

The problems began suddenly, with a sell-off last month of Brazilian shares and
the currency as foreign investors rushed to cover losses elsewhere, or just went
home. The sell-off triggered unexpected losses on foreign-exchange derivatives
that were meant to limit the exposure of Brazilian companies to currency moves
but have exacerbated it instead. While the real was appreciating these contracts
looked like a fairly safe one-way bet, says Marcelo Carvalho of Morgan Stanley.
Companies got Lula-ed into a false sense of security.
The Brazilian press estimates that some 200 companies hold such contracts. For
many, these instruments at best were peripheral to their business. Some have
already acknowledged big losses. Jitters over how many more will follow, and
confusion over how these contracts will be enforced in the clogged courts, has
spread fear and caused banks to retract lending.
To make matters worse, external funding has dried up. Figures from the central
bank show that credit lines to finance trade, normally considered low-risk, are
running at about half the level of mid-September. There are reports that farmers
are finding it hard to find credit to buy fertilisers and pesticides, which could affect
next years harvest. Furthermore, consumer credit is becoming scarcer as banks
anticipate a rise in bad loans. The monthly payments demanded for everything
from cars to football boots are rising.
The government is no longer saying that Brazil will be untouched by the rich
worlds recession. On October 30th Paulo Bernardo, the planning minister,
confirmed that the government has reduced its target for the primary fiscal
surplus (the difference between revenue and spending before debt payments) for
2009 from 4.3% to 3.8% of GDP. He said this was in order to maintain spending
on infrastructure projects. But the change is unlikely to be sufficient for this

purpose, particularly given that many of the governments plans depend on private
investors being able to raise credit.
The Central Bank has put measures in place to make sure that those who need
access to dollars can get them, while quietly indicating that it has enough dollars
to prevent sudden moves in the value of the real. On October 29th the United
States Federal Reserve announced a deal with Brazil, Singapore, South Korea and
Mexico under which it will provide up to $30 billion to each of them. These steps
seemed to bring some stability to the exchange rate.
Officials have also moved to shore up the banking system. The government has
reserved the right to take stakes in struggling banks, via two big state-owned
ones, Banco do Brasil and Caixa Econmica Federal. Banco do Brasil is negotiating
to buy several smaller banks owned by state governments. Itas merger with
Unibanco will probably trigger a new round of consolidation among private banks.
Ita, which will have a majority stake in the new bank, began to talk to Unibanco
last year, when Spains Banco Santander bought Banco Real from ABN AMRO, a
Dutch bank, turning it into Brazils third-largest private lender. The financial
turmoil accelerated the talks, according to Roberto Setbal, Itas chief
executive, who will hold the same post in the merged bank. The deal may prompt
acquisitions by Bradesco, previously the market leader.
Although credit has been growing fast, it still amounts to only about 40% of GDP
a much lower figure than in developed economies. That is partly because reserve
requirements and interest rates are the highest in the world. Because of past
financial crises, most banks are conservatively run. Brazils economy has been
travelling with the brakes on, says Eduardo Giannetti of IBMEC, a business school.
At times like this that can be an advantage. Big bank failures seem unlikely at
the moment.

The government has used the favourable conditions of the last few years to
improve its finances. The public sectors debt has fallen to less than 40% of GDP,
down from over 60% in 2002. At the same time, the government has retired most
of its dollar-denominated debt. This means that at least currency depreciation
does not trigger fiscal problems.

But companies took advantage of Brazils new-found financial stability to raise


dollar loans and issue bonds abroad, and to load up on derivatives (see chart). The
result is a novelty for Brazil: a financial problem made entirely in the private rather
than the public sector. That is progress of a sort. But it means that investment will
slump. Analysts have slashed their forecast for growth next year to between 2%
and 3%. Even so, many other big economies will fare worse.
Conclusion:
Brazilian economy is one of the fastest growing Latin American economies. Throughout the years,
Brazil has relaxed its protection policies and integrated with many other economies through trade
negotiations and free trade. Globalisation has increased Brazils vulnerability to external shocks and at
the same time helped Brazils economy grow. President Da Silva has reduced the income inequality
within people to a large extent and try reduce the poverty problem. It is expected that Brazil being a part
of the BRIC, will dominate the global economy within 20 years or so.