A Comparative Look at the Development Experience of Brazil and China

china_brazil_400Ashwin Nair presents a comparative look and contrasts the role of the state in the economic development of two BRICS countries, Brazil and China.

The Brazilian State and the Chinese state are two vastly different entities. While one has a history of military rule the other owes a lot to Maoist ideology. Today Brazil has a democratic form of Government whereas China’s government for over half a century has been composed of members from the same party, the Communist Party of China. But what impact has each of these states had on economic development? Is one form of state better than the other in ensuring greater economic development? These are the two main issues that will be addressed by taking a look at some key growth drivers in each of these economies and examining the role the state has played in these aspects.

Industrial Policy as a driver of Economic Growth
Brazil’s industrial sector contributes 26.9% of the country’s GDP. Historically the Brazilian Government following the Great Depression realized the importance of import substitution to lower dependence on external imports that were completely wiped out due to a lack of export earnings during the Depression. But the inefficiencies in this system were seen with public sector enterprises racking up huge debt causing the 1980s financial crises in Brazil. Learning from these lessons, the government of late has played an active role in promoting efficiency and protecting Brazilian industries by creating a spate of anti dumping policies mainly aimed to restrict the sudden spurt of Chinese made products in their country. The industrial base set up prior to the 90s although inefficient has played a major role in providing momentum to the Brazilian economy. Hence industrial policy has been really important in the development of Brazil. A large amount of attention in Brazil is given to this particular sector because of its contribution to growth. With an ever strengthening Real the Government itself has entered the market for industrial goods with its “Buy Brazil” policy which involves buying locally made goods at higher prices by the government. However there still remain some deeper issues that the Brazilian government still hasn’t been able to solve. These are largely structural issues that have been prevalent in the Brazilian Economy for decades. This goes to show how lackluster the Government’s role in Industrial policy framing has been. Brazilian manufacturers have been struggling to cope due to the strong currency (leading to lower exports), high interest rates, high taxes, poor infrastructure and a poorly educated workforce.

The Chinese Government on the other hand has been a lot more effective and innovative with its industrial policies. Its innovative policy of promoting rural industries has helped the country’s small and medium industries to flourish within rural areas which nullified the need to instantly urbanize, something that was seen in Brazil following their industrialization policy which created a lot of imbalances in the Brazilian economy and also caused social issues. Setting up of SEZs was the main instrument through which the government aimed to promote industrialization in urban areas which had the supplementary effect of creating adequate urban infrastructure as well. These SEZs were the main drivers of Chinese value added exports as the cheap prices of labour in these SEZs attracted a large number of MNCs to set up their production chain in China. Hence China has been able to promote a very successful industrialization policy that has aligned itself among the most industrialized nations in the world and this factor has been a major contributor to China’s rapid growth. The industrial sector contributes the highest to the GDP in comparison to other sectors (46.6%). The only negative perhaps in China’s industrial policy in comparison to Brazil would be its lack of attention to domestic demand.

20121202_brazilTrade policies as a driver of Economic Growth
The fact that China became Brazil’s largest trade partner pits these two states directly against each other in the international trade framework. Both of these nations have been highly dependent on trade but the composition of trade for both countries is quite different. While China’s trade policy involves generating large current account surpluses by providing cheaper products to the world market this has come at the cost of other countries’ domestic products. Brazil being one of them. Due to the high demand for cheap Chinese products in Brazil such as Chinese cars, China today can dictate a large number of terms to Brazil because of its hold in the Brazilian market. This has been seen with increasing discontent among the Brazilian polity. The Brazilian government has been imposing increasingly protectionist measures specially targeted against Chinese imports. Recent measures such as a 30% increase in tax on cars with less than 65% percent local content shows how seriously the Brazilian government is taking this issue. Even after having a trade surplus with China the Brazilian government realizes that they would still need to transform their exports to China which are now mainly composed of raw materials such as soya beans, crude oil, iron ore etc. Still, currently the only viable measure to ensure economic development of Brazil is by imposing protectionist measures to foster domestic industries. The Chinese government on the other hand has benefited to a large extent because of their policies to make their products competitive on the global stage, something that the Brazilian government hasn’t been able to do instead depending on protectionist measures and exports of raw materials. Hence to conclude one could say that China’s trade policies have made them more independent in the Global trade arena whereas due to Brazil’s composition of trade, its dependence on others is quite high.

Influence of Monetary Policy on Growth
The Brazilian economy today owes a lot to its monetary policies. After the Latin American crisis, Brazil had to undertake a large number of monetary measures to make its currency stable again and to reduce inflation that reached a peak of 2477% in 1993. While its system of “heterodox shocks” to boost up the economy quickly in the 1980s was a huge failure, the policy of creating a new currency called the Real through the carefully implemented system known as the Unidade Real de Valor in the mid 1990s effectively curtailed the dual problems of inflation and currency instability. The careful transition from a dollar pegged Real to a floating Real has certainly has helped in a very big way in making the Real a competitive currency that it is today. (Hol, D., A Barbosa, 1999). China’s monetary policy on the other hand has been quite independent and immune from outside shocks given its high current account surpluses and hence hasn’t had much of an influence on growth. But the American Recession did have an impact on its exports and the monetary policy response of giving away loans at cheap rates gave rise to Shadow Banking, a problem that is hampering domestic financial development in China. (Qi, 2003)

Hence having examined some of the policies undertaken in these key growth drivers of the Brazilian and Chinese Economy we can notice vast differences in the policies undertaken by both of these states. Keeping the above factors in mind if we assess the focus on welfare by the state we see marked similarities. China being a Socialist state has inherently had a high focus on welfare and development. A reduction of the poor to total population ratio by 11.4% within 5 years goes to show the importance given to welfare. Brazil on the other hand is currently led by the Workers Party which has introduced a large number of welfare programmes especially during the Presidency of Lula da Silva. Programmes such as the Bolsa Familia (Family Grant) and Fome Zero (Zero Hunger) have had a large impact on development in Brazil.

One could right from the outset say that the Chinese state has played a much better role in Economic Development as compared to Brazil’s which is clearly seen by the current Economic standing of both of these countries. But this judgement shouldn’t be taken at face value as this form of governance has come at a huge cost to the people of China in the form of restricted freedoms and rights. The fact that China’s government is anything but democratic is a strong constraint to personal growth and hence welfare. Hence a value judgement about what form of Governance is beneficial to economic development cannot be narrowed down to just policies concerning economic growth. We need to examine both the rule of law and democratic accountability which guide governance to determine how strong the state needs to be to further economic and development progress of a nation.

Ashwin Nair is a 2nd Year student pursuing a Masters in Applied Economics at Centre for Development Studies, JNU.

References:
1. Qi, L. (2013). China’s Shadow Bankers Seek Their Place in the Sun. Wall Street Journal, 17th September.
2. Hol, D., A Barbosa, F. and O (1999). Economic Development: The Brazilian Experience. Development Strategies in East Asia and Latin America, 11.

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