Michael Walch

Regional Economies

Posted in Rates of Exchange: Amazon Studio by michaelwalch on 24 January, 2010

I am starting Leslie Gill and Mike Jacob’s studio at GSAPP – titled ‘Rates of Exchange’ we’ll be dealing with the conflicting pressures – political, economic, and environmental – on the Amazon in Brazil.  The first task (and assignment) is to learn something about Brazil.  I had a friend growing up the East Bay Area (of California) who grew up in the Sao Paulo area (see, Carol, I really did want to know!), and I’ve definitely studied Brazilian architecture and urbanism, but it’s time to get down to it.

USAM Countries

Anyone who knows me knows I’m interested in economics and data.  Brazil and the South American continent generally are fascinating in both those realms.

First, the existing trade agreements:

The Andean Community of Nations was established in 1969 by the Cartagena Agreement.  Current member countries are Bolivia, Colombia, Ecuador and Peru.  Chile and Venezuela were members in the past and have since left.
Mercosul/Mercosur was estabished in 1991 by the Treaty of Asuncion.  The agreement is between Argentina, Brazil, Paraguay, Uruguay.

Among member nations, barriers to trade (tariffs and visas) are reduced or eliminated.  For Mercosur citizens, Brazil has offered streamlined residency and citizenship application.

UNASUR Logo

The next wave of South American political and economic cooperation is the Union of South American Nations (USAN/UNASUL/UNASUR).  Modeled on the European Union, this would unify all countries in South America with free trade and easy movement of people.  They will be headquartered in Quito, Ecuador, with a parliament in Cochabamba, Bolivia and the Bank of the South in Caracas, Venezuela.

One major arm of the new organization is the Initiative for Infrastructure Integration of South America (IIRSA)  They would adopt the Interoceanic Highway, under construction since 2006, which will connect the Peruvian ports of Ilo, Matarani, and Marcona to the Brazilian ports of Rio de Janeiro and Santos.  Most of the construction is in Peru, working to connect to Brazil’s existing road infrastructure.  This opens up huge economic potential for the region, but without regulation could easily lead to further deforestation and pollution of the Amazon.

Other goals for IIRSA include integrating highway networks, river ways, hydroelectric dams and telecommunications infrastructure, and creating a cooperative South American Energy Ring.

No discussion of Brazilian economics would be complete without talking about the BRIC countries.  This idea comes from a thesis by Goldman Sachs from 2001 – BRIC stands for Brazil, Russia, India and China.  While geographically disparate and not politically or economically aligned, Goldman researchers saw these countries representing huge potential in the coming decades as ’emerging markets’.  (I put that in quotes because I personally find it a near-useless distinction, but there it is.)

Some highlights:

  • BRIC countries represent over 25% of world’s land, and 40% population
  • They have no formal political/economic alliance, but viewed as a unit, they are in line to be the next world power
  • The countries have distinct opportunities, in the minds of the Goldman researchers.  The economies of China and India are poised to grow in the manufactured goods and services industry, while Brazil and Russia have vast amounts of raw materials to export.  For Russia, this is oil and natural gas reserves, and for Brazil, soy and iron ore.
  • The BRIC countries represent huge markets, with rising per capital income and GDPs, but are not projected to keep pace (on per capita) with developed world, which could maintain the relative status quo of world economic power.

Brazil has a lower growth rate than the other BRIC countries, but is wealthier per capita, and more modern infrastructure and open financial markets.  It is considered the most free, capitalist and economically stable of the BRIC countries, and is a good source of raw materials and industrial production  Interestingly, Mexico and South Korea individually could be much more powerful than BRIC countries, but were excluded (by Goldman) because they are more developed.

Essentially, Goldman sees similar levels of economic development and potential in these countries.  While their predictions from 2001 of explosive economic growth, particularly in the case of China, seem to have been prophetic, the countries are totally different from each other and it’s difficult to see their futures – economic or otherwise – as tightly intertwined based on this analysis.  It is really a very boring statement that many status quo things will continue – Brazil will export its raw materials, China will be a manufacturing capital, etc.  One interesting potential shift that is pointed out is that with rising per capita income in the BRIC countries, one growth strategy for companies in developed countries would be to innovate in those markets, developing more affordable, rather than luxury, products and services.

International relations and efforts to protect the environment are intrinsically economic, but I’ll devote separate posts to those topics.

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