HSC

STUDY BUDDY 1

International Economic Integration

The World Economy
Is all the economic activity in the world. That is the combination of
each domestic economies production and the links between
individual economies such as trade, financial flows, technology and
labor movement.
Globalization
Is the integration of national economies through
Trade flows
Capital flows (finance)
Migration (labor flows)
The spread of technology
Why is it Happening?
Increase in the trade of goods and services beyond national
boundaries
Increase in the movements of capital, labor and technology
between nations
The related increase in the interdependency between national
economies
The growth in the size and number of transnational corporations in
multiple nations
Tendency for consumer trends to be worldwide and westernized
Increasing environmental damage which does not stop at the
national boarders
Gross World Product
GWP= the sum of total output of goods and services produced by all
economies in the world over a period of time.
Calculated by adding up the GDP of every domestic economy.
In 2009, GWP was $69 809 billion USD PPP
Purchasing Power Parody is a method used to convert all values into
the same currency, so they can be compared.
Real GDP- adjusted to take into account inflation and exchange
rates.
48% of GWP comes from the top 5 countries.
Australia contributes approximately 1%
Trade In Goods and Services
World trade as a percentage of GWP has risen from 12% in 1962 to
53% in 2008


Germany is the world leader in exports with 9.1%, China is second
with 8.9%, followed by the US, Japan and the Netherlands
Australia has 1.2% of exports
Half of the worlds exports come from the top 10 countries
China has made rapid progress in past few years.
USA has slumped form 11.9% in 2001, to 8.1% in 2008
Types of International Financial Flows
Direct Investment- involves the purchase of a significant degree of
control (10%+) over foreign assets.
Portfolio Investment- purchasing equity in foreign assets without
gaining any significant control over the issue of these assets.
Direct has grown from 32 billion to 418 billion from 1980 to 1997
Portfolio has grown from $34 billion to $1002 billion from 1980 to
1997
This is due to deregulation of financial markets in the 80s and 90s.
International trade has expanded at roughly twice the rate of real
GDP
International direct investment has grown by 3 times the rate of
real GDP
International portfolio (equity) investment has grown 10 times the
rate of real GDP.
World private capital flows have leaped from 3% of GWP in 1978 to
32% in 2005.
85% of direct investment involved high-income countries in 1990,
the figure has fallen to 67% in 2008.
Australia saw a net inflow of $47 billion in 2008, compared $7billon
in 2003. This is due to the mining boom and foreign investors want
a piece.
Examples of financial productsFutures- a contract that you can effectively lock in the price at
which you sell of by an asset, at a set day in the future.
Options- same as future, but an option to bail out.
Swaps- a currency swap is an agreement to exchange a currency
during a specified period of time. For example swapping 100 million
Australian dollars for US dollars now and an agreement to reverse
the swap within a set period of time.
Transnational Corporations
A corporation that delivers a good or service in more than one
country
They are responsible for the bulk of direct investment as they set
up subsidiaries in other countries.
Many have a large influence on employment, production, and play a
large role in the international economy
Top 5 cities for TNCs Tokyo, Paris, Beijing, New York and London

HSC STUDY BUDDY 3

Enticing TNCsMany governments offer tax incentives, government assistance,
infrastructure etc. Example of Ireland in the 1990s
They can increase the technological know how and encourage
development of local economies and provide valuable taxation
revenue for the government.
Technological Process
The birth of e-commerce has had benefits to business:
Stock ordering systems
Client/employee records- databases
Time saving- less need to travel
Reduction of wholesalers and middle men
Innovation and product development

The International Business Cycle

The ups and downs of world economic growth, which refers to the
changes in the level of economic activity in the global economy over
time.
Most countries experience booms while others are, and vice versa.
This is due to increased levels of globalization and economic
integration. This was explained during the GFC.
63% of our output levels can be explained by changing economic
condition in the G7
Factors that Strengthen International Business Cycle:
Trade flows, investment flows, TNCs, financial flows, technology,
global interest rates and international organizations.
Factors that weaken international business cycle (differ between
economies):
Domestic interest rates, government fiscal policy, other domestic
policies, exchange rates, structural factors and regional factors.

Trade, Financial Flows and Foreign

Investment
Free Trade- A situation where governments impose no artificial
barriers to trade that restrict the free exchange of goods and
services between countries with the aim of shielding domestic
producers form foreign competitors.
Protectionism- Is the economic policy of restraining trade between
countries through methods such as tariffs on imported goods,
restrictive quotas, and a variety of other restrictive government
regulations designed to discourage imports, and prevent foreign
take over of local markets and companies.

Comparative Advantage Theory

Pretend there are only two goods, and two countries. Have a look at
production. Assume they each used the same amount of resources
to produce these figures.
Computers
Wheat
China
300 (2.6)
800 (0.375)
USA

200 (2)

400 (0.5)

USA should produce computers because they lose less wheat

(opportunity cost of producing computers from wheat is lower) than
if china were to produce computers. In this way they have a
comparative advantage over China in the production of computers.
They should sell computers to China, and use this money to buy
wheat from China.
China should specialize in wheat because the lose less computers
when producing wheat. They have a comparative advantage over
USA in Wheat production.
In economics, absolute advantage refers to the ability of one
country to produce more of a good or service than competitors,
using the same amount of resources. China has the absolute
advantage in both areas above.
Comparative Advantage: A country has a comparative advantage in
producing a good if the opportunity cost of producing that good is
lower in that country than it is in other countries. USA has a
comparative advantage in producing computers.
Trade between two countries can benefit both countries if each
country exports the goods in which it has a comparative advantage.
The total output of the world economy increases when countries
specialize in the production of goods in which they have a
comparative advantage.
Factor Endowments- Each country has different amounts or types of
resources that will determine what they can or cannot produce. The
combination of these resources is referred to as a countrys factor
endowment.
Advantages of Free Trade
Each country can specialize in good in which they have a
comparative advantage, and trade for the good in which they
dont. Leads to higher world output.

HSC STUDY BUDDY 5

Better foreign relations, less conflict.

Increase standard of living due to higher output (higher incomes)
Increase in enterprise and innovation (increasing sales increases
R and D)
Increases competition (innovation, better quality, reduced prices
leading to lower inflation)
Lower prices with no tariffs, reduce inflation.
Low inflation = low interest rates
Increase sales for exporters because of wider market
Allows economies of scale for large companies with access to
more customers
Efficient allocation of resources
Allows countries to trade for goods they cannot produce themselves

Disadvantages of Free Trade

New industries may find it difficult to establish if they are not
protected from larger foreign companies. They cannot achieve
economies of scale required to compete, therefore will fail to
establish. (infant argument)
Production surplus from other countries can be dumped onto
other markets, undermining domestic producers.
The most efficient and competitive producers attract resources
away from less efficient industries, creating structural
employment in those industries.
If a country is reliant on another country for goods, a conflict will
restrict supply of the good. (military self sufficiency)

Trading Blocs and Agreements

What is a trading bloc?
When a group of countries join a formal preferential trade
relationship to the exclusion of other countries. They tend to be
discriminatory to outsiders because they provide free trade for
those on the inside but keep protection from goods and services
from outsiders.
Examples- European Union, North American Free Trade Area
(NAFTA), Asian Free Trade Area (AFTA)
European Union
With almost 500 million citizens, the EU generates a 30% share
($US 18.4 trillion in 2008) of the normal GWP
27 countries
Most use the same currency (Euro)
NAFTA
Is an agreement between the USA, Canada and Mexico creating a
trilateral trade block in North America.

Spectrum of Free tradeFree Trade Area- where a group of countries abolish trade
restrictions between themselves but retain restrictions against nonmembers. (each country is free to have its own unique tariffs set
against outsiders)
Customs Union- free trade area, but the member countries adopt a
common set of trade restrictions against all other non-members.
Called a common external tariff (CET).
Common Market- is a customs union, but also allows for the free
movement of labor and capital.
Monetary Union- is a common market, that also shares the same
currency and monetary system i.e. common central bank.
Advantages of trade Agreements (EU- monetary union)
Reduced transactional costs by using single currency to do all
business, estimated at 1% of GDP in EU. (eliminates exchange
fees)
Elimination of exchange rate uncertainty increases investment
across boarders
Price transparency- easy to compare prices across boarders.
Should increase competition and lower prices and inflation in the
EU zone.
Disadvantages
Loss of national currency controls. Reckless behavior by Greece
saw the Euro lose value for all other nations.
Loss of monetary policy as a tool to solve specific issues in your
domestic economy. (The European Central Bank will make
decisions on the basis of the whole European economic situation,
not just your own country)
Difficult to reach consensus on decisions.
Free Trade Area- Are They Beneficial to World Trade?
Trading blocs are beneficial to world growth if trade created within
regions is larger than the amount of trade that is diverted because
of the blocs.
Trading Bloc- A type of intergovernmental agreement where the
regional barriers to trade are reduced or eliminated for participating
members

HSC STUDY BUDDY 7

Members
EU

Most of Europe

Influence on world
economy
21% of total world
output.
Largest importer.
161 0f largest 500
corporations based in
EU

Advantages

Reduced transactional
costs by using single
currency to do all
business, estimated at
1% of GDP in EU.
(eliminates exchange
fees)
Elimination of exchange
rate uncertainty
increases investment
across boarders
Price transparency- easy
to compare prices across
boarders. Should
increase competition and
lower prices and inflation
in the EU zone.

Disadvantages

APEC

Pacific Rim

ASEAN

Association of
South East
Asian Nations
(south east
Asia)
USA, Canada,
Mexico

NAFTA

54% of world output,

44% of trade. Greatly
increased trade and
investment in the Asis
Pacific Region
1.8 Trillion GDP

Largest bloc in the

world (in terms of ppp).
Second largest in terms
of GDP.

Political relations within Asia

Pacific. Has increased
investment etc. among
Pacific

Loss of national
currency controls.
Reckless behavior by
Greece saw the Euro
lose value for all other
nations.
Loss of monetary
policy as a tool to
solve specific issues in
your domestic
economy. (The
European Central
Bank will make
decisions on the basis
of the whole European
economic situation,
not just your own
country)
Difficult to reach
consensus on
decisions.

Is yet to establish free

trade agreements.
Debatable whether it has
accomplished much.

Free trade area, common

market for certain good. Also
has established free trade
agreements with other
nations, including Australia
Has not caused trade
diversion.
Movement of professional
labor among boarders.
Free trade area

Bi-lateral AgreementAustralia-United States Free Trade Agreement came in to effect in

2005. Australias third largest import and export partner, two way
trade of over 48 billion dollars, and outward investment of 788
billion dollars.
World Organizations (role, influence and work)
World Trade Organization
Monitors developments in world trade and reviews barriers to world
trade such as tariffs and subsidies. It is the most important
multilateral trade treaty, governing the rules or world trade.
Ability to negotiate trade agreements with the 153 members. They
advocate for trade liberalism (free trade), work to stabilize trade
relationships, and allow discussions and scrutiny of trade
relationships at forums.


Uruguay Round- worked to decrease tariffs and subsidies, to
increase world trade.
Doha Round- Further cuts to tariffs, but also gave developing
countries more access to free trade.
International Monetary Fund
Improve international financial stability. 5 main responsibilities:
1. Promoting international monetary cooperation.
2. Facilitating expansion of international trade
3. Promoting exchange rate stability
4. Supporting multilateral payments system
5. Making resources available for member countries
Three main influences.
Surveillance of global economy and member economies.
Technical Assistance- especially for low-income economies. Fiscal
and monetary policy advice.
Lending- at low interest rates to help countries meet their
international payments, and reduce poverty.
Global Financial Crisis- lending money to developing countries,
who had no access to private funds. Boosted global liquidity by
increasing the amount of Special Drawing Rights to members.
Provided financial assistance countries in times of disasters
(tsunami)
World Bank
Long-term development projects in emerging countries.
Influence economies to donate, to help them achieve their
objectives. Ability to give aid to countries in need
Aid programs etc.
United Nations
Efforts for peace, human rights, democracy, strong governance,
environmental sustainability and eradication of poverty.
Peacekeeping, getting nations to work together for the benefit of
humanity.
Aid programs for developing nations, Millennium Development
goals.
Organization for Economic Cooperation and Development
Sustainable economic and employment growth and raising living
standards in member countries, while promoting world
development.
Contains the biggest economies of the world
Used monetary and fiscal stimulus to reduce effects of the GFC

HSC STUDY BUDDY 9

G7
Largest seven economies in the world who discuss economic and
trade issues
Account for half of the worlds GDP
Use fiscal and stimulus policies to reduce effects of economic
downturns
G8
Eight largest economies discuss economic and trade issues.
Work with world bank to reduce poverty. Policies to increase
economic growth
G20
Six monthly forum for finance ministers from the G8 nations and 12
other nations.
Discussed re-capitalizing the financial system and more regulation
of financial markets. Support expansionary fiscal and monetary
policy to increase global spending.

Protectionism

Different Types of Protectionist Methods

Tariff: a tax on imports
Quota: only allowing a certain number of goods into a country
Embargo: complete ban on a certain good entering a country
Subsidies: payments from the government to keep local
industries strong and competitive relative to overseas
competitors.
Technical Standards: Forcing importers to comply with health,
safety, quality or packaging regulations simply to make it difficult
for them to qualify to import to Australia.
Quarantine Regulations: A country could potentially fake reasons
for preventing foreign good into our country under the guise of
saying that they are dangerous to Australia.

Reasons for Protection

1. Infant Industry Argument
Is the oldest argument for protection. It argues that import
barriers are required to help protect new domestic industries who
cant produce at the necessary economies of scale to drive costs
low enough to compete.
After they establish themselves the import barriers should be
removed allowing free trade. There should only be temporary
protection.


In reality this rarely happens as they are immune from
competition and never have to innovate and always suffer from
inefficiency.
2. Protects Domestic Employment
If protection was reduced unemployment would rise. Increases in
protection therefore should reduce unemployment.
In the short term this appears to be true. Protection does save
Australian Jobs.
The problem is, by exporting less, trading partners will see a rise
in their unemployment figures.
In the long run, reductions in protection have potential to create
more jobs as those structurally unemployed workers retrain in
more efficient areas. Having workers in jobs that are inefficient is
bad for Australian growth.
3. Dumping Argument
Dumping refers to selling a product in a foreign market at a price
below its cost of production. It is usually a temporary
phenomenon used to dispose of surplus stock.
It undermines the prices of local producers and can put them out
of business.
4. Defence
Need to ensure that Australia can still provide protection for itself
in terms of war. This means we should retain industries such as
ship building, aircraft construction and communications.
Note this is not an economic argument, it is a military argument.
Method of Protection and Effects on Domestic and Global Economies
Tariff Diagram

10

HSC STUDY BUDDY 1

1

example of shirt industry in Australia:

1. The price of the shirts have risen after the tariff was imposed
2. This sees a rise in the level of inflation as higher prices are now
being paid by consumers. Price effect
3. Domestic producers were producing Q1, but after protection now
produce Q2. This should lead to greater local employment.
Protection effect
4. The quantity demanded falls from Q3 to Q4f after the
introduction of the tariff. This is a non desirable outcome for
consumers. Consumption effect
5. The government receives tariff revenue equal to Pw-Pt x Q2-Q4f.
Tax effect
6. Income is redistributed from foreign exporters and consumers
towards government and local producers. Redistribution effect
Quota Diagram

11

Quota is he size of the red line.

Domestic production rises from y axis to blue to y axis to red.
Demand has fallen due to the higher prices that result from a quota.
The more extreme the quota the less imports and higher the price.
Quota diagram type 2

Subsidy Diagram

12

HSC STUDY BUDDY 1

3

Imports make up the difference between supply and demand at P2.

After the imposition of a subsidy , supply increased (as production
costs are lowered) and the level of domestic producers increased.
Therefore less imports are needed to meet the demand.
Effects of subsidies- anti inflationary (lower prices, and increase
domestic production.
Subsidies are preferred by economists because it does not raise the
price of the good, and the government (because it is a cost to
them) are more likely to remove a subsidy.
Local Content Rules
A regulation that requires that some specified fraction of a final
good be produced domestically. In return for guaranteeing a certain
percentage of a good be made locally, the imported components
may not attract a tariff.
For example, the Australian motor vehicle industry may not attract
tariffs on certain imported good, provided that certain percentage of
the vehicle be Australian made.
Local content rules apply for television (55% from 6 am to
midnight)
Export Incentives
Grants, loans, tax concessions and technical advice that is available
to encourage local exporters to penetrate foreign markets.

13


Focus on capturing foreign markets rather than protecting imports.
Provides an artificial advantage to exporting firms overseas.
E.g. Export Market Development Grants
Considered part of protection because it restricts free trade by
giving domestic producers an unfair advantage.

Globalization and Economic Development

Differences Between Economic Growth and Development
Growth has to do with GDP and GDP growth rates. While
development measures the human side, that is the HDI (GDP per
capita, mortality rates and adult literacy rates).
Economic Growth
Measured by GDP or GNI (the sum of all value added by resident
producers in an economy plus the receipts of primary income from
foreign sources.
Figures are converted into PPP for fair results. (a theory that states
that exchange rates should adjust to equalize the price of identical
goods and services in different economies throughout the world.
Allows for a standard comparison between countries)
High income earners ($38 000) make up 1 billion of the worlds
seven billion.
Economic Development
Economic development is a broad measure of welfare in a nation
that includes indicators of health education and environmental
quality as well as material living standards (GDP per capita)
Quality of life indicators are factors that measure the living
standards of people in a nation such as:
Health standards, education levels, domestic work that is
not given a financial value, the level of damage to the
environment and inequalities in income distribution.
HDI- is a measure of economic development devised by the UN. It
takes into account life expectancy, levels of education(quality of
workforce) and, material living standards (GDP per capita)
Categories Of Development
Developing Economies- also known as low income nations since
their income range from $975- 3 855, according to the world bank.
Most are located in Africa.
Common Characteristics:
Limited industrialization
Agricultural societies
High income inequality
Reliance on foreign aid

14

HSC STUDY BUDDY 1

5

Low levels of labor productivity , technological innovation

and infrastructure
Weak political and economic institutions, with high levels of
corruption

Emerging Economies- BRIC (Brazil, Russia, India, China) have

become very dominant in world trade and experienced high
economic growth compared with developed nations.
Incomes between $3856-11905 per capita
Rapid increase in development due to opening up of markets and
increased output and great improvements in living standards.
30% of world output
Advanced Economies- economies that have been through the
process of industrialization, experience high output, incomes and
living standards.
Incomes over $11905 per capita. Account for 54% of world output.
Usually have close economic ties with each other.
Liberal/democratic economic and political institutions.
Most are members of the OECD.
Includes a subgroup called Newly Industrialized Economies
(Singapore, Hong Kong etc.)
Transitional Economies- is an economy which is changing from a
centrally planned economy to a free market. Most are still emerging
or developing
Causes of Inequality in the Global Economy
Global Factors
Global Trade System- advanced economies tend to subsidies their
industries so they can compete with developing nations. Subsidies
to OECD farmers totaled $265 billion. Expanding regional trading
blocs also tend to discriminate poor nations (if developing
economies increased trade by 1% in the world , 120 million people
are predicted to escape poverty). Failure of Doha round also means
that poor nation have little ability to negotiate trade agreements
Global Financial Architecture- International financial flows favor high
income economies (over half of FDI inflows went to advanced
economies). Short term financial flows favor emerging economies
(speculators on share markets). IMF has been criticized to have
implemented policies to favor rich countries. Access to global
financial markets have created massive foreign debt burdens for
poor countries (2008 poor nations debt = 3.7 trillion). This means

15


domestic governments are not able to spend money on pressing
issues such as health and education.
Global Aid and Assistance- only 0.3% of GDP of rich nations is given
as aid (0.7% was promised, difference between money promised
and money delivered was 4 trillion). Reductions in aid have been
caused by the recession. In addition, most aid is phantom aid and
does not help standards of living. Most American aid is given to aid
war efforts in Afghanistan and Iraq.
Global Technology Flows- Technology is geared towards the needs
of high income nations (health needs in rich nations sorted before
needs of poor nations). Poor nations also cannot afford the
technology that would help them.
Domestic Factors
Natural Resources- countries have different levels and quality of
resources, countries with an abundance have an advantage.
Labor Supply and Quality- low income nations have poorly educated
work force. Heath issues also reduce supply of labor.
Access to Capital and Indebtness- low savings rate, less money for
investment and capital goods. Businesses in poor economies cannot
find funds to expand.
Entrepreneurial Culture- low innovation in poor nations
Political and Economic Institutions- political instability and
corruption undermines investor confidence (corruption index:
Somalia 1.1)
Government Responses to Globalization- policies relating to trade ,
investment flows, TNCs and participation will influence an
economies ability to take advantage of globalization.
Impact of Globalization
Economic Growth
East Asia and Pacific 8.7% (China 10.5%)
South Asia 6.3% (India growing at approx 6.8%)
Europe + Central Asia (soviet states) 6.8%
Middle East 4.2% (Egypt 4.5%)
Sub-Saharan Africa 3.6% (Sudan 6.5% ,not enough to catch up)
Latin America 3.9% (Brazil and Argentina 3-4%)
High Income Economies staying around 1-2%
Globalization has led to increased economic growth

16

HSC STUDY BUDDY 1

7

This statement is partly true, that is, it is true for some economies
and not for others. Economic growth has increased in emerging
economies due to increased markets, foreign investment and access
to new technologies (China 10.5% growth). High income economies
and Least Developed Countries (LDCs) have experienced very little
change during the globalization era.
Economic Development
Globalization has led to economic growth and therefore may benefit
economic development.
Economic growth leads to more money and higher incomes in an
economy. Therefore the extra money will improve GDP per capita
and could be used to improve health, education etc.
Rapid industrialization in China has increased incomes, health and
education, improving economic development.
Globalization can be detrimental to economic development as cheap
labor and the environment may be exploited.
Trade, Investment and Transnational Corporations
Vertical Specialization- how goods are produced in different stages
in different countries. Motor Vehicle example: material
manufacturing, components manufacturing and final assembly
occurring in three different countries.
There are approximately 82 000 TNCs operating in the global
economy. They have a profound effect on the economy including:
Responsible for one third of world exports
Employ over 77 million people
Top 100 TNCs account for 4% of GDP
Dominate major industries
Criticisms include:
Move operations to areas with weak government
regulation, especially tax
Exploit lower labor standards and environmental protection
law, especially in developing economies.
Environmental Sustainability
Disadvantages of globalization- more exploitation of environment to
improve growth, especially in developing countries. Also, TNCs will
move operations to exploit countries with weak environmental laws.
Advantages of Globalisation- environmentally friendly technologies
are able to be shared, international conferences set up to achieve
solution, cost of protecting environment shared amongst many
countries
International Business Cycle

17


Advantages of globalization- allows for countries to specialize in
certain types of production (export what they produce, and import
goods and services in which they are inefficient). Also allows
nations to benefit from the growth of other economies
Disadvantages- a recession in one economy will affect global
economy (example of GFC), increased reliance on solid domestic
policy setting

Case Study-Brazil
Economic Growth
Statistics- 2-3% growth during 90s, increasing to 4% in 2009.
Increasing to 7% after the GFC
Economic Linkage- Globalisation begun during the 1980s as Brazil
borrowed funds from overseas to finance their industrialisation
process. This increase of funds (especially FDI), through the
deregulation of financial markets, helped increase economic activity.
However the economic issues of stagflation (inflation coupled with
unemployment) and foreign debt in the 80s, and protection of
trade kept growth moderate as investors preferred the fast growing
Asian region. The policy of pegging the Brazilian currency against
the US dollar helped stabilise the economy, coupled with the
liberalisation of trade, aided faster growth during the 90s and early
00s, becoming a hotspot for FDI. An early recovery from the
recession, sound economic policy, increased wages leading to more
consumption and the prospects of the World Cup and Olympics have
further increased growth, predicted at 7%.
Economic Development
Statistics- 0.813 HDI, 0.7s in 80s. Literacy rate from 82% (1990)
to 90%. Life expectancy 67 (1990) to 73. GDP per capita 5000 to
10 000.
Economic Linkages- Globalisation has increased economic growth
and therefore employment and wages, effecting economic
development in two ways. Firstly, people are now able to provide
for themselves and live above the poverty line (high demand for
labor put workers in a better bargaining position with wages).
Secondly, with more people in jobs, earning higher wages, the
government will receive more income tax revenue and company tax
revenue and therefore be able to provide better service in education
and health. This has resulted in higher literacy rates, life expectancy
and GDP per capita, thus increasing Brazils score on the HDI.
Unemployment
Statistics- 8.1%. 10-20% in 80s

18

HSC STUDY BUDDY 1

9

Economic Linkages- Labour is a derived demand, therefore
increases in economic growth caused by globalisation will amplify
demand for jobs. Also, as TNCs set up subsidiaries, new jobs are
created.
Distribution of Income
Statistics- Gini coefficient 2002 0.596, 2007 0.550
Economic Linkages- Brazil is historically one of the most unequal
societies, however globalisation and government policies have
reduced this inequality. As globalisation increased employment, the
lower classes of Brazil were given jobs, therefore raising their
incomes (when supply of labour is low, and demand is high,
employees are in the bargaining position when negotiating wages),
thus reducing inequality in Brazil. However the most important
contributor to reduced inequality has been presidents Lulas policy
developments. These were to raise the minimum wage, and social
security payments to poor families. This has reduced brazils Gini
coefficient.
Trade, Investment and Transnational Corporations
Statistics- Trade balance surplus of 25 billion, negative during 80s
and 90s. FDI 2 billion in 1990, 26 billion in 2009.
Economic Linkages- Trade in Brazil has changed significantly due to
the globalisation era. In the early period of globalisation, in the
80s, Brazil did not actively engage in word trade. Attempting to
protect domestic industries, encouraging them to mature. This
resulted in a negative trade balance. Although, to rectify this, Brazil
reduced their tariffs from 32% to 11% and abolished all quotas,
liberalising their trade to increase economic prosperity. This has
resulted in a trade balance surplus of over $25 billion in 2009. Brazil
is now a vital trading partner in the Latin America region, a vital
part of the MERCOSUR customs union and the WTO (world trade
organisation)
Investment has been the cornerstone of Brazils economic
integration, which started from borrowing funds from overseas.
Investment, especially FDI, and TNCs have played a major role in
the growth of the Brazilian economy. Investment in the early years
of globalisation remained minimal as issues such as stagflation and
external debt drove away investors to the higher performing Asian
region. However, as these problems were fixed, Brazil became a
hotspot for FDI, growing from $2billion in 1990, to $26 billion in
2009. Responsible for this is the many TNCs, especially in the
automotive and pharmaceutical industries. Theses companies such
as Ford and Mercedes Benz, have increased technology flows,
employment and growth and thus are vital to the Brazilian
economy.

19

International Business Cycle

Due to globalisation and economic integration, domestic economies
usually follow the pattern of the international business cycle.
However, Brazil has shown resilience and has not followed these
patterns. During the international boom periods of the 90s and
early 00s Brazil only experienced moderate growth of 2-3%. Whilst
at the same time economies such as China were growing at over
10%. This was mostly due to their issues surrounding foreign debt;
meaning investors were reluctant to pursue Brazil. Conversely, the
most meaningful test of Brazils resilience has been its response to
the GFC. Many countries have significantly slowed their economic
growth, some even recorded negative growth, while Brazil is
expected to not only recover, but record 7% growth. This has been
caused by the new wave of confidence in the Brazilian economy due
to good economic policies, fiscal surplus and the comfort of the
Olympics and Fifa World Cup on the horizon. Furthermore, many
TNCs in Brazil are Brazilian based, therefore they were not affected
by retreating such as that in Ireland.
External Stability
Statistics- negative trade balance and CAD in 80s 90s. Trade
surplus of 25 billion 2009. External debt reduced from 49% of GDP
in 1985 to 12% in 2009
Economic Linkages- One of the few negative impacts that
globalisation has had on Brazil includes the impact on External
Stability. As Brazil borrowed heavily from overseas, foreign debt
accumulated to be almost half of GDP in 1985. This coupled with
negative trade balanced severely weakened Brazils external
stability. Although, fiscal surpluses, the Economic Stabilisation
Program (pegging currency against USD) and increasing incomes
have aided the paying off of these debts and increasing stability,
while liberating trade has helped improve the Current Account
Deficit.
Environment
Statistics- 18% of rainforest area has been cleared since 60s
Economic Linkage- Increasing demand for Brazilian exports such as
timber, soy beans and coffee have necessitated clearing of
rainforest area for farms etc. which has had a significant impact
upon the natural environment of Brazil. However, president Lula
announced plans reduce deforestation by 70% by 2017. This has
had immediate affect, as Brazil has skyrocketed up the Happy
Planet Index from 63rd to 9th in just the year from 2009 2010.
Furthermore, TNCs have exploited the poor local environment rules
prior to Lula, releasing many negative externalities.

20

HSC STUDY BUDDY 2

1

Policy Developments
President Lulas plan to decrease income inequality (Zero Hunger,
and Family Fund programs) by increasing minimum wage and social
security payments
Liberalisation of Trade, to help external stability and economic
growth
Deregulation of financial markets and industries to attract
investment
President Lulas plan to reduce deforestation
Economic Stabilisation Program, pegged currency against USD to
control inflation and increase stability
Sustained Fiscal surplus (Aimed at 4% of GDP), attract investment,
pay of debts
Brazilian Central Bank inflation targeting framework, aimed at 4.5%
inflation. Need high interest rate to do so
PAC (Growth Acceleration Program), increase growth to 5%, main
reforms were 250 billion of infrastructure projects, and tax
concessions to businesses to promote business.
Federal Value Added Tax (similar to GST) raise funds for
government and decrease tax evasion.
Pension system (similar to superannuation) help people retire on
more
Progressive Tax System

21