CIA-1

DEVELOPMENTAL ECONOMICS

CHARACTERISTICS OF DEVELOPING COUNTRIES

A Case Study on Brazil

Khushboo Kothari

2140880
3 EMS

Submitted to:
Dr Mahesh E
DEVELOPING COUNTRIES
A developing country, often known as an emerging or transitional economy, is a nation with a
weak industrial base, a low Human Development Index (HDI) in comparison to other nations,
and subpar governance. It is one that has a moderate to low Human Development Index, an
undeveloped economic base, and a relatively poor level of living, according to the UN (HDI).
Such nations have, among other things, a much lower per capita national product, low labour
productivity, a high percentage of illiteracy, and a high proportion of employment in agriculture
when compared to industrialised nations.

INTRODUCTION

Brazil is a country with the 9th largest economy of the world but is still considered a developing
economy. It has an impressive stock of human resources but is overshadowed by inequality and
poverty. Moreover, it is also facing a crisis of political leadership and shirking of climate change
responsibilities. The country is facing a big challenge of resuming growth without backtracking
on its social reforms and ensuring political stability. Brazil is developing country because its
economy’s rate of growth failed to grow or grew too slowly for most of its history. The
institutional obstacles to Brazilian growth falls into three main categories:
 slavery and its long after effects,
 centralism before 1889 and federalism thereafter
 failure to define and effectively protect basic human and property rights.

BACKGROUND AND ANALYSIS

Slavery has always been an integral part of Brazilian society, however human resources like
education and training for these slaves had been completely ignored which adversely affected
their economy. There was excessive centralism in the nineteenth century, which meant that it the
prevented municipal and state governments from borrowing money from abroad or at home and
invest in the needed infrastructure such as roads, ports, railroads, schools and hospitals. Many
government policies have contributed to the country’s stagnation and most of them had
established interests over competitive efficiency. Policies have included over the top
protectionism and regulation that discouraged entry and blocked competition, fiscal and
expenditure policies increased the regional and social inequalities and a lack of public
investment and incentives for research in scientific and technological development.
The following table compares Brazil with other developed and developing economies.

CHARACTERSTICS OF DEVELOPING COUNTRIES

Brazil’s dependence on primary sector:

Concentrating on primary products can result in a lack of investment in other areas, such as
education and industrial production, which can be detrimental to the long-term growth of an
economy. Comparative advantage is subject to change. It's crucial to consider future prospects
as well as the current comparative advantage over the next 10 or 20 years. Because of inelastic
demand, prices are frequently erratic. For instance, if there is a "good harvest," supply will
increase and the price of primary products will decrease. However, because demand is rigid, this
would result in a decline in earnings. The finite primary products may get exhausted in
developing economies. Resources can become limited. This would leave a hole in the economy
without diversification.
Brazil is the largest source of products like coffee, oranges, cassava, sugar, soy, and beef in the
world making these items very profitable for their industries. Agriculture business contributes to
Brazil's trade balance, in spite of trade barriers and subsidizing policies adopted by the
developed countries. Brazil’s economy in history, has been largely characterized as a cycle of
huge booms and busts. Between the 16th to the middle of the 20th century, the country was
dependent on one or two major agricultural products, which had very volatile prices in the
international markets. Diversification the country’s production and reducing its dependency on
agricultural exports by encouraging manufacturing was the main agenda of the Brazilian
government in the 20th century.

Brazil’s export dependency is on primary goods:

Commodity-dependent is not just an adverb. A state, that is. a condition that is frequently linked
to poverty and vulnerability. a condition that is so pervasive that it not only characterizes a
nation's present but also, most likely, will decide its destiny. When a nation's economy is
insufficiently diversified and is overly dependent on basic goods, it leaves itself vulnerable to
price fluctuations on the global market. Employment, exports, and tax revenue all suffer when
prices drop.
Brazil is the 27th largest exporter of goods and services in the world which constitutes 1.2% of
the global exports. Brazil exported 225 Billion US dollars in 2019. The majority of exports are
basis or semi-manufactured products which generates little monetary value which prevents
long term growth. Soy represents 12% of the exports. Oil, Iron ore, pulp, corn, coffee,
cotton, tobacco constitutes the major exports.
There are several factors that attribute to this problem, highlighting a few:
 An excessive amount of production taxes are collected (as a result of the nation's
economic and legal system being based on State Capitalism rather than Free-Market
Capitalism).
 The lack or deficiency of infrastructure (means of transport, excessive bureaucracy) for
export, high production costs (expensive energy, expensive fuel, expensive maintenance
of trucks, expensive loan rates and export rates).
 Lack of an industrial policy.
 Tariff barriers imposed by other countries on the country's exports.

Hence, in spite of being one of the top 10 exporters in volume, value wise it accounts only
around 1% of value.
Among the ten products that Brazil exports the most and that generate the most value, eight
come from the agriculture business. If we compare with a developed economy like the US, the
contrast is evident. US has been a leader in technology and innovation since 2019 and the
exports are mainly in Hi Tech goods and royalties. Eight out of the top ten tech companies of the
world are from the US. More than half of the semi-conductor manufacturers are from the US
origin. Again, the main industry for Switzerland is machinery, precision instruments,
pharmaceuticals, banking and tourism where the value addition extremely high compared to a
primary good.

Low GDP/ capital, high unemployment, inequitable distribution of wealth and low capital
formation
Lower income levels are frequently accompanied by the poverty trap, a vicious cycle in which
inadequate funding for infrastructure, health care, and infrastructure investment reduces capital
formation (capital shortfall), which in turn results in low productivity. The low capital per capita
of the population is one sign of capital insufficiency. Low investment levels as a result of low
savings rates are frequently cited as the main reasons of capital insufficiency.
At the beginning of the 21st century, serious problems marked the Brazilian economy which
was aggravated by political uncertainties. Inflation, financial instability and unemployment (or
underemployment) are some of the factors which remained constant threats to the economy.
Political and financial scandals periodically erupted throughout the country causing further
instability. Brazil still has one of the world’s most inequal distributions of wealth: around 10
percent of the people received nearly 50% of the country’s income, whereas the poorest 40 % of
the population brought in less than one-tenth of the total wealth of the nation. In addition,
landownership continued to unequally distributed as they were in the old, colonial times.
 The GDP per capital for Brazil is 4 to 5 times lower compared to developed economics with
high unemployment rates with 15% of people below poverty lines and lower Human
development Index (HMI) compared to the developed countries. One of the striking features is
the high Gini coefficient which measures the income inequality and wealth inequality within a
nation. Brazil has a high index which signifies an inequality of wealth in the country which is a
hindrance to the progress of the nation. The Gross Capital Formation of Brazil in 2020 as per
World Bank is 15.4% of GDP which has been declining over the past ten years.

Still mired in debts

The greatest economy in South America, Brazil, is accruing a record amount of debt that has
brought up echoes of previous catastrophes. Due to crisis-related spending, Brazil is on track to
post a record 800 billion reais ($115 billion) budget deficit this year, pushing the country's debt
to an unprecedented level for an emerging market economy of roughly 95% of GDP.
The spending limitation, which restricts growth in non-obligatory government outlays to the rate
of inflation, will be broken next year barring a sharp increase in income or a squeeze on
spending. Only 31 billion reais greater than this year's amount, the cap is 1.485 trillion reais
($275 billion). Even in normal times, there gives very little room for maneuver, less alone the
additional social, health, and investment spending required in a pandemic. Importantly, the Bank
for International Settlements estimates that only 3% of Brazil's entire $1.45 trillion debt is held
in foreign currency. The government is now less exposed to currency swings than in the past
because that is one of the lowest levels among emerging markets.
Over 90% of that debt is owed to its own citizens, therefore the government is also less
vulnerable to shifts in investor sentiment.
SUMMARIZATION OF DEVELOPMENT ISSUES

The core problems of Brazil’s economy which hinders it growth and sustainability are:
The first cause of hindrance in the growth of the nation is the persistent social, ethnic and
regional inequalities that makes wealth distribution in Brazil one of the most unequally
distributed in the world. High rates of poverty, chronic malnutrition and preventable disease
cause a strain on the economy.
The second cause of hindrance in the growth of the nation is the widespread and costly unsurely
of civic and property rights. At the bottom of the social ladder, where unsurely is most
pervasive, the lack of effective legal protection greatly increases social inequality. In economic
life, the cost of protecting life and property acts a huge strain on the productivity of the
economy.
Realistic Economic Solution
The third cause of hindrance in the growth of the nation is the cost and inefficiency of the
public sector of the country. It takes an average of 152 days to register a business in Brazil after
which business transactions may begin whereas the world average is 48. Transparency
International ranks Brazil 62nd out of 158 countries in perceived corruption and Brazil also
ranks 124th in ease of doing business . Maybe that’s where policymakers can start simplifying
the taxation regime, liberalizing the economy and cross- border trade, increasing privatization
and take steps to reduce inequality.
The economy of Brazil would gain from opening up. Brazilian economic barriers, both tariff and
non-tariff, make it one of the most closed economies in the world. Opening up to broader trade
is necessary to increase competitiveness and could offer investment the much-needed boost. In
this regard, the recent trade agreement between the European Union and Mercosur and actions
taken to adhere to the OECCD liberalisation norms present significant chances to promote trade
integration.
RECOMMENDATIONS
It is important for Brazil to bounce back and crawl back for sustainable growth. Inequality not
only hinders economic growth in an economy but it also fuels polarization and populism in the
country.
Brazil needs to focus on reducing inequality as its national objectives by bringing in many
different reforms. A combination of interventions for fairer collection of taxes, reducing
subsidies for the rich, rolling-out more civil right policies and stimulating opportunities for the
most vulnerable.
Most important of all is to give impetus on improving the quality of basic public education,
especially early childhood schooling. Brazil's education system is failing poorer families.
Wealth inequality, therefore greatly increases inequality of opportunity for the next generation.
Brazil needs an inclusive growth strategy to tide of the crisis. The strategy is not only for
growing income and smart deregulation but also ensures that quality public services delivering
security, education, health, sanitation and transportation reach all citizens not limiting to a
few privileged ones.
Secondly, to tackle the big challenges of the upcoming decades, Brazil needs to previsualize
their leadership strategies. Accountable, responsible and representative leadership are some
qualities that are vital to revitalizing the social contract. Brazil is a country of infinite possibility.
It has achieved major gains over the last generation. Powered by civic and social entrepreneurs
from across the political spectrum, moving away from their comfort zones can tackle the above
problems and growth can be triggered.
REFERENCES
 https://www.worldbank.org/en/country/brazil/overview#:~:text=Results-,The
%20COVID%2D19%20pandemic%20exposed%20Brazil%20to%20an
%20unprecedented%20health,by%20a%20rebound%20in%202021.
 https://www.bbc.com/news/business-48386415
 https://en.wikipedia.org/wiki/Economy_of_Brazil#Components
 https://www.reuters.com/article/us-brazil-economy-spending-analysis-idUSKCN2581IK
 https://economics.rabobank.com/publications/2014/january/brazils-macro-economy-past-
and-present/#:~:text=big%20in%20Brazil.-,Conclusion%20and%20outlook,a
%20slightly%20higher%20inflation%20target.