Production of Primary Goods . Brazil was founded by Portugese explorers in the 1500's. The country was an imperial colony for over 300 years. Head to head with China . -------------------------------------------------------------------------------- . Fifth largest population . Under Portuguse rule, Brazil concentrated on the production of primary products such as food and raw materials, stunting the country's development relative to Western manufacturing economies. It was only in the late 19th century, after the abolition of slavery, that Brazil began a process of industrialization. . Brazil-World's Ninth-Largest Economy . Bovespa stock market in São Paulo, Brazil, Latin America's largest stock exchange. >From 1950 and 80's Brazil underwent a significant industrial transformation. During this period, industry's contribution to GDP nearly doubled. By the 1990's, Brazil produced 1 million cars per year, nearly 2 million tons of fertilizers, 3 million refrigerators and around 70 million cubic meters of reprocessed petroleum. . Economic liberalization of Brazil began after World War II. Brazil was a major exporter of rubber and other raw materials to the US's WWII war machine, and by the end of the war Brazil had accumulated large foreign reserves. However, Brazil's fixed exchange rate was valued too highly in the postwar era, when Brazil was no longer as integral to the United States economy as it had been in the past. The combination of a mispriced currency peg and high inflation led to a balance of payment crisis. In response to a 1953 foreign exchange crisis, Brazil liberalized its exchange rate regime. . Brazil's new, flexible exchange rate was somewhat unusual; different exchange rates were set for different types of imports and exports. Imports of goods that were in competition with goods that were produced in Brazil had a worse rate than exchange rates for imports of goods that could only be produced abroad. The Brazilian "exchange rate" also served as a de facto tariff. The variation of exchange rates helped curtail unnecessary imports and thereby improved the balance of payments situation. Brazil experienced rapid economic growth between 1950 and 1971 with an average growth rate of 7%. The manufacturing sector experienced considerable change with the traditional industries like textiles and food declining in importance. . A Coup . In 1964 Brazil experienced an army coup, and a military junta instituted many market reforms for Brazil's then-overregulated economy. The government took measures to reduce inflation and removed some of the accumulated distortions of the heavily regulated Brazilian exchange regime. The government also attracted significant foreign investment, alleviating the balance of payment crisis. The reforms allowed the economy to grow at an annual average rate of 11.1% between 1968 and 1973. . The Plano Real (The Real Plan) . In 1994 the "Plano Real" pegged the real to the USD to prevent Brazilian politicians from inflating their way out of Brazil's deficit problems. Although inflation was brought down to single digits, it was not enough to avoid a foreign exchange rate appreciation. Exports decreased, and the balance of payments worsened. The Real Plan did eventually eliminate inflation, but the large current account deficit became problematic as worldwide risk premia increased, following the Asian crisis in 1997-98. . The IMF offered monetary assistance, conditional on Brazil going through another painful round of economic reforms. The offer was for US$41.5 bn USD after Brazil submitted a credible fiscal adjustment program. Brazil removed its dollar peg, bolstering otherwise sluggish growth in 1999. Brazil's total debt to GDP ratio dropped below 50%, which was better than the IMF target. . Recent Progress . Brazil's efforts at economic restructuring have overall been highly successful. Liuz Inacio "Lula" da Silva, whose left-wing support base initially frightened investors, proved to be not only an adroit politician, but a relatively laissez-faire president, at least by Latin American standards. During the past few years productivity has also risen considerably. However, Brazil's annual GDP growth over the past decade has averaged 2.5% per year, and is still low relative to the OECD area. Fiscal policy has been in line with expectations. Public debt has been reduced since 2003 (although it is still relatively high compared to other emerging markets). Brazil used very high bank interest rates to destroy inflation as an economic threat. Brazil's next challenge is to reduce its public debt without tax hikes that would make Brazil less attractive to foreign investment. . According to the OECD, Brazil's rate of innovation, the key factor in endogenous economic growth, has accelerated. However, the level of R&D is still low relative to other OECD countries. Brazil needs to improve its private-sector innovation to compete effectively in the global economy. For Brazil to reach the OECD average it will need to increase its R&D investment to 4 times its current share of GDP. Brazil's labor force is comparable to other OECD countries and its level of skills and education is improving. . Brazil's stock index, the Bovespa, has outperformed the S&P500, FTSE 100 and has nearly matched Mexico's Bolsa since 1995. In terms of valuations, P/E ratio, and price-to-book ratio, the Bovespa is in line with similarly developing economies. Brazilian companies are trading around 1 ½ times book value with a PE of around 10. Average debt to equity of Bovespa companies is around 90%, compared to 145% for the S&P 500. .
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