ECONOMIC ANALYSIS DANGER 1

SURVEY OF BRAZIL PART 1 TO BE CONTINUED

SURVEY OF BRAZIL

THE LIMIT AND DANGER OF CLASSICAL ECONOMIC ANALYSIS

THROUGH THE CASE OF BRAZIL

By Didier BERTIN

8 March 2010

This survey constitutes also the “PART 2” of the survey on Brazil dated 4 January 2010

I-INTRODUCTION

Brazil made recently substantial economic improvements according to usual economic standards and values issued from the classic liberal model.  One may wonder in which extent these improvements as they are determined are meaningful in the real world in which the Brazilian population is living and if the measure tools are not distorted by an improper weighing excluding adequate priorities.  We will see that classic tools issued from liberal model give indicators, which are not entirely reliable and which lead Authorities like FMI or OCDE‘s Economic Department (hereinafter referred as OCDE) to base their assessments on signals , which might be unreliable and may thus give a distorted view on certain Countries. Such a distorted view may probably come from the fact that certain analyses do not underline sufficiently the difference between Nations whose substance is their people and Nations viewed as Commercial Corporations. National Economics should assess in priority the Citizens’ welfare. 

Surveys on Brazil are often an excellent example of the inadequacy of the classic Economic methodology. As a matter of fact, Brazil is a successful country on a basis of usual economics standards, which are unfortunately useless regarding the reality of population’s welfare.

II – THE RESULTS OF BRAZIL ACCORDING TO CLASSICAL ECONOMICS - Sources: OCDE and CIA fact book

Or, how improper signals may involve OCDE’s immediate conservative advice: “Tax and social burden on Companies must be alleviated”

Brazil is a federative Republic of 26 States and one federal District including 200 million inhabitants on an area of 8.5 million km2.

Classic Economic Standards:

·         GDP at official exchange rate: $1.573 trillion -2008 estimation

·         GDP - real growth rate: +5.1% (2008 estimation) – World comparison: 84

·         GDP per Capita  at current prices and current exchange rate: $ 8 210 according to OCDE

·         Unemployment rate: 7.9% (2008 estimation) –world comparison: 109

·         Distribution of family income - Gini index: 0.57 (2005) – 0.61(1998)

·          Inflation rate (consumer prices): 5.7% (2008 estimation)

·         Public debt: 38.8% of GDP (2008 estimation) – World comparison: 58 – Ratio estimated to 52% in 2004

·         External Debt :$262.9 billion (31 Dec. 2008) -$240.5 billion (31 Dec.2007)

·         Population below poverty line: 31% (2005)

·            Foreign Trade:

·         Exports of goods: 197.9 USD billion -12.6 % of GDP - 22.1 % p.a. on average over 5 previous years.

·         Imports of goods: 173.1 USD billion - 11.0 % of GDP - 29.1 % p.a. on average over 5 previous years.

·         Total official reserves: 192.8 USD billion – i.e. 13.4 months of goods imports.

·         OIL:

·         Oil production: 2.422 million bbl/day (2008 est.) - world comparison:13

·         Oil exports: 570,100 bbl/day (2007 est.) -  world comparison: 27

·         Oil imports: 632,900 bbl/day (2007 est.) -  world comparison: 21

·         Oil proven reserves: 12.62 billion bbl (January 2009 est.) -  world comparison:15

We might see through these figures:

·         A good economic expansion reflected by GDP increase

We have excluded GDP at purchasing power parity since criteria (external pricing, basket of goods…) are controversial.

·         An external debt increase by 8% from 2007 to 2008, which might be acceptable if it covers capital expenditures

·         Balance of payments surpluses permitting  to accumulate International Reserves well over one year of imports

·         Oil independence and proven reserves guaranteeing the future.

·         Acceptable unemployment as compared to Western countries.

·         Population under poverty in line with other emerging countries

·         Improving Gini index

This is sufficient for OCDE to issue a survey in last July advising Brazilian Authorities to alleviate Taxes and Social burden on Corporations to ease their development as a mechanical consequence of such steps.

We will show why OCDE’s survey illustrates the inadequacy of classic Economic approach regarding assessment of a reality with traditional Standards. OCDE is thus in line with views of conservative Governments’ blindness.

OCDE’s survey includes 140 pages whose substance may be contained in 12 pages, with many appendices such as mathematical modeling of budget elasticity disconnected in our opinion from reality.

As a consequence improper recommendations were made to Brazilian Government and few correct observations were made without identifying the roots of the problems.

II- THE REALITY OF BRAZILIAN SITUATION FAR FROM CLASSICAL ECONOMIC ANALYSIS

1-GDP

The GDP is not a full secured assessment of a Richness production of a country since it is based on prices determined by agents for their production of goods and services in a context where consumers may not have a moderating power on prices trough an efficient market competition. Value is a consequence of the efficiency of production agents and of the market competition’. In a country where companies are inefficient and the market competition insufficient, GDP may not reflect an objective creation of richness comparable to other countries. On top currency market variations may influence substantially GDP’s valuation. Internal pricing and external currency markets may be together led by speculative targets far from rationality, especially if Government does not make adequate corrections to protect consumers i.e. citizens.

2- BRAZILIAN PURCHASING POWER.

In the following table we have considered very few but meaningful prices. This view is very approximate but gives an idea of everyday life of Brazilian people in the field of purchasing power and was considered as meaningful by many Brazilian consumers:

The basic food prices shown on this table are on average similar to those of France in value but on the basis of the Brazilian minimum wage, they are near 6 times more expensive than in France. This is worst regarding products as a simple TV, car or PC 12 times more expansive as well as for any basic domestic appliances. A more detailed research should be made but again this table gives a good indication according to Brazilian consumers.

Many factors may create a distortion as the:

·         Absence of efficient market competition

·         Managerial incompetence of Entrepreneurs

·         Very high profit margins

·         Heavy indirect taxation of Authorities

·         Low wages and Salaries  (this aspect will be specially developed)

The combination of these factors creates high poverty.

3-GDP INCREASE

The high rate of GDP increase has a limited importance since Brazil is in a phase of development from a low level. Matured Economies have of course more moderate GDP increases.

4-EXTERNAL DEBT INCREASE

Despite the stringent financial policy of Brazil, external Debt increased by 8% from 2007 to 2008. This might be acceptable if this increase covers import of production equipment. But In fact this increase was due to the incapacity local Banks to provide sufficient Credits. Corporations have compensated the gap by requesting loans from Banks abroad.