Regional Economic Conditions Improving
Emerging market countries with growing economic power such as Brazil have been pushing for greater say on the international stage with various organizations such as the International Monetary Fund. This shift is all the more noticeable now as traditional economic powerhouses in Europe are facing sovereign debt crises; Japan has been in a decades’ long pattern of stagnant growth, and the U.S. is facing high unemployment and high debt while borrowing heavily to support a costly war. The push for a greater role at global gatherings is not one-sided; the WSJ reported recently that Dominique Strauss-Kahn, IMF president, told South American leaders at a recent summit that »their new economic resilience gave them greater voice and persuasive power«.
Thus the IMF now is allowing the region’s nations to sign up for »flexible credit lines« rather than acting as a lender of last resort and levying what were perceived as onerous interest rates that only served to keep recipient countries impoverished. In Brazil’s case, which only five years ago owed the IMF US$15.5 billion, it has not only paid that debt, but last year agreed to purchase as much as US$10 billion in IMF bonds to help the IMF finance programs.
Economic Vulnerability Still Present
The growth that has bolstered the region in recent years doesn’t necessarily translate into a forecast of uninterrupted growth. Brazil and Chile, are good examples of nations with high exposure to commodity driven export sales, which would be susceptible to price volatility or sudden changes in demand from major trade partners such as China. As the WSJ reported in mid-June the combination of slumping European demand for everything from sweaters to solar panels along with the depreciation of the Euro means many Asian manufacturers are feeling the pinch. As one family-owned sweater manufacturer based in Hong Kong replied, »For Euro-based orders we could lose our shirts and pants and underwear.« According to the data cited in the WSJ, the EU accounts for 13% of exports from Asia’s ten largest economies, excluding Japan. This makes the EU a larger trading partner than the U.S., which accounts for 11%. And trade data hasn’t shown any effects yet of any austerity measures undertaken by European nations. For some industry sectors that rely heavily on government subsidies such as renewable energies, scaling back any governmental investment could be catastrophic.
Other pitfalls that could manifest as stronger regional growth persists would include an influx of foreign investment that could lead to asset bubbles and the risk of speculators wreaking havoc by jumping in and out of the market to reap short term gains. And inflation, long a scourge of South American economies could return as growth accelerates. As growth continues there will be pressure to increase wages, a development that has affected companies such as Honda, Toyota, and Hon-Hai in China.
Is Brazil Overheating?
Central bank officials in Brazil have begun raising the benchmark Selic rate, most recently to 10.25% in early June to help stave off any threat of inflation. Already the country’s consumer price index is above the official year end target of 4.5%.
The Brazilian Census Bureau, or IBGE, reported in early June that a record first-quarter growth had been achieved with GDP expanding 9% from the year-earlier period. This first quarter growth, according to government officials, is not expected to persist as it was influenced by domestic spending that included tax and lending incentives as part of an economic stimulus package introduced during the downturn to help stimulate the economy. The benefits generated by that aid will have been exhausted and will not influence future quarterly growth this year.
Can China Serve as an Example of What Not to Do?
China’s growth has been built on a single-minded focus to develop and compete in a broad range of technically challenging industries as well as providing an almost unlimited manpower to labour intensive work as in the garment industry. China’s rapid growth has not come without its share of problems; its dependence on coal-burning power plants and factories helped increase emissions of acid-rain-causing sulphur-dioxide levels by 1.2% in the first quarter as domestic demand and exports picked up. The increase is the first in several years, but highlights the challenges of adhering to environmental targets in the face of meeting economic goals.
Amazon: The Last Frontier
Brazil’s Amazon region is comparable in size to Western Europe and some towns such as Porto Velho are more than 4,000 km away from Sao Paolo. The biodiversity in the Amazon River basin makes it one of the Earth’s greatest, yet fragile, natural resources. The area around the bauxite mine that Alcoa is building, for example, is home to more than 300 species of birds and more than 50 types of snakes. And the WSJ reports that population density has increased significantly enough that developers are building malls in five of the largest cities in the interior. Inhabitants are willing to travel up to six hours to go shopping. As malls begin to proliferate, foreign investors such as the Dutch warehouse club Makro and its French competitor Carrefour have either built or are planning to build stores in the region.
The growth in this region is not by accident, but part of a governmental plan to raise the standard of living by providing jobs in building hydroelectric dams. And local businesses receive subsidized loans from the federal Banco da Amazônia. The investment has encouraged people to move to the region in search of jobs and opportunity. With larger populations come the litany of services and infrastructure that citizens demand. As one mall owner mentioned in the WSJ article, »The mall is the only place in Porto Velho where all social classes are mingling in an open space, on equal footing. The middle class gets a chance to see what the rich are wearing, and then wants to go out and buy it.«
Most of the new building construction taking place is in areas already deforested, but new roads are being built to link previously isolated towns, which creates commerce, and momentum to continue building in the area. Government officials believe that growth in the Amazon can be managed through careful planning and by using new technologies.
