the problem of commodity dependence in the context of global imbalances: the case of brazil
DESCRIPTION
Economics in Latin America session at 12th International ConferenceTRANSCRIPT
The Problem of Commodity Dependence in the Context of
Global Imbalances: The Case of Brazil
byLaura Ebert
and Leanne Ussher THE 12TH INTERNATIONAL POST
KEYNESIAN CONFERENCE
Kansas City, MissouriSeptember 25–27, 2014
Outline
Commodity Producers and Global Imbalance
Current Commodity Boom
A new Commodity Curse
Conclusion
Creation of Global Real Imbalance
United States
Key reserve currency
Deindustrialization and financialization
Overconsumption of commodities, ease of financing trade deficit
China
Build up US reserves to devalue Yuan
Low wage
Leader in mass production (Verdoorn’s Law), high returns to scale
BrazilBuild up US reserves to counter pressure of capital inflows and rising commodity priceLow 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
Manufactured goods
Commodities
FDI in commodities, manufactured gds
Commodities, limited manufactured gds
FDI, net agricultural . .
FDI
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
Brazil
Appreciated currency
Limited domestic capital market
Ineffective capital controls
Falling profits from commodities as profits get repatriated
Short term capital
Capital inflows for commodity
Long term capital, US $ forex, revenue manufactured gds
Short term capital, US $ forexCapital outflows
manufactured gds
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)
0
5
10
15
20
25
30
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Argentina Brazil
Chile Peru
0
20
40
60
80
100
120
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CN EU US
Source: UN Comtrade Source: UN Comtrade
Total imports from Exports to China (% of total export) South America* (in USD billion)
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
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
World bank
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….?
World bank
World bank
World bank
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
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??
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 )
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…
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
Than US economy recovers….
US interest rates rise
US dollar appreciates relative to Real
Commodity prices fall as producers adjust prices in competitive market
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
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: http://unctadxiii.org/en/SessionDocument/suc2011d8_en.pdf
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
THE END