Brazil EMBRACING GLOBALIZATION : case study HBR

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BRAZIL: EMBRACING GLOBALIZATION

Import substitution refers to a strategy where a country imposes restrictions on imports to allow

local manufacturers and products to prosper. Secondly country would sometimes choose

selective imports where it would allow favorable terms on imports of industrial goods while it

places greater restrictions on import of consumer goods.

Brazil chose this import substitution after the Great Depression. But it stayed with this strategy

for decades allowing the local industries to prosper. Brazil chose the import substitution policy

during the two oil shocks too along with devaluing its currency. Devaluation made local products

cheaper in international markets while it also strengthened the economy by minimizing imports

of consumer goods. However there were side effects of this strategy too. Due to this problem,

inflation increased and normal competition couldn’t prosper.

The protectionism policy that became possible due to import substitution strategy worked for

Brazil for some time. Between 1950 and 1980, Brazil saw a growth rate of 7% each year and its

industrial sector became stronger. This substitution policy was marked by excessive investment

by government where specific industries were targeted and high tariff rates were imposed against

competition. However after 1980, disaster struck as Brazil saw hyper inflation, collapse of

investment, external debt increased excessively and foreign investors disappeared due to

economic conditions in Brazil.

Regional integration called Mercosur was established between five Latin American countries

including Brazil, Argentina, Uruguay, Paraguay and Venezuela. This was basically a trade

agreement between Brazil and Argentina while smaller partners were also included. Even though

initially most experts felt that Mercosur was destined to fail because of the dissimilarities

between member countries, the reality is that this integration worked for most members

especially Brazil and Argentina though in different time periods.

By 1992, Argentina pegged its currency against US dollar and growth rate picked up. The peso

appreciated against real and Brazilian goods became cheaper. Argentina’s markets saw an over

influx of Brazilian goods which was not a good sign for Argentina’s local industries even if the

integration was in place. In a bid to curtail this influx Argentina placed high import tax on goods

from Brazil. However by 1994, the things changed as this time Brazilian economy expanded and

real gained against peso. This time Brazil imposed import quotas and some other measures to

curtail imports from Argentina.

By 1999, things went in favor of Brazil again and its economy expanded while Argentina faced

possible recession. The integration in this region has continued to work in favor of one country at

the expense of another member. This is rather disturbing because while integration was formed to

help all member countries gain economic power and stability, it worked only partially and that

too favored one over the other as economic conditions changed. Some viewed the devaluation of

Brazilian currency as an attempt to sabotage rising economy stability in member countries and

other viewed it simply as a case of dissimilar members with differing interests and distinct needs.

Most felt that a regional integration is a good idea for Latin American countries because this

could allow all countries to gain power as an economic bloc just like the European Union.

However so far it appears to have failed to work completely because Latin American countries

are too dissimilar in terms of economic needs, economic power, population and industrial

growth. While most countries in the European Union are on equal footing and hence exercise

equal power, the same cannot be said of the countries forming the Mercosur. Hence Mercosur

was declared dead by most people a decade after it was formed. (O’Keefe, 2009)

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BRAZIL: EMBRACING GLOBALIZATION Import substitution refers to a strategy where a country imposes restrictions on imports to allow local manufacturers and products to prosper. Secondly country would sometimes choose selective imports where it would allow favorable terms on imports of industrial goods while it places greater restrictions on import of consumer goods. Brazil chose this import substitution after the Great Depression. But it stayed with this strategy for decades allowing the local industries to prosper. Brazil chose the import substitution policy during the two oil shocks too along with devaluing its currency. Devaluation made local products cheaper in international markets while it also strengthened the economy by minimizing imports of consumer goods. However there were side effects of this strategy too. Due to this problem, inflation increased and normal competition couldn't prosper. The protectionism policy that became possible due to import substitution strategy worked for Brazil for some time. Between 1950 and 1980, Brazil saw a growth rate of 7% each year and its industrial sector became stronger. This substitution policy was marked by excessive investment by government where specific industries were targeted and high tariff rates were imposed against competition. However after 1980, disaster struck as Brazil saw hyper inflation, collapse of investment, external debt increased excessively and foreign investors disappeared due to economic conditions in Brazil ...
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