Economics in Latin America session at 12th International Conference

1. The Problem of Commodity
Dependence in the Context of
Global Imbalances: The Case of
Brazil
by
Laura Ebert
and Leanne Ussher
THE 12TH INTERNATIONAL POST
KEYNESIAN CONFERENCE
Kansas City, Missouri
September 25–27, 2014

2. Outline
Commodity Producers and Global
Imbalance
Current Commodity Boom
A new Commodity Curse
Conclusion

3. Creation of Global Real
Imbalance
United States
Key reserve currency
Deindustrialization and
financialization
Overconsumption of commodities,
ease of financing trade deficit
China
Manufactured
goods
Build up US reserves to devalue Yuan
Low wage
Leader in mass production (Verdoorn’s
Law), high returns to scale Brazil
Build up US reserves to counter
pressure of capital inflows and rising
commodity price
Low wage,
Low market share, low technology and
returns to scale
Primary commodity producer but high
FDI in commodity production
Low FDI and domestic investment in
manufacturing
Commodities
FDI in commodities,
manufactured gds
Commodities,
limited
manufactured
gds
FDI, net
agricultural . .
FDI

4. Creation of Financial
Imbalance
United States
Appreciated reserve currency
Cheap imports
Low inflation
Low interest rates
China
Depreciated currency
Rising commodity prices (unless
commodity exporters devalue)
Effective capital controls
Short term
capital
Brazil
Appreciated currency
Limited domestic capital market
Ineffective capital controls
Falling profits from commodities as
profits get repatriated
Capital inflows for
commodity
Long term
capital, US $
forex, revenue
manufactured
gds
Short term
capital,
Capital outflows US $ forex
manufactured gds

5. After buildup of global imbalances things start to
change…
•1990s – financial sector deregulation in Brazil
increasing access to foreign creditors (Studart,
2000)
•US dollar starts to depreciate as US interest rates
fall
•Commodity boom after 2004 – rising prices of
commodities (linked to China and depreciating US
dollar)

7. 30
25
20
15
10
5
0
1990
1992
Exports to China (% of total export) South America* (in USD billion)
1994
1996
1998
2000
2002
2004
2006
2008
2010
Argentina Brazil
Chile Peru
Total imports from
120
80
60
40
20
0
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CN EU US
Source: UN Comtrade Source: UN Comtrade

8. China main source of demand for iron and soy…
but overall small contribution to economic
growth
0.05 points in Brazil
Compared to Chile at .34 in Chile

9. However currently Brazil’s stocks of external
debt to GNI have declined from about 50
percent to under 20 percent
…. Due to reduction in public sector debt
This is a good thing 

10. World bank

11. The question now is what is happening to
private sector debt and how might Brazil’s
status as a commodity producer influence
things going forward….?

12. World bank

13. World bank

16. World bank

17. Reasons for private sector debt build up…
•Greater access to foreign creditors
•Low interest rates abroad vs in Brazil
•Push to increase demand of middle and lower classes –
the new “let’s generate domestic demand”…
•Rising commodity prices increasing credit worthiness in
eyes of foreign creditors

18. The question that needs further research:
Are CDEs vulnerable in boom times to
private developed country creditors who see
the commodity revenue stream as a source
of interest payments (Michael Hudson)
Is this another “commodity curse” in the
current world of global imbalance??

19. What is happening …
Foreign creditors are happy to lend to Brazilians –
But credit is going to finance imports of manufactured
goods…. (Net Exports of Manufactured goods was 2010
74% of Brazilian imports were manufactured goods -
exports 14%)
As domestically produced manufactured goods have
fallen… (plus would be lower quality and more
expensive in any case  )

20. Instead the idea of growth through domestic
demand is to raise incomes by raising labor
productivity….
But private sector left to own devices is not
channeling debt in this manner…

21. What happens next??
•Debt buildup among lower and middle classes continues

•Debt buildup of Brazilian corporations continues 
•Continual accumulation of foreign reserves by Federal
Reserve bank
•Continued deindustrialization of economy – rise in services
and commodity and commodity related production 
•Rise in FDI 

22. Than US economy recovers….
 US interest rates rise
 US dollar appreciates relative to Real
 Commodity prices fall as producers adjust
prices in competitive market

23. For a commodity producer like Brazil, this means….
• Capital flight (and depreciation despite central bank
forex) 
• Higher interest rates on private sector foreign debt 
•Higher cost of financing dollar denominated debt due to
deprecation of Real relative to US dollar 
•Falling commodity prices on account of stronger dollar
leading to falling growth 

24. Ratio of Commodity Exports to
Total Merchandise Exports
By Region 2009-2010 Average, 154 developing countries in sample.
Source: “State of Commodity Dependent Countries 2012” UNCTAD p.18.
Accessed: http://unctadxiii.org/en/SessionDocument/suc2011d8_en.pdf

25. What do we do??
IMF/UNDP demand lead growth with no/low
imports
Frankel – peg exchange rate to commodities
Kaldor via Ussher – commodity reserve
currency