The Problem of Commodity Dependence in the Context of

Global Imbalances: The Case of Brazil

byLaura Ebert

and Leanne Ussher THE 12TH INTERNATIONAL POST

KEYNESIAN CONFERENCE

Kansas City, MissouriSeptember 25–27, 2014

Outline

Commodity Producers and Global Imbalance

Current Commodity Boom

A new Commodity Curse

Conclusion

Creation of Global Real Imbalance

United States

Key reserve currency

Deindustrialization and financialization

Overconsumption of commodities, ease of financing trade deficit

China

Build up US reserves to devalue Yuan

Low wage

Leader in mass production (Verdoorn’s Law), high returns to scale

BrazilBuild up US reserves to counter pressure of capital inflows and rising commodity priceLow 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

Manufactured goods

Commodities

FDI in commodities, manufactured gds

Commodities, limited manufactured gds

FDI, net agricultural . .

FDI

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

Brazil

Appreciated currency

Limited domestic capital market

Ineffective capital controls

Falling profits from commodities as profits get repatriated

Short term capital

Capital inflows for commodity

Long term capital, US $ forex, revenue manufactured gds

Short term capital, US $ forexCapital outflows

manufactured gds

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)

0

5

10

15

20

25

30

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Argentina Brazil

Chile Peru

0

20

40

60

80

100

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

CN EU US

Source: UN Comtrade Source: UN Comtrade

Total imports from Exports to China (% of total export) South America* (in USD billion)

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

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

World bank

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….?

World bank

World bank

World bank

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

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??

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 )

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…

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

Than US economy recovers….

US interest rates rise

US dollar appreciates relative to Real

Commodity prices fall as producers adjust prices in competitive market

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

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

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

THE END