The Economic Activity of BrazilThe fifth-largest country in the world in terms of both area and population, Brazil boasts the largest economy in Latin America and the ninth-largest economy in the world as measured by purchasing-power parity. In recent years, Brazil has developed into an upper middle-income nation and is also the only country in Latin America to be a member of BRIC—an acronym that refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development.
Also known as the Big Four, the acronym BRIC was coined by Jim O’Neill in a 2001 paper entitled “Building Better Global Economic BRICs.” More recently, the term has come into widespread use as a symbol of the apparent shift in global economic power; a shift away from the developed G7 economies and towards the developing world.
To completely understand the economy of Brazil, it is imperative that we analyze a number of related factors, including the country’s economic history, its major economic sectors and inflation, among others.
The Economic History of Brazil
When Portuguese explorers arrived and later settled in Brazil in the 15 century, the native tribes of this enormous region, totaling some 2.5 million people, had lived virtually unchanged since the Stone Age. From Portugal’s colonization of Brazil—1500-1822—until the latter half of the 1930s, the market elements of the Brazilian economy relied on the production of primary products for export. Within the Portuguese Empire, Brazil was a colony subjected to an imperial mercantile policy, which had three primary and very large-scale economic production cycles—sugar, gold and, from the early 19th century on, coffee. Below we will take a closer look at each of these primary exports as they relate to the Brazilian economy.
The sugar industry was established in northeast Brazil in the 16th century and it brought great wealth to the region until competing sources of sugar were created in the Caribbean by the French (Haiti) and the British (Jamaica) in the eighteenth century. The sugar industry consisted of sugarcane plantations and plants for processing the sugarcane into sugar. The sugarcane plantations were worked by slaves brought from the Portuguese-controlled areas of southern Africa, namely Angola and Mozambique.
Naturally, the majority of the prosperity brought on by the sugar boom went for imported luxuries for the plantation owners. In fact, many of these wealthy landowners were so ostentatious that they shipped their dirty laundry to Portugal rather than having it done locally. Thus the wealth of the sugar industry was concentrated in the hands of the elite and very little spread to the rest of the economy. Moreover, because the Portuguese discouraged the development of local industry that would compete with enterprises in Portugal, the prosperity of the sugar industry had little to no effect on the economy as a whole.
Brazil has seen several gold booms throughout its history. The first came in 1698 in the region now known as Minas Gerais, followed 21 years later in 1719 by another in the town of Mato Grosso and then another six years later in 1725 in the city of Goias. In more recent decades, a gold deposit in the region of Serra Pelada was worked by thousands of gold prospectors, known locally as garimpieros.
The collective gold rushes in Brazil all had positive effects on the economy, albeit very fleeting and localized. Like with other large-scale gold finds throughout history, the booms in Brazil were always followed by busts, mostly because the “winners” would take their fortunes out of the area. Usually their prosperity did not spread to the local economy because the gold rushes were in isolated areas inhabited only by the garimpieros. Even if entrepreneurs had been present, most would have been rightfully reluctant to invest capital in an area that could not sustain economic activity for very long. Thus there were no major "spread effects" from the Brazilian gold rushes.
Coffee growing developed in Brazil in the early part of the nineteenth century, but as an economic sector it did not have a major impact until the latter half of that century. Much of the Brazilian coffee industry was centered in and around the capital city of São Paulo, thus catapulting that city into one of the largest metropolitan areas in the world, with a population exceeded only by that of Tokyo and Mexico City. Although slavery had been banned in the country by the time the coffee boom began, the industry thrived with immigrant labor from Europe, supplying much of the necessary manpower.
As time progressed, the enormous coffee boom experienced a major bust, which can largely be attributed to an increasing glut on the market caused by the headlong expansion of coffee plantations. Imprecise planning was also to blame. The four years between the planting of a coffee tree and its production of coffee beans caused planters to typically base their planting decisions on past prices, which were sadly out of date when new production came onto the market.
The economy of Brazil was heavily dependent on African slave labor until the late 19th century. (about 3 million imported African enslaved individuals in total). After that point, Brazil experienced a period of strong economic and demographic growth accompanied by mass immigration from Europe (mainly from Portugal, Italy, Spain and Germany) until the 1930s. In the Americas, the United States, Argentina, Brazil, and Canada (in descending order) were the countries that received the most immigrants. In Brazil’s case, statistics show that 4.5 million people emigrated to the country between 1882 and 1934.
During the 1950s, Brazil developed rampant inflation when the government started printing money to fund the new capital of Brazil—Brasilia. By the 1980s, inflation was completely out of control, at times as high as 80% a month. On many occasions, the government tried to control the inflation by freezing prices or even bank accounts. However, each of these stop-gaps failed, and Brazilians became less and less trusting of their government and their currency.
In 1992, the government of Brazil, now desperate, tried a very unique method to control inflation by slowing down the creation of money, and also boosting faith in the value of their currency. They created a new virtual currency called the "URV", or unit of real value, which was kept stable, even while inflation in the rest of the country was still out of control. Of course, the URV didn't actually exist, and people still used their usual currency of Cruzeiros, but all prices, taxes and currency amounts were listed in URV's. This idea was designed to help people think differently about their money.
By "thinking" in URV's rather than in the rapidly changing Cruzeiros, people began to experience a stable currency. Then, on July 1, 1994, the Brazilian government completely phased out their old, inflating currency and created the Real—a transition that took less than 6 months. Since that time, inflation has been minimal and the country’s economy has grown by leaps and bounds.
The Brazilian Economy Today
With a population of 190 million inhabitants and an abundant store of natural resources, Brazil is one of the ten largest markets in the world, producing tens of millions of tons of steel, 26 million tons of cement, 3.5 million television sets, and 3 million refrigerators a year. In addition, about 70 million cubic meters of petroleum were being processed annually into fuels, lubricants, propane gas, and a wide range of petrochemicals. Brazil also has at least 161,500 kilometers of paved roads and more than 93 Gigawatts of installed electric power capacity.
Here are some other quick facts regarding the Brazilian economy of today:
- Brazil is currently ranked ninth in the world in terms of Gross Domestic Product (GDP)
- Average GDP growth for Brazil overall is 5% (most of that is for the very wealthy)
- Brazil exports 25% of the world's supply of refined and raw sugar products
- 80% of the orange juice produced worldwide comes from Brazil
- Brazil leads the world in soybean production and export
- Brazil also sells significant amounts of chicken and beef to other parts of the world
- Brazil is the 5th largest producer of cellulose in the world
The Bank of Brazil (Banco do Brasil)
The Banco do Brasil, or Bank of Brazil, is the most important financial institution in Brazil and the oldest bank in Latin America. Although the bank falls under the domain of the government of Brazil, it adheres to the international standard of banking and deals in the stock exchange of Sao Paulo.
The Banco do Brasil deals with both government and private sectors of banking and monitors closely the economy and commerce of Brazil. With hundreds of locations throughout the country, customers are provided a wide range of services, including:
- Bill payment services
- ATM services
- Multiple savings account options
- Checking the accounts
- Accounts for investment
- Provision of applying for international credit and debit cards
- Varied range of loans
- Facility of automatic payment
- Account-to-account transfers
- And more
Gross Domestic Product and Brazil
Economists talk often of Gross Domestic Product or GDP, but what does this term mean exactly? Simply put, the GDP is the total amount, measured in U.S. dollars, of the services and goods a country produces. The economic health of any country is determined first and foremost by its GDP, which greatly influences the way businesses behave, the amount of government spending, and even retail sales.
When you translate the GDP, or purchasing power, of the Brazilian economy into U.S. dollars, it currently comes to about 2 trillion dollars. The three major drivers of Brazil’s GDP are the service industry, accounting for 67 percent; industry, another 30 percent; and agriculture, accounting for a very important 4 percent.
Major Sectors of the Brazilian Economy
As noted above, the three most important sectors of the Brazilian economy are the service sector, industry and agriculture. Let’s take a closer look at each of these:
Accounting for almost two-thirds of Brazil’s Gross Domestic Product, the service sector is a major driver of the Brazilian economy. The service sector employs roughly 65 percent of Brazil’s workforce, and includes things such as mail, telecommunications, banking, energy, commerce, and computing.
The major industries in Brazil are centered mostly in the south and southeast, although the northeast has also been attracting new investors in recent years. The industrial sector in Brazil is the most advanced in Latin America, accounting for over 30% of the country's GDP in 2013. There is a wide variety of industries in Brazil, including steel, automobiles, petrochemicals, computers, aircraft, and consumer durables. The increased economic stability in the country has resulted in a boost of international activity, with various multinational businesses investing heavily in new equipment and technology.
The agricultural sector of Brazil is well diversified, with a wide variety of resources, and the country is mostly self-sufficient in terms of food. The country is the largest producer of sugarcane and coffee in the world and also a major exporter of cocoa, orange juice, soybeans, tobacco, forest products, and other tropical fruits and nuts.
In several parts of Brazil, livestock production is also very economically significant and there has been rapid growth in the beef, pork, poultry, and milk industries indicating changes in consumer tastes.
The Agricultural sector of Brazil accounted for nearly 5 percent of the country's GDP in 2013, and employed 20% of the labor force in over 6 million agricultural enterprises.
Economic Inequality in Brazil
Although the economy has experienced significant growth in recent years there remain some glaring inequalities in terms of the manner in which real wealth is allocated. Despite many significant and groundbreaking efforts by Brazil's most recent President, poverty is still widespread in Brazil, and there is still quite a large gap between the rich and poor.
The exact gap between the wealthy and poor in Brazil can be difficult to gauge; some experts say that wealth inequality has increased since Brazil's economy began to grow, while others claim the gap is shrinking. Wealth redistribution programs in Brazil, such as Fome Zero and Bolsa Familia, have helped to bring relief to many of the country’s poorest citizens and have helped them to create a more prosperous life through incentive programs; however there are still many challenges that need to be overcome.
Brazil has made a concentrated effort to improve their system of education, investing half of their education budget toward elementary schools and high schools, with the other half reserved for colleges and universities. Despite these efforts, only a small portion of the Brazilian population pursues higher education opportunities, and an alarming number of students/workers are either illiterate or do not possess a high school diploma.
Like in many developing countries, Brazil possesses an economy that is extremely lopsided, where the wealthy earn 23 times more money than the poor of the country; and where the land is held and controlled by less than 2% of the country's population. This imbalance is quite visible throughout Brazil. Visitors to the country will no doubt witness many instances in which a million dollar mansion is built right next to a favela, or slum-like community, with a wall erected between the two to prevent the wealthy from seeing the blight that exists below.