Factors that have enabled Brazil to become a rapidly developing economy.

3635 Words Jan 19th, 2014 15 Pages

Brazil is the largest country in the South American continent, and it is amongst the 12 largest economies of the world. It possesses vast natural resources and offers remarkable ecological diversity, majority of its 192 million inhabitants now live in urban areas (Griffiths, A and Wall, S. p 609). The country also possesses a diversified industrial and agricultural sector and In 2001, the contribution of the agricultural sector to GDP was 9.3%, while that for industry and services was 33.9% and 56.8% respectively (Pereira, L 2004).
At around the same time, Jim O’Neill, the head of global economic research at Goldman Sachs, coined the acronym “BRICs” to refer to Brazil, Russia, India, and China, the emerging market
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It was rather centred around the de-indexation of the Brazilian economy, which was accomplished in most part by converting salaries and a number of other prices in the months preceding the implementation of the Real Plan into ‘Real Value Units’ (URVs), which were then linked to the dollar (Ferrari-Filho, F 2001).
Source: www.inflation.eu
Fig. 1 Illustrates Brazil’s battle with hyperinflation

These policies enabled Brazil to get monthly inflation rates down from 45% during the second quarter of 1994 to an average of less than 1% in 1996 (Inflation.eu 2012). As a result the economy grew by 6% percent in 1994, and by 4.2% and 2.9% in 1995 and 1996, respectively (Clements, B. 1997) as domestic demand increased fuelled by lower inflation and higher real wages. The successful implementation of the Real Plan not only helped stabilize the economy , it also showed real economic discipline necessary to attract the foreign capital and investment.

The combination of bringing inflation down and provoking expansion in demand in the short term resulted in domestic savings dropping sharply to 17.9% of GDP in 1995, from 21.5%, in 1993 (Cinquetti, C 2000), this forced the government to slow the economy down by controlling domestic credit and increasing the real’s interest rate. The result of the high interest rate and capital account liberalization was short term…