Economy: Inflation in Brazil

Economy: Inflation in Brazil

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Brazil, an economy expanding in the world market is known as one of the South American countries that has a well-developed agricultural, mining, manufacturing, and service sectors. This thriving economy has been experiencing economic growth slowly but surely (World Fact Book). They have secured and maintained inflation rates in the single digits for the past ten years the lowest recorded at 2.6 in 2003 and the highest being 6.9 in 2005 (World Fact Book). Brazil’s ultimate aim is to maintain inflation rate below 6%. In macroeconomics national income, inflation and unemployment goes hand in hand, from a monetarist point of view the change in supply of money will have an effect on unemployment, inflation and fluctuate national income (Robinson Rojas 2014). Views from the monetarist are seen in Brazil’s economy since the change in the supply of money has had an effect on this economy from as early as 1986. To combat high inflation rates Brazil changed currency several times from 1986 to 1995 until the deployment of the Real Plan (Brazil Travel). The Real Plan which was developed by the Minister of Finances Fernando Henrique Cardoso, Brazilian economist Persio Arida and Andre Lara Resende with MIT Rudger Dornbush endorsing the idea by publishing it in his book of macroeconomics (Brazil Travel) was the beginning of the a stable inflation rate and the beginning of extremely high unemployment rates in the growing economy of Brazil with fluctuating national income.
Inflation has many components, in Brazil indexation was seen as their reason of high inflation rates so the plan was introduced, because of the rates in a period before sellers will assume that the rates may be the same and would factor that index in their prices, doing this the rates remained higher and sometimes where higher because of this assumption. There were three key elements to the plan being a success 1) fiscal strategy 2) monetary reform and 3) Opening the economy (Brazil Travel).
These strategies had positive and negative outcomes for the economy and the people in Brazil. The fiscal strategy which was based on Constitutional Amendments #17 approved on November 22, 1997 which changed articles 71 and 72 of the Temporary Constitutional Provisions to extend the period of the Social Emergency Fund was to be used for economic and social interest. Among the many positives of this strategy the reform of social security of the public sector and labour legislations among others failed.

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The monetary reform was one of the most rewarding strategies, in that it managed to beat indexation with the creation of a super index Unidande Real De Valor -The Real Unity of Value (URV). Then the strategy that brought unemployment rates to increase drastically in Brazil, opening the economy. Brazil was now of huge interest to the international market, huge investments were being made. Importers gained tremendously because the real gained value against the dollar (US$100 =R$87), but on the down side exporters were at a disadvantage. A lot of businesses closed down, several industries closed down; people lost their jobs, unemployment increased in Brazil. The main concern was for deflation and maintain a 6% inflation rate and that is what was done in spite of job loss (Brazil Travel).
As regimes changed and fiscal policies continued to be reformed Brazil soon balanced their economy where employment and inflation rates were controlled. Brazil under the ruling of a former trade union leader and Workers’ Party chairman (Luiz Inácio da Silva also known as “Lula”) now president, took the country through a transformation of social change. Industrial development was revamped, and steps were taken to relieve poverty and inequality whilst continuing in steps of macroeconomic policies by the former administration. According to reports poverty has decreased from 20% in 2004 to 7% in 2009 and extreme poverty dropped from 10% to 4%. The income growth rate from 10% of the very poor was 7% per year and the rich from 10% was 1.7%, these figures may not seem like much but they are better than in the past. According to the CIA fact book unemployment is at a higher rate among women than men in all working age brackets. Below shows a table of unemployment rates in Brazil for the period 2008-2011.
Male 2008-11 Female 2008-11
5 9

Male 2008-11 Female 2008-11
12 20
Youth unemployment age 15-24

Long term unemployment (%of Total unemployment)

Total 1

(CIA Fact book)
The table above shows that in the period male unemployment was 5% and females stood at 9% in the single digits, youth unemployment between the ages of 15-24 among male was 12% and female at 20% but total long term unemployment is 1%, a great achievement for the government of Brazil. (CIA Factbook).
In Brazil according the monetarist the reduction in unemployment caused inflation rates to increase because the government was not borrowing from the banks which are causing the interest rates to go up because of the additional supply of bonds which in turn caused a reduction in private investments and that resulted in less output in the economy. National income which is affected by a change in the supply of money will increase if the government continues borrowing and creating cash (Robinson Rojas2013).

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