Free Custom Essay on «Latin American Economy (Brazil and Argentina)»

Latin American Economy (Brazil and Argentina)

Introduction

Although Brazil and Argentina had a wealth of resources that could have contributed to their industrialization process, they experienced political and economic challenges that posed a big threat to their development. This research will look at a broader picture of how the political economies of Argentina and Brazil have affected the devaluation of their currencies. The research will also introduce other minor factors contributing to the devaluation process. In addition, the inter-temporal political-economic issues will be underscored. It will assess the possible unification of currency in Latin America and the future of MERCOSUR. The comparison between the economy of each country and its prevailing politics of the time since 1900 to up to date will also be highlighted.

Although the policy of the currency within the region has remained concealed over a long period of time, there have been very minimal attempts made to analyze the influence of politics on currency policy. This involves the political, economic and especially the government factors that play a vital role in making decisions involving the exchange rates. There is a fundamental correlation between the political and economic situation in Latin America and more so in Brazil and Argentina (Krueger par.2). The key point is that companies working in the areas of Argentina and Brazil have a number of issues to deal with, such as inflationary challenges.

Countries in Latin America, which Brazil and Argentina form a part, have accepted to open up their borders for international investments and trade over the past decade. Inter-border economic activities have been taking place at an alarming rate within the region. This means that there are high rates of currency movements. Workers, farmers and business people who used to complain of many trade barriers across their borders now find themselves subject of the pressures emanating from different changes in the exchange rates (“Brazilian Economy”).

Overview of the Political-Economic Progress of Brazil

There was a lot of success in the attempt by the Brazilians to utilize the locally available resources to produce an efficient economic system at the beginning of the 20th century. This was facilitated by the availability of some of the natural resources, such timber, steel, gold, gems, sugarcane, and coffee (“Brazilian Economy”). The presence of slave labor facilitated many activities to be carried out. An upsurge in the rate of industrialization was experienced in the World War I era until in the early 1930’s when Brazil was able to reach the climax of modern economic performance. In the 1940’s, a steel plant was built in Rio de Janeiro, a factor that played a big role in increasing the economic performance of the Brazilian economy. Important sectors of the economy, such as the automobile industry, steel and petrochemicals, grew at an alarming rate between the 1950’s and the 1970’s (“Ministry of External Relations”). This led to a huge boost in the industrialization process.

The annual GDP growth rate of the country had been among the best in the whole world by the early 1970’s. A lot of resources were borrowed from other countries, such as the United States, Japan, and other European states. Huge capital expenditure was used to develop the infrastructure and formation of the state-based enterprises that could not be attractive to private investment programs. The GDP growth rate was catapulted between the early 1970’s and 1980’s. It was estimated to be a growth rate of 8.5% on average (“Brazilian Economy”). Since the early 1980’s, the United States interest rates has risen up as a result of the increased global interest rates. Brazil, similar to other Latin American countries, started to make stringent measures that were aimed at dealing with the prevailing economic challenges, which eventually led to negative growth rates. One of the measures the country took was to adjust the wages and contracts according to the level of inflation. Furthermore, there was the freezing of all prices. There was a significant economic growth rate in the country in the 1980’s that facilitated it to clear the pending debts (“Ministry of External Relations”).

In the early 1990’s, there was a series of measures that were developed in order to put the economic growth on the right path. Some of the measures that were developed and implemented included the establishment of a structural framework to encourage foreign investments, privatization, deregulation and others (“Brazilian Economy”). There were continuous efforts that aimed to remove various trade barriers throughout the 1990’s. Certain efforts implemented by the government to reduce inflation bore fruits, and the country experienced an improvement in the income distribution. The value of the currency was restored. This led to increased purchasing power of the lower economic classes of the populace. As a result, the poverty levels were reduced in the country. 

One of the major advantages of Brazil over Argentina is the fact that it has been able to offer greater investment opportunities to the foreign investors. Its stability and good infrastructural growth facilitate this fact. It is estimated that the budget for a growth acceleration program may amount to close to 500 billion dollars (Pang 31). Foreign investors should be aware of the fact that the Brazilian government is highly nationalistic and may tend to favor local investors at the expense of foreign investors, something that may go a long way in denying the country to earn resources from the foreign investors. Brazilians always champion for local companies. For them, the local content is more significant than the foreign one. The only thing that the foreign investors need to do to invest in Brazil is to set up factories in the country because of the high tariff the country charges on the goods imported into the country (Pang 73). This also acts to discourage the foreign investors, who might be the source of new ideas necessary to develop the economy. Due to te prevailing political challenges in the nation, the attainment of development might be very difficult.

Since 1977, Brazil has decided to put an embargo on different imported computer products so that they could protect the local manufactures. This was a great effort that attempted to harm the modernization process because a lot could have been achieved when most of the processes were modernized (Pang 112). However, during the mid-1991, this computer policy was changed. Other countries that intensively utilized computerized systems, such as Germany, the United States, and Japan, were far much industrialized than Brazil. This acted as a wake-up call for the country. Nevertheless over this period that Brazil imposed the embargo, a lot was lost. The following policy, popularly referred to as the informatics policy, was assessed to have done more harm than good to the economy and the society (Pang 112). For instance, by 1991, the automobile sector, which accounted for the majority of the export earnings for the country, had approximately 4% of the automation rate as compared to that of such countries as the United States, Japan, and Germany, which had 31, 38 and 30% respectively (Pang 113). This showed that Brazil had failed in capitalizing on the available modernized opportunities that would have assisted it in becoming one of the leading economies of the world.

Overview of the Political-Economic Progress of Argentina

The era between the early 1980’s and 2001 formed a very important period in the economy of Argentina. Many changes took place within the following period. Prior to the crisis that took place in 2001, a lot of political events had happened, and they played a great role in shaping the consequent events. From 1983 to the early 1990’s, Argentina was nursing an aftermath of military dictatorship (Borello 584). This period was characterized by hyperinflation. During the time, the country was experiencing hard economic moments. Some considerable amount of stability was achieved between the early and late 1990’s, specifically 1998 (Paolera & Taylor 34). At this time, there was the implementation of neo-liberal rules and policies, which succeeded to a considerable degree. From 1999 to 2001, the Argentine economy began to manifest signs of recession. There was negative GDP growth, a factor that exposed the inadequacies in the political reforms and the system. The crisis erupted in 2001 when there was a complete economic collapse (Munck 79).

One of the challenges that has faced Argentina emanates from the fact that the country adopted the culture of operating from a deficit budget. This seems like a habit to the country. For example, to finance the construction of a port in Buenos Aires in 1881, a certain sum of money was borrowed from Barings bank (Paolera & Taylor 71). Latin America landed into the crisis because of the huge borrowing in the 1980’s, which left it in the crisis of debt. As part of the aspirations to develop the industrialization programs, Argentina, just like its counterparts in Latin America, borrowed huge sums of money in the International markets to finance its activities in the 1960’s and 1970’s (“International Monetary Fund”). The country borrowed a lot of funds. There was a recession between 1970 and 1980. At this time, Argentina needed more borrowing so that it could finance the repayment of the interests accrued from the borrowing (Paolera & Taylor 196).

The country suffered a lot of financial challenges in 1982. At that time, it had to seek assistance from the International Monetary Fund (IMF). As a result, the country was secluded from the capital borrowing. Throughout the 1980’s, the country attempted to re-enter the capital borrowing market without success (“International Monetary Fund”). The situation that saved the country was when Nicholas Brandy came up with a plan that was aimed at assisting the emerging markets. As a result, Argentina among other emerging economies was able to capitalize on the international market borrowing so that they could finance their different activities. The mid 1990’s provided a great opportunity for the country because it was again fully integrated into the international borrowing market. It was estimated that by 1999, the total debts by Argentina had been almost 50% of the total Gross Domestic Product of the nation (Munck 65).

One of the greatest challenges that the country experienced is the aftermath of fixing the exchange rates. The goods that came from the country were more expensive than those that would be exported, especially those that came from the countries with currencies of lower value. There were not enough strong currencies or dollars that entered the country through trade. Argentina bought a lot of goods from foreign suppliers. This policy was in real sense working in a contradictory manner. Although the inflow of dollars was required to maintain the policy, very few goods would be exported into the country. A big error was made when the government attempted to solve the challenge through borrowing and privatization. The resources that came from these two processes were used to provide a steady supply of dollars. However, this was only working to widen the parity between the peso and the dollar. In the year 2002, Argentina devalued its currency (Munck 231). If the authorities had been able to design policies that would have kept the dollars flowing, they would have avoided devaluing the currency.

Political-Economic Conditions in Brazil

The political situation in Brazil is not healthy for carrying out business activities. One of the greatest challenges faced by the country is the fact that the political undertakings of the system percolates into the economics, therefore affecting the economic progress of the nation. Foreign investors have worries about the economic conditions of Brazil especially because of the unfriendly tax system that discourages investment in the country. This makes the environment in Brazil unfavorable as a target for foreign investment (“Ministry of External Relations”). The tax system can be said to be very complicated and burdensome. The labor costs inn the country have continued to skyrocket, which means that few investors would be willing to put in their resources where the returns are few or unpredictable due to various negative political and economic changes. Most of the foreign investors had waited for Brazil economy to grow, at least 5% to 6% of its growth in the GDP (“Brazil Economy”). However, the economy of the country had been growing at significantly lower rate than its growth rate until the financial crisis had not started.

Political-Economic Conditions in Argentina

Argentina faced a serious drawback through inflation in the 1980’s. At the time, the national currency was seen as worthless. Some of the people who had predicted or were prepared saved their money in terms of dollars. By the year 2002, Argentina had faced a major blow in its development because there was a great economic collapse (Munck 87). Before the collapse, there had been several factors that preceded this outcome. For example, there was a negative GDP growth in 1998 because of inculcating poor political strategies in an already collapsing economy (Munck 79).

As a result of the prevailing political-economic crisis facing Argentina, there are a lot of challenges that the business people have to contend with in their daily operations. The inflation rate in Argentina is skyrocketing now and has reached almost to a climax of 40 % (Paolera & Taylor 76). It was previously expected that there would be a recession either in 2014 or 2015. The country has been experiencing a sharp decline in the international reserves since 2011. The greatest challenge that is expected to arise in such situations will affect the businesses because the government of the country was likely to impose either an embargo or price control measures, especially in the food sector.

Operating in such conditions means that there will be the likelihood of the high level of civil and industrial unrests. This is, therefore, a great challenge posited by non-compliance to the informed regulation of an economic crisis. When there are high inflation rates, the workers are likely to demand higher salaries. In the early 2014, the President of Argentina worked towards devaluing the country’s currency and attempted to increase the interest rates (Munck 75).

The development programs have concentrated on one area only. There is a regional imbalance in the development of the country. Although there are local policies that have been designed to correct this imbalance, there have been drastic changes in the political system, especially the government, a factor that hinders development. On the other hand, Brazil has been on the forefront in pursuing regional development policy. It has been estimated that a lot of the development-related resources have been concentrated in the city of Bueños Aires in Argentina (Borello 576). This has been a consistent trend over a long period of time. For instance, a survey carried out in the year 1895 proved that more than half of the resources allocated to the manufacturing sector was invested in the city (Borello 592). An analysis carried out in 1922, proved that most of the resources were invested in the regions bordering the city.

In 1999, Argentina’s President suggested that the country would adopt the dollar as the currency and abolish its own currency. This showed declined nationalism from what had been witnessed in the previous years. At the time, a great number of the country's deposits were dollarized. It was estimated that over 50 % of the deposits present in the country were in dollars (Falcoff par.3). However, this was not only the case of Argentina alone, but also several Latin American countries. Most of these Latin American countries use the dollar on a large scale basis, making the dollar to be recognized in the region as the main currency. This acted to suppress the value of other currencies in the individual Latin American countries, including Brazil and Argentina.

The Argentina faces a lot of fiscal weaknesses. For instance, there is a lot of spending, and the corruption rates are high from the political platform. In addition, there is a high rate of corruption within the governmental systems, thus making the local currency depreciate in value with time due to the lack of a regulated cash flow. The tax system put in place by the government authority is very inefficient. People usually evade taxes paying at a very high rate. While Brazil collects more than 30% of their GDP from taxes, Argentina manages to collect about 21% of its GDP from tax (Paolera & Taylor 97). The greatest challenge that Argentina faces is poor political management. The existing regimes have usually worked in a direction that has compromised the level of development within the economic system. For instance, most of the ministers that have been elected into the financial offices are usually appointed on the basis of friendship and not competency. This has really worked to compromise the level of economic development in the country.

Most of the transactions that have been taking place in Argentina have been made using the dollar. This means that the peso is declining in terms of its popularity within the country. Economists predict a situation in which the Argentines will no longer trust their local currency and quickly adopt the dollar. Thus, the peso is expected to crash at the expense of the dollar.

Analysis of Financial Crisis in Brazil

In the recent past, Brazil has faced electoral manipulation of the currency. In this case, the government decided to engineer the value of the currency during the election period to facilitate people’s purchasing power. Even if the exchange rate has to be de-valued, the temporary boost of consumer purchasing power will increase the chances of the present government to be re-elected (“Brazil Economy”). Incumbent governments usually work on this basis. The irony is that the temporary adjustment measures work to the advantage of the government seeking re-election. This might, however, pose a serious economic challenges to the whole nation, which might take a long time to amend.

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