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The Impacts of Trade Liberalization and Macroeconomic Instability on the Brazilian Economy

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The Impacts of Trade Liberalization and Macroeconomic Instability on the Brazilian Economy THE IMPACTS OF TRADE LIBERALIZATION AND MACROECONOMIC INSTABILITY ON THE BRAZILIAN ECONOMY DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Mauricio Vaz Lobo Bittencourt, M.S., M.A. * * * * * The Ohio State University 2004 Dissertation Committee: Approved by Dr. Donald W. Larson, Adviser Dr. David S. Kraybill _______________________________________ Adviser Dr. Stanley R. Thompson Graduate Program in Agricultural, Environmental, and Development Economics ABSTRACT For decades, Latin America, and particularly Brazil, adopted traditional protectionist policies that created an economic structure based on high import tariffs and prohibitions that generated a severe anti-export bias that discouraged both the growth and diversification of exports. However, the large number of trade agreements worldwide was also implemented in Latin America in the late 1980s, reducing substantially the level of protection in these countries. Brazil was one of the last closed Latin American countries to open its economy to the foreign market in the beginning of the 1990s, with the creation of the Mercosur, together with Argentina, Paraguay and Uruguay. After this, Brazil trade with its Mercosur partners increased largely, and new free trade agreements began to be debated between Mercosur and other countries. Mercosur is still negotiating two other main agreements. The first involves Mercosur and the European Union, and their main issues have been the agricultural products. This issue also seems to be one of the obstacles of the second main agreement, the Free Trade Area of Americas (FTAA), which was initially planned to be implemented in January 2005. The FTAA, if successfully implemented, will include all countries in the North, Central, and South Americas, except Cuba, and it will be the largest free trade area in the world. ii The main goal of the Brazilian trade liberalization program is to reverse the negative effects of protectionist policies adopted in the past. Traditional trade theory predicts that trade liberalization reallocates resources according to comparative advantage, reduces waste, and lowers the price of imported goods in a more transparent economic regime, with less lobbying activities, and exports not only grow rapidly, but also become more diversified. Most economists also share that open countries fare better in the long run than do closed ones, but the short run impacts from trade liberalization can harm the poor. Since Brazil is one of the countries with larger inequality in the distribution of income, with high levels of poverty and regional differences, this study takes these concerns seriously by assessing the economic impacts of a reduction in import tariffs on poverty and distribution of income, identifying a combined policy that can reduce possible negative impacts from trade reform on the poor, through a single-country multi-regional computable general equilibrium model (CGE) applied to Brazil. The main findings show that sectoral reduction on import tariffs can bring better results than an overall reduction on such tariffs. Poverty and regional income inequality can be reduced through combined trade and tax policies. Because of the ongoing Mercosur trade agreement and also the negotiations of the proposed FTAA, the role of macroeconomic policies in the involved countries in the process of opening a country’s economy is very relevant. In recent years, countries like Argentina and Brazil have experienced many different economic crises due to their own domestic instabilities, which have contributed to delayed market opening in these countries, and have threatened the evolution of new trade agreements, such as the FTAA. This study also emphasizes the lack of macroeconomic policy coordination between iii Mercosur and FTAA countries, notably the exchange rate policy through the impact of real bilateral exchange rate volatility on trade. Excessive price and exchange rate fluctuations caused by uncoordinated macroeconomic policies among trade partners can affect trade and resource allocation among members of a free trade area. Therefore, a sectoral gravity model is estimated to evaluate not only the role played by the lack of macroeconomic policy coordination, but also to better evaluate the patterns of trade in the Mercosur and in the proposed FTAA. The overall results show that, at the same time that the reduction in the level of exchange rate volatility can increase bilateral trade, gradual reduction in the level of tariffs and increase in countries’ income are also important pro- trade variables. iv Dedicated to my wife Marcia and my daughter Bruna v ACKNOWLEDGMENTS This dissertation would not be possible without contributions and support from many people. I will try to thank all of them in the lines below. Please forgive me if I forgot someone. First of all, I wish to mainly thank my loved wife and daughter, Marcia Adriane and Bruna, for their enormous love, support, patience, and for being my main source of inspiration during the graduate studies. I also would like to thank Professor Donald Larson, my adviser, for his continuous support, guidance, and patience throughout these 4 years. Prof. Larson was not only my advisor during this period, but he also became a great friend of mine. Thanks for everything, Professor Larson! I am also thankful to his wife, Mrs. Karen Larson, for the grammar suggestions and for her patience in reading the whole dissertation. I am grateful to professors David Kraybill and Stanley Thompson for their intellectually challenging and stimulating discussions and comments. I wish to thank my parents, Joao Alfredo and Scheila, for all their support and for believing in me. Thanks to my father-in-law and his wife, Antonio Carlos and Maria de Lourdes, for their willingness to help and for trying to be with us most of the time. vi I am grateful to many people who helped me in one way or another to be here. Among them, I am particularly thankful to Armando Vaz Sampaio, Jose Gabriel Porcile, Mauricio Serra, Nilson de Paula, Ramon Fernandez, and all professors from the department of Economics (Federal University of Parana) for their unconditional support during these 4 years. Special thanks to my friend, Armando Vaz Sampaio, who was always ready to help and to assist us in whatever we needed. Thanks to professors Judas Tadeu G. Mendes and Ricardo Shirota for being so supportive and also for their optimism about my accomplishments in the graduate studies. I would like to thank professor Joaquim Bento Ferreira for his encouragement and technical support with chapter 2 of this dissertation. I also would like to thank Dr. Hans Lofgren, from International Food Policy Research Institute (IFPRI), for supplying the basic Brazilian social accounting matrix used in chapter 2. I also wish to thank Mr. Samuel Munyaneza from the United Nations Conference on Trade and Development (UNCTAD) for allowing me to access their trade database in November/2003, which I used in chapter 3 of this dissertation. I am also thankful to the Brazilian Embassy for having me in Washington, D.C. to download this data set. I am grateful to my friends and colleagues, Eric Rangel, Marcos Hasegawa, Ratapol Teratanavat, and Tufan Ekici, for listening and encouraging me throughout these 4 years. I must especially acknowledge the CAPES Foundation and the Federal University of Parana for the financial support during the whole 4-year period in which I was on leave in the doctorate program at the Ohio State University. vii VITA May 6, 1970 ………………………… Born – Curitiba, Parana, Brazil 1992 …………………………………... B.Sc. Agronomy, Federal University of Parana 1995 …………………………………... M.S. Agricultural Economics, Escola Superior de Agricultura “Luiz de Queiroz” (ESALQ), University of Sao Paulo, Brazil 1995 - 1997............................................ Substitute Professor, Department of Agricultural Economics, Federal University of Parana, Brazil 1995 - 1997............................................ Agric. Economics Analyst and Consultant, Agromarket Socio-Economic Consultant Ltd., Brazil 1997 – present ....................................... Assistant Professor, Graduate Studies in Development Economics, Department of Economics, Federal University of Parana, Brazil 2000 – 2004 ....................................... Fellowship Recipient, Fundacao CAPES, Brazil 2004 ....................................................... M.A. Economics, The Ohio State University 2004 - present ………………………… Graduate Teaching Associate, The Ohio State University viii PUBLICATIONS Journal Articles 1. Oliveira, A., Larson, D., Bittencourt, M., and Graham, D. "The Potential for Savings Mobilization in Rural Mozambican Households". Savings and Development XXVIII (2), (2004). 2. Barros, G.S.C., and Bittencourt, M.V.L. “Price Formation Under Oligopsony: The Poultry Market in Sao Paulo”. Brazilian Economic Review (Revista Brasileira de Economia) 51 (2): 181–199, (1997). 3. Bittencourt, M.V.L. (1996). “Price Formation of Soybean in Parana and the Infuence of External Market”. Agrarian Sciences Review (Revista do Setor de Ciencias Agrarias)15 (2): 07–13, (1996). 4. Bittencourt, M.V.L., and Barros, G.S.C. “Prices Ratios of Poultry in the Brazilian South and Southeast Regions”. Brazilian Society of Agricultural Economics and Rural Sociology Journal (Revista Brasileira de Economia e Sociologia Rural) 34 (3/4): 147–172, (1996). Book Chapters 1. Porcile-Meireles, J.G., Bittencourt,
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