Brazil was one of the most closed economies in the world until it underwent a period of trade and financial liberalization between 1988 and 1994, exposing it to the full extent of globalization. This paper starts by exploring the concept and definition of globalization. An economic background to Brazil is given, followed by analysis of when globalization took place. This is found to be in 1993-1994 when markets were liberalized. Globalization is then shown to have a positive effect on GDP as well as reducing poverty and inequality. However, its effects on standard of living indicators such as health and education are less clear, and globalization appears to have a negative impact on unemployment.
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In this paper we find that globalization has made a positive impact on reducing poverty in Brazil, but it’s impact on other indicators of standard of living has been more vague. The findings of the vast amount of literature in the area of globalization are reported in chapter 2. We then investigate the definition of globalization in the next chapter, finding that it is the “the increasing integration of national economies into expanding global markets” and has numerous components such as trade, FDI and labour flows. We then discover that globalization is not a new phenomenon, it is driven by improvements in technology and that it has several benefits and costs.
Brazil is then introduced in chapter 4; we find that it has experienced elements of globalization before. It was one of the most protected economies in the world before its period of liberalization between 1988 and 1994 which opened it to globalization. In chapter 5 we investigate evidence of globalization occurring in Brazil, finding that trade and FDI flows increased vastly after 1994, and the KOF globalization index showed a more gradual increase which seems to have levelled out somewhat in the new millennium.
In chapter 6 we begin to examine the effects of globalization on the standard of living in Brazil. We find that it has had a positive impact on GDP per capita, as well as reducing poverty. Next, in chapter 7, inequality somewhat unexpectedly shows a slight decline. We then find improvements to health and education in chapter 8, although it is harder to directly attribute these to globalization, and the HDI shows similar results. We investigate unemployment in chapter 9, which shows a large increase after globalization before showing signs of decline, and establish that this may be transitional unemployment down to a structural change in the economy.
Finally, we evaluate the effects of globalization on Brazil and conclude that it has had a positive effect in increasing income and reducing poverty. However, the impact on the rate of improvement in other areas is uncertain. I then make recommendations on future policy for globalization, advising that Brazil should remain open to the world economy, although with some qualifications of redistributive government policy and production diversification to ensure Brazil maximises its gains from globalization.
2. Literature Survey
There is a wealth of literature covering all aspects of globalization. Firstly, there are many criticisms about the difficulty of defining the term, with a good example in Figini & Santarelli (2006). Most of the literature concur that globalization involves the growing integration and interdependence of the global economy. There is also evidence that the current wave of globalization is not the first, but there is disagreement on how many waves there have been. Some literature only cites the 1870-1914 period and the current period (Daudin, Mory’s, O’Rouke, 2008) whereas others cite at least three (Aghion and Williamson, 1999). Dreher et al. (2008) use trade flows and FDI to measure globalization, and more recently the KOF globalization index. McCann (2008) offers the rationale of falling spatial transmission costs as to the continued growth of globalization, and technology driving these falling costs.
One area in particular that has been thoroughly investigated is the relationship between globalization and inequality. Goldberg and Pavnik (2007) find that globalization does not make countries better off, observing an increase in inequality. These findings are backed up by Williamson. However, Dollar finds that global inequality has fallen. Daumal (2010) identified regional inequality falls in Brazil, whilst rising in India. Finally Sala-I-Martin (2002), predicts that world inequality will soon rise, since it has only been falling due to the increasing wealth of China.
An area where there is more consensus of agreement is the relationship between globalization and poverty. Figini and Santarelli (2006) found a reduction in poverty, findings which are supported in Dollar (2001). Findings of globalization’s effects on standard of living are less well documented, although Schwartzman (2003) has found increases in the literacy rate as well as school enrolment.
This paper will investigate which findings about inequality hold specifically in Brazil. It is expected that poverty will be reduced following globalization. Finally the paper will investigate impacts on standards of living in greater detail.
3. An Introduction to Globalization
As seen above, there is no general consensus about whether globalization has had a positive or negative impact on the world economy. But what does globalization actually involve? Globalization is a term that has been defined differently by all who use the word. It can be interpreted in a number of different ways in the broader political, social and cultural contexts in which it is used (MacGillivray, 2006). However, it’s the economic definition which is of interest in this paper.
Even within the narrower context, there is still no set definition of globalization. Todaro and Smith (2009, pg 825) use the term to cover “the increasing integration of national economies into expanding global markets”. Goldberg and Pavnik(2007, pg5) mention that the term can “include phenomena such as flows of goods and services across borders, reductions in poverty and transport barriers to trade, international capital flows, multinational activity, foreign direct investment, outsourcing, increased exposure to exchange rate volatility, and immigration”. In this chapter I will investigate a number of these components associated with globalization to uncover when Brazil experienced integration into the global economy.
In order to deduce when globalization has taken place and when it has occurred in a particular country, the components of economic globalization need to be defined. Firstly, international trade is considered to be the most important feature of globalization (Figini & Santarelli, 2006). International trade is often confused with being interchangeable with globalization; however, it is only one aspect. Globalization has seen a huge increase in international trade flows and openness to trade; tariffs, quotas and hidden barriers to trade are all falling.
Globalization is not restricted to increased trade flows between countries. The liberalization of capital markets has also played a large role. This allows money to move freely from country to country, encouraging foreign direct investment (FDI) (Dreher et al, 2008). There has also been a reduction of barriers within labour markets, allowing movement of workers internationally to where they are in demand. This increasing integration between countries has allowed truly global multinational corporations (MNCs), and it is these who have helped drive the process of globalization.
These MNCs are the ones who have gained the largest benefits from globalization. They have spread their production and sales processes across the globe. For example, they take advantage of the high human capital in developed countries to design their products and refine production processes. Raw materials are then purchased where they are cheapest, before they are shipped to be manufactured utilizing competitive low-cost labour in another country. Finished goods are then shipped around the world. MNCs can bring several benefits to a country; they create jobs, train the workforce and bring new technology and infrastructure (Todaro & Smith, 2009). For these reasons countries are desperate attract MNCs and offer tax breaks, among other incentives to encourage investment. This sometimes to their detriment as MNCs often fail to invest further in the countries they inhabit; instead returning profits to their “parent” country.
There is some debate over whether globalization and liberalization are two different processes, or whether liberalization is driven by globalization (Stallings, 2007). In one view, globalization cannot affect a country if its markets are not liberalized. Alternatively, globalization forces countries to liberalize; no country can afford to shut itself away from the international economy whilst others exploit the potential benefits. I believe that the two are interlinked; the more globalization is seen to benefit countries that have liberalized their markets, the more countries are likely to follow suit and liberalize to replicate gains.
Although the word “globalization” is a fairly recent term, not used until the 1980’s (Figini & Santarelli, 2006), the phenomenon itself is not new. Throughout the course of history various examples of globalization can be found; you could argue that ever since the first inter-continental discoveries and the first empires were created, globalization has been taking place in some form. Although there are conflicting views of the timings of globalization waves, it’s generally accepted the first wave of modern globalization started in the 19th century with the industrial revolution and ended at the French revolution. The second period was from the middle of the 19th century until 1914; some say the world has yet to reach the same level of integration as it did then. In 1990 European trade values grew at 6.8%. Prices gaps also dropped dramatically, for example the London-Cincinnati bacon price gap fell from 92.5% to 17.9%, signalling prices were equalizing across the world as markets became internationally competitive. Capital markets also integrated; Europe was said to be the world’s banker, with the UK being the largest foreign investor, holding a huge 32% of its net national wealth overseas (Figures: Daudin et al, 2008, pg 2).
In effect, the world became less integrated during and after WWI, with trade barriers being re-instated. In the inter-war years, FDI was very low as a percentage of GDP, until it started to grow gradually until 1980, at which point it rose rapidly. This pattern displays a U-shape over the 20th century; it starts high before WWI before dipping during and after the war and stays low until after WWII, finally increasing again during the last two decades of the century. After WWII, most of the developed world integrated back to the same level as earlier years. The most recent wave of globalization started in the 1980’s. As well as increasing capital flows, and growth in trade, the main characteristic of this wave of globalization has been in the way developing countries such as China, India and Brazil have integrated with developed ones (Dollar, 2001).
There were a number of reasons that globalization occurred so rapidly and to such a large extent in the 1800s. Firstly, the cost of transportation dropped rapidly with the development of new technology such as steamships and railways. These didn’t just save the monetary cost of transport, but also the time costs as these new technologies were faster to reach their final destinations. Peace also helped; development of empires encouraged the reduction of trade barriers which encouraged international trade and made markets more perfect internationally which would have equalized prices. Foreign investment is likely to have also benefited from peace, and with no wars to fund, more money was available for investment, giving investors confidence to take risks abroad. Finally, countries movement towards the gold standard with fixed exchange rates took one of the risks out of trading internationally (Daudin et al 2008).
The common factor driving waves of globalization is developments in technology, particularly improvements in either transport or the communication of knowledge and information. As seen in the first wave of globalization, there were breakthroughs in transport technology such as steam ships. Jet aeroplanes now make it possible to travel between continents in a matter of hours. But it is not just the speed of transport; developments have lead to the costs of transport allegedly falling by 95% over the 20th century (McCann, 2008, pg356)
McCann (2006) explains these spatial transactions costs; these are “the costs associated with engaging in and co-ordinating activities across space” and these costs are dependent on spatial transmissions costs; the cost of communication and transportation. In all instances of globalization these costs have been cut massively, whether new steamships in the 19th century or reduced communication costs due to the internet since 1980.
Despite having common factors with older waves of globalization, the current wave differs since developing countries are now the driving force. In previous waves, developed countries caused the increase of integration through colonies and trade within their empires, before MNC’s in developing countries dictated which countries to invest in. However, developing countries are now becoming a powerful source of globalization. Export shares for developing countries overtook industrial countries in 1990 (Harrison & Rodríguez-Clare, 2009). This means developing countries now have a much larger influence on the world economy, and can begin to change terms in their favour. The rise of developing countries is not expected to slow; China is already the world’s second largest economy, and “US and Japan may be the only two of the current G6 countries to be among the six largest economies in US dollar terms in 2050” (Wilson & Purushothaman, 2003).
The driving force behind the current wave is certainly communication technology (Figini & Santarelli, 2006).The internet, among other developments, has made it cheap to transmit vast amounts of information over extensive distances, instantly making it easier to co-ordinate other elements of globalization.
A number of other factors are thought to have helped the current wave of globalization, including political factors. After the break-up of the former communist countries the western world is happier to integrate with the East once again. The adoption of the free-market throughout the world has also been cited for some of the increase, as well as the spread of institutions such as the International Monetary Fund, the General Agreement on trade and tariffs and the World Bank (Figini & Santarelli, 2006). Countries are more likely to open their barriers to trade if they know that the countries they are trading with are obeying the same rules.
It’s uncertain whether customs unions such as the European Union are conducive to globalization. On the one hand, they encourage and accelerate integration within a geographic area. However protective trade policies against countries outside these areas may actually inhibit globalization, as globalization involves the whole world. Instead of seeing the whole world integrate, we may actually see the development of large regional customs unions, promoting trade within them but limiting trade externally as they retaliate to each other with high barriers.
Most of the theoretical benefits of globalization come from trade theory, detailed in the Hecksher-Ohlin model (Todaro & Smith, 2009).Trade brings benefits to consumers, such as enhanced consumption capabilities through lower prices from competition and greater choice from foreign goods added to domestic goods. Exporters also gain from economies of scale and a larger market. Other gains from globalization come from foreign investment. Investment is deemed vital for economic growth and development in models such as Rostow’s stages of growth model, the Lewis model and the Solow neoclassical growth model (Todaro & Smith, 2009).
There are also costs associated with globalization, including environmental costs and labour drain of workers moving abroad to gain a higher wage. There may be costs in certain areas as uncompetitive local industries shut down if they cannot compete with firms abroad.
4. Background to Brazil
In order to investigate whether globalization has had a positive or negative impact on living standards in Brazil it is firstly necessary to investigate its economic background. Brazil is the 5th largest country in the world, and has a population of approximately 193 million. It has a large industrial sector and has a relatively high income by developing country standards.
In the 1500s, Brazil was colonized by Portugal, experiencing elements of globalization for the first time. Timber, shortly followed by sugar were the first commodities to be exported, before a huge discovery of gold was made. This was a time of enormous growth for Brazil; in 1700 it had 300,000 inhabitants, a century later this number was eleven times larger (Galeano, 1997).
Brazil has always been at the forefront of primary product production. However it was often unable to benefit from this itself. For example, it used to be the world’s largest sugar producer, until the Dutch left and took all the specialized knowledge of producing sugar to Barbados (Galeano, 1997). It’s currently the world’s largest coffee producer, currently exporting around 1/3 of the worlds supply of coffee beans. The downside of this is that Brazil is exposed to the world market price; small fluctuations in price can make a huge difference to the Brazilian economy. Once again foreign interests both help and hinder Brazil. Brazil seems to have no rights to compete with foreign factories on soluble coffee. When they did compete, foreign factories complained so much that the Brazilian government put huge internal tariffs on factories to make them uncompetitive (Galeano, 1997).
Another example of the exploitation of the Brazilian wealth of raw materials is the oil, gas and kerosene industry. These attract more US investment than any other industry bar automobiles because they are so profitable for investors. Despite this, Brazil opens its doors to foreigners; foreign factory openings were celebrated in the 1960s and Brazil was an investment favourite, with no restrictions on foreigners investing in the country, and no limits on the foreign ownership of business (Galeano, 1997).It built a large industrial sector using import-substitution strategies; however, it allowed foreign participation through investments and loans. The international debt crisis led to the gradual loss of its economic sovereignty (Pedersen, 2008)
During the second wave of globalization, Brazil had one of the most protected economies in the world to protect its industrial sector. The debt crisis in 1982 severely hampered the economy throughout the 1980’s, which is often referred to as the “lost decade of growth” (Ferreira et al, 2007) A new democratic government lead to a gradual opening of the economy in the late 80’s; average nominal tariffs fell from 43.4% in 1987 to 13.9% in 1995 (Ferriera et al, 2007, pg2). It was the mid-90’s when the economy stabilized that Brazil became fully exposed and integrated with the world economy.
5. Evidence of globalization
In this chapter I will analyse data that measures the key components of globalization to discover when it had an impact on Brazil. These are trade flows, FDI flows and the KOF index of globalization. Analysing these measures of globalization will allow me to assess whether standard of living indicators have improved or declined after Brazil became more integrated with the world economy.
Firstly, a large component of globalization is international trade. We would expect to see a large increase in the volume of both imports and exports with an increasing level of globalization, as consumers buy goods from abroad and producers start selling in foreign markets. However, the amount of trade doesn’t just depend on the level of globalization; it also depends on the level of trade liberalization, the trade policy of the country. This includes tariffs and quotas as well as hidden barriers to trade. For example, even if the rest of the world is highly integrated, Brazil may not be if it has high barriers to trade. Since Brazil had one of the most closed economies in the world until it started to change its policy, we would expect to see a large increase in the level of trade flows in the early 90’s when it liberalized.
Source: Constructed from OECD Main Economic Indicators Data
Figure 1 shows the value of trade has multiplied many times since the 1980s. We can see that the level of trade stays relatively similar throughout the 1980s, increasing toward the end of the decade and rising in the early 90’s, before it takes off in 1994. We observe a slight slowdown in the rise in value of total trade between 1998 and 2002, when Brazil ran a trade deficit. However, between 2002-2008 trade explodes in value, when the value peaks at over 60 times the 1971 value, before dropping in 2009.
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This huge growth in trade can be attributed to two main factors; globalization and the removal of trade barriers. After the debt crisis during the 1980s the economy clearly picks up, and then the removal of barriers to international trade contributes to the huge increase in trade. Brazil has obviously found enormous markets throughout the rest of the world as its export value has multiplied many times, but the amount of imports has increased too as domestic consumers buy more goods from abroad. This suggests Brazil was becoming more integrated in world markets, and experiencing globalization.
The next indicator of globalization is foreign direct investment flows and stocks, shown in figure 2 and 3 respectively.
Source: Constructed from UNCTAD Statistics Data
Source: Constructed from UNCTAD Statistics Data
Once again we see a steep rise in FDI in the early 90’s, due to Brazil opening itself to international markets. There is reason to believe that the subsequent changes in FDI are down to movements in the international finance markets; most of the changes in investment can be explained by investor confidence. For example, the fall in investment at the beginning of the 2000’s can be explained by the (incorrect) expectation that Brazil would default on its debts (Favero & Giavazzi, 2004). Consequently there was an increased risk associated with any investment in the country. The fall between 2008 and 2009 is due to the financial crisis (Schwartzman, 2003) with less investment available due to a lack of credit and Brazil is still seen as a developing country, therefore potential investors are likely to look to “safer” markets.
Globalization can also explain the downturn in 1998. The Asian Financial crisis warned investors of the risk in developing markets (Dreher, 2008) which possibly contributed to a slowdown in FDI flows to Brazil. Other fluctuations can be explained by macroeconomic instability caused by the peso crisis, elections and plans to devalue the currency.
Once again, FDI flows increase at a similar time to trade, and FDI stocks have grown almost constantly at what appears exponential rate. This suggests that Brazil is becoming increasingly internationally integrated since more money can be sourced abroad.
The KOF globalization index is a measure of economic globalization calculated from actual flows of FDI, trade, income payments to foreign workers and capital flows, as well as restrictions such as hidden import barriers and tariffs. These should give a good indication of Brazil’s openness to the international economy.
Source: Constructed from KOF Index of Globalization data
Figure 4 shows that once again, Brazil didn’t become integrated with the world market until the mid 1990’s, after which steady growth took place. However, although the increase is large, it is not the same dramatic increase seen with FDI and trade flows, particularly from 2003-2008 when the index remains at around the same value. This suggests that globalization may have slowed, and changes in the other two indicators may be down to other economic factors other than globalization.
If we look at all three measures of globalization combined we can see that at around 1993-4 Brazil becomes more and more integrated with the world economy. After this point any changes in the indicators can be explained by changes in world markets. This is because in the early 90’s Brazil opened its economy to international trade. This was supported by other decisions such as joining the World Trade Organisation. There are possibly time lags as markets respond, for example despite the increasing speed of information flow, it still takes time for markets to respond to new products and for investors to assess where they can get good returns for their money. Another example is that it takes time for producers to respond and produce the extra goods needed to meet international demand.
Although the indicators do drop or grow less slowly around the year 2000, this is more likely due to changes in international markets, for example in reaction to the East Asian Debt crisis and speculation over Brazilian default rather than Brazil becoming less integrated with the world economy. It can be argued that this re-affirms Brazil’s position as being integrated; it is unlikely to have been as adversely affected by these worldwide phenomena before globalization.
There is an absence of a definitive measure of globalization that could have been used, and there are alternative suggestions of measuring integration, such as using the theory of factor price equalization between countries. This would involve finding whether factor prices in Brazil were converging with the rest of the world. However, this is just a theory and data is harder to come across. There is also the likelihood that factor price equalization is likely to take a longer period of time. Indicators are also unavailable for labour migration statistics (Ferreira et al, 2007). Since globalization means that it should be easier for labour to move across borders then you would expect to see a higher level of migration.
Taking everything into account, in subsequent chapters we should note that there is strong evidence that Brazil had begun the process of globalization by 1993-4, and if globalization has any impact on standard of living then it is after this time, which is denoted by a vertical red line in following figures.
6. Effect of Globalization on Income
In the last chapter we found evidence of globalization in Brazil, which took off in 1993-1994. In the next section of the essay I will investigate whether this globalization has had a positive or negative impact on the standard of living in Brazil by assessing changes of a number of different indicators of wellbeing.
GDP per capita gives a basic overview of how much income each person would receive if income was divided equally between everyone in the country. A higher mean level of income suggests a higher standard of living (Todaro & Smith, 2009)
Source: Constructed from OECD Main Economic Indicator Data
Figure 5 shows since 1993 GDP per capita has increased, and as we saw in the previous chapter, this was when that international trade and FDI started to grow. It is very likely that trade flows and FDI are positively correlated with GDP, since these are a large source of new income. GDP per capita shows that the average person in Brazil is now much better off than before globalization, but there are many more factors to take into account. Firstly, although GDP is a good base measure of whether a country is wealthier, it doesn’t tell whether standard of living has increased, for example one person might own 99% of GDP, leaving the rest of the population poor.
One of the most basic and important measures of development is poverty, since people must have enough money to satisfy basic needs.
Source: Constructed from World Development Index Data
Although the dataset is incomplete, poverty is obviously in decline in Brazil; however this was occurring even before Brazil became more integrated in the world economy. By taking the data and splitting it into two parts, one before 1993 and one after and identifying trends we can observe whether globalization has sped up the process of reducing poverty.
Initially globalization seems to have slightly slowed the rate of poverty reduction, however in these years GDP per capita was not growing rapidly either, so it’s likely there was little extra wealth to redistribute. In more recent years when trade, FDI and GDP per capita increased more rapidly, there has been an increase in the rate of poverty reduction. Therefore it appears there is more of a link with a successful, growing economy and poverty reduction rather than just globalization and poverty reduction, since although poverty was falling, it was already falling before globalization is judged to have intervened in the economy. However, globalization may be judged to have contributed to the success of the Brazilian economy.
Another reason it may be unfair to credit globalization for reducing poverty is that the government may be behind it, for example a drive on re-distribution etc.
Additionally, it may be unfair to judge the rate that poverty is falling, since the lower the percentage of the population in poverty, the harder it may be to reduce it. For example it may be easier to find employment and redistribute funds for 1000 people when the percentage of population under $1.25 a day is at 17.1% as it was in 1981 compared to helping 1000 people out of poverty when only 5.21% are under $1.25 a day as was the case in 2007. If this is the reality then the mechanisms of globalization may well be a large positive force in reducing poverty at the same rate, which would have slowed down had Brazil not become more globally integrated.
Another possibility is that the reduction is a product of both globalization and state intervention. If we attribute the rise in GDP to globalization, globalization creates the additional capital from increased trading and investment which leads to an increase in income which the government can then re-distribute to those that need it most. Since increases in GDP per capita appear to be correlated with globalization this seems likely.
7. Effect of Globalization on Inequality
There are many reasons that an equal society will benefit a country. Todaro and Smith (2009) describe; the higher the level of inequality, the less people at the average income can borrow. This is important because credit gives people on lower incomes the capital to invest and set up their own business or put their children through good quality education, thus they are less likely to be able to break free from the poverty trap. High inequality can also lead to an inefficient allocation of assets. The rich are much more likely to spend their money on luxury goods from abroad, which can lead to capital flight.
An unequal society also undermines socia