The Brazilian Economic crisis of 2014

The Economic Crisis of Brazil, 2014

The 2014, Brazilian Economic crisis has reached social, political, and economic domains. Meddling with the fiscal monetary policies along with political instability due to Petrobras scandal has caused such a big impact that it will be remembered for generations together as it has made a mark in the history.

 REASONS FOR THE 2014 BRAZIL'S ECONOMIC CRISIS

Brazil has the 9^th largest economy in the world, yet Brazil had fallen short of capitalizing on its own potential. The major factors that led to this were:

1.     Political instability

2.     Macroeconomic policy mistakes

Political instability:

It is important to understand the politics of Brazil to understand the economics of Brazil. Prior to 1985, brazil was ruled by a ruthless dictatorship. Eventually people came out and there was an election held. Mr. Lula De Silva was elected as the president in the elections. He was the founding member of the workers party due to which he favored social norms which covered education, workers rights and natural resources allocation. He also sought to emulate policies of successful nations like china which were growing rapidly. Under the presidency of Mr. Lula De silva, the country was building industries, exporting resources, upskilling workers at an unprecedented rate. Brazil saw a period of concentrated economic growth. The growth rate increased by 500%. Lula became a popular figure, and enormous wealth was pouring into the economy. His presidency ended in the year 2010, after which came the turn of a new decade, which hit the Brazilian economy very hard.

After 2010, the Brazilian economy was hit hard, this was majorly because of the Petrobras scandal. Petrobras was a semi state owned enterprise that is responsible for the majority of Brazil’s oil production. It was a bug business which involved a lot of money coming and going out. But this business was not given a lot of oversight. An investigation campaign called the ‘Operation Car Wash’ which was started in 2014, found that government officials were getting huge sums of money as bribe to vote to award lucrative Petrobras contract to questionable businesses. After over four years of investigation, the campaign found out over $2.5 billion worth of funds have been misappropriated. On further investigation, it was also uncovered that Petrobras has paid over $12 billion to corrupt contractors.

The return on investment for this business was pretty high, but it didn’t do great for the nation as a whole. This was because, oil revenues bankrolled the social policies that people of the nation had started to take for granted. If oil money ran dry, then so will the quality of their life. There not many socialized services anymore. These were some driving factors for the election of Jair Bolsonaro as the subsequent president for Brazil.

Macroeconomic Policy mistakes:

We saw how the Petrobras scandal had impacted the economy significantly. However, there are allegations that one of the primary reasons for the economic crisis was internal. The collective macroeconomic measures which brought the downfall of brazil was referred to as the New Economic matrix. These policies were majorly used in Dilma Rousseff’s (president of brazil from 2011 to 2016) two terms of presidency until she was impeached in 2016. The Matrix, included fiscal and monetary policies such as such as subsidized loans through the National Bank of Development (Banco Nacional de Desenvolvimento, BNDES), control of the interest rate by the Central Bank of Brazil, and other instruments mainly used to stimulate the economy, at first, in a short-term perspective, but which later on became the symbol of Dilma’s economic policy.

Prior to the World Financial crisis of 2008, the Brazilian economy was doing pretty well with a forward-looking monetary policy and the income and the investments of the economy was also rising. When the financial crisis of 2008 hit the world economy, in order to adapt to this crisis, the Brazilian government under the presidency of Lula, decided to use the state owned banks, especially the BNDES  (Banco Nacional de Desenvolvimento) as a major medium to bring in credit expansion in the economy. With the introduction of such a monetary policy, the economy seemed to be doing well in the short run with stable price inflation and an economic growth. When Dilma Rousseff came into power, they made a decision to intensify this existing policy by incorporating some Keynesian instruments of economic growth as well. This made up the New Economic Matrix. The New Economic Matrix was mainly focused on low interest rates, cheap credit provided by state-owned banks, devalued exchange rates and increased import tariffs.

In 2012, the government imposed some restrictions on private banks as well to maintain low interest rates for the public and the government also imposed lower tariffs on the transmission companies on their upcoming contracts. Moreover, the state-owned Petrobras company was compelled into maintain artificially low prices for gas and petroleum throughout the whole country. All this only made the country fall into a deeper and more grievous debt.

Such policies showed clear cut signs of a nearing economic recession in 2014, if the government continued with them and made no efforts to rectify it.

HINDRANCES FOR ECONOMIC GROWTH IN BRAZIL

Brazil’s geographic conditions does not favor economic activities so much. The country is surrounds and covered by mountains and it becomes difficult to construct ports to facilitate economic activities. This puts the Brazilian exports in a major disadvantage as it makes them more expensive even for low priced marginal commodities. Its city centers are confined to tiny flats plains which means that the living conditions become very dense. On top of this the entire nation is covered by the amazon rain forest. This forest is not only hard to work with logistically, but also it is protected internationally. Hence the country finds it hard to connect its major trade cities as the dense jungle separates them and also making it harder to navigate it. This hinders in having large scale infrastructure. Industries like mining and farming require large scale infrastructure. Moreover, infrastructure is very much important to attract foreign capital investment into the country.

CONSEQUENCES OF BRAZIL’S 2014 ECONOMIC CRISIS

 

1.     Unemployment:

A   The unemployment rate from 6.4% in in January 2104, to 13.2% in December 2017. The unemployment rate has risen by 6.8% over the span of three years which is an average increase in the unemployment rate by 2.2% every year. This massive amount of unemployment in the economy would have definitely depressed the country.

2.     Income inequality:

The Gini index is a tool to measure the income inequality of a nation. According, to the World Bank estimate, the Gini index of Brazil in 2011 was 52.90%, in 2014 it was measured at 51.50% and at 2015 it was, 51.30%. From this data we can see that the income inequality has been gradually decreasing. The income inequality has decreased by 1.6 from 2011 to 2015. This may be the result of the expansionary fiscal policy and monetary policy adopted by the government.

3.

 

 

 

 

 

 

 

GOVERNMENT INTERVENTIONS

1.     On 13^th December 2016, the 95^th constitutional amendment was approved by the Brazilian Federal senate, which limited the government’s public expenditure for the next 20 years, that means till the tear 2036, they will have a limit in their spending.

2.     On 31^st march, 2017, under the presidency of Michel Temer, the outsourcing law was passed. This law allows the businesses to outsource their employees even for primary activities rather than only secondary activities like cleaning or maintenance. This law encourages companies i.e. employers to employ more people at the same time make it more convenient for them.

3.     On 26^th April 2017, the bill for the labor law reforms of 2017 was approved by the chamber of Deputies. This bill made some changes like for example, the 30 days’ vacation that a laborer can take can be divided into 3 periods now, earlier it was only 2. There is also flexibility in the hours of work of the laborers. These changes encourage more employment and could help the economy to come out of recession.

BRAZIL’S CRISIS IMPLICATIONS ON THE IS-LM MODEL

Some major reasons for the crisis was the high expansionary fiscal policy that was adopted by the Russeff’s government between the year 2012 to 2014 and the drastic reduction in the interest rates from 12.5% in the year 2011 to 7.25% in 2013.

We know that when there is an expansionary fiscal policy, the IS curve shifts to the right. Hence. the output in the economy increases. As we saw above, the income inequality did reduce. Similarly an reduction in the interest rates, increases the money supply in the economy as the savings will be channelized into investments. So, an expansionary fiscal policy as well as an simultaneous expansionary monetary policy will lead to an increase in the nominal output as the increase in output maybe due to the increase in prices primarily.

To counter the crisis, the government limited its spending in the long-term thereby shifting back the IS curve to the left. Hence, the economy could go back to its original state before the introduction of such policies.

CONCLUSION

 These policies were at the expense of the governments treasury, the government was falling into deeper debt. The introduction of such policies made the people of Brazil habituated to it and therefore, the economy faced a crisis when the government could no longer support it.

Brazil’s short and troubled histories contains many lessons for the other nations to learn from its mistakes from political instability or the introduction of policies without thinking them through.

 

References

1.     COHN, J. (2012). Employment and Development under Globalization: State and Economy in Brazil (International Political Economy Series) Retrieved from https://books.google.com/books/about/Employment_and_Development_Under_Globali.html?id=sjK9xH6p_4IC&printsec=frontcover&source=kp_read_button&redir_esc=y#v=onepage&q&f=false

2.     LEANDRO, D. (2018). The Effects of the “New Economic Matrix” Policy on the Brazilian Economy (2010-2016) Retrieve from

https://www.hse.ru/en/edu/vkr/219184388

3.   

      ANDRÉ, N. (2017). An analysis of Brazil’s economic situation: 2014-2017, the short-term outlook and policy alternatives. Retrieved from https://www.scielo.br/scielo.php?pid=S0101-31572020000100068&script=sci_arttext