Brazil: Recent Economic Developments
Author: International Monetary Fund
Publication Date:
15 Apr 1998
eISBN:
9781451805888
Language:
English
Keywords:
ISCR; CR; state; federal government; export; price competitiveness; trade ratio; exports share; competitiveness factor; financing program; Exports; Export performance; Trade balance; Imports; Competition; Asia and Pacific
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This paper describes major economic developments in Brazil in 1997. A number of issues were analyzed in the paper, including the slow progress being made in the negotiation of the fiscal adjustment programs with the states, the sustainability of the growing current account deficit, as well as the strength of the banking system following macroeconomic stabilization. The paper discusses the post-Real crisis in the states and the state adjustment programs being negotiated with the federal government. Privatization and the associated foreign direct investment flows are also described.

Abstract

This paper describes major economic developments in Brazil in 1997. A number of issues were analyzed in the paper, including the slow progress being made in the negotiation of the fiscal adjustment programs with the states, the sustainability of the growing current account deficit, as well as the strength of the banking system following macroeconomic stabilization. The paper discusses the post-Real crisis in the states and the state adjustment programs being negotiated with the federal government. Privatization and the associated foreign direct investment flows are also described.

VI. Export Performance And Competitiveness of Brazilian Manufactured Goods119

A. Introduction and Summary

179. Since 1992, Brazil’s external current account has deteriorated significantly. The current account balance moved from a surplus equivalent to 1.6 percent of GDP in 1992 to a deficit of 4.3 percent of GDP in 1997 despite an important improvement in the terms of trade. This has been due largely to a deterioration in the trade balance of manufactured goods, from a surplus of 2.3 percent of GDP in 1992 to a deficit of 1.9 percent of GDP in 1996.120 While this drastic swing is partly explained by a rapid growth of domestic demand and trade liberalization, it also reflects a significant deterioration in the competitiveness of Brazil’s manufactured goods. This deterioration is of concern especially in view of the fact that already in the 1980s Brazil was losing export market shares, and the large trade surpluses observed in those years were more a reflection of import compression than of sharp export growth. The opening up of the Brazilian economy in recent years underscores the need to secure a steady improvement in export performance, if the external current account is not to become a serious constraint on sustained economic growth in the years ahead.

180. The chapter is organized as follows.121 An overview of Brazil’s total export performance over the past three decades is presented in Section B. Changes in Brazil’s export market shares in key trading partners destinations during 1985–96 are also examined in this section. Section C focuses on manufactured exports and examines the performance of several competitiveness indicators based on manufacturing trade data over the period 1985–96. Section D analyzes the evolution of price, cost, and nonprice competitiveness indicators over the same period. The final section offers some remarks on the outlook for manufactured exports.

181. The main results from the study can be summarized as follows:

  • An analysis of trade flows since the early 1980s suggests that the deterioration in manufactured goods trade balance evident in recent years had already begun in the mid-1980s, as a result of a weak export performance, which led to a sharp decline in Brazil’s export market shares during the past decade, except to its Mercosul partners.

  • An analysis of indicators of competitiveness based on relative prices and costs shows wide fluctuations in the competitiveness of Brazil’s manufactured exports during the 1980s and the early 1990s reflecting the reliance on the exchange rate as a nominal anchor during various heterodox stabilization programs. The real appreciation of the domestic currency was also strong in the immediate aftermath of the introduction of the Real Plan in mid-1994, partly as a result of a sharp increase in net capital inflows. However, since 1996 there has been some improvement in competitiveness measured in terms of relative unit labor costs.

  • The deterioration in competitiveness, has also contributed to a significant increase in import penetration (together with the reduction in import protection during the 1990s).

B. Brazil’s Export Performance and Market Shares

182. Brazil’s export performance has experienced wide fluctuations over the past three decades. Brazil’s share in world exports increased from less than 1 percent in the mid-1960s to a peak of 1.4 percent in 1984. However, by mid-1990s, Brazil’s total export share had declined back to less than 1 percent of world exports (and to 3.2 percent of developing country exports from 5.3 percent in 1984), while Mexico replaced Brazil as the leading exporter in the Western Hemisphere region. Brazil recorded one of the lowest levels of total exports in 1996, in per capita terms (as measured by the total labor force), among emerging markets (Figure 27).

FIGURE 27
FIGURE 27

Total Exports of Goods Per Capita, 1996 1/

(In U.S. Dollars)

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: World Economic Outlook database.1/ Total exports of goods divided by total labor force.

183. It is useful to divide Brazil’s export performance over the past three decades (from the mid-1960s through the mid-1990s) into five sub-periods:

  • In the first sub-period (from the mid-1960s to the first international oil price shock in 1973), Brazil’s export performance was remarkable and partially reflected a policy of maintaining a competitive exchange rate.122 Its share in world exports (in nominal terms) increased steadily from about 0.8 percent in the mid-1960s to 1.1 percent by 1973 or from 4.2 percent of developing countries exports to 5.9 percent as a percentage over the same period (Table 17). In addition, in the early 1970s, Brazil replaced Venezuela as the leading exporting country in Latin America. Much of this improvement in export performance was a reflection of a rapid growth in manufactured exports, which as a proportion of total exports rose from about 6 percent in

  • 1965 to almost 20 percent in 1973 (Table 18). In real terms, manufactured exports grew, on average, by 30 percent per year during 1968–73, more than double the growth rate of total exports (14 percent).

  • During the second sub-period (covering the years from 1974 through 1979) the rise in Brazil’s share of world exports came to a halt mainly because of two factors: a sharp deterioration in the terms of trade due to the effects of the two international petroleum price shocks, and the replacement of the aggressive export promotion strategy of the previous period with an import substitution policy, particularly in the capital and intermediate goods sectors, bolstered by a sharp increase in tariffs and nontariff barriers. The annual average growth rate of total exports, in volume terms, declined to 4.5 percent (about 1/3 the rate in the preceding sub-period), and that of manufactured exports to 16 percent (half the rate in the preceding sub-period).

  • During the third sub-period, covering the first half of the 1980s, Brazil’s export performance improved significantly; its share of world trade rose from 0.9 percent in 1979 to about 1.4 percent in 1984–85. The growth of export volume accelerated, on average, to almost 11 percent per year. However, much of the improvement in export performance took place after 1982. The authorities aggressively used the exchange rate policy together with export subsidies to encourage a rapid export expansion after the international debt crisis unfolded. The objective was to generate trade surpluses by improving price competitiveness in order to service the foreign debt. Total exports volume grew, on average, by 17 percent a year in 1983–84, and the rate of growth of manufactured exports increased sharply to over 25 percent a year. In addition, the import substitution policy and restrictions were extended to curtail imports further. As a result, the external current account deficit was practically eliminated by 1984. However, this important improvement in the external accounts turned out to be temporary as the accelerating inflation made more difficult to translate nominal devaluations into gains in price competitiveness.

  • In the fourth sub-period (from 1985 to 1993), Brazil’s total exports performed poorly with its share of world exports declining back to less than 1 percent by 1990. Much of this sub-period was characterized by the adoption of heterodox stabilization plans, designed to control a rising rate of inflation.123 These plans used the exchange rate as a nominal anchor to reduce inflation. Consequently, the real exchange rate experienced wide fluctuations, and there was a sharp appreciation of the currency over the period as a whole. Manufactured exports declined in volume terms by almost 1 percent a year on average during 1985–90. A temporary recovery in export volume growth took place after the local currency depreciated significantly in 1990. Despite the weak export performance during much of the period, the external current account balance was often in surplus, because the growth of import volume remained stagnant. The Brazilian economy became even more closed during this period, with total imports declining from about 8 percent of GDP in 1983 to less than 4 percent in 1990 and total exports from almost 12 percent of GDP to 7 percent over the same period.

  • During the fifth sub-period (from 1994 to the first half of 1997), Brazil’s export performance experienced a further deterioration. At the onset of the Real Plan, the floating of the currency combined with rising (net) capital inflows, resulted in an initial nominal and real appreciation, which, in turn, accelerated the deterioration in competitiveness observed since 1992. Brazil’s share of world exports declined, from 1.0 percent in 1993–94 to 0.9 percent by 1996 as exports declined in volume terms. As a percentage of developing countries’ exports, Brazil’s share dropped to around 3 percent by 1996, the lowest level in the past two decades. In addition, for the first time in two decades, Brazil’s total exports grew in 1994–96 at a lower rate than those of other countries in the Western Hemisphere. As imports soared during this sub-period, the external current account balance, which had posted a surplus equivalent to 1.6 percent of GDP in 1992, deteriorated rapidly, reaching a deficit of 3.3 percent of GDP in 1996 and 4.3 in 1997.

  • More recently, beginning in mid-1997 there has been a rebound in export growth.124 The adoption of an adjustable exchange rate band system since 1995 has brought about a gradual nominal depreciation against the U.S. dollar, which in conjunction with price and cost moderation, strong productivity growth and various structural measures to support and facilitate exports, has led to some improvement in competitiveness.

Table 17.

Brazil: Total Exports of Selected Countries and Regions, 1970-96

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Source: IMF, World Economic Outlook database.
Table 18.

Brazil: Composition of Manufactured Exports, 1965–96

(In percent)

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Sources: Trade Analysis and Reporting System (United Nations Statistiscal Office); and Fundacao Centro de Estudos do Comercio Exterior (Funcex) database.

As a percentage of total manufactured exports (SITC 5–8).

As a percentage of total exports.

184. Over the past three decades, both the product composition and trade direction of Brazil’s exports have experienced considerable changes. The proportion of manufactured goods in total exports rose from about 6 percent in 1965 to almost 60 percent by 1996.125 Up until the late 1970s the increase in exports of manufactured goods was led by goods with high value added (SITC 7–8), but since 1980 the increase in the share of manufactured goods in total exports was largely driven by exports of basic manufactured goods (SITC 5–6). However, the proportion of manufactured exports in total exports has declined in the more recent years as primary exports have expanded rapidly.

185. As far as the direction of trade and product composition is concerned, Brazil’s exports to developing countries are generally more capital-intensive than exports to industrialized countries. For instance, labor-intensive manufactured goods generally account for about 60 percent of Brazil’s manufactured exports to the United States. In contrast, these same goods only account for about half of Brazil’s manufactured exports to Argentina.

186. An important development during the past decade has been the decline in the importance of the United States as one of Brazil’s major markets for manufactured exports (Table 19). About 34 percent of Brazil’s manufactured exports went to the U.S. market in 1985, declining to 25 percent by 1996. This drop was initially offset by an increase in the share of manufactured exports to European countries and Japan, while the share of manufactured exports to Latin American countries remained relatively stable. However, since the early 1990s, the shares of manufactured exports to most industrialized countries have declined, whereas those to Mercosul countries (Argentina, Paraguay, and Uruguay) have soared.126 Brazil’s manufactured exports to these countries rose from 5.8 percent of total manufactured exports in 1990 to almost 23 percent in 1996. This development was mostly accounted for by a sharp rise in exports to Argentina, which has become the second most important market for Brazilian manufactured exports after the United States. With the exception of Mexico, the share of manufactured exports to other Latin American countries increased slightly between 1990 and 1996. In contrast, the share of Brazil’s manufactured exports to its main trading partners in Asia and Europe has declined significantly during the 1990s. As a result, by 1996, about 60 percent of Brazil’s manufactured exports went to the U.S. and Latin American markets.

Table 19.

Brazil: Direction of Brazil’s Manufactured Exports, 1985–96

(In percent of total exports)

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Source: Trade Analysis and Reporting System (United Nations).

C. Trade Balance Performance of Brazil’s Manufactured Goods

187. In this section, several indicators of competitiveness based in manufacturing on trade flow data are examined. First, trade balances, in value and volume terms, for various categories of manufactured goods at one-digit SITC level are analyzed. Second, trade ratios of exports to imports, in value and volume terms, and relative export performance indicators, are also discussed. These measures permit the examination of trends in trade performance over time.

188. After nine years of consecutive surpluses averaging over US$6 billion a year, Brazil’s nominal trade balance on manufactured goods recorded a surplus of only US$800 million by 1994 and large deficits in the following years (Table 20). The opening up of the Brazilian economy which began in the late 1980s, contributed to this deterioration; the average tariff rate on imports of consumer durable goods fell from 92 percent in 1987 to 53 percent by 1989.

Table 20.

Brazil: Manufacturing Nominal Trade Balances, and Trade Ratios by SITC Commodity Groupings, 1985-96 1/

(In thousands of U.S. dollars)

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Source: Staff estimates based on data provided by Trade Analysis and Reporting System (United Nations); and Funcex database.

Imports c.i.f, and exports f.o.b. Trade ratios are defined as expots over imports in percentage terms.

189. By 1996, almost all categories of manufactured goods showed large nominal trade deficits, with only iron, steel, and nonferrous metals continuing to record large surpluses. Overall, this performance suggests a widespread decline in the competitiveness of Brazilian manufacturing. The authorities have attempted to reverse these trends by providing fiscal incentives, export financing facilities, and other measures to reduce the so-called Brazil cost and enhance the competitiveness of manufacturing sector.127 It will take some time for the impact of these measures to be fully felt. Other steps have also been taken which have had a more immediate impact, such as the adoption of an automobile regime, increases in import tariffs, and the reduction in short-term financing of imports. Although these latter measures may contribute to reducing the trade deficit in the short run (the trade deficit of motor vehicles declined from US$2.9 billion in 1995 to US$0.5 billion in 1996 but deteriorated again in 1997), over the longer run they have substantial efficiency costs and are unlikely to improve the external accounts in a sustained way.

190. The deterioration of the trade deficit of manufactured goods in real terms (US$22 billion) during 1993–96, was more severe than the corresponding deterioration in the nominal balance (US$21 billion) as there was an estimated improvement of over 12 percent in U.S. dollars terms in Brazil’s terms of trade for manufactured goods128 (Table 21).

Table 21.

Brazil: Manufacturing Real Trade Balances, and Trade Ratios by SITC Commodity Groupings, 1985-96 1/

(In thousands of U.S. dollars at 1990 prices)

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Sources: Trade Analysis and Reporting System (United Nations); Funcex; and IMF Research Department.

Trade ratio is defined as exports/imports.

191. The analysis of real trade balances for individual SITC categories shows quite different results from the analysis of nominal trade balances. For instance, in the case of basic manufactures, the real trade balance deteriorated roughly the same as the nominal balance, implying that price movements were relatively neutral in 1994–96. In the case of machinery and transport equipment, while the nominal balance improved slightly in 1996, the real balance continued to deteriorate, implying that Brazil export prices rose relative to import prices. This could be the result that Brazil’s exporters have more influence over prices of machinery and transport equipment which are less homogeneous products than basic manufactures.

192. A rising trade deficit (or surplus) does not necessarily indicate a worsening (or an improvement) in competitiveness because this measurement is affected by the growth of trade value terms. To eliminate the influences of both changes in the terms of trade and the expansion of the volume of trade, the real normalized trade balance (RNTB) was used, defined as the real trade balance as a proportion of total real trade. The RNTB indicator shows that total manufactured goods trade surplus attained a peak of 34 percent of total trade in 1988, declining thereafter and turning by 1996 into a deficit equivalent to 21 percent of total trade (Table 22). Thus, contrary to the nominal and real trade balance indicators, the RNTB indicates that the deterioration in trade performance had already begun in 1988 rather than in 1994.

Table 22.

Brazil: Real Normalized Trade Balance of Manufactured Goods, 1985-96 1/

(In percent)

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Sources: Trade Analysis and Reporting System (United Nations); Funcex; and Fund staff estimates.

The real normalized trade balance (RNTB) is a measure of the trade surplus or deficit in volume terms as a proportion of total trade in volume terms.

193. Indicators of Brazil’s relative export performance (i.e., the growth of Brazilian exports relative to the growth of destination markets) also suggest that the performance of manufactured trade had already begun to deteriorate in 1988 (Table 23 and Figure 28).129 Export performance worsened even in periods in which export market growth was improving, particularly in the case of machinery and transport equipment during 1989–92 and other manufactured goods during 1988–92. This deteriorating trend has been reversed since 1994 only in the case of machinery and transport equipment. The ratios of exports to imports showed a similar deterioration in trade performance from 1985 to 1995 (see Tables 20 and 21, and Figure 29) although the rate of deterioration showed some signs of slowing in 1996.130 However, it is difficult to attribute the latter to an improvement in competitiveness as, in the second half of 1995, the authorities had imposed higher tariffs and quotas on electronic products, footwear, toys, and textiles.

Table 23.

Brazil: Export Market Growth and Relative Export Performance of Manufacturing for Brazil by SITC Commodity Groupings, 1985-96

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Source: Staff estimates based on data provided by Trade Analysis and Reporting System (United Nations).

An increase in the index indicates that a country’s exports grew faster than its import markets, and that, thus, is registering a gain in market shares.

Brazil’s export market growth is a weighted average of imports (in nominal terms) of the SITC categories under consideration of the five main destination markets of Brazil (Argentina, Germany, Japan, the Netherlands, and the United States). These countries account for about 50 percent of total Brazil’s exports.

FIGURE 28
FIGURE 28

BRAZIL Export Market Growth and Relative Export Performance, 1985–96

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Table 11.
FIGURE 29
FIGURE 29

BRAZIL Trade Ratios of Manufactured Exports, 1985-96 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Sources: Tables 8 and 9.1/ The trade ratio is defined as exports over imports.

D. Developments in Price, Cost, and Nonprice Competitiveness Factors

194. The various indicators of trade performance point to a trend deterioration of the trade balance in manufactured goods in evidence since the mid-1980s which suggests that Brazil’s competitiveness deteriorated during that period. This section specifically analyzes price and cost indicators of competitiveness.

195. The price competitiveness131 of Brazil’s manufactured exports has fluctuated widely since the late 1970s, with a clear deterioration taking place since 1992 (Figure 30). After a discrete devaluation of the local currency in December 1979, the real effective CPI-based exchange rate appreciated sharply (by about 60 percent) through 1981, as the authorities interrupted temporarily the policy of periodic minidevaluations which had prevailed since 1968. In early 1983, in the aftermath of the second oil shock and the international debt crisis, a new nominal exchange rate correction was implemented, together with the decision to maintain a competitive exchange rate.132 The second half of the 1980s was characterized by a trend deterioration in the real exchange rate because of the adoption of heterodox stabilization programs in which the exchange rate often was used as a nominal anchor, and prices were subjected to periodic freezes and/or controls. By end-1980s, the currency had appreciated by 65 percent in real effective terms and the volume of manufactured exports had declined almost 20 percent.

FIGURE 30
FIGURE 30

BRAZIL Real Effective Exchange Rates of Manufactured Exports, January 1985–October 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Sources: Information Notice System (IMF), Boletim de Dados (Depart, de Economia, PUC); and staff estimates.1/ A rising index Indicates a real appreciation.2/ Actual data for unitlabor cost of Brazil through end–June, 1997.

196. A new stabilization and adjustment program was adopted in March 1990 under the Collor administration, including a free-market exchange rate regime and a trade reform, in response to the deepening crisis. In the following months, the real depreciated steadily in real effective terms, reaching by January 1991—on the onset of a second phase in President Collor’s economic program—its lowest level since 1979. However, a new cycle of real exchange appreciation started in mid-1992. From that time to when the real was introduced on July 1, 1994, the currency appreciated by 25 percent in real effective terms. Subsequently, the currency appreciated another 20 percent in real terms, between July 1994 and February 1995. In early March 1995, the authorities adopted the adjustable exchange rate band system after having permitted a nominal depreciation of almost 5 percent vis-à-vis the U.S. dollar in previous trading days. During the rest of 1995 and in 1996, the currency depreciated some-what in real effective terms, but experienced a renewed appreciation in 1997, mainly due to the sharp appreciation of the U.S. dollar vis-à-vis the currencies of other industrialized countries. By October 1997, Brazil’s CPI-based real effective exchange rate vis-à-vis key developed countries showed an appreciation of about 20 percent from a 1994 base period.133 It is interesting to note that, in general, a real effective exchange rate index based on seasonally adjusted relative unit labor costs in manufacturing followed a similar path to that exhibited by the real CPI-based effective exchange rate index during much of the 1980s and 1990 (see Figure 30).

197. Brazil’s bilateral competitiveness with respect to different major trading partners has differed markedly over time. For instance, with respect to the United States, Brazil’s price competitiveness deteriorated steadily during the second half of the 1980s (Figure 31). Thus, it is not surprising to see the sharp decline in the share of manufactured exports to the United States that has been observed since then. The important gain in price competitiveness vis-à-vis the U.S. dollar that was experienced during the 1980s by Asian manufactured exports, which are important competitors of Brazilian products in the U.S. market, might have contributed to the decline of Brazilian manufactured exports to the U.S. market (Figure 32).

FIGURE 31
FIGURE 31

BRAZIL Real Exchange Rates vis-a-vis Selected Developed Countries, January 1985–October 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Sources: IMF, Research Department; and staff estimates.1/ A rise in the index indicates real appreciation.
FIGURE 31 (contd.)
FIGURE 31 (contd.)

BRAZIL Real Exchange Rates vis-a-vis Selected Developed Countries, January 1985–October 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Sources: IMF, Research Department; and staff estimates.1/ A rise indicates real appreciation.
FIGURE 32
FIGURE 32

BRAZIL AND SELECTED ASIAN COUNTRIES Real Dollar Exchange Rates CPI-Based, January 1980–September 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Information Notice System (IMF).1/ An Increase in the index indicates real appreciation.

198. Brazil’s price competitiveness started to deteriorate with respect to European currencies and the yen toward the end of the 1980s. After the sharp improvement in Brazil’s price competitiveness in 1990–92, the trend in the following years has been a continuous deterioration against Europe and Japan. While there has been an improvement with respect to the United States as a result of the adoption of the adjustable exchange rate band system since 1995, this policy has not avoided an appreciation of the local currency with respect to other currencies because the U.S. dollar has appreciated significantly against European currencies and the yen. In fact, while the bilateral indicators show that, by October 1997, the real had appreciated, in real terms, by about 15 percent vis-à-vis the U.S. dollar from the 1994 base period, the appreciation with respect to some European currencies had been above 20 percent and that vis-à-vis the yen about 40 percent.

199. Brazil’s price competitiveness with respect to some key trade partners in Latin America was subject to sharp fluctuations through much of the 1980s and early 1990s (Figure 33). The gain in price competitiveness that took place with respect to Argentina and Uruguay in 1990–94, was clearly reversed at the onset of the Real Plan, but the real exchange rate vis-à-vis these countries has remained relatively stable thereafter. Important gains in price competitiveness have taken place with respect to Chile, Mexico, and Venezuela since 1995. These bilateral indices show that by October 1997, the real had appreciated, in real terms, by less than 10 percent vis-à-vis many of these countries from the 1994 base period. Not surprisingly, manufactured exports have been mainly growing to Latin American countries in the 1990s.

FIGURE 33
FIGURE 33
FIGURE 33

BRAZIL Real Exchange Rates vis-a-vis Selected Latin American Countries, January 1980 - October 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Information Notice System (IMF).1/ An increase in the index indicates real appreciation.

200. In contrast, Brazil’s price competitiveness with respect to Asian countries other than Japan has shown a sharp deterioration, particularly since the second half of the 1980s and, most recently, in the second half of 1997 (Figure 34). By October 1997, the real had appreciated by over 40 percent (from its average 1994 level) against the currencies of most of these countries, with the exception of China.

FIGURE 34
FIGURE 34
FIGURE 34

BRAZIL Real Exchange Rates vis-a-vis Selected Asian Countries, January 1980 - October 1997 1/

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Information Notice System (IMF).1/ An increase in the index indicates real appreciation.

201. A comparison of the movements of an index of relative prices134 of Brazil’s manufactured exports and the cost-based competitiveness indicator gives an indication of the profitability of Brazilian manufactures versus its competitors (Figure 35). This comparison shows a divergent movement in prices and costs, probably related to Brazil’s direction of trade. During the second half of the 1980s, in which Brazilian manufactured exports expanded toward developed countries, mainly Europe and Japan, the relative movement in prices and costs suggested a profit squeeze. This points to strong competition from other countries in these markets, which made any attempt to increase export prices shortlived. The exchange rate adjustment that took place in 1990 provided a correction to this short-term disequilibrium between prices and costs. In the early 1990s, despite a sharp decline in relative costs brought about by the nominal correction of the exchange rate, export prices did not decline by the same extent, implying that exporters used the exchange rate adjustment to rebuild their profit margins.

FIGURE 35
FIGURE 35

BRAZIL Relative Prices of Manufactured Exports and Real Effective Exchange Rates, I Quarter 1983–III Quarter 1997

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Staff estimates based on Funcex and WEO database.

202. Movements in the degree of import penetration and export orientation of Brazil’s manufacturing can also shed some light about changes in Brazil’s competitiveness.135 Table 24 shows that significant import penetration occurred in all Brazilian manufacturing industries from the onset of the trade liberalization process initiated in 1988–89 through 1995. However, while the increase in the import share was substantial in some industries, like machinery and equipment, imports still accounted by 1995 for only about 16 percent the domestic market consumption for the sectors under consideration.136 This upward trend in import penetration could reflect the opening of the Brazilian economy to foreign trade, rather than an erosion in Brazil’s competitiveness position as, at the same time, many industries also increased their export market shares. It is interesting, however, to note that the import penetration measure rose on average 23 percent a year during 1990–95. By contrast the export orientation measure rose only 6.8 percent a year over the same period and much of this increase took place in the early 1990s; since 1993, the export orientation indicator of total manufacturing has remained constant at around 15 percent of domestic production (Table 25).

Table 24.

Brazil: Import Penetration Ratios: Imports/Apparent Consumption, 1989/95

(In percent)

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Source: Moreira and Correa (1996).
Table 25.

Brazil: Export Penetration Ratios: Imports/Apparent Consumption, 1989/95

(In percent)

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Source: Moreira and Correa (1996).

203. A country’s exports performance, particularly of manufactured goods, depends not only on price and cost competitiveness but also on nonprice competitiveness factors such as technological innovation, investment in physical and human capital, and services-related factors. As Agenor (1997) has pointed out, “nonprice competitiveness is also related to production potential, which is itself positively correlated with investment and the capacity to innovate. A low rate of capital accumulation in manufacturing may create conditions for lower growth in productive capacity, and may also lead to losses in price competitiveness, if lack of flexibility of the production structure leads to higher labor costs.” In this context, if Brazil imports relatively more capital goods, i.e., technology, than its competitors and assuming that it uses technology at least as efficiently, then one could expect Brazil to increase its competitiveness with respect to these other countries over time. This is so because technological progress and better ways to organize production are embodied in capital equipment. Thus, nonprice competitiveness factors may be particularly important over the longer run to improve a country’s market share.

204. Given the lack of data on nonprice competitiveness, the procedure adopted here is to use an indicator based on the movements in the share of imported capital goods (as measured by category SITC 7) in Brazil’s total imports, compared with those of a group of 12 competitor countries and with weights based on each country share in Brazil’s total imports of capital goods in 1996. Bilateral indices show the relative movements in the share of imported capital goods in Brazil’s total imports with respect to those of each individual country. An increase in the indices indicates an improvement in nonprice competitiveness of Brazil vis-à-vis the group of countries or each country.

205. Brazil’s nonprice competitiveness, proxied by this general index, deteriorated significantly in 1980–84 (about 28 percent) as the Brazilian economy remained one of most closed in the world (Figure 36). Following an initial sharp improvement in 1985–86, nonprice competitiveness showed no clear trend until the trade liberalization program was initiated in 1988.137 During much of the 1990s, the index suggests an improvement in Brazil’s nonprice competitiveness. Notwithstanding this general improvement, some bilateral indices showed declines, most notably with respect to Mexico (11 percent) and Korea (4 percent).

FIGURE 36
FIGURE 36

BRAZIL Nonprice Competitiveness Indicators, 1980-96 1/

(Index 1994 = 100)

Citation: IMF Staff Country Reports 1998, 024; 10.5089/9781451805888.002.A006

Source: Table 14.1/ A rise in the index indicates on improvement in nonprice competitiveness.

206. It is interesting to note that the ULC-based and nonprice competitiveness indices often moved in opposite directions during the 1980s. This may suggest that the failure to open up the economy offset, at least in part, the positive effect of a decline in labor costs. This is probably why the rapid export growth of the early 1980s could not be sustained once the policy of maintaining a competitive exchange rate was abandoned. In volume terms, Brazil’s exports of manufactured goods remained practically stagnant in 1985–90. In contrast, it is not surprising that rapidly expanding imports of capital goods and a policy of avoiding an appreciation of the real exchange rate in the first half of the 1980s, positioned key competitors of Brazil, particularly in Asia, advantageously in the world market during the rest of the decade. By contrast, in 1990–93, both indicators moved in the same direction, the volume of Brazilian manufactured exports boomed, expanding by 59 percent. Both indices started to move in different directions in 1994–96 and export volume growth began to deteriorate at the same time. As a result, one could conclude that price and nonprice competitiveness factors complement each over the longer run. Thus, local producers might not be willing to engage in a process of modernization (i.e., higher capital goods imports) if it is not supported at the same time by adequate relative prices.

E. Conclusions and Outlook

207. The wide fluctuations in the competitiveness of Brazil’s manufactured exports during the 1980s and first half of the 1990s contributed to significant losses in market shares, particularly in developed countries. Brazil’s manufactured exports, in volume terms, recorded only a modest increase during the second half of the 1980s, and after a marked but short-lived improvement in the early 1990s, declined through 1996. For the rebound of manufacturing exports observed in the second half of 1997 to be sustained, it is important that ongoing efforts to improve competitiveness prove to be effective. The current policy of gradual depreciation vis-à-vis the U.S. dollar, at a rate in excess of the inflation differential, does not necessarily ensure a real effective depreciation of the real, especially in view of the recent sharp depreciation of several Asian currencies. The latter is likely to affect negatively Brazilian manufactured exports, particularly to third markets (about 15 percent of the U.S. imports of manufactured goods are accounted for by Asian countries that have recently experienced a sharp depreciation of their currencies). For this reason, exchange rate policy needs to be kept under review.

208. With few exceptions, manufactured exports have been performing relatively poorly for a long time. This indicates that there is a need for a broadly based policy rather than a micro approach to enhance the competitiveness of Brazilian exports. Measures adopted to protect certain sectors such as cars, electronic products, and other consumer goods, and to restrict short-term import financing will not result in a lasting improvement. There is also a need to further reduce the average level of import protection to promote efficiency gains and the modernization of industry. This is especially important in some sectors (like automobiles) which still remain highly protected in Brazil. Measures taken to address a number of institutional and economic obstacles to export growth, including the elimination of taxes on exports, the creation of an export credit insurance, the expansion of export financing programs, deregulation, and privatizations are steps in the right direction.

209. An expansion and modernization of the capital stock and a strong growth of labor productivity in manufacturing are also important to sustain export growth in the manufacturing sector. However, investment in export oriented industries is unlikely to take place unless export profitability is sustained over the longer run. In this context, the future performance of Brazilian relative unit labor cost would continue to play a key role in improving the competitiveness and profitability of Brazilian exports of manufactured goods. In addition, Brazil needs to raise its savings rate, improve its educational system, and deepen the trade liberalization process in order to raise its productivity and foster a sectoral allocation of investment toward tradable goods.

210. Increasing competition from lower wage countries will require Brazil to move into higher quality, higher value added manufactured exports. However, the lack of qualified workers could hinder this process.138 The proportion of the population with secondary and tertiary education in Brazil is quite low.

211. In the longer run, the rising concentration of Brazilian manufactured export in Latin American countries, could make the Brazilian export performance excessively dependent on a region which is still relatively vulnerable to external shocks. Thus, it is important that Brazil diversify its export destination and regain shares in the relatively more stable industrial markets.

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119

Prepared by Ugo Fasano.

120

Between 1980 and 1993 the trade surplus averaged almost 4 percent of GDP reaching a peak of over 6 percent of GDP in 1984 and 1988.

121

The main source of data for this study is the Trade Analysis and Report System (TARS), which is a trade database collected and maintained by the United Nations Statistical Office (UNSO). Exports are measured f.o.b. and imports c.i.f. The help of the STA country assistance team in obtaining the TARS data is acknowledged.

122

The exchange rate market was unified in 1964 and a crawling peg system was introduced in 1968, according to which the exchange rate was periodically devalued, in small amounts, following the difference between inflation at home and abroad.

123

The cruzado plan was adopted in February 1986, the Bresser plan in July 1987, the summer plan in January 1989, and the Collor administration plans in 1990–91.

124

Due to data limitation, this chapter analyzes mostly the period up through June 1997. For a general discussion of export rebound in the second half of 1997, see the Staff Report for the 1997 Article IV consultation (EBS/98/12).

125

Manufactured exports and imports include the Standard International Trade Classifications (SITC) categories: 5 (chemicals), 6 (basic manufactures), 7 (mechanical and transport equipment), and 8 (miscellaneous manufactured goods).

126

Mercosul was officially established in March 1991 with the signature of the Asuncion Treaty, by Argentina, Brazil, Paraguay, and Uruguay. A customs union has been in operation since January 1995.

127

For details of the measures taken see “Measures to Reduce the Brazil Cost”, Ministry of Finance, Secretariat of Economic Policy, Brasilia, April 1997. See also, “Ações Setoriais para o Aumento de Competitividade da Indústria Brasileira”, Documento Base, Ministério da Indúistria, do Comércio e do Turismo, Secretaria de Politica Industrial, 1997,

128

Consistent price deflators for the components of exports and imports of manufactured goods were not available under the SITC classification of goods followed in this study. Thus, these results should be interpreted with caution.

129

The relative export performance index is calculated as the ratio of the rate of growth of Brazil’s manufactured exports to the rate of growth of its export market. The latter is defined as a weighted average of the rate of growth of manufactured imports, in nominal terms, of Brazil’s main partner countries (the United States, Argentina, the Netherlands, Germany, and Japan).

130

Deflators for total exports and manufactured exports used were published by Fundação Centro de Estudos do Comércio Exterior (Funcex), see Guimarães (1997).

131

A real effective exchange rate index for Brazil vis-à-vis 11 developed trading partners was calculated on the basis of consumer price indices. Only those partners for which there was information on both consumer prices (CPI) and unit labor costs (ULC) were chosen in order to facilitate a subsequent comparison with a real effective exchange rate index calculated on the basis of ULC, The weights used in this index were the average trade shares of these countries in Brazil’s total trade in manufactured goods in the period 1993–95. An increase of the real exchange rate indicates an appreciation.

132

Changes in international price competitiveness during the second half of the 1980s, should be interpreted with caution because the presence of widespread price controls at that time may have introduced distortions in the indicators.

133

The traditional CPI-based real effective exchange rates calculated by the Fund’s Information Notice System vis-à-vis 20 developed and developing countries also showed a real appreciation of the real of about 20 percent by October 1997.

134

Prices of Brazil’s manufactured exports, expressed in U.S. dollars (taken from Guimarães (1997)), relative to the international prices of manufactured exports (taken from the World Economic Outlook database).

135

Import penetration is a measure of the share of the domestic market (defined as domestic production less exports plus imports), satisfied by imports. Export orientation is defined as the ratio of exports to domestic production.

136

The total import penetration coefficient jumped to almost 18 percent in the first half of 1997, according to preliminary information provided in Moreira (1997).

137

A reduction in import tariffs had already started in 1988 but a pre-announced schedule of tariff reductions only began in 1990. The average import tariff for all goods declined from 51 percent in 1987 to 35.5 percent by 1989 and further to 12.5 percent by 1995. However, the import tariff of capital goods has declined at a lower pace, from 50.7 percent to 40.7 percent and to about 20 percent over the same period.

138

Information obtained from the World Bank database indicates that only 43 percent of Brazilian children attended secondary school in 1992 compared to 91 percent in Korea, 77 percent in the Philippines, 72 percent in Argentina, and 58 percent in Mexico. Only 11.5 percent of school age population attended universities or other tertiary education institutions in Brazil in 1993 compared to 48.2 percent in Korea, 26.2 percent in the Philippines, 40.5 percent in Argentina, and 13.8 percent in Mexico.

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