Analyzing the Diplomatic Ties: Brazil and the U.S.

 

 Brazil's Economy: Engines and Obstacles

Brazil's economic growth drives both local achievements and most of its foreign agenda. Brazil's constantly increasing economy propelled the South American powerhouse into the global spotlight, initially among investors looking for an emerging market. Brazilians believe that the country's successful blend of capitalism and social democracy warrants the promotion of these ideals and Brazil's economic interests overseas. As a result, Brazil has converted its home economic strength into international commercial and diplomatic might, which it wields in most parts of the world.
Sound macroeconomic policies, increased access to capital inflows, a shift from an import- to export-led economy, and a lengthy period of low commodity prices and easy financing conditions have all contributed to a dramatic economic and social transformation in recent years. Brazil's GDP per capita is currently twice as high as it was ten years ago, and the poverty rate has been cut by nearly half.

President Rousseff took office following a 7.5 percent economic growth in 2010, with an expected 4.5 percent expansion in 2011. The excellent economic performance in 2010 was supported by robust domestic demand, which was boosted by rapid credit growth and expansionary monetary and fiscal policies. The unemployment rate is at its lowest point in eight years, and real wages have risen dramatically. Thus, while Brazil confronts near-term issues, the majority of which are related with a quickly developing economy, the country's long-term prospects are bright, provided the abundance is handled properly. However, the economic outlook is not without concern. At the time of writing, inflationary pressures had increased significantly, and several in major sectors of the Brazilian economy were concerned about overheating. Overheating pressures are manifesting themselves not just as greater inflation, but also as a widening trade deficit and quickly rising credit and asset prices.
Brazil's vulnerability to global commodity price swings, reliance on Asian demand, and rapid credit growth in real estate markets like Rio and São Paulo raise concerns about the country's future growth prospects. Additionally, some key drivers of Brazilian expansion, such as
President Rousseff has made it clear that she is aware of these risks, and her appointments to lead the Ministry of Finance and the Central Bank have a strong mandate to provide critical continuity with the orthodox programs of the two previous administrations while also addressing these issues, the most pressing of which is inflation. Indeed, the common Brazilian experience of recent severe inflation has served as a primary source of consensus for macroeconomic measures.
The incoming government will face a variety of economic issues in the coming years that will necessitate policy action. In the short term, the Brazilian government must remain vigilant and steadfast in its policies to avoid overheating and deal with the consequences of large capital inflows and a rapidly appreciating currency—the real has appreciated nearly 40% against the dollar in the last two years—while also attempting to shape policies to protect and enhance the economic and social gains of the previous decade.

Brazil, along with other major emerging-market countries, expressed concern about the U.S.

 

Federal Reserve's decision to release $600 billion to stimulate the U.S. economy (QE2). Brazilians feared that this move would drive more money into countries with high interest rates, as investors seek higher returns. The unfavorable Brazilian response was partially due to impatience.
With the absence of prior conversation with the United States on monetary issues, it was also intended to counter concurrent criticism of China. In response, Brazil increased its financial operations tax, known as the IOF, on foreign purchases of domestic bonds. Brazil stands out in its region due to its comparatively high level of public debt, strong public revenues, and low public investment. Between 2005 and 2008, Brazil's public sector invested half the GDP of Argentina, Chile, Colombia, Mexico, Peru, and Uruguay. Improvements in this area will not be straightforward and will necessitate significant changes in fiscal methods. The country's weak physical infrastructure, for example, demonstrates a lack of public investment. To preparation for the 2014 World Cup and the 2016 Olympics, Brazil has undertaken a high-priority infrastructure improvement program. The Rousseff administration should prioritize labor, pension, and social security reform to boost public savings and increase budget flexibility.
Doing business and founding small and medium-sized firms in Brazil remains difficult due to the complexity of the tax system, high labor and corporate taxes, and long judicial review processes for contract enforcement—issues that the Brazilian government recognizes as impediments. Brazil's complicated regulatory, tax, and protectionist systems stifle international investment and delay the path to even more robust and equitable growth. Addressing such structural difficulties in Brazil, like in the United States, is hampered by domestic politics at the federal, state, and municipal levels. The Rousseff administration will also face challenges in terms of trade policy. Brazil is in the early phases of building the ability and willingness of its small and medium-sized firms to see overseas commerce as a driver of growth and development.

Conclusions

The Task Force observes that, in this setting, near-term attention to the risks of inflation and overheating in general is necessary. In 2010, inflation rose to 5.8 percent, much exceeding the 4.5 percent target. Nonetheless, the Task Force concludes that the Rousseff administration—which has pursued a round of budget cuts, raised interest rates, and taken steps to regulate consumer credit—has acted prudently, though more attention to these concerns and a greater willingness to acknowledge threats earlier are required. Given the importance of Brazil's economy on a global scale, the United States and other G20 powers should collaborate closely with Brazil to avoid difficulties that could cause substantial regional and global contagion.
BRAZI L's Trading And Investment Relationship with China: Questions and Answers.
Brazil's economic relations with China are both mutually advantageous and competitive, and they pose a significant challenge to the Brazilian economy's long-term diversification. Rousseff's first big international trip as president was to China in April 2011, where she focused on trade and investment. Brazil has benefited greatly from its trade and business connections with China over the last decade. Commodity prices have hit historic highs, owing primarily to China's rapid economic expansion and demand for natural resources. In the first two quarters of 2010, China surpassed the United States as the leading buyer of Brazilian exports and the second-largest supplier of Brazilian imports.