Abstract
This Selected Issues paper and Statistical Appendix on Brazil looks at price developments following the floating of the Real in mid-January 1999. The paper highlights that the experiences in East Asia—Indonesia, Korea, Malaysia, Philippines, and Thailand—all show that the pass-through from devaluation to inflation has been lower than expected, with the exception of Indonesia. The paper analyzes the competitiveness and export performance of Brazil. Effects of high interest rates and currency depreciation on Brazilian enterprises are also analyzed.
II. Competitiveness and Export Performance1
A. Competitiveness
Macroeconomic indicators
1. After the inception of the Real Plan in mid-1994, most indices showed an immediate loss of competitiveness owing to the constraints of the nominal exchange rate anchor and the remaining price inertia. In the 12 months following the inception of the Real Plan, real effective exchange rates (REER) based on the consumer price index (CPI) showed a 26 percent appreciation over the preceding 12 months (Figure 2.1). Similarly, REER based on unit labor cost (ULC) showed a 12 percent appreciation over the same period.2 This appreciation was mostly due to an increase in dollar denominated unit labor costs (and therefore real incomes) that outstripped productivity gains. As the prices of traded goods stabilized, the ratio of nontraded prices to traded prices showed a 13 percent appreciation over the 12 months following the Real Plan relative to the preceding 12 months. In contrast, the terms of trade showed a 13 percent improvement in the 12 months following the start of the Real Plan relative to the preceding 12 months.
Brazil: Indicators of Competitiveness, January 1991-May 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Indicators of Competitiveness, January 1991-May 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Indicators of Competitiveness, January 1991-May 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
2. From 1995 through mid-1998, most indices of competitiveness remained fairly constant with the exception of the ratio of nontraded prices to traded prices; it registered a further 39 percent appreciation over the period. The initial real appreciation, and loss in competitiveness, of the Real Plan was maintained during this period, or in the case of the ratio of nontraded to traded prices, further exacerbated. The latter appreciated due to a rapid rise in the prices of nontraded goods (67 percent) relative to the prices on traded goods (20 percent) as stabilization took hold and real incomes rose.
3. In mid-1998, competitiveness began to improve reflecting the low rate of inflation, the recessionary phase of the business cycle, and also the nominal effective depreciation under the crawling peg. By December 1998, the CPI-based REER showed a 10 percent real depreciation over December 1997. The ULC-based REER showed an 18 percent depreciation over the same period. However, the ratio of nontraded prices to, traded prices continued to register a slight but decelerating appreciation (about 1 percent) at the end of 1998 compared to the end of 1997. Conversely to competitiveness, the terms of trade showed a 4.5 percent deterioration in December 1998 relative to December 1997.
4. By February 1999, after the devaluation and float of the Real, the gain in competitiveness was sizable. The CPI-based REER registered a 40 percent depreciation over February 1998 and the ULC-based REER registered a 47 percent depreciation over the same period. The ratio of nontraded/traded prices also adjusted, although at a much slower rate. The slow adjustment of this measure of competitiveness is a result of the very limited pass-through of the nominal depreciation onto traded and nontraded prices. By April 1999, the ratio of nontraded to traded prices had only depreciated by 5 percent over April 1998.
5. The gain in competitiveness, stemming from the devaluation and float of the Real, has been accompanied by a substantial deterioration in the terms of trade. The terms of trade deteriorated by about 18 percent in the first quarter of 1999 relative to the first quarter of 1998.3 Although causality is not certain, the close relation between the terms of trade and measures of the REER suggests that owing to its size, Brazil’s terms of trade deteriorate when the country’s competitiveness improves. The inverse relationship derives from Brazil being a large exporter of certain commodities; this perversely influences the prices of Brazil’s commodity exports when the country’s competitiveness improves.
6. More recently, since the devaluation of January 1999, the dollar profitability of Brazilian exports has risen by about 22 percent over the period January-April 1999, compared to the same period in 1998 (Figure 2.2). This measure of profitability takes into account the entire cost structure of exports, not just ULC, using an input-output matrix.4 It also takes into account the movement in export prices and input prices for which the exchange rate is a factor for exports with import content; the import content of Brazilian exports is reportedly around 7–10 percent. It is worth noting that profitability is very closely related to competitiveness.
Brazil: Profitability of Exports, January 1991-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Profitability of Exports, January 1991-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Profitability of Exports, January 1991-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Microeconomic Indicators
7. Taking a closer look at the evolution of competitiveness across industries, between 1994 and 1998, clear winners and losers emerge. While the ULC of some industries has remained low relative to that of others, some industries have shifted from being winners to losers. Because 1994 was normalized as the base year, industries with ULC above 100 in 1998 experienced a loss of competitiveness among Brazilian manufactures while the contrary is the case for industries with ULC that dropped below 100 in 1998. At the extremes are toiletries with a relative loss of competitiveness of 48 percent over the four-year period from 1994 to 1998 and machine tools with a relative gain in competitiveness of 20 percent (Figure 2.3). The real depreciation resulting from the devaluation of January 1999, and business cycle during 1998–99, will likely affect the relative competitiveness across industries; however, data is not yet available for this period.
Brazil: Unit Labor Cost By Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Unit Labor Cost By Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Unit Labor Cost By Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
8. Data on export profitability by industry show that some sectors benefited more from the devaluation than others and that the devaluation is not the only influence on profitability. For example, low commodity prices and low prices for manufactured exports in 1999 have mitigated the positive effects of the devaluation in the first quarter of 1999 relative to the first quarter of 1998 for some sectors. For example, the export profitability of agriculture increased by 15 percent over the period, that of oil increased by 4.7 percent, that of electronic equipment increased by 9.6 percent, and that of metallurgy increased by only 3.9 percent (Figure 2.4). In contrast, the export profitability of auto parts increased by 44 percent, that of machine tools increased by 53 percent, and that of mineral extraction increased by 44.5 percent increase. In relation to 1994, it is also clear that some sectors have benefited more than others from the devaluation. The export profitability of all sectors has risen above 1994 levels after the devaluation.
Brazil: Profitability of Exports by Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Profitability of Exports by Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Profitability of Exports by Industry
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
B. Export Performance
Export market share
9. Brazil’s export share of GDP has traditionally been low relative to that of other countries. On average, the export share of GDP has remained above 20 percent for a sample of 35 countries, whereas Brazil’s export share has only occasionally breached the 10 percent mark (Figure 2.5). More recently since 1994, the export share of GDP for the sample of 35 countries has increased substantially, while Brazil’s export share of GDP has fallen to its lowest level since 1980.
Brazil: Export Share of GDP, 1980-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Share of GDP, 1980-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Share of GDP, 1980-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
10. The world market share of Brazilian exports hovered above 1 percent over the 1980s, but trended downward during the 1980s and 1990s. A similar trend can be observed for the Brazilian export market share of the Asian and North American markets. Over the 1990s Brazilian exports gained market shares in Europe and Latin America, the latter gain reflecting a growing market share in Mercosur. Between 1991, when Mercosur was created, and 1998 the share of Brazilian exports to the common market rose from 19.3 to 23.2 percent. Since the devaluation, Argentine imports have declined at about 24.5 percent in value over the first five months of 1999, relative to the same period in 1998. Argentine imports from Mercosur (mostly Brazilian exports) have declined by about 26.5 percent over the first five months of 1999, relative to the same period in 1998 (Figure 2.6). The relative decline in the value of Argentine imports suggests a small loss in market share for Brazilian exports to Mercosur over the first five months of 1999.
Brazil: Export Market Share, 1981-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Market Share, 1981-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Market Share, 1981-1998
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
11. Brazilian manufactured exports are not concentrated in the most dynamic world product markets and are therefore not competitive in product markets with expanding market share.5 Dynamic product markets are defined as those which grew in relation to the volume of trade in manufactures over the period 1989–95, while super-dynamic product markets are defined as those in which relative growth exceeded 10 percent. Over the period, Brazil’s share in dynamic world products dropped from 0.50 percent to 0.38 percent (-24 percent), while the share in super-dynamic world product markets dropped from 0.30 percent to 0.19 percent (-37 percent). In contrast, the share of dynamic products in Brazilian exports increased from 29.4 percent over the period to 34.4 percent (17 percent), while the share of super-dynamic exports increased from 8.8 percent to 9,4 percent (7 percent). Although the share of dynamic exports in total Brazilian exports is increasing, it is not increasing at a fast enough rate to result in an increased market share in strategic product markets.
Export volumes
12. Data through April 1999 suggest that trade volumes are beginning to react favorably to the devaluation.6 Import volumes continue to decline, although the three-month rolling rate of decline seems to have stabilized at around 25 percent over April and May. Export volumes are now beginning to increase after a period of decline. Specifically, export volumes declined on average by 2.5 percent during the period February–May relative to the same period in 1998. This decline can be explained by substantive cuts in external trade financing in the second half of 1998 and the first quarter of 1999, and by significantly lower levels of economic activity in the region, namely in Mercosur and especially Argentina. However, in May 1999, as financing constraints eased and economic activity showed signs of recovery in Southeast Asia, export volumes began to show incipient signs of recovery. On a three-month rolling basis, export volume increased by 1.6 percent in May 1999 relative to May 1998; on a year-over-year basis, export volume increased by 9 percent in May 1999 (Figure 2.7).
Brazil: Trade Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Trade Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Trade Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
13. The response of exports and imports to the devaluation has varied according to product types. Semimanufactured exports have been the most buoyant, followed by basic (mostly agricultural commodities) exports (Figure 2.8). The response of manufactured exports has been more lethargic. Thus, semimanufactured export volumes increased by 22 percent over the period March–May 1999 relative to the same period in 1998, basic export volumes increased by 5.6 percent over the same period, while manufactured export volumes declined by 6.5 percent over the period. On a year-over-year basis, semimanufactured export volumes increased by 44.5 percent, basic export volumes increased by 12 percent, while manufactured export volume declined by 1 percent in May 1999. While manufactured export volumes have been the slowest to respond, their rate of decline has decelerated sharply over the first five months of 1999 and is expected to turn positive in the second half of the year as market share is gradually regained in world markets. Among imports, the fastest decline is observed in consumer durables (Figure 2.9). There is also anecdotal evidence of a high degree of import substitution in the production of manufactures, especially auto parts.
Brazil: Export Volumes by Type of Export, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Volumes by Type of Export, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Export Volumes by Type of Export, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Import Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Import Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
Brazil: Import Volumes, January 1995-April 1999
Citation: IMF Staff Country Reports 1999, 097; 10.5089/9781451805895.002.A002
C. Export Financing and Promotion
14. The government’s export promotion strategy (Programa Especial de Exportaçoes) has the objective of increasing exports to US$100 billion by 2002. This is to be accomplished by increasing the export share of small and medium enterprises with high value added, thus diversifying the export base away from large enterprises and basic exports. To achieve this goal, the registry system for exports (Siscomex) is being greatly simplified and red tape is being reduced. In addition, several formal and informal official export financing schemes are indirectly geared at export promotion. These schemes are managed either by BNDES or the Banco do Brasil. The BNDES operates an Exim facility (BNDES-Exim) which provides pre- and post-embarkation export financing and buyers credits. The BNDES, in conjunction with the Association of Small and Medium Enterprises (SEBRAE), has instituted a guarantee fund (FGPC) to increase access to trade financing by small and medium enterprises. The Banco do Brazil manages the government’s PROEX scheme; PROEX has both a financing component and an interest equalization component.7 The Banco do Brasil is also informally and almost entirely responsible for providing export financing through ACC (“adiantamento de contrato de cambio”) to small and medium enterprises. The dollar value of the PROEX budget has shrunk significantly in 1999 after the devaluation and the dollar value of ACC (including but not exclusively from Banco do Brazil) has increased since the devaluation. The latter signals some further recuperation in export volumes (Table 2.1).
Brazil. Proex Budget
(In millions of US dollars)
Brazil. Proex Budget
(In millions of US dollars)
| Financing | Equalization | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Budget | Executed | Percent of Budget Executed | Budget | Executed | Percent of Budget Executed | Budget | Executed | Percent of Budget Executed | |
| 1995 | 216.4 | 84.1 | 38.9 | 1074.7 | 98.2 | 9.1 | 1291.1 | 182.4 | 14.1 |
| 1996 | 52.5 | 45.6 | 86.9 | 442.7 | 139.1 | 31.4 | 495.2 | 184.7 | 37.3 |
| 1997 | 289.4 | 98.9 | 34.2 | 643.5 | 262.6 | 40.8 | 932.9 | 361.6 | 38.8 |
| 1998 | 404.9 | 181.6 | 44.9 | 845.5 | 531.0 | 62.8 | 1250.4 | 712.6 | 57.0 |
| 1999 | 459.1 | -- | -- | 477.8 | -- | -- | 936.9 | -- | -- |
Brazil. Proex Budget
(In millions of US dollars)
| Financing | Equalization | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Budget | Executed | Percent of Budget Executed | Budget | Executed | Percent of Budget Executed | Budget | Executed | Percent of Budget Executed | |
| 1995 | 216.4 | 84.1 | 38.9 | 1074.7 | 98.2 | 9.1 | 1291.1 | 182.4 | 14.1 |
| 1996 | 52.5 | 45.6 | 86.9 | 442.7 | 139.1 | 31.4 | 495.2 | 184.7 | 37.3 |
| 1997 | 289.4 | 98.9 | 34.2 | 643.5 | 262.6 | 40.8 | 932.9 | 361.6 | 38.8 |
| 1998 | 404.9 | 181.6 | 44.9 | 845.5 | 531.0 | 62.8 | 1250.4 | 712.6 | 57.0 |
| 1999 | 459.1 | -- | -- | 477.8 | -- | -- | 936.9 | -- | -- |
D. Taxation and Competitiveness
15. Brazil’s complex tax system and heavy tax burden (above 30 percent of GDP) have been frequently highlighted as a hindrance to competitiveness. The complicated tax system implies that companies, whether exporters or not, must incur large administrative costs to keep up with the changes made to the system even if they do not alter its basic structure. In addition, several taxes including ICMS, PIS, COFINS, IPI, and, more recently, the CPMF, have a cascading effect over the production chain, thus distorting the relative pattern of production. Tax concessions are granted to exporters in an effort to allow them to compete abroad on a level fiscal playing field. Reimbursement may be obtained for the IPI, COFINS, and PIS/PASEP taxes for the purchase of intermediate goods used in export products. More recently, primary and semimanufactured exports have been relieved, through rebates, of the value-added tax imposed by the states. In addition, exporters benefit from a drawback system by which import and other taxes are rebated, or reduced, if imports are to be used as inputs for re-export. Nevertheless, the tax system remains a structural hindrance to the competitiveness of Brazilian exports; it is impossible to purge, through rebates and exemptions, all of the indirect taxes levied on Brazilian exports.
Prepared by Alberto Musalem.
The ULC-based REER is calculated relative to 21 industrial countries.
The terms of trade are calculated using Funcex export and import price indices.
Calculated by Funcex using IBGE’s 1992 input-output matrix.
R. Fonseca and E. Velloso (1998), “Desempenho Exportador da Indústria Brasileira”, Confederação Nacional de Indústria. Although the study is based on data through 1995 it provides insights into the strategic positioning of exporting industries in world markets and their loss of export market share.
Trade volume data from Boletim de Comercio Exterior, Fundação de Comercio Exterior (Funcex), June 1999.
A recent ruling by the WTO on the interest equalization component of PROEX classified it as a de facto subsidy. After the appeals process, the continuation of this component of Proex will be decided on the basis of the final WTO ruling.
