The Problem of Commodity Dependence in the Context of Global Imbalances: The Case of Brazil

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Information about The Problem of Commodity Dependence in the Context of Global Imbalances:...
Economy & Finance

Published on October 15, 2014

Author: pkconference



Economics in Latin America session at 12th International Conference

1. The Problem of Commodity Dependence in the Context of Global Imbalances: The Case of Brazil by Laura Ebert and Leanne Ussher THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE Kansas City, Missouri September 25–27, 2014

2. Outline Commodity Producers and Global Imbalance Current Commodity Boom A new Commodity Curse Conclusion

3. Creation of Global Real Imbalance United States Key reserve currency Deindustrialization and financialization Overconsumption of commodities, ease of financing trade deficit China Manufactured goods Build up US reserves to devalue Yuan Low wage Leader in mass production (Verdoorn’s Law), high returns to scale Brazil Build up US reserves to counter pressure of capital inflows and rising commodity price Low wage, Low market share, low technology and returns to scale Primary commodity producer but high FDI in commodity production Low FDI and domestic investment in manufacturing Commodities FDI in commodities, manufactured gds Commodities, limited manufactured gds FDI, net agricultural . . FDI

4. Creation of Financial Imbalance United States Appreciated reserve currency Cheap imports Low inflation Low interest rates China Depreciated currency Rising commodity prices (unless commodity exporters devalue) Effective capital controls Short term capital Brazil Appreciated currency Limited domestic capital market Ineffective capital controls Falling profits from commodities as profits get repatriated Capital inflows for commodity Long term capital, US $ forex, revenue manufactured gds Short term capital, Capital outflows US $ forex manufactured gds

5. After buildup of global imbalances things start to change… •1990s – financial sector deregulation in Brazil increasing access to foreign creditors (Studart, 2000) •US dollar starts to depreciate as US interest rates fall •Commodity boom after 2004 – rising prices of commodities (linked to China and depreciating US dollar)

6. 30 25 20 15 10 5 0 1990 1992 Exports to China (% of total export) South America* (in USD billion) 1994 1996 1998 2000 2002 2004 2006 2008 2010 Argentina Brazil Chile Peru Total imports from 120 80 60 40 20 0 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CN EU US Source: UN Comtrade Source: UN Comtrade

7. China main source of demand for iron and soy… but overall small contribution to economic growth 0.05 points in Brazil Compared to Chile at .34 in Chile

8. However currently Brazil’s stocks of external debt to GNI have declined from about 50 percent to under 20 percent …. Due to reduction in public sector debt This is a good thing 

9. World bank

10. The question now is what is happening to private sector debt and how might Brazil’s status as a commodity producer influence things going forward….?

11. World bank

12. World bank

13. World bank

14. Reasons for private sector debt build up… •Greater access to foreign creditors •Low interest rates abroad vs in Brazil •Push to increase demand of middle and lower classes – the new “let’s generate domestic demand”… •Rising commodity prices increasing credit worthiness in eyes of foreign creditors

15. The question that needs further research: Are CDEs vulnerable in boom times to private developed country creditors who see the commodity revenue stream as a source of interest payments (Michael Hudson) Is this another “commodity curse” in the current world of global imbalance??

16. What is happening … Foreign creditors are happy to lend to Brazilians – But credit is going to finance imports of manufactured goods…. (Net Exports of Manufactured goods was 2010 74% of Brazilian imports were manufactured goods - exports 14%) As domestically produced manufactured goods have fallen… (plus would be lower quality and more expensive in any case  )

17. Instead the idea of growth through domestic demand is to raise incomes by raising labor productivity…. But private sector left to own devices is not channeling debt in this manner…

18. What happens next?? •Debt buildup among lower and middle classes continues  •Debt buildup of Brazilian corporations continues  •Continual accumulation of foreign reserves by Federal Reserve bank •Continued deindustrialization of economy – rise in services and commodity and commodity related production  •Rise in FDI 

19. Than US economy recovers….  US interest rates rise  US dollar appreciates relative to Real  Commodity prices fall as producers adjust prices in competitive market

20. For a commodity producer like Brazil, this means…. • Capital flight (and depreciation despite central bank forex)  • Higher interest rates on private sector foreign debt  •Higher cost of financing dollar denominated debt due to deprecation of Real relative to US dollar  •Falling commodity prices on account of stronger dollar leading to falling growth 

21. Ratio of Commodity Exports to Total Merchandise Exports By Region 2009-2010 Average, 154 developing countries in sample. Source: “State of Commodity Dependent Countries 2012” UNCTAD p.18. Accessed:

22. What do we do?? IMF/UNDP demand lead growth with no/low imports Frankel – peg exchange rate to commodities Kaldor via Ussher – commodity reserve currency

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