Tuesday, July 24, 2012

Brazil's current conditions

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Brazils Current Conditions

Table of Contents

1. Introduction

. Current Conditions




Exchange Rates

. Causes of Current Conditions


Stabilization and Reform

The Real Plan

4. The future


5. Conclusion

6. Bibliography


The purpose of this paper is to analyze Brazils current economic conditions using statistical data, economic theory, and implemented government policies. We intend to discuss the current condition of Brazils economy, the causes for its current condition and future projections.

In the early 180s, Brazil had an emerging economy that looked strong and promising. However, looks can be deceiving and they were, for Brazil has failed to become economically strong.

Under a military regime in the 160s, Brazil had a built-in Real depreciation effect. This allowed Brazil to control inflation successfully. However, the oil shocks of the 170s led to a debt crises, extreme inflation and stagnation. In the wake of the debt crisis, many attempts made to stop inflation have failed. Most of the plans introduced new money and higher bouts of inflation followed each of them.

The current plan called, the Real Plan is struggling to accomplish what the other plans have failed to do�stop inflation. The Real Plan has, been a major success in decreasing inflation, and increasing economic activity. Although in 00 it failed to meet its targeted goals due to the confidence crisis and global risk aversion.

Current Conditions


Years GDP growth per capital Year GDP Annual Growth in %

165-7 5. 1 -0.

180- 0. 1 4.5

11-01 1.5 14 6.

000 .1 15 4.

001 0. 16 .5

001-05 1.6 17 .1

18 0.1

1 0.7

000 4.4

001 1.5

00 1.5

00 .8

Source International Monetary Fund


Year Unemployment Rate

1 5.68

1 5.1

14 5.06

15 4.66

16 5.4

17 5.66

18 7.60

1 6.0

000 7.0

001 6.0

00 7.10

Sources ILO. Panorama Laboral, IBGE/PME


Years Inflation%

165-7 0.0

180- 4

1 114

1 48


15 .0

16 .1

17 4.

18 .5

1 8.4

000 7.0

001 6.8

00 8.4

00f 14.0

004f 5.5

Source International Monetary Fund

Exchange Rates

Year Exchange Rate

15 0.8440

16 0.71

17 1.040

18 1.117

1 1.0

000 1.810

001 1.410

00 .610

00 .00

All rates given for the month of Jan with US$ as the base

Source Federal Reserve Bank of New York

Causes of Current Conditions


Brazil was a major importer of oil when the oil shocks of the 170s took place. Domestic price increases for oil did not come at the same time as the external deficits caused by the higher prices. The lack of adjustment led Brazil to finance, using the debt market. After the first oil shock, Brazil might have had a chance to recover. However, when the second oil shock hit the damage became long term as Brazil went farther into debt. With full domestic indexation of wages and the exchange rate, oil price increases became wage increases. The wage increases turned into another and higher round of price inflation. This effect seen by using the wage-setting and price-setting curves, shows that the higher the markup, the lower the real wage will be, implied by price-setting. The graph below shows the lower price-setting line and the adjustment of the wage setting line.

P = Pe ( 1 + ยต ) F ( 1 � Y / L , z )

Using the AS/AD model, we can follow the order of events. The increase in the price of oil, the markup, will lead firms to increase their prices, leading to an increase in the price level, P, at any level of output, Y. This causes the aggregate supply curve to shift up. The aggregate demand curve may shift as a result. The higher price of oil may lead firms to change investment plans. The increase in the price of oil also redistributes income from oil buyers to oil producers. Some of these effects will shift the aggregate demand curve to the right and some will shift it to the left. To simplify our example we have made the effects cancel each other out, thus the aggregate demand curve does not move. The graph below shows the moves up of the AS curve and it shows how the AD curve will adjust so that it returns to its natural state.

Stabilization and Reform

Plan after plan has been implemented to stop inflation. Unfortunately, another round of increasingly worse inflation has followed each plan. Most of the plans introduced new money and all of the plans had a name Cruzado, Cruzado II, Plan Bresser, Summer Plan, Collor Plan, Collor II, and finally the Real Plan, which is currently in place.

The Real Plan

Of all plans attempted, the most successful economic stabilization program is known as the Real Plan.

The Real Plan was established to attain

1. “Deindexation” of the economy through the use of the URV

. A gradual approach to the monetary reform;

. Appreciation of the currency.

The main concern of the plan is to deal with Brazil’s problem with high inflation. The Real Plan was put into use in 14. The plan was first to deal with factors causing a strong indexation, leading to ongoing inflation. The Real, was introduced as a new currency to discourage inflation. No use of price controls or price freezing, were needed The real plan used a combination of domestic, monetary anchors with external ones. The monetary anchors were influenced by higher interest rates and appreciated exchange conjunction with the Real Plan, which is in contrast with previous failed plans. A gradual depreciation of the currency was used to stimulate economic activity. At the launch of the real plan interest rates dropped to %! Interest rates have continued to stay below 10% since 16. This reduction of interest rates has expanded economic activity.

In 00 problems have occurred in the domestic financial market, public debt management, and a steep decrease in foreign credit flows. These problems are associated with the confidence crisis. This has negatively affected the inflation and the level of activity. The shock of the confidence crisis was felt much larger than expected by Brazil.

Graph Exchange rate depreciation and Inflation in 00(will have Ryan do)

To overcome this shock the goal of the monetary policy in 00 is to continue a path back to that of the previously given, Real Plan, but adjusting the targeted goals over a longer period of time..

To maintain this plan in the future, objectives for the Real Plan include inflation on a downward trend, long-term sustainable growth in output, investment, and employment and productivity, and a steady and substantial reduction of social imbalances.

The Future

Brady Bonds

To better Brazil’s current and future debt Brady bonds are being used. Brady bonds are a system of dept relief by swapping old loans for new loans. The Brady Plan was introduced in 18 by Nicholas Brady. The plan consisted of asking banks to forgive part of their loans to debtor countries in return for limited guarantees of repayment. These would be financed by the World Bank and the IMF. To partake in this, debtors would be required to participate in policies favoring private investment. Brazil’s Central Bank was involved in the Brady plan. In 001 they found $18. billion in outstanding bonds that would be eligible for the swap. These new loans would mature in 04.


In 18 Brazil was handed $41.5 billion as a life-preserver. They failed to use this money to the best of their advantage causing a confidence crisis. In August 00, Brazil was given $0 billion from the IMF to get them back on their feet and improve confidence in the markets. This is the last of the money the IMF said they would give Brazil until they can take control and stabilize themselves. To exercise future use of the IMF stabilization needs to occur in the areas of inconsistent currency management, accounting and reserve management, and poor debt management.




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