Brazil: Road to Development
Brazil was Portuguese colony for about three centuries until it regained dependence in early 19th century. During the 1800's Brazil have witnessed several changes. There has been increase in population size due to migration of Europeans; the population grew from two million to about eighteen million. Urbanization started to grow, but still more people lived in the rural areas. One of the most urbanized cities at that time was Rio de Janeiro; it became the political center, and industrialized city. In 1889, the republic of Brazil was established; still landowners had political power as before because the national government advocated their interests, and dedicated power to them. In the late 19th early 20th century, landowners had political and economic power as Brazil depended on coffee exporting in growing their economy, so landowners dominated the Brazilian policies. Although slavery was abolished by 1850, land labors were exploited. Not to mention the fact that this created high inequality between the rich and the poor in Brazil, as the landowners exploited agricultural farmers, and gave them very low wages. In addition, farmers were not able own land, as the law only permitted the purchase of the land; in order to be a landowner, and the farmers did not have enough money . Moreover, if a farmer owned his own land, he was not able to finance it, so the end result was the landowners who controlled the agriculture; consequently, they dominated the Brazilian economy as it was an agrarian economy. The huge gap between the rich and the poor created high poverty rate since the farmers receive very low wage rate. Not only are farmers excluded from the Brazilian economy, but were hindered to have a voice in politics, as well. The poor were not allowed to participate in politics, as they did not afford to get educated, so they were not allowed to get positions in the national state (DeWitt 2002).
In the 20th century after the World War II, especially the second half of the 20th century, there were several changes in Brazil. During the military rule from 1964 to 1985, there were severe problems in Brazil. The main problem came with the infrastructure; large cities, like Rio de Janeiro, did not have enough electricity supply. In some cases factories in Rio generated their own electricity as not be hardly affected by the problems of the infrastructure. When it comes to the economy, there was monopolistic competition from foreign investors as to increase their profits. However, during the military rule, there were economic policies that attempted to stabilize the economy. The policies were more of central planning where the state has control over the different sectors of the economy. Actually, the state control capitalism failed in Brazil as there was inefficient resource allocation (Skidmore 1988). The main improvements in the Brazilian economy started in 1985 as the military rule was abolished, and civil rule appeared. There has been increase in urbanization, the urban population increased from 30% in 1940 to 78% in 1999. This was caused due to more industrialization occurred in Brazil as it started relying much less on agriculture in its economy, and more diversification in the economy. In the 1990's more than 60% of the Brazilian exports were manufactured goods, like refrigerators, cars, and steel. Yet, Brazil depends on agriculture on its economy, for example, exporting sugar cane, soybean, and coffee. This shows that the Brazilian economy is diversified, does not depend on one good, or service in developing its economy. Despite the fact that Brazil has improved vigorously in the fourth quarter of the 20th century, inequality between the rich and the poor existed(DeWitt 2002).
Nowadays, Brazil is considered one of the leaders in the developing world; it's considered to be on the right track of development. Brazil has the tenth largest economy in the entire world. It is one of "BRIC" countries; Brazil, Russia, India, and China. These countries are almost developed as they have witnessed extensive economic progress in the last decades. There has been economic growth, increase in GDP per capita, and improvement in average income, etc. However, each country of the "BRIC's" has its own unique case in developing its economy, and each one has limitations in developing its country. Brazil is currently attempting to improve its situation in order to become well developed in the near future by amending some of the polices, and eradicating its social ills, like poverty and inequality.
Brazil is considered to be a democratic country where there is multi-party in the political system, and there is freedom of press. There are presidential elections every four years, and the president could only be elected two times. This is similar to the US presidential elections. The current ruling is coalition party, and the President is Luiz Incio Lula da Silva was reelected in 2006. The legislative bodies in Brazil are the senate and Chamber of deputies. The current Brazilian constitution was founded in 1988, as there have been several transformations, and amendments in it since 1930, and these changes were finalized by the legislative bodies in 1988 (Grinfield 2009) .
There has been a significant transformation in the economic system of Brazil in 1974 by Eugenio Gudin, he changed the economy from mercantilism to State guided capitalism (De Onis, 2002). Mercantilist system is when the government controls international trade as to protect domestic goods. This is done by imposing high tax rates, and high tariffs on imported goods, so domestic goods would be cheaper than the imported goods; consequently, people would buy domestic goods instead of the imported ones. In the mercantilist system there are barriers on exporting raw material, so this is also protecting domestic products, as domestic producers would have a plenty of raw materials .i.e. supply would be greater than demand, so the prices of the raw materials would be low; as a result, domestic products would be cheap (Bates 2001). During mercantilism in Brazil, there was considerable economic growth, as the economic growth was dependent mainly on internal markets; the average growth rate per annum was about six percent (De Onis 2000).
After mercantilism, came the state guided capitalism in Brazil. State controlled capitalism means that the government decides what to be produced, and which firms should be there, still it is capitalism as the government does not interfere in forces of the market which determine the prices of the goods, and the wage rate. In this type of capitalism the private sector has a minimal role in the economy most of economy is dependent on the public sector. When the shift occurred in the economic system, Brazil succeeded at the beginning with the state guided capitalism, but at the beginning of the 1980's, Brazil started to face high inflation rate, problems in paying back its foreign debt, and high corruption rate. These troubles occurred due to the bad fiscal policies; consequently, there was poor economic growth. In fact, in a State guided economy usually government officials seek for their personal gains, so that's why corruption rate increased in Brazil during this type of capitalism. Actually, unlike Brazil, the state guided capitalism was successful in many parts of South East Asia, like South Korea (Baoumel et al2007 ).
The significant changes that happened in Brazil were at the time of President Fernando Henrique Cardoso; he was elected twice from 1995 to 2003. Cardoso introduced the "new model"; this model gives more attention to the private sector in the economy where the private investors are encouraged to enter the market freely with very few restrictions. This system shifts to a more free market system; where the Brazilian government encourages privatization, and it liberates international trade, different from previous economic systems that were present in Brazil whether the mercantilism, or the sate guided capitalism, as previously mentioned. The state role was focusing on public spending targeted on health and education as to improve the quality of life of citizens. The government also focuses on alleviating poverty as Brazil has high poverty rate (De Onis 2000). There are about sixty five million Brazilians, about 30 % of the total population, are under the poverty line; a person earns less than $USD 2, per day (Elbers and Lanjouw 2004). This shows that there is high rate of poverty in Brazil, so that's why the government should allocate some of its resources on eliminating poverty.
In addition to public spending, the state still has some control over the market. In the "new model", the government controls the macroeconomic policies, like the monetary and fiscal policies. Unfortunately, in 1999 there was crisis in the monetary policy which resulted in the devaluation of the real, Brazilian currency that was introduced in 1994, the real depreciated by more than 60%. In reality, when there a currency devaluates, inflation rate increases as people would prefer to buy more of domestic products, so the supply of domestically produced products would be less than the demand; as a result, the prices would of internally produced products would increase .i.e. a general increase in the price level. Since Brazil had strong economic policies, it was able to control inflation rate it only reached 10 % (Currency Devaluation and Revaluation 1999). Brazil controlled inflation by imposing high tax rates, and high interest rate, so people would consume less, so prices would be stabilized. The positive side of the currency devaluation was foreign investment increased in Brazil during 1999-2000; foreigners invested about thirty billion US dollars. These investments were in privatization, mergers and acquisitions, and takeovers. Foreign investments assisted Brazil in covering up its deficit that resulted from the decline in the value of the real (De Onis 2000). After this currency problem, Brazil started to have more control on currency exchange rates by injecting foreign reserves in to the market, so this would avoid the fluctuation in the real (Holland 2005). This example of the currency crisis in Brazil shows that Brazil was able to stand an economic crisis without losing as it was able to attract foreign investors, and it was able to control inflation. Moreover, it shows that Brazil has strong, and spontaneous economic policies, so it could be able to be fully develop soon.
One of the most important polices of the "new model" was privatization of governmental companies' since Brazil was a state guided capitalist, so there were many firms controlled by the government. Privatization is one the keys to development. Foreign investors were attracted to the Brazilian economy after the government started privatizing some of its property. When there is privatization this creates more competition between firms in the same industry. Companies start to produce goods in more effective and efficient means, so this increases production with minimal sources, and economy is at its full potential. If production increased, the businesses would start expanding, and this would create more job opportunities, so it would solve the problem of unemployment. In fact, unemployment has decreased significantly in last two years in decreased from about 10% in 2007 to about 7% in 2008. Privatization also increases government revenues as the business would expand, and they are going to pay more taxes; consequently, the Brazilian government would have more income; this would assist it in solving one of the social ills in Brazil.
One of the most important tools that measure the growth of an economy is the Gross Domestic Product (GDP). The GDP(Y) is calculated by adding consumption expenditure(C), Investments(I), Government expenditure(G), and net exports(Xn) which is exports subtracted from Imports(X-M), Y=C+I+G+ Xn (McConnell and Brue 2008). According to the CIA world Factbook, Brazil has realized a significant increase in GDP from 1998 till 2008; it has grew from USD$787.9 billion to USD$ 1.573 trillion. It grew more than 50% in last ten years, so there was about 5% to 6% on average increase in GDP, annually. This shows that Brazil's economy is growing positively.
The main two reasons for the growth of the GDP were increase in investments, and increase in balance of trade (X-M). Foreign direct investments has increase considerably in the last decade, in 2008 there was about $USD45 billion foreign investments; this was a great achievement for Brazil as this is the first time Brazil has this sum of investment. The total foreign investment in Brazil is about $USD295billion (Information About the Other Three BRIC Countries 2009). Foreign investors are encouraged to invest in Brazil as it has a high potential of further economic growth, its domestic market is growing, and it has low production costs compared to the USA and Canada. In fact, one of the factors that assisted Brazil in decreasing its unemployment rate is the foreign investments (Laaksonen-Craig 2008). In the five last years, Brazil started making reforms in order to facilitate, and shorten the period for investors in starting a new business. One of these reforms is establishment of "one-stop shops for business and simplify application forms" by doing this would decrease the time for the business to operate, and would facilitate its entry to the market. The Brazilian government also assists investors by giving loans with cheaper interest rate; there were also tax reforms; for instance, exemption from taxes the first year the business operates in, and a fairer and clear tax system with lower tax rates. These financial incentives encourage more investors to start up their new business, and being encouraged to work in the formal sector instead of the informal sector; this would benefit the Brazilian economy, at large would be discussed later(Doing business in Brazil 2006).
The balance of trade is positive in Brazil the exports in 2008 were $USD197.9 billion, and imports $USD 173.1 billion, so net exports would be equal $USD24.8 billion. Although it is expected in 2009 that exports decreased by 19% as a result of the financial crisis, its imports also decreased by 21%, so the net effect would be a positive balance of trade (exports > imports). It is predicted that the net exports would be equal to $USD22billion (Amiel 2009).
Brazil main exports are automobiles, iron-ore, shoes, and equipment spare parts. Brazil is considered to be the biggest exporter of poultry in the world; she is also the biggest exporter of sugarcane in the world, and it is the second largest exporter of soybean after the United States. Brazil is also attempting to be the largest exporter of ethanol, source of energy, and it is planning to construct a $1billion ethanol pipelines in the main ports of Brazil as to facilitate the exportation of ethanol (Brazilian firm plans $1 billion ethanol line 2008). Brazil is attempting to depend on ethanol instead of oil as fossil fuels became relatively expensive, and there are predictions that oil would be extinct in the coming decades. If Brazil was successful in producing a renewable source of energy, ethanol, it will boost its net exports as Brazil is considered to be a pioneer in producing bio-fuels (Hira and de Olivera 2009).Noticeably, Brazil's exports are diversified it depends on agriculture and industry. In addition to exporting bio-fuels, with the increase of technological advances and foreign investment, Brazil was able to export vehicles; one of the main automobiles is Volks Wagon the German car as many models are produced, and assembled in Brazil (WORLD NEWS: BRAZIL 2009).
The main policy of Brazil in trading is free trade between other nations it tries to promote the idea of librating trade, and the Brazilian president declared this in the World Economic Forum in Davos, Switzerland (Lyons 2009). Brazil joined a number of organizations in order to fulfill its goals which is have more free trade; She is a member of the World Trade Organization(WTO), Mercosor , NAMA -11,Cairins group. Each of these organizations help Brazil in trading weather with its neighboring countries (Mercosor), or librating its agricultural goods (Cairins group). Moreover Brazil is a member of the General Agreement on Trade and Tariff (GATT), so this assist her in increasing the scope of international trade .When a country has the privilege to have a free trade with other countries, she would be able to expand its market in other countries, so she would be able to increase its production; therefore, its GDP would increase. Moreover, when a country increases its production its unemployment rate would decrease, as there are more job opportunities created. Therefore, the increase in foreign investment, and increase in balance of trade caused to the growth and development of the economy in Brazil (The self harming state 2009).
In the last decade, Brazil has been trying to become a leader in Information Technology (IT) production, and computer industry. Actually, Brazil is implementing India's model in IT innovation as India became one of the leaders in software industry. By becoming a leader in IT, Brazil would be able to increase its production, and would be able to export it to developed nations, so this would boost its GDP. Actually, the Brazilian government in the 1980's has imposed high tariffs on IT technologies reaching more than 100%, so there was limited technological innovation. However, when Brazil was transformed from state guided capitalism to more liberal market it has decreased tariffs and taxes on IT goods significantly reaching less than 15 %( Botelho 1999). Brazil, nowadays, is encouraging more investors to start business in technological innovation as she started knowing more about the advantages of having technologically advanced economy. Businesses which their main aim is technological innovation are given tax incentives by the government, so by this way more business would start grow in this field. Brazil promotes the idea of more technologically advanced country through the educational system, and there are majors in universities that are specifically for technology, like IT major .The more technologically advances the economy, the more the increase in production, and decrease in cost. Cost decreases as when production increases, economies of scale result, so this would benefit the economy as there would be profit maximization with the minimum cost (Somoggi 2005).
Although Brazil's GDP per capita has an upward trend, there is high poverty in Brazil reaching 30%, and there is a huge gap between the rich and the poor .i.e. inequality. GDP per capita has increased from $USD4, 700 in 1998 to $10,200 in 2008. Despite the fact there has been transformation in the Brazilian economy, like privatization, and more liberal economy, "the poor became poorer, and the rich became richer". The problem is that there is high inequality in Brazil, and high poverty rate. The higher the inequality, the higher the poverty rate because when there is high inequality the less the percentage of people get share of the country's national income .i.e. in extreme cases is when there is perfect inequality it means that only one person gets all the national income. The other extreme case is ideal equality is when all the citizens get the same share of the national income (Ferreira 2004).According to the Gini coefficient "0.52" (it measures the degree of income inequality in a certain country, it is scaled from 1 to 0, the closer it to 1 the more income inequality), it shows that there is high income inequality. In Brazil, the top richest ten percent receive about forty five percent of the national income, while bottom forty percent of the population receive only nine percent of the national income. This also shows the huge gap between the rich and the poor, and explains why there is about 30% poverty (A better today 2009).
There are several problems associated with inequality. One of these troubles is that when it comes to agriculture, most of the agricultural land is owned by rich people about 77% of the land, and they hire farms to cultivate their farms, so the land owners get most, if not all, of the profit of the land, and farms are given very low wages. Therefore, the farmers don't have the incentive to increase the productivity of the land, and they don't use the most efficient means of agriculture, so there are wasteful resources, and the economy is not working at its full potential. The problem is that agriculture is one of the most important sectors in the Brazilian economy it constitute more than 20% of the Brazilian GDP, so if there is more land reforms, and the wages of the farmers increased agricultural sector would be more productive. If agriculture became more productive, then the exports of Brazil would increase as it exports many agricultural products as mentioned above (Ferreira 2004).
Another problem that is associated with unequal distribution of income is that the impoverished people become frustrated, so they turn to be criminals, and this obvious in Brazil as there is high crime rate. When there is high crime rate, it adds costs to the government because it is trying to decrease crime rate. Had crime rates being low, the government would allocate its resources in more beneficiary areas of development, like improving the educational system of the Brazil (Messias 2003).
There has been a recent study in Brazil that showed because of the high inequality, the quality of life's is relatively low. Although Brazil is doing well on the economic side, Brazil is the 75th country in the Human Development Index (HDI). This index measures the quality of life of citizens in a certain country, it measures it based on life expectancy (reflects the health of the citizens), education (literacy rate), and the income level (GDP pre capita) (HDI report 2009). Erick Messias suggests that Brazil has a relatively low HDI because of the high income inequality. Messias conducted a study that measures the inequality with the life expectancy. The study showed the higher the gini coefficient the lower the life expectancy. Another study between inequality and literacy rate, also it was proved that the higher the gini coefficient. The findings of this study was that when there is high inequality only the rich people could have access to medicine, and health care, while the poor don't have as the government could not supply them all with the medication especially that in Brazil about 30% of the population are impoverished. Furthermore, the Brazilian government decreased its investment in health care as there is a huge private sector in providing health care, but problem is that only the privileged people could afford using these private institutions. When there is insufficient heath care, people would not think about education; they will merely think about getting cured not educated. There is also unequal distribution of social spending as the poor could not afford continuing education, so only the upper or the middle class who enter universities and universities are for free in Brazil. Obviously, the Brazilian government spend on the rich people not the under privileged .Noticeably, the HDI is relatively low because of the life expectancy and education, and the income level is just fine (Messias 2003).
The fourth problem associated with high inequality is low investment rates in Brazil, because one third most of the society is poor, so the unprivileged could not get loans with low interest rate as they don't have any collateral, and interest rate on loans could reach 20-30%; as a result, the poor are discouraged to get loans as they are going to have low rates of return. Thus, the poor would find it cheaper to join the informal sector .i.e. black markets, in order get more profits. However, the Brazilian government started to make more reforms in assisting the underprivileged by granting them loans with cheaper interest rates that can reach only 10% which is quite affordable. Investments are important for the economy's development.
In addition to improving the gap between the rich and the poor, eradicating the informal sector is vital for the economic development because the informal sector is one of the obstacles that Brazil is facing in developing. In Brazil to launch a new business it takes about 150 days in order to register, and start operation, and this is much higher than the average in any other developing countries; for instance, in China it takes only 38 days. The problem is that investors decide to work in the informal sector instead of the formal sector as in the informal there isn't any bureaucracy that hinder the firm from starting, and the investor could start his business in a much shorter period. That's why Brazil has made many amendments when registering a new company (Capp et al 2005). The other reason why companies choose to work in the informal sector is that there is a complicated tax system with very high tax rate that in some cases may reach more than 40% on profits, so the firms become unprofitable, so they choose the informal sector to avoid these taxes. There was a study made by the World Bank and found that Brazil's cooperate taxes are one of the worst systems in the world.
Not only does business choose to work in the informal sector, but labor, as well. Because of the high taxes that may reach more than 25% of the salary, and because of the inflexible labor laws in Brazil, like not able to leave the company that the worker works in for a long time period, so there isn't any job changing; that's whyworker select the informal sector. There are a huge percentage of workers who work in the informal sector about half of the labor force (Farell 2009).
According to Collier, there are four traps of development; they are civil wars, geography, bad governance, and natural resources. There are several reasons why civil wars occur. The first reason is that the country is low income, and there is extreme poverty. The second reason for the occurrence of civil war is ethnic differences; usually, the problem occurs when there is ethnic minorities as they don't trust the dominant ethnic group in ruling them. The third cause of civil wars is the dispersion of people in the country i.e. they are do not live in the same area.
If we apply these causes on Brazil's case we would find that civil war is not a trap for Brazil. Although there is a significant percentage of an impoverished people, and high inequality between the rich and the poor in Brazil, this would not cause to a civil war as there was a study conducted by Collier and Anke Hoeffler, a research officer in "Centre for the Study of African Economies at Oxford University"(Phill 2009), that attempts to find the relation between civil wars and income inequality, and the result of the study was that there is no relation between inequality and internal conflicts. Noticeably, the first cause of civil wars is not applicable to Brazil. The second cause could be applicable to Brazil as there is black ethnic minorities about 6% of the population, but the problem is that they are sometimes discriminated against, so they could rebel against other ethnic groups. Throughout history in Brazil, there has not been conflict between racial differences, and, nowadays, black are starting to get equal rights (Plummer2006), so the second cause is not feasible. In Brazil most of the people live in the same areas usually around the rivers, so the Brazilians are not dispersed (Hollanda et al 2008). Collier suggests that the more the dispersed the people in the country, the more likely civil wars occur. Hence, the third cause is not a trap for development in the case of Brazil. Therefore, civil wars are not counted as a trap for Brazil.
Natural resource is considered to be one of the development traps. Collier suggests that when a country depends only on exporting natural resources so their currency appreciate, so they are able to import more goods .i.e. "Dutch disease". This is a typical example of the oil rich countries, like Kuwait .The problem arises when this natural resource abolishes the country would face a crisis as its economy is dependent on one good. In fact, this phenomenon is not valid to Brazil's case as Brazil depend more than one good in its economy. Collier did not mention that limited natural recourses is a trap which I believe that it is trap because when a country has few natural recourses it would have to import these recourses, so this would add cost to its production, and the country would have difficulty in having industry, so this would be a trap. Brazil has various natural resources as there is the Amazon forest which is full of resources, like wood, tropical fruits and medicine (Todaro and Smith 2007). Thus, natural resources are not considered as a trap for Brazil.
Geography could also be a trap for development. Brazil has access to the Atlantic Ocean, and it has good trading relations with its neighboring countries, like Argentine, so it is not a landlocked country, so geography is not considered as a trap.
The fourth trap of development that was introduced by Collier is Bad governance. Good governance is when it realizes opportunities for the country rather than destroying them. Noticeably, Brazil has good governance as the government realizes opportunities for development, and it is changing its policies towards better development for Brazil. Therefore, bad governance is not considered as a trap. It is clear, then, that according to Collier Brazil does not have any constrains when becoming a developed country.
According to Todaro and Smith, constrains of development of Brazil are inequality, high tax rate on wages which result in increase of the informal sector, (2007). If the Brazil sorted out these factors that hinder it from development, would it be fully developed by 2030?
The Brazilian current president states: "Upon first taking office in 2003, I pledged to end hunger in my country. Under the "Zero Hunger" banner, I put poverty eradication and the alleviation of in-equality at the forefront of government action" (Da Silva 2008) .In fact, Brazil is working on narrowing the gap between the rich and the poor by tax reforms and introducing many social programs. Recently, there have been tax reforms in order to improve inequality; the amendments in taxes are that the rich people should pay much higher taxes than the middle class, so by this way the rich would lose some of their wealth; the rich are indirectly giving some their wealth to the poor. The result would be the gap between the rich and the poor would narrow (Rodrigues 2009).
The most imperative program that Brazil is adapting these days is the "Bolsa Famlia"; this program is supported by the World Bank, and similar programs are implemented in more than one developing country; for example in Mexico there is Oportunidades .The "Bolsa Famlia" reaches about twelve million underprivileged families. This program main goal is to reduce poverty in the future by giving direct cash to low income families in order to fulfill their basic needs (food, shelter, and clothes), but they should send their children to school. If the family did not send their children to school, they are not given money. This program emphasize on investing in schooling of children, so when low income family child finish school s/he could enter university as they are free in Brazil (Happy Family 2008). When finishing university, this would actually solve two main social ills in Brazil which are poverty and inequality. It would solve social inequality as the poor would be able to enter universities, as in Brazil most of the university students are rich as mentioned above. In addition, poverty rates would decrease as university graduates get higher salaries and better jobs even if the low income family child did not enter university he could go to vocational school, to learn skills that would help him in getting better jobs with a descant salary. The result of this program is that the low income families who are considered be low class; their social class would change as they would shift from the lower class to the middle class; the middle class in Brazil would expand; consequently, the huge gap between the rich and the poor would narrow (Gleaser al et 2009). Brazil is adopting the twenty millennium goals of the United Nations which stress on having better quality of life, and one of the goals Brazil is working hardly on is eliminating poverty, and hunger by 2015.
Statistics has prove that Brazil is working on narrowing the gap between the rich and the poor, between 2001 and 2004 there has been great improvement in the situation; the share of the top 10% richest people their share decreased in the national income from 49.5% to 46%, and the share of the bottom 40% increased in the National Income (Osava 2006). Not to mention the fact that after the implementation of the "Bolsa Famlia" extreme poverty rate has decreased by half this was mentioned by the IPEA, the Brazilian institute for economic applications. Furthermore, the gini coefficient has decreased dramatically in the last ten to fifteen years it has decreased from 0.58 to o.52, so inequality is improving. Not only does improving income inequality is beneficial for the country's HDI improvement as mentioned above, but it is important for the growth of the economy. When the gap decreases the percentage of the impoverished people would decrease, so the aggregate demand would shift to the right, so there would shortage; for the economy to reach equilibrium the quantity supplied should increase. This means that production would increase, and the economy would grow. Thus, moving towards equality would improve the quality of life of the Brazilian citizens, and would flourish the economy. That's why Brazil is moving towards improving income inequality (Ensor 2009).
Since Brazil is moving towards equality, by the year 2030 the drawbacks of income inequality would be minimal. In last five years has witnessed a decrease in the gap between the rich and the poor this was shown by the gini coefficient, so the if trend kept the same until 2030, then the problem would be solved. Not to mention the fact that by 2030 the outcomes of the "Bolsa Famlia" would come into effect as the children of the low income families would have graduated weather from vocational schools, or universities. Noticeably, the effect would be decrease in income inequality, so would befit the economy as mentioned above. By 2030, National Income would increase as more people would be available in the labor market as there are more educators that would be resulted from the "Bolsa Famlia".
Not to mention the fact that Brazil has a large informal sector, about 40% of the GDP is contributed towards the informal sector. Surprisingly, more than half of the labor force work in the informal sector for several reasons. There was study made by "Mckensy" states that in Brazil: Despite the fact that business in the informal sector are as "half as productive" the firms in the formal sector which are in the same industry, the companies in the in the informal sector are much profitable than the formal firms. The reason for this is that informal companies do not pay taxes, and taxes may reach more than 30%. Hence, after the tax reforms that are being made in Brazil encourage many firms to operate in the formal sector. Usually, the companies in the informal sector are inefficient as they have less access to capital, so they employ more workers than buying machines. Machines are more efficient than people. When companies move from the informal to the formal sector, there would be efficient source allocation, so this would benefit the economy as inefficient source allocation increases costs (Messias 2003).The problem of the informal sector is that they produce goods without quality control, or safety measures as there is no supervision from the government. One of the drawbacks of the informal sector is that it decreases growth rate as the employer does not have the incentive to maximize his production, so when production rate is low it means that there is no job creation, so this keeps the GDP backward, and growth rates low(Farell 2006) .The other disadvantage of informal sector is that it destroys competition, as the price of the goods or services are not determined by the market mechanisms which are the forces of the supply and demand (Elstrodt elt 2007). Usually, the prices determined by the black market is higher than the market equilibrium price, so there would be excess supply as the demand would lower than the supply. One of the drawbacks of the informal sector is that it is not counted in the GDP, so the officials do not get accurate data about the Brazilian economy, and this may hinder them from enforcing the right economic policies (Farell 2006). One of the problems that companies face when they enter the formal sector is that Supreme Court is very slow there are only eleven judges for one hundred thousand cases, so if a company wants to lawsuit against another firm, it would take more than one year.
Brazil is currently working out on how to decrease the informal sector, and make people leave the informal sector, and work in the formal sector. The Brazilian tax authority is reforming the tax system in order encourage companies, and workers shift to the formal sector, also the current president of Brazil is willing to submit a tax reform package as he claims that he wants to encourage more investors, and magnetize workers in to the formal sector. The Brazilian government also is promoting the idea of working in the formal sector as workers in the formal sector get social insurance, and other fringe benefits, unlike employees in the informal sector .Actually, there has been decrease in the informal sector, the percentage of employees has decreased by almost 5% of the workers shift to the formal sector annually since 2003. Moreover, the contribution of the informal sector in the GDP has decreased by 6-8 % in 2005 (Lorenzi 2005).
Since the informal sector is shrinking in size in Brazil, so by 2030 the informal sector would be very small in size if the rate of decline in the informal sector is about 5%, so by the year 2030 the informal sector would be abolish. If the whole economy is formal by the year 2030, the economy would be working at its full potential as the side effects of the informal sector would be diminished. In addition, unemployment rate would be the natural rate 4-5% as in the formal sector there is growth, and reinvestment as the business men would always seek in increasing his output to the maximum level. There would also be fair competition as the informal sector, nowadays, is disturbing competition; as a result by 2030 the prices would be determined by the market price as there would be no other factors that limit the market from operating freely only with the supply and demand forces.
In addition to the reforms made to improve inequality, and informal sector, there were tax reforms as to encourage education. In 2007, there have been tax reforms in order to decrease the size of the informal sector, but also there have been reforms to assist the economy development. Parents in low/average income classes who have children in schools and universities are exempted from taxes as to encourage them educate their children, and this would add to the social welfare. The tax revenues are also reallocated to social problems, like health care, and improving the quality of education (Rodrigues 2009). Apparently, the Brazilian government is encouraging its citizens to educate their children as this would benefit her in the coming future.
Education is actually important for economic development as there would be more entrepreneurs, and more creativity in the society. When there is innovation in the society, there would be more investments (Todaro and Smith 2007). In Brazil, there have been reforms in starting new business mentioned in section 1. By 2030, there would be more entrepreneurs as the number of educated people would increase because of the "Bolsa Famlia" effect, and the tax incentives. In fact, entrepreneurs have important role in the economy as they increase production of the economy, so the economy would flourish (Grossmann 2009). In order for this to happen the Brazilian government should facilitate for entrepreneurs in implementing their ideas as this would benefit the economy, at large. Obviously, the Brazilian government started giving loans with low interest rates as to encourage more investors in entering the market, but Brazil should emphasis more on entrepreneurship as they have new ideas, and they are risk takers. The higher the risk the higher the return; this would be an asset for the Brazilian economy (Grossmann 2009). Therefore, the Brazilian economy would further grow, and develop if it encouraged entrepreneurs.
Most of the economic development models; for instance, Rostow's model, Harrod-Domer model, and Lewis model all three models emphasis on capital accumulation and reinvestment in order for the country to become economically developed (Todaro and Smith 2007). It could inferred that in Brazil that there is capital accumulation as there is foreign investment, and the government is encouraging investors to invest, and the laws and the polices are changing for the further investment; like tax reforms, cooperates pay less taxes, so they could have more profits to reinvest them. By 2030, Brazil would become economically developed as the reforms are currently taking place, so it would take some time, so all the firms in the economy accumulate capital, and reinvest it.
Brazil would also witness increase in the quality of life of the citizens as when inequality decreases; consequently, poverty rate would decrease, and more people would get educated. The HDI of Brazil would become much better than today by 2030.
Since Brazil is currently politically stable, by the next twenty years Brazil would become fully developed as it would be economically, socially, and politically developed.
It is clear, then, that there has been transformation in Brazil's economic system from mercantilism to state guided capitalism to liberal economy. Brazil in last few decades has witnessed several economic reforms; for example, privatization, foreign investment, trade liberalization. There has been also improving in the gap between the rich and the poor, and the informal sector started to shrink in the last five years. Hence, Brazil is on its way to development.
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