CASE STUDY: THE BUSINESS ENVIROMENT OF BRAZIL: NAVIGATING THE FINANCIAL CRISIS
Brazil is the largest country in South America, covering around half of the total surface area of the subcontinent. It shares borders with every other South American country except Chile and Ecuador. The population of Brazil is estimated at 190 million. Brazil ranks fifth in the world in size and population. Discovered in 1500 by the Portuguese, Brazil gained independence in 1822. Upon becoming president in 1994, Cardoso began a program of combating inflation and his policy of economic openness attracted foreign capital to Brazil which resulted in rise of GDP. Under the Lula’s presidency, successor of Cardoso, Brazil was once again on track and he established a track record of fiscal responsibility, strong macroeconomic policies and meaningful structural reforms.
In the early 2000, a Goldman Sachs economist dubbed Brazil to be one of the “ BRIC” ( Brazil, Russia, India & China) nations as the economies of these countries were growing so rapidly that he predicted they had the potential to become the four most dominant world economies by the year 2050. But by 2008 Brazil was in the mid of global financial crisis and its growth was slower than the other three countries. Also, it was clear that Brazil could not isolate itself from the global happening events and was losing the ground as by the end of fourth quarter its economic results were the worst in a decade, its industrial output plunging, unemployment was spiking and overall GDP growth contracting. Despite this the Brazilian President Lula was optimistic and confident enough that Brazil “has every chance of coming out of it more quickly”.
But with the negative growth forecast for 2009, the question which remains to be answered is whether Brazil would be ever be able to realize its full potential and establish itself as a stable, globally competitive economy?
➢ The economy depended a lot on agriculture, from sugar cultivation in colonial times to coffee plantation in early independence years; the dictatorial rule laid major emphasis on agriculture as the main source of economic activity. In 1964, the military regimes took steps to reduce inflation, shift workers from agriculture to manufacturing & services and stimulate capital investment. ➢ Under Cardoso’s finance administration, Real Plan was devised in 1993. This was aimed at curbing inflation in a transparent manner. The new currency Unidade Real de Valor was linked 1:1 with US dollar and was allowed to slowly depreciate in order to prevent from becoming overvalued. ➢ Under Cardoso’s leadership the economy was opened to greater foreign participation, reducing state intervention, trimming public spending, reducing bureaucracy, simplifying the tax system and correcting the country’s severe socio-economic imbalances. ➢ Lula’s administration in 2002 aimed at poverty alleviation and greater equality. Lula and his team paid down and restructured the national debt and accelerated the repayment of a $14 billion IMF loan. His plan was to take short term hit to economic growth in an effort to free up funding for investment and social spending as Brazil’s debt payments were reduced. ➢ Lula played a key role in establishing the G-20, a consortium of emerging nations that participated in World Trade Organization meetings as a unified block. ➢ To fend off recession, the Central Bank started cutting interest rates in January 2009. The country followed the policy of Import Substitution industrialization for a long time through which government used industry targeting, tariffs, import quotas and other controls to replace imported products with locally produced substitutes. Context
• Brazil has rich reserves of natural resources like iron ore, manganese, bauxite, nickel, uranium, phosphates, tin, hydropower, gold, platinum and timber. • Discoveries of large offshore oil fields in 2007 have positioned...
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