Emerging Markets: Brazil’s Quest for Comparative Advantage
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When it comes to Global Business, Strategic/International Trade, among other forms of doing business domestic and internationally, it is crucial to follow on of the most important principles in all economics; comparative advantage. This theory was developed by David Ricardo in 1817. “On the basis of a simple model with just two countries and two goods, he showed that every country—even one enjoying an absolute productivity advantage in both goods—would benefit from specializing in what it was relatively best at producing and then engaging in trade for everything else” (Moss, 2014). Taking a look at major players in emerging global markets, Brazil by all means should be in the list as emerging market. This Case Study will explain why Brazil is an emerging market but at the same is having difficulties being competitive globally.
What makes Brazil’s agriculture competitive and why its manufacturing industries lack competitiveness. Brazil’s agriculture prowess is the envy of many other countries that spent a lot more in resources and lack the Brazil’s geography to produce agricultural products. Benefitting from its geography and extensive water reserves, Brazil is able to produce the majority of its food products domestically, yet maintains enough surplus to engage in substantial exportation. Moreover, due to severe Brazilian currency devaluation in 1999, making Brazilian exports extremely competitive in the foreign market, Brazil’s export sector expanded enough to employ a fifth of the labor force. Though agriculture only accounts for 6% of total GDP currently, Brazil is still one of the largest producers and exporters of coffee, sugar, and soybeans in the world, and depends only on wheat as an agricultural import (Pendergast, 2002). This led Brazilians to realize that the country’s comparative advantage lies in agriculture (Peng, 2014).
However, Brazilian government policies have played an enormous role in the Brazilian economy. The main factor affecting the competitiveness of Brazilian exports is the high cost in manufacturing including labor costs. Skilled labor is in short supply and is one of the most significant growth barriers for Brazil’s labor-intensive manufacturing industry. Industrial surveys undertaken by the most prestigious research institutions in Brazil over the last few years ranked the lack of qualified labor as one of the most critical barriers to manufacturing growth, along with the high tax burden. With the current tax reductions benefiting a broad range of manufacturing industries, the National Confederation of Industry’s latest surveys have shown a decline in the percent of respondents listing the tax burden as one of the major problems facing factories (Sedano, 2013).
Brazil’s eager to develop world-class manufacturing
Brazil is today a rising competitor with a strong position in the global scenario, and working to achieve its competitive potential through making feasible changes in its industries. “Brazil has also pursued an industrialization policy centered on replacing imported manufactured products with Brazilian-made ones, yielding a highly diversified manufacturing sector” (Deloitte, 2010). The government under President Dilma Rousseff continues to believe that Brazil has to build up a world-class manufacturing base in order to modernize its economy (Peng, 2014). Its main products such as beef, coffee, poultry, soybeans and sugar, have given Brazil an advantage in the agro-industry. However, they struggle globally due to rise in the costs of energy, raw materials and wages.
Shifting Brazil’s Economy from Uncompetitive Industries to Competitive Industries Brazil has high potential on becoming World Economy High Competitive Industries. However the government is affecting tremendously in this to happen. One of the main factors affecting their competitiveness is high manufacturing costs. To make Brazilian market competitive, Brazil needs to reduce their labor costs by work efficiency and automation. Also the government should make adjustments to lower interest rates and taxes. “It is evident that to meet the complexity of our challenges, Brazil needs structural reforms in the most diverse fields. Tax exemptions, foreign trade stimulus, expansion of corporate credit, trade protection measures and incentives for significant sectors are some of the timely measures established by the PBM that need to be incorporated into the essence of a national development strategy” (Deloitte, 2012)
President Rousseff’s has many critics accusing her of lacking of comparative advantage in manufacturing. She also has Brazilians supporting the fact that Brazil does not need dependence of foreign-made manufacturing goods. Even though Brazil has the potential to have global business, I would take the side on the fact that Brazil does not need dependence on other countries. Brazil has today the resources, raw material and labor to produce for the country. Brazil also has innovation in many technological industries. “Brazil is one of the few countries with a sufficiently large natural resource base coupled with a relatively advanced research infrastructure. This places the country in a unique position to capture more profitable stages of the value chain through the use of alternative energies that are ecologically sustainable” (World Economic Forum).
This case study of Brazil Quest’s for Comparative Advantage is a great example on how a country with many resources and potential on becoming a World Economy Leader, can also be held back by its own laws, and what can be called the “Brazil Cost”. The mere fact that a country has resources and exposition to compete with the world’s finest does not mean it will be successful. Brazil’s main struggle is due to self-imposed laws and politics constraints that are set in place to possibly protect and even value its resources. However, these laws prevent it from fully competing with other countries that produce and export the same products and do not have to suffer from the same constraints.
1. Moss, D. (2014). An Economic Principle For Us All: Comparative Advantage. Forbes. Retrieved from: http://www.forbes.com/sites/hbsworkingknowledge/2014/10/22/an-economic-prinicple-for-us-all-comparative-advantage/2/ 2. Pendegast, S. & Pendergast T. (2002). “Brazil” and “India”. Worldmark Encylopedia of National Economies (Volume 2 and 3). 3. Peng, M. (2014). Chapter 5. Trading Internationally. Global Business, Third Edition. 4. Sedano, F. (June, 2013). Brazil’s Manufacturing Growth Puzzle. MAPI. Retrieved from: https://www.mapi.net/brazils-manufacturing-growth-puzzle 5. Deloitte. (June, 2010). Global Manufacturing Competitiveness Index. Retrieve from: http://www.compete.org/images/uploads/File/PDF%20Files/2010_Global_Manufacturing_Competitiveness_Index_FINAL.pdf 6. Deloitte. (2012). Competitive Brazil. Challenges and strategies for manufacturing industry. Retrieve from: http://www.deloitte.com/assets/Dcobrazil/Local%20Assets/Documents/Ind%C3%BAstrias/Manufatura/livro_ingles.pdf 7. World Economic Forum. CEO Policy Recommendations for Emerging Economy Nations: Brazil. Retrieve from: http://reports.weforum.org/manufacturing-growth/brazil/