Characterised by higher levels of free trade, communications, technology and transport, globalisation is a process of economic, political and cultural integration (Hamdi, 2013) Interdependence between economies as a product of globalisation has allowed developing countries to influence the world economy more than before, increased sensitivities and vulnerabilities mean that actions in these developing countries have a larger impact elsewhere. There are three main forces that power the process of globalisation, the liberalisation of capital movements, opening up domestic markets to foreign trade and investment and the increasing use of information and communication. Studies on the effect of globalisation on poverty have been inconclusive, David Dollar and Aart Kray say that since 1980 globalisation has contributed to a reduction in poverty as well as a reduction in global income inequality (Dollar and Kray, 2001), other studies suggest otherwise. There is a view that the benefits of globalisation haven’t been shared fairly.
In order to measure globalisation, it is important to split it up into three different dimensions, economic, political and social. Economic globalisation consists of two main factors, actual capital inflows which is the extent to which the economy is exposed to foreign trade and capital and restrictions of capital and trade flows which is the extent to which an economy is restricted to the global market. Political globalisation measures the degree to which a country is politically integrated with world politics and their relations with other nations. Social globalisation can be measured by poverty, unemployment and income distribution. Axel Dreher.
In 1985 Brazil had a national debt of $95 million, the largest in the world at the time, their balance of payments was positive, $13.1 billion. In the same year the inflation rate was 222%, as a result President Sarney introduced the Cruzado Plan in 1986 which entailed drastic monetary policy reform. The new currency, Cruzado, replaced the old currency, Cruzeiro, mortgages and wages were frozen. Between the years 1985 to 1992 there was high inflations and fiscal instability which contributed to fluctuations in GDP growth throughout this period. At the start of this period, 1985 and 1986, the country experienced high growth of 7.9% and 8% under a new government. Following failure of monetary plans and poor fiscal management growth fell to 3.6% in 1987 and experienced negative growth in the following year. Brazil’s GDP growth was volatile throughout the rest of this period, increasing to 3.3% in 1989 and falling to -4.3% in 1990. (The World Bank Data).
Throughout the 1980’s Brazil’s foreign direct investment wasn’t as high as it is today, there were high trade barriers. There were state monopolies in the oil and gas, communications and postal sectors. It was not until President José Sarney came into power that Brazil started to consider opening up the economy, and by 1987, trade liberalisation and privatisation were introduced when some non-tariff barriers were removed and the steel and petrochemical state monopolies were dismantled. However, it was not until President Fernando Collor de Melo was elected in 1989 and his radical liberalising agenda that Brazil truly started to open themselves up to the world economy. In his first year of presidency, Collor abolished nearly all non-tariff barriers and in conjunction implemented a system of quotas that would favour domestic producers which gave domestic producers a necessary shield against an aggressive world market.
Between the years 1990 and 1994, a drastic tariff reform plan was implemented which slashed tariffs in half over the four years, average tariffs went from 32.2% in 1990 to 14.2% in 1995 (Fritsch and Franco, 1991). This was considered to be the defining moment of transition from a sealed, protectionist economy to a transparent economy with more open trade barriers, integrating it slowly to the global economy.
In 1994, Collor’s successor, Itamar Franco and his finance minister, Fernando Henrique Cardoso began to implement the Real plan. Monetary Policy was tightened in order to curb inflation and a new currency was introduced, that would be pegged to the U.S dollar (Roett, 2010:86) (Clements, 1997) By late 1996, early 1997 inflation was at less than 20% and by 1998 it was down to less than 5%. The adoption of the Real was considered the determining factor of the increased economic stability at the time, following years of uncertainty and volatility in the economy.
In 1995, government, now under President Cardoso, passed a constitutional amendment privatising telecommunications, electricity generation and oil exploration and production opening up these key sectors to foreign direct investment. From 1996 to 2000 total privatisation related foreign investment increased every year from US$2.7bn to US$8.8bn respectively (Banco Central do Brasil, 2000). The macroeconomic stability achieved by the implementation of the Real Plan and the privatisation of key state-owned companies attracted a large influx of foreign direct investment. Net foreign direct investment skyrocketed following these market liberalisation measures increasing from US$2000 million in 1995 to US$26000 in 1998.
Brazil has one of the most unequal distributions of income in the world. Despite the size of the economy there are still abundant social disparities and in regards to income distribution inequality, it can be compared to some of the poorest African countries such as Sierra Leone, Lesotho and Namibia (Beghin, 2008). In 1993, the number of people living under US$1.90 a day was 31.4 million this decreased post Real Plan, in 1995, to 21.1 million people (around 11.3% of the population). Though the Real Plan seemed to have decreased poverty, however it is still a large problem despite the reduction.
Growth in FDI has led to improvements in Brazillian society, in order for government to increase welfare it depends on stable growth in the economy, and has to consider inflation as a product of expansionary fiscal measures. Bolsa Familia was a programme implemented in 2003 in order to reduce Brazil’s poverty and inequality by direct money transfers to poor families. This programme has been made possible because of increased economic growth and increased government earnings. In order for Brazil to capitalise on globalisation it ahs to have an educated workforce, to meet the increased demand for labour.
During the late 1980’s and early 1990’s, trade liberalisation measures led to an increase in income inequality, transitioning from a protectionist country to a more open market, Brazil’s domestic firms felt the competitiveness of the world market and as a result lost some of their power. This was apparent in the agricultural sector. Larger Brazilian farmers benefitted from the increased exposure the international market, because they were able to compete however smaller farmers suffered therefore widening the inequality gap.
In order for trade liberalisation to be effective, policies have to be implemented in conjunction with reforms in order to distribute the benefits across the whole population, not just amongst the rich. Trade liberalisation and and privatisation allowed the currency to become more stable and lowered inflation,