Brazil: Economy

The Brazilian economy’s solid performance during the 2008 financial crisis and its strong and early recovery, including 2010 growth of 7.5%, have contributed to the country’s transition from a regional to a global power. Expected to grow 3.5% in 2011 and 4.0% in 2012, the economy is the world’s seventh-largest and is expected to rise to fifth within the next several years. During the administration of former President Lula, surging exports, economic growth, and social programs helped lift tens of millions of Brazilians out of poverty. For the first time, a majority of Brazilians are now middle-class, and domestic consumption has become an important driver of Brazilian growth. President Dilma Rousseff, who took office in January 2011, has indicated her intention to continue the former president’s economic policies, including sound fiscal management, inflation control, and a floating exchange rate.

Low unemployment and strong domestic demand pushed 12-month inflation to 7.3% through the first three quarters of 2011, above the upper limit of the government’s target of 2.5%-6.5%. The central bank believes, however, that the global economic downturn will dampen inflationary pressure and projects inflation to fall within the target band by the end of 2011 and throughout 2012. Concerns regarding global economic conditions drove the central bank to reduce interest rates from 12.5% to 12%, the first such rate decrease since mid-2009, to keep domestic consumption high. Prolonged high interest rates have attracted foreign currency inflows that have driven up the value of the currency (the real) by nearly 30% since the start of 2009. In an effort to limit the appreciation, the government had increased dollar reserves and introduced capital controls.

Brazil is generally open to and encourages foreign investment. It is the largest recipient of foreign direct investment (FDI) in Latin America, and the United States is traditionally the top foreign investor in Brazil. Since domestic savings are not sufficient to sustain long-term high growth rates, Brazil must continue to attract FDI, especially as the government plans to invest billions of dollars in off-shore oil, nuclear power, and other infrastructure sectors over the next few years. The major international athletic competitions that Brazil will host every year until the 2016 Rio Olympics are also leading the government to invest in roads, airports, sports facilities, and other areas.

Trade Policy
President Rousseff has made economic growth and poverty alleviation top priorities. Export promotion is a main component of plans to generate growth and reduce what is seen as a vulnerability to international financial market fluctuations. To increase exports, the government is seeking access to foreign markets through trade negotiations and increased export promotion, including tax breaks for exporters.

Brazil has been a leading player in the World Trade Organization’s Doha Round negotiations and continues to seek to bring that effort to successful conclusion. To further increase its international profile (both economically and politically), the Rousseff administration is also seeking expanded trade ties with developing countries, as well as a strengthening of the Mercosul (Mercosur in Spanish) customs union with Uruguay, Paraguay, and Argentina. In 2008, Mercosul concluded a free trade arrangement with Israel, followed by another arrangement with Egypt in 2010. Mercosul is pursuing free trade negotiations with Mexico and Canada and resumed trade negotiations with the EU. This trade bloc also plans to launch trilateral free trade negotiations with India and South Africa, building on partial trade liberalization agreements concluded with these countries in 2004. China has significantly increased its purchases of Brazilian soy, iron ore, and steel in recent years, becoming Brazil's principal export market and an important source of investment.

Agriculture
Agriculture is a major sector of the Brazilian economy, and is key for economic growth and foreign exchange. Agriculture accounts for about 6% of GDP (25% when including agribusiness) and 36% of Brazilian exports. Brazil enjoyed a positive agricultural trade balance of $55 billion in 2009. Brazil is the world's largest producer of sugarcane, coffee, tropical fruits, frozen concentrated orange juice (FCOJ), and has the world's largest commercial cattle herd (50% larger than that of the U.S.) at 170 million animals. Brazil is also an important producer of soybeans (second to the United States), corn, cotton, cocoa, tobacco, and forest products. The remainder of agricultural output is in the livestock sector, mainly the production of beef and poultry (second to the United States), pork, milk, and seafood.

Environment, Science, and Technology
About half of Brazil is covered in forests, and Brazil has the majority of the world's largest rain forest, the Amazon. A little less than 40% of the Amazon, and to a lesser extent the Cerrado (tropical savannah), is managed by national, state, or municipal governments, either as conservation units, forest concessions, or officially designated indigenous lands. In the last 30 years, migration into the Amazon and the conversion of forest land, primarily for agricultural use, reduced forest cover in the Brazilian Amazon by 20%. Through initiatives such as the revitalization of degraded pastures and forest, agriculture, and livestock integration, the government made progress in reducing deforestation for agricultural use. However, deforestation due to illegal logging remains a serious problem. In 2006, the government created the Brazilian Forest Service with the aim to manage the Amazon forest resources in a sustainable manner.

Including emissions from deforestation, Brazil is one of the largest emitters of greenhouse gases. As part of its domestic commitments on climate change incorporated into legislation in 2010, Brazil inscribed a target of reducing emissions by 36.1%-38.9% below business as usual by 2020. This commitment includes further reductions in deforestation rates as well as advances on renewable energy and energy efficiency. Brazil also created a National Climate Change Fund, the country’s primary means for financing national climate change policies.

Figures from 2010 demonstrated that Brazil had reduced the rate of Amazon deforestation by more than 70%, its lowest rate of deforestation in over 20 years. Government officials predict that, at the current pace, Brazil’s goal of reducing greenhouse gas emissions by 36.1%-38.9% could be reached by 2016 rather than 2020. Brazil also increased its programs in other biomes at risk for significant deforestation. At COP-16 in December 2010 in Cancun, the Brazilian Government delegation played an important role in developing a characterization of country commitments under the Kyoto Protocol, the central outcome of the conference. These commitments could enable Protocol proponents to continue into a second commitment period.

Brazil is a regional leader in science and technology and a global leader in fields such as biofuels, agricultural research, deep-sea oil production, and remote sensing. The Brazilian Government seeks to develop an environment that is more supportive of innovation, taking scientific advances from the laboratory to the marketplace in order to promote economic growth. Yet it still faces some challenges. With the vast majority of the population living in urban areas, Brazil faces serious environmental obstacles in providing potable water to its citizens and removing and treating their waste water.

U.S. Government, private sector, and academic researchers have extensive ties with Brazilian counterparts. Areas in which there is close cooperation include biofuels, medical research, remote sensing, and agriculture. The extent of bilateral scientific and technological cooperation is expanding and prospective areas in which to expand include advanced materials, telecommunications, energy transmission, and energy efficiency. Limitations to cooperation include substantial restrictions on foreign researchers collecting or studying biological materials, due to concerns over possible unauthorized taking and commercialization of genetic resources or traditional knowledge of indigenous communities (often referred to as "biopiracy").

Other Aspects
Brazil has one of the most advanced industrial sectors in Latin America. Accounting for roughly one-third of the GDP, Brazil's diverse industries include automobiles and parts, machinery and equipment, textiles, shoes, cement, computers, aircraft, and consumer durables. Brazil continues to be a major world supplier of commodities and natural resources, with significant operations in lumber, iron ore, tin, other minerals, and petrochemicals. Brazil has a diverse and sophisticated services industry as well, including developed telecommunications, banking, energy, commerce, and computing sectors. The financial sector is secure and provides local firms with a wide range of financial products, yet interest rates remain among the highest in the world. The largest financial firms are Brazilian (and the two largest banks are government-owned), but U.S. and other foreign firms have an important share of the market.

Government-initiated privatization after 1996 triggered a flood of investors in the telecom, energy, and transportation sectors. Privatization in the transportation sector has been particularly active over the last 20 years. Many antiquated and burdensome state management structures that operated in the sector were dismantled, though some still exist. The Brazilian railroad industry was privatized through concession contracts ranging from 30 to 60 years, and the ports sector is experiencing similar, albeit less expansive, privatization. In response to the dramatic deterioration in the national highway system, the federal government granted concessions for existing highways to private companies, which in turn promise to restore, maintain, and expand these highways in exchange for toll revenues generated. New opportunities are expected to arise with the opening of Brazilian civil airports to private management and investment through a federal concession model, but the initiative faces obstacles due to questions surrounding sovereignty and opposition from airport unions. The United States and Brazil signed an Air Services Liberalization Agreement in 2008 that increased commercial air travel between the two countries. In 2010, they initialed an air transportation agreement and an air transportation memorandum of understanding that, when they are signed and enter into force, will continue and expand this process.

The Government of Brazil undertook an ambitious program to reduce dependence on imported oil. In the mid-1980s, imports accounted for more than 70% of Brazil's oil and derivatives needs; the net figure is now zero. Brazil announced in early 2008 the discovery of pre-salt oil fields off the coast of Brazil. The oil reserves in these fields are conservatively estimated at between 30 billion and 80 billion barrels, which would make Brazil one of the top 10 countries worldwide in reserves. Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015. Brazil is one of the world's leading producers of hydroelectric power. Of its total installed electricity-generation capacity of 112,000 megawatts, hydropower accounts for 77,000 megawatts (69%). Brazil is also one of the world’s largest biofuels producers, and sugar-based ethanol comprises over 50% of its vehicle fuel usage. Brazil and the United States, as the world’s largest biofuels producers, have worked jointly through a 2007 memorandum of understanding to help make sustainable biofuels a global commodity. In 2011, that memorandum was subsumed under the Strategic Energy Dialogue, a partnership announced by President Rousseff and President Barack Obama when the latter visited Brazil in March.

Like its supply of carbon-based fossil fuels, Brazil’s proven mineral resources are extensive. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Mining companies, most of them Brazilian, tend to prefer to explore the deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals. High-quality, coking-grade coal required in the steel industry is in short supply.

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