Introduction
Brazil is one of the fascinating developing economies, which economic and social progress over the period of 2003-2014 lifted over 29 million people from extreme poverty. Based on the World Bank (2015) statistics, the inequality rate in the country fell by 11% with the income level of the poorest 40% of the population rose by as much as 7.1% over the same period. At the same time, global financial crisis and political instability in the country over the past few years have had its negative impact on the economy as a whole, reflecting stagnation in inequality reduction and deterioration in the situation in some of the poorest regions in the country.
Starting in 2014, Brazil entered a deep recession, where the country’s growth rate decreased from 4.5% in the period 2006-2010 to only 2.1% in 2014. This along with political crisis, developed in the country significantly undermined the confidence of domestic consumers as well as international investors. Coupled with the commodity price drop in the recent years and the reevaluation of the country's position in international investment attractiveness index, Brazil will see a number of challenges in the years to come.
The reaction of the government to the economic challenges resulted in a number of macroeconomic measures, such as ambitious fiscal consolidation plan, rigid monetary exchange rate policies to control inflation and the real exchange rate. Given the internal political polarization of the country, the reforms only partially passed in congress. The medium and the long-term outlook of the country therefore will depend on the success of the current policies and the ability to address the productivity and competitiveness to boost the economic growth (Gregoriou, 2009).
Production and Output Performance Analysis
The real Gross Domestic Product (GDP) is defined as an inflation-adjusted measure that aims to reflect the comprised value of all the goods and services, produced in a given country in a given year of analysis. The real GDP is measured and expressed in base-year prices and, thus, often called an "inflation-corrected" GDP. Real GDP per capital is anther measure, which uses the total real GDP divided by the total population of the country. This measure is widely used to compare the performance of different economies, utilizing the relative performance of the countries (Brezina, 2012).
The real GDP measure is used to evaluate the real economic growth of the country over a given period of time. This measure has expresseda a percentage of change in real GDP and adjusted to inflation. Real GDP and real GDP per capita are effective relative performance measures, allowing evaluating the improvement in economic growth and the trends (Brezina, 2012).
Real GDP Analysis
The below table reflects the real GDP growth of the country, outlining the above-discussed deterioration of the country's growth rates and the issues in an internal economic situation. With the strong dependence on the commodity prices and the great share of agricultural export in the development of the production output in the country, it is expected that the following years will continue negatively affect the major economic indicators in Brazil.
*Source: The World Bank (2015)
Based on the country’s outlook, it is possible to observe the change in real GDP per capita, reflecting the challenging economic and political situation, through which the country is going.
*Source: The World Bank (2015)
Given the situation, the balance of trade of the country has suffered significant variations, reflecting general instability in the country. While the country ran regular trade surplus since 2003, the income comes primarily from mining and agricultural activities. 2013-2014 had the trade deficit, affected the internal crisis and the lack of confidence from external investors and buyers. Hakim (2016) attributes the return to surplus, seen in the following years to the overall reduction of domestic demand for imports and the weaker real exports, reflecting temporary and unstable nature of this recovery.
The reality of the past decade demonstrates strong dependency of Brazil on the international demand for commodity products, which the country exports in large quantities. With the skyrocketing imports of commodities by the major developed economies, Brazil benefited from artificially created demand boosted Balance of Trade (BoT) figures, in spite of the general reduction in economic growth.
Governmental Measures
It is evident that the change in the political leadership of the country has had the tremendous impact on the measures, taken with regards to control and optimization of production output in the country. The analysis of the economic measures, taken during Lula's government outlines a typical situation when the governmental spending increasing along with the booming economy with the lack of focus on the future sustainability of the economy. The result of such measures led to the significant adjustment in the balance of payment current account of 4.3% and the 30% depreciation in Brazilian real (BRL). Current measures (UNIDO, 2005).
Ferrari and De Paula (2015) note that the entire period of the "leftist" government in the country can be divided into two parts: 2003-2006 and 2007-2014.While the first period reflects the focus on maintaining the inflation, fiscal surplus, and flexible exchange rates. At the beginning of this period, the ratio of GDP improved, followed by the beginning of deterioration as a result of the poor structural monetary and fiscal policies. The second period under Dilma Rousseff introduced structural measures of addressing the stagnation of the economy and as a response to the global financial crisis. The purpose of the fiscal measures was to reduce the fiscal surplus and expanding public investment and social protection programs. With the expansion of the counter-cyclical and expansionary monetary and fiscal policies, such as tax reduction and increased spending,the government sought to increase competitiveness. The political instability prevented these measures from being fully implemented until today.
Labour Market Analysis
Unemployment Defined
Unemployment is defined as the situation in which individuals, actively searching for a job, cannot find occupation. Unemployment is one of the important indicators of the economic health of a given country. The unemployment rate, therefore, reflects the total number of unemployed people divided by a number of people in the labor force in the country. While there are many variations of the unemployment rate, some of them are widely accepted by the majority of the countries as a common measure of economic stability. Frictional, cyclical and structural unemployments are the critical elements and measures for the country. Frictional unemployment is the type of unemployment that occurs when individuals take longer than usual time to move from one job to another. This type of unemployment is generally short-term as the workers are able to find the new job within a limited period of time. Cyclical unemployment occurs due to variations in the economic profile of the country. As such, the recession placed pressure on the employment market, while economic growth builds up a number of new jobs. This type of unemployment reflects the recovery and temporary nature of recession in the country. Finally, structural unemployment is the situation when the labor market has access supply of workers under the conditions when there are not enough jobs available and the wages do not decrease to bring the situation to equilibrium (Pedersen, 1987).
Types of Unemployment in Brazil
Brazil has been suffering from the unemployment challenges for the past decades due to many reasons. Job inequality and insufficient income became central to the economic reforms in the country. With the recovery of the economy in 2003-2007, Brazil managed to reduce the structural unemployment, but the rate of improvement was not fast enough to significantly change the situation in the country. Some of the major measures, such as a liberalization of the corporate law and the reduction of the wage taxes for micro and small businesses in the country have had the positive influence on the employment profile of the country.
While the unemployment rate has reduced from 11.2% in 2003 to 8.5% in 2014, it is evident that the country reached the limit of growth and many analysts argue that the structural unemployment will become severe in the next few years due to significant reduction in domestic demand for goods and the lack of governmental measures to control the wage rates, positively affecting employment. One of the important indicators of the structural issues in the labor market is the growing level of unemployment in the major metropolitan areas in the country. In 2006 the rate of unemployment in Sao Paulo alone reached alerting 20% with the average number of the major cities being 9.2% above the average for the country of 8.3%. This type of unemployment is a result of the seasonal demand in the capitals during the holiday season. Due to the high population numbers, seasonal unemployment in the country is one of the major issues and will continue placing pressure on the governmental policies, due to expected growth of 15% over the next five years. At the same time, Economy Watch (2016) outlines the signs of improvement, based on the fact that over 15% of the population is involved in industries and urban employment will continue improving due to the service sector growth in the country and the recovery of the trade balance.
Price Level Analysis
Inflation Defined and the Cause of Inflation in Brazil
Inflation is the rate, which measures the general change in the level of prices for goods and services in the country and the consequent drop in purchasing power of a domestic consumer. More specifically, the increase in inflation drives the reduction in purchasing power of the unit of currency.With that in mind, Federal Reserves use the inflation data for core industries to measure the inflation. Monetary policy is often aimed at controlling the inflation rate by setting stable long-term interest rates, improving unemployment rates and maintaining the price stability in the country.
When it comes to the analysis of the inflation in Brazil, it is important to look at the longer period of time to evaluate the effectiveness of the governmental measures with respect to the above factors. The below table demonstrates the change in the rate of inflation during the period in analysis:
*Source: The World Bank (2015)
While the interest rate did not suffer significant change over the period of 2007-2014, the overall rate of 6.4% builds on the challenges in domestic consumption and purchasing power of the poorest population in the country. The historic inflation in Brazil demonstrates the inflation trend in the country have been running above target over the period of 2006-2014, the end of Lula's government and the entire presidency of Dilma Rousseff. Malinowski (2015) notes that the prices increase well above the target of 4.5% set at the beginning of Rousseff's term when the six out of eight target group of products still experience inflation of above 8%. The service sector, representing 70% of the country's economy, however, shows the signs of stability with the inflation rates stable over the past 2 years (BCB, 2016).
Governmental Measures to Achieve Stable Price
Brazil's government outlines the weak currency and high government-administrated prices, such as water and electricity costs, as the major causes of the fast inflation over the past ten years. The deficit of the Rousseff's government drove radical policies with regards to the increase in the government-regulated prices, especially in energy sector. This policy had a tremendous impact on the inflation rate and caused criticism from various groups of the population. At the same time, the government announced in 2013 that it would save less money to interest rates payment, which placed significant pressure on consumer confidence and the created further price pressure (Manilowski, 2015).
The past years monetary policy, targeting inflation rates demonstrate that the Brazil's Central Bank's primary policy is to maintain the stability of the SELIC interest rate at 14.25%. With that in mind, the inflation remained elevated over the past five years and the deepening stagflation is predicted by the major economists due to the inefficiency of the current monetary measures. The point that should be made here is that the shift from tight fiscal policy, adopted by Lula's government at the beginning of the term to the countercyclical measures and increased governmental spending and the lowering of the interest rates in the past years rendered temporary results. The economy saw dramatic recovery from negative 0.9 growth in 2009 to the positive 7.5% in 2010. These measures, however, proved to be much less effective without the impact of recovering commodity prices in the long term. In 2011-2013 the central Ban was successful in keeping inflation under control, but still above the target, mainly by implementing rigid exchange rate policy, keeping the rate of domestic currency under strong management (Loman, 2014).
Conclusion
In conclusion, it is important to outline the influence of global financial crisis and internal political volatility in the country on the economic situation in the country. It is evident that the development of Brazil’s economy over the period 2003-2014 have suffered dramatic change from rapid and promising growth and inequality reduction to the period of stagnation with significant loss of confidence from external investors in the recent years. Much credit should be given to Lula's government for the reduction in unemployment rates and overall levels of poverty. Countercyclical monetary and fiscal policies, implemented under Rousseff's leadership, on the other hand, can still render expected results. The success of these measures, however, will depend on the ability of the government to pass the reforms through congress. One of the critical contributing factors to the relatively low impact of the international crisis on the local economy and the ability of the government to maintain the inflation under control is the skyscraping demand and increase in price for commodities, which constitute a large part of Brazil's export. The impact of the commodity prices on the economy and the reduction of the positive GDP growth trends along with stagnation in unemployment reduction, however, demonstrate the insufficiency of the current monetary and fiscal policies in the country.
References
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