Volume 43, Number 171,
October-December 2012
Argentina and Brazil:
Macroeconomic Challenges
Eduardo Bastian and Elena Soihet

In this context, the main problem of the Brazilian macroeconomic regime was the tendency for the exchange rate to appreciate. According to data from the Central Bank of Brazil, the real Brazilian exchange rate started to appreciate in 2003 and by December 2010, was equivalent to 70% of the rate in June 1994, a value lower than the active rate in December 1998, when there was a generalized opinion that Brazil’s exchange rate was lagging.

Currency appreciation can also represent a serious future obstacle, as it tends to provoke an increase in public account deficits and, even worse, can lead the country towards a process of deindustrialization and/or reprimarization of export patterns.17 These elements make the Brazilian economy more fragile, because in the short term, high international prices for commodities only minimally back up trade balances. However, increasing dependence on primary products is worrisome, as the country is more exposed to fluctuations in international prices for these goods.

Taking into account that China has a very important weight in the recent increase in commodities and that this growing participation is due to its economy’s rapid industrialization and growth, it is very possible that in the medium term, as China begins to grow at lower rates, commodities prices will adjust to lower levels. This is the case, for example, for precious metals. According to the International Monetary Fund (2006), “historical models suggest that the consumption of metals typically grows together with income per capita until reaching a level of $15,000-$20,000 (in equivalent terms of purchasing power), as the country goes through a process of industrialization and building infrastructure” (imf, 2006: 6). As per capita income levels in China have still not reached this point, metal prices will continue to rise for a few more years, according to this logic. However, this increase is not a permanent process.

In this context, the problem is that in the face of an appreciated exchange rate, elevated commodities prices minimally guarantee profit for exports of primary products. However, this is not the case for industrial products, which need a more depreciated exchange rate18 (Bresser Pereira, 2007: 121). Thus, industrial sectors suffer in two ways from the appreciated exchange rate: on the one hand, these sectors have lower real income per exported product and, on the other hand, they have to confront competition from foreign products with more competitive prices in the international market. The risk for this process is that the Brazilian industry may not be able to stand up to this heavier competition and the country would suffer deindustrialization. If this were to happen, Brazil would be very vulnerable when the high cycle of commodities ends.

By analyzing these problems in Brazil today, we can see strong evidence of reprimarization of the export pattern. One example is the fact that relative participation of basic manufactures in Brazilian exports has increased from 46% in 2001 to 55.4% in 2009, according to data from the 2009 eclac statistical yearbook.

Regarding deindustrialization, it remains unclear whether this process is already under way in Brazil.19 There is evidence of difficulties in Brazilian industry today. Data for the penetration coefficient of imports20 in the period 2004-2010 provides some evidence (Table 1). Statistics from Ipeadata show a jump in the penetration coefficient of imports from 11.1% in the fourth quarter of 2004 to 19% in the fourth quarter of 2010 in the industry of transformation. By sector, this value almost tripled for the textile industry and almost doubled for vehicles in this period.21 There was a nearly 65% increase for machines and equipment during this period.

In any event, although there is still no consensus on the effects of currency appreciation on industry, there is certain agreement among authors that if the current tendency is maintained, problems related to deindustrialization and reprimarization of the export pattern will arise in the future.22

17 It is important to distinguish deindustrialization from reprimarization of the export pattern. Deindustrialization — as defined by Tregenna (2009) — is characterized by a situation where there is both reduction in industrial employment relative to total employment as well as a drop in the value added by industry to the GDP. Reprimarization of the export pattern is rather characterized by an increased participation in the export pattern of primary and manufactured products of low aggregate value and/or technological content (Oreiro & Feijó, 2010: 221-222).

18 Bresser Pereira talks about an industrial equilibrium exchange rate that would be “the rate that makes commercial goods industries viable using the best technology available worldwide” (Bresser Pereira, 2010: 69).

19 There are studies — such as those by Oreiro & Feijó — that affirm that Brazil has undergone deindustrialization in recent years, in light of the simultaneous loss of participation of the industry of transformation in gdp and the increase in the industry trade deficit (Oreiro & Feijó, 2010: 229-230).

20 This is the coefficient of participation of imports in apparent consumption

21 Vehicle data includes vehicles with motors, tow trucks and bodywork.

22 The risk of reprimarizing the export pattern, and in particular deindustrialization, should be indicated due to the importance that industry acquired in the country’s economy. Throughout the twentieth century, Brazil made a great effort to develop its industry, which allowed the country to have an integrated and pretty diversified industrial base at the beginning of the 1980s (Versiani & Suzigan, 1990: 21).

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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