Do not underestimate Brazil!

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By PAULO NOGUEIRA BATISTA JR.*

Brazil is one of the world's giants and is part of a group of only 5 countries that make up the lists of the ten largest GDPs, territories and populations on the planet

I'm sorry to ask: are there any reasons to criticize the Bolsonaro government? Plenty, isn't it? And yet, time and again the opposition resorts to dubious arguments!

The worst thing is when the points raised affect Brazil itself. In their eagerness to demoralize at any cost the criminal who occupies the Presidency of the Republic, critics belittle and diminish the country. There, reader, my unbridled patriotism gives rise to the famous “triumphant jerks of a run over dog”, as Nelson Rodrigues would say (an image that I have used a million times).

I give an example. It is said that because of the disastrous economic policy of recent years, the Brazilian economy is no longer among the 10 largest in the world. And that Brazil would now have a relatively small economy, with a GDP equivalent to about 5% of the GDP of the US or the European Union.

Is it grounded? Well, Brazilian economic policy has been disastrous, without a doubt. But these claims underestimate the relative size of the national economy. The subject is a bit technical and causes confusion even among economists. I'll try to clarify.

 

misleading comparisons

According to the risk rating agency Austin Rating, for example, Brazil would have dropped in 2021 from 12th to 13th in the list of the largest economies, having been overtaken by Australia. According to the same agency, we had already been surpassed in 2020 by Canada, South Korea and Russia. Similar numbers were released by the British consultancy Center for Economic and Business Research – the same one that, in 2011, mistakenly announced that Brazil's economy was about to overtake that of the United Kingdom and become the 6th largest in the world.

These comparisons migrated to the excellent speech that Lula gave at the launch of his presidential candidacy: “During our governments, (…) Brazil became the 6th largest economy on the planet. (…) But the current government made Brazil plummet to the 12th position in the ranking of the largest economies”. Doubly wrong. Using a correct criterion for comparing GDPs, Brazil did not reach the 6th position. And it hasn't dropped to 12th now.

Where is the problem? Essentially, using current exchange rates to convert GDPs and compare them. It turns out that exchange rates fluctuate sharply. This makes the dollar value of GDPs a fragile and misleading basis for measurement.

So, for example, when the real appreciated a lot in the last decade, our GDP converted into dollars at current exchange rates increased significantly, leading us, in fact, to almost reach the 6th position in the world ranking of economies by this method of comparison. But the increase in our GDP in dollars exaggerated the real relative size of the Brazilian economy.

Conversely, in recent years and even more acutely, there has been a sharp depreciation of the Brazilian currency. As a result, the Brazilian GDP, measured in current dollars, really dropped a lot, taking us to the 2020th position in 12 and to the 13th position in 2021, according to preliminary data. Relative to the GDP of the United States, ours represents 7% by this criterion.

But none of this reflects well the relative size of Brazil and what really happened in the economy.

The most defensible method of comparison is based on the purchasing power parity (PPP) exchange rate – the rate at which one would have to convert one currency into another to buy the same quantity of goods and services of comparable quality in each country. country. There are careful surveys published by international organizations that are based on this criterion.  

Below is a slightly more technical explanation. But the reader can, if he wants, skip the next section of this text and go straight to the next section, which shows some of the main numbers.

 

A slightly technical interlude

Each country records its GDP in its own currency. When trying to compare the GDP values ​​of different countries, it is necessary to convert them to a common form of measurement. There is more than one way to do these conversions and therein lies the difficulty.

The two main methods are mentioned above. The simplest is converting GDPs to the same currency, usually the US dollar, using market exchange rates. This method is more defensible for international comparisons when it comes to comparing economic data originally reported in dollars, such as flows recorded in balances of payments (current account balances, financial flows, etc.). Its application to GDPs, however, produces distortions and misleading fluctuations, for the reason explained above.

The second method is to use the purchasing power parity (PPP) exchange rate – the rate that converts one currency into another to buy the same quantity of goods of comparable quality. So, for example, if the same product costs R$3 in Brazil and US$1 in the US, the implicit PPP exchange rate is R$3/US$1, even if the market exchange rate is, say, 5 reais per dollar.

In order to make adequate comparisons, it is necessary to survey a large number of prices for goods and services in different countries, which makes it difficult to collect and compare products. Data currently used by the IMF and other agencies are based on national averages of 1000 detailed product breakdowns for approximately 147 participating countries.

What are the advantages of the PPP method? First, the relative stability of exchange rates over time, in contrast to the volatility of market rates. The latter are relevant only for internationally tradable goods and services (exportable or importable), whose domestic prices essentially correspond to international prices converted into national currency at the current exchange rate.

Non-tradable goods and services tend to be cheaper in emerging or developing countries. This is because wages are lower in these countries and services, in particular, tend to be more labor intensive. A comparison that ignores these differences will tend to considerably underestimate the purchasing power of currencies in less developed countries and to overestimate it in more advanced countries.

For this reason, comparing GDPs using market rates tends to inflate the relative weight of more advanced countries and underestimate the weight of emerging and developing countries. For example, by the PPP criterion, China's economy is already larger than that of the United States a few years ago. At market exchange rates, the United States retains a lead that is more illusory than real.

 

Relative size of the Brazilian economy

When using the most correct comparison criteria, Brazil appears in 2021, as the 8th in the world, slightly above the United Kingdom and France, according to preliminary data, published by the IMF. We reached the 7th position in the last decade, until we were overtaken by Indonesia (table 1).

Tabela 1

And look, reader: the Brazilian GDP corresponds, in reality, to 15% of the GDP of the United States and 13% of the GDP of China. In per capita terms, Brazil's GDP-PPP is equivalent to 23% of the United States' GDP and 84% of China's GDP (table 2).

Tabela 2

The data also show that we have been in relative decline since 2011, and especially since 2015, reflecting our poor performance and rapid growth in Asia. But we will correct this trend from 2023 onwards.

In any case, the observation that I always repeat remains: Brazil is one of the world's giants and is part of a group of only 5 countries (with the United States, China, India and Russia) that make up the lists of the ten largest GDPs, territories and populations of the planet.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).

Extended version of article published in the journal capital letter, on May 13, 2022.

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