March 15, 2010Brazil Economyby EW World Economy Team

Brazil Economy

Brazil sports the tenth largest economy by nominal GDP in the world, and seventh largest by GDP per capita based on purchasing power parity (PPP). The Brazilian economy has a moderately free market but is a predominantly inward-facing economy. Brazil's economy is the largest in Latin America and second largest in the western hemisphere—behind the United States.

Brazil was one of the fastest-growing major economies in the world from 2000 to 2012. During this period, it experienced average annual GDP growth of over five percent. In 2012, the Brazilian economy surpassed the United Kingdom's, making Brazil the world's sixth largest economy that year. However, the Brazilian economy decelerated in 2013 and 2014.

In 2012, Forbes ranked Brazil as having the fifth largest number of billionaires in the world, ahead of even the United Kingdom and Japan. Brazil is a member of Mercosur, Unasul, G8+5, G20, WTO, and the Cairns Group.

Economic History

When Portuguese explorers landed in what is today Brazil in the 15th century, the native tribes of the region totaled about 2.5 million individuals. These people had lived virtually unchanged lives since the Stone Age. Thus, most of the early economy of Brazil relied on the production of primary products for export, such as sugar and gold. Under Portugal, Brazil was a mercantile nation and largely reliant on slave labor imported from Africa.

The use of slaves continued until the late 19th century, with about three million African slaves forcefully immigrated into the region. During this period, Brazil was also the largest European colony with the European settlers: mostly Portuguese, but also Dutch, Azorean, Madeiran, Spanish, English, French, German, Flemish, Danish, Jewish, and Scottish.

After the late 19th century, following the abolition of slavery and the end of mercantilism, Brazil experienced a period of strong economic and demographic growth accompanied by mass immigration from Europe, the Middle East, Japan, and, to a smaller extent, from the United States and Africa. This continued until the 1930s, when important structural transformations began.

The 1930s saw the beginnings of Brazil's industrialization. In the 1940s, only 31.3 percent of Brazil's 41.2 million inhabitants resided in urban areas. However, by 1991, the country's population had exploded to 146.9 million inhabitants, with 75.5 percent of those individuals living in urban areas.

This growth and urbanization resulted from a shift away from production of primary products to the manufacture of finished goods. The primary sector ate up 28 percent of the GDP in 1947, but only made up 11 percent by 1992. Industry, on the other hand, grew from 20 percent to 39 percent of the GDP for the same period.

Unfortunately, this led to rampant inflation through the 1980s and 1990s. This inflation offset economic growth. Brazil attempted several economic reforms with limited success before implementing the Plano Real in 1994. This plan brought greater stability and enabled economic growth with less dramatic inflation. As a result, Brazil's growth has surpassed that of most of the rest of the global economy.

However, much of that growth has been moderated by inadequate investor confidence. Despite the rapid growth of this nation, the country still suffers from a culture of significant corruption, violence, illiteracy, and poverty.

Current Economic Situation

Contemporary Brazil has a population of over 190 million people. The nation still boasts abundant natural resources, despite centuries of exploitation by European powers. Today, Brazil is one of the 10 largest markets in the world and is a global leader in the supply of steel, cement, television sets, and refrigerators. It is also a major oil producing nation, as well as a petrochemical producer: processing fuels, lubricants, propane gas, and many other petrochemical products.

While not yet as modernized as many other European nations, Brazil has significant amounts of paved roads and more than 93 gigawatts of installed electric power capacity. Moreover, the nation's scientific and technological research and development has attracted many international investors, contributing, on average, an additional $30 billion to the national economy each year. The Brazilian industrial sector makes up three-fifths of Latin America's industrial production. The agricultural and mining sectors also remain highly productive, which has led to trade surpluses, massive currency gains, and pay downs of external debts. Surprising to many, the service sector is actually the largest component of Brazil's GDP at 67.0 percent, followed by the industrial sector at 27.5 percent, and agriculture at 5.5 percent. Brazil has an estimated labor force of 100.77 million, with 10 percent engaged in agriculture, 19 percent in industry, and 71 percent in the service sector.

Brazil's national currency, the real, surpassed the US dollar in value in 2008, due to its strong and continued appreciation for more than a decade. However, this harmed more than helped after the global recession, when exports suffered because of the overvalued real. This led to an effort to reduce value.

Brazil also has a large and thriving black and grey market. According to the Asian Development Bank and the Tax Justice Network, these illegal or questionable activities may account for as much as 39 percent of Brazil's GDP.

Brazil has also undertaken a program designed to reduce dependence on imported petroleum. Until recently, Brazil imported more than 70% of its oil needs from foreign sources. However, in 2006-2007 Brazil achieved oil self-sufficiency. This was supported, in large part, by the development of hydroelectric power, with a current capacity of about 260,000 megawatts providing 90 percent of the nation's electricity. The government of Brazil also plans to construct 19 nuclear plants by 2020.

Economic Forecast

After modest economic declines in the first half of 2014, activity has been on a gradual path of recovery. However, the OECD still predicts that growth will remain modest due to political, social, and infrastructural issues. Inflation, which has been problematic for some time, will slowly ebb as the government takes long overdue action to moderate these forces.

The OECD suggests that greater fiscal discipline and efforts to combat corruption will be needed to ensure sustainable growth and reductions in public debt. The nation also needs to make much greater investments in infrastructure improvements, lower trade barriers, reform taxes, and reduce administrative burdens in order to stimulate growth and reduce supply constraints.

Experts see the Brazilian economy contracting 1.0 percent by the end of 2015, but they predict a rebound and growth at a rate of 1.1 percent in 2016.

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