Economic Turmoil of Present Day Brazil
Economic Turmoil of Present Day Brazil
After reviewing the Defending the Brazilian Real case study, I was amazed at what I learned. How can a country that is such a known for its festive atmosphere and abundance of natural resources, be going through such economic turmoil? I’m sure no one in the United States could imagine their rent doubling every 10 weeks. That their credit card charged 25% interest. That the costs for food and clothes increased by 40%. That the value of their savings declined 2000%. In a year! Well in my research, I learned that this is what the citizens of Brazil experienced for ten years, 1987 to 1997. During those ten years, 40% of GNP was eaten up by inflation, which means nearly everyone got rid of cash as fast as possible, because it literally lost value in their pockets. And the majority of people were reduced to buying only the essentials of life, which had a devastating effect on industries that produced all kinds of goods and services.
In the case study, the reader is introduced to the Brazilian economy at its turning point away from hyperinflation, with the introduction of the Real Plan. With steady economic improvement, the Brazilian government pursued economic policies to transform its previous system to a market based system. The Real Plan (also known as the Plano Real) was designed by then Finance Minister, Fernando Henrique Cordoso, to drive inflation out of the Brazilian economy. When implemented in 1994, annual inflation rate was running at 1000%. This level discouraged economic activity and foreign direct investments (FDI). To fight inflation, the Brazilian government replaced it’s previous currency, the cruziero with the real. The real was pegged to that of the US dollar. Interest rates were repeatedly increased to maintain the value of the real to that of the US dollar. For Brazil, the high cost of credit helped reduce expansion of the monetary supply and brought inflation under control. The Real Plan was a success. This plan ignited economy growth and increased FDI’s in Brazil.
The study further explained, in the midst of all of the economic growth, the trade deficit continued to grow. When I read this, I was baffled. How can Brazil still be in trouble if the economy was growing? According to the text, the trade deficit was due in...